10-Q 1 a2018q310q_6302018.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, 2018
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
ezcorplogoa38.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 24, 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)
 
June 30,
2018
 
June 30,
2017
 
September 30,
2017
 
 
 
 
 
 
 
(Unaudited)
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
285,031

 
$
113,729

 
$
164,393

Pawn loans
183,054

 
168,262

 
169,242

Pawn service charges receivable, net
33,388

 
30,585

 
31,548

Inventory, net
151,145

 
135,053

 
154,411

Notes receivable, net
37,906

 
22,024

 
32,598

Prepaid expenses and other current assets
43,448

 
31,993

 
28,765

Total current assets
733,972

 
501,646

 
580,957

Investment in unconsolidated affiliate
61,056

 
41,725

 
43,319

Property and equipment, net
71,587

 
53,022

 
57,959

Goodwill
292,544

 
254,469

 
254,760

Intangible assets, net
59,678

 
32,551

 
32,420

Non-current notes receivable, net
13,432

 
41,253

 
28,377

Deferred tax asset, net
4,269

 
36,506

 
16,856

Other assets, net
3,575

 
9,145

 
9,715

Total assets
$
1,240,113

 
$
970,317

 
$
1,024,363

 
 
 
 
 
 
Liabilities and equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt, net
$
195,796

 
$

 
$

Accounts payable, accrued expenses and other current liabilities
61,813

 
64,830

 
61,543

Customer layaway deposits
11,938

 
11,091

 
11,032

Total current liabilities
269,547

 
75,921

 
72,575

Long-term debt, net
222,897

 
260,414

 
284,807

Other long-term liabilities
11,111

 
9,680

 
7,055

Total liabilities
503,555

 
346,015

 
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 June 30, 2018; 51,326,582 as of June 30, 2017; 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
395,428

 
322,559

 
348,532

Retained earnings
392,315

 
340,256

 
351,666

Accumulated other comprehensive loss
(48,040
)
 
(37,921
)
 
(38,367
)
EZCORP, Inc. stockholders’ equity
740,248

 
625,437

 
662,375

Noncontrolling interest
(3,690
)
 
(1,135
)
 
(2,449
)
Total equity
736,558

 
624,302

 
659,926

Total liabilities and equity
$
1,240,113

 
$
970,317

 
$
1,024,363

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,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Merchandise sales
$
104,737

 
$
97,921

 
$
333,270

 
$
319,672

Jewelry scrapping sales
20,428

 
17,641

 
44,166

 
37,658

Pawn service charges
72,874

 
65,878

 
223,601

 
201,983

Other revenues
1,903

 
2,193

 
6,147

 
6,572

Total revenues
199,942

 
183,633

 
607,184

 
565,885

Merchandise cost of goods sold
66,896

 
62,615

 
210,283

 
204,840

Jewelry scrapping cost of goods sold
17,625

 
15,010

 
37,536

 
32,195

Other cost of revenues
349

 
453

 
1,273

 
1,433

Net revenues
115,072

 
105,555

 
358,092

 
327,417

Operating expenses:
 
 
 
 
 
 
 
Operations
83,032

 
74,246

 
248,802

 
226,352

Administrative
13,268

 
14,095

 
39,927

 
41,305

Depreciation and amortization
6,124

 
5,843

 
18,298

 
18,246

Loss on sale or disposal of assets
314

 
17

 
453

 
11

Total operating expenses
102,738

 
94,201

 
307,480

 
285,914

Operating income
12,334

 
11,354

 
50,612

 
41,503

Interest expense
7,394

 
5,654

 
19,070

 
16,847

Interest income
(4,358
)
 
(2,053
)
 
(12,896
)
 
(6,909
)
Equity in net income of unconsolidated affiliate
(1,151
)
 
(1,047
)
 
(3,477
)
 
(3,768
)
Other income
(5,287
)
 
(99
)
 
(5,473
)
 
(294
)
Income from continuing operations before income taxes
15,736

 
8,899

 
53,388

 
35,627

Income tax expense
1,553

 
3,432

 
14,911

 
13,663

Income from continuing operations, net of tax
14,183

 
5,467

 
38,477

 
21,964

Income (loss) from discontinued operations, net of tax
91

 
(265
)
 
