FirstCash Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion of financial condition, results of operations, liquidity and capital resources of FirstCash Holdings, Inc. and its wholly-owned subsidiaries (together, the “Company”) should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included under Part I, Item 1 of this quarterly report on Form 10-Q, as well as with the audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

GENERAL

The Company’s primary line of business is the operation of retail pawn stores, also known as “pawnshops,” which focus on serving cash- and credit-constrained consumers. The Company is the leading operator of pawn stores in the U.S. and Latin America. Pawn stores help customers meet small short-term cash needs by providing non-recourse pawn loans and buying merchandise directly from customers. Personal property, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments, is pledged and held as collateral for the pawn loans over the typical 30-day term of the loan. Pawn stores also generate retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers.

The Company is also a leading provider of technology-driven, retail POS payment solutions focused on serving credit-constrained consumers. The Company’s retail POS payment solutions business line consists solely of the operations of AFF, which focuses on LTO products and facilitating other retail financing payment options across a large network of traditional and e-commerce merchant partners in all 50 states in the U.S., the District of Columbia and Puerto Rico. AFF’s retail partners provide consumer goods and services to their customers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions.

The Company’s two business lines are organized into three reportable segments. The U.S. pawn segment consists of pawn operations in the U.S., while the Latin America pawn segment consists of pawn operations in Mexico, Guatemala, Colombia and El Salvador. The retail POS payment solutions segment consists of the operations of AFF in the U.S. and Puerto Rico.

OPERATIONS AND LOCATIONS

Pawn Operations

As of June 30, 2024, the Company operated 3,018 pawn store locations composed of 1,201 stores in 29 U.S. states and the District of Columbia, 1,716 stores in 32 states in Mexico, 72 stores in Guatemala, 17 stores in El Salvador and 12 stores in Colombia.

The following tables detail pawn store count activity for the three and six months ended June 30, 2024:

(1) In addition to new store openings, the Company strategically relocated four stores in the U.S. during the three months ended June 30, 2024. During the six months ended June 30, 2024, the Company strategically relocated six stores in the U.S.

(2) Store consolidations were primarily acquired locations over the past seven years which have been combined with overlapping stores and for which the Company expects to maintain a significant portion of the acquired customer base in the consolidated location.

(3) Includes 10 pawnshops located in Acapulco, Mexico that were severely damaged by a hurricane in the fall of 2023 which the Company elected to consolidate with other stores in this market. The Company expects to replace certain of these locations in this market over time as the city’s infrastructure recovers.

POS Payment Solutions

As of June 30, 2024, AFF provided LTO and retail POS payment solutions for consumer goods and services through a network of approximately 12,800 active retail merchant partner locations located in all 50 U.S. states, the District of Columbia and Puerto Rico. This compares to the active door count of approximately 10,500 locations at June 30, 2023.

CRITICAL ACCOUNTING ESTIMATES

The financial statements have been prepared in accordance with GAAP. The significant accounting policies and estimates that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results have been reported in the Company’s 2023 Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies for the six months ended June 30, 2024.

RESULTS OF OPERATIONS (unaudited)

Operating Results for the Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

U.S. Pawn Segment

The following table presents segment pre-tax operating income and other operating metrics of the U.S. pawn segment for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 (dollars in thousands). Operating expenses include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.

(1) Includes $1.1 million and $1.8 million of retail merchandise sales from intersegment transactions for the three months ended June 30, 2024 and 2023, respectively, related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment sales, consolidated U.S. retail merchandise sales for the three months ended June 30, 2024 and 2023 totaled $229.0 million and $194.3 million, respectively.

(2) Includes $0.6 million and $0.9 million of cost of retail merchandise sold from intersegment transactions for the three months ended June 30, 2024 and 2023, respectively, related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment sales, consolidated U.S. cost of retail merchandise sold for the three months ended June 30, 2024 and 2023 totaled $131.9 million and $110.6 million, respectively.

The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of the U.S. pawn segment, as of June 30, 2024 compared to June 30, 2023 (dollars in thousands, except as otherwise noted):

Retail Merchandise Sales Operations

U.S. retail merchandise sales increased 17%, totaling $230.1 million during the second quarter of 2024 compared to $196.0 million for the second quarter of 2023. Same-store retail sales increased 7% in the second quarter of 2024 compared to the second quarter of 2023. The increase in total retail sales was primarily due to incremental sales contributions from acquired stores. The gross profit margin on retail merchandise sales in the U.S. was 42% in the second quarter of 2024 and 43% in the second quarter of 2023, reflecting continued demand for value-priced, pre-owned merchandise and low levels of aged inventory.

U.S. inventories increased 24% from $180.4 million at June 30, 2023 to $223.4 million at June 30, 2024. The increase was primarily due to incremental inventories from acquired stores and an increase in same-store inventories as a result of the higher pawn loan balances noted below. Inventories aged greater than one year in the U.S. decreased to 1% at June 30, 2024 compared to 2% at June 30, 2023.

Pawn Lending Operations

U.S. pawn loan receivables as of June 30, 2024 increased 22% in total and 11% on a same-store basis compared to June 30, 2023. The increase in total pawn receivables was due to incremental pawn loans from acquired stores and an increase in same-store pawn receivables, which the Company believes was primarily due to continued inflationary pressures driving additional demand for pawn loans and tightened underwriting for other competing forms of consumer credit.

U.S. pawn loan fees increased 22% to $120.3 million during the second quarter of 2024 compared to $99.0 million for the second quarter of 2023. Same-store pawn fees in the second quarter of 2024 increased 12% compared to the second quarter of 2023. The increase in total and same-store pawn loan fees was primarily due to store growth and continued growth in demand for pawn loans.

