10-Q 1 a2018q110q_12312017.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 December 31, 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
ezcorplogoa25.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 January 25, 2018, 51,494,246 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)
 
December 31,
2017
 
December 31,
2016
 
September 30,
2017
 
 
 
 
 
 
 
(Unaudited)
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
113,584

 
$
63,707

 
$
164,393

Pawn loans
177,001

 
162,696

 
169,242

Pawn service charges receivable, net
34,054

 
30,967

 
31,548

Inventory, net
163,310

 
143,440

 
154,411

Notes receivable, net
36,682

 
36,180

 
32,598

Prepaid expenses and other current assets
26,516

 
36,242

 
28,765

Total current assets
551,147

 
473,232

 
580,957

Investment in unconsolidated affiliate
45,605

 
39,875

 
43,319

Property and equipment, net
62,098

 
54,881

 
57,959

Goodwill
288,773

 
253,585

 
254,760

Intangible assets, net
43,974

 
31,708

 
32,420

Non-current notes receivable, net
23,343

 
39,365

 
28,377

Deferred tax asset, net
10,997

 
34,667

 
16,856

Other assets, net
16,625

 
37,187

 
9,715

Total assets
$
1,042,562

 
$
964,500

 
$
1,024,363

 
 
 
 
 
 
Liabilities and equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable, accrued expenses and other current liabilities
$
60,207

 
$
68,694

 
$
61,543

Customer layaway deposits
10,686

 
9,729

 
11,032

Total current liabilities
70,893

 
78,423

 
72,575

Long-term debt, net
294,761

 
278,936

 
284,807

Other long-term liabilities
8,845

 
8,259

 
7,055

Total liabilities
374,499

 
365,618

 
364,437

Commitments and contingencies (Note 8)


 


 


Stockholders’ equity:
 
 
 
 
 
Class A Non-voting Common Stock, par value $.01 per share; shares authorized: 100 million; issued and outstanding: 51,494,246 as of December 31, 2017; 51,306,608 as of December 31, 2016; and 51,427,832 as of September 30, 2017
515

 
513

 
514

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
351,110

 
319,825

 
348,532

Retained earnings
364,414

 
326,973

 
351,666

Accumulated other comprehensive loss
(44,902
)
 
(47,577
)
 
(38,367
)
EZCORP, Inc. stockholders’ equity
671,167

 
599,764

 
662,375

Noncontrolling interest
(3,104
)
 
(882
)
 
(2,449
)
Total equity
668,063

 
598,882

 
659,926

Total liabilities and equity
$
1,042,562

 
$
964,500

 
$
1,024,363

See accompanying notes to unaudited interim condensed consolidated financial statements.

1


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended December 31,
 
2017
 
2016
 
 
 
 
 
(Unaudited)
 
(in thousands, except per share amounts)
Revenues:
 
 
 
Merchandise sales
$
113,588

 
$
111,513

Jewelry scrapping sales
12,213

 
9,798

Pawn service charges
76,360

 
69,013

Other revenues
2,347

 
2,300

Total revenues
204,508

 
192,624

Merchandise cost of goods sold
71,167

 
71,732

Jewelry scrapping cost of goods sold
10,337

 
8,344

Other cost of revenues
577

 
583

Net revenues
122,427

 
111,965

Operating expenses:
 
 
 
Operations
83,610

 
77,646

Administrative
13,318

 
13,927

Depreciation and amortization
5,723

 
6,373

Loss (gain) on sale or disposal of assets
39

 
(77
)
Total operating expenses
102,690

 
97,869

Operating income
19,737

 
14,096

Interest expense
5,847

 
5,565

Interest income
(4,270
)
 
(2,616
)
Equity in net income of unconsolidated affiliate
(1,450
)
 
(1,478
)
Other income
(182
)
 
(423
)
Income from continuing operations before income taxes
19,792

 
13,048

Income tax expense
7,437

 
4,782

Income from continuing operations, net of tax
12,355

 
8,266

Loss from discontinued operations, net of tax
(222
)
 
(1,228
)
Net income
12,133

 
7,038

Net loss attributable to noncontrolling interest
(615
)
 
(127
)
Net income attributable to EZCORP, Inc.
$
12,748

 
$
7,165

 
 
 
 
Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.24

 
$
0.15

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.23

 
$
0.15

 
 
 
 
Weighted-average basic shares outstanding
54,464

 
54,158

Weighted-average diluted shares outstanding
55,682

 
54,214

See accompanying notes to unaudited interim condensed consolidated financial statements.

2


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended December 31,
 
2017
 
2016
 
 
 
 
 
(Unaudited)
 
(in thousands)
Net income
$
12,133

 
$
7,038

Other comprehensive loss:
 
 
 
Foreign currency translation loss, net of income tax expense for our investment in unconsolidated affiliate of $205 and $444 for the three months ended December 31, 2017 and 2016, respectively
(6,575
)
 
(3,465
)
Other comprehensive loss, net of tax
(6,575
)
 
(3,465
)
Comprehensive income
5,558

 
3,573

Comprehensive loss attributable to noncontrolling interest
(655
)

(104
)
Comprehensive income attributable to EZCORP, Inc.
$
6,213

 
$
3,677

See accompanying notes to unaudited interim condensed consolidated financial statements.
EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling Interest
 
Total 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
)
 
$
(778
)
 
$
594,205

Stock compensation

 