(631
)
 
(1,868
)
Net income
14,274

 
5,202

 
37,846

 
20,096

Net loss attributable to noncontrolling interest
(359
)
 
(58
)
 
(1,348
)
 
(352
)
Net income attributable to EZCORP, Inc.
$
14,633

 
$
5,260

 
$
39,194

 
$
20,448

 
 
 
 
 
 
 
 
Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.27

 
$
0.10

 
$
0.73

 
$
0.41

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.25

 
$
0.10

 
$
0.70

 
$
0.41

 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
54,464

 
54,295

 
54,453

 
54,247

Weighted-average diluted shares outstanding
57,954

 
54,367

 
57,080

 
54,310

See accompanying notes to unaudited interim condensed consolidated financial statements.

2


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(in thousands)
Net income
$
14,274

 
$
5,202

 
$
37,846

 
$
20,096

Other comprehensive gain (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss), net of income tax benefit (expense) from our unconsolidated affiliate of $135 and ($76) for the three and nine months ended June 30, 2018 respectively, and ($820) and ($290) for the three and nine months ended June 30, 2017, respectively.
(7,576
)
 
4,608

 
(8,111
)
 
6,163

Other comprehensive gain (loss), net of tax
(7,576
)
 
4,608

 
(8,111
)
 
6,163

Comprehensive income
6,698

 
9,810

 
29,735

 
26,259

Comprehensive loss attributable to noncontrolling interest
(358
)

(73
)
 
(1,241
)

(357
)
Comprehensive income attributable to EZCORP, Inc.
$
7,056

 
$
9,883

 
$
30,976

 
$
26,616

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) Income
 
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

 

 
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

 
(5
)
 
6,163

Net income (loss)

 

 

 
20,448

 

 
(352
)
 
20,096

Balances as of June 30, 2017
54,297

 
$
543

 
$
322,559

 
$
340,256

 
$
(37,921
)
 
$
(1,135
)
 
$
624,302

 
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

 

 
8,150

 

 

 

 
8,150

Release of restricted stock
66

 
1

 

 

 

 

 
1

Taxes paid related to net share settlement of equity awards

 

 
(311
)
 

 

 

 
(311
)
Reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act

 

 

 
1,455

 
(1,455
)
 

 

Foreign currency translation adjustment

 

 

 

 
(8,218
)
 
107

 
(8,111
)
Equity classified conversion feature of 2025 Convertible Notes, net of tax

 

 
39,057

 

 

 

 
39,057

Net income (loss)

 

 

 
39,194

 

 
(1,348
)
 
37,846

Balances as of June 30, 2018
54,464

 
$
545

 
$
395,428

 
$
392,315

 
$
(48,040
)
 
$
(3,690
)
 
$
736,558

See accompanying notes to unaudited interim condensed consolidated financial statements.

3


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended June 30,
 
2018
 
2017
 
 
 
 
 
(Unaudited)
 
(in thousands)
Operating activities:
 
 
 
Net income
$
37,846

 
$
20,096

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
18,298

 
18,246

Amortization of debt discount and deferred financing costs
12,126

 
8,595

Accretion of notes receivable discount and deferred compensation fee
(7,222
)
 
(2,898
)
Deferred income taxes
3,135

 
(871
)
Other adjustments
1,948

 
1,397

Stock compensation expense
8,216

 
5,145

Income from investment in unconsolidated affiliate
(3,477
)
 
(3,768
)
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Service charges and fees receivable
1,601

 
604

Inventory
988

 
1,470

Prepaid expenses, other current assets and other assets
(3,617
)
 
6,808

Accounts payable, accrued expenses and other liabilities
(4,313
)
 
(29,464
)
Customer layaway deposits
935

 
288

Income taxes, net of excess tax benefit from stock compensation
2,586

 
9,873

Net cash provided by operating activities
69,050

 
35,521

Investing activities:
 
 
 
Loans made
(512,914
)
 
(472,676
)
Loans repaid
318,636

 
288,833

Recovery of pawn loan principal through sale of forfeited collateral
202,078

 
187,819

Additions to property and equipment and capitalized labor, net
(33,917
)
 