Segment Expenses

U.S. operating expenses increased 16% to $125.2 million during the second quarter of 2024 compared to $108.2 million during the second quarter of 2023. The increase in operating expenses was primarily due to store growth.

The U.S. segment pre-tax operating income for the second quarter of 2024 was $90.6 million, which generated a pre-tax segment operating margin of 24% compared to $72.4 million and 23% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected increased net revenue from both acquired and existing stores partially offset by an increase in segment expenses.

Latin America Pawn Segment

Latin American segment pre-tax operating income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 benefited from a 3% favorable change in the average value of the Mexican peso compared to the U.S. dollar. The translated value of Latin American earning assets as of June 30, 2024 compared to June 30, 2023 was also impacted by an 8% unfavorable change in the end-of-period Mexican peso compared to the U.S. dollar. Constant currency results are non-GAAP financial measures, which exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. See the “Constant Currency Results” section in “Non-GAAP Financial Information” below for additional discussion of constant currency operating results.

The following table presents segment pre-tax operating income and other operating metrics of the Latin America pawn segment for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 (dollars in thousands). Operating expenses include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.

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The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of the Latin America pawn segment, as of June 30, 2024 compared to June 30, 2023 (dollars in thousands, except as otherwise noted):

Retail Merchandise Sales Operations

Latin America retail merchandise sales increased 6% (3% on a constant currency basis) to $134.4 million during the second quarter of 2024 compared to $126.6 million for the second quarter of 2023. Same-store retail sales also increased 6% (3% on a constant currency basis) during the second quarter of 2024 compared to the second quarter of 2023. The increase in total and same-store retail sales was primarily due to increased inventory levels during the second quarter of 2024 compared to the second quarter of 2023 and greater demand for value-priced, pre-owned merchandise. The gross profit margin on retail merchandise sales was 36% during the second quarter of 2024 compared to 35% during the second quarter of 2023.

Latin America inventories increased 6% (14% on a constant currency basis) from $86.7 million at June 30, 2023 to $92.0 million at June 30, 2024. The increased inventories were primarily due to increases in pawn loan receivable balances over the past several quarters creating more forfeited inventory. Inventories aged greater than one year in Latin America were 1% at both June 30, 2024 and 2023.

Pawn Lending Operations

Latin America pawn loan receivables were flat (8% increase on a constant currency basis) as of June 30, 2024 compared to June 30, 2023. On a same-store basis, pawn loan receivables increased 1% (8% on a constant currency basis) as of June 30, 2024 compared to June 30, 2023. The increase in constant currency total and same-store pawn receivables is primarily due to increasing demand for pawn loans and larger loan sizes driven in part by a slightly increased mix of higher value jewelry loans.

Latin America pawn loan fees increased 10% (7% on a constant currency basis), totaling $60.7 million during the second quarter of 2024 compared to $55.2 million for the second quarter of 2023. Same-store pawn fees also increased 10% (7% on a constant currency basis) in the second quarter of 2024 compared to the second quarter of 2023. The increase in total and same-store constant currency pawn loan fees was primarily due to increased average pawn loan receivable balances outstanding during the second quarter of 2024 compared to the second quarter of 2023.

Segment Expenses

Operating expenses increased 14% (11% on a constant currency basis) to $67.9 million during the second quarter of 2024 compared to $59.5 million during the second quarter of 2023. Same-store operating expenses increased 12% (9% on a constant currency basis) compared to the prior-year period. The increase in total and same-store constant currency operating expenses was primarily driven by increased store counts, accelerated store opening activity, general inflationary impacts and continued increases in the federally mandated minimum wage and increased costs associated with required employee benefit programs.

The segment pre-tax operating income for the second quarter of 2024 was $37.1 million, which generated a pre-tax segment operating margin of 18% compared to $37.7 million and 20% in the prior year, respectively. The decrease in the segment pre-tax operating income and margin reflected the increase in operating expenses, partially offset by an increase in net revenue.

Retail POS Payment Solutions Segment

Retail POS Payment Solutions Operating Results

The following table presents segment pre-tax operating income of the retail POS payment solutions segment for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 (dollars in thousands). Operating expenses include salary and benefit expenses of certain operations-focused departments, merchant partner incentives, bank and other payment processing charges, credit reporting costs, information technology costs, advertising costs and other operational costs incurred by AFF.

(1) Includes $0.4 million and $0.5 million of depreciation of leased merchandise from intersegment transactions for the three months ended June 30, 2024 and 2023, respectively, related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment transactions, consolidated depreciation of leased merchandise for the three months ended June 30, 2024 and 2023 totaled $110.2 million and $102.5 million, respectively.

(2) Includes $0.2 million of provision for lease losses from intersegment transactions for both the three months ended June 30, 2024 and 2023 related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment transactions, consolidated provision for lease losses for the three months ended June 30, 2024 and 2023 totaled $47.7 million and $52.9 million, respectively.

The following table provides a detail of gross transaction volumes originated during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 (dollars in thousands):

The following table details retail POS payment solutions earning assets as of June 30, 2024 as compared to June 30, 2023 (dollars in thousands):

(1) Includes $0.2 million and $1.4 million of intersegment transactions as of June 30, 2024 and 2023, respectively, related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment transactions, consolidated net leased merchandise as of June 30, 2024 and 2023 totaled $142.9 million and $143.1 million, respectively.

The following table details the changes in the allowance for lease and loan losses and other portfolio metrics for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 (dollars in thousands):

(1) Includes $0.2 million of provision for lease losses from intersegment transactions for both the three months ended June 30, 2024 and 2023 related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment transactions, consolidated provision for lease losses for the three months ended June 30, 2024 and 2023 totaled $47.7 million and $52.9 million, respectively.

