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 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. This discussion contains 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, 20 20 , 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. Business Overview EZCORP is a Delaware corporation headquartered in Austin, Texas. We are a leading provider of pawn loans in the United States and Latin America. Pawn loans are non-recourse loans collateralized by personal property. We also sell merchandise, primarily collateral forfeited from unpaid loans or goods purchased directly from customers. We exist to serve our customers’ short-term cash needs, helping them to live and enjoy their lives. We are focused on three strategic pillars: Strengthen the Core Renewed focus on the unique and essential elements of our pawn business Cost Reduction and Simplification Significant and sustained adjustment of cost base through ongoing simplification Innovate and Grow Broaden customer engagement to service more customers more frequently in more locations 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 pre-owned 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. We see opportunity for further expansion through acquisitions and de novo openings in Latin America and acquisitions in the United States. 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 18 Table of Contents 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. Financial Highlights We remain focused on optimizing our balance of pawn loans outstanding (“PLO”) and the resulting higher pawn service charges (“PSC”). The following chart presents sources of net revenues, including PSC, merchandise sales gross profit ("Merchandise sales GP") and jewelry scrapping gross profit ("Jewelry Scrapping GP") for the three months ended December 31, 2020 and 2019: The following chart presents sources of net revenues by geographic disbursement for the three months ended December 31, 2020 and 2019: 19 Table of Contents Business Developments COVID-19 The COVID-19 pandemic continues to affect the U.S. and global economies, and as disclosed in our 2020 Annual Report on Form 10-K, the pandemic also affected our business in a variety of ways beginning in the second quarter of fiscal 2020 and continuing into fiscal 2021. Our business was negatively impacted by COVID-19 during the current quarter largely due to volume declines as compared to the prior year 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. Additionally, the impact of sustained lower pawn portfolios has led to reduced inventory available for sale. As a result, our net revenues for the three months ended December 31, 2020 were down $21.7 million as compared to the prior year. The full extent and duration of the COVID-19 impact on the global economy generally, and on our business specifically, is currently unknown. We expect the impact of the pandemic, and the recovery therefrom, will continue to adversely affect net revenues and earnings in fiscal 2021. A prolonged pandemic and recovery may have an adverse effect on our results of operations, financial position and liquidity in future periods. Results of Operations Non-GAAP Constant Currency 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 rates below. 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 months ended December 31, 2020 and 2019 and September 30, 2020 and 2019 were as follows: December 31, Three Months Ended December 31, September 30, Three Months Ended September 30, 2020 2019 2020 2019 2020 2019 2020 2019 Mexican peso 19.9 18.9 20.5 19.2 21.6 19.7 22.1 19.4 Guatemalan quetzal 7.6 7.5 7.6 7.5 7.6 7.6 7.5 7.5 Honduran lempira 23.8 24.4 24.1 24.3 24.3 24.2 24.3 24.1 Peruvian sol 3.6 3.3 3.6 3.3 3.5 3.4 3.5 3.3 20 Table of Contents Operating Results Segments We manage our business and report our financial results in three reportable operating segments; • U.S. Pawn — Represents all pawn activities in the United States; • Latin America Pawn — Represents all pawn activities in Mexico and other parts of Latin America; and • Other International — Represents our equity interest in the net income of Cash Converters International and Rich Data Corporation and our financial services stores in Canada, operating under the CASHMAX brand. In the fourth quarter of fiscal 2020, we closed our stores in Canada, and operating activities related to CASHMAX are not material. See Note 12 – Segment Information, for information regarding changes in reportable segments. Our historical segment results have been recast to conform to current presentation. Three Months Ended December 31, 2020 vs. Three Months Ended December 31, 2019 Store Data by Segment Three Months Ended December 31, 2020 U.S. Pawn Latin America Pawn Consolidated As of September 30, 2020 505 500 1,005 New locations opened — 2 2 Locations sold, combined or closed — — — As of December 31, 2020 505 502 1,007 Three Months Ended December 31, 2019 U.S. Pawn Latin America Pawn Other International Consolidated As of September 30, 2019 512 480 22 1,014 New locations opened — 4 — 4 