(14,887
)
Acquisitions, net of cash acquired
(93,165
)
 

Investment in unconsolidated affiliate
(14,036
)
 

Principal collections on notes receivable
16,210

 
23,336

Net cash (used in) provided by investing activities
(117,108
)
 
12,425

Financing activities:
 
 
 
Taxes paid related to net share settlement of equity awards
(311
)
 
(767
)
Proceeds from borrowings, net of issuance costs and other
170,468

 

Net cash provided by (used in) financing activities
170,157

 
(767
)
Effect of exchange rate changes on cash and cash equivalents
(1,461
)
 
813

Net increase in cash and cash equivalents
120,638

 
47,992

Cash and cash equivalents at beginning of period
164,393

 
65,737

Cash and cash equivalents at end of period
$
285,031

 
$
113,729

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
197,163

 
$
182,682

Dividend reinvestment acquisition of additional ownership in unconsolidated affiliate

 
1,153

Deferred acquisition consideration
1,143

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

4


EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
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 and nine months ended June 30, 2018 and 2017 (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, 2017.
Reclassifications to Prior Period Financial Statements
We have reclassified certain capitalized labor expenditures in the previous period on our condensed consolidated statements of cash flows from "Prepaid expenses, other current assets and other assets" in operating cash flows to "Additions to property and equipment and capitalized labor, net" in investing cash flows. Additionally, we have reclassified certain information included in Note 10 to conform to the current period presentation. These reclassifications do not have a material impact to prior periods presented.
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 was effective as of January 1, 2018 and, accordingly, reduced our current fiscal year federal statutory rate to a blended rate of 24.5%, and will further reduce it to 21% beginning in fiscal 2019. As of June 30, 2018, while we are able to make reasonable estimates of the impact of the reduction in the corporate rate and the deemed repatriation

5


transition tax, the final impact of the Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the Internal Revenue Service and actions we may take. We are continuing to gather additional information to determine the final impact of the Act. We recognized $2.8 million during the quarter ended December 31, 2017, 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.
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. The amount recorded related to the remeasurement of our deferred tax balances was $2.8 million. This amount was recorded in the quarter ended December 31, 2017 with no further adjustment.
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 do not believe that we will 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. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis differences inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.
Recently Adopted Accounting Policies
In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-05, Income Taxes — (Topic 740): Amendments to SEC (U.S. Securities and Exchange Commission) Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU adds various paragraphs to the accounting standards codification from SEC Staff Accounting Bulletin No. 118. The provisions of this ASU were effective immediately. The discussion above of the impacts of the Act have incorporated the provisions of this ASU and SEC Staff Accounting Bulletin No. 118.
In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows entities to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the Act. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As allowed, we early adopted ASU 2018-02 on a prospective basis as of January 1, 2018 and reclassified $1.5 million of accumulated foreign currency translation associated with our unconsolidated affiliate Cash Converters International Limited (“Cash Converters International”), resulting from the stranded tax effects from the reduction of our effective tax rate, from accumulated other comprehensive loss to retained earnings.
Recently Issued Accounting Pronouncements and Significant Accounting Policies
In June 2016, the FASB issued 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

6


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 have completed upgrades to our third party software solution to support 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.
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
Camira Administration Corp. and subsidiaries (“GPMX”)
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.
All Other
On June 25, 2018, we acquired 40 pawn stores operating under the name "Montepio San Patricio” in and around Mexico City, the largest market in Mexico. The acquisition of these stores is our largest acquisition in Mexico to date and significantly strengthens our competitive position in the strategically important Mexico City metropolitan area. The physical space in these stores is substantially larger than our average store in Mexico, giving us the capacity to increase their focus on general merchandise pawn loan and retail activities.
On June 11, 2018, we acquired 23 pawn stores operating under the name "Presta Dinero," giving us a presence in a number of cities within seven central-Mexico states in which we already have Empeño Fácil stores. These stores complement our existing

