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Item 7. Management’s Discussion and Analysis

2020-12-14 compared with 2019-12-05 · 259 added, 457 removed, 205 unchanged (78% of the section changed)

ITEM 7 — 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.” See also “Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results” below.

This discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

Management’s Discussion and Analysis of Financial Condition and Results of Operations 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” or the “Company”) for the two-year period ended September 30, 2020.

The following discussion should be read together with our consolidated financial statements and accompanying notes included in “Part II, Item 8 — Financial Statements and Supplementary Data.” This discussion and analysis contains forward-looking statements, and our actual results could differ materially from those anticipated in these forward-looking statements.

See “Part I, Item 1A — Risk Factors” and “Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results” below.

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, beginning in March 2020, 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Many of these measures have expired or been rescinded, but some are continuing and others are being reimplemented or considered for reimplementation in November 2020 as COVID-19 continues to spread at rapid rates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.

Since that time and continuing through the fourth quarter and into fiscal 2021, 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 (368 stores), retail sales in all stores were prohibited by regulators during the last three weeks of May;

in Guatemala (87 stores), regulators imposed country-wide lockdowns on many weekends and 39 mall-based locations were closed for extended periods;

in El Salvador (18 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 fourth 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 fiscal year end 2020 were down $51.1 million (32)% in U.S.

Pawn and $16.7 million (40%) in Latin America Pawn (down $16.7 million, or 34% on a constant currency basis), compared to the prior-year end.

The overall decline in pawn loan balances led to significantly reduced pawn service charge revenue.

Offsetting this net revenue loss, we saw a strong increase in merchandise sales during March and continuing into the third quarter, before stabilizing in the fourth 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 $312.6 million at the end of fiscal 2020.

Sustained lower pawn portfolios will lead to lower pawn service charge revenue and may lead to less inventory available for sale, which in turn may lead to lower merchandise sales volume in fiscal 2021.

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

We recorded a goodwill impairment charge of $41.3 million in the second quarter of fiscal 2020.

In addition, we (a) determined an impairment had occurred in the fair values of 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, all in the second quarter of 2020.

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 has had an adverse effect on our net revenues and earnings in fiscal 2020, producing operating losses in the fourth quarter.

We expect 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 I, Item 1A - Risk Factors."

Strategic Initiatives

During the fourth quarter of fiscal 2020, we began to implement strategic initiatives to refocus on our core pawn business and optimize our cost structure in order to improve our bottom line performance and position the Company for sustainable growth.

The initiatives focused on workforce reductions, closure of our CASHMAX operations in Canada, store closures and write-offs of other miscellaneous charges.

As a result of these initiatives, we incurred the following pre-tax charges during the fourth quarter of fiscal 2020:

• $6.4 million in severance and other payroll-related costs related to a headcount reduction in the corporate office;

• $4.9 million in costs related to the closure of the CASHMAX business and related operations, primarily consisting of severance and other payroll-related costs, net asset write-offs, impairment of internally developed software and contract termination costs;

• $4.1 million in costs primarily related to the closure of four stores in U.S.

Pawn and three stores in Latin America Pawn, consisting primarily of severance and other payroll-related costs and reserves on net assets;

• $5.0 million in other miscellaneous charges, primarily consisting of impairment of internally developed software and contract termination costs.

In addition to optimizing our cost structure to improve profitability and better align with near-term pawn loans outstanding trends, we are focused on creating long-term shareholder value by strengthening our core business operations and continuing to innovate and grow.

Our optimization of pricing, lending and transactional efficiencies, and the modernization of our IT and data assets, will drive more consistent profitability.

Our efforts to give customers more convenient choices, both in-store and through our Lana platform, will result in a superior customer experience, and our continued de novo store growth will give us the opportunity to expand our platform.

In late May and early June 2020, 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 four stores in the U.S.

suffered total losses, and two of these stores were permanently closed as of September 30, 2020.

We recorded $1.9 million in inventory losses, $0.2 million in loan restitution losses and $0.2 million in property, plant and equipment losses during the fiscal year.

The inventory losses were recorded under "Merchandise cost of goods sold" in our consolidated statement of operations.

Results of Operations

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The following table presents selected summary consolidated financial data for fiscal 2020 and fiscal 2019.

Fiscal Year Ended September 30,

Fiscal Year Ended

September 30, Change

(in thousands)

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Merchandise sales gross profit 163,732 155,867 5%

Gross margin on merchandise sales

Gross margin on merchandise sales 33 % 34 % (100) bps

Jewelry scrapping sales 47,953 60,445 (21)%

Jewelry scrapping gross profit 9,912 7,510 32%

Gross margin on jewelry scrapping sales

Gross margin on jewelry scrapping sales 21 % 12 % 900 bps

Other revenues, net 2,953 3,705 (20)%

Net revenues 449,235 494,448 (9)%

Operating expenses 422,565 447,439 (6)%

Impairment of goodwill, intangible and other assets 54,666 — *

Other charges 20,388 — *

Non-operating expenses 21,711 42,835 (49)%

Income from continuing operations before income taxes

Income tax expense

Income from continuing operations, net of tax

(Loss) income from continuing operations before income taxes (70,095) 4,174 (1,779)%

Income tax (benefit) expense (1,632) 2,406 (168)%

(Loss) income from continuing operations, net of tax (68,463) 1,768 (3,972)%

Loss from discontinued operations, net of tax — (457) (100)%

Net (loss) income (68,463) 1,311 (5,322)%

Net loss attributable to noncontrolling interest — (1,230) (100)%

Net income attributable to EZCORP, Inc.

Net (loss) income attributable to EZCORP, Inc.

$ (68,463) $ 2,541 (2,794)%

Net pawn earning assets:

Pawn loans $ 131,323 $ 199,058 (34)%

Inventory, net 95,891 179,355 (47)%

Total net pawn earning assets $ 227,214 $ 378,413 (40)%

* Represents a percentage computation that is not mathematically meaningful.

Net revenues for fiscal 2020 were $449.2 million compared to $494.4 million in the prior year.

Pawn service charges (“PSC”) increased 7% on a higher average pawn loans outstanding (“PLO”) balance throughout the year resulting from acquisitions, newly opened stores and same store growth.

Average ending monthly PLO balances during the current year increased by 7%.

Merchandise sales increased 3% , but gross margin on merchandise sales declined 300 basis points to 34% , resulting in a 4% decline in merchandise sales gross profit.

Excluding a discrete $4.6 million transaction tax adjustment in our Latin America segment, gross margin on merchandise sales was 35%, falling within our target range of 35-38%.

Total operating expenses increased $33.0 million , or 8% , primarily as a result of the acquisition of 84 pawn stores in Latin America in fiscal 2018 that were not in operation for the full fiscal 2018, another 12 pawn stores acquired in the U.S.

and Latin America in fiscal 2019 and the opening of 34 de novo stores in Latin America during fiscal 2018 and 2019, as well as other investments to support the growth of the business.

Total non-operating expenses increased $31.3 million , or 270%, primarily due to:

Impairment of our investment in Cash Converters International in the amount of $19.7 million ($15.3 million, net of taxes) as compared to an impairment of $11.7 million ( $9.2 million , net of taxes) in the prior year;

A $5.7 million decrease in income from our unconsolidated affiliates, primarily Cash Converters International;

A $5.2 million decrease in other income from a favorable legal settlement in the prior year;

A $4.8 million increase in interest expense, primarily due to an increase in average debt outstanding during the current year compared to the prior year, offset by the reduction of interest expense on $195.0 million of our 2019 Cash Convertible Notes which were repaid on June 17, 2019;

A $6.0 million decrease in interest income, primarily due to the declining principal balance on the Grupo Finmart notes 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.

Income taxes decreased $16.0 million due primarily to:

A decrease in income from continuing operations before income taxes;

A discrete transaction tax adjustment with an income tax benefit of $1.8 million in the current year;

A lower maximum U.S.

corporate tax rate of 21% in the current year compared to a higher blended rate in the prior year;

partially offset by

A first quarter fiscal 2018 charge related to the impacts of the U.S.

