10-K 1 a2016-q410xk.htm 10-K Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2016
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 000-19424
 
 
 
ezcorplogoa06.jpg
EZCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
74-2540145
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2500 Bee Cave Road, Bldg One, Suite 200, Rollingwood, Texas
 
78746 
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (512) 314-3400
Securities Registered Pursuant to Section 12(b) of the Act
Title of Each Class
 
Name of Each Exchange on Which Registered
Class A Non-voting Common Stock, $.01 par value per share
 
The NASDAQ Stock Market
 
 
(NASDAQ Global Select Market)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Ac
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The only class of voting securities of the registrant issued and outstanding is the Class B Voting Common Stock, par value $.01 per share, all of which is owned by a single stockholder. There is no trading market for the Class B Voting Common Stock. The aggregate market value of the Class A Non-Voting Common Stock held by non-affiliates of the registrant was $161 million, based on the closing price on the NASDAQ Stock Market on March 31, 2016.
As of November 30, 2016, 51,108,575 shares of the registrant’s Class A Non-Voting Common Stock, par value $.01 per share, and 2,970,171 shares of the registrant’s Class B Voting Common Stock, par value $.01 per share, were outstanding.
Documents incorporated by reference: None
 
 
 
 
 



EZCORP, INC.
YEAR ENDED SEPTEMBER 30, 2016
INDEX TO FORM 10-K
Item
Page
No.
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I
This report contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those currently anticipated and expressed or implied by those forward-looking statements because of a number of risks and uncertainties, including those discussed under “Part I, Item 1A — Risk Factors.” We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results, and the differences can be material. See also “Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results.”
Unless otherwise specified, references to the “company,” “we,” “our,” “us” and “EZCORP” refer to EZCORP, Inc. and its consolidated subsidiaries. References to a “fiscal” year refer to our fiscal year ended September 30 of the specified year. For example, “fiscal 2016” refers to the fiscal year ended September 30, 2016. All currency amounts preceded with “$” are stated in U.S. dollars, except otherwise indicated.
ITEM 1 — BUSINESS
Overview
EZCORP, Inc. is a Delaware corporation headquartered in Austin, Texas. We are a leading provider of pawn loans in the United States and Mexico with approximately 5,600 team members.
Our vision is to be the market leader in North America in responsibly and respectfully meeting our customers’ desire for access to cash when they want it. That vision is supported by four key imperatives:
Market Leading Customer Satisfaction;
Exceptional Staff Engagement;
Attractive Shareholder Returns; and
Most Efficient Provider of Cash.
At our pawn stores (520 in the U.S. and 239 in Mexico), we offer pawn loans, which are non-recourse loans collateralized by tangible property, and we sell merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers.
In addition to our core pawn business in the U.S. and Mexico, we operate 27 CASHMAX financial services locations in Canada and own 31% of Cash Converters International Limited (“Cash Converters International”), based in Australia, which franchises and operates a worldwide network of nearly 700 locations that provide financial services and also buy and sell second-hand goods.
During fiscal 2016, we disposed of our 94%-owned subsidiary, Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart"), and recast all results of its operations as discontinued operations. During fiscal 2015, we announced and implemented a plan to exit our U.S. Financial Services business (“USFS”), ceasing all payday, installment and auto title lending in the U.S and recast all results of USFS’s operations as discontinued operations. For additional information about our discontinued operations and restructuring plans, see Note 3 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

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Revenue and net revenue for fiscal 2016 from continuing operations was comprised of the following:
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Segment and Geographic Information
Our business consists of three reportable segments: “U.S. Pawn,” which includes our EZPAWN, Value Pawn & Jewelry and other branded pawn operations in the United States; “Mexico Pawn,” which includes our Empeño Fácil pawn operations in Mexico; and “Other International,” which primarily includes our CASHMAX financial services operations in Canada and our equity interest in the net income (loss) of Cash Converters International. The following tables present store data by segments included in our continuing operations:
 
Company-owned Stores
 
 
 
U.S. Pawn
 
Mexico Pawn
 
Other International
 
Consolidated
 
Franchises
 
 
 
 
 
 
 
 
 
 
As of September 30, 2013
502

 
258

 
39

 
799

 
8

New locations opened
9

 
3

 

 
12

 

Locations sold, combined or closed
(7
)
 

 

 
(7
)
 
(3
)
As of September 30, 2014
504

 
261

 
39

 
804

 
5

New locations opened
5

 
3

 

 
8

 

Locations acquired
25

 

 

 
25

 

Locations sold, combined or closed
(12
)
 
(27
)
 
(12
)
 
(51
)
 
(4
)
As of September 30, 2015
522

 
237

*
27

 
786

 
1

New locations opened

 
3

 

 
3

 

Locations acquired
6

 

 

 
6

 

Locations sold, combined or closed
(8
)
 
(1
)
 

 
(9
)
 
(1
)
As of September 30, 2016
520

 
239

 
27

 
786

 

*
Includes five buy/sell stores reflected in fiscal 2015 ending count which were converted to Mexico Pawn stores during the three-months ended March 31, 2016.
For additional information about our discontinued operations and segments and geographic areas, see Note 3 and Note 18, respectively, of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

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Pawn Activities
At our pawn stores, we offer secured loans, which are typically small, non-recourse loans collateralized by tangible personal property. As of September 30, 2016, we had a closing pawn loan principal balance of $167.3 million. We earn pawn service charge revenue on our pawn loans. In fiscal 2016, pawn service charges accounted for approximately 36% of our total revenues and 61% of our net revenues.
While allowable service charges vary by state and loan size, our United States pawn loans primarily earn 13% to 25% per month as permitted by applicable law, excluding forfeitures. The total United States pawn loan term generally ranges between 30 and 90 days. Individual loans vary depending on the valuation of each item pawned, but United States pawn loans made typically average approximately $100 to $120.
In Mexico, pawn loans earn 15% to 21% per month as permitted by applicable law, excluding forfeitures. The Mexico pawn loan primary term is 30 days. Individual loans are made in Mexican pesos and vary depending on the valuation of each item pawned, but Mexico pawn loans typically average approximately 1,000 Mexican pesos, or approximately $56 using the average exchange rate for fiscal 2016.
Collateral for our pawn loans consists of tangible personal property, generally jewelry, consumer electronics, power tools, sporting goods and musical instruments. Security for our pawn loans is provided via the estimated resale value of the collateral and the perceived probability of the loan’s redemption. We generally lend from 40% to 70% of the collateral’s estimated resale value depending on an evaluation of these factors, and may additionally offer to purchase the product outright.
If a customer chooses not to repay, renew or extend a loan, the collateral is forfeited and becomes inventory available for sale. We do not record loan losses or charge-offs of pawn loans because the principal amount of an unpaid loan becomes the inventory carrying cost of the forfeited collateral. If the subsequent sale of the forfeited collateral is less than the loan value, this is reflected in gross margin.
The following table presents our pawn loan redemption rates by segment:
 
Fiscal Year Ended September 30,
 
2016
 
2015
 
2014
 
 
 
 
 
 
U.S. Pawn loan redemption rate*
84
%
 
84
%
 
83
%
Mexico Pawn loan redemption rate*
78
%
 
77
%
 
77
%
*
Our pawn loan redemption rate represents the percentage of loans made that are repaid, renewed or extended at a point in time as opposed to the life of the loan.
Our ability to offer quality second-hand goods at prices significantly lower than original retail prices attracts value-conscious customers. The gross profit on sales of inventory depends primarily on our assessment of the loan or purchase value at the time the property is either accepted as loan collateral or purchased. As a significant portion of our inventory and sales in the U.S. involve gold and jewelry, our results can be heavily influenced by the market price of gold.
Customers may purchase a product protection plan that allows them to return or exchange certain general merchandise (non-jewelry) sold through our retail pawn operations within three to six months of purchase. We also offer a jewelry VIP package, which guarantees customers a minimum future pawn loan amount on the item sold, allows them full credit if they trade in the item to purchase a more expensive piece of jewelry, and provides minor repair service on the item sold. Customers may also purchase an item on layaway by paying a minimum layaway deposit of typically 10% to 20% of the item’s sale price. We hold the item for a 60 to 180-day period, during which the customer is required to pay the balance of the sales price.
Our inventory is stated at the lower of cost or market. We record a valuation allowance for obsolete or slow-moving inventory based on the type and age of merchandise. We generally establish a higher allowance percentage on general merchandise, as it is more susceptible to obsolescence, and establish a lower allowance percentage on jewelry, as it retains much greater commodity value. The total allowance was 4.2% of gross inventory as of September 30, 2016 compared to 5.4% as of September 30, 2015 due to the lower levels of aged inventory outstanding at the end of fiscal 2016. Our reserve for estimated unrealized inventory shrinkage, included in the above allowance, was flat compared to the prior-year at 1.0% of gross inventory as of September 30, 2016.
Other
We also operate financial services stores in Canada under the CASHMAX brand, all located in the Ontario province. These small footprint locations offer payday loan services.