7


stores, allowing us to achieve synergies in management and administration while giving us a presence in new cities and neighborhoods.
On December 4, 2017, we acquired 21 pawn stores located in the Mexican state of Sinaloa and operating under the name "Bazareño." 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 purchase prices of the above acquisitions were paid in cash. These acquisitions, collectively referred to as "All Other" below, were individually immaterial and we have therefore omitted or aggregated certain disclosures.
Other Information
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 all attributable to our Latin America Pawn segment. The allocation of the consideration for the net acquired assets from these business combinations was as follows:
 
 
GPMX
 
All Other
 
 
 
 
 
 
 
(in thousands)
Cash and cash equivalents
 
$
2,560

 
$

Earning assets
 
17,247

 
7,980

Other assets
 
3,450

 
4,272

Property and equipment, intangible assets and other assets, net*
 
11,671

 
18,868

Goodwill
 
34,022

 
4,192

Accounts payable, deferred taxes and other liabilities
 
(7,234
)
 
(159
)
Total consideration
 
$
61,716

 
$
35,153

*
Intangible assets consist primarily of $9.8 million and $14.0 million in trade names acquired with indefinite useful lives, for GPMX and All Other, respectively.
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 acquisitions, 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. As the acquisition of Montepio San Patricio and Presta Dinero were consummated near the end of the current quarter, we may include certain revisions to the initial purchase accounting in subsequent quarters.
The results of the acquired businesses have been included in our condensed consolidated financial statements beginning after the acquisition dates as indicated above in our Latin America Pawn segment with revenue and net income amounts as presented below. Such net income does not include acquisition-related costs of approximately $0.2 million and $0.6 million during the three and nine months ended June 30, 2018, respectively, which were expensed as incurred and primarily included under “Administrative” expense in our condensed consolidated statements of operations. It is impracticable to provide historical supplemental pro forma financial information for GPMX and All Other acquisitions due to a variety of factors, including complexity of restructured entities acquired and access to historical information, such as information necessary to eliminate intercompany transactions.
 
Three Months Ended June 30, 2018
 
Nine Months Ended June 30, 2018
 
Revenue
 
Net Income
 
Revenue
 
Net Income
 
 
 
 
 
 
 
 
 
(in millions)
GPMX
$
11.3

 
$
2.2

 
$
34.6

 
$
6.0

All Other
1.5

 
0.4

 
2.7

 
0.5


8


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 June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(in thousands, except per share amounts)
Net income from continuing operations attributable to EZCORP (A)
$
14,542

 
$
5,525

 
$
39,825

 
$
22,316

Income (loss) from discontinued operations, net of tax (B)
91

 
(265
)
 
(631
)
 
(1,868
)
Net income attributable to EZCORP (C)
$
14,633

 
$
5,260

 
$
39,194

 
$
20,448

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

 
54,295

 
54,453

 
54,247

Dilutive effect of restricted stock and 2024 Convertible Notes*
3,490

 
72

 
2,627

 
63

Weighted-average common stock and common stock equivalents (E)
57,954


54,367


57,080


54,310

 
 
 
 
 
 
 
 
Basic earnings per share attributable to EZCORP:
 
 
 
 
 
 
 
Continuing operations (A / D)
$
0.27

 
$
0.10

 
$
0.73

 
$
0.41

Discontinued operations (B / D)

 

 
(0.01
)
 
(0.03
)
Basic earnings per share (C / D)
$
0.27

 
$
0.10

 
$
0.72

 
$
0.38

 
 
 
 
 
 
 
 
Diluted earnings per share attributable to EZCORP:
 
 
 
 
 
 
 
Continuing operations (A / E)
$
0.25

 
$
0.10

 
$
0.70

 
$
0.41

Discontinued operations (B / E)

 

 
(0.01
)
 
(0.03
)
Diluted earnings per share (C / E)
$
0.25

 
$
0.10

 
$
0.69

 
$
0.38

 
 
 
 
 
 
 
 
Potential common shares excluded from the calculation of diluted earnings per share above, exclusive of the additional potential impact of the 2019 Convertible Notes Warrants, 2024 Convertible Notes and 2025 Convertible Notes*:
 
 
 
 
 
 
 
Restricted stock**
3,569

 
2,418

 
3,375

 
2,435

*
See Note 6 for discussion of the terms and conditions of these potential common shares and dilutive impact thereon.
**
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.

