EZCORP, INC. The discussion in this section contains forward-looking statements that are based on our current expectations. Actual results could differ materially from those expressed or implied by the forward-looking statements due to a number of risks, uncertainties and other factors, including those identified in "Part I, Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year endedSeptember 30, 2019 , as supplemented by the information set forth in "Part I, Item 3 - Quantitative and Qualitative Disclosures about Market Risk" and "Part II, Item 1A - Risk Factors" of this Report. Impact of COVID-19 We began to see the impact of the novel coronavirus disease ("COVID-19") to our operations in mid-March, which is when the closure of non-essential businesses and the implementation of stay-at-home requirements began in our geographic locations. We have been able to keep most of our stores open for business and operating under enhanced safety measures and restrictions 22
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on occupancy. During March, we lost 163 store operating days inU.S. Pawn as a result of mostly intermittent closures due to local orders or other COVID-19 related issues. In Latin America Pawn, governmental closure orders have had a more severe impact on our business, particularly in our GPMX unit (Guatemala ,El Salvador ,Honduras andPeru ). During March, we lost a total of 1,089 store operating days in Latin America Pawn (18 inMexico Pawn and 1,071 in GPMX). The store closure orders in GPMX continued into April, but started to ease in the latter portion of the month. As of the date of this Report, 99% of our stores inU.S. Pawn and 90% in Latin America Pawn are open for business and serving customers. Additionally, we have experienced a decline in pawn loan originations and associated loan balances since mid-March, in both theU.S. andLatin America , as a result of a change in customer borrowing behaviors due to COVID-19. Pawn loan balances at the end of the second quarter were down$8.6 million (6.6%) inU.S. Pawn and$4.5 million (10.5%) in Latin America Pawn (up$0.6 million , or 1% on a constant currency basis), compared to the prior-year quarter. SinceMarch 31, 2020 , the decline in pawn loan balances has accelerated and is continuing. The decline in pawn loan balances will have a negative impact on net revenues and earnings for the remainder of fiscal 2020 and future periods until we are able to rebuild the loan balances. Offsetting the net revenue losses due to decreased loan originations, we have seen a strong increase in merchandise sales during March and continuing into April. As a result of this increased sales activity, combined with the decrease in loan originations and our liquidity initiatives described below, our cash balance has grown to$197.7 million at the end of the quarter, further increasing to greater than$250.0 million at the end of April. In 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 inLatin America , have delayed certain capital expenditures and, as a result of The Coronavirus Aid, Relief, and Economic Security (CARES) Act, are able to delay payments of certain taxes. The full extent and duration of the COVID-19 impact on the global economy generally, and on our business specifically, is currently unknown. We expect, however, that the pandemic will have an adverse effect on our net revenues and earnings in fiscal 2020, and if it continues, it may have an adverse effect on our results of operations, financial position and liquidity in future periods. See "Part II, Item 1A - Risk Factors."Goodwill and Intangible Asset Impairment During the current quarter, we concluded there was an indicator of impairment due to a decline in our market capitalization. We performed a quantitative analysis as ofMarch 31, 2020 and determined the fair value of each of our reporting units was below its carrying value as a result of the impact of COVID-19, as discussed above. As a result of this analysis, we recorded an impairment charge of$41.3 million in the current quarter. We also (a) determined an impairment had occurred in the fair values of acquired trade names of previously acquired entities in ourMexico and GPMX reporting units and recorded a related impairment of$2.9 million and$1.7 million respectively, and (b) determined the carrying amount of certain long-lived asset groups were not recoverable and recorded a related impairment of$1.1 million . These impairments were recorded under "Impairment of goodwill and intangible assets" in the condensed consolidated statement of operations. See Note 2 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 - Financial Statements."We remain confident in our businesses, as all business units were performing well prior to the COVID-19 related impacts. Overview and Financial HighlightsEZCORP is aDelaware corporation headquartered inAustin, Texas . We are a leading provider of pawn loans inthe United States andLatin America . Our vision is to be the market leader inNorth America in responsibly and respectfully meeting our customers' desire for access to cash when they want it. That vision is supported by four key imperatives: • Market Leading Customer Satisfaction;
• Exceptional Staff Engagement;
• Most Efficient Provider of Cash; and
• Attractive Shareholder Returns.
At our pawn stores, we offer pawn loans, which are nonrecourse loans collateralized by tangible personal property, and sell merchandise to customers looking for good value. The merchandise we sell consists of second-hand collateral forfeited from our pawn lending activities or purchased from customers.
