Notes to Consolidated Financial Statements
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
We are a leading provider of pawn loans in the United States and Mexico. Pawn loans are non-recourse loans collateralized by tangible property. We also sell merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers, and operate a small number of financial services stores in Canada.
As of
September 30, 2017
, we operated a total of
786
locations, consisting of:
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513
United States pawn stores (operating primarily as EZPAWN or Value Pawn & Jewelry);
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246
Mexico pawn stores (operating as Empeño Fácil); and
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27
financial services stores in Canada (operating as CASHMAX).
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We also own approximately
32%
of Cash Converters International Limited (“Cash Converters International”), based in Australia and publicly-traded on the Australian Stock Exchange, which franchises and operates a worldwide network of nearly
700
locations that provide pawn loans, short-term unsecured loans and other consumer finance products, and buy and sell second-hand goods.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of EZCORP, Inc. and its consolidated subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
We adopted Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs") 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) during the first quarter of fiscal 2017. Upon adoption of the ASU, management has the responsibility to evaluate whether there is substantial doubt about our ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued) or to provide related footnote disclosures.
To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity; otherwise, the entity is evaluated under the voting interest model. Where we hold current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in that VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally.
In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.
In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to a VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including the entity’s capital structure, contractual rights to earnings or losses, subordination of our interests relative to those of other investors, as well as any other contractual arrangements that might exist that could have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.
Our fiscal 2017 noncontrolling interest is comprised of activities of an insignificant consolidated VIE of which we have majority ownership and are the primary funding source. In addition, see “Notes Receivable from Grupo Finmart Divestiture” in Note 5 for discussion of the nonconsolidated VIE Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart").
Reclassifications to Prior Period Financial Statements
Certain reclassifications of prior period amounts have been made. These reclassifications, other than those pertaining to the adoption of ASUs discussed below, were made to conform to the current period presentation.
Pawn Loan and Sales Revenue Recognition
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.
We record sales revenue and the related cost when merchandise inventory is sold, or when we receive the final payment on a layaway sale. We record sales revenue and the related cost when scrap inventory is sold and the proceeds to be received are fixed and determinable and ownership is transferred. Sales tax collected on the sale of inventory is excluded from the amount recognized as sales and instead recorded as a liability in “Accounts payable, accrued expenses and other current liabilities” in our consolidated balance sheets until remitted to the appropriate governmental authorities.
Customers may purchase a product protection plan that allows them to exchange certain general merchandise (non-jewelry) sold through our retail pawn operations within six months of purchase. We recognize the fees for this service as revenue ratably over the three to six month period of the plan. We also offer a jewelry VIP package, which guarantees customers a minimum future pawn loan amount on the item sold, allows them full credit if they trade in the item to purchase a more expensive piece of jewelry, and provides minor repair service on the item sold. These fees are recognized upon sale. Customers may also purchase an item on layaway by paying a minimum layaway deposit of typically
10%
of the item’s sale price. We hold the item for a
60
to
180
-day period, during which the customer is required to pay the balance of the sales price. The initial deposit and subsequent payments are recorded as customer layaway deposits. Layaways are recorded as sales when paid in full. We record product protection, jewelry VIP and layaway fees as merchandise sales revenue, as they are incidental to sales of merchandise.
Inventory and Cost of Goods Sold
If a pawn loan is not redeemed, we record the forfeited collateral at cost (the principal amount of the pawn loan) in "Inventory, net" in our consolidated balance sheets. We do not record loan loss allowances or charge-offs on the principal portion of pawn loans, as they are fully collateralized. We record our inventory using the specific identification method of accounting.
In order to state inventory at the lower of cost or net realizable value, we record an allowance for excess, obsolete or slow moving inventory based on the type and age of merchandise. Our inventory consists primarily of general merchandise and jewelry. Our "Merchandise cost of goods sold" includes the historical cost of inventory sold, inventory shrinkage and any change in the allowance for inventory shrinkage and valuation. We include the cost of operating our central jewelry processing unit under “Jewelry scrapping cost of goods sold,” as it relates directly to sales of precious metals to refiners.