9


NOTE 4: STRATEGIC INVESTMENTS
As of June 30, 2018, we owned 214,183,714 shares, or approximately 34.75%, of our unconsolidated affiliate Cash Converters International Limited. We acquired 57,631,230 shares in June 2018 for $14.0 million (increasing our ownership by three percentage points) in connection with an underwritten placement of approximately 123.3 million shares by Cash Converters International for AUD 39.5 million, excluding costs. Cash Converters International stated it will use the proceeds from the offering to reduce outstanding indebtedness and provide additional capital to pursue growth opportunities while maintaining sufficient working capital. Our participation in this offering, including our incremental equity ownership, does not change our conclusion to account for our investment in Cash Converters International under the equity method. The following tables present summary financial information for Cash Converters International’s most recently reported results as of June 30, 2018 after translation to U.S. dollars:
 
December 31,
 
2017
 
2016
 
 
 
 
 
(in thousands)
Current assets
$
203,664

 
$
158,235

Non-current assets
151,189

 
141,218

Total assets
$
354,853

 
$
299,453

 
 
 
 
Current liabilities
$
128,731

 
$
70,468

Non-current liabilities
14,559

 
48,181

Shareholders’ equity
211,563

 
180,804

Total liabilities and shareholders’ equity
$
354,853

 
$
299,453

 
Half-Year Ended December 31,
 
2017
 
2016
 
 
 
 
 
(in thousands)
Gross revenues*
$
95,784

 
$
105,816

Gross profit*
32,572

 
38,533

Net profit
7,292

 
8,633

*
Certain reclassifications of prior period amounts have been made. These reclassifications were made to conform to the current period presentation included in the report of Cash Converters International for the half year ended December 31, 2016.
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
 
June 30, 2018
 
June 30, 2017
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2019 Convertible Notes Hedges — Level 2
 
Prepaid expenses and other current assets
 
$
7,491

 
$

 
$

2019 Convertible Notes Hedges — Level 2
 
Other assets, net
 

 
5,900

 
6,591

2019 Convertible Notes Embedded Derivative — Level 2
 
Current maturities of long-term debt, net
 
(7,491
)
 

 

2019 Convertible Notes Embedded Derivative — Level 2
 
Long-term debt, net
 

 
(5,900
)
 
(6,591
)
We measured the fair value of the cash-settled call options pertaining to the 2.125% Cash Convertible Senior Notes Due 2019 (the “2019 Convertible Notes Hedges”) and the 2019 Convertible Notes derivative instrument (the “2019 Convertible Notes

10


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 June 30, 2018 was 36% based on observed market inputs. As an estimate of the sensitivity of the fair values of the 2019 Convertible Notes Hedges and 2019 Convertible Notes Embedded Derivative, were volatility inputs of 30% and 45% used, the fair values would have ranged from $4.9 million to $12.2 million.
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
 
 
June 30, 2018
 
June 30, 2018
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable, net
 
$
51,338

 
$
57,116

 
$

 
$

 
$
57,116

Investment in unconsolidated affiliate
 
61,056

 
49,205

 
49,205

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
184,823

 
$
197,925

 
$

 
$
197,925

 
$

2024 Convertible Notes
 
104,562

 
195,974

 

 
195,974

 

2025 Convertible Notes
 
118,335

 
168,464

 

 
168,464

 

 
 
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:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
206,279

 
$
218,500

 
$

 
$
218,500

 
$

Term loan facility
 
48,235

 
48,159

 

 

 
48,159

 
 
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, current consumer loans, fees and interest receivable and other debt, 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, consumer loans, fees and interest receivable and other debt to be measured using Level 3 inputs. Significant increases or

11


decreases in the underlying assumptions used to value pawn loans, pawn service charges receivable, consumer loans, fees and interest receivable and other debt 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 June 30, 2018 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 7% to 13%. 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, 2024 Convertible Notes and 2025 Convertible Notes using quoted price inputs. The 2019 Convertible Notes, 2024 Convertible Notes and 2025 Convertible Notes are not actively traded, and thus the price inputs represent a Level 2 measurement. As the quoted price inputs are highly variable from day to day, the fair value estimates disclosed above could significantly increase or decrease.
NOTE 6: DEBT
The following tables present our debt instruments outstanding, contractual maturities and interest expense:
 
