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Table of Contents

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, 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
EZCORPLOGOA47.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
¨
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, 2019, 52,475,070 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.


Table of Contents

EZCORP, Inc.
INDEX TO FORM 10-Q
 
 
 
 
 
 
1
 
 
2
 
 
3
 
 
3
 
 
4
 
 
5
 
 
5
 
 
7
 
 
8
 
 
9
 
 
10
 
 
12
 
 
15
 
 
15
 
 
17
 
 
19
 
 
19
 
 
31
 
 
31
 
 
 
 
 
32
 
 
32
 
 
32
 
 
33


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EZCORP, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
December 31,
2018
 
December 31,
2017
 
September 30,
2018
 
 
 
 
 
 
 
(Unaudited)
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
297,031

 
$
113,584

 
$
286,015

Pawn loans
193,984

 
177,001

 
198,463

Pawn service charges receivable, net
38,959

 
34,054

 
38,318

Inventory, net
175,422

 
163,310

 
166,997

Notes receivable, net
26,711

 
36,682

 
34,199

Prepaid expenses and other current assets
31,223

 
26,516

 
33,154

Total current assets
763,330

 
551,147

 
757,146

Investment in unconsolidated affiliate
35,511

 
45,605

 
49,500

Property and equipment, net
69,770

 
62,098

 
73,649

Goodwill
294,881

 
288,773

 
297,448

Intangible assets, net
55,956

 
43,974

 
54,923

Notes receivable, net
4,599

 
23,343

 
3,226

Deferred tax asset, net
9,283

 
10,997

 
7,165

Other assets
4,442

 
16,625

 
3,863

Total assets
$
1,237,772

 
$
1,042,562

 
$
1,246,920

 
 
 
 
 
 
Liabilities and equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt, net
$
190,238

 
$

 
$
190,181

Accounts payable, accrued expenses and other current liabilities
57,628

 
60,207

 
57,800

Customer layaway deposits
11,747

 
10,686

 
11,824

Total current liabilities
259,613

 
70,893

 
259,805

Long-term debt, net
229,928

 
294,761

 
226,702

Deferred tax liability, net
9,617

 

 
8,817

Other long-term liabilities
6,150

 
8,845

 
6,890

Total liabilities
505,308

 
374,499

 
502,214

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: 52,475,070 as of December 31, 2018; 51,494,246 as of December 31, 2017; and 51,614,746 as of September 30, 2018
524

 
515

 
516

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
400,081

 
351,110

 
397,927

Retained earnings
387,936

 
364,414

 
392,180

Accumulated other comprehensive loss
(49,104
)
 
(44,902
)
 
(42,616
)
EZCORP, Inc. stockholders’ equity
739,467

 
671,167

 
748,037

Noncontrolling interest
(7,003
)
 
(3,104
)
 
(3,331
)
Total equity
732,464

 
668,063

 
744,706

Total liabilities and equity
$
1,237,772

 
$
1,042,562

 
$
1,246,920

See accompanying notes to unaudited interim condensed consolidated financial statements.

1

Table of Contents

EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended December 31,
 
2018
 
2017
 
 
 
 
 
(Unaudited)
 
(in thousands, except per share amounts)
Revenues:
 
 
 
Merchandise sales
$
121,024

 
$
113,588

Jewelry scrapping sales
9,281

 
12,213

Pawn service charges
83,674

 
76,360

Other revenues
1,871

 
2,347

Total revenues
215,850

 
204,508

Merchandise cost of goods sold
77,112

 
71,167

Jewelry scrapping cost of goods sold
8,050

 
10,337

Other cost of revenues
484

 
577

Net revenues
130,204

 
122,427

Operating expenses:
 
 
 
Operations
89,546

 
83,610

Administrative
15,479

 
13,318

Depreciation and amortization
6,848

 
5,723

Loss on sale or disposal of assets and other
4,442

 
39

Total operating expenses
116,315

 
102,690

Operating income
13,889

 
19,737

Interest expense
8,791

 
5,847

Interest income
(3,339
)
 
(4,270
)
Equity in net loss (income) of unconsolidated affiliate
1,119

 
(1,450
)
Impairment of investment in unconsolidated affiliate
13,274

 