We consider our estimates of obsolete or slow moving inventory and shrinkage critical estimates in determining the appropriate overall valuation allowance for inventory. We monitor our sales margins for each type of inventory on an ongoing basis and compare to historical margins. Significant variances in those margins may require a revision to future inventory reserve estimates. We monitor our reserve estimates pertaining to jewelry inventory depending on the current and projected prices of gold. Future declines in the value of gold prices may cause an increase in reserve rates pertaining to jewelry inventory.
With respect to our Mexico pawn operations, we do not own the forfeited collateral; however, we assume the risk of loss on such collateral and are solely responsible for its care and disposition and as such, record such collateral under “Inventory, net” in our consolidated balance sheets. The amount of inventory from our Mexico pawn operations classified as “Inventory, net” in our consolidated balance sheets was
$21.8 million
and
$19.0 million
as of
September 30, 2017
and
2016
, respectively.
We adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, during the first quarter of fiscal 2017 on a prospective basis, and such adoption did not have a material impact on our consolidated financial position, results of operations or cash flows. We now measure our inventories at the lower of cost or net realizable value, where net realizable value is "estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation." Inventory was previously required to be measured at the lower of cost or market value, where the measurement of market value had several potential outcomes.
Cash and Cash Equivalents and Cash Concentrations
Cash and cash equivalents consist primarily of cash on deposit or highly liquid investments with original contractual maturities of three months or less, or money market mutual funds. We hold cash at major financial institutions that often exceed FDIC insured limits. We manage our credit risk associated with cash and cash equivalents and cash concentrations by concentrating our cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions issuing investments or holding such deposits. Historically, we have not experienced any losses due to such cash concentrations.
Notes Receivable
As discussed under “Notes Receivable from Grupo Finmart Divestiture” in Note 5, in September 2017 we restructured the repayment arrangements for certain promissory notes that we had received from Grupo Finmart in connection with such divestiture. We accounted for the restructuring as new notes receivable for which the modification was more than minor, recognizing
$3.0 million
of discount remaining on the original notes receivable as a gain, included in our income statement as a component of “Interest income.” As part of the restructuring of the notes receivable, we negotiated a deferred compensation amount of up to
$14.0 million
which we will account for as “Interest income” under the effective interest method, accreting to its ultimate estimated settlement amount at September 2020. We review the payment history, creditworthiness, projected cash flows and related assumptions of Grupo Finmart and AlphaCredit (the guarantor of such notes receivable) in determining whether our notes receivable and deferred compensation amounts are collectible. Prior to the restructuring, we amortized the discount on our notes receivable into “Interest income” under the effective interest method over the life of the notes receivable. We currently accrue interest under the terms of the repayment schedules. These items are included in “Corporate items” and “Mexico Pawn” within our segment disclosure in
Note 5
. As of
September 30, 2017
, we have included no impairment due to non-collectability on our notes receivable.
Equity Method Investments
We account for our investment in Cash Converters International using the equity method. Since Cash Converters International’s fiscal year ends three months prior to ours, we report the income from this investment on a
three
-month lag. Thus, income reported for fiscal years ended September 30,
2017
,
2016
and
2015
represents our percentage interest in the results of Cash Converters International’s operations from July 1,
2016
to June 30,
2017
, July 1,
2015
to June 30,
2016
and July 1,
2014
to June 30,
2015
, respectively. Because Cash Converters International publicly files semi-annual financial reports with the Australian Securities & Investments Commission as of and for the periods ended June 30 and December 31, we make estimates for our equity in Cash Converters International’s net income (loss) for Cash Converters International three-month periods ended March 31 (our reporting period ended June 30) and September 30 (our reporting period ended December 31). Those estimates may vary from actual results. We adjust our estimates as necessary in our reporting periods ended March 31 and September 30 to conform to Cash Converters International actual results as shown in their published semi-annual reports. We record all other-than-temporary impairments as of the date of our reporting period.
Cash Converters International records its results of operations under International Financial Reporting Standards (“IFRS”). There have historically been and currently are no material differences between Cash Converters International results of operations based upon IFRS versus results of operations as converted to accounting principles generally accepted in the United States of America (“GAAP”). We will continue to monitor for any potential IFRS to GAAP differences.