 
1,808

 

 

 

 
1,808

Release of restricted stock
178

 
2

 

 

 

 

 
2

Taxes paid related to net share settlement of equity awards

 

 
(706
)
 

 

 

 
(706
)
Foreign currency translation adjustment

 

 

 

 
(3,488
)
 
23

 
(3,465
)
Net income (loss)

 

 

 
7,165

 

 
(127
)
 
7,038

Balances as of December 31, 2016
54,277

 
$
543

 
$
319,825

 
$
326,973

 
$
(47,577
)
 
$
(882
)
 
$
598,882

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited, except balances as of September 30, 2017)
 
(in thousands)
Balances as of September 30, 2017
54,398

 
$
544

 
$
348,532

 
$
351,666

 
$
(38,367
)
 
$
(2,449
)
 
$
659,926

Stock compensation

 

 
2,889

 

 

 

 
2,889

Release of restricted stock
66

 
1

 

 

 

 

 
1

Taxes paid related to net share settlement of equity awards

 

 
(311
)
 

 

 

 
(311
)
Foreign currency translation adjustment

 

 

 

 
(6,535
)
 
(40
)
 
(6,575
)
Net income (loss)

 

 

 
12,748

 

 
(615
)
 
12,133

Balances as of December 31, 2017
54,464

 
$
545

 
$
351,110

 
$
364,414

 
$
(44,902
)
 
$
(3,104
)
 
$
668,063

See accompanying notes to unaudited interim condensed consolidated financial statements.

3


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended December 31,
 
2017
 
2016
 
 
 
 
 
(Unaudited)
 
(in thousands)
Operating activities:
 
 
 
Net income
$
12,133

 
$
7,038

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
5,723

 
6,373

Amortization of debt discount and deferred financing costs
3,682

 
2,826

Accretion of notes receivable discount and deferred compensation fee
(2,577
)
 
(1,029
)
Deferred income taxes
3,129

 
750

Other adjustments
601

 
801

Stock compensation expense
2,919

 
1,808

Income from investment in unconsolidated affiliate
(1,450
)
 
(1,478
)
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Service charges and fees receivable
(50
)
 
(83
)
Inventory
(1,087
)
 
(615
)
Prepaid expenses, other current assets and other assets
(2,384
)
 
(3,856
)
Accounts payable, accrued expenses and other liabilities
(5,283
)
 
(21,948
)
Customer layaway deposits
(283
)
 
(881
)
Income taxes, net of excess tax benefit from stock compensation
2,295

 
5,004

Net cash provided by (used in) operating activities
17,368

 
(5,290
)
Investing activities:
 
 
 
Loans made
(169,666
)
 
(156,457
)
Loans repaid
103,041

 
91,283

Recovery of pawn loan principal through sale of forfeited collateral
67,144

 
64,430

Additions to property and equipment
(7,917
)
 
(2,326
)
Acquisitions, net of cash acquired
(62,163
)
 

Principal collections on notes receivable
2,849

 
7,831

Net cash (used in) provided by investing activities
(66,712
)
 
4,761

Financing activities:
 
 
 
Taxes paid related to net share settlement of equity awards
(311
)
 
(706
)
Net cash used in financing activities
(311
)
 
(706
)
Effect of exchange rate changes on cash and cash equivalents
(1,154
)
 
(795
)
Net decrease in cash and cash equivalents
(50,809
)
 
(2,030
)
Cash and cash equivalents at beginning of period
164,393

 
65,737

Cash and cash equivalents at end of period
$
113,584

 
$
63,707

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
72,649

 
$
68,071

Dividend reinvestment acquisition of additional ownership in unconsolidated affiliate

 
1,153

Deferred and contingent consideration
1,920

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

4


EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
December 31, 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 Latin America. 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 which are of a normal, recurring nature. 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, 2017. The balance sheet as of September 30, 2017 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 months ended December 31, 2017 and 2016 (the "current quarter" or "current three months" and "prior-year quarter," 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, 2017.
Reclassifications to Prior Period Financial Statements
Certain reclassifications of prior period amounts have been made. These reclassifications 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.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law. Among other things, the Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The corporate tax rate reduction is effective as of January 1, 2018 and, accordingly, will reduce our current fiscal year federal statutory rate to a blended rate of 24.5%, and then to 21% beginning in fiscal 2019. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. We recognized a provisional amount of $2.8 million, as discussed below, for the revaluation of our deferred tax assets and liabilities upon enactment of the Act, which is included as a component of "Income tax expense" in our condensed consolidated statements of operations.

5


Provisional amounts
Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally either 24.5% or 21%, depending on whether they are expected to reverse in fiscal 2018 or in future fiscal years. We also recorded a valuation allowance against certain foreign tax credit carryforwards which management does not believe will be realized based on changes in the taxation of dividends of foreign subsidiaries in the Act. However, we are still analyzing certain aspects of the Act and refining our calculations, which could affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balances was $2.8 million.
Foreign tax effects: The one-time transition tax is based on our total post-1986 earnings and profits ("E&P") for which we have previously deferred U.S. income taxes. We have estimated that we will not owe any transition tax as we have foreign tax credits sufficient to cover the tax that we estimate will be due on the deferred earnings of our foreign subsidiaries. We have not yet completed our calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.
Recently Issued Accounting Pronouncements and Significant Accounting Policies
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires financial assets (or groups of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected, among other provisions. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A reporting entity should generally apply the amendment on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting periods in which the amendment is effective. 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, 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 2021.
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. 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, and 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 will complete our implementation 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.