Tax Cuts and Jobs Act of 2017;

A $3.1 million reduction in benefits associated with the expiration of a statute of limitations on uncertain tax positions.

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 impact of earnings and foreign tax credits from our equity investment in Cash Converters International, the net effect of state taxes, non-deductible items and changes in valuation allowances, the lapse of the statute of limitations of uncertain tax positions, as well as impacts from the new federal tax in the United States.

See Note 10 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of these items.

Pawn service charges (“PSC”) decreased 17% as a result of lower loan demand and increased loan redemptions believed to be related to the federal economic stimulus in response to the COVID-19 pandemic.

Pawn loans outstanding decreased 34% during fiscal 2020.

Merchandise sales increased 10%, but gross margin on merchandise sales declined 100 bps to 33%, resulting in a net 5% increase in merchandise sales gross profit.

Excluding looting charges of $2.3 million and a $2.6 million increase in inventory reserves due to an increase in aged inventory resulting from the impact of COVID-19, gross margin on merchandise sales was flat at 34%.

Jewelry scrapping sales decreased 21%, primarily reflecting disruption in the diamond auction market.

Jewelry scrapping gross profit increased 32% due to a 900 bps increase in gross margin, partially driven by an increase in gold prices.

Operating expenses decreased 6% due to a $21.0 million reversal in accrued short-term and long-term incentive compensation as well as the implementation of strategic initiatives, including cost cutting at the store level due to reduced transaction activity.

During the second and fourth quarters, we recorded goodwill, intangible and other assets impairment charges of $47.1 million and $7.6 million respectively, totaling $54.7 million for the fiscal year, as further described in Note 8 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data .

Other charges of $20.4 million consist of charges recorded in the fourth quarter of fiscal year 2020 due to the implementation of strategic initiatives, as further described in Note 2 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

Total non-operating expenses decreased $21.1 million, or 49%, primarily due to an impairment of $19.7 million in unconsolidated subsidiaries in the prior year with no similar impairment in the current year.

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

Pawn segment:

Fiscal Year Ended September 30,

Fiscal Year Ended

September 30, Change

(in thousands)

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Merchandise sales gross profit 140,377 130,860 7%

Gross margin on merchandise sales

Gross margin on merchandise sales 36 % 37 % (100) bps

Jewelry scrapping sales 36,691 45,815 (20)%

Jewelry scrapping sales gross profit 8,627 6,497 33%

Gross margin on jewelry scrapping sales

Gross margin on jewelry scrapping sales 24 % 14 % 1,000 bps

Other revenues 150 233 (36)%

Segment operating expenses:

Net revenues 359,235 385,959 (7)%

Segment contribution:

Operations expense 261,608 269,003 (3)%

Impairment of goodwill, intangible and other assets 10,000 — *

Depreciation and amortization 11,030 11,879 (7)%

Other charges 3,106 — *

Segment operating contribution 73,491 105,077 (30)%

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Net earning assets — continuing operations (a) $ 182,147 $ 299,674 (39)%

Inventory turnover

Inventory turnover 2.3 1.9 0.4x

Average monthly ending pawn loan balance per store (b) $ 235 $ 292 (20)%

Monthly average yield on pawn loans outstanding

Pawn loan redemption rate

Balance includes pawn loans and inventory.

Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

Net revenue increased $7.0 million , or 2% , primarily due to a 5% , or $11.3 million increase in PSC, partially offset by a 3% , or $3.4 million, decrease in merchandise sales gross profit.

These results include a slight margin decline and an 11% , or $0.8 million, decrease in jewelry scrapping sales gross profit on less scrap volume.

The increase in net revenue attributable to same stores and new stores added/closed during the year is summarized as follows:

Monthly average yield on pawn loans outstanding 14 % 14 % — bps

Pawn loan redemption rate 88 % 84 % 400 bps

* Represents a percentage computation that is not mathematically meaningful.

(a) Balance includes pawn loans and inventory.

(b) Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

Segment contribu tion decreased $28.6 million, primarily due to a $26.7 million decrease in net revenues.

The decrease in net revenues split between same stores and stores closed during the year is summa rized as follows:

Change in Net Revenue

Pawn Service Charges

Merchandise Sales Gross Profit

Pawn Service Charges Merchandise Sales Gross Profit Total

(in millions)

Same stores $ (39.5) $ 8.6 $ (30.9)

Closed stores and other 1.2 0.9 2.1

Total $ (38.3) $ 9.5 $ (28.7)

Change in jewelry scrapping sales gross profit and other revenues 2.0

Total change in net revenue $ (26.7)

PSC increased 5% primarily due to a 5% increase in average ending monthly PLO balances during the current year.

The higher average loan balance was driven by disciplined lending practices and a focus on meeting customers' need for cash, as well as acquired stores.

Same store pawn service charges increased 5%.

Merchandise sales increased 2% , with gross margin on merchandise sales of 37% , a 100 basis point decline over the prior year, but within our target range.

As a result, merchandise sales gross profit decreased 3% to $130.9 million .

Jewelry scrapping sales gross profit remained relatively flat at 2% of net revenues, but down 11% from the prior year, in-line with our strategy to sell rather than scrap jewelry in prime sales periods, with a 100 basis point decrease in gross margin to 14% .

Operations expenses increased 2% , including increased team member compensation at same stores.

Depreciation and amortization improved 8% primarily as a result of a discrete charge of $0.5 million for the retirement of certain assets in the prior year.

A 2% increase in net revenue resulted in a 1% decrease in segment contribution primarily as a result of a $2.9 million reserve against a receivable balance from a gold refiner deemed uncollectible due to the refiner's Chapter 11 bankruptcy included in other segment expenses.

As a net effect of these factors, segment contribution decreased 1% to $101.7 million .

PSC decreased 15% primarily due to a substantial decline in new loan originations and associated loan balances because of a change in customer borrowing behaviors during the COVID-19 pandemic.

Merchandise sales increased 10% and merchandise sales gross profit increased 7% to $140.4 million primarily due to the impact of federal economic stimulus measures, with gross margin on merchandise sales down 100 bps to 36%, falling within our target range of 35-38%.

Excluding looting charges of $2.1 million and a $1.4 million increase in inventory reserves due to an increase in aged inventory resulting from the impact of COVID-19, gross margin on merchandise sales remained flat at 37%.

Jewelry scrapping sales gross profit increased 33% to $8.6 million, due primarily to higher scrapping margins as a result of higher gold prices and a reduction in demand for diamond scrap sales.

Jewelry scrap sales margins increased 1,000 bps to 24%.

Total expenses increased $1.8 million, or 1%.

Excluding an impairment charge of $10.0 million and other charges of $3.1 million, total expenses decreased $11.3 million, or 4%, primarily due to a $7.4 million decrease in operating expenses ($5.0 million attributable to cost reduction initiatives and $2.4 million attributable to the reversal of accrued short-term and long-term incentive compensation) and a $3.0 million decrease in loss on sale or disposal of assets.

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").

In addition to the financial information prepared in conformity with generally accepted accounting principles in the United States ("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 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 more complete understanding 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.

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dollars as of and for the three and twelve months ended September 30, 2020 and 2019 were as follows:

September 30,

Three Months Ended September 30,

Twelve Months Ended

September 30, Three Months Ended

September 30, Twelve Months Ended

September 30,

2020 2019 2020 2019 2020 2019

Mexican peso 21.6 19.7 22.1 19.4 21.0 19.4

Guatemalan quetzal 7.6 7.6 7.5 7.5 7.5 7.6

Honduran lempira 24.3 24.2 24.3 24.1 24.3 24.1

Peruvian sol 3.5 3.4 3.5 3.3 3.4 3.3

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

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Latin America Pawn

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

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 of the Mexican peso, Guatemalan quetzal, Honduran lempira and Peruvian sol.