(2) Calculated as provision for lease or loan losses as a percentage of the respective gross transaction volume originated.

(3) Calculated as charge-offs, net of recoveries, as a percentage of the respective average earning asset balance before allowance for lease or loan losses.

(4) Calculated as the percentage of the respective contractual earning asset balance owed that is 1 to 89 days past due (the Company charges off leases and finance receivables when they are 90 days or more contractually past due).

LTO Operations

Leased merchandise, before allowance for lease losses, decreased 4% as of June 30, 2024 compared to June 30, 2023. The decrease was primarily due to decreased transaction volumes and a slight increase in the number of customers taking advantage of the early buyout or other early payment options.

The allowance for lease losses decreased 7% to $103.3 million as of June 30, 2024 compared to $111.0 million as of June 30, 2023, which was primarily due to the decrease in leased merchandise. As a percentage of lease merchandise, the allowance was 42% at June 30, 2024 and 43% at June 30, 2023.

Leased merchandise income increased 3% to $194.6 million during the second quarter of 2024 compared to $189.8 million during the second quarter of 2023, which was primarily due to higher average leased merchandise balances outstanding during the second quarter of 2024 compared to the second quarter of 2023.

Depreciation of leased merchandise increased 7% to $110.6 million during the second quarter of 2024 compared to $103.1 million during the second quarter of 2023. As a percentage of leased merchandise income, depreciation of leased merchandise increased from 54% during the second quarter of 2023 to 57% during the second quarter of 2024 primarily as a result of a slight increase in the number of customers taking advantage of the early buyout or other early payment options.

Provision for lease losses decreased 10% to $47.8 million during the second quarter of 2024 compared to $53.0 million during the second quarter of 2023, which was primarily due to a slight decrease in lease loss provisioning rates used during the second quarter of 2024 compared to the second quarter of 2023 and the 5% decrease in gross transaction volumes. As a percentage of gross transaction volume, the provision for lease losses decreased from 34% during the second quarter of 2023 to 33% during the second quarter of 2024.

Retail Finance Operations

Finance receivables, before allowance for loan losses, increased 1% as of June 30, 2024 compared to June 30, 2023. The increase was primarily due to increased transaction volumes.

The allowance for loan losses increased 7% to $100.0 million as of June 30, 2024 compared to $93.1 million as of June 30, 2023, which was primarily due to the increase in finance receivables and a slight increase in loan loss provisioning rates used during the second quarter of 2024 compared to the second quarter of 2023. As a percentage of finance receivables, the allowance was 46% at June 30, 2023 compared to 49% at June 30, 2024.

Interest and fees on finance receivables decreased 2% to $56.8 million during the second quarter of 2024 compared to $58.2 million during the second quarter of 2023, which was primarily due to a slight decline in portfolio yield primarily as a result of AFF expanding its offerings and merchant relationships in certain services sector verticals in the second quarter of 2024, some of which provide slightly lower interest rates.

Provision for loan losses increased 10% to $31.1 million during the second quarter of 2024 compared to $28.2 million during the second quarter of 2023, which was primarily due to a slight increase in loan loss provisioning rates used during the second quarter of 2024 compared to the second quarter of 2023 and the 3% increase in gross transaction volumes. As a percentage of gross transaction volume, the provision for loan losses increased from 28% during the second quarter of 2023 to 30% during the second quarter of 2024.

Segment Expenses

Operating expenses decreased 5% to $35.3 million during the second quarter of 2024 compared to $37.1 million during the second quarter of 2023, which was primarily due to lower receivable acquisition costs, the realization of information technology cost synergies from the Company’s acquisition of AFF and decreased variable costs associated with the 2% decrease in gross transaction volumes. As a percentage of segment revenues, operating expenses decreased slightly from 15% during the second quarter of 2023 to 14% during the second quarter of 2024.

The retail POS payment solutions segment pre-tax operating income for the second quarter of 2024 was $25.9 million compared to $25.8 million in the second quarter of 2023. The slight increase was primarily the result of the decrease in segment expenses, partially offset by a decrease in net revenue.

Consolidated Results of Operations

The following table reconciles pre-tax operating income of the Company’s U.S. pawn segment, Latin America pawn segment and retail POS payment solutions segment, discussed above, to consolidated net income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 (dollars in thousands):

(1) Represents the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores. For further detail, see Note 10 of Notes to Consolidated Financial Statements.

Corporate Expenses and Taxes

Administrative expenses increased 13% to $45.6 million during the second quarter of 2024 compared to $40.4 million in the second quarter of 2023, primarily due to increased incentive compensation expense, the increase in pawn store count and a 3% change in the average value of the Mexican peso resulting in higher U.S. dollar translated administrative expenses in Latin America. As a percentage of revenue, administrative expenses were 5% during both the second quarter of 2023 and the second quarter of 2024.

Depreciation and amortization decreased 10% to $13.2 million during the second quarter of 2024 compared to $14.8 million in the second quarter of 2023, primarily due to a $1.7 million decrease in amortization of acquired AFF intangible assets.

Interest expense increased 20% to $25.2 million during the second quarter of 2024 compared to $21.1 million in the second quarter of 2023, primarily due to higher floating interest rates on the Company’s unsecured bank credit facilities and higher average total long-term debt balances outstanding. See Note 8 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources.”

Consolidated effective income tax rates for the second quarter of 2024 and 2023 were 25.8% and 25.4%, respectively.

Operating Results for the Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023

U.S. Pawn Segment

The following table presents segment pre-tax operating income and other operating metrics of the U.S. pawn segment for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 (dollars in thousands). Operating expenses include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.

