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, 2021, 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 services in the United States and Latin America. Pawn loans are nonrecourse 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 Relentless focus on superior execution and operational excellence in our core pawn business Cost Efficiency and Simplification Shape a culture of cost efficiency through ongoing focus on simplification and optimization Innovate and Grow Broaden customer engagement to service more customers more frequently in more locations Pawn Activities At our pawn stores, we advance cash against the value of collateralized tangible personal property. We earn pawn service charges (“PSC”) for those cash advances, and the PSC rate varies by state and transaction size. At the time of the transaction, we take possession of the pawned collateral, which consists of tangible personal property, generally jewelry, consumer electronics, tools, sporting goods and musical instruments. If the customer chooses to redeem their pawn, they will repay the amount advanced plus any accrued PSC. If the customer chooses not to redeem their pawn, the pawned collateral becomes our inventory, which we sell in our retail merchandise sales activities or, in some cases, scrap for its inherent gold or precious stone content. Consequently, the success of our pawn business is largely dependent on our ability to accurately assess the probability of pawn redemption and the estimated resale or scrap value of the collateralized personal property. Our ability to offer quality second-hand goods at prices significantly lower than original retail prices attracts value-conscious customers. The gross profit on sales of inventory depends primarily on our assessment of the estimated resale or scrap value at the time the property is either accepted as pawn 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 and investments in both Latin America, the United States and potential new markets. Our ability to open de novo stores, acquire new stores and make other related investments 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. Seasonality and Quarterly Results In the United States, PSC is historically highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season. PSC is historically 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 19 Table of Contents surrounding Valentine’s Day and the availability of tax refunds. In Latin America, most of our customers receive additional compensation from their employers in December, and many receive additional compensation in June or July, applying downward pressure on loan balances and fueling some merchandise sales in those periods. As a net effect of these and other factors and excluding discrete charges, our consolidated profit before tax is generally highest in our first fiscal quarter (October through December) and lowest in our third fiscal quarter (April through June). These historical trends have been impacted by COVID-19, but 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 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, 2021 and 2020: The following chart presents sources of net revenues by geographic disbursement for the three months ended December 31, 2021 and 2020: 20 Table of Contents Business Developments COVID-19 The COVID-19 pandemic continues to affect the U.S. and global economies, as disclosed in our 2021 Annual Report on Form 10-K. The full extent and duration of the COVID-19 impact on the global economy generally, and on our business specifically, is currently unknown. The impact of the pandemic, and the recovery therefrom, continued to adversely effect net revenues and earnings into fiscal 2021. During the latter part of fiscal 2021, we saw pawn transaction activity continue to rebuild, driving PLO balances closer to pre-pandemic levels, which will drive accelerating PSC revenue in the coming quarters given the natural lag between pawn originations and related fees. We continue to assess what type of impact the recent surge of the COVID-19 Omicron variant will have to our business net revenues and operating expenses in fiscal year 2022. A prolonged pandemic and recovery may have an adverse effect on our results of operations, financial position and liquidity in future periods. Investments in Unconsolidated Entities On October 1, 2021, we purchased an additional 13 million shares of Cash Converters for $2.5 million. This purchase increased our total ownership in Cash Converters to 236,702,991 shares, representing a 37.72% ownership interest. Additionally, on October 14, 2021, we received a cash dividend of $1.7 million from Cash Converters. On October 6, 2021, the Company purchased $15.0 million in exchange for a non-redeemable voting participating preferred equity interest in Founders One, LLC (“Founders”), a newly-formed entity with one other member. Founders used that $15.0 million to acquire an equity interest in Simple Management Group, Inc. (“SMG”) which owns and operates more than 20 pawn stores principally in the Caribbean region, with plans to build and acquire more stores in that region. Executive Management Changes On January 12, 2022, Jason A. Kulas informed the Company's Board of Directors (the "Board") that he was resigning from his position as Chief Executive Officer to accept a position at another company. The same day, the Board appointed Lachlan P. Given and John Blair Powell, Jr. as co-Interim Chief Executive Officers, effective immediately. Both Mr. Given and Mr. Powell are executive officers of the Company and have extensive experience with the Company and its business. A description of their respective backgrounds and experiences can be found in "Part III, Item 10 — Directors, Executive Officers and Corporate Governance — Executive Officers" of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021. 