5


Operations
Our pawn operations structure is built to provide the optimum level of support to the store team, providing coaching, mentoring and problem solving to identify opportunities to better serve our customers and position us to be the leader in customer service and satisfaction.
Our asset protection and compliance departments monitor the inventory system, lending practices, regulatory compliance and compliance with our policies and procedures. We perform full physical audits of active inventory and pawn collateral at each store at least on an annual basis. Cycle counts are completed daily for jewelry and firearms, and targeted high risk inventory categories are cycle counted multiple times annually. We record shrink adjustments for known losses at the conclusion of the annual full physical audit and as estimates during interim periods, and as discovered during cycle counts. Asset protection monitors all shrink adjustments for exceptions.
Our success is dependent upon our team members’ ability to provide prompt and courteous customer service and to execute our operating procedures and standards. To achieve our long-range personnel goals, we offer a structured career development program for all of our field team members. This program includes computer-based training, formal structured classroom training and supervised on-the-job training. Generally, we expect that store team members, including managers, will meet certain competency criteria prior to hire or promotion and participate in on-going training classes and formal instructional programs. Our career development program develops and advances our employees and provides training for the efficient integration of experienced managers and team members from outside the company.
Seasonality and Quarterly Results
Historically, pawn service charges are highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season. Merchandise sales are highest in the first and second fiscal quarters (October through March) due to the holiday season, jewelry sales surrounding Valentine’s Day and the availability of tax refunds in the United States.
Growth and Expansion
We plan to expand the number of locations we operate through opening new (“de novo”) locations and through acquisitions. We believe there are growth opportunities with de novo stores in Mexico and pawn store acquisitions in both Mexico and in the U.S. Our ability to add new stores is dependent on several variables, such as the availability of acceptable sites or acquisition candidates, the regulatory environment, local zoning ordinances, access to capital and the availability of qualified personnel.
For information about our acquisitions, see Note 4 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”
Competition
We encounter significant competition in connection with all of our activities. These competitive conditions may have an impact on our revenues, profitability and ability to expand. We compete with other pawn stores, credit service organizations, banks, credit unions and other financial institutions, such as consumer finance companies. We believe that the primary elements of competition are the quality of customer service and relationship management, convenience, store location and a customer friendly environment. In addition, we believe the ability to compete effectively will be based increasingly on strong general management, regional focus, automated management information systems, access to capital and superior customer service.
Our competitors for merchandise sales include numerous retail and wholesale stores, such as jewelry stores, discount retail stores, consumer electronics stores, other pawn stores, other resale stores, electronic commerce retailers and auction sites. Competitive factors in our retail operations include the ability to provide the customer with a variety of merchandise at an exceptional value coupled with exceptional customer service and convenient locations.
The pawn industry in the United States is large and highly fragmented. The industry consists of pawn stores owned primarily by independent operators who own one to three locations, and the industry is relatively mature. We are the second largest of two public operators of pawn stores in the United States.
The pawn industry in Mexico is also fragmented, but less so than in the United States. The industry consists of pawn stores owned by independent operators and chains, including some not-for-profit organizations. The pawn industry, particularly full-line stores offering general merchandise and jewelry loans and resale, remains in an expansion stage in Mexico.

6


Trademarks and Trade Names
We operate our U.S. pawn stores principally under the names “EZPAWN” or “Value Pawn” and the Mexico pawn stores under the name “EMPEÑO FÁCIL.” Our financial services stores in Canada operate under the name “CASHMAX.” We have registered with the United States Patent and Trademark Office the names EZPAWN and EZCORP, among others. We hold a trademark in Mexico for the name “EMPEÑO FÁCIL.”
Regulation
Compliance with federal, state and local laws and regulations is an integral part of how we manage our business, and we conduct our business in material compliance with all of these rules. The following is a general description of significant regulations affecting our business. For a geographic breakdown of our operating locations, see “Part I, Item 2 — Properties.”
U.S. Regulations
Pawn Regulations — Our pawn stores are regulated by the states in which they are located and, in some cases, by individual municipalities or other local authorities. The applicable statutes, ordinances and regulations vary from location to location and typically impose licensing requirements for pawn stores or individual pawn store employees. Licensing requirements typically relate to financial responsibility and character, and may establish restrictions on where pawn stores can operate. Additional rules regulate various aspects of the day-to-day pawn operations, including the pawn service charges that a pawn store may charge, the maximum amount of a pawn loan, the minimum or maximum term of a pawn loan, the content and format of the pawn ticket and the length of time after a loan default that a pawn store must hold a pawned item before it can be offered for sale. Failure to observe applicable regulations could result in a revocation or suspension of pawn licenses, the imposition of fines or requirements to refund service charges and fees, and other civil or criminal penalties. We must also comply with various federal requirements regarding the disclosure of the annual percentage rate, finance charge, amount financed, total of payments and payment schedule related to each pawn loan transaction. Additional federal regulations applicable to our pawn lending business are described in “Other Regulations” below.
A number of our pawn stores, voluntarily or pursuant to applicable laws, provide periodic (generally daily) reports to local law enforcement agencies. These reports provide local law enforcement with information about the items received from customers (whether through pawn or purchase), including a detailed description of the goods involved and the name and address of the customer. If we accept as collateral or purchase merchandise from a customer and it is determined that our customer was not the rightful owner, the merchandise is subject to recovery by the rightful owner and those losses are included in our shrinkage. Historically, we have not experienced a material number of claims of this nature.
Some of our pawn stores in the U.S. handle firearms and each of those stores maintains a federal firearms license as required by federal law. The federal Gun Control Act of 1968 and regulations issued by the Bureau of Alcohol, Tobacco, and Firearms also require each pawn store dealing in firearms to maintain a permanent written record of all receipts and dispositions of firearms. In addition, we must comply with the Brady Handgun Violence Prevention Act, which requires us to conduct a background check before releasing, selling or otherwise disposing of firearms.
Other Regulations — Our pawn lending activities are subject to other state and federal statutes and regulations, including the following:
We are subject to the federal Gramm-Leach-Bliley Act and its underlying regulations, as well as various state laws and regulations relating to privacy and data security. Under these regulations, we are required to disclose to our customers our policies and practices relating to the protection and sharing of customers’ nonpublic personal information. These regulations also require us to ensure that our systems are designed to protect the confidentiality of customers’ nonpublic personal information, and many of these regulations dictate certain actions that we must take to notify customers if their personal information is disclosed in an unauthorized manner. We are subject to the Fair Credit Reporting Act, which was enacted, in part, to address privacy concerns associated with the sharing of consumers’ financial information and credit history contained in consumer credit reports and limits our ability to share certain consumer report information. We are subject to the Federal Fair and Accurate Credit Transactions Act, which amended the Fair Credit Reporting Act, and requires us to adopt written guidance and procedures for detecting, preventing and mitigating identity theft, and to adopt various policies and procedures (including employee training) that address and aid in detecting and responding to suspicious activity or identify theft “red flags.”
Under the USA PATRIOT Act, we must maintain an anti-money laundering compliance program that includes the development of internal policies, procedures and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test the program.

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We are subject to the Bank Secrecy Act and its underlying regulations, which require us to report and maintain records of certain high-dollar transactions. In addition, federal laws and regulations prohibit us from doing business with terrorists and require us to report certain suspicious transactions to the Financial Crimes Enforcement Network of the Treasury Department (“FinCen”). Generally, a transaction is considered to be suspicious if we know, suspect or have reason to suspect that the transaction (a) involves funds derived from illegal activity or is intended to hide or disguise such funds, (b) is designed to evade the requirements of the Bank Secrecy Act or (c) appears to serve no legitimate business or lawful purpose.
The Foreign Corrupt Practices Act ("FCPA") was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of mail or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
Mexico Pawn Regulations
Federal Regulation — Federal law in Mexico provides for administrative regulation of the pawnshop industry by Procuraduría Federal del Consumidor (PROFECO), Mexico’s primary federal consumer protection agency. PROFECO regulates the form and terms of pawn loan contracts (but not interest or service charge rates) and defines certain operating standards and procedures for pawnshops, including retail operations, and establishes registration, disclosure, bonding and reporting requirements. There are significant fines and sanctions, including operating suspensions, for failure to comply with PROFECO’s rules and regulations. We believe that we comply with the rules and regulations, as currently administered, and believe that when fully implemented, the PROFECO registration requirements should have limited impact on our operations or profitability.
PROFECO requires that we report certain transactions (or series of transactions) that exceed certain monetary limits. Anti-money laundering regulations restrict the use of cash in certain transactions. Relevant aspects of the law specifically affecting the pawn industry include monthly reporting on “vulnerable activities,” which includes certain high-value pawn and precious metal transactions.
The Federal Personal Information Protection Law requires us to protect our customers’ personal information. Specifically, the law requires us to inform customers if we share customer personal information with third parties and to post (both on-line and in-store) our privacy policy.
State and Local Regulation — Our pawn business in Mexico is also subject to regulation at the state and local level through state laws and local zoning and permitting ordinances. For example, some states require permits for pawn stores to operate, certification of employees as trained in the valuation of merchandise, and strict customer identification controls. State and local agencies often have authority to suspend store operations pending resolution of actual or alleged regulatory, licensing and permitting issues.
General Regulation — In addition to the above, our pawn business in Mexico is subject to various general business regulations in the areas of tax compliance, customs, consumer protections, money laundering, public safety and employment matters, among others, by various federal, state and local governmental agencies.
Available Information
We maintain an Internet website at www.ezcorp.com. All of our reports filed with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and Section 16 filings, are accessible, free of charge, through the Investor Relations section of our website as soon as reasonably practicable after electronic filing. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. Information on our website is not incorporated by reference into this report.