(1) Includes $2.1 million and $3.5 million of retail merchandise sales from intersegment transactions for the six months ended June 30, 2024 and 2023, respectively, related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment sales, consolidated U.S. retail merchandise sales for the six months ended June 30, 2024 and 2023 totaled $465.0 million and $403.3 million, respectively.

(2) Includes $1.1 million and $1.8 million of cost of retail merchandise sold from intersegment transactions for the six months ended June 30, 2024 and 2023, respectively, related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment sales, consolidated U.S. cost of retail merchandise sold for the six months ended June 30, 2024 and 2023 totaled $271.2 million and $231.6 million, respectively.

Retail Merchandise Sales Operations

U.S. retail merchandise sales increased 15% to $467.1 million during the six months ended June 30, 2024 compared to $406.7 million for the six months ended June 30, 2023. Same-store retail sales increased 5% during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in total retail sales was primarily due to incremental sales contributions from acquired stores. During the six months ended June 30, 2024, the gross profit margin on retail merchandise sales in the U.S. was 42% compared to a margin of 43% during the six months ended June 30, 2023 reflecting continued demand for value-priced, pre-owned merchandise and low levels of aged inventory.

Pawn Lending Operations

U.S. pawn loan fees increased 21% to $243.3 million during the six months ended June 30, 2024 compared to $201.7 million for the six months ended June 30, 2023. Same-store pawn fees increased 12% during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in total and same-store pawn loan fees was primarily due to store growth and continued growth in demand for pawn loans.

Segment Expenses

U.S. operating expenses increased 12% to $244.1 million during the six months ended June 30, 2024 compared to $217.9 million during the six months ended June 30, 2023 while same-store operating expenses increased 3% compared with the prior-year period. The increase in operating expenses was primarily due to store growth.

The U.S. segment pre-tax operating income for the six months ended June 30, 2024 was $187.2 million, which generated a pre-tax segment operating margin of 25% compared to $153.4 million and 24% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected increased net revenue from both acquired and existing stores partially offset by the increase in segment expenses.

Latin America Pawn Segment

Latin American segment pre-tax operating income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 benefited from a 6% favorable change in the average value of the Mexican peso compared to the U.S. dollar.

The following table presents segment pre-tax operating income and other operating metrics of the Latin America pawn segment for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 (dollars in thousands). Operating expenses include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.

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Retail Merchandise Sales Operations

Latin America retail merchandise sales increased 8% (2% on a constant currency basis) to $265.3 million during the six months ended June 30, 2024 compared to $245.5 million for the six months ended June 30, 2023. Same-store retail sales increased 7% (1% on a constant currency basis) during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in total and same-store retail sales was primarily due to increased inventory levels throughout the first half of 2024 and greater demand for value-priced, pre-owned merchandise. The gross profit margin on retail merchandise sales was 36% during the six months ended June 30, 2024 and 35% during the six months ended June 30, 2023.

Pawn Lending Operations

Latin America pawn loan fees increased 13% (6% on a constant currency basis) to $117.3 million during the six months ended June 30, 2024 compared to $104.1 million for the six months ended June 30, 2023. Same-store pawn fees also increased 13% (6% on a constant currency basis) during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in total and same-store constant currency pawn loan fees was primarily due to increased average receivable balances outstanding during the six months ended June 30, 2024.

Segment Expenses

Operating expenses increased 17% (11% on a constant currency basis) to $135.3 million during the six months ended June 30, 2024 compared to $115.3 million during the six months ended June 30, 2023. Same-store operating expenses increased 15% (9% on a constant currency basis) compared to the prior-year period. The increase in total and same-store operating expenses was primarily driven by increased store counts, accelerated store opening activity, general inflationary impacts and continued increases in the federally mandated minimum wage and increased costs associated with required employee benefit programs.

The segment pre-tax operating income for the six months ended June 30, 2024 was $69.0 million, which generated a pre-tax segment operating margin of 17% compared to $70.6 million and 19% in the prior year, respectively. The decrease in the segment pre-tax operating income and margin reflected an increase in operating expenses, partially offset by an increase in net revenue.

Retail POS Payment Solutions Segment

Retail POS Payment Solutions Operating Results

The following table presents segment pre-tax operating income of the retail POS payment solutions segment for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 (dollars in thousands). Operating expenses include salary and benefit expenses of certain operations-focused departments, merchant partner incentives, bank and other payment processing charges, credit reporting costs, information technology costs, advertising costs and other operational costs incurred by AFF.

(1) Includes $0.9 million and $1.1 million of depreciation of leased merchandise from intersegment transactions for the six months ended June 30, 2024 and 2023, respectively, related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment transactions, consolidated depreciation of leased merchandise for the six months ended June 30, 2024 and 2023 totaled $230.4 million and $204.1 million, respectively.

(2) Includes $0.3 million of provision for lease losses from intersegment transactions for both the six months ended June 30, 2024 and 2023 related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment transactions, consolidated provision for lease losses for the six months ended June 30, 2024 and 2023 totaled $90.7 million and $101.9 million, respectively.

The following table provides a detail of gross transaction volumes originated during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 (dollars in thousands):

The following table details the changes in the allowance for lease and loan losses and other portfolio metrics for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 (dollars in thousands):

(1) Includes $0.3 million of provision for lease losses from intersegment transactions for both the six months ended June 30, 2024 and 2023 related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores that are eliminated upon consolidation. Excluding these intersegment transactions, consolidated provision for lease losses for the six months ended June 30, 2024 and 2023 totaled $90.7 million and $101.9 million, respectively.

(2) Calculated as provision for lease or loan losses as a percentage of the respective gross transaction volume originated.

(3) Calculated as charge-offs, net of recoveries, as a percentage of the respective average earning asset balance before allowance for lease or loan losses.