Other income
(386
)
 
(182
)
(Loss) income from continuing operations before income taxes
(5,570
)
 
19,792

Income tax (benefit) expense
(1,032
)
 
7,437

(Loss) income from continuing operations, net of tax
(4,538
)
 
12,355

Loss from discontinued operations, net of tax
(183
)
 
(222
)
Net (loss) income
(4,721
)
 
12,133

Net loss attributable to noncontrolling interest
(477
)
 
(615
)
Net (loss) income attributable to EZCORP, Inc.
$
(4,244
)
 
$
12,748

 
 
 
 
Basic (loss) earnings per share attributable to EZCORP, Inc. — continuing operations
$
(0.07
)
 
$
0.24

Diluted (loss) earnings per share attributable to EZCORP, Inc. — continuing operations
$
(0.07
)
 
$
0.23

 
 
 
 
Weighted-average basic shares outstanding
55,032

 
54,464

Weighted-average diluted shares outstanding
55,032

 
55,682

See accompanying notes to unaudited interim condensed consolidated financial statements.

2

Table of Contents

EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
Three Months Ended December 31,
 
2018
 
2017
 
 
 
 
 
(Unaudited)
 
(in thousands)
Net (loss) income
$
(4,721
)
 
$
12,133

Other comprehensive loss:
 
 
 
Foreign currency translation loss, net of income tax expense for our investment in unconsolidated affiliate of $87 and $176 for the three months ended December 31, 2018 and 2017, respectively
(6,488
)
 
(6,575
)
Comprehensive (loss) income
(11,209
)
 
5,558

Comprehensive loss attributable to noncontrolling interest
(477
)

(655
)
Comprehensive (loss) income attributable to EZCORP, Inc.
$
(10,732
)
 
$
6,213

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, 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 loss

 

 

 

 
(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

 
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, 2018)
 
(in thousands)
Balances as of September 30, 2018
54,585

 
$
546

 
$
397,927

 
$
392,180

 
$
(42,616
)
 
$
(3,331
)
 
$
744,706

Stock compensation

 

 
2,247

 

 

 

 
2,247

Release of restricted stock
860

 
8

 

 

 

 

 
8

Taxes paid related to net share settlement of equity awards

 

 
(3,288
)
 

 

 

 
(3,288
)
Transfer of subsidiary shares to noncontrolling interest

 

 
3,195

 

 
 
 
(3,195
)
 

Foreign currency translation loss, net

 

 

 

 
(6,488
)
 

 
(6,488
)
Net loss

 

 

 
(4,244
)
 

 
(477
)
 
(4,721
)
Balances as of December 31, 2018
55,445

 
$
554

 
$
400,081

 
$
387,936

 
$
(49,104
)
 
$
(7,003
)
 
$
732,464

See accompanying notes to unaudited interim condensed consolidated financial statements.

3

Table of Contents

EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended December 31,
 
2018
 
2017
 
 
 
 
 
(Unaudited)
 
(in thousands)
Operating activities:
 
 
 
Net (loss) income
$
(4,721
)
 
$
12,133

Adjustments to reconcile net (loss) income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
6,848

 
5,723

Amortization of debt discount and deferred financing costs
5,585

 
3,682

Accretion of notes receivable discount and deferred compensation fee
(1,376
)
 
(2,577
)
Deferred income taxes
352

 
3,129

Impairment of investment in unconsolidated affiliate
13,274

 

Other adjustments
5,052

 
601

Stock compensation expense
2,238

 
2,919

Loss (income) from investment in unconsolidated affiliate
1,119

 
(1,450
)
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Service charges and fees receivable
(877
)
 
(50
)
Inventory
685

 
(1,087
)
Prepaid expenses, other current assets and other assets
(1,564
)
 
(500
)
Accounts payable, accrued expenses and other liabilities
(461
)
 
(5,283
)
Customer layaway deposits
18

 
(283
)
Income taxes, net of excess tax benefit from stock compensation
(3,412
)
 
2,295

Net cash provided by operating activities
22,760

 
19,252

Investing activities:
 
 
 
Loans made
(186,588
)
 
(169,666
)
Loans repaid
106,643

 
103,041

Recovery of pawn loan principal through sale of forfeited collateral
70,594

 
67,144

Additions to property and equipment, net
(5,880
)
 