Locations sold, combined or closed — — — — As of December 31, 2019 512 484 22 1,018 21 Table of Contents 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 December 31, Change (in thousands) 2020 2019 Net revenues: Pawn service charges $ 50,220 $ 64,090 (22)% Merchandise sales 82,253 95,354 (14)% Merchandise sales gross profit 34,194 33,990 1% Gross margin on merchandise sales 42 % 36 % 600bps Jewelry scrapping sales 4,004 6,117 (35)% Jewelry scrapping sales gross profit 1,160 1,362 (15)% Gross margin on jewelry scrapping sales 29 % 22 % 700bps Other revenues 22 36 (39)% Net revenues 85,596 99,478 (14)% Segment operating expenses: Store expenses 62,092 68,059 (9)% Depreciation and amortization 2,736 2,865 (5)% Segment operating contribution 20,768 28,554 (27)% Other segment income 27 — * Segment contribution $ 20,741 $ 28,554 (27)% Other data: Net earning assets (a) $ 199,569 $ 305,336 (35)% Inventory turnover 2.6 1.8 44% Average monthly ending pawn loan balance per store (b) $ 233 $ 301 (23)% Monthly average yield on pawn loans outstanding 14 % 14 % —bps Pawn loan redemption rate 84 % 84 % —bps * 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. Pawn service charges decreased by 22% due to a decrease in pawn loans outstanding resulting from the effects of the COVID-19 pandemic. Same stores pawn service charges also decreased by 22%. Merchandise sales decreased 14%, but merchandise sales gross profit increased 1% to $34.2 million driven by lower inventory levels and a 600 bps improvement in merchandise sales gross profit margin, primarily driven by reduced aged inventory levels and improved inventory turnover. Same stores merchandise sales also decreased by 14%. Store expenses decreased by 9% driven by a reduction in labor expense. Segment contribution decreased $7.8 million primarily due to the changes in revenue and store expenses described above. 22 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 December 31, (in thousands) 2020 (GAAP) 2019 (GAAP) Change (GAAP) 2020 (Constant Currency) Change (Constant Currency) Net revenues: Pawn service charges $ 13,269 $ 20,635 (36)% $ 13,949 (32)% Merchandise sales 25,530 31,374 (19)% 26,784 (15)% Merchandise sales gross profit 9,046 8,662 4% 9,446 9% Gross margin on merchandise sales 35 % 28 % 700bps 35 % 700bps Jewelry scrapping sales 2,755 3,411 (19)% 2,855 (16)% Jewelry scrapping sales gross profit 397 412 (4)% 417 1% Gross margin on jewelry scrapping sales 14 % 12 % 200bps 15 % 300bps Other revenues, net 7 25 (72)% 8 (68)% Net revenues 22,719 29,734 (24)% 23,820 (20)% Segment operating expenses: Store Expenses 17,217 19,983 (14)% 18,097 (9)% Depreciation and amortization 1,860 1,889 (2)% 1,956 4% Segment operating contribution 3,642 7,862 (54)% 3,767 (52)% Other segment income (a) (1,320) (265) 398% (1,281) 383% Segment contribution $ 4,962 $ 8,127 (39)% $ 5,048 (38)% Other data: Net earning assets (b) $ 43,263 $ 77,619 (44)% $ 45,009 (42)% Inventory turnover 3.8 2.7 41% 3.8 41% Average monthly ending pawn loan balance per store (c) $ 53 $ 119 (55)% $ 56 (53)% Monthly average yield on pawn loans outstanding 17 % 16 % 100bps 17 % 100bps Pawn loan redemption rate (d) 83 % 79 % 400bps 83 % 400bps (a) Fiscal 2021 constant currency amount excludes net GAAP basis foreign currency transaction adjustment of $0.1 million resulting from movement in exchange rates. The net foreign currency transaction gains for fiscal 2020 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 two de novo stores. Pawn service charges decreased 36% (32% on a constant currency basis). Same stores pawn service charges also decreased by 36%. The average ending monthly pawn loan balance outstanding during the current quarter was down 55% (53% 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 decreased 19% (15% on a constant currency basis). Same stores merchandise sales decreased by 20%. This decrease in merchandise sales was offset by an increase in merchandise sales gross profit of 4% to $9.0 million (9% to $9.4 million on a constant currency basis) driven by a 700 basis points improvement in merchandise sales gross profit margin primarily due to reduced aged inventory levels and improved inventory turnover. Store expenses decreased by 14% (9% on a constant currency basis) driven by a reduction in labor expense. Segment contribution decreased $3.2 million primarily due to the changes in revenue and store expenses described above. 23 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 December 31, Change (in thousands) 2020 2019 Net revenues: Consumer loan fees, interest and other $ 75 $ 1,393 (95)% Consumer loan debt — 536 (100)% Net revenues 75 857 (91)% Segment operating expenses: Operations — 1,233 (100)% Equity in net (income) loss on unconsolidated affiliates (516) 5,897 (109)% Segment operating contribution 591 (6,273) (109)% Other segment expense (210) 203 (203)% Segment contribution (loss) $ 801 $ (6,476) (112)% Segment contribution was $0.8 million, an increase of $7.3 million from the prior-year quarter primarily due to 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 Queensland, Australia class action lawsuit. We operated 22 financial services stores in Canada under the CASHMAX brand during fiscal year 2020. During the fourth quarter of fiscal year 2020, we closed our CASHMAX business and are no longer operating stores in Canada. 