10-Q 1 a2017q310q_6302017.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or 
¨
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. 0-19424
ezcorplogoa16.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
 
 
 
 
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  x    No  ¨
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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
APPLICABLE ONLY TO CORPORATE ISSUERS:
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 an affiliate of the registrant. There is no trading market for the Class B Voting Common Stock.
As of July 26, 2017, 51,326,582 shares of the registrant’s Class A Non-voting Common Stock ("Class A 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.



EZCORP, Inc.
INDEX TO FORM 10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EZCORP, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
June 30,
2017
 
June 30,
2016
 
September 30,
2016
 
 
 
 
 
 
 
(Unaudited)
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
113,729

 
$
29,380

 
$
65,737

Pawn loans
168,262

 
160,269

 
167,329

Pawn service charges receivable, net
30,585

 
29,643

 
31,062

Inventory, net
135,053

 
130,368

 
140,224

Notes receivable, net
22,024

 

 
41,946

Current assets held for sale

 
157,554

 

Prepaid expenses and other current assets
31,993

 
26,577

 
35,845

Total current assets
501,646

 
533,791

 
482,143

Investment in unconsolidated affiliate
41,725

 
56,843

 
37,128

Property and equipment, net
53,022

 
61,201

 
58,455

Goodwill
254,469

 
254,273

 
253,976

Intangible assets, net
32,551

 
30,569

 
30,681

Non-current notes receivable, net
41,253

 

 
41,119

Deferred tax asset, net
36,506

 
34,170

 
35,303

Other assets, net
9,145

 
18,950

 
44,439

Total assets
$
970,317

 
$
989,797

 
$
983,244

 
 
 
 
 
 
Liabilities, temporary equity and equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable, accrued expenses and other current liabilities
$
64,830

 
$
63,242

 
$
84,285

Current liabilities held for sale

 
130,261

 

Customer layaway deposits
11,091

 
11,201

 
10,693

Total current liabilities
75,921

 
204,704

 
94,978

Long-term debt, net
260,414

 
211,421

 
283,611

Other long-term liabilities
9,680

 
9,548

 
10,450

Total liabilities
346,015

 
425,673

 
389,039

Commitments and contingencies (Note 7)


 


 


Temporary equity:
 
 
 
 
 
Redeemable noncontrolling interest

 
(2,378
)
 

Total temporary equity

 
(2,378
)
 

Stockholders’ equity:
 
 
 
 
 
Class A Non-voting Common Stock, par value $.01 per share; shares authorized: 100 million; issued and outstanding: 51,326,582 as of June 30, 2017; 51,019,332 as of June 30, 2016; and 51,129,144 as of September 30, 2016
513

 
510

 
511

Class B Voting Common Stock, convertible, par value $.01 per share; shares authorized: 3 million; issued and outstanding: 2,970,171
30

 
30

 
30

Additional paid-in capital
322,559

 
316,565

 
318,723

Retained earnings
340,256

 
316,577

 
319,808

Accumulated other comprehensive loss
(37,921
)
 
(66,974
)
 
(44,089
)
EZCORP, Inc. stockholders’ equity
625,437

 
566,708

 
594,983

Noncontrolling interest
(1,135
)
 
(206
)
 
(778
)
Total equity
624,302

 
566,502

 
594,205

Total liabilities, temporary equity and equity
$
970,317

 
$
989,797

 
$
983,244

See accompanying notes to unaudited interim condensed consolidated financial statements.

1


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Merchandise sales
$
97,921

 
$
94,014

 
$
319,672

 
$
311,941

Jewelry scrapping sales
17,641

 
11,230

 
37,658

 
33,631

Pawn service charges
65,878

 
62,473

 
201,983

 
193,197

Other revenues
2,193

 
2,433

 
6,572

 
7,151

Total revenues
183,633

 
170,150

 
565,885

 
545,920

Merchandise cost of goods sold
62,615

 
60,140

 
204,840

 
194,731

Jewelry scrapping cost of goods sold
15,010

 
9,110

 
32,195

 
28,271

Other cost of revenues
453

 
506

 
1,433

 
1,549

Net revenues
105,555

 
100,394

 
327,417

 
321,369

Operating expenses:
 
 
 
 
 
 
 
Operations
74,246

 
73,172

 
226,352

 
221,446

Administrative
14,095

 
14,481

 
41,305

 
50,085

Depreciation and amortization
5,843

 
6,274

 
18,246

 
20,422

Loss (gain) on sale or disposal of assets
17

 
(41
)
 
11

 
641

Restructuring

 

 

 
1,910

Total operating expenses
94,201

 
93,886

 
285,914

 
294,504

Operating income
11,354

 
6,508

 
41,503

 
26,865

Interest expense
5,654

 
3,936

 
16,847

 
12,014

Interest income
(2,053
)
 
(50
)
 
(6,909
)
 
(66
)
Equity in net income of unconsolidated affiliate
(1,047
)
 
(1,694
)
 
(3,768
)
 
(5,626
)
Other (income) expense
(99
)
 
500

 
(294
)
 
815

Income from continuing operations before income taxes
8,899

 
3,816

 
35,627

 
19,728

Income tax expense
3,432

 
1,038

 
13,663

 
11,224

Income from continuing operations, net of tax
5,467

 
2,778

 
21,964

 
8,504

Loss from discontinued operations, net of tax
(265
)
 
(9,133
)
 
(1,868
)
 
(99,068
)
Net income (loss)
5,202

 
(6,355
)
 
20,096

 
(90,564
)
Net loss attributable to noncontrolling interest
(58
)
 
(666
)
 
(352
)
 
(6,589
)
Net income (loss) attributable to EZCORP, Inc.
$
5,260

 
$
(5,689
)
 
$
20,448

 
$
(83,975
)
 
 
 
 
 
 
 
 
Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.10

 
$
0.05

 
$
0.41

 
$
0.16

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.10

 
$
0.05

 
$
0.41

 
$
0.16

 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
54,295

 
53,980

 
54,247

 
54,574

Weighted-average diluted shares outstanding
54,367

 
54,192

 
54,310

 
54,690

See accompanying notes to unaudited interim condensed consolidated financial statements.

2


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(in thousands)
Net income (loss)
$
5,202

 
$
(6,355
)
 
$
20,096

 
$
(90,564
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss), net of income tax (expense) benefit for our investment in unconsolidated affiliate of ($820) and ($290) for the three and nine months ended June 30, 2017 respectively, and ($845) and $969 for the three and nine months ended June 30, 2016, respectively
4,608

 
(685
)
 
6,163

 
(12,181
)
Amounts reclassified from accumulated other comprehensive loss

 

 

 
22

Other comprehensive income (loss), net of tax
4,608

 
(685
)
 
6,163

 
(12,159
)
Comprehensive income (loss)
9,810

 
(7,040
)
 
26,259

 
(102,723
)
Comprehensive loss attributable to noncontrolling interest
(73
)

(577
)
 
(357
)

(6,870
)
Comprehensive income (loss) attributable to EZCORP, Inc.
$
9,883

 
$
(6,463
)
 
$
26,616

 
$
(95,853
)
See accompanying notes to unaudited interim condensed consolidated financial statements.