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Fiscal Year Ended September 30,

Change (GAAP)

(Constant Currency)

Change (Constant Currency)

(in thousands)

(in thousands) (in thousands)

Net revenues:

2 unchanged sentences

Merchandise sales gross profit 23,355 25,007 (7)% 24,838 (1)%

Gross margin on merchandise sales

Gross margin on merchandise sales 22 % 26 % (400) bps 22 % (400) bps

Jewelry scrapping sales 11,262 14,630 (23)% 11,961 (18)%

Jewelry scrapping sales gross profit 1,285 1,013 27% 1,347 33%

Gross margin on jewelry scrapping sales

Other revenues

Segment operating expenses:

Depreciation and amortization

Segment operating contribution

Other segment expense (income) (a)

Gross margin on jewelry scrapping sales 11 % 7 % 400 bps 11 % 400 bps

Other (expenses) revenues, net (101) 179 (156)% (164) (192)%

Net revenues 87,096 105,196 (17)% 91,534 (13)%

Segment contribution:

Operations expense 69,916 74,199 (6)% 73,377 (1)%

Impairment of goodwill, intangible and other assets 35,938 — * 37,745 *

Depreciation and amortization 7,315 6,267 17% 7,749 24%

Other charges 1,715 — * 1,801 *

Segment operating (loss) contribution (27,788) 24,730 (212)% (29,138) (218)%

Other segment (income) expense (a) (1,129) 606 (286)% (1,625) *

Segment (loss) contribution $ (26,659) $ 24,124 (211)% $ (27,513) (214)%

Net earning assets — continuing operations (b) $ 45,067 $ 78,739 (43)% $ 49,163 (38)%

Inventory turnover

Inventory turnover 2.8 2.4 0.4x 2.4 —x

Average monthly ending pawn loan balance per store (c) $ 70 $ 89 (21)% $ 92 3%

Monthly average yield on pawn loans outstanding

Pawn loan redemption rate (d)

Monthly average yield on pawn loans outstanding 15 % 16 % (100) bps 16 % — bps

Pawn loan redemption rate (d) 78 % 78 % — bps 78 % — bps

* Represents a percentage computation that is not mathematically meaningful.

Fiscal 2019 constant currency amount excludes nominal net GAAP basis foreign currency transaction gains resulting from movement in exchange rates.

The net foreign currency transaction gains for fiscal 2018 were $0.2 million and are included in the above results.

Balance includes pawn loans and inventory.

Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

Rate is solely inclusive of results from Empeño Fácil.

In the current year, our Latin America pawn segment acquired five pawn stores and opened 22 de novo stores.

At new stores, net revenue growth typically trails the growth in expenses until new stores begin to mature and until acquired stores are fully integrated and migrated to our operating metrics.

Net revenue increased $9.0 million , or 9% , ($11.8 million, or 12% , on a constant currency basis), primarily due to a 17% increase ( 20% on a constant currency basis) in PSC, offset by a 9% decrease ( 6% on a constant currency basis) in merchandise sales gross profit, inclusive of a discrete tax adjustment of $4.6 million relating to prior periods.

Excluding the discrete transaction tax adjustment, net revenues increased 14% (17% on a constant currency basis).

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

(a) Fiscal 2020 constant currency amount excludes net GAAP basis foreign currency transaction gains of $0.5 million resulting from movement in exchange rates.

(b) Balance includes pawn loans and inventory.

(d) Rate is solely inclusive of results from Empeño Fácil.

During fiscal 2020, we opened 23 de novo stores in Latin America.

Segment contribution decreased $50.8 million, or 211%, to $(26.7) million (down 214% on a constant currency basis), primarily due to the goodwill impairment charges of $35.9 million recorded during the second quarter.

Excluding those charges, segment contribution decreased $14.5 million, primarily due to a decrease in net revenues.

The decrease in net revenues split between same stores and stores added/closed during the year is summa rized as follows:

Change in Net Revenue (GAAP)

Pawn Service Charges

Merchandise Sales Gross Profit

Pawn Service Charges Merchandise Sales Gross Profit Total

(in millions)

Same stores (a)

New stores and other

Same stores $ (17.8) $ (3.4) $ (21.2)

Stores added/closed and other 1.4 1.7 3.1

Total $ (16.4) $ (1.7) $ (18.1)

Change in jewelry scrapping sales gross profit and other revenues —

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Change in Net Revenue (Constant Currency)

Pawn Service Charges

Merchandise Sales Gross Profit

Pawn Service Charges Merchandise Sales Gross Profit Total

(in millions)

Same stores (a)

New stores and other

Same stores $ (14.9) $ (2.0) $ (16.9)

Stores added/closed and other 1.2 0.8 2.0

Total $ (13.7) $ (1.2) $ (14.9)

Change in jewelry scrapping sales gross profit and other revenues —

Total change in net revenue $ (14.9)

Amount includes discrete tax adjustment in merchandise sales gross profit of $4.6 million ($4.4 million on a constant currency basis).

PSC increased 17% ( 20% on a constant currency basis).

The average ending monthly PLO balance per store during the current year increased 1% ( 2% on a constant currency basis).

PSC includes a $1.1 million increase in revenue attributable to the receipt of previously escrowed seller funds as a result of settling certain indemnification claims with the sellers of GPMX.

In the current year, we loaned the $1.1 million back to the seller of GPMX in exchange for a promissory note.

The note bears interest at the rate of 2.89% per annum and is secured by certain marketable securities owned by the seller and held in a U.S.

brokerage account.

All principal and accrued interest is due and payable in April 2024.

Merchandise sales increased 11% ( 14% on a constant currency basis) primarily from newly acquired stores, reduced by a $4.6 million discrete transaction tax adjustment relating to prior periods.

Excluding the discrete transaction tax adjustment, gross margin on merchandise sales was 29%, or 200 basis points, below the prior year.

The lower merchandise sales margin was influenced by efforts to liquidate aged general merchandise as well as slightly more lenient underwriting to optimize the balance between PSC and sales gross profit.

As a result of these factors, merchandise sales gross profit was down 9% to $25.0 million ( 6% to $25.9 million on a constant currency basis).

Excluding the discrete transaction tax adjustment, merchandise sales gross profit increased 8% to $29.6 million (up 10% to $30.3 million on a constant currency basis).

Jewelry scrapping sales increased 12% ( 15% on a constant currency basis), with a 200 basis point decrease in margin to 7% .

The slightly lower scrap margin reflects higher processing fees from a new refiner following the bankruptcy of our prior refiner, as well as our stores’ efforts to merchandise higher value jewelry in store rather than scrapping to obtain a higher overall gross profit.

Other segment expense included interest of $1.5 million related to the previously discussed discrete transaction tax adjustment.

Net revenue increased 9% (12% on a constant currency basis) in the current year.

Excluding the discrete transaction tax adjustment, net revenues increased 14% (17% on a constant currency basis).

Operations expense increased at a faster pace of 21% ( 23% on a constant currency basis).

Of this increase, 11% was attributable to same stores and the remaining 10% was attributable to newly acquired or opened stores.

At new stores, net revenue growth typically trails the growth in expenses until new stores begin to mature and until acquired stores are fully integrated and migrated to our operating metrics.

Contributing to the overall increase in operating expenses was higher labor, energy and robbery/security costs, as well as increases in operating supplies at same stores and the cost of new licensing requirements in Mexico.

We are investing in improved security features at higher risk stores to deter, thwart and limit the losses from future robbery attempts, not only to decrease direct robbery losses but to enhance the safety and comfort of our team members and customers.

Depreciation and amortization increased 54% ( 57% on a constant currency basis) from new and acquired stores and additional capital investment in existing and acquired operations following acquisition.

Additionally, we recorded a $0.7 million reserve against a receivable deemed uncollectible from a refiner, consisting of a $1.5 million reserve recorded in the first quarter ended December 31, 2018 and a subsequent $0.8 million recovery in the second quarter of fiscal 2019 included in other segment expenses.