(9,537
)
Acquisitions, net of cash acquired
(332
)
 
(62,163
)
Principal collections on notes receivable
7,284

 
2,849

Net cash used in investing activities
(8,279
)
 
(68,332
)
Financing activities:
 
 
 
Taxes paid related to net share settlement of equity awards
(3,288
)
 
(311
)
Proceeds from borrowings, net of issuance costs
743

 

Payments on borrowings
(67
)
 

Net cash used in financing activities
(2,612
)
 
(311
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(865
)
 
(1,165
)
Net increase (decrease) in cash, cash equivalents and restricted cash
11,004

 
(50,556
)
Cash, cash equivalents and restricted cash at beginning of period
286,282

 
164,393

Cash, cash equivalents and restricted cash at end of period
$
297,286

 
$
113,837

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
80,301

 
$
72,649

Deferred and contingent consideration

 
1,920


See accompanying notes to unaudited interim condensed consolidated financial statements.

4

Table of Contents

EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
December 31, 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, 2018. The balance sheet as of September 30, 2018 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, 2018 and 2017 (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, 2018, other than those described below.
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.
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, net" in investing cash flows.
Recently Adopted Accounting Policies
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification ("ASC") 350-40 to determine which implementation costs to defer and recognize as an asset. This ASU generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. Our hosting

5


arrangements that are service contracts include various third-party software applications. We adopted this ASU during the first quarter of our fiscal 2019 on a prospective basis for all service contracts entered into after adoption, with no material impact during the current quarter.
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this ASU during the first quarter of our fiscal 2019 with no impact on our financial position or results of operations. However, we have recast our statements of cash flows on a retrospective basis to include restricted cash when reconciling the beginning-of-period and end-of-period total amounts. Restricted cash of $0.3 million was recorded under "Prepaid expenses and other current assets" in our condensed consolidated balance sheets as of December 31, 2018 and 2017.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on eight specific cash flow issues. We adopted this ASU during the first quarter of our fiscal 2019 on a prospective basis with no impact on our financial position, results of operations or cash flows.
In May 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10). The amendments in this ASU make targeted improvements to U.S. GAAP primarily as it pertains to equity investments (not including equity method of accounting), fair value disclosures, balance sheet presentation, and other items pertaining to financial instruments. We adopted this ASU during the first quarter of our fiscal 2019 on a prospective basis, as applicable, with no impact on our financial position, results of operations or cash flows.
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 this ASU, and the subsequently issued ASUs modifying or clarifying this ASU, 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 adopted this ASU and related guidance as of October 1, 2018 using the modified retrospective method. We evaluated the impact of ASC 606 on our consolidated financial position, results of operations, cash flows and disclosure requirements noting no material impact to our consolidated financial statements or disclosures. See Note 9 for disaggregated information about our sources of revenue. Additionally, we have concluded that ASC 606 does not impact our revenue recognition for pawn service charges or consumer loan fees as we believe neither of those revenue streams are within the scope of ASC 606.
Pawn Service Charges Revenue
We record pawn service charges using the effective interest method for all pawn loans we believe to be collectible. We base our estimate of collectible loans on several inputs, including recent redemption rates, historical trends in redemption rates and the amount of loans due in the following months. Unexpected variations in any of these factors could change our estimate of collectible loans, affecting our earnings and financial condition. If a pawn loan is not repaid, we value the forfeited collateral (inventory) at the lower of cost (pawn loan principal) or net realizable value of the item.
Merchandise and Related Sales Revenue
This revenue stream involves the sale of merchandise to retail customers in our pawn stores. The performance obligation is the delivery of the merchandise to the customer, and revenue, and the related cost of merchandise sold, is recognized at the time of sale. Customers have a very limited period of time to return merchandise for a refund or exchange, and actual returns for refunds are insignificant. Sales tax collected on the sale of merchandise is excluded from the amount recognized as sales and instead recorded as a liability in “Accounts payable, accrued expenses and