3


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
EZCORP, Inc.
Stockholders’
Equity
 
Shares
 
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited, except balances as of September 30, 2015)
 
(in thousands)
Balances as of September 30, 2015
53,696

 
$
537

 
$
310,038

 
$
400,552

 
$
(55,096
)
 
$
656,031

Stock compensation

 

 
7,012

 

 

 
7,012

Release of restricted stock
294

 
3

 

 

 

 
3

Excess tax deficiency from stock compensation

 

 
(336
)
 

 

 
(336
)
Taxes paid related to net share settlement of equity awards

 

 
(149
)
 

 

 
(149
)
Amounts reclassified from accumulated other comprehensive loss

 

 

 

 
21

 
21

Foreign currency translation adjustment

 

 

 

 
(11,899
)
 
(11,899
)
Net loss attributable to EZCORP, Inc.

 

 

 
(83,975
)
 

 
(83,975
)
Balances as of June 30, 2016
53,990

 
$
540

 
$
316,565

 
$
316,577

 
$
(66,974
)
 
$
566,708

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
EZCORP, Inc.
Stockholders’
Equity
 
Shares
 
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited, except balances as of September 30, 2016)
 
(in thousands)
Balances as of September 30, 2016
54,099

 
$
541

 
$
318,723

 
$
319,808

 
$
(44,089
)
 
$
594,983

Stock compensation

 

 
5,126

 

 

 
5,126

Release of restricted stock
198

 
2

 

 

 

 
2

Taxes paid related to net share settlement of equity awards

 

 
(767
)
 

 

 
(767
)
Reclassification of Cash Convertible Notes Warrants to liabilities

 

 
(523
)
 

 

 
(523
)
Foreign currency translation adjustment

 

 

 

 
6,168

 
6,168

Net income attributable to EZCORP, Inc.

 

 

 
20,448

 

 
20,448

Balances as of June 30, 2017
54,297

 
$
543

 
$
322,559

 
$
340,256

 
$
(37,921
)
 
$
625,437

See accompanying notes to unaudited interim condensed consolidated financial statements.

4


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended June 30,
 
2017
 
2016
 
 
 
 
 
(Unaudited)
 
(in thousands)
Operating activities:
 
 
 
Net income (loss)
$
20,096

 
$
(90,564
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
Depreciation and amortization
18,246

 
21,432

Amortization of debt discount and deferred financing costs
8,595

 
8,864

Amortization of prepaid commissions

 
10,684

Accretion of notes receivable discount
(2,898
)
 

Consumer loan loss provision
1,434

 
24,157

Deferred income taxes
(871
)
 
(14,234
)
Impairment of goodwill

 
73,244

Other adjustments
(48
)
 
(2,002
)
Loss on sale or disposal of assets
11

 
641

Stock compensation
5,145

 
3,206

Income from investment in unconsolidated affiliate
(3,768
)
 
(5,626
)
Changes in operating assets and liabilities:
 
 
 
Service charges and fees receivable
604

 
8,363

Inventory
1,470

 
(1,349
)
Prepaid expenses, other current assets and other assets
1,261

 
(4,983
)
Accounts payable, accrued expenses and other liabilities
(29,464
)
 
(20,497
)
Customer layaway deposits
288

 
781

Income taxes receivable and payable, current, net of excess tax benefit from stock compensation
9,873

 
51,990

Payments of restructuring charges

 
(8,367
)
Dividends from unconsolidated affiliate

 
2,197

Net cash provided by operating activities
29,974

 
57,937

Investing activities:
 
 
 
Loans made
(472,676
)
 
(497,255
)
Loans repaid
288,833

 
324,478

Recovery of pawn loan principal through sale of forfeited collateral
187,819

 
173,710

Additions to property and equipment
(9,340
)
 
(6,470
)
Acquisitions, net of cash acquired

 
(6,000
)
Principal collections on notes receivable
23,336

 

Net cash provided by (used in) investing activities
17,972

 
(11,537
)
Financing activities:
 
 
 
Taxes paid related to net share settlement of equity awards
(767
)
 

Payout of deferred consideration

 
(14,875
)
Repurchase of redeemable common stock issued due to acquisitions

 
(11,750
)
Proceeds from settlement of forward currency contracts

 
3,557

Change in restricted cash

 
2,710

Proceeds from borrowings, net of issuance costs

 
16,442

Payments on borrowings

 
(63,994
)
Net cash used in financing activities
(767
)
 
(67,910
)
Effect of exchange rate changes on cash and cash equivalents
813

 
(6,506
)
Net increase (decrease) in cash and cash equivalents
47,992

 
(28,016
)
Cash and cash equivalents at beginning of period
65,737

 
59,124

Cash and cash equivalents at end of period
$
113,729

 
$
31,108

Non-cash investing and financing activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
182,682

 
$
179,394

Dividend reinvestment acquisition of additional ownership in unconsolidated affiliate
1,153

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

5


EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
June 30, 2017
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
When used in this report, the terms “we,” “us,” “our,” “EZCORP” and the “Company” mean EZCORP, Inc. and its consolidated subsidiaries, collectively.
We are a leading provider of pawn loans in the United States and Mexico. Pawn loans are non-recourse loans collateralized by tangible property. We also sell merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers, and operate a small number of financial services stores in Canada.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Our management has included all adjustments it considers necessary for a fair presentation. These adjustments are of a normal, recurring nature except for those related to discontinued operations described in Note 9. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended September 30, 2016. The balance sheet as of September 30, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
Our business is subject to seasonal variations, and operating results for the three and nine months ended June 30, 2017 and 2016 (the "current quarter" and "current nine-months" and "prior-year quarter" and "prior-year nine-months," respectively) are not necessarily indicative of the results of operations for the full fiscal year.
There have been no changes in significant accounting policies as described in our Annual Report on Form 10-K for the year ended September 30, 2016, other than those described below, and we have eliminated certain disclosures previously presented in our historical financial statements that we do not consider material to the overall financial statements presented herein.
Reclassifications to Prior Period Financial Statements
Certain reclassifications of prior period amounts have been made. These reclassifications, other than those pertaining to discontinued operations discussed in Note 9, the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs") discussed below and immaterial corrections for the nine months ended June 30, 2016 discussed in "Part II, Item 8 — Financial Statements and Supplementary Data — Note 2" of our Annual Report on Form 10-K for the year ended September 30, 2016, were made to conform to the current period presentation.
Use of Estimates and Assumptions
The preparation of these financial statements 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 ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, loan loss allowances, long-lived and intangible assets, share-based compensation, income taxes, contingencies and litigation. We base our estimates on historical experience, observable trends and various other assumptions that we believe are 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 materially from these estimates under different assumptions or conditions.
Recently Adopted Accounting Policies
We early adopted ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the quarter ended December 31, 2016. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, calculation of the dilutive impact of awards, classification of awards as either equity or liabilities and classification on the statement of cash