These factors resulted in a decrease in segment contribution of $9.0 million or 27% ($8.1 million or 24% on a constant currency basis), including the impact of a $6.1 million discrete transaction tax adjustment.

Other International

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

dollars from its reporting units’ functional currencies of primarily Canadian and Australian dollars:

Fiscal Year Ended September 30,

Percentage Change

(in thousands)

Net revenues:

Consumer loan fees and interest

Consumer loan bad debt

Segment operating expenses (income):

Operating expenses

Equity in net loss (income) of unconsolidated affiliates

Segment operating (loss) income

Impairment of investment

Other segment expense (income)

Represents a percentage computation that is not mathematically meaningful.

Segment loss of $26.8 million was $16.8 million greater than the prior year loss primarily due to:

Impairment of our investment in Cash Converters International in the amount of $19.7 million ($15.3 million, net of taxes);

A $5.7 million decrease in income from our unconsolidated affiliates including recognition of several discrete charges recognized by Cash Converters International;

A $3.1 million decrease in net revenue as we continue to manage the product mix between installment loans and single-pay loans in Canada;

A $1.9 million charge from the expiration of a call option as a result of a third-party investment in Rich Data Corporation (“RDC”), our unconsolidated affiliate;

partially offset by

A $2.3 million decrease in costs to develop technology to drive future revenue enhancement as a result of the deconsolidation of RDC.

Due partly to regulatory changes that became effective January 1, 2018, we added installment loan products in our Canada CASHMAX business to meet the needs of our customers.

In addition to single-pay loans, all CASHMAX stores now offer installment loans with terms ranging from six to 18 months and average yields of 47% per annum.

We recently decreased efforts to grow the installment loan balance and refocused on serving customers’ greater demand for single-pay loans and, as a result, have seen improved operating results in the latter half of fiscal 2019.

We entered into a secured borrowing arrangement in November 2018 to provide up to CAD $25.0 million to fund originations of installment loans through November 2019 and have obtained $1.5 million in proceeds from the facility through September 30, 2019.

See Note 8 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.”

Subsequent to September 30, 2019 (on October 21, 2019), Cash Converters International agreed to settle the sole remaining class action lawsuit previously lodged on behalf of borrowers residing in Queensland, Australia who took out personal loans from Cash Converters International between July 30, 2009 and June 30, 2013.

Cash Converters International agreed to pay AUD $42.5 million, subject to court approval.

We estimate recording a charge of approximately $10.0 million for our share of the settlement from Cash Converters International in fiscal 2020 related to this event, in addition to our regularly included share of their earnings.

Cash Converters International has announced that it intends to fund the settlement with cash on hand and cash flow from operations.

Though such increase in value does not affect the carrying value of our investment, shares in Cash Converters International increased from AUD $0.14 as of September 30, 2019 to AUD $0.245 as of October 30, 2019, representing an increase in value of our investment of $15.8 million during that period.

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:

Fiscal Year Ended September 30,

Percentage Change

(in thousands)

Segment contribution

Corporate expenses (income):

Administrative

Depreciation and amortization

Loss on sale or disposal of assets and other

Interest expense

Interest income

Income from continuing operations before income taxes

Income tax expense

Income from continuing operations, net of tax

Loss from discontinued operations, net of tax

Net loss attributable to noncontrolling interest

Net income attributable to EZCORP, Inc.

Segment contribution decreased primarily due to a $19.7 million impairment of our investment in Cash Converters International, a $2.9 million charge included in our ordinary share of earnings from Cash Converters International, several discrete charges recorded by Cash Converters International and the impact of a $6.1 million discrete transaction tax adjustment in our Latin America Pawn segment.

Administrative expenses increased $10.0 million , or 19% , in the current year primarily due to $6.7 million of strategic investments in the Lana digital platform, due diligence expenses on acquisition opportunities ultimately abandoned, other professional fees and costs related to recruitment and compensation of additional members of our board of directors.

Depreciation and amortization expense increased $2.1 million, or 25% , primarily due to additional capitalized software costs, including the costs to develop our new point of sale system.

Interest expense increased $2.8 million, or 10% , primarily due to an increase in average debt outstanding during the current year compared to the prior year, offset by the reduction of interest expense on our 2019 Convertible Notes which were repaid on June 17, 2019.

Effective interest rates on our outstanding convertible debt were approximately 8% to 9%.

We expect interest expense to decrease in future periods due to the repayment of the 2019 Cash Convertible Notes.

For additional information about our financing transactions, see “ Note 8 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

Interest income decreased $4.9 million , or 34% , primarily due to the declining principal balance on the Grupo Finmart notes as they are repaid in accordance with their agreed amortization schedule and the reduction of interest earned on outstanding cash balances after repayment of our 2019 Convertible Notes in June 2019.

The remainder of principal outstanding on the Grupo Finmart notes and the first installment ($6.0 million) of the deferred compensation fee were received by September 2019, reducing the amount of interest income recognized going forward.

As of September 30, 2019, remaining amounts receivable under the Grupo Finmart notes receivable are $4.0 million in March 2020 and $4.0 million in September 2020, plus interest.

Other income in the prior year was comprised primarily of $5.2 million in net recoveries pertaining to a legal settlement.

Income taxes decreased $16.0 million due primarily to:

A $51.4 million decrease in income from continuing operations before income taxes;

A discrete transaction tax adjustment with a tax benefit of $1.8 million in the current year;

A lower maximum U.S.

corporate tax rate of 21% in the current year compared to a higher blended rate in the prior year;

partially offset by

A first quarter of fiscal 2018 charge related to the impacts of the U.S.

Tax Cuts and Jobs Act of 2017;

A $3.1 million reduction in benefits associated with the expiration of a statute of limitations on uncertain tax positions.

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 impact of earnings and foreign tax credits from our equity investment in Cash Converters International, the net effect of state taxes, non-deductible items and changes in valuation allowances, the lapse of the statute of limitations of uncertain tax positions in the current year, as well as impacts from the new federal tax regime in the United States.

See Note 10 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of these items.

Fiscal 2018 vs.

Summary Financial Data

The following table presents selected summary consolidated financial data for fiscal 2018 and 2017 .

Fiscal Year Ended September 30,

(in thousands)

Net revenues:

Pawn service charges

Merchandise sales

Merchandise sales gross profit

Gross margin on merchandise sales

Jewelry scrapping sales

Jewelry scrapping sales gross profit

Gross margin on jewelry scrapping sales

Other revenues, net

Operating expenses

Non-operating expenses

Income from continuing operations before income taxes

Income tax expense

Income from continuing operations, net of tax

Loss from discontinued operations, net of tax

Net loss attributable to noncontrolling interest

Net income attributable to EZCORP, Inc.

Net pawn earning assets:

Inventory, net

Total net pawn earning assets

Net revenues for fiscal 2018 were $481.6 million compared to $435.5 million in the prior year, driven primarily by acquired stores.

PSC increased 12% on a higher average PLO balance resulting from acquisitions and same store growth.

Merchandise sales increased 6% with gross margin on merchandise sales improving 100 basis points to 37% , falling within our target range of 35-38%.

Total operating expenses increased $32.0 million, or 8% , primarily as a result of the acquisition of 196 pawn stores in Latin America during fiscal 2018.

Total non-operating expenses increased $1.2 million, or 12% , primarily due to:

Impairment of our investment in Cash Converters International in the amount of $11.7 million ($9.2 million, net of taxes);

partially offset by

A $4.9 million increase in interest income on the Grupo Finmart notes receivable, in addition to ordinary accruals of interest and accretion of associated debt discounts;

A $5.0 million increase in other income primarily due to net recoveries from a legal settlement.

Income taxes increased $7.3 million, or 66% , from $11.1 million in fiscal 2017 to $18.4 million in fiscal 2018.