6


other current liabilities” in our condensed consolidated balance sheets until remitted to the appropriate governmental authorities.
Jewelry Scrapping Sales Revenue
This revenue stream involves the sales of scrap (precious metals and stones) to refiners. The performance obligation is the legal transfer of scrap to the refiner. Revenue, and the related cost of scrap sold, is recognized when scrap inventory is provided to the refiner, which is when the customer obtains control of the promised good. The receivables outstanding at the end of a given reporting period are not material. Payment of the receivable from the customer is generally received within a short period of time after the legal transfer of the scrap materials to the refiner.
Other Revenue
Layaway fees, product protection plan revenues, and jewelry VIP package revenues are not significant.
Recently Issued Accounting Pronouncements
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 this 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 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. We currently plan to adopt this ASU using the optional transition method provided under ASU 2018-11, Leases, (Topic 842): Targeted Improvement which was issued in July 2018, allowing for application of ASU 2016-02 at the adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
Please refer to Note 1 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, 2018 for discussion of our significant accounting policies and other accounting pronouncements issued but not yet adopted.
NOTE 2: ACQUISITIONS
Fiscal 2019 Acquisitions
In December 2018, we acquired assets related to five pawn stores in Mexico, for an aggregate purchase price of $0.3 million in cash, of which $0.1 million was recorded as goodwill. We have concluded that this acquisition was immaterial to our overall consolidated financial results and, therefore, have omitted certain information that would otherwise be required.
Fiscal 2018 Acquisition of 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, at the time, owned and operated 112 stores located in Guatemala, El Salvador, Honduras and Peru for a total purchase price of $61.7 million. The GPMX acquisition significantly expanded our store base into Latin American countries outside of Mexico and provides us with a platform for further growth in the region. The accompanying condensed consolidated results of operations for the three months ended December 31, 2018 include the results

7


of operations for GPMX, while the comparable prior-year quarter includes the results of GPMX for the period October 6, 2017 to December 31, 2017, affecting comparability of fiscal 2019 and 2018 amounts. We have performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the total consideration based on the fair values of those identifiable assets and liabilities.
All Other Fiscal 2018 Acquisitions
On June 25, 2018, June 11, 2018 and December 4, 2017, we acquired pawn stores operating in Mexico under the names “Montepio San Patricio,” "Presta Dinero" and "Bazareño," respectively. These acquisitions significantly strengthened our competitive position in existing regions, gave us a presence in new regions and allowed us to achieve synergies in management and administration. The accompanying condensed consolidated results of operations for the three months ended December 31, 2018 include the results of operations for these acquisitions, while the comparable prior-year quarter only includes the results of Bazareño for the period December 4, 2017 to December 31, 2017, affecting comparability of fiscal 2019 and 2018 amounts.
We have performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the total consideration based on the fair values of those identifiable assets and liabilities for these acquisitions. During the current quarter, we finalized accounting for the Montepio San Patricio and Presta Dinero acquisitions, which were completed in fiscal 2018, and increased associated deferred tax assets by $1.8 million with an offsetting reduction in goodwill.
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,
 
2018
 
2017
 
 
 
 
 
(in thousands, except per share amounts)
Net (loss) income from continuing operations attributable to EZCORP (A)
$
(4,061
)
 
$
12,970

Loss from discontinued operations, net of tax (B)
(183
)
 
(222
)
Net (loss) income attributable to EZCORP (C)
$
(4,244
)
 
$
12,748

 
 
 
 
Weighted-average outstanding shares of common stock (D)
55,032

 
54,464

Dilutive effect of restricted stock*

 
1,218

Weighted-average common stock and common stock equivalents (E)
55,032


55,682

 
 
 
 
Basic (loss) earnings per share attributable to EZCORP:
 
 
 
Continuing operations (A / D)
$
(0.07
)
 
$
0.24

Discontinued operations (B / D)

 

Basic (loss) earnings per share (C / D)
$
(0.07
)
 
$
0.24

 
 
 
 
Diluted (loss) earnings per share attributable to EZCORP:
 
 
 
Continuing operations (A / E)
$
(0.07
)
 
$
0.23

Discontinued operations (B / E)

 

Diluted (loss) earnings per share (C / E)
$
(0.07
)
 
$
0.23

 
 
 
 
Potential common shares excluded from the calculation of diluted (loss) earnings per share above*:
 
 
 
Restricted stock**
2,626

 
2,991


*
See Note 6 for discussion of the terms and conditions of the potential impact of the 2019 Convertible Note Warrants, 2024 Convertible Notes and 2025 Convertible Notes.
**
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.