8


ITEM 1A — RISK FACTORS
There are many risks and uncertainties that may affect our operations, performance, development and results. Many of these risks are beyond our control. The following is a description of the important risk factors that may affect our business. If any of these risks were to actually occur, our business, financial condition or results of operations could be materially adversely affected. Additional risks and uncertainties not currently known to us or that we currently consider to be immaterial may also materially adversely affect our business, financial condition or results of operations.
We have exposure to Grupo Finmart through promissory notes that we received as part of the divestiture transaction. Our ability to recover those notes is heavily dependent on the success and performance of the Grupo Finmart business and the guarantee of AlphaCredit.
As described in Note 3 and Note 7 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data,” we received various promissory notes, having an aggregate principal amount of approximately $89.8 million, in connection with the completion of the sale of Grupo Finmart in September 2016. Some, but not all, of these promissory notes are guaranteed by Alpha Holding, S.A. de C.V. (“AlphaCredit”), and some are secured by specific portfolios of consumer loans. These promissory notes are repayable in various amounts through September 2019. Our ability to recover full payment of these promissory notes over the next three years is dependent on AlphaCredit’s and Grupo Finmart’s ability to pay the notes, which is heavily dependent on the success and performance of the Grupo Finmart business. To the extent that AlphaCredit and Grupo Finmart do not repay the promissory notes, our financial performance and cash flows would be adversely affected.
If our assessment of and expectations concerning various factors affecting the collectability of these notes receivable change in the future, we may be required to record an allowance for losses or otherwise impair the carrying value the notes, which could adversely affect our financial performance in the period of recordation or impairment. These notes receivable were recorded at fair value on the date of the sale of Grupo Finmart, which initially accounted for the risk of default. See Note 7 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”
Changes in laws and regulations affecting our products and services could have a material adverse effect on our operations and financial performance.
Our products and services are subject to regulation under various federal, state and local laws and regulations. Adverse legislation or regulations could be adopted in any country, state or municipality in which we operate. If such legislation or regulation is adopted in any particular jurisdiction, we generally evaluate our business in the context of the new rules and determine whether we can continue to operate in that jurisdiction with new or modified products or whether it is feasible to enhance our business with additional product offerings. In any case, if we are unable to continue to operate profitably under the new rules, we may decide to close or consolidate stores, resulting in decreased revenues, earnings and assets.
The U.S. Department of Defense has issued rules that expand certain protections under the Military Lending Act, including a 36% APR rate cap, to a wider range of credit products, including pawn loans. These rules became effective in October 2016. The effective interest rate on our pawn loans varies by state, but in all cases, exceeds 36% APR. Consequently, active military personnel are unable to access our pawn loans. The implementation of this rule could have a significant adverse impact on our business at certain locations, but is not expected to have a material adverse impact on the Company as a whole.
Litigation and regulatory proceedings could have a material adverse impact on our business.
We are currently subject to various litigation and regulatory actions, including those described in Note 17 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” These matters are subject to inherent uncertainties and unfavorable rulings could occur, which could include monetary damages or other relief. Any unfavorable ruling or outcome could have a material adverse effect on our results of operations and could negatively affect our reputation.
We have procured management liability insurance policies that should protect us from much of the potential exposure related to the shareholder derivative litigation and the federal securities litigation described in Note 17 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” However, under the terms of those policies, we bear the first $1 million of costs or liability associated with each claim, and there are elements of the defense costs that are not covered under the insurance policies. In addition, to the extent that our ultimate liability in the current litigation or any subsequent litigation that is included in the same policy year exceeds the management liability policy limits, our results of operations could be adversely affected.

9


One person beneficially owns all of our voting stock and controls the outcome of all matters requiring a vote of stockholders, which may influence the value of our publicly-traded non-voting stock.
Phillip E. Cohen is the beneficial owner of all of our Class B Voting Common Stock. As a result of his equity ownership stake, Mr. Cohen controls the outcome of all issues requiring a vote of stockholders and has the ability to appoint or remove directors and officers who control our policies and operations. All of our publicly-traded stock is non-voting stock. Consequently, stockholders other than Mr. Cohen have no vote with respect to the election of directors or any other matter requiring a vote of stockholders except as required by law. This lack of voting rights may adversely affect the market value of our publicly-traded Class A Non-Voting Common Stock.
A significant portion of our business is concentrated in Texas.
As of September 30, 2016, a significant portion of our U.S. pawn stores were located in Texas, and those stores account for a significant portion of our revenues and profitability. The legislative, regulatory and general business environment in Texas has been relatively favorable for our pawn business activities, but a negative legislative or regulatory change in Texas could have a material adverse effect on our overall operations and financial performance.
A significant or sudden decrease in gold values or the volume of gold transactions may have a material impact on our earnings and financial position.
Gold jewelry comprises a large portion of the collateral security for our pawn loans and our inventory. Pawn service charges, sales proceeds and our ability to liquidate excess jewelry inventory at an acceptable margin are dependent upon gold values and the volume of gold transactions. A decline in the availability of gold or our customers’ willingness or ability to sell us gold or use gold as collateral for pawn loans could impact our business. Over the fiscal 2013 to 2015 periods and into fiscal 2016, we experienced a significant softening of gold prices and volumes in the aggregate, which had a negative impact on our profitability. The impact on our financial position and results of operations of a continued decrease in gold values or volumes or a change in customer behavior cannot be reasonably estimated because the market and customer response to changes in gold values is not known; however, a significant decline in gold values or gold volumes could result in decreases in sales, sales margins and pawn service charge revenues.
A significant change in foreign currency exchange rates could have a material adverse impact on our earnings and financial position.
We have foreign operations in Mexico and Canada and an equity investment in Australia. Our assets and investments in, and earnings and dividends from, each of these must be translated to U.S. dollars from their respective functional currencies. A significant weakening of any of these foreign currencies could result in lower assets and earnings in U.S. dollars, resulting in a potentially material adverse impact on our financial position, results of operations and cash flows.
In part, achievement of our growth objectives is dependent upon our ability to open and acquire new stores.
Our expansion strategy includes acquiring existing stores and opening de novo store locations. Our acquisition strategy is dependent upon the availability of attractive acquisition candidates, while the success of our de novo store strategy is contingent upon numerous factors that cannot be predicted or controlled, such as the availability of acceptable locations with a desirable customer base, the negotiation of acceptable lease terms, the ability to obtain required government permits and licenses and the existence of a suitable competitive environment. The achievement of our growth objectives is also subject to our ability to attract, train and retain qualified team members. Failure to achieve our expansion goals could adversely affect our prospects and future results of operations.
Changes in the business, regulatory or political climate in Mexico could adversely affect our operations there, which could adversely affect our growth plans.
Our growth plans include potential expansion in Latin America. Changes in the business, regulatory or political climate in Mexico, or significant fluctuations in currency exchange rates, could affect our ability to expand or continue our operations there, which could have a material adverse impact on our prospects, results of operations and cash flows.
Fluctuations in our sales, pawn loan balances, sales margins and pawn redemption rates could have a material adverse impact on our operating results.
We regularly experience fluctuations in a variety of operating metrics. Changes in any of these metrics, as might be caused by changes in the economic environment, competitive pressures, changes in customers’ tastes and preferences or a significant decrease in gold prices could materially and adversely affect our profitability and ability to achieve our planned results of operations.

10


Changes in our liquidity and capital requirements or in banks’ abilities or willingness to lend to us could limit our ability to achieve our plans.
A significant reduction in cash flows from operations or the availability of credit could materially and adversely affect our ability to achieve our planned growth and operating results. During fiscal 2014, we completed the sale of $230 million principal amount of 2.125% Cash Convertible Senior Notes Due 2019 and used the proceeds to, among other things, pay all outstanding amounts under, and terminate, our revolving credit facility with a syndicate of banks. During fiscal 2016, we obtained a term loan facility of $100 million principal amount, at variable interest, of which we have drawn $50 million. Our ability to obtain additional credit or alternative financing, if needed, will depend upon market conditions, our financial condition and banks’ or other lenders’ willingness to lend capital at acceptable rates. The inability to access capital at acceptable rates and terms could restrict or limit our ability to achieve our growth objectives, which could adversely affect our financial condition and results of operations.
Changes in competition from various sources could have a material adverse impact on our ability to achieve our plans.
We encounter significant competition from other pawn stores, other consumer lending companies and other retailers, many of which have significantly greater financial resources than we do. Increases in the number or size of competitors or other changes in competitive influences could adversely affect our operations.
Infrastructure failures and breaches in data security could harm our business.
We depend on our information technology infrastructure to achieve our business objectives. If a problem, such as a computer virus, intentional disruption by a third party, natural disaster, telecommunications system failure or lost connectivity impairs our infrastructure, we may be unable to process transactions or otherwise carry on our business. An infrastructure disruption could damage our reputation and cause us to lose customers and revenue, result in the unintentional disclosure of company or customer information and require us to incur significant expense to eliminate these problems and address related data security concerns.
We invest in companies for strategic reasons and may not realize a return on our investments.
We currently have a significant investment in Cash Converters International Limited, which is a publicly-traded company based in Australia. We have made this investment, and may in the future make additional investments in this or other companies, to further our strategic objectives. The success of these strategic investments is dependent on a variety of factors, including the business performance of the companies in which we invest and the market’s assessment of that performance. If the business performance of any of these companies suffers, then the value of our investment may decline. We wrote down a portion of our investment in Cash Converters International Limited during the fourth quarter of both fiscal 2016 and fiscal 2015. See Note 6 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” If we determine that any future other-than-temporary declines in the fair value exist for one of our equity investments, we will be required to write down that investment to its fair value and recognize the related write-down as an investment loss. Any future realized investment loss would adversely affect our results of operations.
We may incur property, casualty or other losses not covered by insurance.
We maintain a program of insurance coverage for various types of property, casualty and other risks. The types and amounts of insurance that we obtain vary from time to time, depending on availability, cost and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. Losses not covered by insurance could be substantial and may increase our expenses, which could harm our results of operations and financial condition.
Our acquisitions, investments and other transactions could disrupt our ongoing business and harm our results of operations.
In pursuing our business strategy, we routinely conduct discussions, evaluate opportunities and enter into agreements regarding possible acquisitions, investments and other transactions. These transactions may involve significant challenges and risks, including risks that we may not realize the expected return on an acquisition or investment, that we may not be able to retain key personnel of an acquired business, or that we may experience difficulty in integrating acquired businesses into our business systems and processes. If we do enter into agreements with respect to acquisitions, investments or other transactions, we may fail to complete them due to inability to obtain required regulatory or other approvals or other factors. Furthermore, acquisitions, investments and other transactions require substantial management resources and have the potential to divert our attention from our existing business. These factors could harm our business and results of operations.