6


We are evaluating the impact that will result from adopting ASU 2014-09 on our consolidated financial position, results of operations, cash flows and disclosure requirements. 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 charges 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, 2017 for discussion of our significant accounting policies and other accounting pronouncements issued but not yet adopted.
NOTE 2: ACQUISITIONS
On October 6, 2017, we completed the acquisition of 100% of the outstanding stock of Camira Administration Corp. and subsidiaries (“GPMX”), a business that owns and operates 112 stores located in Guatemala, El Salvador, Honduras and Peru. The GPMX acquisition significantly expands our store base into Latin American countries outside of Mexico and provides us with a platform for further growth in the region. Under the terms of the stock purchase agreement ("SPA"), we paid $53.4 million in cash upon closing and, subsequent to the closing, paid $6.7 million to satisfy the acquired company's indebtedness to members of the seller’s affiliated group. The SPA specified a further $2.25 million to be paid contingent upon performance of GPMX’s business during a period up to 24 months following the closing date, and the business achieved the specified performance goal during the first quarter of fiscal 2018. Consequently, we made a final payment of $1.6 million in January 2018 in satisfaction of the contingent purchase price obligation, after reduction for certain adjustments under the SPA, yielding a total purchase price of $61.7 million.
On December 4, 2017, we acquired 21 pawn stores located in the Mexican state of Sinaloa and operating under the name "Bazareño," further expanding our geographic footprint within Mexico. The Bazareño stores make up the largest chain of pawn stores in Culiacan, the capital city of Sinaloa, giving EZCORP the number one position in that market with more than double the store count of the nearest competitor and an important strategic presence in the northwest region of Mexico. The majority of the purchase price was paid in cash, subject to finalization of deferred amounts.
With the completion of the GPMX acquisition, we have combined the results of that business with the results of our Mexico pawn business, and that reporting segment is now referred to as "Latin America Pawn." See Note 9, Segment Information, below. The acquisitions described above were both attributable to our Latin America Pawn segment and have been aggregated below. The allocation of the consideration for the net acquired assets from these business combinations was as follows, in thousands:
Cash and cash equivalents
 
$
2,560

Earning assets
 
19,594

Other assets
 
4,005

Property and equipment, intangible assets and other assets, net*
 
13,153

Goodwill
 
34,678

Accounts payable, deferred taxes and other liabilities
 
(7,349
)
Total consideration
 
$
66,641

*
Intangible assets consist primarily of $11.1 million in trade names acquired with indefinite useful lives.
The factors contributing to the recognition of goodwill, which is recorded in our Latin America Pawn segment, were based on several strategic and synergistic benefits we expect to realize from the acquisition, including expansion of our store base as well as the ability to further leverage our pawn expertise, investments in information technology and other back office and support functions of our existing Mexico pawn business. We expect none of the goodwill resulting from these business combinations will be deductible for tax purposes.
The results of GPMX have been included in our condensed consolidated financial statements from October 7, 2017 through December 31, 2017, and the results of the Bazareño stores have been included in our condensed consolidated financial statements from December 5, 2017 through December 31, 2017, both in our Latin America Pawn segment. Pro forma results of operations have not been presented because it is impracticable to do so due to a variety of limitations, including a lack of readily available historical GAAP basis financial statements.

7


We incurred $0.4 million in acquisition-related costs during the current quarter, which were expensed as incurred and included under “Administrative” expense in our condensed consolidated statements of operations.
NOTE 3: EARNINGS PER SHARE
Components of basic and diluted earnings per share and excluded antidilutive potential common shares are as follows:
 
Three Months Ended December 31,
 
2017
 
2016
 
 
 
 
 
(in thousands, except per share amounts)
Net income from continuing operations attributable to EZCORP (A)
$
12,970

 
$
8,393

Loss from discontinued operations, net of tax (B)
(222
)
 
(1,228
)
Net income attributable to EZCORP (C)
$
12,748

 
$
7,165

 
 
 
 
Weighted-average outstanding shares of common stock (D)
54,464

 
54,158

Dilutive effect of restricted stock*
1,218

 
56

Weighted-average common stock and common stock equivalents (E)
55,682


54,214

 
 
 
 
Basic earnings per share attributable to EZCORP:
 
 
 
Continuing operations (A / D)
$
0.24

 
$
0.15

Discontinued operations (B / D)

 
(0.02
)
Basic earnings per share (C / D)
$
0.24

 
$
0.13

 
 
 
 
Diluted earnings per share attributable to EZCORP:
 
 
 
Continuing operations (A / E)
$
0.23

 
$
0.15

Discontinued operations (B / E)

 
(0.02
)
Diluted earnings per share (C / E)
$
0.23

 
$
0.13

 
 
 
 
Potential common shares excluded from the calculation of diluted earnings per share above, exclusive of the additional potential impact of the 2024 Convertible Notes:
 
 
 
Restricted stock**
2,991

 
2,288

2019 Convertible Notes Warrants***
12,138

 
14,317

Total potential common shares excluded
15,129

 
16,605

*
Includes the dilutive impact of share-based awards as well as the 2024 Convertible Notes, the terms and conditions of which are discussed in Note 6.
**
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 6 for discussion of the terms and conditions of these potential common shares.