6


flows. We prospectively applied the requirement to present excess tax benefits as an operating activity on the statement of cash flows. Further, we continue to estimate the number of award forfeitures in recording costs for share-based awards. The financial impact of adopting ASU 2016-09 was a $0.4 million income tax benefit during the three and nine months ended June 30, 2017 for excess tax benefits on vested awards which previously would have been recorded to "Additional paid-in capital" prior to adoption of ASU 2016-09.
We further adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, ASU 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement and ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) during the quarter ended December 31, 2016. The impacts of adoption for each ASU are as follows:
We early adopted ASU 2015-11 during the quarter ended December 31, 2016 on a prospective basis, and such adoption did not have a material impact on our consolidated financial position, results of operations or cash flows. We now measure our inventories at the lower of cost or net realizable value, where net realizable value is "estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation." Inventory was previously required to be measured at the lower of cost or market value, where the measurement of market value had several potential outcomes.
We adopted ASU 2015-05 during the quarter ended December 31, 2016 on a prospective basis for all arrangements entered into or materially modified after adoption of the ASU, and such adoption did not have a material impact on our consolidated financial position, results of operations or cash flows. We now consider whether cloud computing arrangements include a software license. If a cloud computing arrangement includes a software license, then we account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, we account for the arrangement as a service contract.
We early adopted ASU 2014-15 during the quarter ended December 31, 2016. Upon adoption of the ASU, management has the responsibility to evaluate whether there is substantial doubt about our ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued) or to provide related footnote disclosures.
Recently Issued Accounting Pronouncements and Significant Accounting Policies
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments a consensus of the FASB Emerging Issues Task Force. This ASU clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Early adoption is permitted based upon guidance issued within the ASU and we plan to adopt the ASU in our fourth quarter of fiscal 2017. We do not anticipate that the adoption of ASU 2016-06 will have a material effect on our financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718). This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted based upon guidance issued within the ASU. A reporting entity should apply the amendment to awards modified after the adoption date on a prospective basis. We do not anticipate that the adoption of ASU 2017-09 will have a material effect on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test which previously required measurement of any goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new standard, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, without exceeding the total amount of goodwill allocated to that reporting unit. The provisions of this ASU are effective for fiscal years beginning after December 15, 2019, and any interim goodwill impairment tests within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. A reporting entity should apply the amendment on a prospective basis. We currently anticipate adoption of ASU 2017-04 in the fourth quarter of our fiscal 2017 with no anticipated material impact on our consolidated financial position, results of operations or cash flows.

7


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted based upon guidance issued within the ASU. Although we are in the process of evaluating the impact of adopting ASU 2016-02 on our consolidated financial position, results of operations and cash flows, we anticipate a material impact on our consolidated financial position. Additionally, we are evaluating the disclosure requirements under this ASU and are identifying and preparing to implement changes to our accounting policies, practices and controls to support adoption of the ASU and are evaluating upgrades to our third party software solution concurrently with our adoption. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption of the ASU which is effective for our fiscal 2020.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) to defer the effective date to December 15, 2017 for annual reporting periods beginning after that date, with early adoption permitted, but not before the original effective date of December 15, 2016. The core principle of ASU 2014-09, and the subsequently issued ASUs modifying or clarifying ASU 2014-09, is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance.
We are evaluating the impact that will result from adopting ASU 2014-09 on our consolidated financial position, results of operations, and cash flows. We currently anticipate adopting the ASU using the modified retrospective method. We do not believe the adoption will have an impact on our pawn service charge revenue recognition as we do not believe such charges are within the scope of the ASU. Further, we have not identified any impacts to our financial statements that we believe will be material as a result of the adoption of the ASU for other revenue streams, although we continue to evaluate the impact of adoption. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption of the ASU which is effective for our fiscal 2019.
Please refer to Note 1, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements included in "Part II, Item 8 — Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended September 30, 2016 for discussion of our significant accounting policies and other accounting pronouncements issued but not yet adopted.

8


NOTE 2: EARNINGS PER SHARE
Components of basic and diluted earnings per share and excluded antidilutive potential common shares are as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(in thousands, except per share amounts)
Net income from continuing operations attributable to EZCORP (A)
$
5,525

 
$
2,904

 
$
22,316

 
$
8,954

Loss from discontinued operations, net of tax (B)
(265
)
 
(8,593
)
 
(1,868
)
 
(92,929
)
Net income (loss) attributable to EZCORP (C)
$
5,260

 
$
(5,689
)
 
$
20,448

 
$
(83,975
)
 
 
 
 
 
 
 
 
Weighted-average outstanding shares of common stock (D)
54,295

 
53,980

 
54,247

 
54,574

Dilutive effect of restricted stock
72

 
212

 
63

 
116

Weighted-average common stock and common stock equivalents (E)
54,367


54,192


54,310


54,690

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to EZCORP:
 
 
 
 
 
 
 
Continuing operations (A / D)
$
0.10

 
$
0.05

 
$
0.41

 
$
0.16

Discontinued operations (B / D)

 
(0.16
)
 
(0.03
)
 
(1.70
)
Basic earnings (loss) per share (C / D)
$
0.10

 
$
(0.11
)
 
$
0.38

 
$
(1.54
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to EZCORP:
 
 
 
 
 
 
 
Continuing operations (A / E)
$
0.10

 
$
0.05

 
$
0.41

 
$
0.16

Discontinued operations (B / E)

 
(0.16
)
 
(0.03
)
 
(1.70
)
Diluted earnings (loss) per share (C / E)
$
0.10

 
$
(0.11
)
 
$
0.38

 
$
(1.54
)
 
 
 
 
 
 
 
 
Potential common shares excluded from the calculation of diluted earnings (loss) per share above:
 
 
 
 
 
 
 
Restricted stock*
2,418

 
2,109

 
2,435

 
1,259

Warrants**
12,138

 
14,317

 
12,138

 
14,317

Total potential common shares excluded
14,556

 
16,426

 
14,573

 
15,576

*
Includes antidilutive share-based awards as well as performance-based and market conditioned share-based awards that are contingently issuable, but for which the condition for issuance has not been met as of the end of the reporting period.
**
See Note 5 for discussion of the terms and conditions of these potential common shares and Note 10 for settlement of a portion of the Cash Convertible Notes Warrants subsequent to June 30, 2017.

9


NOTE 3: STRATEGIC INVESTMENTS
As of June 30, 2017, we owned 156,552,484 shares, or approximately 32%, of our unconsolidated affiliate Cash Converters International Limited ("Cash Converters International"). The following tables present summary financial information for Cash Converters International’s most recently reported results as of June 30, 2017 after translation to U.S. dollars:
 
December 31,
 
2016
 
2015
 
 
 
 
 
(in thousands)
Current assets
$
158,235

 
$
176,105

Non-current assets
141,218

 
143,466

Total assets
$
299,453

 
$
319,571

 
 
 
 
Current liabilities
$
70,468

 
$
68,857

Non-current liabilities
48,181

 
48,263

Shareholders’ equity:
 
 
 
Equity attributable to owners of the parent
$
180,803

 
$
202,450

Noncontrolling interest
1

 
1

Total liabilities and shareholders’ equity
$
299,453

 
$
319,571

 
Half Year Ended December 31,
 
2016
 
2015
 
 
 
 
 