11


We could be subject to changes in tax rates, the adoption of new tax laws in the U.S. or other countries, or exposure to additional tax liabilities.
We are subject to taxes in the U.S. and several foreign jurisdictions. Current economic and political conditions make tax rates in any of these jurisdictions subject to significant change. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation.
Events beyond our control could result in business interruption or other adverse effects on our operations and growth.
Our business or operations could be subject to interruption or damage due to inclement weather, natural disaster, power loss, acts of violence, terrorist attacks, war or similar events. Such events could impair our customers' access to our business, impact our ability to expand or continue our operations or otherwise have an adverse effect on our financial condition.
Goodwill comprises a significant portion of our total assets. We assess goodwill for impairment at least annually, which could result in a material, non-cash write-down and could have a material adverse effect on our results of operations and financial conditions.
The carrying value of our goodwill is $254 million, or approximately 26% of our total assets, as of September 30, 2016. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350-20-35 Goodwill — Subsequent Measurement, we test goodwill and intangible assets with an indefinite useful life for potential impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in the estimated future discounted cash flows of our reporting units. Our annual goodwill impairment test is performed in the fourth quarter utilizing the income approach. This approach uses future cash flows and estimated terminal values for each of our reporting units (discounted using a market participant perspective) to determine the fair value of each reporting unit, which is then compared to the carrying value of the reporting unit to determine if there is an impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. See Note 9 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data” for a discussion of the impairment of goodwill and indefinite-lived intangible assets during fiscal 2016.
We may be exposed to liabilities under applicable anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to various anti-corruption laws that prohibit improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. We have business in countries and regions that are less developed and are generally recognized as potentially more corrupt business environments. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees or agents that could be in violation of various anti-corruption laws, including the Foreign Corrupt Practices Act (the "FCPA"). We have implemented safeguards and policies to discourage these practices by our employees and agents. However, our existing safeguards and any future improvements may prove to be less than effective, and our employees or agents may engage in conduct for which we might be held responsible. If employees violate our policies or we fail to maintain adequate record-keeping and internal accounting practices to accurately record our transactions, we may be subject to regulatory sanctions. Violations of the FCPA or other anti-corruption laws may result in severe criminal or civil sanctions and penalties, and we may be subject to other liabilities that could have a material adverse effect on our business, results of operations and financial condition. We engage professional service firms with relevant expertise to perform certain reviews of our compliance under the FCPA.
We face other risks discussed under "Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk."
ITEM 1B — UNRESOLVED STAFF COMMENTS
None.
ITEM 2 — PROPERTIES
Our typical pawn store is a freestanding building or part of a retail strip center with contiguous parking. Store interiors are designed to resemble small retail operations and attractively display merchandise by category. Distinctive exterior design and

12


attractive in-store signage provide an appealing atmosphere to customers. We maintain property and general liability insurance for each of our stores. Our stores are open six or seven days a week.
We generally lease our locations with terms of three to ten years with one or more renewal options. Our existing leases expire on dates ranging between October 2016 and February 2030, with a small number of leases on month-to-month terms. All leases provide for specified periodic rental payments at market rates. Most leases require us to maintain the property and pay the cost of insurance and taxes. We believe the termination of any one of our leases would not have a material adverse effect on our operations. Our strategy generally is to lease rather than own space for our stores unless we find what we believe is a superior location at an attractive price.
On an ongoing basis, we may close or consolidate under-performing store locations. For additional information about our discontinued operations and restructuring plans, see Note 3 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

13


The following table presents the number of store locations by state or province as of September 30, 2016:
United States:
 
Texas
218

Florida
98

Colorado
37

Illinois
22

Oklahoma
21

Arizona
20

Nevada
16

Indiana
16

Tennessee
13

Iowa
11

Utah
10

Georgia
8

Minnesota
7

Alabama
5

Oregon
5

Virginia
4

Wisconsin
3

New York
2

Pennsylvania
2

Mississippi
1

Arkansas
1

Total United States Locations
520

 
 
Mexico:
 
Distrito Federal
42

Estado de Mexico
41

Veracruz
31

Jalisco
16

Guanajuato
15

Puebla
11

Tabasco
8

Nuevo León
7

Chiapas
7

Guerrero
7

Michoacán
7

Tamaulipas
6

Hidalgo
6

Queretaro
6

Coahuila
5

Quintana Roo
4

Oaxaca
4

Campeche
4

Morelos
4

Aguascalientes
4

Tlaxcala
3

San Luis Potosí
1

Total Mexico Locations
239

Canada:
 
Ontario
27

Total Canada Locations
27

Total Company
786


14


In addition to our store locations, we lease corporate office space primarily in Austin, Texas (179,400 square feet, of which 71,916 square feet has been subleased to other tenants), Querétaro, Mexico (8,400 square feet) and Ontario, Canada (8,400 square feet).
For additional information about store locations during fiscal 2016, 2015 and 2014, see “Segment and Geographic Information” included in “Part I, Item 1 — Business.”
ITEM 3 — LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 17 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”
ITEM 4 — MINE SAFETY DISCLOSURES
Not applicable.

15


PART II
ITEM 5 — MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Class A Non-Voting Common Stock (“Class A Common Stock”) is traded on the NASDAQ Stock Market under the symbol “EZPW.” As of November 30, 2016, there were 85 stockholders of record of our Class A Common Stock. There is no trading market for our Class B Voting Common Stock (“Class B Common Stock”), which was held by one stockholder as of November 30, 2016.
The high and low per share sales price for our Class A Common Stock for the past two fiscal years, as reported by the NASDAQ Stock Market, were as follows:
 
High
 
Low
 
 
 
 
Fiscal 2016:
 
 
 
Fourth quarter ended September 30, 2016
$
11.12

 
$
7.19

Third quarter ended June 30, 2016
7.59

 
2.94

Second quarter ended March 31, 2016
5.15

 
2.44

First quarter ended December 31, 2015
7.14

 
4.68

Fiscal 2015:
 
 
 
Fourth quarter ended September 30, 2015
$
7.58

 
$
5.29

Third quarter ended June 30, 2015
9.88

 
7.10

Second quarter ended March 31, 2015
12.35

 
9.08

First quarter ended December 31, 2014
12.08

 
8.25

As of September 30, 2016, the closing sales price of our Class A Common Stock, as reported by the NASDAQ Stock Market, was $11.06 per share.
We have not declared or paid any dividends and currently do not anticipate paying any dividends in the immediate future. As described in Note 10 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data,” payment of a dividend requires an adjustment to the conversion rate of our 2.125% Cash Convertible Senior Notes due 2019. In addition, our Financing Agreement with Fortress Credit Co LLC (described in Note 10 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data”) limits our ability to pay dividends and other distributions. Should we pay dividends in the future, our certificate of incorporation provides that cash dividends on common stock, when declared, must be declared and paid at the same per share amounts on both classes of stock. Any future determination to pay cash dividends will be at the discretion of our Board of Directors (subject to the limitations described above).

16


Stock Performance Graph
The following Stock Performance Graph and related information shall not be deemed to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
The following table compares cumulative total stockholder returns for our Class A Common Stock for the last five fiscal years, with the cumulative total return on the NASDAQ Composite Index (ticker symbol: IXIC) and the NASDAQ Other Financial Index (ticker symbol: IXFN) over the same period. The graph shows the value, at the end of each of the last five fiscal years, of $100 invested in our Class A Common Stock or the indices on September 30, 2011. The graph depicts the change in the value of our Class A Common Stock relative to the indices at the end of each fiscal year and not for any interim period. Historical stock price performance is not necessarily indicative of future stock price performance.        
a2014-10k9_chartx39259a01a07.jpg

17


ITEM 6 — SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with, and is qualified in its entirety by, the accompanying consolidated financial statements and related notes. Amounts shown in the tables below include the impact of revisions to prior period financial statements, as discussed in Note 2 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.”
Operating Data
 
Fiscal Year Ended September 30,
 
2016
 
2015
 
2014
 
2013 (a)
 
2012 (a)
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except per share and store figures)
Operating data:
 
 
 
 
 
 
 
 
 
Total revenues
$
730,505

 
$
720,000

 
$
745,770

 
$
765,039

 
$
778,870

Net revenues
428,230

 
403,020

 
421,857

 
447,661

 
455,839

Restructuring
1,921

 
17,080

 
6,664

 

 

Impairment of investments
10,957

 
26,837

 
7,940

 
43,198

 

(Loss) income from continuing operations, net of tax
(8,998
)
 
(52,182
)
 
3,438

 
13,583

 
85,317

(Loss) income from discontinued operations, net of tax
(79,432
)
 
(42,045
)
 
(77,474
)
 
4,045

 
45,129

Net (loss) income
(88,430
)
 
(94,227
)
 
(74,036
)
 
17,628

 
130,446

Net loss from continuing operations attributable to noncontrolling interest
(1,025
)
 
(884
)
 
(1,038
)
 
(927
)
 
(29
)
Net (loss) income from discontinued operations attributable to redeemable noncontrolling interest
(6,661
)
 
(4,151
)
 
(5,281
)
 
951

 
5,751

Net (loss) income attributable to EZCORP, Inc.
(80,744
)

(89,192
)
 
(67,717
)
 
17,604

 
124,724




 
 
 
 
 
 
 
 
Basic (loss) earnings per share attributable to EZCORP, Inc.:


 
 
 
 
 
 
 
 
Continuing operations
$
(0.15
)
 
$
(0.94
)
 
$
0.08

 
$
0.27

 
$
1.68

Discontinued operations
(1.34
)
 
(0.70
)
 
(1.33
)
 
0.06

 
0.77

Basic (loss) earnings per share
$
(1.49
)
 
$
(1.64
)
 
$
(1.25
)
 
$
0.33

 
$
2.45




 
 
 
 
 
 
 
 
Diluted (loss) earnings per share attributable to EZCORP, Inc.:


 
 
 
 
 
 
 
 
Continuing operations
$
(0.15
)
 
$
(0.94
)
 
$
0.08

 
$
0.27

 
$
1.67

Discontinued operations
(1.34
)
 
(0.70
)
 
(1.33
)
 
0.06

 
0.77

Diluted (loss) earnings per share
$
(1.49
)
 
$
(1.64
)
 
$
(1.25
)
 
$
0.33

 
$
2.44




 
 
 
 
 
 
 
 
Weighted average shares outstanding:


 
 
 
 
 
 
 
 
Basic
54,427

 
54,369

 
54,148

 
53,657

 
50,877

Diluted
54,427

 
54,369

 
54,292

 
53,737

 
51,133




 
 
 
 
 
 
 
 
Stores attributable to continuing operations at end of period
786

 
786

 
804

 
799

 
775

(a)    We acquired a controlling interest in Grupo Finmart in January 2012 and began consolidating its results of operations. In September 2016, we disposed of our entire interest and recast all historical operating data pertaining to Grupo Finmart as discontinued operations. Further, certain corrections and revisions to the fiscal 2013 and 2012 consolidated financial statements have been made. See Note 2 and Note 3 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” The effects of these corrections and revisions to the fiscal 2013 and 2012 operating data presented above are as follows:

18


 
Fiscal Year Ended September 30, 2013
 
As Previously Reported
 
Corrections and Reclassifications
 
As Corrected and Reclassified
 
 
 
 
 
 
 
(in thousands, except per share figures)
Operating data:
 