8


NOTE 4: STRATEGIC INVESTMENTS
As of December 31, 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 December 31, 2017 after translation to U.S. dollars:
 
June 30,
 
2017
 
2016
 
 
 
 
 
(in thousands)
Current assets
$
155,749

 
$
173,830

Non-current assets
150,843

 
141,028

Total assets
$
306,592

 
$
314,858

 
 
 
 
Current liabilities
$
57,387

 
$
83,275

Non-current liabilities
48,698

 
51,873

Shareholders’ equity
200,507

 
179,710

Total liabilities and shareholders’ equity
$
306,592

 
$
314,858

 
Fiscal Year Ended June 30,
 
2017
 
2016
 
 
 
 
 
(in thousands)
Gross revenues
$
204,684

 
$
225,712

Gross profit
130,943

 
146,286

Net profit (loss)
15,546

 
(3,839
)
During the current quarter, the fair value of our investment in Cash Converters International declined below its carrying value. We considered the guidance in FASB 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 carrying value 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. See Note 5 for the fair value and carrying value of our investment in Cash Converters International.

9


NOTE 5: FAIR VALUE MEASUREMENTS
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:
Financial Assets (Liabilities)
 
Balance Sheet Location
 
December 31, 2017
 
December 31, 2016
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2019 Convertible Notes Hedges — Level 2
 
Other assets, net
 
$
12,863

 
$
29,800

 
$
6,591

2019 Convertible Notes Embedded Derivative — Level 2
 
Long-term debt, net
 
(12,863
)
 
(29,800
)
 
(6,591
)
Deferred and contingent consideration
 
Accounts payable, accrued expenses and other current liabilities
 
(1,920
)
 

 

We measured the fair value of the 2019 Convertible Notes Hedges and the 2019 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. The volatility input used as of December 31, 2017 was 36% based on observed market inputs. See Note 2 for discussion of the contingent consideration.
There were no transfers in or out of Level 1, Level 2 or Level 3 for financial assets or liabilities measured at fair value on a recurring basis during the periods presented.
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 on a recurring basis:
 
 
Carrying Value
 
Estimated Fair Value
 
 
December 31, 2017
 
December 31, 2017
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable, net
 
$
60,025

 
$
68,720

 
$

 
$

 
$
68,720

Investment in unconsolidated affiliate
 
45,605

 
42,777

 
42,777

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
179,835

 
$
201,084

 
$

 
$
201,084

 
$

2024 Convertible Notes
 
102,063

 
201,250

 

 
201,250

 

 
 
Carrying Value
 
Estimated Fair Value
 
 
December 31, 2016
 
December 31, 2016
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable, net
 
$
75,545

 
$
76,012

 
$

 
$

 
$
76,012

Investment in unconsolidated affiliate
 
39,875

 
38,360

 
38,360

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
200,728

 
$
221,950

 
$

 
$
221,950

 
$

Term Loan Facility
 
48,408

 
49,160

 

 

 
49,160


10


 
 
Carrying Value
 
Estimated Fair Value
 
 
September 30, 2017
 
September 30, 2017
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable, net
 
$
60,975

 
$
74,262

 
$

 
$

 
$
74,262

Investment in unconsolidated affiliate
 
43,319

 
49,057

 
49,057

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
177,346

 
$
193,811

 
$

 
$
193,811

 
$

2024 Convertible Notes
 
100,870

 
175,016

 

 
175,016

 

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 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 consumer loans, fees and interest receivable could significantly increase or decrease these fair value estimates.
Subsequent to the sale of Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart") to Alpha Holding, S.A. de C.V. (“AlphaCredit”) in September 2016, we determined that we retained a variable interest in Grupo Finmart including notes receivable. 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. We measured the fair value of the notes receivable as of December 31, 2017 under a discounted cash flow approach considering the estimated credit ratings for Grupo Finmart and AlphaCredit and as determined with external consultation, with discount rates ranging from 10% to 16%. Certain of the significant inputs used for the valuation were not observable in the market. Included in the fair value of the notes receivable is the estimated fair value of the deferred compensation fee negotiated in September 2017, of which the ultimate amount to be received is dependent upon the timing of payment of the notes receivable. 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.
We measured the fair value of the 2019 Convertible Notes and the 2024 Convertible Notes using quoted price inputs from Bloomberg. Neither the 2019 Convertible Notes nor the 2014 Convertible Notes are actively traded, and thus the price inputs represent a Level 2 measurement. 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.

11


NOTE 6: LONG-TERM DEBT
The following tables present our long-term debt instruments outstanding as well as future principal payments due:
 
December 31, 2017
 
December 31, 2016
 
September 30, 2017
 
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
$
195,000

 
$
(15,165
)
 
$
179,835

 
$
230,000

 
$
(29,272
)
 
$
200,728

 
$
195,000

 
$
(17,654
)
 
$
177,346

Cash Convertible Senior Notes Due 2019 Embedded Derivative
12,863

 

 
12,863

 
29,800

 

 
29,800

 
6,591

 

 
6,591

2.875% Convertible Senior Notes Due 2024
143,750

 
(41,687
)
 
102,063

 
 
 

 

 
143,750

 
(42,880
)
 
100,870

Term Loan Facility

 

 

 
50,000

 
(1,592
)
 
48,408

 

 

 

 
$
351,613

 
$
(56,852
)
 