June 30, 2018
 
June 30, 2017
 
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)
2019 Convertible Notes
$
195,000

 
$
(10,177
)
 
$
184,823

 
$
230,000

 
$
(23,721
)
 
$
206,279

 
$
195,000

 
$
(17,654
)
 
$
177,346

2019 Convertible Notes Embedded Derivative
7,491

 

 
7,491

 
5,900

 

 
5,900

 
6,591

 

 
6,591

2024 Convertible Notes
143,750

 
(39,188
)
 
104,562

 

 

 

 
143,750

 
(42,880
)
 
100,870

2025 Convertible Notes
172,500

 
(54,165
)
 
118,335

 

 

 

 

 

 

Other debt*
3,482

 

 
3,482

 

 

 

 

 

 

Term loan facility

 

 

 
50,000

 
(1,765
)
 
48,235

 

 

 

Total
$
522,223

 
$
(103,530
)
 
$
418,693

 
$
285,900

 
$
(25,486
)
 
$
260,414

 
$
345,341

 
$
(60,534
)
 
$
284,807

Less current portion
(205,973
)
 
10,177

 
(195,796
)
 

 

 

 

 

 

Total long-term debt
$
316,250

 
$
(93,353
)
 
$
222,897

 
$
285,900

 
$
(25,486
)
 
$
260,414

 
$
345,341

 
$
(60,534
)
 
$
284,807

*
Purchase money financing; debt classified as current as collateral was destroyed. Insurance proceeds are expected to cover the entire loss.

12


 
Schedule of Contractual Maturities
 
Total
 
Less Than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than 5 Years
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2019 Convertible Notes*
$
195,000

 
$
195,000

 
$

 
$

 
$

2024 Convertible Notes*
143,750

 

 

 

 
143,750

2025 Convertible Notes*
172,500

 

 

 

 
172,500

Other debt
3,482

 
3,482

 

 

 

 
$
514,732

 
$
198,482

 
$

 
$

 
$
316,250

*
Excludes the potential impact of embedded derivatives.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(in millions)
2019 Convertible Notes:
 
 
 
 
 
 
 
Contractual interest expense
$
1.1

 
$
1.3

 
$
3.2

 
$
3.8

Amortization of debt discount and deferred financing costs
2.5

 
2.8

 
7.5

 
8.3

Total interest expense
$
3.6

 
$
4.1

 
$
10.7

 
$
12.1

 
 
 
 
 
 
 
 
2024 Convertible Notes:
 
 
 
 
 
 
 
Contractual interest expense
$
1.1

 
$

 
$
3.1

 
$

Amortization of debt discount and deferred financing costs
1.3

 

 
3.8

 

Total interest expense
$
2.4

 
$

 
$
6.9

 
$

 
 
 
 
 
 
 
 
2025 Convertible Notes:
 
 
 
 
 
 
 
Contractual interest expense
$
0.5

 
$

 
$
0.5

 
$

Amortization of debt discount and deferred financing costs
0.8

 

 
0.8

 