 
 
 
 
Total revenues
$
809,525

 
$
(44,486
)
 
$
765,039

Net revenues
480,433

 
(32,772
)
 
447,661

Impairment of investments
43,198

 

 
43,198

Income from continuing operations, net of tax
22,527

 
(8,944
)
 
13,583

Income (loss) from discontinued operations, net of tax
(1,517
)
 
5,562

 
4,045

Net income
21,010

 
(3,382
)
 
17,628

Net loss from continuing operations attributable to noncontrolling interest
(1,222
)
 
295

 
(927
)
Net income (loss) from discontinued operations attributable to redeemable noncontrolling interest
(76
)
 
1,027

 
951

Net income attributable to EZCORP, Inc.
22,308

 
(4,704
)
 
17,604

 
 
 


 
 
Basic earnings (loss) per share attributable to EZCORP, Inc.:
 
 


 
 
Continuing operations
$
0.44

 
$
(0.17
)
 
$
0.27

Discontinued operations
(0.03
)
 
0.09

 
0.06

Basic earnings per share
$
0.41

 
$
(0.08
)
 
$
0.33

 
 
 


 
 
Diluted earnings (loss) per share attributable to EZCORP, Inc.:
 
 


 
 
Continuing operations
$
0.44

 
$
(0.17
)
 
$
0.27

Discontinued operations
(0.03
)
 
0.09

 
0.06

Diluted earnings per share
$
0.41

 
$
(0.08
)
 
$
0.33

 
Fiscal Year Ended September 30, 2012
 
As Previously Reported
 
Corrections and Reclassifications
 
As Corrected and Reclassified
 
 
 
 
 
 
 
(in thousands, except per share figures)
Operating data:
 
 
 
 
 
Total revenues
$
805,653

 
$
(26,783
)
 
$
778,870

Net revenues
474,512

 
(18,673
)
 
455,839

Income from continuing operations, net of tax
110,819

 
(25,502
)
 
85,317

Income from discontinued operations, net of tax
30,296

 
14,833

 
45,129

Net income
141,115

 
(10,669
)
 
130,446

Net (loss) income from continuing operations attributable to noncontrolling interest
4,119

 
(4,148
)
 
(29
)
Net income from discontinued operations attributable to redeemable noncontrolling interest
151

 
5,600

 
5,751

Net income attributable to EZCORP, Inc.
136,845

 
(12,121
)
 
124,724

 
 
 


 
 
Basic earnings per share attributable to EZCORP, Inc.:
 
 


 
 
Continuing operations
$
2.10

 
$
(0.42
)
 
$
1.68

Discontinued operations
0.59

 
0.18

 
0.77

Basic earnings per share
$
2.69

 
$
(0.24
)
 
$
2.45

 
 
 


 
 
Diluted earnings per share attributable to EZCORP, Inc.:
 
 


 
 
Continuing operations
$
2.09

 
$
(0.42
)
 
$
1.67

Discontinued operations
0.59

 
0.18

 
0.77

Diluted earnings per share
$
2.68

 
$
(0.24
)
 
$
2.44


19


Balance Sheet Data
 
September 30,
 
2016
 
2015
 
2014
 
2013 (b)
 
2012 (b)
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Balance sheet data:
 
 
 
 
 
 
 
 
 
Pawn loans
$
167,329

 
$
159,964

 
$
162,444

 
$
156,637

 
$
157,648

Inventory, net
140,224

 
124,084

 
138,175

 
145,200

 
109,214

Working capital (a)
387,165

 
318,107

 
370,247

 
325,263

 
329,535

Total assets (a)
983,244

 
898,908

 
1,023,982

 
1,044,136

 
950,995

Long-term debt, less current maturities (a)
283,611

 
197,976

 
213,265

 
139,894

 
128,452

Total equity
594,205

 
656,031

 
812,346

 
879,027

 
815,690

(a)
Amounts exclude assets and liabilities held for sale as discussed in note (b) below.
(b)    We acquired a controlling interest in Grupo Finmart in January 2012 and began consolidating its results of operations. In September 2016, we disposed of our entire interest and recast all historical balance sheet data pertaining to Grupo Finmart as held for sale. Further, certain corrections and revisions to the fiscal 2014, 2013 and 2012 consolidated financial statements have been made. See Note 2 and Note 3 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” The effects of these corrections and revisions to the fiscal 2014, 2013 and 2012 balance sheet data presented above are as follows:
 
September 30, 2014
 
As Previously Reported
 
Corrections and Reclassifications
 
As Corrected and Reclassified
 
 
 
 
 
 
 
(in thousands)
Balance sheet data:
 
 
 
 
 
Pawn loans
$
162,444

 
$

 
$
162,444

Inventory, net
138,175

 

 
138,175

Working capital
486,649

 
(116,402
)
 
370,247

Total assets
1,410,544

 
(386,562
)
 
1,023,982

Long-term debt, less current maturities
392,054

 
(178,789
)
 
213,265

Total equity
832,304

 
(19,958
)
 
812,346

 
September 30, 2013
 
As Previously Reported
 
Corrections and Reclassifications
 
As Corrected and Reclassified
 
 
 
 
 
 
 
(in thousands)
Balance sheet data:
 
 
 
 
 
Pawn loans
$
156,637

 
$

 
$
156,637

Inventory, net
145,200

 

 
145,200

Working capital
376,360

 
(51,097
)
 
325,263

Total assets
1,332,968

 
(288,832
)
 
1,044,136

Long-term debt, less current maturities
215,939

 
(76,045
)
 
139,894

Total equity
895,883

 
(16,856
)
 
879,027

 
September 30, 2012
 
As Previously Reported
 
Corrections and Reclassifications
 
As Corrected and Reclassified
 
 
 
 
 
 
 
(in thousands)
Balance sheet data:
 
 
 
 
 
Pawn loans
$
157,648

 
$

 
$
157,648

Inventory, net
109,214

 

 
109,214

Working capital
381,567

 
(52,032
)
 
329,535

Total assets
1,209,075

 
(258,080
)
 
950,995

Long-term debt, less current maturities
198,836

 
(70,384
)
 
128,452

Total equity
827,791

 
(12,101
)
 
815,690


20


ITEM 7 — MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this section contains forward-looking statements that are based on our current expectations. Actual results could differ materially from those expressed or implied by the forward-looking statements due to a number of risks, uncertainties and other factors, including those identified in “Part I, Item 1A — Risk Factors.” See also “Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results” below.
This discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included in “Part II, Item 8 — Financial Statements and Supplementary Data.”
Overview and Fiscal 2016 Financial Highlights
 
Fiscal Year Ended September 30,
 
2016 (GAAP)
 
2015 (GAAP)
 
Change (GAAP)
 
2016 (Constant Currency)
 
Change (Constant Currency)
 
(in USD thousands)
 
 
 
(in USD thousands)
 
 
Consolidated pawn loans outstanding
$
167,329

 
$
159,964

 
5%
 
$
169,688

 
6%
 
 
 
 
 
 
 
 
 
 
Consolidated pawn service charges
261,800

 
247,204

 
6%
 
267,717

 
8%
U.S. pawn service charges
229,893

 
216,211

 
6%
 
229,893

 
6%
Mexico pawn service charges
31,907

 
30,993

 
3%
 
37,824

 
22%
 
 
 
 
 
 
 
 
 
 
Consolidated merchandise sales gross profit
150,836

 
134,329

 
12%
 
154,420

 
15%
Consolidated gross margin on merchandise sales
37
%
 
33
%
 
400 bps
 
37
%
 
400 bps
 
 
 
 
 
 
 
 
 
 
Consolidated monthly average return on pawn earning assets (a)
11
%
 
12
%
 
(100) bps
 
11
%
 
(100) bps
Consolidated monthly average yield on inventory (b)
10
%
 
10
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
U.S. pawn loan redemption rate (c)
84
%
 
84
%
 
 
84
%
 
Mexico pawn loan redemption rate (c)
78
%
 
77
%
 
100 bps
 
78
%
 
100 bps
 
 
 
 
 
 
 
 
 
 
U.S. aged general merchandise inventory (d)
5
%
 
5
%
 
 
5
%
 
U.S. aged jewelry inventory (d)
11
%
 
15
%
 
(400)bps
 
11
%
 
(400)bps
 
 
 
 
 
 
 
 
 
 
Mexico aged general merchandise inventory (d)
4
%
 
4
%
 
 
4
%
 
Mexico aged jewelry inventory (d)

 

 
 

 
(a)
Calculated as average monthly merchandise and scrap sales gross profit and pawn service charges, divided by average pawn loans and inventory balances outstanding.
(b)
Calculated as average monthly merchandise and scrap sales gross profit, divided by inventory balances outstanding as of the applicable period end.
(c)
Our pawn loan redemption rate represents the percentage of loans made that are repaid, renewed or extended at a point in time as opposed to the life of the loan.
(d)
Calculated as inventory aged greater than 360 days as a percentage of total inventory as of the applicable period end.
Core pawn revenue (pawn service charges and merchandise sales) from the U.S. Pawn segment increased 5% from fiscal 2015, while core pawn revenue from the Mexico Pawn segment decreased 4% on a GAAP basis but increased 13% on a constant currency basis. See “Results of Operations — Non-GAAP Financial Information” below.
We acquired an additional six pawn stores in the Houston, Texas area. The stores reinforce our market-leading presence in that market.