$
294,761

 
$
309,800

 
$
(30,864
)
 
$
278,936

 
$
345,341

 
$
(60,534
)
 
$
284,807

 
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*
$
195,000

 
$

 
$
195,000

 
$

 
$

2.875% Convertible Senior Notes Due 2024*
143,750

 

 

 

 
143,750

 
$
338,750

 
$

 
$
195,000

 
$

 
$
143,750

*
Excludes the potential impact of the embedded derivative.
2.875% Convertible Senior Notes Due 2024
In July 2017, we issued $143.75 million aggregate principal amount of 2.875% Convertible Senior Notes Due 2024 (the “2024 Convertible Notes”). All of the 2024 Convertible Notes were issued pursuant to an indenture dated July 5, 2017 (the "2017 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The 2024 Convertible Notes were issued in a private offering under Rule 144A under the Securities Act of 1933. The 2024 Convertible Notes pay interest semi-annually in arrears at a rate of 2.875% per annum on January 1 and July 1 of each year, commencing January 1, 2018, and mature on July 1, 2024 (the "2024 Maturity Date"), unless converted, redeemed or repurchased in accordance with their terms prior to such date.
The 2024 Convertible Notes are convertible into cash or shares of Class A Non-Voting Common Stock ("Class A Common Stock"), or any combination thereof, at our option subject to satisfaction of certain conditions and during the periods described in the 2017 Indenture, based on an initial conversion rate of 100 shares of Class A Common Stock per $1,000 principal amount of 2024 Convertible Notes (equivalent to an initial conversion price of $10.00 per share of our Class A Common Stock). We account for the Class A Common Stock issuable upon conversion under the treasury stock method. To the extent our average share price is over $10.00 per share for any fiscal quarter, we are required to recognize incremental dilution of our earnings per share.
2.125% Cash Convertible Senior Notes Due 2019
In June 2014, we issued $200 million aggregate principal amount of 2.125% Cash Convertible Senior Notes Due 2019 (the "2019 Convertible Notes"), with an additional $30 million principal amount of 2019 Convertible Notes issued in July 2014. In July 2017, we used $34.4 million of net proceeds from the 2024 Convertible Notes offering to repurchase and retire $35.0 million aggregate principal amount of 2019 Convertible Notes. All of the 2019 Convertible Notes were issued pursuant to an indenture dated June 23, 2014 (the "2014 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The 2019 Convertible Notes were issued in a private offering and resold under Rule 144A under the Securities Act of 1933. The 2019 Convertible Notes pay interest semi-annually in arrears at a rate of 2.125% per annum on June 15 and

12


December 15 of each year and mature on June 15, 2019 (the "2019 Maturity Date"), unless converted, redeemed or repurchased in accordance with their terms prior to such date.
The 2019 Convertible Notes are convertible into cash, subject to satisfaction of certain conditions and during the periods described in the 2014 Indenture, based on an initial conversion rate of 62.2471 shares of Class A Common Stock per $1,000 principal amount of 2019 Convertible Notes (equivalent to an initial conversion price of approximately $16.065 per share of our Class A Common Stock).
2019 Convertible Notes Hedges
In connection with the issuance of the 2019 Convertible Notes, we purchased cash-settled call options (the “2019 Convertible Notes Hedges”) in privately negotiated transactions with certain of the initial purchasers or their affiliates (in this capacity, the “Option Counterparties”). The 2019 Convertible Notes Hedges provide us with the option to acquire, on a net settlement basis, approximately 12.1 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 2019 Convertible Notes and corresponds to the conversion price of the 2019 Convertible Notes. If we exercise the 2019 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 2019 Convertible Notes, less the principal amount thereof.
2019 Convertible Notes Warrants
In connection with the issuance of the 2019 Convertible Notes, we also sold net-share-settled warrants (the “2019 Convertible Notes Warrants”) in privately negotiated transactions with the Option Counterparties. The 2019 Convertible Notes Warrants allow for the purchase of up to approximately 12.1 million shares of our Class A Common Stock at a strike price of $20.83 per share. We account for the Class A Common Stock issuable upon exercise under the treasury stock method. As a result of the 2019 Convertible Notes Warrants and related transactions, we are required to recognize incremental dilution of our earnings per share to the extent our average share price is over $20.83 for any fiscal quarter. The 2019 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.
NOTE 7: 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, 2017, the 2010 Plan permitted grants of options, restricted stock awards and stock appreciation rights covering up to 3,985,649 shares of our Class A Common Stock. In December 2017, the Board of Directors and the voting stockholder approved the addition of 1,100,000 shares to the 2010 Plan.
In December 2017, we granted 1,308,533 restricted stock unit awards to employees and 84,250 restricted stock awards to non-employee directors with a grant date fair value of primarily $9.75 per share. Our long-term incentive awards are generally granted based on our share price as of October 1 each year, which was $9.50 for these fiscal 2018 awards. For the awards granted to employees, 190,725 vest on September 30, 2018 and 1,117,808 vest on September 30, 2020, subject to the achievement of certain earnings before interest, taxes, depreciation and amortization ("EBITDA") performance targets. As of December 31, 2017, we considered the achievement of these performance targets probable. The awards granted to non-employee directors vest on September 30, 2018 and are subject only to service conditions.
NOTE 8: 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 December 31, 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:

13


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);
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.
On August 23, 2017, the parties agreed to a mediated settlement of all remaining claims and entered into a Memorandum of Understanding regarding that settlement. Under the terms of the proposed settlement, a settlement payment of $6.5 million, less attorney fees awarded to the plaintiff’s counsel and administrative costs of settlement, will be paid to the Company. Of such amount, $5.5 million will be funded by the Company’s insurance carriers and $1.0 million will be funded by Madison Park LLC. After the completion of confirmatory discovery, the parties prepared and agreed to a Stipulation and Agreement of Settlement, Compromise and Release and other settlement papers, which were filed with the Court on January 11, 2018. A settlement fairness hearing, at which the Court will consider the fairness and adequacy of the parties’ proposed settlement, has been scheduled for April 3, 2018. The proposed settlement will not be final until approved by the Court.
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 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

14


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.