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We remain focused on optimizing our balance of pawn loans outstanding ("PLO")
and the resulting higher pawn service charges ("PSC"). The following charts
present sources of net revenues, including PSC, merchandise sales gross profit
("Merchandise sales GP") and jewelry scrapping gross profit ("Jewelry scrapping
GP"):
[[Image Removed: chart-bee374197f3558beb29.jpg]][[Image Removed: chart-2fb1342750ef51898af.jpg]]
[[Image Removed: chart-23996f923b6b291df66.jpg]][[Image Removed: chart-56f1f5c236a82061d7f.jpg]]
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The following charts present sources of net revenues by geographic disbursement:
[[Image Removed: chart-57b8afaa84a358e6bc2.jpg]][[Image Removed: chart-412561a5e5a65a2eb71.jpg]]
[[Image Removed: chart-94a9329aca201eec13a.jpg]][[Image Removed: chart-64983616f7b74f824e9.jpg]]
The following charts present store counts by geographic disbursement:
[[Image Removed: chart-7a352ab09d1755d2b71.jpg]][[Image Removed: chart-87eb89ff3cfb524d9b3.jpg]]
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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 collateral and the
perceived probability of the loan's redemption.
Our ability to offer quality second-hand goods at prices significantly lower
than original retail prices attracts value-conscious customers. The gross profit
on sales of inventory depends primarily on our assessment of the loan or
purchase value at the time the property is either accepted as loan collateral or
purchased and our ability to sell that merchandise in a timely manner. As a
significant portion of our inventory and sales involve gold and jewelry, our
results can be influenced by the market price of gold and diamonds.
Growth and Expansion
Or strategy is to expand the number of locations we operate through opening new
("de novo") locations and through acquisitions in both Latin America and the
United States and potential new markets. Our ability to add new stores is
dependent on several variables, such as projected achievement of internal
investment hurdles, the availability of acceptable sites or acquisition
candidates, the alignment of acquirer/seller price expectations, the regulatory
environment, local zoning ordinances, access to capital and the availability of
qualified personnel. Given the environment which we currently operate, we have
placed all de novo and acquisition activities on hold.
Seasonality and Quarterly Results
Historically, pawn service charges are highest in our fourth fiscal quarter
(July through September) due to a higher average loan balance during the summer
lending season in the United States and lowest in our third fiscal quarter
(April through June) following the tax refund season in the United States .
Merchandise sales are highest in our first and second fiscal quarters (October
through March) due to the holiday season, jewelry sales in the United States
surrounding Valentine's Day and the availability of tax refunds in the United
States . Most of our customers in Latin America receive additional compensation
from their employers in December, and many receive additional compensation in
June or July, applying downward pressure on loan balances and fueling some
merchandise sales in those periods. As a net effect of these and other factors
and excluding discrete charges, our consolidated profit before tax is generally
highest in our first fiscal quarter (October through December) and lowest in our
third fiscal quarter (April through June).
We expect the COVID-19 pandemic to negatively impact our financial results for
fiscal 2020, and such impact is unknown. This uncertainty is dependent upon the
longevity and severity of the pandemic and the pace of the business reopening
and rebound, including the impact of government responses. The pandemic could
also be material to our longer-term financial results and condition based upon
the same factors.