Impairments and other items recognized in prior years have created a negative basis in our investment in Cash Converters International of
$20.7 million
as compared to our proportionate share of equity. We accounted for this negative basis as a reduction in our portion of Cash Converters International goodwill. We will increase our equity in Cash Converters International’s net income in future reporting periods for our portion of any impairments of goodwill that may be recorded by Cash Converters International until such negative basis is restored.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets having indefinite lives are not subject to amortization. We test goodwill and intangible assets with indefinite useful lives for potential impairment annually as of September 30, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We adopted ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during the fourth quarter of fiscal 2017, and such adoption did not have a material impact on our consolidated financial position, results of operations or cash flows. This ASU eliminates Step 2 from the goodwill impairment test which previously required measurement of any goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new standard we compare the fair value of our reporting units with their carrying
amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, without exceeding the total amount of goodwill allocated to that reporting unit.
We perform our impairment analyses utilizing the income approach. This approach uses future cash flows and estimated terminal values for each of our reporting units (discounted using a market participant perspective) to determine the fair value of each reporting unit, which is then compared to the carrying value of the reporting unit to determine if there is an impairment. We have determined that our reporting units are equivalent to our operating segments for fiscal
2017
. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in fiscal
2017
goodwill and other intangible asset valuations ranged from
9%
to
12%
. In testing other intangible assets for potential impairment, we apply key assumptions that are consistent with those utilized in our goodwill impairment test. Changes in the economic conditions or regulatory environment could negatively affect our key assumptions.
In addition to the assumptions discussed above pertaining to the income approach, we consider the assessment of potential triggering events to be a critical estimate.
Property and Equipment
We record property and equipment at cost. We depreciate these assets on a straight-line basis using estimated useful lives of
30
years for buildings and
two
to
seven
years for furniture, equipment and software development costs. We depreciate leasehold improvements over the shorter of their estimated useful life (typically
10
years) or the reasonably assured lease term at the inception of the lease.
Valuation of Tangible Long-Lived Assets
We assess the impairment of tangible long-lived assets whenever events or changes in circumstances indicate that the net recorded amount may not be recoverable. The following factors could trigger an impairment review: significant underperformance relative to historical or projected future cash flows, significant changes in the manner of use of the assets or the strategy for the overall business, or significant negative industry trends or legislative changes prohibiting us from offering our loan products. An impairment loss is recognized if the future undiscounted cash flows associated with the asset and the estimated fair value of the asset are less than the asset's carrying value.
In addition to the assumptions associated with the determination of projected future cash flows, we consider the assessment of potential triggering events to be a critical estimate.
Software Development Costs and Cloud Computing Arrangements
We capitalize certain costs incurred in connection with developing or obtaining software for internal use and amortize the costs on a straight-line basis over the estimated useful lives of each system, typically
five
years.
We adopted ASU 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, during the first quarter of fiscal 2017 on a prospective basis for all arrangements entered into or materially modified after adoption of the ASU, and such adoption did not have a material impact on our consolidated financial position, results of operations or cash flows. We now consider whether cloud computing arrangements include a software license. In evaluating whether our arrangements include a software license, we consider whether we have the contractual right to take possession of the software at any time during the hosting period without significant penalty and whether it is feasible for us to either run the software on our own hardware or contract with another party unrelated to the vendor to host the software. If a cloud computing arrangement includes a software license, then we account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, we account for the arrangement as a service contract.
Customer Layaways
Customer layaway deposits are recorded as deferred revenue until we collect the entire related sales price and deliver the related merchandise to the customer.
Insurance Recoveries
We incur legal costs with respect to a variety of issues on an ongoing basis. To the extent that such costs are reimbursable under applicable insurance policies, we believe it is probable such costs will be reimbursed and such reimbursements can be reasonably estimated, we record a receivable from the insurance enterprise and a recovery of the costs in our statements of operations. All loss contingencies are recorded gross of the insured recoveries as applicable.