(4) Calculated as the percentage of the respective contractual earning asset balance owed that is 1 to 89 days past due (the Company charges off leases and finance receivables when they are 90 days or more contractually past due).

LTO Operations

Leased merchandise income increased 7% to $400.2 million during the six months ended June 30, 2024 compared to $373.2 million for the six months ended June 30, 2023, which was primarily due to higher leased merchandise balances outstanding during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Depreciation of leased merchandise increased 13% to $231.3 million during the six months ended June 30, 2024 compared to $205.2 million during the six months ended June 30, 2023. As a percentage of leased merchandise income, depreciation of leased merchandise increased from 55% during the six months ended June 30, 2023 to 58% during the six months ended June 30, 2024 primarily as a result of a slight increase in customers taking advantage of early buyout or other early payment options.

Provision for lease losses decreased 11% to $91.0 million during the six months ended June 30, 2024 compared to $102.2 million for the six months ended June 30, 2023, which was primarily due to a slight decrease in lease loss provisioning rates used during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 and the 1% decrease in gross transaction volumes. As a percentage of gross transaction volume, the provision for lease losses decreased from 33% during the six months ended June 30, 2023 to 30% during the six months ended June 30, 2024.

Retail Finance Operations

Interest and fees on finance receivables increased 1% to $114.2 million during the six months ended June 30, 2024 compared to $112.8 million for the six months ended June 30, 2023. The increase was primarily due to the higher year-over-year finance receivable balances, partially offset by a slight decline in portfolio yield primarily as a result of AFF expanding its offerings and merchant relationships in certain services sector verticals in the six months ended June 30, 2024, some of which provide slightly lower interest rates.

Provision for loan losses increased 7% to $61.5 million during the six months ended June 30, 2024 compared to $57.5 million for the six months ended June 30, 2023, which was primarily due to a slight increase in loan loss provisioning rates used during the six months ended June 30, 2024 and the 4% increase in gross transaction volumes. As a percentage of gross transaction volume, the provision for loan losses increased from 29% during the six months ended June 30, 2023 to 30% during the six months ended June 30, 2024.

Segment Expenses

Operating expenses decreased 1% to $70.1 million during the six months ended June 30, 2024 compared to $70.6 million during the six months ended June 30, 2023, which was primarily due to lower receivable acquisition costs, the realization of information technology cost synergies from the Company’s acquisition of AFF, partially offset by increased variable costs associated with the 1% increase in gross transaction volumes. As a percentage of segment revenues, operating expenses decreased slightly from 15% during the six months ended June 30, 2023 to 14% during the six months ended June 30, 2024.

The retail POS payment solutions segment pre-tax operating income for the six months ended June 30, 2024 was $59.1 million compared to $49.0 million in the six months ended June 30, 2023. The increase was primarily the result of increased segment income resulting from increases in net revenue and a decrease in segment expenses.

Consolidated Results of Operations

The following table reconciles pre-tax operating income of the Company’s U.S. pawn segment, Latin America pawn segment and retail POS payment solutions segment, discussed above, to consolidated net income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 (dollars in thousands):

(1) Represents the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution in its U.S. pawn stores. For further detail, see Note 10 of Notes to Consolidated Financial Statements.

Corporate Expenses and Taxes

Administrative expenses increased 12% to $88.6 million during the six months ended June 30, 2024 compared to $79.4 million during the six months ended June 30, 2023, primarily due to increased incentive compensation expense, the increase in pawn store count and a 6% change in the average value of the Mexican peso resulting in higher U.S. dollar translated administrative expenses in Latin America. As a percentage of revenue, administrative expenses were 5% during both the six months ended June 30, 2023 and 2024.

Depreciation and amortization decreased 11% to $26.4 million during the six months ended June 30, 2024 compared to $29.8 million in the six months ended June 30, 2023, primarily due to a $3.7 million decrease in amortization of acquired AFF intangible assets.

Interest expense increased 21% to $50.6 million during the six months ended June 30, 2024 compared to $42.0 million for the six months ended June 30, 2023, primarily due to higher floating interest rates on the Company’s unsecured bank credit facilities and higher average total long-term debt balances outstanding. See Note 8 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources.”

Consolidated effective income tax rates for the six months ended June 30, 2024 and 2023 were 25.4% and 25.2%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Material Capital Requirements

The Company’s primary capital requirements include:

• Expand pawn operations through growth of pawn receivables and inventories in existing stores, new store openings, strategic acquisitions of pawn stores and purchases of underlying real estate at existing locations;
• Expand retail POS payment solutions operations through growth of the business generated from new and existing merchant partners; and
• Return capital to shareholders through dividends and stock repurchases.

Other material capital requirements include operating expenses (see Note 4 of Notes to Consolidated Financial Statements regarding operating lease commitments), maintenance capital expenditures related to its facilities, technology platforms, general corporate operating activities, income tax payments and debt service, among others. Net interest expense is expected to increase in 2024 compared to 2023 due to (i) increased borrowings primarily undertaken to fund recent acquisitions and (ii) anticipated higher floating interest rates on the borrowings under the revolving credit facilities. The Company believes that net cash provided by operating activities and available and unused funds under its revolving unsecured credit facilities will be adequate to meet its liquidity and capital needs for these items over the next 12 months and also in the longer-term beyond the next 12 months.

Expand Pawn Operations

The Company intends to continue expansion of its pawn operations through growth of pawn receivables and inventories in existing stores along with new store openings and acquisitions.

During the six months ended June 30, 2024, the Company acquired 27 pawn stores in the U.S. and acquired one pawn license that was used to open a pawn store in the state of Nevada for a cumulative purchase price of $99.2 million, net of cash acquired and subject to future post-closing adjustments. The Company evaluates potential acquisitions based upon growth potential, purchase price, available liquidity, strategic fit and quality of management personnel, among other factors.