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") and "same store" basis. We use constant currency results to evaluate our Latin America Pawn operations, which are denominated primarily in Mexican pesos, Guatemalan quetzales and other Latin American currencies. We analyze results on a same store basis (which is defined as stores open during the entirety of the comparable periods) to better understand existing store performance without the influence of increases or decreases resulting solely from changes in store count. We believe presentation of constant currency and same store 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, 2021 and December 31, 2020 were as follows: 21 Table of Contents December 31, Three Months Ended December 31, 2021 2020 2021 2020 Mexican peso 20.5 19.9 20.7 20.5 Guatemalan quetzal 7.5 7.6 7.6 7.6 Honduran lempira 24.1 23.8 23.9 24.1 Peruvian sol 4.0 3.6 4.0 3.6 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 Investments — Represents our equity interest in the net income of Cash Converters International and Rich Data Corporation, along with our investment in Founders. See Note 11 - Segment Information for information regarding changes in reportable segments. Store Data by Segment Three Months Ended December 31, 2021 U.S. Pawn Latin America Pawn Consolidated As of September 30, 2021 516 632 1,148 New locations opened — 1 1 As of December 31, 2021 516 633 1,149 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 As of December 31, 2020 505 502 1,007 22 Table of Contents Three Months Ended December 31, 2021 vs. Three Months Ended December 31, 2020 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) 2021 2020 Net revenues: Pawn service charges $ 56,557 $ 50,220 13% Merchandise sales 102,078 82,253 24% Merchandise sales gross profit 44,246 34,194 29% Gross margin on merchandise sales 43 % 42 % 100bps Jewelry scrapping sales 4,980 4,004 24% Jewelry scrapping sales gross profit 1,005 1,160 (13)% Gross margin on jewelry scrapping sales 20 % 29 % (900)bps Other revenues 22 22 —% Net revenues 101,830 85,596 19% Segment operating expenses: Store expenses 64,689 62,092 4% Depreciation and amortization 2,670 2,736 (2)% Loss on sale or disposal of assets and other — 27 (100)% Segment contribution $ 34,471 $ 20,741 66% Other data: Net earning assets (a) $ 231,408 $ 199,569 16% Inventory turnover 2.8 2.6 8% Average monthly ending pawn loan balance per store (b) $ 270 $ 233 16% Monthly average yield on pawn loans outstanding 13 % 14 % (100)bps Pawn loan redemption rate 83 % 84 % (100)bps (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 increased 13% as a result of higher average PLO for the quarter. Merchandise sales increased 24% compared to the prior year quarter. Merchandise sales gross profit increased 29% to $44.2 million as well as a 100 bps improvement in merchandise sales gross profit margin, reflecting a continued focus on improving retailing and lower levels of aged general merchandise inventory. Store expenses increased 4% primarily due to rising labor costs resulting from growing transaction volume and store count. Segment contribution increased $13.7 million or 66%, due to the changes in net revenues and store expenses described above. 23 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) 2021 (GAAP) 2020 (GAAP) Change (GAAP) 2021 (Constant Currency) Change (Constant Currency) Net revenues: Pawn service charges $ 19,468 $ 13,269 47% $ 19,559 47% Merchandise sales 35,642 25,530 40% 36,022 41% Merchandise sales gross profit 10,363 9,046 15% 10,471 16% Gross margin on merchandise sales 29 % 35 % (600)bps 29 % (600)bps Jewelry scrapping sales 1,964 2,755 (29)% 1,973 (28)% Jewelry scrapping sales gross profit 167 397 (58)% 167 (58)% Gross margin on jewelry scrapping sales 9 % 14 % (500)bps 8 % (600)bps Other revenues, net 240 7 3,329% 242 3,357% Net revenues 30,238 22,719 33% 30,439 34% Segment operating expenses: Store Expenses 22,082 17,217 28% 22,247 29% Depreciation and amortization 1,980 1,860 6% 1,995 7% Segment operating contribution 6,176 3,642 70% 6,197 70% Other segment income (311) (1,320) (76)% (384) (71)% Segment contribution $ 6,487 $ 4,962 31% $ 6,581 33% Other data: Net earning assets (a) $ 64,490 $ 43,263 49% $ 65,773 52% Inventory turnover 3.6 3.8 (5)% 3.7 (3)% Average monthly ending pawn loan balance per store (b) $ 60 $ 53 13% $ 61 15% Monthly average yield on pawn loans outstanding 17 % 17 % —bps 17 % —bps Pawn loan redemption rate (c) 81 % 83 % (200)bps 81 % (200)bps (a) Balance includes pawn loans and inventory. (b) Balance is calculated based upon the average of the monthly ending balances during the applicable period. (c) Rate is solely inclusive of results from Mexico Pawn. 2021 Change (GAAP) 2021 Change (Constant Currency) Same Store data: (a) PLO 18% 20% PSC 28% 29% Merchandise Sales 15% 16% Merchandise Sales Gross Profit (4)% (3)% Store Expenses 5% 6% In the current quarter, we opened one de novo store, bringing total segment store-count to 633. PLO increased 37% to $35.5 million (40% on constant currency basis). On a same store basis, PLO increased 18% (20% on a constant currency basis). PSC increased 47% in the first quarter to $19.5 million (up 47% to $19.6 million on a constant currency basis) as a result of higher average PLO for the quarter. 