The overall increase in our tax expense was driven primarily by a 30% increase in our pre-tax earnings.

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

In addition, we were impacted by the Tax Cuts and Jobs Act of 2017 (the "Act") as well as the lapse of statutes of limitations on uncertain tax positions in the current year.

That tax law change caused us to revalue our net deferred tax assets to reflect the lower U.S.

federal tax rate at which deferred tax items are expected to reverse, partially offset by the expiration of statutes of limitations on some previously uncertain tax positions.

See Note 10 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of these items.

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

Pawn segment:

Fiscal Year Ended September 30,

Net revenues decreased $ 18.1 million, or 17%, primarily due to a decrease in PSC of $16.4 million.

PSC decreased 21%, or 17% on a constant currency basis, primarily due to a substantial decline in new loan originations and associated loan balances because of a change in customer borrowing behaviors during the COVID-19 pandemic.

Pawn loans outstanding decreased by 40% during the current year.

Merchandise sales increased 9% (16% on a constant currency basis) as we continued with efforts to reduce aged general merchandise at a higher cost basis, with an offsetting 400 bps decline in margins to 22% (400 bps on a constant currency basis).

Excluding the $1.2 million increase in inventory reserves due to an increase in aged inventory resulting from the impact of COVID-19, gross margin on merchandise sales decreased to 23% from 26%.

Jewelry scrapping gross profit increased 27% (33% on a constant currency basis) due to a 400 bps increase in margins (400 bps on a constant currency basis), as a result of higher gold prices.

Operations expense decreased $4.3 million or 6% (1% on a constant currency basis) due to cost reduction initiatives.

Of the total decrease, $1.1 million is related to the reversal of accrued short-term and long-term incentive compensation.

The following table presents selected summary financial data from the Lana segment:

Fiscal Year Ended

September 30, Change

(in thousands)

Net revenues:

Pawn service charges

Merchandise sales

Merchandise sales gross profit

Gross margin on merchandise sales

Jewelry scrapping sales

Jewelry scrapping sales gross profit

Gross margin on jewelry scrapping sales

Other revenues, net

Segment operating expenses:

Depreciation and amortization

Segment operating contribution

Other segment expenses

Segment contribution:

Net earning assets — continuing operations (a)

Inventory turnover

Average monthly ending pawn loan balance per store (b)

Monthly average yield on pawn loans outstanding

Pawn loan redemption rate

Balance includes pawn loans and inventory.

Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

Net revenue increased $4.9 million, or 1%, due to higher gross margins from our merchandise and jewelry scrapping sales.

The increase in net revenue in fiscal 2018 attributable to same stores and new stores added/closed during the year is summarized as follows:

Change in Net Revenue

Pawn Service Charges

Merchandise Sales Gross Profit

(in millions)

Closed stores and other

Change in jewelry scrapping sales gross profit and other revenues

Total change in net revenue

PSC decreased 1% due to a similar decrease in average PLO balances during fiscal 2018, with yield unchanged.

PLO balances were negatively affected by Hurricanes Harvey and Irma near the end of fiscal 2017 and the relief funds provided by FEMA and others in the months following the storms, which partially mitigated our customers’ loan demand.

Recovery of the loan balance continued throughout fiscal 2018.

Merchandise sales were flat, but gross margin on merchandise sales increased 200 basis points to 38%, resulting in a 5% improvement in merchandise sales gross profit to $134.3 million.

The increase in gross margin was due to enhanced discipline in pricing and discounting.

Jewelry scrapping sales gross profit remained at 2% of current year net revenues, in-line with our strategy to sell rather than scrap merchandise, with a 100 basis point increase in gross margin to 15% due primarily to improvements in lending practices.

Operations expenses increased 1%, primarily due to the cost of labor, and depreciation and amortization increased 27% primarily as a result of additional capital expenditures associated with our store refresh initiatives and a discrete charge of $0.5 million for the retirement of certain assets.

As a result of these factors, segment contribution was down 1% to $102.7 million.

Latin America Pawn

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

dollars from its functional currency of the Mexican peso.

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

Fiscal Year Ended September 30,

Change (GAAP)

2018 (Constant Currency)

Change (Constant Currency)

(in thousands)

Net revenues:

Pawn service charges

Merchandise sales

Merchandise sales gross profit

Gross margin on merchandise sales

Jewelry scrapping sales

Jewelry scrapping sales gross profit

Gross margin on jewelry scrapping sales

Other revenues

Segment operating expenses:

Operations 4,270 7,675 (44)%

Depreciation and amortization 1,058 10 *

Segment operating contribution

Other segment income (a)

Segment contribution (loss)

Net earning assets — continuing operations (b)

Inventory turnover

Average monthly ending total pawn loan balances per store (c)

Monthly average yield on pawn loans outstanding

Pawn loan redemption rate (d)

Fiscal 2018 constant currency amount excludes $0.2 million of net GAAP basis foreign currency transaction gains resulting from movement in exchange rates.

The net foreign currency transaction gains for fiscal 2017 were $0.1 million and are included in the above results.

Balance includes pawn loans and inventory.

Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

Rate is solely inclusive of results from Empeño Fácil.

During fiscal 2018, we increased our store count in Latin America by 84% through the acquisition of a total of 196 stores and the opening of 12 de novo stores.

The acquisitions strengthened our position in Mexico and provided our first entry into Guatemala, El Salvador, Honduras and Peru.

See “Part I, Item 1 — Business — Growth and Expansion.” As a result of these initiatives, combined with strong same store results, net revenue increased $40.7 million, or 73% (up $41.7 million, or 75% , on

a constant currency basis).

The increase in net revenue attributable to same stores and new stores added/closed during the year is summarized as follows:

Change in Net Revenue (GAAP)

Pawn Service Charges

Merchandise Sales Gross Profit

(in millions)

New stores and other

Change in jewelry scrapping sales gross profit and other revenues

Total change in net revenue

Change in Net Revenue (Constant Currency)

Pawn Service Charges

Merchandise Sales Gross Profit

(in millions)

New stores and other

Change in jewelry scrapping sales gross profit and other revenues

Total change in net revenue

PSC was up 96% (99% on a constant currency basis) primarily due to the addition of acquired stores discussed above and same store growth.

Including the impact of new and acquired stores and foreign currency movements, the average PLO balance per store during fiscal 2018 increased 22%.

Same store PSC grew 11% on a 9% growth in average same store PLO.

Merchandise sales were up 39% on both a GAAP and a constant currency basis, with gross margin on merchandise sales of 31%, 100 basis points below the prior year.

As a result of the combination of these effects, offset by foreign currency impacts, merchandise sales gross profit was up 38% to $27.5 million (38% to $27.4 million on a constant currency basis).

Jewelry scrapping sales increased 336% (GAAP and constant currency) with a 700 basis point decline in margin, primarily due to the results of the acquired stores discussed above.

Though we have steadily increased their general merchandise business since acquisition, the 112 GPMX stores acquired in Guatemala, El Salvador, Honduras and Peru in October 2017 have a higher concentration of pawn loans collateralized by gold jewelry than our stores in Mexico, and they scrap a greater portion of any jewelry loan defaults than our other stores.

This relationship drove the larger increase in total Latin America PSC and jewelry scrapping sales in relation to the smaller increase in in-store merchandise sales.

We leveraged a 73% increase in net revenue (75% on a constant currency basis) into an 87% increase in segment operating contribution (94% increase on a constant currency basis) due to greater operational leverage from the addition of the acquired stores, resulting in only a 69% increase (68% on a constant currency basis) in operations expenses.

After a $0.8 million improvement in other segment income, primarily interest income from our peso-denominated note receivable, segment contribution increased 82% to $33.2 million (up 89% to $34.4 million on a constant currency basis).

See Note 2 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of revenue and net income attributable to the fiscal 2018 acquisitions.