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Segments
During the first quarter of fiscal 2020, we revised the financial information our chief operating decision maker (currently our chief executive officer) reviews for operational decision-making purposes and for allocation of capital to include the separate financial results of our Lana business. Our historical segment results have been recast to conform to current presentation. We currently report our segments as follows:U.S. Pawn - all pawn activities inthe United States ; Latin America Pawn - all pawn activities inMexico and other parts ofLatin America ; Lana - our customer-centric digital engagement platform; and Other International - primarily our equity interest in the net income of Cash Converters International and consumer finance activities inCanada . While we expect the operations of the Lana segment to have a positive impact on our pawn loan redemption rates and therefore our pawn service charges and yield, the pawn service charges will all be reported in our pawn segments rather than allocated to the Lana segment. Only discrete revenues related to the Lana segment will be reported in the Lana segment results. As a digital offering, Lana has no separate physical store locations. Leases As ofOctober 1, 2019 , we adopted Accounting Standards Codification ("ASC") Topic 842, Leases (Topic 842). Topic 842 required companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. We recorded a net right-of-use asset of$237.5 million and a net lease liability of$246.0 million . Store Data by Segment Three Months Ended March 31, 2020 Latin America Other U.S. Pawn Pawn International Consolidated
As of December 31, 2019 512 484 22 1,018
New locations opened - 9 - 9
As of March 31, 2020 512 493 22 1,027
Three Months Ended March 31, 2019
Latin
America
U.S. Pawn Pawn OtherInternational Consolidated
As of December 31, 2018 508 462 27 997
New locations opened - 4 - 4
Locations sold, combined or closed - - (3 ) (3 )
As of March 31, 2019 508 466 24 998
Six Months Ended March 31, 2020
Latin
U.S. America Other
Pawn Pawn International Consolidated
As of September 30, 2019 512 480 22 1,014
New locations opened - 13 - 13
As of March 31, 2020 512 493 22 1,027
Six Months Ended March 31, 2019
Latin
U.S. America
Pawn Pawn OtherInternational Consolidated
As of September 30, 2018 508 453 27 988
New locations opened - 8 - 8
Locations acquired - 5 - 5
Locations sold, combined or closed - - (3 ) (3 )
As of March 31, 2019 508 466 24 998
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Results of Operations Three Months EndedMarch 31, 2020 vs. Three Months EndedMarch 31, 2019 These tables, as well as the discussion that follows, should be read with the accompanying condensed consolidated financial statements and related notes. All comparisons, unless otherwise noted, are to the prior-year quarter.U.S. Pawn The following table presents selected summary financial data for theU.S. Pawn segment: Three Months Ended March 31, 2020 2019 Change (in thousands) Net revenues: Pawn service charges$ 61,700 $ 61,798 -% Merchandise sales 102,447 96,632 6% Merchandise sales gross profit 37,161 35,704 4% Gross margin on merchandise sales 36 %
37 % (100)bps
Jewelry scrapping sales 9,659 7,916 22% Jewelry scrapping sales gross profit 1,859 1,345 38% Gross margin on jewelry scrapping sales 19 % 17 % 200bps Other revenues 31 43 (28)% Net revenues 100,751 98,890 2% Segment operating expenses: Operations 67,619 67,475 -% Impairment of goodwill and intangible assets 10,000 - * Depreciation and amortization 2,711 2,982 (9)% Segment operating contribution 20,421 28,433 (28)% Other segment income - (1 ) (100)% Segment contribution$ 20,421 $ 28,434 (28)% Other data: Net earning assets (a)$ 263,112 $ 267,998 (2)% Inventory turnover 2.0 1.9 5% Average monthly ending pawn loan balance per store (b) $ 271 $ 280 (3)% Monthly average yield on pawn loans outstanding 14 % 14 % - Pawn loan redemption rate 86 % 86 % - * Represents a percentage computation that is not mathematically meaningful. (a) Balance includes pawn loans and inventory. (b) Balance is calculated based upon the average of the monthly ending balances
during the applicable period.
Segment contribution decreased$8.0 million due to the goodwill impairment charge recorded during the quarter. Excluding that charge, segment contribution increased$1.9 million , or 7.0%, to$30.4 million . Net revenues increased 2% to$100.8 million while operations expenses were tightly managed and were flat to the prior-year quarter. 28
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The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows:
Change in Net Revenue
Merchandise Sales
Pawn Service Charges Gross Profit Total
(in millions)
Same stores $ (0.6 ) $ 1.1 $ 0.5
New stores and other 0.5 0.4 0.9
Total $ (0.1 ) $ 1.5 $ 1.4
Change in jewelry scrapping sales gross
profit and other revenues 0.5
Total change in net revenue $ 1.9
Pawn service charges were flat as a higher yield offset a 3% decrease in average
ending monthly pawn loan balances outstanding during the quarter. We have
experienced a substantial decline in new loans activity and associated loan
balances since mid-March 2020 and continuing as a result of a change in customer
borrowing behaviors due to COVID-19. See "Impact of COVID-19" above.
Merchandise sales increased 6% with margins down 100 basis points to 36%, the
low end of our target range, as we continue to focus on inventory management. As
a result, merchandise sales gross profit increased 4% to $37.2 million .
Jewelry scrapping sales gross profit increased 38% to $1.9 million on higher
volume and scrapping margins as a result of increased gold market prices, with
margins up 200 basis points to 19%.