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 December 31, Percentage Change (in thousands) 2020 2019 Segment contribution $ 26,504 $ 30,205 (12)% Corporate expenses (income): General and administrative 12,510 18,839 (34)% Depreciation and amortization 2,976 2,945 1% Gain on sale or disposal of assets and other 52 716 (93)% Interest expense 5,455 5,131 6% Interest income (57) (455) (87)% Other expense 66 32 * Income before income taxes 5,502 2,997 84% Income tax expense 1,203 1,759 (32)% Net income $ 4,299 $ 1,238 247% * Represents a percentage computation that is not mathematically meaningful. Segment contribution decreased $3.7 million or 12% 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 and decreased store expenses. General and administrative expenses decreased $6.3 million or 34% due to strategic initiatives implemented in the fourth quarter of fiscal year 2020 to optimize our cost structure at the corporate level. 24 Table of Contents Liquidity and Capital Resources We currently believe that, based on available capital resources and projected operating cash flow, we have adequate capital resources to fund working capital needs, currently anticipated capital expenditures, currently anticipated business growth and expansion, tax payments, and current and projected debt service requirements. Cash and Cash Equivalents Our cash and equivalents balance was $290.5 million at December 31, 2020 compare d to $304.5 million at September 30, 2020. At December 31, 2020, our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments. Cash Flows The table and discussion below presents a summary of the selected sources and uses of our cash: Three Months Ended December 31, Percentage Change (in thousands) 2020 2019 Cash flows used in operating activities $ (4,513) $ (10,918) 59% Cash flows used in investing activities (15,062) (6,798) (122)% Cash flows used in financing activities (783) (2,934) 73% Effect of exchange rate changes on cash, cash equivalents and restricted cash 6,266 1,349 364% Net decrease in cash, cash equivalents and restricted cash $ (14,092) $ (19,301) 27% Net cash used in operating activities decreased $6.4 million, or 59%, year-over-year due to a net decrease of $12.1 million in non-cash adjustments to reconcile net income to operating cash flows, offset by an increase of $15.4 million in working capital and a $3.1 million increase in net income. Net cash used in investing activities increased $8.3 million, or 122%, year-over-year primarily due to a $22.5 million decrease in the sale of forfeited collateral, offset by an $11.9 million net decrease in customer loan growth, l. Net cash used in financing activities decreased $2.2 million, or 73%, year-over-year primarily due to a $1.0 million decrease in the repurchase of common stock and $0.7 million decrease in taxes paid related to the net settlement of equity awards. The net effect of cash flows was a $14.1 million decrease in cash on hand during the current year-to-date period, resulting in a $298.5 million ending cash and restricted cash balance. Sources and Uses of Cash In December 2019, our Board of Directors authorized a stock repurchase program that will allow us to repurchase up to $60 million of our Class A Non-voting Common Stock over three years. 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, such as the return to normal business conditions, stock price, trading volume, general market conditions, legal and regulatory requirements, cash flow levels, and corporate considerations determined by management and the Board, such as liquidity and capital needs and the availability of attractive alternative investment opportunities. The Board of Directors has reserved the right to modify, suspend or terminate the program at any time. During the three months ended December 30, 2020, there were no stock repurchases. As of September 30, 2020, we had 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 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. 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. 25 Table of Contents 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, 20 20 , we reported that we had $604.6 million in total contractual obligations as of September 30, 2020. There have been no material changes to this total obligation since September 30, 2020, other than changes as the result of adoption of accounting standards as further discussed in Note 1 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements." We are responsible for the maintenance, property taxes and insurance at most of our locations. In the fiscal year ended September 30, 2020, these collectively amounted to $6.2 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, 20 20 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.