Other charges 3,258 — *

Operations expense and other 8,586 7,685 12%

Segment loss $ (8,552) $ (7,685) 11%

* Represents a percentage computation that is not mathematically meaningful.

Discrete revenues to date are minimal as the Lana 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 our pawn segments.

Operations expense decreased 44% due to the initial investment of non-capitalizable costs in the Lana platform in the prior year.

Segment loss increased 11% primarily as a result of the $3.3 million increase in other charges primarily related to the impairment of Lana software of $3.0 million and an increase in depreciation of $1.0 million (as the product offering was launched in the first quarter of fiscal 2020) offset by the decrease in operations expense.

The impairment was due to a strategic initiative to focus on significantly improving and strengthening our core pawn business, which led to scaling back our expectations and development of Lana to a digital customer service platform to support our pawn businesses.

Other International

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

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

dollars from its reporting units’ functional currencies of primarily Canadian and Australian dollars:

Fiscal Year Ended September 30,

Percentage Change

Fiscal Year Ended

September 30, Change

(in thousands)

2 unchanged sentences

Consumer loan bad debt (953) (2,338) (59)%

Segment operating expenses:

Net revenues 2,870 3,293 (13)%

Segment operating loss:

Operating expenses 5,314 7,595 (30)%

Equity in net income of unconsolidated affiliate

Segment operating income

Impairment of goodwill, intangible and other assets 1,149 — *

Impairment of investment — 19,725 *

Other segment income

Segment (loss) income

Other charges 3,802 — *

Equity in net loss of unconsolidated affiliates 2,429 135 *

Segment operating loss (9,824) (24,162)

Other segment expense 535 2,668 (80)%

Segment loss $ (10,359) $ (26,830) (61)%

* Represents a percentage computation that is not mathematically meaningful.

Segment loss was $10.0 million, a decrease of $12.4 million from the prior year primarily due to:

Impairment of our investment in Cash Converters International in the amount of $11.7 million ($9.2 million, net of taxes) related to shares acquired prior to fiscal 2018;

A $1.7 million increase in operating expenses, including further investment in the development of technology to drive future revenue enhancement.

Segment loss was $10.4 million, an improvement of $16.5 million from the prior year primarily due to an impairment of our investment in Cash Converters International in the amount of $19.7 million in the prior year with no similar impairment in the current year, offset by 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.

We operated 22 fina ncial services stores in Canada under the CASHMAX brand during the fiscal year.

All of the stores were located in the Ontario province, in and around Toronto.

During the fourth quarter, we closed our CASHMAX business.

We recorded other charges of $4.9 million in this segment, primarily consisting of severance and other payroll-related costs, net asset write-offs, impairment of internally developed software and contract termination costs.

In October 2019, Cash Converters International agreed to settle the sole remaining class action lawsuit previously lodged on behalf of borrowers residing in Queensland, Australia who took out personal loans from Cash Converters International between July 30, 2009 and June 30, 2013.

Cash Converters International agreed to pay AUD $42.5 million in two tranches, subject to court approval.

We recorded a charge of approximately $10.0 million for our share of the settlement from Cash Converters International in fiscal 2020 related to this event, in addition to our regularly included share of their earnings.

Fiscal Year Ended September 30,

Percentage Change

Fiscal Year Ended

September 30, Change

(in thousands)

2 unchanged sentences

Administrative 49,897 55,990 (11)%

Impairment of goodwill and intangibles 7,579 — *

Depreciation and amortization 11,356 10,422 9%

Loss on sale or disposal of assets and other 508 24 *

Other charges 8,507 — *

Interest expense 21,238 30,537 (30)%

Interest income (1,587) (9,485) (83)%

Income from continuing operations before income taxes

Income tax expense

Income from continuing operations, net of tax

Other income 133 (378) *

(Loss) income from continuing operations before income taxes (70,095) 4,174 *

Income tax (benefit) expense (1,632) 2,406 (168)%

(Loss) income from continuing operations, net of tax (68,463) 1,768 *

Loss from discontinued operations, net of tax — (457) (100)%

Net (loss) income (68,463) 1,311 *

Net loss attributable to noncontrolling interest — (1,230) *

Net income attributable to EZCORP, Inc.

Administrative expenses increased $0.1 million, as we focused on controlling administrative expenditures despite the growth of the business.

Depreciation and amortization expense decreased $2.3 million, or 21% , primarily due to acceleration of depreciation in the prior year for certain assets resulting from a decrease in useful life estimates.

Interest expense was flat due to the net effect of the following financing transactions:

The May 2018 issuance of $172.5 million aggregate principal amount of 2.375% Senior Convertible Notes Due 2025, including accruals of interest and amortization of associated discounts and deferred financings costs;

Extinguishment of debt and other costs of $5.3 million in fiscal 2017 as a result of retiring $35 million principal amount of our 2.125% Senior Cash Convertible Notes Due 2019 and the entirety of our $100 million Term Loan Facility in July 2017;

The July 2017 issuance of $143.8 million aggregate principal amount of 2.875% Senior Convertible Notes Due 2024, including accruals of interest and amortization of associated discounts and deferred financings costs.

Net (loss) income attributable to EZCORP, Inc.

$ (68,463) $ 2,541 *

* Represents a percentage computation that is not mathematically meaningful.

Administrative expenses decreased $6.1 million, or 11%, primarily due to the reduction of short-term and long-term incentive compensation of approximately $17.0 million, offset by a $10.9 million increase in labor costs.

Other charges include $8.5 million of charges resulting from the implementation of cost saving initiatives and rationalizing non-core activities.

These charges include $5.4 million in severance costs and other payroll-related costs and $3.1 million of miscellaneous charges.

Interest expense decreased $9.3 million, or 30%, primarily due to the repayment in June 2019 of our 2.125% Cash Convertible Senior Notes Due 2019.

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

For additional information about our financing transactions, see “Note 9 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

Interest income increased $4.2 million, or 42% , primarily as a result of our notes receivable from the sale of Grupo Finmart, which were restructured in September 2017, including ordinary accruals of interest in addition to accretion of associated deferred compensation amounts.

Throughout the year, Grupo Finmart made timely monthly principal and interest payments on the notes in accordance with the amortization schedule.

Excess cash on hand has generated incremental interest income.

Other income included primarily $5.2 million in net recoveries received in connection with the settlement of a derivative lawsuit that was initiated in fiscal 2014 and settled in the third quarter of fiscal 2018.

Income taxes increased $7.3 million, or 66%, from $11.1 million in fiscal 2017 to $18.4 million in fiscal 2018.

The overall increase in our tax expense was driven primarily by an increase in our pre-tax earnings from $42.7 million to $55.5 million.

Interest income decreased $7.9 million, or 83%, 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 taxes decreased $4.0 million due primarily to:

• A $74.3 million decrease in income from continuing operations before income taxes;

• A $9 million increase in income tax expense resulting from non-deductible goodwill impairments.

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 impact of earnings and foreign tax credits from our equity investment in Cash

Converters International, the net effect of state taxes, non-deductible items and changes in valuation allowances, the lapse of the statutes of limitations of uncertain tax positions in the current year, as well as impacts from the new federal tax in the United States.

On December 22, 2017, the Act was signed into law.

Among other things, the Act reduced the U.S.

federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings.

The corporate tax rate reduction was effective January 1, 2018 and, accordingly, reduced our fiscal 2018 federal statutory rate to a blended rate of 24.5%, with a further reduction to 21% beginning in fiscal 2019 as a result of our fiscal year ending September 30.

As of September 30, 2018, we finalized amounts previously estimated related to the impact of the Act.

We recognized a $2.1 million charge for the revaluation of our deferred tax assets and liabilities to the reduced tax rate upon enactment of the Act.

In addition, we recorded a charge of approximately $2.6 million to record a valuation allowance against foreign tax credit carryforwards which fail to meet the “more likely than not” threshold to be utilized as a result of changes in tax law enacted as part of the Act.

Both items are included as components of "Income tax expense" in our consolidated statements of operations in fiscal 2018.