15


NOTE 9: SEGMENT INFORMATION
Following the acquisition of GPMX during the first quarter of fiscal 2018 (see Note 2), we have retitled our Mexico Pawn segment to "Latin America Pawn" and have combined the results of GPMX with the results of our Mexico pawn business, as we expect the financial performance and economic characteristics of those businesses to be similar over the long-term. Segment information is prepared on the same basis that our chief operating decision maker reviews financial information for operational decision-making purposes. As a result, we currently report our segments as follows: U.S. Pawn — all pawn activities in the United States; Latin America 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 consolidated financial statements.
 
Three Months Ended December 31, 2017
  
U.S. Pawn
 
Latin America Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
91,494

 
$
22,094

 
$

 
$
113,588

 
$

 
$
113,588

Jewelry scrapping sales
8,525

 
3,688

 

 
12,213

 

 
12,213

Pawn service charges
59,705

 
16,655

 

 
76,360

 

 
76,360

Other revenues
74

 
169

 
2,104

 
2,347

 

 
2,347

Total revenues
159,798

 
42,606

 
2,104

 
204,508

 

 
204,508

Merchandise cost of goods sold
56,088

 
15,079

 

 
71,167

 

 
71,167

Jewelry scrapping cost of goods sold
6,842

 
3,495

 

 
10,337

 

 
10,337

Other cost of revenues

 

 
577

 
577

 

 
577

Net revenues
96,868

 
24,032

 
1,527

 
122,427

 

 
122,427

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
66,300

 
14,687

 
2,623

 
83,610

 

 
83,610

Administrative

 

 

 

 
13,318

 
13,318

Depreciation and amortization
2,799

 
845

 
47

 
3,691

 
2,032

 
5,723

Loss on sale or disposal of assets
16

 
10

 

 
26

 
13

 
39

Interest expense

 
1

 

 
1

 
5,846

 
5,847

Interest income

 
(637
)
 

 
(637
)
 
(3,633
)
 
(4,270
)
Equity in net income of unconsolidated affiliate

 

 
(1,450
)
 
(1,450
)
 

 
(1,450
)
Other (income) expense
(4
)
 
115

 
(83
)
 
28

 
(210
)
 
(182
)
Segment contribution
$
27,757

 
$
9,011

 
$
390

 
$
37,158

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
37,158

 
$
(17,366
)
 
$
19,792


16


 
Three Months Ended December 31, 2016
  
U.S. Pawn
 
Latin America Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
94,861

 
$
16,652

 
$

 
$
111,513

 
$

 
$
111,513

Jewelry scrapping sales
8,845

 
953

 

 
9,798

 

 
9,798

Pawn service charges
61,045

 
7,968

 

 
69,013

 

 
69,013

Other revenues
51

 
131

 
2,118

 
2,300

 

 
2,300

Total revenues
164,802

 
25,704

 
2,118

 
192,624

 

 
192,624

Merchandise cost of goods sold
60,248

 
11,484

 

 
71,732

 

 
71,732

Jewelry scrapping cost of goods sold
7,550

 
794

 

 
8,344

 

 
8,344

Other cost of revenues

 

 
583

 
583

 

 
583

Net revenues
97,004

 
13,426

 
1,535

 
111,965

 

 
111,965

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
67,350

 
8,640

 
1,656

 
77,646

 

 
77,646

Administrative

 

 

 

 
13,927

 
13,927

Depreciation and amortization
2,617

 
631

 
50

 
3,298

 
3,075

 
6,373

Gain on sale or disposal of assets
(71
)
 
(6
)
 

 
(77
)
 

 
(77
)
Interest expense

 
2

 

 
2

 
5,563

 
5,565

Interest income

 
(67
)
 

 
(67
)
 
(2,549
)
 
(2,616
)
Equity in net income of unconsolidated affiliate

 

 
(1,478
)
 
(1,478
)
 

 
(1,478
)
Other (income) expense
(5
)
 
11

 
(1
)
 
5

 
(428
)
 
(423
)
Segment contribution
$
27,113

 
$
4,215

 
$
1,308

 
$
32,636

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
32,636

 
$
(19,588
)
 
$
13,048

NOTE 10: SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
The following table provides supplemental information on net amounts included in our condensed consolidated balance sheets:
 
December 31, 2017
 
December 31, 2016
 
September 30, 2017
 
 
 
 
 
 
 
(in thousands)
Gross pawn service charges receivable
$
43,316

 
$
40,229

 
$
42,117

Allowance for uncollectible pawn service charges receivable
(9,262
)
 
(9,262
)
 