Fair Value of Financial Instruments
We have elected not to measure at fair value any eligible items for which fair value measurement is optional. We determine the fair value of financial instruments by reference to various market data and other valuation techniques, as appropriate.
Business Combinations
We allocate the total acquisition price to the fair value of assets and liabilities acquired and immediately expense transaction costs. We adopted ASU 2015-16, Business Combinations (Topic 805), during the second quarter of fiscal 2016 to reduce the cost and complexity of accounting for and reporting business combinations, and such adoption did not have a material impact on our consolidated financial position, results of operations or cash flows. This ASU requires recognition of adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, with the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
Convertible Debt Securities
In accounting for our
2.875%
Convertible Senior Notes Due 2024 (the “2024 Convertible Notes”) at issuance, we separated the 2024 Convertible Notes into debt and equity components pursuant to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The carrying value of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature, including discount rates slightly above
8%
. The excess of the principal amount of the 2024 Convertible Notes over the fair value of the liability component was recorded as a discount with a corresponding increase in additional paid-in capital. The debt discount will be accreted to “Interest expense” over the term of the 2024 Convertible Notes using the effective interest method. The amount recorded to “Additional paid-in capital” will not be remeasured as long as it continues to meet the conditions for equity classification.
Foreign Currency
Our equity investment in Cash Converters International is translated from Australian dollars into United States dollars at the exchange rates as of Cash Converters International’s balance sheet date each reporting period. The related interest in Cash Converters International’s net income is translated at the average exchange rate for each
six
-month period reported by Cash Converters International.
The functional currency of Mexico Pawn is the Mexican peso. The functional currency of our wholly owned foreign subsidiary in Canada is the Canadian dollar. Our foreign subsidiaries' balance sheet accounts are translated from their respective functional currencies into United States dollars at the exchange rate at the end of each quarter, and their earnings are translated into United States dollars at the average exchange rate each quarter. We present resulting translation adjustments as a separate component of stockholders’ equity.
Foreign currency transaction gains and losses not accounted for as translations as discussed above are included under “Other expense” in our consolidated statements of operations. These (gains) losses included in continuing operations were
$(0.5) million
,
$1.1 million
and
$2.2 million
for fiscal
2017
,
2016
and
2015
, respectively.
Operations Expense
Included in “Operations” expense are costs related to operating our stores and any direct costs of support offices. These costs include labor, other direct expenses such as utilities, supplies and banking fees and indirect expenses such as store rent, building repairs and maintenance, advertising, store property taxes and insurance and regional and area management expenses.
Administrative Expense
Included in “Administrative” expense are costs related to our executive and administrative offices. This includes executive and administrative salaries, wages, stock and incentive compensation, professional fees, license fees, costs related to the operation of our administrative offices such as rent, property taxes, insurance, information technology and other corporate costs.
Advertising
Advertising costs are expensed as incurred and included primarily under “Operations” expense in our consolidated statements of operations. These costs included in continuing operations were
$1.9 million
,
$2.1 million
and
$3.1 million
for fiscal
2017
,
2016
and
2015
, respectively.
Stock Compensation
We measure share-based compensation expense at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, ratably over the vesting or service period, as applicable, of the stock award. Our policy is to recognize expense on performance-based awards ratably over the awards’ vesting period and recognize expense on awards that only have service requirements on a straight-line basis.
We adopted ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, during the first quarter of fiscal 2017. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, calculation of the dilutive impact of awards, classification of awards as either equity or liabilities and classification on the statement of cash flows. We prospectively applied the requirement to present excess tax benefits as an operating activity on the statement of cash flows. Further, we continue to estimate the number of award forfeitures in recording costs for share-based awards. The financial impact of adopting the ASU was a
$0.5 million
income tax benefit for excess tax benefits on vested awards which previously would have been recorded to "Additional paid-in capital" prior to adoption of the ASU.
We adopted ASU 2014-12, Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, during the second quarter of fiscal 2016 and applied the amendments prospectively to all awards granted or modified after the effective date. This ASU requires recognition of compensation costs for share-based awards with performance targets in the period in which it becomes probable that the performance targets will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered.
