# EZCORP INC (EZPW) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from EZCORP INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/876523/000087652322000071/ezpw-20220930.htm
Accession: 0000876523-22-000071
Filing date: 2022-11-16
Report date: 2022-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EZPW/
All MD&A years: /company/EZPW/mda/
Previous year: /company/EZPW/mda/fy2021/ (FY 2021)
Next year: /company/EZPW/mda/fy2023/ (FY 2023)

ITEM 7. 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” or the “Company”) for the two-year period ended September 30, 2022. The following discussion should be read together with our consolidated financial statements and accompanying notes included in “Part II, Item 8 — Financial Statements and Supplementary Data.” This discussion and analysis contains forward-looking statements, and our actual results could differ materially from those anticipated in these forward-looking statements. See “Part I, Item 1A — Risk Factors” and “Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results” below.

Results of Operations

Non-GAAP Financial Information

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide certain other non-GAAP financial information on a constant currency basis ("constant currency") 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 (in the case of constant currency) and our store operations (in the case of same store results) 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

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exchange rates for each applicable currency as compared to U.S. dollars as of and for the twelve months ended September 30, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","September 30,","","","","Twelve Months Ended September 30,"],["","","2022","","2021","","","","","","2022","","2021"],["Mexican peso","","20.1","","","20.5","","","","","","","20.4","","","20.2"],["Guatemalan quetzal","","7.6","","","7.6","","","","","","","7.5","","","7.6"],["Honduran lempira","","24.1","","","23.9","","","","","","","24.1","","","23.8"],["Peruvian sol","","3.9","","","4.1","","","","","","","3.8","","","3.7"]]
[[/GREPCENT_TABLE]]

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Operating Results

Fiscal 2022 vs. Fiscal 2021

These tables, as well as the discussion that follows, should be read in conjunction with the accompanying condensed consolidated financial statements and related notes.

Summary Financial Data

The following table presents selected summary consolidated financial data for fiscal 2022 and fiscal 2021.

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended September 30,","","Change"],["(in thousands)","2022","","2021"],["Gross profit:"],["Pawn service charges","$","320,865","","","$","260,196","","","23%"],["Merchandise sales","532,886","","","442,798","","","20%"],["Merchandise sales gross profit","203,504","","","185,580","","","10%"],["Gross margin on merchandise sales","38","%","","42","%","","(400) bps"],["Jewelry scrapping sales","32,033","","","26,025","","","23%"],["Jewelry scrapping gross profit","3,337","","","3,177","","","5%"],["Gross margin on jewelry scrapping sales","10","%","","12","%","","(200) bps"],["Other revenues, net","441","","","532","","","(17)%"],["Gross profit","528,147","","","449,485","","","18%"],["Store expenses","357,417","","","330,837","","","8%"],["General and administrative","64,342","","","56,495","","","14%"],["Depreciation and Amortization","32,140","","","30,672","","","5%"],["(Gain) loss on sale or disposal of assets and other","(674)","","","83","","","*"],["Other charges","\u2014","","","229","","","*"],["Total operating expenses","453,225","","","418,316","","","8%"],["Interest expense","9,972","","","22,177","","","(55)%"],["Interest income","(817)","","","(2,477)","","","(67)%"],["Equity in net income of unconsolidated affiliates","(1,779)","","","(3,803)","","","(53)%"],["Other income","(167)","","","(790)","","","(79)%"],["Total non-operating expenses","7,209","","","15,107","","","(52)%"],["Income before income taxes","67,713","","","16,062","","","322%"],["Income tax expense","17,553","","","7,450","","","136%"],["Net income","$","50,160","","","$","8,612","","","482%"],["Net pawn earning assets:"],["Pawn loans","$","210,009","","","$","175,901","","","19%"],["Inventory, net","151,615","","","110,989","","","37%"],["Total net pawn earning assets","$","361,624","","","$","286,890","","","26%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["*","Represents a percentage computation that is not mathematically meaningful."]]
[[/GREPCENT_TABLE]]

PLO increased $34.1 million (19%) to $210.0 million. This is the highest period-end PLO balance we have ever recorded. The increase was due to strong loan demand reflecting continued recovery above pre-COVID levels.