8


NOTE 4: STRATEGIC INVESTMENTS
As of December 31, 2018, we owned 214,183,714 shares, or approximately 34.75%, of Cash Converters International Limited ("Cash Converters International"). The following tables present summary financial information for Cash Converters International’s most recently reported results after translation to U.S. dollars:
 
June 30,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Current assets
$
229,105

 
$
155,749

Non-current assets
148,195

 
150,843

Total assets
$
377,300

 
$
306,592

 
 
 
 
Current liabilities
$
122,924

 
$
57,387

Non-current liabilities
15,449

 
48,698

Shareholders’ equity
238,927

 
200,507

Total liabilities and shareholders’ equity
$
377,300

 
$
306,592

 
Fiscal Year Ended June 30,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Gross revenues
$
201,800

 
$
204,509

Gross profit
128,366

 
130,943

Net profit
17,443

 
15,546


During the first quarter of fiscal 2019, the fair value of our investment in Cash Converters International, as estimated by reference to its quoted market price per share, declined from its value at September 30, 2018 and ended the quarter below its carrying value. As of December 31, 2018, we determined that our investment was impaired and that such impairment was other-than-temporary. In reaching this conclusion, we considered all available evidence, including evidence in existence as of September 30, 2018 as discussed in Note 4 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, 2018. Additionally, we noted the following developments subsequent to September 30, 2018: (i) continued decline in Cash Converters International's share price; and (ii) ongoing uncertainty around remaining Queensland class action lawsuit. As a result, we recognized an other-than-temporary impairment in Cash Converters International of $13.3 million ($10.3 million, net of taxes).
The above impairment increased the difference between the amount at which our investment was carried and the amount of underlying equity in net assets of Cash Converters International and was recorded under “Impairment of investment in unconsolidated affiliate” in our condensed consolidated statements of operations in the “Other International” segment. We will 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 additional impairment charges should the fair value of our investment in Cash Converters International further decline 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, 2018
 
December 31, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2019 Convertible Notes Hedges — Level 2
 
Prepaid expenses and other current assets
 
$
21

 
$

 
$
2,552

2019 Convertible Notes Hedges — Level 2
 
Other assets
 

 
12,863

 

2019 Convertible Notes Embedded Derivative — Level 2
 
Current maturities of long-term-debt, net
 
(21
)
 

 
(2,552
)
2019 Convertible Notes Embedded Derivative — Level 2
 
Long-term debt, net
 

 
(12,863
)
 



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 input used as of December 31, 2018 was 36% based on historically observed market inputs.
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, 2018
 
December 31, 2018
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable, net
 
$
31,310

 
$
33,710

 
$

 
$

 
$
33,710

Investment in unconsolidated affiliate
 
35,511

 
35,511

 
35,511

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
190,076

 
$
190,613

 
$

 
$
190,613

 
$

2024 Convertible Notes
 
107,182

 
145,202

 

 
145,202

 

2025 Convertible Notes
 
121,316

 
134,447

 

 
134,447

 

8.5% unsecured notes due 2024
 
1,237

 
1,237

 

 

 
1,237

CASHMAX secured borrowing facility
 
334

 
1,160

 

 

 
1,160



10


 
 
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
 
 
September 30, 2018
 
September 30, 2018
 
Fair Value Measurement Using
 
 
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


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.
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, 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 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. 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.

11


NOTE 6: DEBT
The following tables present our long-term debt instruments outstanding as well as future principal payments due:
 
December 31, 2018
 
December 31, 2017
 
September 30, 2018
 
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

 
$
(4,924
)
 
$
190,076

 
$
195,000

 
$
(15,165
)
 
$
179,835

 
$
195,000

 
$
(7,567
)
 
$
187,433

2019 Convertible Notes Embedded Derivative
21

 

 
21

 
12,863

 

 
12,863

 
2,552

 

 
2,552

2024 Convertible Notes
143,750

 
(36,568
)
 
107,182

 
143,750

 
(41,687
)
 
102,063

 
143,750

 
(37,892
)
 