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"). We use constant currency results to evaluate our Latin America Pawn
operations, which are denominated primarily in Mexican pesos, Guatemalan
quetzals and other Latin American currencies. We believe that presentation of
constant currency results is meaningful and useful in understanding the
activities and business metrics of our Latin America Pawn operations and reflect
an additional way of viewing aspects of our business that, when viewed with GAAP
results, provide a more complete understanding of factors and trends affecting
our business. We provide non-GAAP financial information for informational
purposes and to enhance understanding of our GAAP consolidated financial
statements. We use this non-GAAP financial information to evaluate and compare
operating results across accounting periods. Readers should consider the
information in addition to, but not instead of or superior to, our financial
statements prepared in accordance with GAAP. 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 so are not directly calculable from
the above rates. Constant currency results, where presented, also exclude the
foreign currency gain or loss. The end-of-period and approximate average
exchange rates for each applicable currency as compared to U.S. dollars as of
and for the three and six months ended March 31 were as follows:
March 31, Three Months Ended March 31, Six Months Ended March 31,
2020 2019 2020 2019 2020 2019
Mexican peso 23.8 19.4 20.0 19.2 19.6 19.5
Guatemalan quetzal 7.6 7.6 7.5 7.6 7.5 7.6
Honduran lempira 24.4 24.3 24.3 24.2 24.3 24.1
Peruvian sol 3.4 3.3 3.4 3.3 3.3 3.3
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Latin America Pawn The following table presents selected summary financial data for the Latin America Pawn segment, including constant currency results, after translation toU.S. dollars from its functional currencies noted above under "Results of Operations - Non-GAAP Financial Information." Three Months Ended March 31, Change 2020 (Constant (Constant 2020 (GAAP) 2019 (GAAP) Change (GAAP) Currency) Currency) (in USD (in USD thousands) thousands) Net revenues: Pawn service charges$ 18,522 $ 20,001 (7)%$ 18,866 (6)% Merchandise sales 27,383 24,628 11% 28,032 14% Merchandise sales gross profit 6,893 7,756 (11)% 7,037 (9)% Gross margin on merchandise sales 25 % 31 % (600)bps 25 % (600)bps Jewelry scrapping sales 2,219 2,464 (10)% 2,259 (8)% Jewelry scrapping sales gross profit 402 202 99% 400 98% Gross margin on jewelry scrapping sales 18 % 8 % 1,000bps 18 % 1,000bps Other revenues, net (12 ) 25 * (11 ) * Net revenues 25,805 27,984 (8)% 26,292 (6)% Segment operating expenses: Operations 18,469 18,223 1% 19,043 4% Impairment of goodwill and intangible assets 35,936 - * 37,055 * Depreciation and amortization 1,940 1,495 30% 1,989 33% Segment operating (loss) contribution (30,540 ) 8,266 (469)% (31,795 ) (485)% Other segment income (a) (399 ) (1,190 ) (66)% (59 ) (95)% Segment (loss) contribution$ (30,141 ) $ 9,456 (419)%$ (31,736 ) (436)% Other data: Net earning assets (b)$ 70,318 $ 78,488 (10)%$ 79,874 2% Inventory turnover 2.5 2.3 9% 2.5 9% Average monthly ending pawn loan balance per store (c) $ 83 $ 90 (8)%$ 87 (3)% Monthly average yield on pawn loans outstanding 15 % 16 % (100)bps 15 % (100)bps Pawn loan redemption rate (d) 78 % 79 % (100)bps 78 % (100)bps
* Represents a percentage computation that is not mathematically meaningful. (a) Fiscal 2020 constant currency amount excludes net GAAP basis foreign currency
transaction gains of
The net foreign currency transaction gains for fiscal 2019 of
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.