(in thousands)
Gross revenues*
$
108,161

 
$
110,219

Gross profit*
74,343

 
81,139

Net profit
8,633

 
11,483

*
Cash Converters International announced during its fiscal 2016 that certain of its United Kingdom operations would be discontinued, including a historical recasting of such operations as discontinued operations. We have recast the above information pertaining to the half year ended December 31, 2015 to reflect this historical recasting.
During the nine months ended June 30, 2017, the fair value of our investment in Cash Converters International declined below its carrying value. We considered the guidance in FASB Accounting Standards Codification ("ASC") 320-10-S99-1 in evaluating whether the impairment was other-than-temporary and whether to measure and recognize any other-than-temporary impairment. We noted the primary factors in determining that the decline in fair value was not other-than-temporary were the length of time and the extent to which the market value has been less than cost as well as our intent and ability to hold our investment in Cash Converters International for a period of time sufficient to allow for any anticipated recovery in market value. We do not believe the decline in fair value is other-than-temporary.
We continue to monitor the fair value of our investment in Cash Converters International for other-than-temporary impairments in future reporting periods and may record an impairment charge should the fair value of our investment in Cash Converters International remain below its carrying value for an extended period of time. We have previously recorded impairments on our investment in Cash Converters International in fiscal 2016 and 2015. See Note 4 for the fair value and carrying value of our investment in Cash Converters International.

10


NOTE 4: FAIR VALUE MEASUREMENTS
In accordance with ASC 820-10, our assets and liabilities discussed below are classified in one of the following three categories based on the inputs used to develop their fair values: Level 1 — Quoted market prices in active markets for identical assets or liabilities; Level 2 — Other observable market-based inputs or unobservable inputs that are corroborated by market data; and Level 3 — Unobservable inputs that are not corroborated by market data.
Recurring Fair Value Measurements
The tables below present our financial assets (liabilities) that were carried and measured at fair value on a recurring basis, exclusive of amounts attributable to Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart"), which we divested in September 2016:
Financial Assets (Liabilities)
 
Balance Sheet Location
 
June 30, 2017
 
June 30, 2016
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Guarantee asset — Level 3
 
Prepaid expenses and other current assets
 
$
298

 
$

 
$
1,209

Guarantee liability — Level 3
 
Accounts payable, accrued expenses and other current liabilities
 
(310
)
 

 
(1,258
)
Cash Convertible Notes Hedges — Level 2
 
Other assets, net
 
5,900

 
16,200

 
37,692

Cash Convertible Notes Embedded Derivative — Level 2
 
Long-term debt, net
 
(5,900
)
 
(16,200
)
 
(37,692
)
Cash Convertible Notes Warrants — Level 3
 
Accounts payable, accrued expenses and other current liabilities
 
(523
)
 

 

We initially measured the guarantee asset and liability at fair value and are subsequently amortizing the guarantees based upon the principal payments received on the associated notes receivable, which approximates the fair value of the guarantees on a recurring basis. See discussion of settlement subsequent to June 30, 2017 in Note 10.
We measured the fair value of the Cash Convertible Notes Hedges and the Cash Convertible Notes Embedded Derivative using the Black-Scholes-Merton model based on observable Level 1 and Level 2 inputs such as conversion price of underlying shares, current share price, implied volatility, risk free interest rate and other factors. As of June 30, 2017 the volatility input was revised downward to 44% based on observed market inputs. As of June 30, 2016 and September 30, 2016 these inputs included volatilities of 53% to 55%.
We executed agreements dated as of June 29, 2017 to cash settle a portion of the Cash Convertible Notes Hedges and Cash Convertible Notes Warrants pertaining to the partial repayment of the Cash Convertible Notes in July 2017. Based on the negotiated cash settlement amount with our counterparties in July 2017, we realized a volatility of approximately 32% to 34%, reducing the amount received on the amounts recorded above as of June 30, 2017. As of June 30, 2017, we reclassified the portion of Cash Convertible Notes Warrants which were cash settled in July 2017 from equity to a liability at its current fair value, including inputs for current share price and trading volume. See Note 5 and Note 10 for additional discussion.
There were no transfers in or out of Level 1 or Level 2 for financial assets or liabilities measured at fair value on a recurring basis during the periods presented.

11


Financial Assets and Liabilities Not Measured at Fair Value
The tables below present our financial assets and liabilities that were not measured at fair value (including those discussed below the following tables) on a recurring basis, exclusive of amounts attributable to Grupo Finmart:
 
 
Carrying Value
 
Estimated Fair Value
 
 
June 30, 2017
 
June 30, 2017
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable, net
 
$
63,277

 
$
65,570

 
$

 
$

 
$
65,570

Investment in unconsolidated affiliate
 
41,725

 
37,306

 
37,306

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Cash Convertible Notes
 
$
206,279

 
$
218,500

 
$

 
$
218,500

 
$

Term Loan Facility
 
48,235

 
48,159

 

 

 
48,159

 
 
Carrying Value
 
Estimated Fair Value
 
 
June 30, 2016
 
June 30, 2016
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Investment in unconsolidated affiliate
 
$
56,843

 
$
49,149

 
$
49,149

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Cash Convertible Notes
 
$
195,221

 
$
190,762

 
$

 
$
190,762

 
$

 
 
Carrying Value
 
Estimated Fair Value
 
 
September 30, 2016
 
September 30, 2016
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable, net
 
$
83,065

 
$
83,065

 
$

 
$

 
$
83,065

Investment in unconsolidated affiliate
 
37,128

 
37,128

 
37,128

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Cash Convertible Notes
 
$
197,954

 
$
227,332

 
$

 
$
227,332

 
$

Term Loan Facility
 
47,965

 
48,688

 

 

 
48,688

Based on the short-term nature of cash and cash equivalents, pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable, we estimate that their carrying value approximates fair value. We consider our cash and cash equivalents to be measured using Level 1 inputs and our pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable to be measured using Level 3 inputs. Significant increases or decreases in the underlying assumptions used to value pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable could significantly increase or decrease these fair value estimates.
We measured the fair value of the notes receivable under a discounted cash flow approach considering the synthetic credit ratings for Grupo Finmart and Alpha Holding, S.A. de C.V. (“AlphaCredit”), as applicable and as determined with external consultation, with discount rates ranging primarily from 8% to 15%. Certain of the significant inputs used for the valuation were not observable in the market. Significant increases or decreases in the underlying assumptions used to value the notes receivable could significantly increase or decrease these fair value estimates.
The inputs used to generate the fair value of the investment in unconsolidated affiliate Cash Converters International were considered Level 1 inputs. These inputs are comprised of (a) the quoted stock price on the Australian Stock Exchange multiplied by (b) the number of shares we owned multiplied by (c) the applicable foreign currency exchange rate as of the end of our reporting period. We included no control premium for owning a large percentage of outstanding shares.