Income Taxes
We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and their tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We have not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes of our undistributed earnings of foreign subsidiaries indefinitely invested outside the U.S.
We may be subject to income tax audits by the respective tax authorities in any or all of the jurisdictions in which we operate or have operated within a relevant period. Significant judgment is required in determining uncertain tax positions. We utilize the required two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We adjust these reserves in light of changing facts and circumstances, such as the closing of an audit or the refinement of an estimate. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We believe adequate provisions for income taxes have been made for all periods. We recognize interest and penalties related to unrecognized tax benefits as “Income tax expense” in our consolidated statements of operations, which were
$0.2 million
,
$0.2 million
and
$0.1 million
during fiscal
2017
,
2016
and
2015
, respectively.
We consider our assessment of the recognition of deferred tax assets as well as estimates of uncertain tax positions to be critical estimates.
Earnings per Share and Common Stock
We compute basic earnings per share on the basis of the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding, including conversion features embedded in our outstanding convertible debt, during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock awards, as well as shares issuable on conversion of our outstanding convertible debt securities and exercise of outstanding warrants. Potential common shares are required to be excluded from the computation of diluted earnings per share if the assumed proceeds upon exercise or vest are greater than the cost to re-acquire the same number of shares at the average market price, and therefore the effect would be anti-dilutive. There were no participating securities outstanding during fiscal
2017
,
2016
and
2015
requiring the application of the two-class method.
Our capital stock consists of two classes of common stock designated as Class A Non-Voting Common Stock (“Class A Common Stock”) and Class B Voting Common Stock (“Class B Common Stock”). The rights, preferences and privileges of the Class A and Class B Common Stock are similar except that each share of Class B Common Stock has
one
vote and each share of Class A Common Stock has no voting privileges, except as required by law. All Class A Common Stock is publicly held. Holders of Class B Common Stock may, individually or as a class, convert some or all of their shares into Class A Common Stock on a one-to-one basis. Class A Common Stock becomes voting common stock upon the conversion of all Class B Common Stock to Class A Common Stock. We are required to reserve the number of authorized but unissued shares of Class A Common Stock that would be issuable upon conversion of all outstanding shares of Class B Common Stock.
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, inventory, collectability of notes receivable, loan loss allowances, long-lived and intangible assets, 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 the estimates under different assumptions or conditions.
Discontinued Operations
We adopted ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, during the first quarter of fiscal 2016. There was no impact of adopting the ASU on our consolidated financial position, results of operations or cash flows. We have presented our Grupo Finmart segment classified as a discontinued operation as held for sale under the ASU, and our operations discontinued prior to adoption of the ASU including our U.S. Financial Services business ("USFS") under the accounting guidance in effect before the adoption of the ASU.
Accounting Pronouncements Not Yet Adopted
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In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718). This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted based upon guidance issued within the ASU. A reporting entity should apply the amendment to awards modified after the adoption date on a prospective basis. We do not anticipate that the adoption of the ASU will have a material effect on our financial position, results of operations or cash flows.
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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. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including within interim periods. A reporting entity should apply the amendment on a retrospective basis as of the beginning of the fiscal year for which the amendments are effective. We are in the process of evaluating the impact of adopting the on our consolidated financial position, results of operations and cash flows.
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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. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including within interim periods. A reporting entity should apply the amendment on a retrospective basis as of the beginning of the fiscal year for which the amendments are effective. We are in the process of evaluating the impact of adopting the ASU on our consolidated financial position, results of operations and cash flows.
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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 as of 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
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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted based upon guidance issued within the ASU. Although we are in the process of evaluating the impact of adopting the ASU on our consolidated financial position, results of operations and cash flows, we anticipate a material impact on our consolidated financial position. Additionally, we are evaluating the disclosure requirements under this ASU and are identifying and preparing to implement changes to our accounting policies, practices and controls to support adoption of the ASU and are evaluating upgrades to our third party software solution concurrently with our adoption. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption of the ASU which is effective for fiscal 2020.