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In the current quarter, ourLatin America pawn segment opened nine de novo stores. Segment contribution decreased$39.6 million , or 419%, to$(30.1) million (436% on a constant currency basis) primarily due to the goodwill impairment charges recorded during the quarter. Excluding those charges, segment contribution decreased$3.7 million , or 39%, to$5.8 million (44% on a constant currency basis) with a net revenue decline of$2.2 million , or 8% ($1.7 million , or 6%, on a constant currency basis), to$25.8 million . Operations expenses were tightly managed with an increase of$0.2 million , or 1% ($0.8 million , or 4% on a constant currency basis), to$18.5 million . The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows: Change in Net Revenue Merchandise Sales Pawn Service Charges Gross Profit Total (in millions) Same stores $ (1.8 ) $ (1.1 )$ (2.9 ) New stores and other 0.3 0.2 0.5 Total $ (1.5 ) $ (0.9 )$ (2.4 ) Change in jewelry scrapping sales gross profit and other revenues 0.2 Total change in net revenue$ (2.2 ) Change in Net Revenue (Constant Currency) Merchandise Sales Gross Pawn Service Charges Profit Total (in millions) Same stores $ (1.4 ) $ (1.0 )$ (2.4 ) New stores and other 0.3 0.2 0.5 Total $ (1.1 ) $ (0.8 )$ (1.9 ) Change in jewelry scrapping sales gross profit and other revenues 0.2 Total change in net revenue$ (1.7 ) Pawn service charges decreased 7% (6% on a constant currency basis). The average ending monthly pawn loan balance outstanding during the current quarter was down 8% (3% on a constant currency basis). We have experienced a substantial decline in new loans activity and associated loan balances sincemid-March 2020 and continuing as a result of a change in customer borrowing behaviors due to COVID-19. Merchandise sales increased 11% (14% on a constant currency basis) with margins down 600 basis point as we continue with efforts to reduce aged general merchandise. As a result of these factors and foreign currency impacts, merchandise sales gross profit was down 11% to$6.9 million (9% to$7.0 million on a constant currency basis). Jewelry scrapping sales decreased 10% (8% on a constant currency basis) as airport closings limited many stores ability to scrap and export their gold, however with a 1,000 basis point increase in margin to 18% as we benefited from an overall increase in gold market prices. 31
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Lana
The following table presents selected financial data for the Lana segment:
Three Months Ended March 31,
2020 2019 Percentage Change
(in thousands)
Operations expense and other
$ (1,098 ) $ (1,523 ) (28)% We launched our customer-centric digital engagement platform ("Lana") in the prior quarter, initially serving customers in selectedFlorida locations. This platform currently offers the ability for customers at selected locations to remotely extend their pawn loans through digital payments using their Lana account, and will allow us to leverage our existing store and pawn customer base to expand customer acquisition and retention and enable rapid deployment of new products. Discrete revenues to date are minimal as the product offering launched late in the first quarter of fiscal 2020, and all fees from pawn loan extensions, including those made through the Lana platform, are reported in the pawn segments. Other International The following table presents selected financial data for the Other International segment after translation toU.S. dollars from its functional currency of primarily Australian and Canadian dollars: Three Months Ended March 31, Percentage 2020 2019 Change (in thousands) Net revenues: Consumer loan fees, interest and other$ 1,294 $ 1,223 6% Consumer loan bad debt (488 ) (407 ) 20% Net revenues 806 816 (1)% Segment operating expenses: Operating expenses 1,583 2,622 (40)% Impairment of goodwill and intangible assets 1,124 - * Equity in net income of unconsolidated affiliates (1,184 ) (431 ) 175% Segment operating income (loss) (717 ) (1,375 ) * Other segment expense 174 6,861 (97)% Segment contribution (loss)$ (891 ) $ (8,236 ) *
* Represents a percentage computation that is not mathematically meaningful.
Segment contribution was$(0.9) million , an improvement of$7.3 million from the prior-year quarter primarily due to: • A$6.5 million impairment of Cash Converters International in the prior-year quarter with no impairment in the current quarter; and • A decrease in operating expenses of$0.9 million subsequent to the
deconsolidation of a previously consolidated variable interest entity
("RDC") in mid-fiscal 2019; and
• An impairment of
quarter.
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Other Items The following table reconciles our consolidated segment contribution discussed above to net income attributable toEZCORP, Inc. , including items that affect our consolidated financial results but are not allocated among segments: Three Months Ended March 31, Percentage 2020 2019 Change (in thousands) Segment contribution$ (11,709 ) $ 28,131 (142)% Corporate expenses (income): Administrative 14,620 14,964 (2)% Depreciation and amortization 2,711 2,458 10% Loss on sale or disposal of assets and other 384 - * Interest expense 5,325 8,407 (37)% Interest income (572 ) (2,695 ) (79)% Other income (72 ) (22 ) 227% (Loss) income from continuing operations before income taxes (34,105 ) 5,019 (780)% Income tax expense 6,749 2,360 186% (Loss) income from continuing operations, net of tax (40,854 ) 2,659 (1,636)% Loss from discontinued operations, net of tax (20 ) (18 ) 11% Net (loss) income (40,874 ) 2,641 (1,648)% Net loss attributable to noncontrolling interest - (753 ) (100)% Net (loss) income attributable to EZCORP, Inc.$ (40,874 ) $
3,394 (1,304)%
* Represents a percentage computation that is not mathematically meaningful.