12


We measured the fair value of the Cash Convertible Notes using quoted price inputs from Bloomberg. The Cash Convertible Notes are not actively traded and thus the price inputs represent a Level 2 measurement. As the Cash Convertible Notes are not actively traded, the quoted price inputs obtained from Bloomberg are highly variable from day to day and thus the fair value estimates disclosed above could significantly increase or decrease.
We measured the fair value of the Term Loan Facility under a discounted cash flow approach considering our synthetic credit rating, including inputs that are not observable in the market, with discount rates up to approximately 9%. A 50 basis point increase or decrease in the calculated credit spread based on our underlying synthetic credit rating would increase or decrease the fair value of our Term Loan Facility by approximately $1.2 million. The fair value of the Term Loan Facility approximated its carrying value, inclusive of issuance costs and exclusive of deferred financing costs, as of September 30, 2016. See Note 5 and Note 10 for additional discussion.
Notes Receivable from Grupo Finmart Divestiture
Subsequent to the sale of Grupo Finmart in September 2016, we determined that we retained a variable interest in Grupo Finmart, including notes receivable and a guarantee liability of the future cash outflows of certain Grupo Finmart foreign exchange forward contracts with a backup guarantee provided by AlphaCredit for any payments we make under the guarantee. We determined that we are not the primary beneficiary of Grupo Finmart subsequent to its disposition as we lack a controlling financial interest in Grupo Finmart. As of June 30, 2017, we had a total gross outstanding balance on our notes receivable of $67.1 million. We have collected $8.2 million and $23.3 million, respectively, in principal on these notes receivable during the three and nine months ended June 30, 2017.
The following table presents the carrying amount and classification of the assets and liabilities pertaining to our variable interest compared to the maximum exposure to loss for each asset and liability:
 
 
 
 
June 30, 2017
 
September 30, 2016
Instrument
 
Balance Sheet Location
 
Asset (Liability) Recorded in Consolidated Balance Sheet
 
Maximum Exposure to Loss
 
Asset (Liability) Recorded in Consolidated Balance Sheet
 
Maximum Exposure to Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes receivable
 
Notes receivable, net (including discount of $3.8 million and $6.7 million as of June 30, 2017 and September 30, 2016, respectively)
 
$
63,277

 
$
63,277

 
$
83,065

 
$
83,065

Guarantee asset
 
Prepaid expenses and other current assets
 
298

 

 
1,209

 

Guarantee liability*
 
Accounts payable, accrued expenses and other current liabilities
 
(310
)
 

 
(1,258
)
 

*
Maximum exposure to loss under the guarantee liability was $6.2 million and $25.3 million as of June 30, 2017 and September 30, 2016, respectively. However such amount is included within the maximum exposure to loss for the notes receivable above, as the guarantee liability is a guarantee by us of Grupo Finmart’s repayment of our notes receivable owed by Grupo Finmart. See discussion of repayment subsequent to June 30, 2017 in Note 10.

13


NOTE 5: LONG-TERM DEBT
The following tables present our long-term debt instruments outstanding as well as future principal payments due, exclusive of amounts attributable to Grupo Finmart:
 
June 30, 2017
 
June 30, 2016
 
September 30, 2016
 
Gross Amount
 
Debt Discount and Issuance Costs
 
Carrying Amount
 
Gross Amount
 
Debt Discount and Issuance Costs
 
Carrying Amount
 
Gross Amount
 
Debt Discount and Issuance Costs
 
Carrying Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2.125% Cash convertible senior notes due 2019
$
230,000

 
$
(23,721
)
 
$
206,279

 
$
230,000

 
$
(34,779
)
 
$
195,221

 
$
230,000

 
$
(32,046
)
 
$
197,954

Cash convertible senior notes due 2019 embedded derivative
5,900

 

 
5,900

 
16,200

 

 
16,200

 
37,692

 

 
37,692

Term loan facility
50,000

 
(1,765
)
 
48,235

 

 

 

 
50,000

 
(2,035
)
 
47,965

 
$
285,900

 
$
(25,486
)
 
$
260,414

 
$
246,200

 
$
(34,779
)
 
$
211,421

 
$
317,692

 
$
(34,081
)
 
$
283,611

 
Principal Payment Schedule
 
Total
 
Less Than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than 5 Years
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2.125% Cash convertible senior notes due 2019 (a) (b)
$
230,000

 
$

 
$
230,000

 
$

 
$

Term loan facility (b)
50,000

 

 

 

 
50,000

 
$
280,000

 
$

 
$
230,000

 
$

 
$
50,000

(a)
Excludes the potential impact of the embedded derivative.
(b)
See discussion of repayments subsequent to June 30, 2017 in Note 10.
Term Loan Facility up to $100 Million
On September 12, 2016 (the “Closing Date”), EZCORP, Inc. (as borrower) and certain of its subsidiaries (as guarantors) entered into a “Financing Agreement” with certain lenders (the “Lenders”) and Fortress Credit Co LLC (as collateral and administrative agent for the Lenders). The Financing Agreement provides for a senior secured credit facility in an aggregate principal amount of $100 million, subject to various terms and conditions contained in the Financing Agreement. The credit facility (“Term Loan Facility”) consists of an Initial Term Loan of $50 million that was drawn on the Closing Date and a Delayed Draw Term Loan of $50 million.
Borrowings under the facility bear interest at an annual rate initially equal to the London Interbank Offered Rate (“LIBOR”) plus 7.5% or, at our election, a “Reference Rate” plus 6.5%. The LIBOR is subject to a floor of 1% and the Reference Rate is subject to a floor of 3%. We pay a monthly fee of 2.75% per annum on the average daily unused portion of the Delayed Draw Term Loan facility and a quarterly loan servicing fee of $15,000.
The Term Loan Facility was repaid in full and terminated subsequent to June 30, 2017. See Note 10.
2.125% Cash Convertible Senior Notes Due 2019
In June 2014 ("Original Issuance Date"), we issued $200 million aggregate principal amount of 2.125% Cash Convertible Notes, with an additional $30 million principal amount of Cash Convertible Notes issued in July 2014. All of the Cash Convertible Notes were issued pursuant to an indenture dated June 23, 2014 (the "Indenture") by and between EZCORP and Wells Fargo Bank, National Association, as the trustee. The Cash Convertible Notes were issued in a private offering and resold under Rule 144A under the Securities Act of 1933. The Cash Convertible Notes pay interest semi-annually in arrears at a rate of 2.125% per annum on June 15 and December 15 of each year and mature on June 15, 2019 (the "Maturity Date").
Prior to December 15, 2018, the Cash Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time prior to the close of business on the second scheduled trading day immediately preceding the Maturity Date. At maturity, the holders of the Cash Convertible Notes will be entitled to receive