24 Table of Contents Merchandise sales increased 40% (41% on a constant currency basis) and 15% on a same store basis (16% on a constant currency basis). Offsetting the sales increase, merchandise sales gross profit margin decreased from 35% to 29% reflecting a return to more normalized margins. Overall, merchandise sales gross profit increased 15% to $10.4 million (16% to $10.5 million on a constant currency basis). Store expenses increased $4.9 million or 28% (29% on a constant currency basis) primarily due to growth in store count and rising labor costs resulting from growing transaction volume. On a same-store basis, store expenses increased by $0.9 million or 5% ($1.0 million or 6% on a constant currency basis). Segment contribution increased $1.5 million, or 31%, to $6.5 million ($1.6 million or 33% on a constant currency basis), due to the changes in net revenues and store expenses described above. Other Investments The following table presents selected financial data for our Other Investments 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) 2021 2020 Net revenues: Consumer loan fees, interest and other $ 43 $ 75 (43)% Net revenues 43 75 (43)% Segment operating expenses: Equity in net income of unconsolidated affiliates (1,138) (516) 121% Segment operating contribution 1,181 591 100% Other segment (income) (12) (210) (94)% Segment contribution $ 1,193 $ 801 49% Segment contribution was $1.2 million, an increase of $0.4 million from the prior-year quarter primarily due to the increase in equity income for our unconsolidated affiliates. 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) 2021 2020 Segment contribution $ 42,151 $ 26,504 59% Corporate expenses (income): General and administrative 15,545 12,510 24% Depreciation and amortization 2,924 2,976 (2)% Gain on sale or disposal of assets and other — 52 (100)% Interest expense 2,431 5,455 (55)% Interest income (122) (57) 114% Other expense 26 66 (61)% Income before income taxes 21,347 5,502 288% Income tax expense 5,626 1,203 368% Net income $ 15,721 $ 4,299 266% Segment contribution increased $15.6 million or 59% over the prior year quarter primarily due to the improved operating results of all three segments above. General and administrative expenses increased $3.0 million, or 24% primarily driven by the timing of fiscal year 2021 expenses. Interest expense decreased $3.0 million primarily driven by the ASU 2020-06 accounting policy change which no longer requires debt discount be included on our balance sheet effective October 1, 2021. The policy change eliminates the non-cash interest amortization of that debt discount. See Note 1 to the consolidated financials for further discussion of this recently adopted accounting policy. 25 Table of Contents Income tax expense increased $4.4 million primarily due to an increase in income before income taxes of $15.8 million this quarter compared to the prior year same quarter. Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate. These items include the net effect of state taxes, non-deductible items and changes in valuation allowances for certain foreign operations. See Annual Report on Form 10-K for the year ended September 30, 2021 Note 11: Income Taxes of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of these items. 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 $233.3 million at December 31, 2021 compare d to $253.7 million at September 30, 2021. At December 31, 2021, 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) 2021 2020 Cash flows provided by (used in) operating activities $ 9,018 $ (4,513) (300)% Cash flows used in investing activities (30,603) (15,062) 103% Cash flows used in financing activities (792) (783) (1)% Effect of exchange rate changes on cash, cash equivalents and restricted cash 719 6,266 89% Net decrease in cash, cash equivalents and restricted cash $ (21,658) $ (14,092) 54% The increase in cash flows provided by operating activities year-over-year was primarily due to a $11.4 million increase in net income. The $15.5 million increase in cash flows used in investing activities year-over-year was primarily due to $16.5 million in outgoing cash flows used to fund investments and an increase of $5.1 million in net pawn lending, offset by an $11.3 million increase in the sale of forfeited collateral. Of the $16.5 million used to fund investments, $15.0 million was invested in Founders, as discussed in Note 6 in Part I, Item 1: Notes to Interim Condensed Consolidated Financial Statements. The net effect of these changes was a $56.5 million decrease in cash on hand during the current year, resulting in a $242.0 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. As of December 31, 2021, we had repurchased and retired 943,149 shares of our Class A Common Stock for $5.2 million. 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 31, 2021, there were no stock repurchases. 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 2022. 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 26 Table of Contents 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. 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, 202 1, we reported that we had $602.6 million in total contractual obligations as of September 30, 2021. There have been no material changes to this total obligation since September 30, 2021, 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, 2021, these collectively amounted to $25.5 million. Recently Adopted Accounting Policies and Recently Issued Accounting Pronouncements In August 2020, the FASB issued its Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40) , (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Additionally, ASU 2020-06 eliminates beneficial conversion feature and cash conversion models resulting in more convertible instruments being accounted for as a single unit. We early adopted this standard on October 1, 2021 under the modified retrospective basis. The effect of eliminating our debt discount on the 2024 and 2025 Convertible Notes will decrease non-cash interest expense amortization on our Condensed Consolidated Statement of Operations, and the reduction of interest expense will affect our basic earnings per common share. When calculating net income per share of common stock attributable to common shareholders, the Company uses the if-converted method as required under ASU 2020-06 to determine the dilutive effect of the Convertible Notes. The Company did not incur any impact to liquidity or cash flows with recently adopted accounting policy. 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, 2021 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.