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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 the ASU, and the subsequently issued ASUs modifying or clarifying the 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 are evaluating the impact that will result from adopting the ASU on our consolidated financial position, results of operations, and cash flows. We currently anticipate adopting the ASU using the modified retrospective method. We do not believe the adoption will have an impact on our pawn service 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 fiscal 2019.
NOTE 2: ACQUISITIONS
We have concluded that the acquisitions described below were immaterial to our overall consolidated financial results and, therefore, have omitted the information that would otherwise be required by ASC 805-10-50-2(h). See Note 18, Subsequent Events, for discussion of an acquisition completed in October 2017.
Fiscal 2017
In August 2017, we acquired certain assets related to
two
pawn stores in Central Texas and
one
pawn store in Las Vegas, Nevada, of which
two
were ultimately placed into operation. The aggregate purchase price for these transactions in total was
$2.3 million
in cash, of which
$0.4 million
was recorded as goodwill. For additional discussion of the Central Texas acquisition, see
Note 11
.
Fiscal 2016
On February 1, 2016, we acquired
six
pawn stores in the Houston, Texas area doing business under the "Pawn One" brand. The aggregate purchase price was $
6.2 million
in cash, inclusive of all ancillary arrangements, of which $
3.2 million
was recorded as goodwill.
Fiscal 2015
On August 17, 2015, we completed the acquisition of
13
pawn stores in Oregon and Arizona doing business under the "USA Pawn" brand. The aggregate purchase price was
$12.3 million
in cash, inclusive of a
$0.2 million
reduction for imputed interest and all ancillary arrangements. Of the total purchase price,
$3.0 million
was paid at closing,
$3.0 million
was paid in December 2015, and
$6.5 million
was paid in February 2016.
On February 19, 2015, we completed the acquisition of
12
pawn stores in Central Texas doing business under the "Cash Pawn" brand. The aggregate purchase price for the acquisition was
$16.5 million
, comprised of
$5.0 million
cash and
1,168,456
shares of our Class A Common Stock, valued at
$10.01
per share less a
$0.2 million
Holding Period Adjustment. On the first anniversary of the closing date, the sellers exercised their right to require us to repurchase the Class A Common Stock for an aggregate price of
$11.8 million
.
NOTE 3: EARNINGS PER SHARE
Components of basic and diluted earnings (loss) per share and excluded antidilutive potential common shares are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Net income (loss) from continuing operations attributable to EZCORP (A)
|
$
|
33,683
|
|
|
$
|
(7,973
|
)
|
|
$
|
(51,298
|
)
|
|
Loss from discontinued operations, net of tax (B)
|
(1,825
|
)
|
|
(72,771
|
)
|
|
(37,894
|
)
|
|
Net income (loss) attributable to EZCORP (C)
|
$
|
31,858
|
|
|
$
|
(80,744
|
)
|
|
$
|
(89,192
|
)
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares of common stock (D)
|
54,260
|
|
|
54,427
|
|
|
54,369
|
|
|
Dilutive effect of restricted stock*
|
108
|
|
|
—
|
|
|
—
|
|
|
Weighted average common stock and common stock equivalents (E)
|
54,368
|
|
|
54,427
|
|
|
54,369
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share attributable to EZCORP:
|
|
|
|
|
|
|
Continuing operations (A / D)
|
$
|
0.62
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.94
|
)
|
|
Discontinued operations (B / D)
|
(0.03
|
)
|
|
(1.34
|
)
|
|
(0.70
|
)
|
|
Basic earnings (loss) per share (C / D)
|
$
|
0.59
|
|
|
$
|
(1.49
|
)
|
|
$
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share attributable to EZCORP:
|
|
|
|
|
|
|
Continuing operations (A / E)
|
$
|
0.62
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.94
|
)
|
|
Discontinued operations (B / E)
|
(0.03
|
)
|
|
(1.34
|
)
|
|
(0.70
|
)
|
|
Diluted earnings (loss) per share (C / E)
|
$
|
0.59
|
|
|
$
|
(1.49
|
)
|
|
$
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
Potential common shares excluded from the calculation of diluted earnings (loss) per share:
|
|
|
|
|
|
|
Restricted stock**
|
2,356
|
|
|
840
|
|
|
—
|
|
|
2024 Convertible Notes***
|
14,375
|
|
|
—
|
|
|
—
|
|
|
2019 Convertible Notes Warrants***
|
12,138
|
|
|
14,317
|
|
|
14,317
|
|
|
Total potential common shares excluded
|
28,869
|
|
|
15,157
|
|
|
14,317
|
|
|
|
|
|
*
|
As required by ASC 260-10-45-19, amount excludes all potential common shares for periods when there is a loss from continuing operations.
