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. We have elected not to measure at fair value any eligible items for which fair value measurement is optional.

Recurring Fair Value Measurements

The table below presents our financial assets (liabilities) that were carried and measured at fair value on a recurring basis:



		September 30, 2018			September 30, 2017
Financial Assets (Liabilities):	Balance Sheet Location	September 30, 2018			September 30, 2017

		(in thousands)
2019 Convertible Notes Hedges — Level 2	Prepaid expenses and other current assets	$	2,552		$	—
2019 Convertible Notes Hedges — Level 2	Other assets, net	—			6,591
2019 Convertible Notes Embedded Derivative — Level 2	Current maturities of long-term debt, net	(2,552		)	—
2019 Convertible Notes Embedded Derivative — Level 2	Long-term debt, net	—			(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 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 inputs used as of September 30, 2018 and 2017 were 36% to 37%, based on observed market inputs. In July 2017, we cash settled the portion of the 2019 Convertible Notes Hedges and 2019 Convertible Notes Warrants relating to $35 million aggregate principal amount of 2019 Convertible Notes that we repurchased and retired, as further discussed in Note 8. As an estimate of the sensitivity of the fair values of the 2019 Convertible Notes Hedges and 2019 Convertible Notes Embedded Derivative, if volatility inputs of 30% and 45% were used, the fair values would have ranged from $1.0 million to $4.6 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 (including those discussed below the following tables) on a recurring basis:



	Carrying Value		Estimated Fair Value
	September 30, 2018		September 30, 2018		Fair Value Measurement Using
	September 30, 2018		September 30, 2018		Level 1		Level 2		Level 3

	(in thousands)
Financial assets:
Notes receivable, net	$	37,425	$	41,153	$	—	$	—	$	41,153
Investment in unconsolidated affiliate	49,500		49,500		49,500		—		—

Financial liabilities:
2019 Convertible Notes	$	187,433	$	189,150	$	—	$	189,150	$	—
2024 Convertible Notes	105,858		180,399		—		180,399		—
2025 Convertible Notes	119,736		161,253		—		161,253		—
8.5% unsecured notes due 2024	1,304		1,304		—		—		1,304



	Carrying Value		Estimated Fair Value
	September 30, 2017		September 30, 2017		Fair Value Measurement Using
	September 30, 2017		September 30, 2017		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 primarily 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 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.

For background information regarding the notes receivable, see “Notes Receivable from Grupo Finmart Divestiture” below. We measured the fair value of the notes receivable as of September 30, 2018 and 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 primarily from 7% to 8%. 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 as discussed in “Notes Receivable from Grupo Finmart Divestiture” below. 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.

Notes Receivable from Grupo Finmart Divestiture

Subsequent to the sale of Grupo Finmart in September 2016, we determined that we retained a variable interest in Grupo Finmart, including notes receivable and a guarantee liability of the future cash outflows of certain Grupo Finmart foreign exchange forward contracts with a backup guarantee provided by AlphaCredit for any payments we make under the guarantee. We determined that we are not the primary beneficiary of Grupo Finmart subsequent to its disposition as we lack a controlling financial interest in Grupo Finmart.

During fiscal 2018 and 2017, we collected $32.4 million and $29.5 million, respectively, in principal on these notes receivable. As of September 30, 2017, all of the notes receivable (other than the Parent Loan Notes discussed below) had been repaid and the guarantee liability had been extinguished.

As of September 30, 2017, only two promissory notes (referred to as the “Parent Loan Notes”), one of which was denominated in Mexican Pesos, remained outstanding from the Grupo Finmart sale, with a total aggregate principal amount of $60.9 million. In September 2017, we and AlphaCredit amended the Parent Loan Notes as follows:


•	The outstanding principal amount (including the $18.3 million that would otherwise have been payable on September 27, 2017) will be payable on a monthly basis over the remaining two years, commencing October 27, 2017.


•	The per annum interest rate was increased from 4% to 10% for the dollar-denominated note and from 7.5% to 14.5% for the peso-denominated note. Accrued interest is also payable monthly, commencing October 27, 2017.


•	We will receive an additional deferred compensation fee of $14.0 million, payable $6.0 million on September 27, 2019, $4.0 million on March 27, 2020 and $4.0 million on September 27, 2020.

•

The Parent Loan Notes may be prepaid in full voluntarily at any time and are subject to mandatory prepayment in certain circumstances. Upon any prepayment, whether voluntary or mandatory, Grupo Finmart must pay all outstanding principal, all accrued but unpaid interest and an amount equal to the sum of (1) all remaining interest payments that would otherwise be due through the end of the term and (2) the deferred compensation fee. If the prepayment occurs on or prior to June 30, 2019, the deferred compensation fee will be reduced to $10.0 million.


•	The Parent Loan Notes, as amended, are now fully guaranteed by AlphaCredit.

As further consideration for these amendments, AlphaCredit agreed to terminate our indemnification obligations with respect to representations and warranties and certain other matters under the Purchase Agreement, dated as of July 1, 2016, that the parties entered into in connection with the sale of Grupo Finmart (the “Purchase Agreement”). Those representations and warranties were originally scheduled to survive until March 27, 2018. AlphaCredit also agreed to terminate all indemnity claims existing at the time of the amendment and to release to us the outstanding balance ($4.1 million) held in escrow pending resolution of indemnification claims.

We accounted for this amendment as an extinguishment of the original Parent Loan Notes, recognizing $3.0 million of remaining discount as a gain included in “Interest income” in our consolidated statements of operations.

We review the financial statements of Grupo Finmart and AlphaCredit including the calculation of synthetic credit spreads as described above in making our determination that the Parent Loan Notes are collectible on an ongoing basis. The following table presents the carrying amount and classification of the assets compared to the maximum exposure to loss:



		September 30, 2018				September 30, 2017
Instrument	Balance Sheet Location	Asset Recorded in Consolidated Balance Sheet		Maximum Exposure to Loss		Asset Recorded in Consolidated Balance Sheet		Maximum Exposure to Loss

		(in thousands)				(in thousands)
Notes receivable	Notes receivable, net (including accreted deferred compensation of $9.2 million and $0.1 million as of September 30, 2018 and 2017, respectively)	$	37,425	$	37,425	$	60,975	$	60,975