Total interest expense
$
1.3

 
$

 
$
1.3

 
$

2.375% Convertible Senior Notes Due 2025
In May 2018, we issued $172.5 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2025 (the “2025 Convertible Notes”). The 2025 Convertible Notes were issued pursuant to an indenture dated May 14, 2018 (the "2018 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The 2025 Convertible Notes were issued in a private offering under Rule 144A under the Securities Act of 1933. The 2025 Convertible Notes pay interest semi-annually in arrears at a rate of 2.375% per annum on May 1 and November 1 of each year, commencing November 1, 2018, and mature on May 1, 2025 (the "2025 Maturity Date"), unless converted, redeemed or repurchased in accordance with their terms prior to such date.
We measured the fair value of the liability component of the 2025 Convertible Notes under a discounted cash flow approach considering our synthetic credit rating, as determined with external consultation, including inputs that are not observable in the market. The fair value of the liability component was estimated by calculating the present value of the cash flows using a discount rate of 8% for a similarly structured liability with no conversion feature, maturing in seven years. Our estimate resulted in an initial carrying value of the liability component of the 2025 Convertible Notes of $121.3 million with an associated original issue discount of $51.2 million, exclusive of deferred financing costs. The carrying amount of the 2025 Convertible Notes as a separate equity-classified instrument (the “2025 Convertible Notes Embedded Derivative”) as initially calculated and is currently included under “Additional paid-in capital” in our condensed consolidated balance sheets of June 30, 2018 was $49.6 million ($39.1 million, net of tax). The 2025 Convertible Notes Embedded Derivative is expected to remain recorded in equity in our condensed consolidated balance sheets as long as it continues to meet the criteria as an equity-classified instrument in subsequent reporting periods. We incurred transaction costs of $5.5 million related to the issuance of the 2025 Convertible Notes, which we recorded as deferred financing costs and are included under “Long-term debt, net” and “Additional paid-in capital” in our condensed consolidated balance sheets. The effective interest rate for the three and nine months ended June 30, 2018 was approximately 9%. As of June 30, 2018, the remaining unamortized debt discount and issuance costs will be amortized through the 2025 Maturity Date assuming no early conversion.

13


The 2025 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 2018 Indenture, based on an initial conversion rate of 62.8931 shares of Class A Common Stock per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of $15.90 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 $15.90 per share for any fiscal quarter, we are required to recognize incremental dilution of our earnings per share.
Prior to November 1, 2024, the 2025 Convertible Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ended on June 30, 2018 (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 2018 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; (3) if we call any or all of the 2025 Convertible Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events, as defined in the 2018 Indenture. On or after November 1, 2024 until the close of business on the business day immediately preceding the 2025 Maturity Date, holders of 2025 Convertible Notes may, at their option, convert their 2025 Convertible Notes at any time, regardless of the foregoing circumstances.
We may not redeem the 2025 Convertible Notes prior to May 1, 2022. At our option, we may redeem for cash all or any portion of the 2025 Convertible Notes on or after May 1, 2022, if the last reported sale price of the Class A Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100% of the principal amount of the 2025 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If, among other triggers described in the 2018 Indenture, the market price of our Class A Common Stock meets the threshold based on at least 20 of the final 30 trading days of the quarter for the 2025 Convertible Notes to become convertible at the option of the holders during the subsequent quarter, we may be required to classify the 2025 Convertible Notes as current on our condensed consolidated balance sheets for each quarter in which such triggers are met. The stock trading price condition and other triggers are measured on a quarter-by-quarter basis and were not met as of June 30, 2018. As of June 30, 2018, the if-converted value of the 2025 Convertible Notes did not exceed the principal amount.
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 carrying amount of the 2024 Convertible Notes as a separate equity-classified instrument (the “2024 Convertible Notes Embedded Derivative”) included under “Additional paid-in capital” in our condensed consolidated balance sheets of June 30, 2018 was $25.3 million. The effective interest rate for the three and nine months ended June 30, 2018 was approximately 9%. As of June 30, 2018, the remaining unamortized debt discount and issuance costs will be amortized through the 2024 Maturity Date assuming no early conversion.
The 2024 Convertible Notes are convertible into cash or shares of 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.
If, among other triggers described in the 2017 Indenture, the market price of our Class A Common Stock meets the threshold based on at least 20 of the final 30 trading days of a quarter for the 2024 Convertible Notes to become convertible at the option

14


of the holders during the subsequent quarter, we may be required to classify the 2024 Convertible Notes as current on our condensed consolidated balance sheets for each quarter in which such triggers are met. The stock trading price condition and other triggers are measured on a quarter-by-quarter basis and were not met as of June 30, 2018, and therefore, the 2024 Convertible notes are not classified as current as of June 30, 2018. Though not currently convertible, we estimate that the if-converted value of the 2024 Convertible Notes exceeded the principal amount by $39.6 million as of June 30, 2018.
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. 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 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 effective interest rate for the three and nine months ended June 30, 2018 and 2017 was approximately 8%. As of June 30, 2018, the remaining unamortized debt discount and issuance costs will be amortized through the 2019 Maturity Date assuming no early conversion.
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). As of June 30, 2018, the if-converted value of the 2019 Convertible Notes did not exceed the principal amount.
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. Subsequent to repurchase and retirement of $35.0 million aggregate principal amount of 2019 Convertible Notes in July 2017, the 2019 Convertible Notes Warrants allow for the purchase of up to approximately 9.4 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