We believe we have adequate foreign tax credits to fully offset any transition tax on the total post-1986 foreign earnings and profit of our foreign subsidiaries as required under the Act.

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

See Note 11 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of these items.

Loss from discontinued operations was primarily comprised of the write-off of balances from a discontinued business which we previously anticipated to collect.

Fiscal 2019 vs.

The Results of Operations discussion for fiscal 2019 vs.

fiscal 2018 has been omitted and is located 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, which was filed with the SEC on December 5, 2019.

Liquidity and Capital Resources

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

Fiscal Year Ended September 30,

Fiscal Year Ended

September 30,

(in thousands)

Cash flows from operating activities $ 49,078 $ 103,517 (53)%

Cash flows from investing activities

Cash flows from financing activities

Cash flows from (used in) investing activities 109,898 (27,829) 495%

Cash flows used in financing activities (6,253) (198,317) 97%

Effect of exchange rate changes on cash and cash equivalents (2,612) (507) *

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents and restricted cash $ 150,111 $ (123,136) 222%

* Represents a percentage computation that is not mathematically meaningful.

Change in Cash and Cash Equivalents for Fiscal 2019 vs.

The increase in cash flows from operating activities was due to a $26.3 million change in operating assets and liabilities as we enhanced efforts to efficiently manage working capital, offset by an $11.7 million decrease in net income plus several non-cash items.

We expect some reduction in cash flow in the first quarter of fiscal 2020 compared to the comparable prior-year quarter, as we repaid certain accounts payable shortly after September 30, 2019.

The increase in cash flows from investing activities was due to an $85.0 million decrease in net cash paid for acquisitions, $14.0 million paid for the purchase of additional shares in Cash Converters International in the prior year, a $1.6 million decrease in net additions to property and equipment as well as capitalized labor, a $4.0 million decrease in net investments related to loan activities and a $1.7 million increase in principal collections from our Grupo Finmart notes receivable.

The decrease in cash flows from financing activities was due primarily to repayment of $195.0 million of our 2.125% Cash Convertible Senior Notes Due 2019 in June 2019, the May 2018 issuance of our $172.5 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2025 and a $3.0 million increase in cash paid for employee net share settlement of individual tax liabilities on vested share-based awards.

The net effect of these and other smaller items was a $123.1 million decrease in cash on hand at September 30, 2019 , providing a $157.6 million ending cash balance, exclusive of restricted cash.

As of September 30, 2019 , our primary source of liquidity was $157.6 million in cash and cash equivalents and cash flows from operations.

Of this amount, approximately 20%, or $30.8 million , was held by foreign subsidiaries and is not available to fund domestic operations, portions of which we may be unable

to repatriate without incurring foreign withholding taxes.

Cash flows from discontinued operations are aggregated with cash flows from continuing operations in the statements of cash flows.

The decrease in cash flows from operating activities year-over-year was due to $33.2 million of changes in working capital and a $20.3 million change 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 $129.5 million net decrease in new loan originations and associated loan balances because of a change in customer borrowing behaviors during the COVID-19 pandemic and a $15.8 million increase in the sale of forfeited collateral, partially offset by a $26.1 million net decrease in principal collections on the Grupo Finmart notes receivable.

The decrease in cash flows used in financing activities was due primarily to repayment of $195.0 million principal amount of 2.125% Cash Convertible Senior Notes Due 2019 in the prior year, partially offset by $5.2 million in common stock repurchases in the current year.

The net effect of these changes was a $150.1 million increase in cash on hand during the current year, resulting in a $312.6 million ending cash and restricted cash balance.

Of the ending cash balance on September 30, 2020, $49.0 million was unavailable to fund domestic operations as we intend to permanently reinvest those funds in our foreign operations and $8.0 million was also unavailable as these funds are being held in an escrow account pending resolution of an indemnification claim related to the sale of Grupo Finmart.

Sources and Uses of Cash

In December 2019, our Board of Directors authorized the repurchase of up to $60.0 million of our Class A Non-voting Common Stock over the three years following plan adoption.

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

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.

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 year ended September 30, 2020, we repurchased and retired 943,149 shares of our Class A Common Stock for $5.2 million.

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 2021.

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.

For a description of acquisitions completed, see Note 2 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

Capital Expenditures

Capital expenditures during fiscal 2019 included a) expenditures related to the development of Lana and strategic initiatives to leverage customer data into improved underwriting and pricing decisions, b) our point of sale system upgrade to improve employee and customer experience for processing pawn transactions and c) other store expenditures.

Capital expenditures during fiscal 2018 included expenditures related to store refreshes in the United States to modernize the layout of certain stores and improve customer experience .

Given the current uncertainty related to the COVID-19 pandemic, we may continue to adjust our capital or other expenditures.

Convertible Notes

In June 2019, we repaid $195.0 million of 2.125% Cash Convertible Senior Notes Due 2019 at maturity using cash on hand.

In May 2018, we issued $172.5 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2025 (the “2025 Convertible Notes”).

Net proceeds from the offering, after deducting discounts and expenses, were approximately $167 million, which were added to our cash balances and were available for general corporate purposes, including potentially funding acquisitions and repaying existing indebtedness.

For a description of the terms of our convertible notes, including the associated conversion and other related features and transactions, see Note 9 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

In June 2019, we repaid $195.0 million principal amount of 2.125% Cash Convertible Senior Notes Due 2019 at maturity using cash on hand.

Depending on the level of acquisition activity and other factors, our ability to repay our longer term debt obligations, including the convertible debt maturing in 2024 and 2025, may require us to refinance these obligations through the issuance of new debt securities, equity securities, convertible securities or through new credit facilities.

Investments in Unconsolidated Affiliates

In June 2018, we acquired 57,631,230 additional shares of Cash Converters International for $14.0 million, increasing our ownership from 31.75% to 34.75%.

We acquired these shares in connection with an underwritten placement of approximately 123.3 million shares for AUD $39.5 million, excluding transaction costs.

Cash Converters International used the proceeds from the offering to reduce outstanding indebtedness and provide additional capital to pursue growth opportunities while maintaining working capital.

Prior to its third-party capital raise in fiscal 2019, we consolidated the results of Rich Data Corporation (“RDC”).

Upon its 2019 capital raise, our ownership was reduced to 13.14% of its outstanding stock and we retained one board seat.

Following the equity method of accounting upon that capital raise, we recorded $8.3 million of previous investments in RDC as a portion of “Investments in Unconsolidated Affiliates.” Although this increased the recorded balance of unconsolidated affiliates at that date, we incurred no cash flows at that point beyond amounts previously funded to RDC while it was consolidated.

Grupo Finmart Notes

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(“AlphaCredit”) in September 2016, Grupo Finmart issued two promissory notes (the “Parent Loan Notes”) to us in the aggregate principal amount of $60.2 million.

The repayment terms of the Parent Loan Notes were amended in September 2017, and since that time, we have received all scheduled payments when due.

As of September 30, 2019, $8.0 million of deferred compensation fees remains outstanding on

the Parent Loan Notes, $4.0 million of which is due on March 27, 2020 and the remaining $4.0 million of which is due on September 27, 2020.

We remain obligated to indemnify AlphaCredit for any tax obligations arising from the Grupo Finmart business that are attributable to periods prior to the completion of the sale in September 2016, referred to as “pre-closing taxes.” Those obligations continue until the expiration of the statute of limitations applicable to the pre-closing periods.

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

The repayment terms of the Parent Loan Notes were amended in September 2017, and since that time, we received all scheduled payments when due.

During the year ended September 30, 2020, we received the remaining deferred compensation fees of $8.0 million, which was placed into escrow pending resolution of a potential indemnity claim.