Total revenues increased $156.7 million ( 21%), and gross profit increased 18%.

PSC increased $60.7 million ( 23%) as a result of higher PLO. Merchandise sales increased $90.1 million (20%), and merchandise sales

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gross profit increased $17.9 million (10%), due to a return to more normalized inventory levels and our improved core retail strategy of selling general merchandise inventory in the first 90 days. Gross margin on merchandise sales declined 400 bps to 38%, reflecting a return to more normalized margins, but remained in our targeted range.

Operating expenses increased $34.9 million (8%) primarily due to (a) a $26.6 million increase in store expenses as a result of increased labor in-line with store activity and rent associated with lease renewals and (b) a $7.8 million increase in general and administrative expenses due to asset write-downs associated with IT infrastructure migration and corporate office sublease, a litigation accrual and increased labor and software licensing costs.

Total non-operating expenses decreased $7.9 million (52%). Interest expense decreased $12.2 million, driven by the Accounting Standards Update 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”) 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 the debt discount. See Note 1: Organization and Summary of Significant Accounting Policies included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion of this recently adopted accounting policy. The interest expense decrease was partially offset by a decrease in equity income for our unconsolidated affiliates primarily due to Cash Converters’ net results, which included an impairment, primarily of its ROU lease assets, that was attributed to COVID-19.

Income tax expense increased $10.1 million primarily due to an increase in income before income taxes of $51.7 million. 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 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.

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U.S. Pawn

The following table presents selected summary financial data from our U.S. Pawn segment:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended September 30,","","Change"],["(in thousands)","2022","","2021"],["Gross profit:"],["Pawn service charges","$","240,982","","","$","196,721","","","22%"],["Merchandise sales","391,958","","","341,495","","","15%"],["Merchandise sales gross profit","161,717","","","150,456","","","7%"],["Gross margin on merchandise sales","41","%","","44","%","","(300) bps"],["Jewelry scrapping sales","25,739","","","15,260","","","69%"],["Jewelry scrapping sales gross profit","2,984","","","2,259","","","32%"],["Gross margin on jewelry scrapping sales","12","%","","15","%","","(300) bps"],["Other revenues","83","","","105","","","(21)%"],["Gross profit","405,766","","","349,541","","","16%"],["Segment contribution:"],["Store expenses","266,114","","","253,344","","","5%"],["Depreciation and amortization","10,552","","","10,650","","","(1)%"],["Segment operating contribution","129,100","","","85,547","","","51%"],["Other segment expenses","49","","","27","","","81%"],["Segment contribution","$","129,051","","","$","85,520","","","51%"],["Other data:"],["Average monthly ending pawn loan balance per store (a)","$","287","","","$","227","","","26%"],["Monthly average yield on pawn loans outstanding","13","%","","14","%","","(100) bps"],["Pawn loan redemption rate","84","%","","86","%","","(200) bps"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(a)","Balance is calculated based on the average of the monthly ending balance averages during the applicable period."]]
[[/GREPCENT_TABLE]]

PLO continued to increase, ending the year at $163.5 million, up 20% in total and on a same store basis, due to increased loan demand reflecting a recovery above pre-COVID levels.

Total revenues increased 19% and gross profit increased 16%, reflecting higher average PLO for the year driving higher PSC.

PSC increased 22% primarily as a result of higher average PLO.

Merchandise sales increased 15% due to our return to more normalized inventory levels and our improved core retail strategy of selling general merchandise inventory in the first 90 days. Offsetting the sales increase, merchandise sales gross margin decreased 300 bps to 41%, reflecting a return to more normalized margins, but remained in our targeted range.

Store expenses increased 5% primarily due to increased labor in-line with store activity and rent associated with lease renewals.

Segment contribution increased $43.5 million due to the changes described above.

During fiscal 2022, we acquired three stores in the U.S.

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Latin America Pawn

The following table presents selected summary financial data from our Latin America Pawn segment, including constant currency results, after translation to U.S. dollars from functional currencies. See “Results of Operations — Non-GAAP Financial Information” above.