105,858

2025 Convertible Notes
172,500

 
(51,184
)
 
121,316

 

 

 

 
172,500

 
(52,764
)
 
119,736

8.5% unsecured notes due 2024*
1,237

 

 
1,237

 

 

 

 
1,304

 

 
1,304

CASHMAX secured borrowing facility**
1,160

 
(826
)
 
334

 

 

 

 

 

 

Total
$
513,668

 
$
(93,502
)
 
$
420,166

 
$
351,613

 
$
(56,852
)
 
$
294,761

 
$
515,106

 
$
(98,223
)
 
$
416,883

Less current portion
195,162

 
(4,924
)
 
190,238

 

 

 

 
197,748

 
(7,567
)
 
190,181

Total long-term debt
$
318,506

 
$
(88,578
)
 
$
229,928

 
$
351,613

 
$
(56,852
)
 
$
294,761

 
$
317,358

 
$
(90,656
)
 
$
226,702


*
Amount translated from Guatemalan quetzals as of December 31, 2018. Certain disclosures omitted due to materiality considerations.
**
See description below.
 
Principal Payment Schedule
 
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

8.5% unsecured notes due 2024
1,237

 
141

 
424

 
424

 
248

CASHMAX secured borrowing facility
1,160

 

 
1,160

 

 

 
$
513,647

 
$
195,141

 
$
1,584

 
$
424

 
$
316,498

*
Excludes the potential impact of embedded derivatives.

12


 
Three Months Ended December 31,
 
2018
 
2017
 
 
 
 
 
(in millions)
2019 Convertible Notes:
 
 
 
Contractual interest expense
$
1.1

 
$
1.1

Amortization of debt discount and deferred financing costs
2.6

 
2.5

Total interest expense
$
3.7

 
$
3.6

 
 
 
 
2024 Convertible Notes:
 
 
 
Contractual interest expense
$
1.0

 
$
1.0

Amortization of debt discount and deferred financing costs
1.4

 
1.3

Total interest expense
$
2.4

 
$
2.3

 
 
 
 
2025 Convertible Notes:
 
 
 
Contractual interest expense
$
1.0

 
$

Amortization of debt discount and deferred financing costs
1.6

 

Total interest expense
$
2.6

 
$


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. The carrying amount of the 2025 Convertible Notes as a separate equity-classified instrument (the “2025 Convertible Notes Embedded Derivative”) included under “Additional paid-in capital” in our condensed consolidated balance sheets of December 31, 2018 was $39.0 million. The effective interest rate for the three months ended December 31, 2018 was approximately 9%. As of December 31, 2018, the remaining unamortized debt discount and issuance costs will be amortized through the 2025 Maturity Date assuming no early conversion.
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.
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 December 31, 2018. As of December 31, 2018, the if-converted value of the 2025 Convertible Notes did not exceed the principal amount.

13


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 December 31, 2018 was $25.3 million. The effective interest rate for the three months ended December 31, 2018 was approximately 9%. As of December 31, 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 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 December 31, 2018, and therefore, the 2024 Convertible notes are not classified as current as of December 31, 2018. As of December 31, 2018, the if-converted value of the 2024 Convertible Notes did not exceed the principal amount.
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 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 months ended December 31, 2018 was approximately 8%. As of December 31, 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 December 31, 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.