The Company has opened 40 new (“de novo”) stores in total through June 30, 2024 and for the full year of 2024 expects to add approximately 90 to 100 total new locations through new store openings and acquisitions. Future store openings are subject to the Company’s ability to identify locations in markets with attractive demographics, available real estate with favorable leases and limited competition.

Although viewed by management as a discretionary expenditure not required to operate its pawn stores, the Company may continue to strategically purchase real estate from its landlords at existing stores or in conjunction with pawn store acquisitions as opportunities arise at reasonable valuations. The Company purchased the real estate at 19 store locations, primarily from landlords at existing stores, for a cumulative purchase price of $21.1 million during the six months ended June 30, 2024.

Expand Retail POS Payment Solutions Operations

AFF expects to expand its business primarily by promoting and expanding relationships with both new and existing customers and retail merchant partners. In addition, AFF has made, and intends to continue to make, investments in its customer and merchant support operations and facilities, its technology platforms and its proprietary decisioning platforms and processes. In addition to utilizing cash flows generated from its own operations to fund expected 2024 growth, AFF has access to the additional sources of liquidity described below if needed to fund further expansion activities.

Return of Capital to Shareholders

In July 2024, the Company’s Board of Directors declared a $0.38 per share third quarter cash dividend on common shares outstanding, or an aggregate of $17.0 million based on the June 30, 2024 share count, to be paid on August 30, 2024 to stockholders of record as of August 15, 2024. While the Company currently expects to continue the payment of quarterly cash dividends, the amount, declaration and payment of cash dividends in the future (quarterly or otherwise) will be made by the Board of Directors, from time to time, subject to the Company’s financial condition, results of operations, business requirements, compliance with legal requirements, debt covenant restrictions and other relevant factors.

During the six months ended June 30, 2024, the Company repurchased a total of 721,000 shares of common stock at an aggregate cost of $85.0 million and an average cost per share of $117.90. During the six months ended June 30, 2023, the Company repurchased 1,153,000 shares of common stock at an aggregate cost of $105.6 million and an average cost per share of $91.48. The aggregate cost and average cost per share does not include the effect of the 1% excise tax on certain share repurchases enacted under the Inflation Reduction Act of 2022. The Company incurred $0.9 million and $1.1 million of excise taxes during the six months ended June 30, 2024 and 2023, respectively.

In July 2023, the Company’s Board of Directors authorized a common stock repurchase program for up to $200.0 million of the Company’s outstanding common stock, of which $115.0 million is currently remaining. The Company intends to continue repurchases under its active share repurchase program, including through open market transactions under trading plans in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, the level of cash balances, liquidity needs, credit availability, debt covenant restrictions, general business and economic conditions, regulatory requirements, the market price of the Company’s stock, the Company’s dividend policy and the availability of alternative investment opportunities.

Sources of Liquidity

The Company regularly evaluates opportunities to optimize its capital structure, including through consideration of the issuance of debt or equity, to refinance existing debt and to enter into interest rate hedge transactions, such as interest rate swap agreements. As of June 30, 2024, the Company’s primary sources of liquidity were $113.7 million in cash and cash equivalents and $519.8 million of available and unused funds under the Company’s revolving unsecured credit facilities, subject to certain financial covenants (see Note 8 of Notes to Consolidated Financial Statements). The Company had working capital of $957.7 million as of June 30, 2024.

The Company’s cash and cash equivalents as of June 30, 2024 included $29.0 million held by its foreign subsidiaries. These cash balances, which are primarily held in Mexican pesos, are associated with foreign earnings the Company has asserted are indefinitely reinvested and which the Company primarily plans to use to support its continued growth plans outside the U.S. through funding of capital expenditures, acquisitions, operating expenses or other similar cash needs of the Company’s foreign operations.

The Company’s liquidity is affected by a number of factors, including changes in general customer traffic and demand, pawn loan balances, loan-to-value ratios, collection of pawn fees, merchandise sales, inventory levels, LTO merchandise, finance receivable balances, collection of lease and finance receivable payments, seasonality, operating expenses, administrative expenses, expenses related to merger and acquisition activities, litigation-related expenses, tax rates, gold prices, foreign currency exchange rates and the pace of new pawn store expansion and acquisitions. Additionally, a prolonged reduction in earnings and EBITDA could limit the Company’s future ability to fully borrow on its credit facilities under current leverage covenants. Regulatory developments affecting the Company’s operations may also impact profitability and liquidity. See “Governmental Regulation Update.”

If needed, the Company could seek to raise additional funds from a variety of sources, including, but not limited to, repatriation of excess cash held in Latin America, the sale of assets, reductions in operating expenses, capital expenditures and dividends, the forbearance or deferral of operating expenses, the issuance of debt or equity securities, utilizing other structured financing arrangements, the leveraging of currently unencumbered real estate owned by the Company and/or changes to its management of current assets. The characteristics of the Company’s current assets, specifically the ability to rapidly liquidate gold jewelry inventory, which accounts for 50% of total inventory, give the Company flexibility to quickly increase cash flow if necessary.

Cash Flows and Liquidity Metrics

The following tables set forth certain historical information with respect to the Company’s sources and uses of cash and other key indicators of liquidity (dollars in thousands):

Cash Flow Provided by Operating Activities

Net cash provided by operating activities increased $23.1 million, or 11%, from $205.7 million for the six months ended June 30, 2023 to $228.7 million for the six months ended June 30, 2024 due to net changes in certain non-cash adjustments to reconcile net income to operating cash flow and net changes in other operating assets and liabilities (as detailed in the consolidated statements of cash flows) and an increase in net income of $17.9 million.