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended September 30,"],["(in thousands)","2022(GAAP)","","2021(GAAP)","","Change (GAAP)","","2022(Constant Currency)","","Change (Constant Currency)"],["Gross profit:"],["Pawn service charges","$","79,883","","","$","63,475","","","26%","","$","80,199","","","26%"],["Merchandise sales","140,928","","","101,303","","","39%","","141,823","","","40%"],["Merchandise sales gross profit","41,787","","","35,124","","","19%","","42,055","","","20%"],["Gross margin on merchandise sales","30","%","","35","%","","(500) bps","","30","%","","(500) bps"],["Jewelry scrapping sales","6,294","","","10,765","","","(42)%","","6,304","","","(41)%"],["Jewelry scrapping sales gross profit","353","","","918","","","(62)%","","354","","","(61)%"],["Gross margin on jewelry scrapping sales","6","%","","9","%","","(300) bps","","6","%","","(300) bps"],["Other revenues, net","247","","","7","","","*","","249","","","*"],["Gross profit","122,270","","","99,524","","","23%","","122,857","","","23%"],["Segment contribution:"],["Store expenses","91,303","","","77,493","","","18%","","91,811","","","18%"],["Depreciation and amortization","7,913","","","7,371","","","7%","","7,955","","","8%"],["Other charges","\u2014","","","229","","","*","","\u2014","","","*"],["Segment operating contribution","23,054","","","14,431","","","60%","","23,091","","","60%"],["Other segment income (a)","(1,000)","","","(2,862)","","","(65)%","","(1,059)","","","(63)%"],["Segment contribution","$","24,054","","","$","17,293","","","39%","","$","24,150","","","40%"],["Other data:"],["Average monthly ending pawn loan balance per store (b)","$","64","","","$","59","","","8%","","$","64","","","8%"],["Monthly average yield on pawn loans outstanding","16","%","","17","%","","(100) bps","","16","%","","(100) bps"],["Pawn loan redemption rate (c)","79","%","","80","%","","(100) bps","","79","%","","(100) bps"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["*","Represents a percentage computation that is not mathematically meaningful."],["(a)","Fiscal 2022 and 2021 constant currency amounts exclude net GAAP basis foreign currency transaction minimal loss and a gain of $0.1 million, respectively, resulting from movement in exchange rates."],["(b)","Balance is calculated based on the average of the monthly ending balance averages during the applicable period."],["(c)","Rate is solely inclusive of results from Mexico."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2022 Change (GAAP)","","2022 Change (Constant Currency)"],["Same Store data: (a)"],["PLO","15%","","13%"],["PSC","17%","","17%"],["Merchandise Sales","23%","","24%"],["Merchandise Sales Gross Profit","13%","","14%"],["Store Expenses","5%","","5%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(a)","Stores open at the end of the period included in the same store calculation were 631."]]
[[/GREPCENT_TABLE]]

During fiscal 2022, we opened 28 de novo stores in Latin America.

PLO improved to $46.6 million, up 17% (15% on constant currency basis). On a same store basis, PLO increased 15% (13% on a constant currency basis). The increase was attributable to increased loan demand reflecting a recovery above pre-COVID levels.

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Total revenues were up 30% and on a constant currency basis, while gross profit increased by 23% and on a constant currency basis, reflecting higher average PLO for the year driving higher PSC

PSC increased 26% on a GAAP and constant currency basis, as a result of higher average PLO during the year.

Merchandise sales increased 39% (40% on a constant currency basis) due to our return to more normalized inventory levels and our improved core retail strategy of selling general merchandise inventory in the first 90 days. Offsetting the sales increase, merchandise sales gross margin decreased 500 bps to 30%, reflecting a return to more normalized margins.

Store expenses increased $13.8 million, up 18% (18% on a constant currency basis), primarily due to increased labor in-line with store activity and rent associated with lease renewals and annual inflation adjustments. Same-store expenses increased 5% (5% on a constant currency basis).

Segment contribution was up 39% to $24.1 million (40% increase to $24.2 million on a constant currency basis) primarily due to the changes described above.