15


June 30, 2018, 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 June 30, 2018 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, named 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; 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 asserted 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);
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 sought (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.
Following briefing and a hearing on the defendants' motions to dismiss, the Court, on January 25, 2016, issued an opinion granting in part and denying in part those motions. 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 Thomas C. Roberts (the sole remaining director defendant). The Court otherwise denied the motions to dismiss, including the motion to dismiss Count III (aiding and abetting) against MS Pawn. On March 4, 2016, following the resolution of additional procedural motions, 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. After the completion of confirmatory discovery, the parties 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. On April 3, 2018, following a settlement fairness hearing, the Court approved the proposed settlement as presented, as well as a fee award of $1.3 million to the plaintiff’s attorneys, and entered a final and binding judgment to that effect, dismissing the action with prejudice.
Under the terms of the agreed and approved settlement, a total of $6.5 million was paid into a settlement fund. Of such amount, $5.5 million was funded by the Company’s insurance carriers and $1.0 million was funded by Madison Park LLC. After payment of the approved fee to the plaintiff's attorneys, the remaining $5.2 million of the settlement fund was paid to the Company because, as a derivative action, the lawsuit was brought on behalf of the Company. We recorded that amount in "Other income" in our condensed consolidated statements of operations for the third quarter of fiscal 2018.
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

16


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.
Following discovery on the surviving claims, the plaintiff filed a Motion for Leave to File a Third Amended Complaint, seeking to revive the "nonperforming" loan claims that the Court previously dismissed. We opposed that motion, and on May 14, 2018, the Court heard oral arguments on the motion, as well as plaintiff's Motion for Class Certification and Appointment of Class Representative and Class Counsel, which was also pending.
On July 26, 2018, the Court granted the plaintiff's motion for leave to amend, thus accepting the Third Amended Consolidated Class Action Complaint, and gave the defendants until August 3, 2018 to file their amended answer. The Court also dismissed the motion for class certification and gave plaintiff until August 31, 2018 to amend and refile such motion.
We cannot predict the outcome of the litigation, but we intend to continue 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.

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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 June 30, 2018
  
U.S. Pawn
 
Latin America Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
83,898

 
$
20,839

 
$

 
$
104,737

 
$

 
$
104,737

Jewelry scrapping sales
17,813

 
2,615

 

 
20,428

 

 
20,428

Pawn service charges
55,620

 
17,254

 

 
72,874

 

 
72,874

Other revenues
55

 
245

 
1,603

 
1,903

 

 
1,903

Total revenues
157,386

 
40,953

 
1,603

 
199,942

 

 
199,942

Merchandise cost of goods sold
52,340

 
14,556

 

 
66,896

 

 
66,896

Jewelry scrapping cost of goods sold
15,329

 
2,296

 

 
17,625

 

 
17,625

Other cost of revenues

 

 
349

 
349

 

 
349

Net revenues
89,717

 
24,101

 
1,254

 
115,072

 

 
115,072

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
65,257

 
15,097

 
2,678

 
83,032

 

 
83,032

Administrative

 

 

 

 
13,268

 
13,268

Depreciation and amortization
3,010

 
951

 
48

 
4,009

 
2,115

 
6,124

Loss on sale or disposal of assets
74

 
26

 

 
100

 
214

 
314

Interest expense

 
3

 

 
3

 
7,391

 
7,394

Interest income

 
(672
)
 

 
(672
)
 
(3,686
)
 
(4,358
)
Equity in net income of unconsolidated affiliate

 

 
(1,151
)
 
(1,151
)
 

 
(1,151
)
Other income

 
(103
)
 

 
(103
)
 
(5,184
)
 
(5,287
)
Segment contribution (loss)
$
21,376

 
$
8,799

 
$
(321
)
 
$
29,854

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
29,854

 
$
(14,118
)
 
$
15,736


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Three Months Ended June 30, 2017
  
U.S. Pawn
 
Latin America 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