14


cash equal to the principal amount of the Cash Convertible Notes plus unpaid accrued interest. See discussion of partial repayment subsequent to June 30, 2017 in Note 10.
Cash Convertible Notes Embedded Derivative
We account for the cash conversion feature of the Cash Convertible Notes as a separate derivative instrument (the “Cash Convertible Notes Embedded Derivative”). The Cash Convertible Notes are convertible into cash, subject to satisfaction of certain conditions and during the periods described below, based on an initial "Conversion Rate" of 62.2471 shares of Class A Common Stock per $1,000 principal amount of Cash Convertible Notes (equivalent to an initial "Conversion Price" of approximately $16.065 per share of our Class A Common Stock). Upon conversion of a note, we will pay cash based on a daily conversion value calculated on a proportionate basis for each trading day in the applicable 80 trading day observation period as described in the Indenture. The Conversion Rate will not be adjusted for any accrued and unpaid interest.
Holders may surrender their Cash Convertible Notes for conversion into cash prior to December 15, 2018 only under the following circumstances (the “Early Conversion Conditions”): (1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2014 (and only during such fiscal quarter), if the last reported sale price of our Class A Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price, as defined in the Indenture, per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class A Common Stock and the conversion rate on such trading day; or (3) upon the occurrence of specified corporate events, as defined in the Indenture. On or after December 15, 2018 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, holders may convert their notes into cash at any time, regardless of the foregoing circumstances.
If a holder elects to convert its Cash Convertible Notes in connection with certain make-whole fundamental changes, as that term is defined in the Indenture, that occur prior to the Maturity Date, we will in certain circumstances increase the Conversion Rate for Cash Convertible Notes converted in connection with such make-whole fundamental changes by a specified number of shares of Class A Common Stock. In addition, the Conversion Rate is subject to customary anti-dilution adjustments (for example, certain dividend distributions or tender or exchange offer of our Class A Common Stock).
Upon the occurrence of a fundamental change, as defined in the Indenture, holders may require us to repurchase for cash all or any portion of the then outstanding Cash Convertible Notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest.
As of June 30, 2017, no triggering events occurred for of the note holders to elect to convert their Cash Convertible Notes. Subsequent to June 30, 2017, we repurchased and retired $35.0 million aggregate principal amount of Cash Convertible Notes, leaving $195.0 million aggregate principal amount outstanding. See Note 10.
Cash Convertible Notes Hedges
In connection with the issuance of the Cash Convertible Notes, we purchased cash-settled call options (the “Cash Convertible Notes Hedges”) in privately negotiated transactions with certain of the initial purchasers or their affiliates (in this capacity, the “Option Counterparties”). The Cash Convertible Notes Hedges provide us with the option to acquire, on a net settlement basis, approximately 14.3 million shares of our Class A Common Stock at a strike price of $16.065, which is equal to the number of shares of our Class A Common Stock that notionally underlie the Cash Convertible Notes and corresponds to the Conversion Price of the Cash Convertible Notes. The Cash Convertible Notes Hedges have an expiration date that is the same as the Maturity Date of the Cash Convertible Notes, subject to earlier exercise. The Cash Convertible Notes Hedges have customary anti-dilution provisions similar to the Cash Convertible Notes. If we exercise the Cash Convertible Notes Hedges, the aggregate amount of cash we will receive from the Option Counterparties will cover the aggregate amount of cash that we would be required to pay to the holders of the converted Cash Convertible Notes, less the principal amount thereof. As of June 30, 2017, we have not purchased any shares under the Cash Convertible Notes Hedges.
The aggregate cost of the Cash Convertible Notes Hedges was $46.5 million (or $21.3 million net of the total proceeds from the Warrants sold, as discussed below). The Cash Convertible Notes Hedges are accounted for as a derivative asset and are recorded in the condensed consolidated balance sheets at their estimated fair value. The Cash Convertible Notes Embedded Derivative liability and the Cash Convertible Notes Hedges asset will be adjusted to fair value each reporting period and unrealized gains and losses will be reflected in the condensed consolidated statements of operations. The Cash Convertible Notes Embedded Derivative and the Cash Convertible Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments are expected to offset and not have a net impact on the condensed consolidated

15


statements of operations. See Note 4 for discussion of fair value of the Cash Convertible Notes Embedded Derivative liability and the Cash Convertible Notes Hedges asset.
Subsequent to June 30, 2017, in connection with our repurchase and retirement of $35.0 million aggregate principal amount of Cash Convertible Notes, we settled and terminated the portion of the Cash Convertible Notes Hedges associated with the retired Cash Convertible Notes principal. See Note 10.
Cash Convertible Notes Warrants
In connection with the issuance of the Cash Convertible Notes, we also sold net-share-settled warrants (the “Cash Convertible Notes Warrants”) in privately negotiated transactions with the Option Counterparties for the purchase of up to approximately 14.3 million shares of our Class A Common Stock at a strike price of $20.83 per share, for total proceeds of $25.1 million, net of issuance costs, which was recorded as an increase in stockholders' equity. The Cash Convertible Notes Warrants have customary anti-dilution provisions similar to the Cash Convertible Notes. As a result of the Cash Convertible Notes Warrants, we will experience dilution to our diluted earnings per share if our average closing stock price exceeds $20.83 for any fiscal quarter. The Cash Convertible Notes Warrants expire on various dates from September 2019 through February 2020 and must be settled in net shares of our Class A Common Stock. Therefore, upon expiration of the Cash Convertible Notes Warrants, we will issue shares of Class A Common Stock to the purchasers of the Cash Convertible Notes Warrants that represent the value by which the price of the Class A Common Stock exceeds the strike price stipulated within the particular warrant agreement. As of June 30, 2017, there were 12.1 million Cash Convertible Notes Warrants outstanding. Subsequent to June 30, 2017, in connection with our repurchase and retirement of $35.0 million aggregate principal amount of Cash Convertible Notes, we settled and terminated the portion of the Cash Convertible Notes Warrants associated with the retired Cash Convertible Notes principal. See Note 10.
NOTE 6: STOCK COMPENSATION
On May 1, 2010 our Board of Directors approved the adoption of the EZCORP, Inc. 2010 Long-Term Incentive Plan (the “2010 Plan”). As of September 30, 2016, the 2010 Plan permitted grants of options, restricted stock awards and stock appreciation rights covering up to 3,485,649 shares of our Class A Common Stock. In December 2016, the Board of Directors and the voting stockholder approved the addition of 500,000 shares to the 2010 Plan.
In November and December 2016, we granted 919,898 restricted stock unit awards to employees and 72,500 restricted stock awards to non-employee directors with a grant date fair value of primarily $9.60 per share. Our long-term incentive awards are generally granted based on our share price as of October 1 each year, which was $11.06 for these fiscal 2017 awards. The awards granted to employees vest on September 30, 2019 subject to the achievement of certain performance targets. As of June 30, 2017, we considered the achievement of these performance targets probable. The awards granted to non-employee directors vest over two years, 50% on September 30, 2017 and 50% on September 30, 2018 and are subject only to service conditions.
NOTE 7: CONTINGENCIES
We are involved in various claims, suits, investigations and legal proceedings, including those described below. We are unable to determine the ultimate outcome of any current litigation or regulatory actions. An unfavorable outcome could have a material adverse effect on our financial condition, results of operations or liquidity. Except as noted below, we have not recorded a liability for any of these matters as of June 30, 2017 because we do not believe at this time that any loss is probable or that the amount of any probable loss can be reasonably estimated. The following is a description of significant proceedings.
Shareholder derivative litigation — On July 28, 2014, Lawrence Treppel, a purported holder of Class A Common Stock, filed a derivative action in the Court of Chancery of the State of Delaware styled Treppel v. Cohen, et al. (C.A. No. 9962-VCP). The complaint, as originally filed and as amended on September 23, 2014, names as defendants Phillip E. Cohen, the beneficial owner of all of our outstanding Class B Voting Common Stock; several current and former members of our Board of Directors (Joseph J. Beal, Sterling B. Brinkley, John Farrell, Pablo Lagos Espinosa, William C. Love, Thomas C. Roberts and Paul E. Rothamel); three entities controlled by Mr. Cohen (MS Pawn Limited Partnership, the record holder of our Class B Voting Common Stock; MS Pawn Corporation, the general partner of MS Pawn Limited Partnership; and Madison Park LLC); and EZCORP, Inc., as nominal defendant. The amended complaint asserts the following claims:
Claims against the current and former Board members for breach of fiduciary duties and waste of corporate assets in connection with the Board’s decision to enter into advisory services agreements with Madison Park from October 2004 to June 2014 (Counts I and II, respectively);