21


We completed the disposition of Grupo Finmart, with a base purchase price for the sale of 100% of Grupo Finmart of $50 million less certain working capital and other adjustments. We also received promissory notes with a total principal amount of $89.8 million.
We entered into a financing agreement for a senior secured credit facility for an aggregate principal amount of $100 million, the proceeds of which will allow us to continue to focus on growing our core pawn operations in the United States and Mexico.
On September 27, 2016, we completed the previously announced sale of all of our interests in Grupo Finmart to Alpha Holding, S.A. de C.V. (“AlphaCredit”), pursuant to a definitive agreement (the “Purchase Agreement”) entered into effective July 1, 2016. The purchase price payable to EZCORP was $40.9 million after application of purchase price adjustments specified in the Purchase Agreement and, subject to a 10% escrow holdback, was paid in cash at closing. In connection with the closing of the transaction, we also received promissory notes, having an aggregate principal amount of approximately $89.8 million, repayable in various principal amounts through September 2019. For additional information about the sale of Grupo Finmart, see Note 3 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” See also “Item I, Part 1A — Risk Factors.”
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted 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, long-lived and 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 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 and Sales Revenue Recognition
We record pawn service charges using the interest method 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, 2016, the balance of our pawn service charges receivable was $31.1 million. Assuming the pawn loan fees and service charges receivable balance as of September 30, 2016 was overestimated or underestimated by 10%, pawn service charges revenue would decrease or increase by approximately $3.1 million in 2016 and net income attributable to the Company would decrease or increase by approximately $2.0 million.
Inventory and Cost of Goods Sold
We consider our estimates of obsolete or slow moving inventory and shrinkage critical 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. Future declines in gold prices may cause an increase in reserve rates pertaining to jewelry inventory.
As of September 30, 2016, the gross balance of our inventory was $146.4 million for which we have included reserves of $6.1 million. Assuming the inventory reserve balance as of September 30, 2016 was overestimated or underestimated by 10%, merchandise cost of goods sold would decrease or increase by approximately $0.6 million in 2016 and net income attributable to the Company would decrease or increase by approximately $0.4 million.

22


Realization of Notes Receivable
We review the payment history, creditworthiness, projected cash flows and related assumptions of Grupo Finmart and AlphaCredit as applicable in determining whether our net notes receivable of $83.1 million are collectible. Through the date of this report, we have received all payments on these notes receivable as contractually obligated.
Goodwill and Other Intangible Assets
We perform our impairment analyses utilizing the income approach. This approach uses future cash flows and estimated terminal values for each of our reporting units (discounted using a market participant perspective) to determine the fair value of each reporting unit, which is then compared to the carrying value of the reporting unit to determine if there is an impairment. We have determined that our reporting units are equivalent to our operating segments for fiscal 2016. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our fiscal 2016 goodwill and other intangible asset valuations ranged from 10% to 14%, down from 16% to 25% for fiscal 2015, representing an overall decrease in our weighted-average cost of capital as a result of improving business fundamentals in fiscal 2016 from 2015, as well as a result of our exit from Grupo Finmart. In testing other intangible assets for potential impairment, we apply key assumptions which are consistent with those utilized in our goodwill impairment test. Changes in the economic conditions or regulatory environment could negatively affect our key assumptions.
We may perform a qualitative assessment in making our determination of whether it is more likely than not goodwill and other intangible assets are impaired under appropriate accounting guidance on an annual basis in future reporting periods. In addition to the assumptions discussed above pertaining to the income approach, we consider the assessment of potential triggering events to be a critical estimate.
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 deferred tax assets. In the event that 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 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 the U.S. federal and state income taxes and foreign withholding taxes of our undistributed earnings of foreign subsidiaries indefinitely invested outside the U.S.
The Company may be subject to income tax audits by the respective tax authorities in any or all of the jurisdictions in which the Company operates or has 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.

23


Results of Operations
Fiscal 2016 vs. Fiscal 2015
Summary Financial Data
The following table presents selected summary consolidated financial data for our fiscal years ended September 30, 2016 and 2015. This table, as well as the discussion that follows, should be read with the consolidated financial statements and related notes included in “Part II, Item 8 — Financial Statements and Supplementary Data.”
 
Fiscal Year Ended September 30,
 
Change
 
2016
 
2015
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Pawn service charges
$
261,800

 
$
247,204

 
6%
 
 
 
 
 
 
Merchandise sales
409,107

 
402,118

 
2%
Merchandise sales gross profit
150,836

 
134,329

 
12%
Gross margin on merchandise sales
37
%
 
33
%
 
400 bps
 
 
 
 
 
 
Jewelry scrapping sales
50,113

 
57,973

 
(14)%
     Jewelry scrapping gross profit
8,074

 
11,907

 
(32)%
Gross margin on jewelry scrapping sales
16
%
 
21
%
 
(500) bps
 
 
 
 
 
 
     Other revenues, net
7,520

 
9,580

 
(22)%
Net revenues
428,230

 
403,020

 
6%
 
 
 
 
 
 
Operating expenses
399,057

 
418,623

 
(5)%
Other non-operating expenses
28,810

 
50,604

 
(43)%
Income (loss) from continuing operations before income taxes
363

 
(66,207
)
 
*
Income tax expense (benefit)
9,361

 
(14,025
)
 
*
Loss from continuing operations, net of tax
(8,998
)
 
(52,182
)
 
(83)%
Loss from discontinued operations, net of tax
(79,432
)
 
(42,045
)
 
89%
Net loss
(88,430
)
 
(94,227
)
 
(6)%
Net loss attributable to noncontrolling interest
(7,686
)
 
(5,035
)
 
53%
Net loss attributable to EZCORP, Inc.
$
(80,744
)
 
$
(89,192
)
 
(9)%
 
 
 
 
 
 
Net pawn earning assets:
 
 
 
 
 
Pawn loans
$
167,329

 
$
159,964

 
5%
Inventory, net
140,224

 
124,084

 
13%
Total net pawn earning assets
$
307,553

 
$
284,048

 
8%
*
Represents an increase or decrease in excess of 100% or not meaningful.
Total revenues for fiscal 2016 were $730.5 million compared to $720.0 million in the prior year. Excluding jewelry scrapping sales, total revenues increased $18.4 million, driven by increased merchandise sales and pawn service charge growth.
Total operating expenses decreased from $418.6 million in the prior year to $399.1 million in the current year. This $19.6 million, or 5%, decrease was primarily due to:
A $15.2 million decrease in restructuring expense from our fiscal 2015 restructuring plan aimed to streamline our structure and operating model to improve overall efficiency and reduce costs;

24


A $4.9 million decrease in administrative expense due primarily to a $3.6 million decrease in salaries and related costs, a $3.4 million decrease in litigation and related costs and $5.8 million in various other individually small reductions in corporate costs as we continue to work towards corporate overhead reduction goals, offset by a $8.0 million increase in short-term and long-term incentive programs. Administrative expenses include $4.2 million of fiscal 2015 restatement related expenses recorded in fiscal 2016;
A $4.4 million decrease in depreciation and amortization expense as a result of ongoing savings realized from a lower depreciable fixed asset base as a result of our strategic review completed in fiscal 2015; and
A $1.6 million decrease in loss on sale or disposal of assets due to a reduction in asset disposals in the current year; partially offset by
A $6.4 million increase in operations expense primarily as a result of staffing enhancements and an increased participation in incentive compensation plans in our field organization and an increase in short-term and long-term incentive programs, as well as costs associated with new stores acquired. The largest component of this increase, which was offset by other items, was increased bonuses due to the substantial improvement in U.S. and Mexico Pawn operating results in fiscal 2016 as compared to fiscal 2015.
Total non-operating expenses decreased by $21.8 million from the prior year. This decrease was primarily due to:
Impairment of our investment in Cash Converters International in fiscal 2016 in the amount of $11.0 million ($7.2 million, net of taxes), as compared to an impairment of our investment in fiscal 2015 in the amount of $26.8 million ($17.4 million, net of taxes);
A $5.2 million decrease in loss from our unconsolidated affiliate due to improvement in performance of Cash Converters International; and
A $1.0 million decrease in other expense primarily due to net foreign currency transaction losses in the current year as a result of movement in exchange rates affecting the revaluation of intercompany amounts and foreign currency debt outstanding.
Income taxes increased $23.4 million, to a $9.4 million expense in the current year, primarily due to the $66.6 million decrease in loss from continuing operations before income taxes, in addition to various permanent differences.
In fiscal 2016, we sold our Grupo Finmart business. As a result, loss from discontinued operations, net of tax includes a gain of $34.2 million and a $2.1 million loss, which we expect to recoup through receipt of future note receivable payments, on assumption of existing Grupo Finmart debt, before taxes. The gain does not take into consideration the total costs associated with the transaction, which were $9.8 million, approximately $8.0 million of which were recorded under “Loss from discontinued operations, net of tax” in our consolidated statements of operations in fiscal 2016 and the remaining $1.8 million of which will be recorded under “Loss from discontinued operations, net of tax” in our consolidated statements of operations in future periods due to ongoing employee service requirements. See “Results of Operations — Grupo Finmart” below for additional information.

25


U.S. Pawn
The following table presents selected summary financial data from continuing operations for the U.S. Pawn segment:
 
Fiscal Year Ended September 30,
 
Change
 
2016
 
2015
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Pawn service charges
$
229,893

 
$
216,211

 
6%
 
 
 
 
 
 
Merchandise sales
348,771

 
334,635

 
4%
Merchandise sales gross profit
131,503

 
115,682

 
14%
Gross margin on merchandise sales
38
%
 
35
%
 
300 bps
 
 
 
 
 
 
Jewelry scrapping sales
47,810

 
54,343

 
(12)%
Jewelry scrapping sales gross profit
7,672

 
11,498

 
(33)%
Gross margin on jewelry scrapping sales
16
%
 
21
%
 
(500) bps
 
 
 
 
 
 
Other revenues
331

 
945

 
(65)%
Net revenues
369,399

 
344,336

 
7%
 
 
 
 
 
 
Segment operating expenses:
 
 
 
 

Operations
255,321

 
244,232

 
5%
Depreciation and amortization
12,242

 
15,227

 
(20)%
Segment operating contribution
101,836

 
84,877

 
20%
 
 
 
 
 
 
Other segment expenses
1,780

 
5,029

 
(65)%
Segment contribution
$
100,056

 
$
79,848

 
25%
 
 
 
 
 
 
Other data:
 
 
 
 

Net earning assets — continuing operations
$
270,974

 
$
251,068

 
8%
Inventory turnover — general merchandise (a)
2.6

 
2.8

 
(7)%
Inventory turnover — jewelry (a)
1.1

 
1.1

 
Average monthly ending pawn loan balance per store (b)
$
270

 
$
252

 
7%
Monthly average yield on pawn loans outstanding
14
%
 
14
%
 
Pawn loan redemption rate
84
%
 
84
%
 
(a)
Calculation of inventory turnover excludes the effects of scrapping.
(b)
Balance is calculated based on the average of the monthly ending balance averages during the applicable period.
Net revenue increased 7% ($25.1 million), with core pawn revenue increasing $27.8 million, or 5%, from the prior-year. The increase in core pawn revenue attributable to same stores and new stores added during the current year is summarized as follows:
 