Other Investments

The following table presents selected summary financial data for our Other Investment segment after translation to U.S. dollars from its functional currency of primarily Australian dollars:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended September 30,","","Change"],["(in thousands)","2022","","2021"],["Gross profit:"],["Consumer loan fees and interest","$","111","","","$","420","","","(74)%"],["Gross profit","111","","","420","","","(74)%"],["Segment operating expenses:"],["Equity in net income of unconsolidated affiliates","(1,779)","","","(3,803)","","","(53)%"],["Segment operating contribution","1,890","","","4,223","","","(55)%"],["Other segment loss (income)","52","","","(173)","","","(130)%"],["Segment contribution","$","1,838","","","$","4,396","","","(58)%"]]
[[/GREPCENT_TABLE]]

Segment contribution was $1.8 million, a decrease of $2.6 million, due to a decrease in equity income for our unconsolidated affiliates. The decrease is primarily due to Cash Converters’ net results, which included an impairment, primarily of its ROU lease assets, that was attributed to COVID-19.

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Other Items

The following table reconciles our consolidated segment contribution discussed above to net income, including items that affect our consolidated financial results but are not allocated among segments:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended September 30,","","Change"],["(in thousands)","2022","","2021"],["Segment contribution","$","154,943","","","$","107,209","","","45%"],["Corporate expenses (income):"],["General and administrative","64,342","","","56,495","","","14%"],["Depreciation and amortization","13,675","","","12,651","","","8%"],["(Gain) Loss on sale or disposal of assets and other","(688)","","","62","","","(1,210)%"],["Interest expense","9,972","","","22,177","","","(55)%"],["Interest income","\u2014","","","(461)","","","(100)%"],["Other (income) expense","(71)","","","223","","","(132)%"],["Income before income taxes","67,713","","","16,062","","","(322)%"],["Income tax expense","17,553","","","7,450","","","(136)%"],["Net income","$","50,160","","","$","8,612","","","(482)%"]]
[[/GREPCENT_TABLE]]

Segment contribution increased $47.7 million (45%), primarily due to the improved operating results of the segments, as discussed above.

General and administrative expenses increased $7.8 million (14%), primarily due to a litigation accrual and increased salaries, including performance-based incentive compensation.

Interest expense decreased $12.2 million (55%) 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 the debt discount. See Note 1: Organization and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion of this recently adopted accounting policy.

Income tax expense increased $10.1 million primarily due to an increase in income before income taxes of $51.7 million. 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 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.

Fiscal 2021 vs. Fiscal 2020

The Results of Operations discussion for fiscal 2021 vs. fiscal 2020 is located in “Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended September 30, 2021.

Liquidity and Capital Resources

Cash and Cash Equivalents

Our cash and equivalents balance was $206.0 million at September 30, 2022 compared to $253.7 million at September 30, 2021. Our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments.

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Cash Flows

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

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended September 30,","","Change"],["(in thousands)","2022","","2021"],["Cash flows provided by operating activities","$","66,535","","","$","46,438","","","43%"],["Cash flows used in investing activities","(113,283)","","","(84,611)","","","34%"],["Cash flows used in financing activities","(2,832)","","","(16,253)","","","(83)%"],["Effect of exchange rate changes on cash and cash equivalents and restricted cash","325","","","5,497","","","(94)%"],["Net decrease in cash and cash equivalents and restricted cash","$","(49,255)","","","$","(48,929)","","","1%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["*","Represents a percentage computation that is not mathematically meaningful."]]
[[/GREPCENT_TABLE]]

The increase in cash flows from operating activities was primarily due to a $41.5 million increase in net income, partially offset by cash flows used to purchase inventory and other changes to working capital primarily related to the timing of collections in pawn service charges receivable and the timing of payments of accounts payable and prepaid expenses.