16


Claims against Mr. Cohen and MS Pawn Limited Partnership for aiding and abetting the breaches of fiduciary duties relating to the advisory services agreements with Madison Park (Count III); and
Claims against Mr. Cohen and Madison Park for unjust enrichment for payments under the advisory services agreements (Count IV).
The plaintiff seeks (a) recovery for the Company in the amount of the damages the Company has sustained as a result of the alleged breach of fiduciary duties, waste of corporate assets and aiding and abetting, (b) disgorgement by Mr. Cohen and Madison Park of the benefits they received as a result of the related party transactions and (c) reimbursement of costs and expenses, including reasonable attorney’s fees.
On November 13, 2014, pursuant to the parties’ stipulation, the Court dismissed the action as to Mr. Brinkley, Mr. Rothamel and Mr. Lagos.
The remaining defendants filed motions to dismiss, and a hearing on those motions was held before the Court on September 8, 2015. Prior to that hearing, the plaintiff proposed a dismissal without prejudice for the claims against Mr. Beal, Mr. Love and Mr. Farrell. Those defendants continued to seek a dismissal with prejudice that would bind all potential plaintiffs. On January 15, 2016, the Court issued an opinion dismissing the action as to Mr. Beal, Mr. Love and Mr. Farrell with prejudice only as to the plaintiff.
On January 25, 2016, the Court issued a separate opinion granting in part and denying in part the motions to dismiss filed by the remaining defendants. Specifically, the Court granted the motion to dismiss Count IV (unjust enrichment) for failure to state a claim. The Court also dismissed Count III (aiding and abetting) as to Mr. Cohen, but interpreted Count I (breach of fiduciary duty) to state a claim against Mr. Cohen and MS Pawn, as well as Mr. Roberts. The Court otherwise denied the motions to dismiss, including the motion to dismiss Count III (aiding and abetting) against MS Pawn.
On February 4, 2016, the remaining defendants filed an Application for Certification of Interlocutory Appeal, which the plaintiff opposed on February 15, 2016, and the Court set a hearing on the application. On February 22, 2016, the Court denied the Application for Certification of Interlocutory Appeal and provided the plaintiff the opportunity to amend its complaint to add a fiduciary-duty claim as to Mr. Cohen and Madison Park, staying proceedings pending a ruling from the Delaware Supreme Court. After the Application for Certification of Interlocutory Appeal was denied, Mr. Roberts, MS Pawn Corporation and MS Pawn Limited Partnership filed notices of appeal from the interlocutory opinion and order denying the motions to dismiss. On March 10, 2016, the Delaware Supreme Court denied those petitions for an interlocutory appeal.
On March 4, 2016, the plaintiff filed a Second Amended Derivative Complaint against Mr. Roberts, Mr. Cohen, Madison Park, MS Pawn Corporation and MS Pawn Limited Partnership with EZCORP, Inc., as nominal defendant. The case is now in the discovery stage.
We intend to continue to defend vigorously against the claims asserted in the lawsuit. Although the lawsuit does not seek relief against the Company, we have certain indemnification obligations to the other defendants (including Madison Park and Mr. Cohen), which obligations include the payment of attorney's fees in advance of the outcome. We cannot predict the outcome of this lawsuit, or the amount of time and expense that will be required to resolve it.
Federal securities litigation (SDNY) — On August 22, 2014, Jason Close, a purported holder of Class A Common Stock, for himself and on behalf of other similarly situated holders of Class A Common Stock, filed a lawsuit in the United States District Court for the Southern District of New York styled Close v. EZCORP, Inc., et al. (Case No. 1:14-cv-06834-ALC). That lawsuit named as defendants EZCORP, Inc., Paul. E. Rothamel (the Company's former Chief Executive Officer) and Mark Kuchenrither (the Company's former Chief Financial Officer). That lawsuit was consolidated with a similar lawsuit filed in the same court on October 17, 2014 by the Automotive Machinists Pension Plan and styled Automotive Machinists Pension Plan v. EZCORP, Inc., et al. (Case No. 1:14-cv-8349-ALC). On November 18, 2014, the court consolidated the two lawsuits under the caption In Re EZCORP, Inc. Securities Litigation (Case No. 1:14-cv-06834-ALC).
The Consolidated Amended Class Action Complaint asserted certain violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder. On March 31, 2016, the Court, in response to the defendants' motions to dismiss, dismissed certain of the claims, but other claims survived the motions to dismiss.
On November 23, 2016, the parties agreed to a mediated settlement of all remaining claims. The settlement provides for the payment of $5.9 million by the defendants, which was covered by applicable directors’ and officers’ liability insurance. Following a Settlement Hearing on April 25, 2017, the Court entered an order to approve the settlement and dismiss the case.
Federal Securities Litigation (WDT) — On July 20, 2015, Wu Winfred Huang, a purported holder of Class A Common Stock, for himself and on behalf of other similarly situated holders of Class A Common Stock, filed a lawsuit in the United States