Cash Flow Used in Investing Activities

Net cash used in investing activities increased $62.6 million, or 50%, from $125.3 million for the six months ended June 30, 2023 to $187.9 million for the six months ended June 30, 2024. Cash flows from investing activities are utilized primarily to fund acquisitions, purchase furniture, fixtures, equipment and improvements, which includes capital expenditures for improvements to existing stores and for new pawn store openings and other corporate assets, and discretionary purchases of store real property. In addition, cash flows related to the funding of new pawn loans, net of cash repayments and recovery of principal through the sale of inventories acquired from forfeiture of pawn collateral and changes in net finance receivables, are included in investing activities. The Company paid $42.7 million for furniture, fixtures, equipment and improvements and $21.1 million for discretionary pawn store real property purchases during the six months ended June 30, 2024 compared to $28.3 million and $34.5 million in the prior-year period, respectively. The Company paid $65.7 million in cash related to pawn store acquisitions during the six months ended June 30, 2024 compared to $5.5 million during the six months ended June 30, 2023. The Company funded a net increase in pawn loans of $20.9 million during the six months ended June 30, 2024 and received funds from a net decrease in pawn loans of $0.2 million during the six months ended June 30, 2023. The Company funded a net increase in finance receivables of $37.6 million during the six months ended June 30, 2024 and $57.1 million during the six months ended June 30, 2023.

Cash Flow Used in Financing Activities

Net cash used in financing activities decreased $47.0 million, or 48%, from $97.9 million for the six months ended June 30, 2023 to $50.9 million for the six months ended June 30, 2024. Net payments on the credit facilities were $418.0 million during the six months ended June 30, 2024 compared to net borrowings of $37.0 million during the six months ended June 30, 2023. During the six months ended June 30, 2024, the Company received $500.0 million in proceeds from the private offering of senior unsecured notes and paid $9.1 million in debt issuance costs which was used to repay a portion of the outstanding balance on the Credit Facility, after payment of fees and expenses related to the offering. The Company funded $85.0 million of share repurchases during the six months ended June 30, 2024 while it funded $101.8 million of share repurchases during the six months ended June 30, 2023. The Company paid dividends of $31.7 million during the six months ended June 30, 2024, compared to $30.6 million during the six months ended June 30, 2023. In addition, the Company paid withholding taxes on net share settlements of restricted stock awards during the six months ended June 30, 2024 of $7.0 million compared to $2.5 million during the six months ended June 30, 2023.

GOVERNMENTAL REGULATION UPDATE

The Company’s pawn and retail POS payment solutions businesses are subject to significant regulation in all of the jurisdictions in which it operates. Existing regulations and regulatory developments are further and more completely described under “Governmental Regulation” in Part I, Item 1 of the Company’s 2023 Annual Report on Form 10-K filed with the SEC on February 5, 2024 and in subsequent documents filed with the SEC. Other than as described below, there have been no changes to the significant regulation that the Company’s businesses are subject to that the Company believes would have a material impact on its businesses or results of operation from those described in the Annual Report on Form 10-K for the year ended December 31, 2023.

On October 5, 2017, the CFPB released its small-dollar loan rule (the “SDL Rule”), which was subsequently revised on July 7, 2020. Traditional possessory, non-recourse pawn loans are not covered under the SDL Rule. The SDL Rule defines some of the RISA transactions that AFF purchases and some of the bank loans that AFF sub-services as transactions that are covered under the rule. After resolution of some challenges to the SDL Rule itself and the constitutionality of the CFPB, on July 3, 2024, trade groups filed a petition for a rehearing with the Fifth Circuit en banc. If the Fifth Circuit does not grant the petition, the SDL Rule is expected to go into effect on March 30, 2025. The SDL Rule imposes certain obligations and limitations associated with the origination and servicing of covered transactions as of its effective date. At this time, the Company does not believe that the implementation of the SDL Rule as proposed will have a material impact on the Company’s future results of operations or financial condition.

NON-GAAP FINANCIAL INFORMATION

The Company uses certain financial calculations such as adjusted net income, adjusted diluted earnings per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow and constant currency results as factors in the measurement and evaluation of the Company’s operating performance and period-over-period growth. The Company derives these financial calculations on the basis of methodologies other than GAAP, primarily by excluding from a comparable GAAP measure certain items the Company does not consider to be representative of its actual operating performance. These financial calculations are “non-GAAP financial measures” as defined under the SEC rules. The Company uses these non-GAAP financial measures in operating its business because management believes they are less susceptible to variances in actual operating performance that can result from the excluded items, other infrequent charges and currency fluctuations. The Company presents these financial measures to investors because management believes they are useful to investors in evaluating the primary factors that drive the Company’s core operating performance and provide greater transparency into the Company’s results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating these non-GAAP financial measures are significant components in understanding and assessing the Company’s financial performance. These non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, the Company’s GAAP financial measures. Further, because these non-GAAP financial measures are not determined in accordance with GAAP and are thus susceptible to varying calculations, the non-GAAP financial measures, as presented, may not be comparable to other similarly-titled measures of other companies.

While acquisitions are an important part of the Company’s overall strategy, the Company has adjusted the applicable financial calculations to exclude merger and acquisition expenses in order to allow more accurate comparisons of the financial results to prior periods. In addition, the Company does not consider these merger and acquisition expenses to be related to the organic operations of the acquired businesses or its continuing operations, and such expenses are generally not relevant to assessing or estimating the long-term performance of the acquired businesses. Merger and acquisition expenses include incremental costs directly associated with merger and acquisition activities, including professional fees, legal expenses, severance, retention and other employee-related costs, contract breakage costs and costs related to the consolidation of technology systems and corporate facilities, among others.