The $28.7 million increase in cash flows used in investing activities was primarily due to $16.5 million in outgoing cash used to fund other investments and $6.9 million investment in unconsolidated affiliate, offset by the prior-year increased acquisition activity, primarily attributable to CAE. In the current year, there was an increase of $79.0 million in net pawn lending associated with PLO growth, partially offset by a $65.9 million increase in the sale of forfeited collateral in line with our growing merchandise sales. Of the $16.5 million used to fund other investments, $15.0 million was invested in Founders, as discussed in Note 5: Strategic Investments of Notes to Consolidated Financial Statements included in in “Part II, Item 8 — Notes to the Condensed Consolidated Financial Statements.”

The decrease in cash flows used in financing activities was primarily due to the prior-year payment of assumed debt of $14.9 million from the CAE acquisition, offset by a $2.0 million current year increase in cash used to repurchase and retire common stock.

The net effect of these changes was a $49.3 million decrease in cash on hand during the current year, resulting in a $214.4 million ending cash and restricted cash balance.

Sources and Uses of Cash

On May 3, 2022, the Company's Board of Directors (the "Board") authorized the repurchase of up to $50 million of our Class A Common Stock over 3 years. Execution of the program will be responsive to fluctuating market conditions and valuations, liquidity needs and the expected return on investment compared to other opportunities.

The amount and timing of purchases will be dependent on a variety of factors, including stock price, trading volume, general market conditions, legal and regulatory requirements, general business conditions, the level of cash flows, 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. Through September 30, 2022, the Company has repurchased and retired 237,943 shares of our Class A Common Stock for $2.0 million, which amount was allocated between "Additional paid-in capital" and "Retained earnings" in our Consolidated Balance Sheets.

We anticipate that cash flows from operations and cash on hand will be adequate to fund any future stock repurchases, our contractual obligations, tax payments, planned de novo store growth, capital expenditures and working capital requirements through fiscal 2023. 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. 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.

Convertible Notes

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

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Contractual Obligations

Below is a summary of our cash needs to meet future aggregate contractual obligations as of September 30, 2022:

[[GREPCENT_TABLE]]
[["","","","Payments due by Period"],["(in thousands)","Total","","Less than 1 year","","1-3 years","","3-5 years","","More than 5 years"],["Debt obligations (a)","$","316,250","","","$","\u2014","","","$","316,250","","","$","\u2014","","","$","\u2014"],["Interest on long-term debt obligations","17,816","","","8,230","","","9,586","","","\u2014","","","\u2014"],["Lease obligations (b)","273,983","","","66,039","","","105,821","","","63,558","","","38,565"],["Total (c) (d)","$","608,049","","","$","74,269","","","$","431,657","","","$","63,558","","","$","38,565"]]
[[/GREPCENT_TABLE]]

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

(b)    Excludes $12.4 million in sublease payments expected to be received.

(c)    No provision for uncertain tax benefits has been reflected in the contractual obligations table as the timing of any such payment is uncertain. See Note 11: Income Taxes of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” Additionally, no provision for insurance reserves, deferred compensation arrangements, or other liabilities totaling $6.7 million has been included as the timing of such payments are uncertain.

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

In addition to the lease obligations in the table above, we are responsible for the maintenance, property taxes and insurance at most of our locations. During the fiscal year ended September 30, 2022, these collectively amounted to $15.2 million.

Critical Accounting Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments including those related to revenue recognition, inventory, loan loss allowances, goodwill and indefinite-lived intangible assets, long-lived and other intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience, observable trends and various other assumptions that we believe to be reasonable under the circumstances. We use this information to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the estimates under different assumptions or conditions.

The critical accounting policies and estimates that could have a significant impact on our results of operations, as well as relevant recent accounting pronouncements, are described in Note 1: Organization and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” Certain accounting policies regarding the quantification of the sensitivity of certain critical estimates are discussed further below.

Pawn Loan Revenue Recognition

We record PSC using the effective interest method over the life of the loan for all pawn loans we believe to be collectible. We base our estimate of collectible loans on several inputs, including recent redemption rates, historical trends in redemption rates and the amount of loans due in the following months. Unexpected variations in any of these factors could change our estimate of collectible loans, affecting our earnings and financial condition. As of September 30, 2022, the balance of our PSC receivable was $33.5 million. Assuming the average forfeiture rate increased or decreased by 10%, our pawn service charges receivable balance as of September 30, 2022 would have increased or decreased by approximately $1.1 million.