17


District Court for the Western District of Texas styled Huang v. EZCORP, Inc., et al. (Case No. 1:15-cv-00608-SS). The complaint names as defendants EZCORP, Inc., Stuart I. Grimshaw (our chief executive officer) and Mark E. Kuchenrither (our former chief financial officer) and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The original complaint related to the Company’s announcement on July 17, 2015 that it will restate the financial statements for fiscal 2014 and the first quarter of fiscal 2015, and alleged generally that the Company issued materially false or misleading statements concerning the Company, its finances, business operations and prospects and that the Company misrepresented the financial performance of the Grupo Finmart business.
On August 14, 2015, a substantially identical lawsuit, styled Rooney v. EZCORP, Inc., et al. (Case No. 1:15-cv-00700-SS) was also filed in the United States District Court for the Western District of Texas. On September 28, 2015, the plaintiffs in these two lawsuits filed an agreed stipulation to be appointed co-lead plaintiffs and agreed that their two actions should be consolidated. On November 3, 2015, the Court entered an order consolidating the two actions under the caption In re EZCORP, Inc. Securities Litigation (Master File No. 1:15-cv-00608-SS), and appointed the two plaintiffs as co-lead plaintiffs, with their respective counsel appointed as co-lead counsel.
On January 11, 2016, the plaintiffs filed an Amended Class Action Complaint (the "Amended Complaint"). In the Amended Complaint, the plaintiffs seek to represent a class of purchasers of our Class A Common Stock between November 6, 2012 and October 20, 2015. The Amended Complaint asserts that the Company and Mr. Kuchenrither violated Section 10(b) of the Securities Exchange Act and Rule 10b-5, issued materially false or misleading statements throughout the proposed class period concerning the Company and its internal controls, specifically regarding the financial performance of Grupo Finmart. The plaintiffs also allege that Mr. Kuchenrither, as a controlling person of the Company, violated Section 20(a) of the Securities Exchange Act. The Amended Complaint does not assert any claims against Mr. Grimshaw. On February 25, 2016, defendants filed a motion to dismiss the lawsuit. The plaintiff filed an opposition to the motion to dismiss on April 11, 2016, and the defendants filed their reply on May 11, 2016. The Court held a hearing on the motion to dismiss on June 22, 2016.
On October 18, 2016, the Court granted the defendants’ motion to dismiss and dismissed the Amended Complaint without prejudice. The Court gave the plaintiffs 20 days (until November 7, 2016) to file a further amended complaint. On November 4, 2016, the plaintiffs filed a Second Amended Consolidated Class Action Complaint (“Second Amended Complaint”). The Second Amended Complaint raises the same claims dismissed by the Court on October 18, 2016, except plaintiffs now seek to represent a class of purchasers of EZCORP’s Class A Common Stock between November 7, 2013 and October 20, 2015 (instead of between November 6, 2012 and October 20, 2015). On December 5, 2016, defendants filed a motion to dismiss the Second Amended Compliant. The plaintiffs filed their opposition to the motion to dismiss on January 6, 2017, and the defendants filed their reply brief on January 20, 2017.
On May 8, 2017, the Court granted the defendants’ motion to dismiss with regard to claims related to accounting errors relating to Grupo Finmart’s bad debt reserve calculations for “nonperforming” loans, but denied the motion to dismiss with regard to claims relating to accounting errors related to certain sales of loan portfolios to third parties. The case is now in the discovery stage. We cannot predict the outcome of the litigation, but we intend to defend vigorously against all allegations and claims.
SEC Investigation — On October 23, 2014, we received a notice from the Fort Worth Regional Office of the SEC that it was conducting an investigation into certain matters involving EZCORP, Inc. The notice was accompanied by a subpoena, directing us to produce a variety of documents, including all minutes and materials related to Board of Directors and Board committee meetings since January 1, 2009 and all documents and communications relating to our historical advisory services relationship with Madison Park (the business advisory firm owned by Mr. Cohen) and LPG Limited (a business advisory firm owned by Lachlan P. Given, our current Executive Chairman of the Board). The SEC has also issued subpoenas to current and former members of our Board of Directors requesting production of similar documents, as well as to certain third parties, and has conducted interviews with certain individuals. We continue to cooperate fully with the SEC in its investigation.

18


NOTE 8: SEGMENT INFORMATION
We currently report our segments as follows: U.S. Pawn — all pawn activities in the United States, Mexico Pawn — all pawn activities in Mexico and other parts of Latin America and Other International — primarily our equity interest in the net income of Cash Converters International and consumer finance activities in Canada. There are no inter-segment revenues, and the amounts below were determined in accordance with the same accounting principles used in our condensed consolidated financial statements.
 
Three Months Ended June 30, 2017
  
U.S. Pawn
 
Mexico Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
82,714

 
$
15,207

 
$

 
$
97,921

 
$

 
$
97,921

Jewelry scrapping sales
17,257

 
384

 

 
17,641

 

 
17,641

Pawn service charges
56,774

 
9,104

 

 
65,878

 

 
65,878

Other revenues
50

 
179

 
1,964

 
2,193

 

 
2,193

Total revenues
156,795

 
24,874

 
1,964

 
183,633

 

 
183,633

Merchandise cost of goods sold
52,488

 
10,127

 

 
62,615

 

 
62,615

Jewelry scrapping cost of goods sold
14,674

 
336

 

 
15,010

 

 
15,010

Other cost of revenues

 

 
453

 
453

 

 
453

Net revenues
89,633

 
14,411

 
1,511

 
105,555

 

 
105,555

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
63,593

 
8,898

 
1,755

 
74,246

 

 
74,246

Administrative

 

 

 

 
14,095

 
14,095

Depreciation and amortization
2,210

 
619

 
44

 
2,873

 
2,970

 
5,843

Loss (gain) on sale or disposal of assets
20

 
(3
)
 

 
17

 

 
17

Interest expense

 
2

 

 
2

 
5,652

 
5,654

Interest income

 
(480
)
 

 
(480
)
 
(1,573
)
 
(2,053
)
Equity in net income of unconsolidated affiliate

 

 
(1,047
)
 
(1,047
)
 

 
(1,047
)
Other income
(5
)
 
(24
)
 
(68
)
 
(97
)
 
(2
)
 
(99
)
Segment contribution
$
23,815

 
$
5,399

 
$
827

 
$
30,041

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
30,041

 
$
(21,142
)
 
$
8,899


19


 
Three Months Ended June 30, 2016
  
U.S. Pawn
 
Mexico Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
79,826

 
$
14,187

 
$
1

 
$
94,014

 
$

 
$
94,014

Jewelry scrapping sales
10,918

 
312

 

 
11,230

 

 
11,230

Pawn service charges
54,395

 
8,078

 

 
62,473

 

 
62,473

Other revenues
39

 
157

 
2,237

 
2,433

 

 
2,433

Total revenues
145,178

 
22,734

 
2,238

 
170,150

 

 
170,150

Merchandise cost of goods sold
50,586

 
9,554

 

 
60,140

 

 
60,140

Jewelry scrapping cost of goods sold
8,845

 
265

 

 
9,110

 

 
9,110

Other cost of revenues

 

 
506

 
506

 

 
506

Net revenues
85,747

 
12,915

 
1,732

 
100,394

 

 
100,394

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
62,733

 
8,744

 
1,695

 
73,172

 

 
73,172

Administrative

 

 

 

 
14,481

 
14,481

Depreciation and amortization
2,888

 
720

 
56

 
3,664

 
2,610

 
6,274

Loss on sale or disposal of assets
(51
)
 
(13
)
 

 
(64
)
 
23

 
(41
)
Interest expense

 
25

 

 
25

 
3,911

 
3,936

Interest income
(1
)
 
(23
)
 

 
(24
)
 
(26
)
 
(50
)
Equity in net income of unconsolidated affiliate

 

 
(1,694
)
 
(1,694
)
 

 
(1,694
)
Other expense (income)

 
759

 

 
759

 
(259
)
 
500

Segment contribution
$
20,178

 
$
2,703

 
$
1,675

 
$
24,556

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
24,556

 
$
(20,740
)
 
$
3,816


20


 
Nine Months Ended June 30, 2017
  
U.S. Pawn
 
Mexico Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
273,125

 
$
46,547

 
$

 
$
319,672

 
$

 
$
319,672

Jewelry scrapping sales
35,158

 
2,500

 

 
37,658

 

 
37,658

Pawn service charges
177,480

 
24,503

 

 
201,983

 

 
201,983

Other revenues
157

 
457

 
5,958

 
6,572

 

 
6,572

Total revenues
485,920

 
74,007

 
5,958

 
565,885

 

 
565,885

Merchandise cost of goods sold
173,235

 
31,605

 

 
204,840

 

 
204,840

Jewelry scrapping cost of goods sold
30,114

 
2,081

 

 
32,195

 

 
32,195

Other cost of revenues

 

 
1,433

 
1,433

 

 
1,433

Net revenues
282,571

 
40,321

 
4,525

 
327,417

 

 
327,417

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
194,499

 
26,439

 
5,414

 
226,352

 

 
226,352

Administrative

 

 

 

 
41,305