Contractual Obligations

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Payments due by Period

Contractual Obligations

Less than 1 year

More than 5 years

Contractual Obligations Total Less than

1 year 1-3 years 3-5 years More than

(in thousands)

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Interest on long-term debt obligations 41,302 8,295 16,537 16,470 —

Operating and other lease obligations (b)

Lease obligations (b) 246,168 66,079 89,971 48,479 41,639

Total (c) (d) $ 604,592 $ 74,587 $ 106,935 $ 381,431 $ 41,639

Excludes debt discount and deferred financing costs as well as convertible features.

Excludes $12.6 million in sublease payments expected to be received.

No provision for uncertain tax benefits has been included as the timing of any such payment is uncertain.

(a) Excludes debt discount and deferred financing costs as well as convertible features.

(b) Excludes $8.6 million in sublease payments expected to be received.

(c) No provision for uncertain tax benefits has been reflected in the contractual obligations table as the timing of any such payment is uncertain.

See Note 11 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” Additionally, no provision for insurance reserves, deferred compensation arrangements, or other liabilities totaling $6.1 million has been included as the timing of such payments are uncertain.

Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the accrued portions of interest and lease obligations which are included in interest on long-term debt obligations and operating and other lease obligations captions above.

In addition to the operating lease obligations in the table above, we are responsible for the maintenance, property taxes and insurance at most of our locations.

During the fiscal year ended September 30, 2019 , these collectively amounted to $22.5 million.

(d) Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the accrued portions of interest and lease obligations which are included in interest on long-term debt obligations and lease obligations captions above.

In addition to the lease obligations in the table above, we are responsible for the maintenance, property taxes and insurance at most of our locations.

During the fiscal year ended September 30, 2020, these collectively am ounted to $24.7 million.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory, long-lived and intangible assets, income taxes, contingencies and litigation.

The preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates and judgments including those related to revenue recognition, inventory, loan loss allowances, long-lived and intangible assets, income taxes, contingencies and litigation.

We base our estimates on historical experience, observable trends and various other assumptions that we believe to be reasonable under the circumstances.

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As of September 30, 2020, the gross balance of our inventory was $108.2 million, for which we have included reserves of $12.3 million.

Assuming the reserve rates were increased or decreased by 1%, our inventory reserve balance as of September 30, 2019 would have increased or decreased by approximately $0.3 million.

Notes Receivable

In September 2017, we restructured our remaining outstanding notes receivable from the sale of Grupo Finmart and accounted for such restructuring as new notes for which the modification was more than minor, recognizing $3.0 million of remaining discount as a gain, included under “Interest income” in our consolidated statements of operations.

As part of the restructuring of the notes receivable, we negotiated a deferred compensation amount of up to $14.0 million which we are accounting for as “Interest income” under the effective interest method by adjusting the underlying basis of the notes accordingly, accreting to its ultimate estimated settlement amount through September 2020.

We review the payment history, creditworthiness, projected cash flows and related assumptions of Grupo Finmart and AlphaCredit (the parent guarantor), as applicable, in determining whether the remainder of the deferred compensation amounts are collectible.

Through the date of this report, we have received all monthly principal, interest and deferred compensation payments on these restructured notes receivable as contractually obligated.

We regularly monitor and evaluate the timeliness of payments and other inputs to the valuation of the notes.

Assuming the reserve rate s were increased or decreased by 10%, our inventory reserve balance as of September 30, 2020 would have increased or decreased by approximately $1.2 million.

Goodwill and Other Intangible Assets

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

Discount rates used in fiscal 2019 goodwill valuations ranged from 10% to 15% similar to rates used in fiscal 2018.

Discount rates used in fiscal 2020 goodwill valuations ranged from 11% to 19%, compared to 10% to 15% used in fiscal 2019.

In testing other intangible assets for potential impairment, we apply key assumptions that are consistent with those utilized in our goodwill impairment test.

The excess of the estimated fair value over carrying value for each of our reporting units as of the annual testing date ranged from 7% to 45%.

In order to evaluate the sensitivity of the fair value calculations used in the goodwill impairment test, the Company applied a hypothetical 10% decrease to the fair values of each reporting unit and compared those hypothetical values to the reporting unit carrying values.

Based on this hypothetical 10% decrease, the excess of the estimated fair value over carrying value for each of our reporting units ranged from negative 4% to positive 31%.

Assuming the hypothetical 10% decrease, the negative 4% could result in a potential impairment of the $34.5 million in goodwill recorded in our “GPMX” reporting unit within our Latin America reporting segment.

Changes in the economic conditions or the regulatory environment could negatively affect our key assumptions.

Future negative developments could include a decline in loan portfolio performance, merchandise sales or demand for our products, a decline in precious metal commodity values, or inflation in costs relative to revenues.

We may perform a qualitative assessment in making our determination of whether it is more likely than not that goodwill and other intangible assets are impaired under appropriate accounting guidance on an annual basis in future reporting periods.

In addition to the assumptions discussed above pertaining to the income approach, we consider the assessment of potential triggering events to be a critical estimate.

The results of impairment analyses for fiscal year 2020 are described in Note 8 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.”

Management believes that it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the net recorded deferred tax assets.

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We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes.

We adjust these reserves in light of changing facts and circumstances, such as the closing of an audit or the refinement of an estimate.

We adjust these reserves in light of changing facts and circumstances, such as the closing

of an audit or the refinement of an estimate.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

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Such risks and uncertainties include, among other things:

The identified material weakness in our internal control over financial reporting;

• Expected operating losses and uncertainties relating to the COVID-19 pandemic, including the impact of renewed economic stimulus measures;

• The need to sustain focus on internal controls;

• Changes in laws and regulations;

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• Concentration of business in Texas and Florida;

Changes in the business, regulatory, political or social climate in Latin America;

• Changes in gold prices or volumes;

Changes in foreign currency exchange rates;

Changes in pawn redemption rates, loan default and collection rates or other important operating metrics;

• Changes in sales, pawn loan balances, sales margins, pawn redemption rates or other important operating metrics;

• Our ability to continue growing our store count through acquisitions and de novo openings;

• Our ability to successfully develop and commercialize a digital transaction and lending services platform;

Our ability to recruit, hire, retain and motivate talented executives and key employees;

Ability to collect the remaining balance of Grupo Finmart notes and exposure to Grupo Finmart for continuing indemnification obligations for pre-closing taxes;

The outcome of current or future litigation and regulatory proceedings;

• Continuing indemnification obligations for pre-closing taxes related to our sale of Grupo Finmart;

• Our controlled ownership structure;

Potential disruptive effect of acquisitions, investments and new businesses;

• Potential regulatory fines and penalties, lawsuits and related liabilities related to firearms business;

• Potential robberies, burglaries and other crimes at our stores;

Potential exposure under anti-corruption, anti-bribery, anti-money laundering and other general business laws and regulations;

Changes in liquidity, capital requirements or access to debt and capital markets;

• Changes in the competitive landscape;

• Our ability to design or acquire, deploy and maintain adequate information technology and other business systems;

Potential data security breaches or other cyber-attacks;

• Failure to achieve adequate return on investments;

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• Potential natural disasters;

Potential civil unrest or government overthrow;

Events beyond our control;

Changes in U.S.

or international tax laws;

• Financial statement impact of potential impairment of goodwill or other intangible assets such as trade names;

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• Limited number of unreserved shares available for future issuance;

• Public health issues that could adversely affect our financial condition or results of operations;

• Changes in the business, regulatory, political or social climate in Latin America;

• Changes in foreign currency exchange rates;

• The outcome of future litigation and regulatory proceedings;

• Potential disruptive effect of acquisitions, investments and new businesses;

• Potential exposure under anti-corruption, anti-bribery, anti-money laundering and other general business laws and regulations;

• Changes in liquidity, capital requirements or access to debt and capital markets;

• Potential data security breaches or other cyber-attacks;

• Potential civil unrest or government overthrow and other events beyond our control.

For a discussion of these important risk factors, see "Part I, Item 1A — Risk Factors."

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What changed 10-K

Item 7. Management’s Discussion and Analysis