The Company has certain leases in Mexico which are denominated in U.S. dollars. The lease liability of these U.S. dollar-denominated leases, which is considered a monetary liability, is remeasured into Mexican pesos using current period exchange rates, resulting in the recognition of foreign currency exchange gains or losses. The Company has adjusted the applicable financial measures to exclude these remeasurement gains or losses (i) because they are non-cash, non-operating items that could create volatility in the Company’s consolidated results of operations due to the magnitude of the end of period lease liability being remeasured and (ii) to improve comparability of current periods presented with prior periods.

Adjusted Net Income and Adjusted Diluted Earnings Per Share

Management believes the presentation of adjusted net income and adjusted diluted earnings per share provides investors with greater transparency and provides a more complete understanding of the Company’s financial performance and prospects for the future by excluding items that management believes are non-operating in nature and are not representative of the Company’s core operating performance. In addition, management believes the adjustments shown below are useful to investors in order to allow them to compare the Company’s financial results for the current periods presented with the prior periods presented.

The following table provides a reconciliation between net income and diluted earnings per share calculated in accordance with GAAP to adjusted net income and adjusted diluted earnings per share, which are shown net of tax (in thousands, except per share amounts):

In Thousands

In Thousands

In Thousands

In Thousands

50

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA

The Company defines EBITDA as net income before income taxes, depreciation and amortization, interest expense and interest income and adjusted EBITDA as EBITDA adjusted for certain items, as listed below, that management considers to be non-operating in nature and not representative of its actual operating performance. The Company believes EBITDA and adjusted EBITDA are commonly used by investors to assess a company’s financial performance, and adjusted EBITDA is used as a starting point in the calculation of the consolidated total debt ratio as defined in the Company’s senior unsecured notes. The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA (in thousands):

(1) Includes $12.4 million, $24.9 million and $52.9 million of amortization expense related to identifiable intangible assets as a result of the AFF acquisition for the three months, six months and trailing twelve months ended June 30, 2024, respectively. Includes $14.1 million, $28.6 million and $56.9 million of amortization expense related to identifiable intangible assets as a result of the AFF acquisition for the three months, six months and trailing twelve months ended June 30, 2023, respectively.

(2) The following table details AFF purchase accounting and other adjustments (in thousands):

51

Free Cash Flow and Adjusted Free Cash Flow

For purposes of its internal liquidity assessments, the Company considers free cash flow and adjusted free cash flow. The Company defines free cash flow as cash flow from operating activities less purchases of furniture, fixtures, equipment and improvements and net fundings/repayments of pawn loan and finance receivables, which are considered to be operating in nature by the Company but are included in cash flow from investing activities. Adjusted free cash flow is defined as free cash flow adjusted for merger and acquisition expenses paid that management considers to be non-operating in nature.

Free cash flow and adjusted free cash flow are commonly used by investors as additional measures of cash generated by business operations that may be used to repay scheduled debt maturities and debt service or, following payment of such debt obligations and other non-discretionary items, that may be available to invest in future growth through new business development activities or acquisitions, repurchase stock, pay cash dividends or repay debt obligations prior to their maturities. These metrics can also be used to evaluate the Company’s ability to generate cash flow from business operations and the impact that this cash flow has on the Company’s liquidity. However, free cash flow and adjusted free cash flow have limitations as analytical tools and should not be considered in isolation or as a substitute for cash flow from operating activities or other income statement data prepared in accordance with GAAP. The following table reconciles cash flow from operating activities to free cash flow and adjusted free cash flow (in thousands):

(1) Includes the funding of new loans net of cash repayments and recovery of principal through the sale of inventories acquired from forfeiture of pawn collateral.

Constant Currency Results

The Company’s reporting currency is the U.S. dollar, however, certain performance metrics discussed in this report are presented on a “constant currency” basis, which is considered a non-GAAP financial measure. The Company’s management uses constant currency results to evaluate operating results of business operations in Latin America, which are transacted in local currencies in Mexico, Guatemala and Colombia. The Company also has operations in El Salvador, where the reporting and functional currency is the U.S. dollar.

The Company believes constant currency results provide valuable supplemental information regarding the underlying performance of its business operations in Latin America, consistent with how the Company’s management evaluates such performance and operating results. Constant currency results reported herein are calculated by translating certain balance sheet and income statement items denominated in local currencies using the exchange rate from the prior-year comparable period, as opposed to the current comparable period, in order to exclude the effects of foreign currency rate fluctuations for purposes of evaluating period-over-period comparisons. See the Latin America pawn segment tables in “Results of Operations” above for additional reconciliation of certain constant currency amounts to as reported GAAP amounts.

The following table provides exchange rates for the Mexican peso, Guatemalan quetzal and Colombian peso for the current and prior-year periods:

Market risks relating to the Company’s operations result primarily from changes in interest rates, gold prices and foreign currency exchange rates and are described in detail in the Company’s 2023 Annual Report on Form 10-K. The impact of current-year fluctuations in foreign currency exchange rates, in particular, are further discussed in Part I, Item 2 herein. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. There have been no material changes to the Company’s exposure to market risks since December 31, 2023.

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2024 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all possible error and fraud. The Company’s disclosure controls and procedures are, however, designed to provide reasonable assurance of achieving their objectives, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.

Important risk factors that could materially affect the Company’s business, financial condition or results of operations in future periods are described in Part I, Item 1A, “Risk Factors” of the Company’s 2023 Annual Report on Form 10-K. These factors are supplemented by those discussed under “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” and “Governmental Regulation Update” in Part I, Item 2 of this quarterly report and in “Governmental Regulation” in Part I, Item 1 of the Company’s 2023 Annual Report on Form 10-K. There have been no material changes in the Company’s risk factors from those in Part I, Item 1A, “Risk Factors” of the Company’s 2023 Annual Report on Form 10-K.