Inventory and Cost of Goods Sold

We consider our estimates of obsolete or slow-moving inventory and shrinkage estimates in determining the appropriate overall valuation allowance for inventory. We monitor our sales margins for each type of inventory on an ongoing basis and compare to historical margins. Significant variances in those margins may require a revision to future inventory reserve estimates. We have historically revised our reserve estimates pertaining to jewelry inventory depending on the current price of gold and resulting trends in margins. Future declines in gold prices may cause an increase in reserve rates pertaining to jewelry inventory. As of September 30, 2022, the gross balance of our inventory was $153.7 million, for which we have included reserves of $2.1 million. Assuming the reserve rates were increased or decreased by 10%, our inventory reserve balance as of September 30, 2022 would have increased or decreased by approximately $0.2 million.

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Goodwill and Indefinite-Lived Intangible Assets

When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine an impairment is more-likely-than-not, we are then required to perform a quantitative impairment test; otherwise, no further analysis is required. We also may elect not to perform a qualitative assessment and, instead, proceed directly to a quantitative impairment test. When performing a quantitative impairment test, we apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

When we perform a quantitative goodwill impairment test, we estimate the fair value of the reporting unit using an income approach based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit. The determination of fair value involves the use of estimates and assumptions, including revenue growth rates, operating margins and terminal growth rates discounted by an estimated WACC derived from other publicly traded companies that are similar but not identical to us from an operational and economic standpoint. We use discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in our internally developed forecasts.

We test indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we believe as a result of the qualitative assessment that it is more-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Otherwise, no further testing is required.

We consider the assessment of the occurrence of triggering events or substantive changes in circumstances that may indicate the fair value of goodwill may be impaired to be a critical estimate. Furthermore, we consider the assumptions discussed above pertaining to the income approach we use in the quantitative testing of impairment to be critical estimates.

The results of the impairment analyses for fiscal year 2022 and fiscal year 2021 are discussed in Note 8: Goodwill and Intangible Assets of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.”

Income Taxes

Management believes that it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the net recorded deferred tax assets. In the event we determine all or part of the net deferred tax assets are not realizable in the future, we will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. We have included valuation allowances against deferred tax assets for net operating losses and tax credits not expected to be utilized based on specific facts and estimates for each jurisdiction.

We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We have not recorded a deferred tax liability related to foreign withholding taxes of our undistributed earnings of foreign subsidiaries indefinitely invested outside the U.S.

We may be subject to income tax audits by the respective tax authorities in any or all of the jurisdictions in which we operate or have operated within a relevant period. Significant judgment is required in determining uncertain tax positions. We utilize the required two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We adjust these reserves in light of changing facts and circumstances, such as the closing of an audit or the refinement of an estimate. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We believe adequate provisions for income taxes have been made for all periods.

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Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results

This Annual Report on Form 10-K, 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. The words “may,” "can," “should,” “could,” “will,” "would," “predict,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements are only predictions of the outcome and timing of future events based on our current expectations and currently available information. 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. Accordingly, you should not regard any forward-looking statement as a representation that the expected results will be achieved. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report. Such risks and uncertainties include, among other things:

•Changes in laws and regulations;

•Negative characterizations of our industry;

•Concentration of business in Texas and Florida;

•Changes in gold prices or volumes;

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

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

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

•Our controlled ownership structure;

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

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

•Changes in the competitive landscape;

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

•Failure to achieve adequate return on investments;

•Potential uninsured property, casualty or other losses;

•Potential natural disasters;

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

•Potential conversion of Convertible Notes into cash (which could adversely affect liquidity) or stock (which will cause dilution of existing stockholders);

•Limited number of unreserved shares available for future issuance;

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

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

•Changes in foreign currency exchange rates;

•The outcome of future litigation and regulatory proceedings;

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

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

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

•Potential data security breaches or other cyber-attacks; and

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

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

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. You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Accordingly, you should not regard any forward-looking statements as a representation that the expected results will be achieved.

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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.