Segment contribution decreased 142% over the prior-year quarter, including the goodwill and intangible assets impairment of$47.1 million recorded in the current quarter and a$6.5 million prior-year quarter impairment related to our investment in Cash Converters International, offset by mixed results in our US Pawn and Latin America Pawn segments partially as a result of the COVID-19 pandemic. Interest expense decreased$3.1 million , or 37%, primarily due to the reduction of interest expense on our 2.125% Cash Convertible Senior Notes Due 2019 ("2019 Convertible Notes") which were repaid inJune 2019 . Prior to repayment, the principal amount of these notes was$195.0 million . Interest income decreased$2.1 million , or 79%, primarily due to the declining principal balance on the Prestaciones Finmart,S.A.P.I. de C.V. , SOFOM, E.N.R. ("Grupo Finmart") notes receivable as they are repaid in accordance with their agreed amortization schedule, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid inJune 2019 . TheMarch 2020 payment on the Grupo Finmart notes was paid into an escrow account pending resolution of an outstanding indemnity claim for pre-closing taxes. Income tax expense increased$4.4 million due primarily to a$39 million decrease in income from continuing operations before income taxes offset by a$20 million increase resulting from non-deductible goodwill impairments and$1.6 million to correct the calculation of certain transaction tax liabilities in prior periods. Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate. These items include the net effect of state taxes, non-deductible items and changes in valuation allowances for certain foreign operations. 33
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Six Months EndedMarch 31, 2020 vs. Six Months EndedMarch 31, 2019 These tables, as well as the discussion that follows, should be read with the accompanying condensed consolidated financial statements and related notes. All comparisons, unless otherwise noted, are to the prior year-to-date period.U.S. Pawn The following table presents selected summary financial data for theU.S. Pawn segment: Six Months Ended March 31, 2020 2019 Change (in thousands) Net revenues: Pawn service charges$ 125,790 $ 126,023 -% Merchandise sales 197,801 191,735 3% Merchandise sales gross profit 71,151 71,659 (1)% Gross margin on merchandise sales 36 %
37 % (100)bps
Jewelry scrapping sales 15,776 14,468 9% Jewelry scrapping sales gross profit 3,221 2,387 35% Gross margin on jewelry scrapping sales 20 % 16 % 400bps Other revenues 67 91 (26)% Net revenues 200,229 200,160 -% Segment operating expenses: Operations 135,678 135,435 -% Impairment of goodwill and intangible assets 10,000 - * Depreciation and amortization 5,576 6,017 (7)% Segment operating contribution 48,975 58,708 (17)% Other segment expense - 2,852 (100)% Segment contribution$ 48,975 $ 55,856 (12)% Other data: Average monthly ending pawn loan balance per store (a) $ 286$ 292 (2)% Monthly average yield on pawn loans outstanding 14 % 14 % - Pawn loan redemption rate 86 % 84 % 200bps
* Represents a percentage computation that is not mathematically meaningful. (a) Balance is calculated based upon the average of the monthly ending balances
during the applicable period.
Segment contribution decreased$7.0 million due to the goodwill impairment charge recorded during the quarter. Excluding that charge, segment contribution decreased$3.1 million , or 6%, to$59.0 million . While net revenue was flat at$200.2 million , total expenses decreased$3.1 million to$141.3 million due primarily a$2.9 million prior-period recognition of an uncollectible receivable balance from a bankrupt refining partner with no comparable charge in the current period. Excluding the impairment, operations expenses were tightly managed and were flat to the prior-year six-months 34
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The change in net revenue attributable to same stores and new stores added since the prior-year is summarized as follows:
Change in Net Revenue
Merchandise Sales
Pawn Service Charges Gross Profit Total
(in millions)
Same stores $ (1.2 ) $ (1.2 ) $ (2.4 )
New stores and other 0.9 0.7 1.6
Total $ (0.3 ) $ (0.5 ) $ (0.8 )
Change in jewelry scrapping sales gross
profit and other revenues 0.8
Total change in net revenue $ -
Pawn service charges were flat as a higher yield offset a 2% decrease in average
ending monthly pawn loan balances outstanding during the current six-months. We
have experienced a substantial decline in new loans activity and associated loan
balances since mid-March 2020 and continuing as a result of a change in customer
borrowing behaviors due to COVID-19.
Merchandise sales increased 3% with margins down 100 basis points to 36%, the
low end of our target range, as we continue to focus on inventory management. As
a result of the net impact of the increase in sales offset by decreased margin,
merchandise sales gross profit decreased 1% to $71.2 million .
Jewelry scrapping sales gross profit increased 35% to $3.2 million due primarily
to higher scrapping margins as a result of increased gold market prices. Scrap
sales margins increased 400 basis points to 20%.