14


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.
CASHMAX Secured Borrowing Facility
In November 2018 we entered into a receivables securitization facility with a third-party lender (the "lender") to provide funding for installment loan originations in our Canadian CASHMAX business. Under the facility, an unconsolidated variable interest entity (the "trust") has the right, subject to various conditions, to borrow up to CAD $25 million from the lender (the "third-party loan") and use the proceeds to purchase interests in installment loan receivables generated by CASHMAX. The trust uses collections on the transferred receivables to pay various amounts in accordance with an agreed priority arrangement, including expenses, its obligations under the third-party loan and, to the extent available, amounts owned to CASHMAX with respect to the purchase price of the transferred receivables and CASHMAX's retained interest in the receivables. CASHMAX has no obligation with respect to the third-party loan or the transferred receivables except to (a) service the underlying installment loans on behalf of the trust and (b) pay amounts owning under or repurchase the underlying installment loans in the event of a breach by CASHMAX or in certain other limited circumstances. The facility is generally nonrecourse to EZCORP. The amount outstanding under the facility as of December 31, 2018 was $1.2 million.
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, 2018, the 2010 Plan permitted grants of options, restricted stock awards and stock appreciation rights covering up to 5,085,649 shares of our Class A Common Stock. In November 2018, the Board of Directors and the voting stockholder approved the addition of 400,000 shares to the 2010 Plan.
In November 2018, we granted 1,008,998 restricted stock unit awards to employees and 59,812 restricted stock awards to non-employee directors with a grant date fair value of primarily $9.18 per share. The number of long-term incentive award shares and units granted are generally determined based on our share price as of October 1 each year, which was $10.51 for these fiscal 2019 awards. The awards granted to employees vest on September 30, 2021, subject to the achievement of certain adjusted net income and adjusted diluted earnings per share performance targets. As of December 31, 2018, we considered the achievement of these performance targets probable. The awards granted to non-employee directors vest on September 30, 2019 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. We have not recorded a liability for any of these matters as of December 31, 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.
Federal Securities Litigation — 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 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

15


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 we filed our answer on August 3, 2018. On August 31, 2018, the plaintiff filed an Amended Motion for Class Certification and Appointment of Class Representative and Class Counsel, and we filed our opposition on September 28, 2018. The Court held a hearing on that motion on November 15, 2018, and the motion is pending decision of the Court.
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.

16


NOTE 9: SEGMENT INFORMATION
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 condensed consolidated financial statements.
 
Three Months Ended December 31, 2018
  
U.S. Pawn
 
Latin America Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
95,103

 
$
25,921

 
$

 
$
121,024

 
$

 
$
121,024

Jewelry scrapping sales
6,552

 
2,729

 

 
9,281

 

 
9,281

Pawn service charges
64,303

 
19,371

 

 
83,674

 

 
83,674

Other revenues
48

 
42

 
1,781

 
1,871

 

 
1,871

Total revenues
166,006

 
48,063

 
1,781

 
215,850

 

 
215,850

Merchandise cost of goods sold
59,148

 
17,964

 

 
77,112

 

 
77,112

Jewelry scrapping cost of goods sold
5,510

 
2,540

 

 
8,050

 

 
8,050

Other cost of revenues

 

 
484

 
484

 

 
484

Net revenues
101,348

 
27,559

 
1,297

 
130,204

 

 
130,204

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
68,068

 
18,848

 
2,630

 
89,546

 

 
89,546

Administrative

 

 

 

 
15,479

 
15,479

Depreciation and amortization
3,035

 
1,422

 
41

 
4,498

 
2,350

 
6,848

Loss on sale or disposal of assets and other
2,853

 
1,589

 

 
4,442

 

 
4,442

Interest expense

 
29

 
72

 
101

 
8,690

 
8,791

Interest income

 
(419
)
 

 
(419
)
 
(2,920
)
 
(3,339
)
Equity in net loss of unconsolidated affiliate

 

 
1,119

 
1,119

 

 
1,119

Impairment of investment in unconsolidated affiliate

 

 
13,274

 
13,274

 

 
13,274

Other (income) expense

 
(126
)
 
22

 
(104
)
 
(282
)
 
(386
)
Segment contribution (loss)
$
27,392

 
$
6,216

 
$
(15,861
)
 
$
17,747

 
 
 
 
(Loss) income from continuing operations before income taxes
 
 
 
 
 
 
$
17,747

 
$
(23,317
)
 
$
(5,570
)

17


 
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



18


NOTE 10: SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION AND OTHER
Supplemental Consolidated Financial Information
The following table provides supplemental information on net amounts included in our condensed consolidated balance sheets:
 
December 31, 2018
 
December 31, 2017
 
September 30, 2018
 
 
 
 
 
 
 
(in thousands)
Gross pawn service charges receivable
$
48,892

 
$
43,316

 
$
49,629

Allowance for uncollectible pawn service charges receivable
(9,933
)
 
(9,262
)
 
(11,311
)
Pawn service charges receivable, net
$
38,959

 
$
34,054

 
$
38,318

 
 
 
 
 
 
Gross inventory
$
185,706

 
$
171,029

 
$