(10,569
)
Pawn service charges receivable, net
$
34,054

 
$
30,967

 
$
31,548

 
 
 
 
 
 
Gross inventory
$
171,029

 
$
149,587

 
$
161,212

Inventory reserves
(7,719
)
 
(6,147
)
 
(6,801
)
Inventory, net
$
163,310

 
$
143,440

 
$
154,411

 
 
 
 
 
 
Property and equipment, gross
$
231,549

 
$
210,913

 
$
224,240

Accumulated depreciation
(169,451
)
 
(156,032
)
 
(166,281
)
Property and equipment, net
$
62,098

 
$
54,881

 
$
57,959


17


ITEM 2. 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" of our Annual Report on Form 10-K for the year ended September 30, 2017, as supplemented by the information set forth in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and "Part II, Item 1 — Legal Proceedings" of this Quarterly Report.
Overview and Financial Highlights
EZCORP is a Delaware corporation headquartered in Austin, Texas. We are a leading provider of pawn loans in the United States and Latin America.
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, we offer pawn loans, which are non-recourse loans collateralized by tangible personal property, and sell merchandise to customers looking for good value. The merchandise we sell consists of second-hand collateral forfeited from our pawn lending activities or purchased from customers.
We remain focused on growing our balance of pawn loans outstanding (“PLO”) and generating higher pawn service charges (“PSC”). The following charts present sources of net revenues, including PSC, merchandise sales gross profit ("Merchandise sales GP") and jewelry scrapping gross profit ("Jewelry scrapping GP"):
chart-e9956a8f7b625aa8a5a.jpgchart-a4b5702c01b75574b71.jpg

18


The following charts present sources of net revenues by geographic disbursement:
chart-9bb9c85a75d79923701.jpgchart-0a98e3f4a8c1bd250de.jpg
The following charts present store counts by geographic disbursement:
chart-caac36f611b7e029f1e.jpgchart-5c632ef5ed9c86c463e.jpg
Pawn Activities
At our pawn stores, we offer pawn loans, which are typically small, non-recourse loans collateralized by tangible personal property. We earn pawn service charges on our pawn loans, which varies by state and loan size. Collateral for our pawn loans consists of tangible personal property, generally jewelry, consumer electronics, tools, sporting goods and musical instruments. Security for our pawn loans is provided via the estimated resale value of the collateral and the perceived probability of the loan’s redemption.
Our ability to offer quality second-hand goods at prices significantly lower than original retail prices attracts value-conscious customers. The gross profit on sales of inventory depends primarily on our assessment of the loan or purchase value at the time the property is either accepted as loan collateral or purchased. As a significant portion of our inventory and sales involve gold and jewelry, our results can be heavily influenced by the market price of gold.

19


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 Latin America and pawn store acquisitions in both Latin America 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, availability of qualified personnel and projected financial results meeting our investment hurdles.
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. Loan balances are generally lower in our second fiscal quarter (January through March). Merchandise sales are highest in our 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. As a net effect of these factors, our earnings generally are lowest during our third fiscal quarter (April through June).
Store Data by Segment
 
Three Months Ended December 31, 2017
 
Company-owned Stores
 
U.S. Pawn
 
Latin America Pawn
 
Other International
 
Consolidated
 
 
 
 
 
 
 
 
As of September 30, 2017
513

 
246

 
27

 
786

New locations opened

 
4

 

 
4

Locations acquired

 
133

 

 
133

As of December 31, 2017
513

 
383

 
27

 
923

 
Three Months Ended December 31, 2016
 
Company-owned Stores
 
U.S. Pawn
 
Latin America Pawn
 
Other International
 
Consolidated
 
 
 
 
 
 
 
 
As of September 30, 2016
520

 
239


27

 
786

Locations sold, combined or closed
(3
)
 

 

 
(3
)
As of December 31, 2016
517

 
239

 
27

 
783


20


Results of Operations
Three Months Ended December 31, 2017 vs. Three Months Ended December 31, 2016
These tables, as well as the discussion that follows, should be read with the accompanying condensed consolidated financial statements and related notes. All comparisons, unless otherwise noted, are to the prior-year quarter.
U.S. Pawn
The following table presents selected summary financial data from continuing operations for the U.S. Pawn segment:
 
Three Months Ended December 31,
 
Change
 
2017
 
2016
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Pawn service charges
$
59,705

 
$
61,045

 
(2)%
 
 
 
 
 
 
Merchandise sales
91,494

 
94,861

 
(4)%
Merchandise sales gross profit
35,406

 
34,613

 
2%
Gross margin on merchandise sales
39
%
 
36
%
 
300bps
 
 
 
 
 
 
Jewelry scrapping sales
8,525

 
8,845

 
(4)%
Jewelry scrapping sales gross profit
1,683

 
1,295

 
30%
Gross margin on jewelry scrapping sales
20
%
 
15
%
 
500bps
 
 
 
 
 
 
Other revenues
74

 
51

 
45%
Net revenues
96,868

 
97,004

 
—%
 
 
 
 
 
 
Segment operating expenses:
 
 
 
 

Operations
66,300

 
67,350

 
(2)%
Depreciation and amortization
2,799

 
2,617

 
7%
Segment operating contribution
27,769

 
27,037

 
3%
 
 
 
 
 
 
Other segment expenses (income)
12

 
(76
)
 
*
Segment contribution
$
27,757

 
$
27,113

 
2%
 
 
 
 
 
 
Other data:
 
 
 
 
 
Net earning assets — continuing operations (a)
$
284,933

 
$
274,616

 
4%
Inventory turnover
1.8

 
2.1

 
(14)%
Average monthly ending pawn loan balance per store (b)
$
283

 
$
285

 
(1)%
Monthly average yield on pawn loans outstanding
14
%
 
14
%
 
Pawn loan redemption rate (c)
84
%
 
83
%
 
100bps
*
Represents an increase or decrease that is not meaningful.
(a)
Balance includes pawn loans and inventory.
(b)
Balance is calculated based upon the average of the monthly ending balances during the applicable period.
(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.