Pawn Service Charges
 
Merchandise Sales
 
Core Pawn Revenue
 
 
 
 
 
 
 
(in millions)
Same stores
$
10.0

 
$
12.3

 
$
22.3

New stores and other
3.7

 
1.8

 
5.5

Total
$
13.7

 
$
14.1

 
$
27.8


26


Pawn service charges increased 6%, with the monthly average yield remaining consistent at 14%, offset by the increase in average monthly ending pawn loans outstanding of 7% due to continued focus on customer experience.
Gross margin on merchandise sales increased to 38% from 35% in the prior year as a result of improved execution in disposing of aged inventory, as well as ongoing discipline in pawn loan valuation and retail pricing cadences. These positive operating developments drove an increase in merchandise sales gross profit of $15.8 million. We reduced total aged inventory (as a percentage of total inventory) to 8% from 10%. This reduction is primarily attributable to a reduction of aged jewelry inventory to 11% from 15% in the prior year, while our aged general merchandise inventory remained consistent at 5%.
Gross margin on jewelry scrapping sales decreased to 16% from 21%. Jewelry scrapping sales gross profit decreased to 2% of net revenues from 3% in the prior year primarily as a result of our strategy to sell rather than scrap jewelry during our peak selling season, as margins on scrapping are lower than those on sales.
Total segment expenses increased to $269.3 million (43% of revenues) in the current year from $264.5 million (44% of revenues) in the prior year primarily due to:
An $11.1 million, or 5%, net increase in operations expense primarily due to increased wages due to staffing enhancements and an increased participation in incentive compensation plans in our field organization to better serve and satisfy our customers amounting to $16.2 million, comprised of a $8.4 million increase in bonuses due to the substantial improvement in operating results in fiscal 2016 as compared to fiscal 2015 and a $7.8 million increase in salaries and related costs, in addition to costs associated with new stores acquired and other small items. The wage increases were partially offset by a $5.3 million reduction due to fiscal 2015 impairment of long-lived intangible and fixed assets; partially offset by
A $3.0 million, or 20%, decrease in depreciation and amortization expense as a result of ongoing savings realized from a lower depreciable fixed asset base as a result of our strategic review completed in fiscal 2015; and
A $3.0 million decrease in restructuring costs pertaining to our fiscal 2015 restructuring plan initiated in the fourth quarter of our fiscal 2015.

27


Non-GAAP Financial Information
In addition to the financial information prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP"), we provide certain other non-GAAP financial information on a constant currency basis ("constant currency"). We use constant currency and ongoing segment contribution results to evaluate results of our Mexico Pawn operations, which are denominated in Mexican pesos and believe that presentation of constant currency results are meaningful and useful in understanding the activities and business metrics of our Mexico Pawn operations and reflect an additional way of viewing aspects of our business that, when viewed with GAAP results, provide a more complete understanding of factors and trends affecting our business. We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. We use this non-GAAP financial information to evaluate and compare operating results across accounting periods. Readers should consider the information in addition to, but not instead of or superior to, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Constant currency results reported herein are calculated by translating consolidated balance sheet and consolidated statement of operations items denominated in Mexican pesos 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 during the appropriate period for statement of operations items. The end-of-period exchange rate as of September 30, 2016 and 2015 was 19.4 to 1 and 17.1 to 1, respectively. The average exchange rate for the years ended September 30, 2016, 2015 and 2014 was 17.9 to 1, 15.1 to 1, and 13.1 to 1, respectively. Constant currency results, where presented, also exclude the foreign currency gain or loss and the related foreign currency derivative gain or loss impact.

28


Mexico Pawn
The following table presents selected summary financial data from continuing operations for the Mexico Pawn segment, including constant currency results, after translation to U.S. dollars from its functional currency of the Mexican peso. See “Results of Operations — Non-GAAP Financial Information” above.
 
Fiscal Year Ended September 30,
 
2016 (GAAP)
 
2015 (GAAP)
 
Change (GAAP)
 
2016 (Constant Currency)
 
Change (Constant Currency)
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Pawn service charges
$
31,907

 
$
30,993

 
3%
 
$
37,824

 
22%
 
 
 
 
 
 
 
 
 
 
Merchandise sales
60,331

 
65,408

 
(8)%
 
71,518

 
9%
Merchandise sales gross profit
19,329

 
18,037

 
7%
 
22,913

 
27%
Gross margin on merchandise sales
32
%
 
28
%
 
400 bps
 
32
%
 
400 bps
 
 
 
 
 
 
 
 
 
 
Jewelry scrapping sales
2,282

 
3,267

 
(30)%
 
2,705

 
(17)%
Jewelry scrapping sales gross profit
397

 
313

 
27%
 
470

 
50%
Gross margin on jewelry scrapping sales
17
%
 
10
%
 
700 bps
 
17
%
 
700 bps
 
 
 
 
 
 
 
 
 
 
Other revenues
385

 
1,021

 
(62)%
 
456

 
(55)%
Net revenues
52,018

 
50,364

 
3%
 
61,663

 
22%
 
 
 
 
 
 
 
 
 
 
Segment operating expenses:
 
 
 
 
 
 
 
 

Operations
38,481

 
43,927

 
(12)%
 
45,617

 
4%
Depreciation and amortization
2,965

 
4,440

 
(33)%
 
3,515

 
(21)%
Segment operating contribution
10,572

 
1,997

 
*
 
12,531

 
*
 
 
 
 
 
 
 
 
 
 
Other segment expenses (a)
2,064

 
2,982

 
(31)%
 
907

 
*
Segment contribution (loss)
$
8,508

 
$
(985
)
 
*
 
$
11,624

 
*
 
 
 
 
 
 
 
 
 
 
Other data:
 

 
 
 
 
 
 

 
 
Net earning assets — continuing operations
$
36,576

 
$
32,966

 
11%
 
$
41,496

 
26%
Inventory turnover (b)
2.5

 
2.7

 
(7)%
 
2.5

 
(7)%
Average monthly ending pawn loan balance per store (c)
$
70

 
$
65

 
8%
 
$
82

 
26%
Monthly average yield on pawn loans outstanding
16
%
 
16
%
 
 
16
%
 
Pawn loan redemption rate
78
%
 
77
%
 
100 bps
 
78
%
 
100 bps
*
Represents an increase or decrease in excess of 100% or not meaningful.
(a)
Fiscal 2016 constant currency amount excludes $1.3 million of net GAAP basis foreign currency transaction losses resulting from movement in exchange rates. The net foreign currency transaction losses for fiscal 2015 were $2.0 million and are not excluded from the above results.
(b)
Calculation of inventory turnover excludes the effects of scrapping.
(c)
Balance is calculated based upon the average of the monthly ending balance averages during the applicable period.

29


The average exchange rate used to translate current year Mexico Pawn results from Mexican pesos to U.S. dollars was 17.9 to 1, a 19% change from the prior-year rate of 15.1 to 1. We have experienced a prolonged weakening of the Mexican peso to the U.S. dollar and may continue to experience further weakening in future reporting periods, which may adversely impact our future operating results when stated on a GAAP basis.
Our Mexico Pawn operations continued to grow significantly, with the positive constant currency results largely offset by changes in foreign currency exchange rates. Core pawn revenue decreased $4.2 million, or 4%, on a GAAP basis, but increased $12.9 million, or 13%, on a constant currency basis. The change in core pawn revenue attributable to same store and new stores added since the prior-year is summarized as follows:
 
Change in Core Pawn Revenue (GAAP)
 
Pawn Service Charges
 
Merchandise Sales
 
Total
 
 
 
 
 
 
 
(in millions)
Same stores
$
0.7

 
$
(1.2
)
 
$
(0.5
)
New stores and other
0.3

 
0.8

 
1.1

Buy/sell stores
(0.1
)
 
(4.7
)
 
(4.8
)
Total
$
0.9

 
$
(5.1
)
 
$
(4.2
)
 
Change in Core Pawn Revenue (Constant Currency)
 
Pawn Service Charges
 
Merchandise Sales
 
Total
 
 
 
 
 
 
 
(in millions)
Same stores
$
6.5

 
$
9.6

 
$
16.1

New stores and other
0.4

 
1.0

 
1.4

Buy/sell stores
(0.1
)
 
(4.5
)
 
(4.6
)
Total
$
6.8

 
$
6.1

 
$
12.9

Pawn service charges increased 3% (22% increase on a constant currency basis) primarily as a result of continued focus on pawn loan growth. The average monthly ending pawn loan balances outstanding increased 8% (26% increase on a constant currency basis) from the prior year.
Gross margin on merchandise sales increased to 32% from 28% in the prior year as a result of improved execution in disposing of aged inventory from the prior year, as well as ongoing discipline in pawn loan valuation and retail pricing cadences. These positive operating developments drove an increase in merchandise sales gross profit of $1.3 million ($4.9 million increase on a constant currency basis).
Total segment expenses in the current year were $43.5 million or 46% of revenues ($50.0 million or 44% of revenues on a constant currency basis), compared to $51.3 million (51% of revenues) in the prior year. These changes were primarily due to:
A $1.9 million decrease ($0.7 million increase on a constant currency basis) in operations expense due to staffing realignments and an increased participation in incentive compensation plans due to the substantial improvement in operating results in fiscal 2016 as compared to fiscal 2015;
A $1.8 million decrease in rent expense primarily due to currency impacts ($0.1 million decrease in constant currency);
A $1.4 million decrease in impairment charges from the prior year on both a GAAP and constant currency basis;
A $1.5 million decrease in depreciation and amortization ($0.9 million decrease on a constant currency basis) expense as a result of ongoing savings realized from a lower depreciable fixed asset base as a result of our strategic review completed in fiscal 2015; and
A $1.1 million decrease in licenses and fees ($1.1 million reduction on a constant currency basis) in addition to other smaller items and additional foreign currency impacts.