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Latin America Pawn The following table presents selected summary financial data for the Latin America Pawn segment, including constant currency results, after translation toU.S. dollars from functional currencies. See "Results of Operations - Non-GAAP Financial Information" above. Six Months Ended March 31, Change 2020 (Constant (Constant 2020 (GAAP) 2019 (GAAP) Change (GAAP) Currency) Currency) (in USD (in USD thousands) thousands) Net revenues: Pawn service charges$ 39,157 $ 39,295 -%$ 39,063 (1)% Merchandise sales 58,757 50,549 16% 58,557 16% Merchandise sales gross profit 15,555 15,713 (1)% 15,469 (2)% Gross margin on merchandise sales 26 % 31 % (500)bps 26 % (500)bps Jewelry scrapping sales 5,630 5,193 8% 5,624 8% Jewelry scrapping sales gross profit 814 391 108% 806 106% Gross margin on jewelry scrapping sales 14 % 8 % 600bps 14 % 600bps Other revenues, net 13 67 (81)% 14 (79)% Net revenues 55,539 55,466 -% 55,352 -% Segment operating expenses: Operations 38,452 36,419 6% 39,115 7% Impairment of goodwill and intangible assets 35,936 - * 36,556 * Depreciation and amortization 3,829 2,917 31% 3,823 31% Segment operating (loss) contribution (22,678 ) 16,130 (241)% (24,142 ) (250)% Other segment income (a) (664 ) (117 ) 468% (254 ) 117%
Segment (loss) contribution
Other data: Average monthly ending pawn loan balance per store (b) $ 86 $ 90 (4)%$ 86 (4)% Monthly average yield on pawn loans outstanding 16 % 16 % - 16 % - Pawn loan redemption rate 78 % 79 % (100)bps 78 % (100)bps
(a) Fiscal 2020 constant currency amount excludes net GAAP basis foreign currency
transaction gains of
rates. The net foreign currency transaction gains for fiscal 2019 were
nominal and are included in the above results. (b) Balance is calculated based upon the average of the monthly ending balances
during the applicable period.
In the current-year six-months, ourLatin America pawn segment opened 13 de novo stores. Segment contribution decreased$38.3 million , or 235%, to$22.0 million (247% on a constant currency basis) primarily due to the goodwill impairment charges recorded during the quarter. Excluding those charges, segment contribution decreased$2.3 million , or 14%, to$13.9 million (22% on a constant currency basis) with flat net revenue. Operations expense were tightly managed and increased$2.0 million , or 6% (7% on a constant currency basis), to$38.5 million due primarily to new store openings, along with relocations and expansions of existing stores. 36
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The change in net revenue attributable to same stores and new stores added since the prior-year is summarized as follows:
Change in Net Revenue
Merchandise Sales
Pawn Service Charges Gross Profit Total
(in millions)
Same stores $ (0.8 ) $ (0.6 ) $ (1.4 )
New stores and other 0.7 0.4 1.1
Total $ (0.1 ) $ (0.2 ) $ (0.3 )
Change in jewelry scrapping sales gross
profit and other revenues 0.4
Total change in net revenue $ 0.1
Change in Net Revenue (Constant Currency)
Merchandise Sales Gross
Pawn Service Charges Profit Total
(in millions)
Same stores $ (0.9 ) $ (0.7 ) $ (1.6 )
New stores and other 0.7 0.4 1.1
Total $ (0.2 ) $ (0.3 ) $ (0.5 )
Change in jewelry scrapping sales gross
profit and other revenues 0.4
Total change in net revenue $ (0.1 )
Pawn service charges were flat (down 1% on a constant currency basis). The
average ending monthly pawn loan balance outstanding during the current-year
six-months was down 4% on a GAAP and constant currency basis, offset by the
addition of new stores since the prior-year. We have experienced a substantial
decline in new loans activity and associated loan balances since mid-March 2020
and continuing as a result of a change in customer borrowing behaviors due to
COVID-19.
Merchandise sales increased 16% on a GAAP and constant currency basis as we
continue with efforts to reduce aged general merchandise at a higher cost basis,
with an offsetting 500 basis point decline in margins. As a result of these
factors and foreign currency impacts, merchandise sales gross profit was down
1% to $15.6 million (2% to $15.5 million on a constant currency basis).
Jewelry scrapping sales increased 8% on a GAAP and constant currency basis, with
a 600 basis point increase in margin to 14% as we benefited from an overall
increase in gold market prices.