21


Net revenue was flat, primarily due to the impacts of the hurricanes affecting the Texas Gulf Coast and Florida in the fourth quarter of fiscal 2017, as previously disclosed, offset by higher gross profit margins. The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows:
 
Change in Net Revenue
 
Pawn Service Charges
 
Merchandise Sales Gross Profit
 
Total
 
 
 
 
 
 
 
(in millions)
Same stores
$
(1.2
)
 
$
0.9

 
$
(0.3
)
New stores and other
(0.1
)
 
(0.1
)
 
(0.2
)
Total
$
(1.3
)
 
$
0.8

 
$
(0.5
)
Change in jewelry scrapping sales gross profit and other revenues
 
 
 
 
0.4

Total change in net revenue
 
 
 
 
$
(0.1
)
Pawn service charges decreased 2% primarily due to a 1% decrease in average ending monthly pawn loan balances outstanding during the current quarter. The lower average loan balance was primarily a result of the negative impacts from the hurricanes, partially offset by other continued positive operating trends.
Merchandise sales decreased 4% with gross margin on merchandise sales of 39%, a 300 basis point improvement over the prior year quarter. As a result, merchandise sales gross profit increased 2% to $35.4 million. The increase in merchandise sales gross profit is inclusive of the negative impacts from the hurricanes. We expect sales gross margin for the full fiscal year to be within our target range of 35-38%.
Jewelry scrapping sales gross profit remained relatively flat at 2% of current quarter net revenues, in-line with our strategy to sell rather than scrap merchandise, with a 500 basis point increase in gross margin to 20% due primarily to improvements in gold prices.
We increased segment contribution 2% through focused expense management, including a 2% decrease in operations expenses across numerous operating items.
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 results to evaluate our Latin America Pawn operations, which are denominated primarily in Mexican pesos and other Latin American currencies. As GPMX was not acquired until fiscal 2018, such results included on a constant currency basis reflect the actual exchange rates in effect during the current quarter without adjustment. We believe that presentation of constant currency results is meaningful and useful in understanding the activities and business metrics of our Latin America Pawn operations and reflect an additional way of viewing aspects of our business that, when viewed with GAAP results, provide a more complete understanding of factors and trends affecting our business. We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. We use this non-GAAP financial information to evaluate and compare operating results across accounting periods. Readers should consider the information in addition to, but not instead of or superior to, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Constant currency results reported herein are calculated by translating consolidated balance sheet and consolidated statement of operations items denominated in 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 on a monthly basis during the appropriate period for statement of operations items. The end-of-period Mexican peso to U.S. dollar exchange rate as of December 31, 2017 and 2016 was 19.7 to 1 and 20.7 to 1, respectively. The approximate average Mexican peso to U.S. dollar exchange rate for the three months ended December 31, 2017 and 2016 was 19.0 to 1 and 19.8 to 1, respectively.
Our statement of operations constant currency results reflect the monthly exchange rate fluctuations and so are not directly calculable from the above rates. Constant currency results, where presented, also exclude the foreign currency gain or loss. 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.

22


Latin America Pawn
The following table presents selected summary financial data from continuing operations for the Latin America Pawn segment, including constant currency results, after translation to U.S. dollars from its functional currencies of the Mexican peso, Guatemalan quetzal, Honduran lempira and Peruvian sol. See “Results of Operations — Non-GAAP Financial Information” above.
 
Three Months Ended December 31,
 
2017 (GAAP)
 
2016 (GAAP)
 
Change (GAAP)
 
2017 (Constant Currency)
 
Change (Constant Currency)
 
 
 
 
 
 
 
 
 
 
 
(in USD thousands)
 
 
 
(in USD thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Pawn service charges
$
16,655

 
$
7,968

 
109%
 
$
16,208

 
103%
 
 
 
 
 

 
 
 

Merchandise sales
22,094

 
16,652

 
33%
 
21,210

 
27%
Merchandise sales gross profit
7,015

 
5,168

 
36%
 
6,727

 
30%
Gross margin on merchandise sales
32
%
 
31
%
 
100bps
 
32
%
 
100bps
 
 
 
 
 

 
 
 

Jewelry scrapping sales
3,688

 
953

 
287%
 
3,629

 
281%
Jewelry scrapping sales gross profit
193

 
159

 
21%
 
187

 
18%
Gross margin on jewelry scrapping sales
5
%
 
17
%
 
(1,200)bps
 
5
%
 
(1,200)bps
 
 
 
 
 

 
 
 

Other revenues
169

 
131

 
29%
 
162

 
24%
Net revenues
24,032

 
13,426

 
79%
 
23,284

 
73%
 
 
 
 
 

 
 
 

Segment operating expenses:
 
 
 
 

&