30


Grupo Finmart
The following table presents selected summary financial data from discontinued operations for Grupo Finmart, including constant currency results, after translation to U.S. dollars from its functional currency of the Mexican peso. See “Results of Operations — Non-GAAP Financial Information” above.
 
Fiscal Year Ended September 30,
 
2016 (GAAP)
 
2015 (GAAP)
 
Percentage Change GAAP
 
2016 (Constant Currency)
 
Percentage Change (Constant Currency)
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues
$
45,256

 
$
68,369

 
(34)%
 
$
53,648

 
(22)%
Consumer loan bad debt
30,081

 
26,446

 
14%
 
35,659

 
35%
Net revenues
15,175

 
41,923

 
(64)%
 
17,989

 
(57)%
 
 
 
 
 
 
 
 
 
 
Expenses (income):
 
 
 
 

 
 
 
 
Operations
38,740

 
32,664

 
19%
 
45,924

 
41%
Impairment of goodwill (a)
73,244

 

 
*
 
73,244

 
*
Depreciation, amortization and other (b)
12,732

 
7,008

 
82%
 
4,544

 
(35)%
Interest expense, net
16,464

 
24,487

 
(33)%
 
19,517

 
(20)%
Gain on disposition (a)
(34,237
)
 

 
*
 
(34,237
)
 
*
Loss from discontinued operations before income taxes
$
(91,768
)
 
$
(22,236
)
 
*
 
$
(91,003
)
 
*
*
Represents an increase or decrease in excess of 100% or not meaningful.
(a)
Amount not adjusted on a constant currency basis as charge occurred at a single point in time.
(b)
Fiscal 2016 constant currency amount excludes a $8.6 million loss from net GAAP basis foreign currency transaction losses, including forward currency forwards, resulting from movement in exchange rates. The net foreign currency transaction losses including foreign currency forwards for fiscal 2015 were $4.4 million and are not excluded from the above results.
The average exchange rate used to translate current year Grupo Finmart results from Mexican pesos to U.S. dollars was 17.9 to 1, a 19% change from the prior-year rate of 15.1 to 1.
During January 2012, we acquired a 60% controlling interest in Grupo Finmart and began consolidating its results of operations. As of September 30, 2015 and prior to its disposition in September 2016, we owned a 94% controlling interest in Grupo Finmart. The results presented above and discussed below include the noncontrolling interest portion of Grupo Finmart’s loss. Amounts discussed below are on a GAAP basis and include the impact of foreign currency effects as presented above.
We received net proceeds of $40.9 million from the disposition of Grupo Finmart in September 2016 in addition to certain notes receivable. See Note 3 of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion of the disposition of Grupo Finmart.
Total revenues decreased $23.1 million, or 34%, in fiscal 2016 to $45.3 million. Consumer loan bad debt increased $3.6 million in fiscal 2016 to $30.1 million. The overall decrease in net revenue was as a result of delays in collections and other factors.
Total expenses increased to $106.9 million in fiscal 2016 from $64.2 million in fiscal 2015 primarily due to:
A $73.2 million goodwill impairment charge in fiscal 2016;
An $8.0 million increase in business and professional fees primarily due to transaction and other costs related to the disposition of Grupo Finmart, partially offset by other decreases;
A $4.2 million increase in foreign currency losses due to fluctuations in foreign currency exchange rates during fiscal 2016 as compared to fiscal 2015; and
A $2.1 million loss on prepayment of outstanding notes payable in conjunction with the disposition of Grupo Finmart; partially offset by

31


A $34.2 million gain on disposition of Grupo Finmart in fiscal 2016; and
An $8.0 million decrease in net interest expense due to a decrease in weighted-average third-party debt outstanding during fiscal 2016 as compared to fiscal 2015.
Loss from discontinued operations, net of tax for fiscal 2016 includes a $12.9 million income tax benefit associated with Grupo Finmart operations presented above.
Other International
The following table presents selected summary financial data from continuing operations for the Other International segment after translation to U.S. dollars from its functional currency of primarily Canadian and Australian dollars:
 
Fiscal Year Ended September 30,
 
Percentage Change
 
2016
 
2015
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Consumer loan fees and interest
$
8,769

 
$
10,739

 
(18)%
Consumer loan bad debt
(1,965
)
 
(3,125
)
 
(37)%
Other revenues, net
9

 
706

 
(100)%
Net revenues
6,813

 
8,320

 
(18)%
 
 
 
 
 
 
Segment operating expenses:
 
 
 
 

Operating expenses
7,803

 
7,396

 
6%
Loss from investment in unconsolidated affiliates
255

 
5,473

 
(95)%
Segment operating loss
(1,245
)
 
(4,549
)
 
(73)%
 
 
 
 
 
 
Other segment expenses
11,165

 
29,406

 
(62)%
Segment loss
$
(12,410
)
 
$
(33,955
)
 
(63)%
Segment loss from the Other International segment was $12.4 million, a decrease of $21.5 million, or 63%, from the prior-year. This decrease was primarily due to:
A $15.9 million decrease in impairment of investments due to the current fiscal year impairment of our investment in Cash Converters International in the amount of $11.0 million ($7.2 million, net of taxes) as compared to the prior-year impairment of $26.8 million ($17.4 million, net of taxes);
A $5.2 million decrease in loss from our unconsolidated affiliate. The loss of $0.3 million presented above for fiscal 2016 includes pre-tax charges totaling $11.8 million including restructuring costs, compliance provision and other, translated using applicable exchange rates in effect for EZCORP’s year ended September 30, 2016;
A $2.4 million decrease in restructuring costs due to substantial costs in the prior-year pertaining to our fiscal 2015 restructuring plan initiated in the fourth quarter of our fiscal 2015, which included the closure of 12 underperforming Canadian Cash Converters stores during fiscal 2015; partially offset by
A $1.5 million decrease in segment net revenues due partially to wind down of certain Canadian operations; and
A $0.4 million increase in segment operating expenses as a result of $2.6 million invested in building an IT marketing platform to provide targeted solutions for our pawn customers, offset by a $2.2 million overall decrease in expenses associated with the wind down of certain Canadian operations.

32


Other Items
The following table reconciles our consolidated segment contribution discussed above to net loss attributable to EZCORP, Inc., including items that affect our consolidated financial results but are not allocated among segments:
 
Fiscal Year Ended September 30,
 
Percentage Change
 
2016
 
2015
 
 
 
 
 
 
 
 
(in thousands)
 
 
Segment contribution
$
96,154

 
$
44,908

 
*
Corporate expenses (income):
 
 
 
 

Administrative
68,101

 
72,986

 
(7)%
Depreciation and amortization
11,117

 
10,676

 
4%
Loss on sale or disposal of assets
269

 
1,407

 
(81)%
Restructuring
183

 
9,702

 
(98)%
Interest expense
16,243

 
16,310

 
Interest income
(49
)
 
(158
)
 
(69)%
Other (income) expense
(73
)
 
192

 
*
Income (loss) from continuing operations before income taxes
363

 
(66,207
)
 
*
Income tax expense (benefit)
9,361

 
(14,025
)
 
*
Loss from continuing operations, net of tax
(8,998
)
 
(52,182
)
 
(83)%
Loss from discontinued operations, net of tax
(79,432
)
 
(42,045
)
 
89%
Net loss
(88,430
)
 
(94,227
)
 
(6)%
Net loss attributable to noncontrolling interest
(7,686
)
 
(5,035
)
 
53%
Net loss attributable to EZCORP, Inc.
$
(80,744
)
 
$
(89,192
)
 
(9)%
*
Represents an increase or decrease in excess of 100% or not meaningful.
Net income from continuing operations before income taxes increased $66.6 million from the prior-year to income of $0.4 million in the current year primarily due to:
A $51.2 million increase in segment contributions of $20.2 million, $21.5 million and $9.5 million from the U.S. Pawn, Other International and Mexico Pawn segments, respectively;
A $9.5 million decrease in restructuring expense primarily due to restructuring actions initiated in prior fiscal years which have wound down; and
A $4.9 million decrease in administrative expense due primarily to a $3.6 million decrease in salaries and related costs, a $3.4 million decrease in litigation and related costs and $5.8 million in various other individually small reductions in corporate costs, including a reduction in restatement related costs, offset by a $8.0 million increase in short-term and long-term incentive programs. Administrative expenses include $4.2 million of fiscal 2015 restatement related expenses recorded in fiscal 2016; partially offset by
A $0.4 million increase in depreciation and amortization expense.
Income taxes increased $23.4 million, to a $9.4 million expense in the current year, primarily due to the $66.6 million decrease in loss from continuing operations before income taxes, in addition to various permanent differences.
In fiscal 2016, we sold our Grupo Finmart business. As a result, loss from discontinued operations, net of tax includes a gain of $34.2 million and a $2.1 million loss, which we expect to recoup through receipt of future note receivable payments, on assumption of existing Grupo Finmart debt, before taxes. The gain does not take into consideration the total costs associated with the transaction, which were $9.8 million, approximately $8.0 million of which were recorded under “Loss from discontinued operations, net of tax” in our consolidated statements of operations in fiscal 2016 and the remaining $1.8 million of which will be recorded under “Loss from discontinued operations, net of tax” in our consolidated statements of operations in future periods due to ongoing employee service requirements. See “Results of Operations — Grupo Finmart” above for additional information.

33


Fiscal 2015 vs. Fiscal 2014
Summary Financial Data
The following table presents selected summary consolidated financial data for our fiscal years ended September 30, 2015 and 2014. This table, as well as the discussion that follows, should be read with the consolidated financial statements and related notes included in “Part II, Item 8 — Financial Statements and Supplementary Data.”
 
Fiscal Year Ended September 30,
 
Change
 
2015
 
2014
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Pawn service charges
$
247,204

 
$
248,378

 
 
 
 
 
 
 
Merchandise sales
402,118

 
388,022

 
4%
Merchandise sales gross profit
134,329

 
139,385

 
(4)%
Gross margin on merchandise sales
33
%
 
36
%
 
(300) bps
 
 
 
 
 
 
Jewelry scrapping sales
57,973

 
96,241

 
(40)%
Jewelry sales gross profit
11,907

 
23,411

 
(49)%
Gross margin on jewelry scrapping sales
21
%
 
24
%
 
(300) bps