Lana
The following table presents selected financial data for the Lana segment:
Six Months Ended March 31,
2020 2019 Percentage Change
(in thousands)
Operations expense and other
$ (2,423 ) $ (3,613 ) (33)% Discrete revenues to date are minimal as the product offering launched late in the first quarter of fiscal 2020, and all fees from pawn loan extensions, including those made through the Lana platform, are reported in the pawn segments. Operations expense decreased$1.2 million from the prior-year six-months primarily as a result of the capitalization of costs related to the Lana platform during and subsequent to the development stage. 37
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Other International The following table presents selected financial data from continuing operations for the Other International segment after translation toU.S. dollars from its functional currency of primarily Australian and Canadian dollars: Six Months Ended March 31, Percentage 2020 2019 Change (in thousands) Net revenues: Consumer loan fees, interest and other$ 2,686 $ 3,004 (11)% Consumer loan bad debt (1,024 ) (891 ) 15% Net revenues 1,662 2,113 (21)% Segment operating expenses: Operating expenses 2,850 5,293 (46)% Impairment of goodwill and intangible assets 1,124 - * Equity in net loss of unconsolidated affiliates 4,713 688 585% Segment operating loss (7,025 ) (3,868 ) 82% Other segment expense 343 20,229 (98)% Segment loss$ (7,368 ) $ (24,097 ) (69)%
* Represents a percentage computation that is not mathematically meaningful.
Segment loss was$7.4 million , an improvement of$16.7 million from the prior-year primarily due to: • A$19.7 million impairment of Cash Converters International in the prior-year with no impairment in the current-year six-months; and • A decrease in operating expenses of$2.5 million related to the
deconsolidation of a previously consolidated variable interest entity
("RDC") in mid-fiscal 2019; and
• An impairment of
quarter; and
• A
in the first quarter of fiscal 2020 for our share of the Cash Converters
International settlement of a class action lawsuit.
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Other Items The following table reconciles our consolidated segment contribution discussed above to net income attributable toEZCORP, Inc. , including items that affect our consolidated financial results but are not allocated among segments: Six Months Ended March 31, Percentage 2020 2019 Change (in thousands) Segment contribution$ 17,170 $ 44,393 (61)% Corporate expenses (income): Administrative 32,109 28,129 14% Depreciation and amortization 5,644 4,808 17% Loss on sale or disposal of assets 1,100 - * Interest expense 10,492 17,097 (39)% Interest income (1,027 ) (5,615 ) (82)% Other income (67 ) (304 ) (78)% (Loss) Income from continuing operations before income taxes (31,081 ) 278 (11,280)% Income tax expense 8,508 1,279 565% Loss from continuing operations, net of tax (39,589 ) (1,001 ) * Loss from discontinued operations, net of tax (47 ) (201 ) (77)% Net loss (39,636 ) (1,202 ) * Net loss attributable to noncontrolling interest - (1,230 ) (100)% Net (loss) income attributable to EZCORP, Inc.$ (39,636 ) $
28 (141,657)%
* Represents a percentage computation that is not mathematically meaningful.
Segment contribution decreased 61% over the prior-year, primarily related to the goodwill and intangible asset impairment of$47.1 million recorded in the second quarter, mixed results in our US Pawn and Latin America Pawn segments partially as a result of the COVID-19 pandemic, partially offset by a$19.7 million prior-year quarter impairment related to our investment in Cash Converters International. Administrative expenses increased$4.1 million primarily as a result of higher labor, including severance costs, cloud computing costs and professional fees. Professional fees include costs related to the remediation of the material weakness in our information technology general controls, fees related to the current quarter adoption of a new lease accounting standard, and other smaller items. Loss on sale or disposal of assets and other includes$1.1 million due to the termination of non-core software projects. Interest expense decreased$6.6 million , or 39%, primarily due to the reduction of interest expense on our 2.125% Cash Convertible Senior Notes Due 2019 ("2019 Convertible Notes") which were repaidJune 17, 2019 . Prior to repayment, the principal amount of these notes was$195.0 million . Interest income decreased$4.6 million , or 82%, primarily due to the declining principal balance on the Prestaciones Finmart,S.A.P.I. de C.V. , SOFOM, E.N.R. ("Grupo Finmart") notes receivable, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid inJune 2019 . Income tax expense increased$7.2 million due primarily to: • A$31 million decrease in income from continuing operations before income taxes offset by a$20 million increase resulting from non-deductible goodwill impairments;
• A
restricted stock units compared to the prior estimates of the related tax
benefit that was recorded over their 3-year vesting period; and
• $1.6 million to reverse the calculation of certain transaction tax
liabilities in prior periods.
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Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate. These items include the net effect of state taxes, non-deductible items and changes in valuation allowances for certain foreign operations. Liquidity and Capital Resources Cash Flows The table and discussion below present a summary of the selected sources and uses of our cash:
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