|
|
|
|
|
**
|
Includes antidilutive share-based awards as well as performance-based and market conditioned share-based awards that are contingently issuable, but for which the condition for issuance has not been met as of the end of the reporting period.
|
|
|
|
|
***
|
See
Note 8
for discussion of the terms and conditions of these potential common shares.
|
Weighted-average outstanding shares of common stock for fiscal 2016 include the impact of redeemable common stock repurchased as discussed in
Note 2
.
NOTE 4: STRATEGIC INVESTMENTS
As of
September 30, 2017
, we owned
156,552,484
shares, or approximately
32%
, of our unconsolidated affiliate Cash Converters International. Our total investment in Cash Converters International was acquired between November 2009 and October 2016 for approximately
$82.1 million
.
Our equity in Cash Converters International’s net income (loss) was
$4.9 million
,
$(0.3) million
and
$(5.5) million
in fiscal
2017
,
2016
and
2015
, respectively. We recorded dividends from Cash Converters International of
$1.2 million
,
$2.2 million
and
$4.8 million
in fiscal
2017
,
2016
and
2015
, respectively, of which the fiscal 2017 dividend was reinvested. Cash Converters International’s accumulated undistributed after-tax earnings included in our consolidated retained earnings were
$10.3 million
as of
September 30, 2017
.
The following tables present summary financial information for Cash Converters International’s most recently reported results as of September 30,
2017
,
2016
and
2015
as applicable after translation to U.S. dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
(in thousands)
|
|
Current assets
|
$
|
155,749
|
|
|
$
|
173,830
|
|
|
Non-current assets
|
150,843
|
|
|
141,028
|
|
|
Total assets
|
$
|
306,592
|
|
|
$
|
314,858
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
57,387
|
|
|
$
|
83,275
|
|
|
Non-current liabilities
|
48,698
|
|
|
51,873
|
|
|
Shareholders’ equity
|
200,507
|
|
|
179,710
|
|
|
Total liabilities and shareholders’ equity
|
$
|
306,592
|
|
|
$
|
314,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gross revenues*
|
$
|
204,684
|
|
|
$
|
225,712
|
|
|
$
|
241,584
|
|
|
Gross profit*
|
130,943
|
|
|
146,286
|
|
|
174,101
|
|
|
Net profit (loss)
|
15,546
|
|
|
(3,839
|
)
|
|
(18,149
|
)
|
|
|
|
|
*
|
Fiscal 2016 amounts recast by Cash Converters International during fiscal 2017.
|
As of
September 30, 2017
, the fair value of our investment in Cash Converters International exceeded its carrying value, though during fiscal 2017 the fair value of our investment in Cash Converters International declined below its carrying value. We continue to monitor the fair value of our investment in Cash Converters International for other-than-temporary impairments in future reporting periods and may record 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.
During fiscal 2016 and 2015, the fair value of our investment in Cash Converters International continued to decline from its previous values and remained below its carrying value as of September 30, 2016 and 2015. As of September 30, 2016 and 2015, we determined that our investment was impaired and that such impairment was other-than-temporary and recognized an other-than-temporary impairment in Cash Converters International of
$11.0 million
(
$7.2 million
, net of taxes) in fiscal 2016 and
$26.8 million
(
$17.4 million
, net of taxes) in fiscal 2015. These impairments 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 as discussed in
Note 1
and were recorded under “Impairment of investment” in our consolidated statements of operations in the “Other International” segment.
NOTE 5: FAIR VALUE MEASUREMENTS
In accordance with ASC 820-10, our assets and liabilities discussed below are classified in one of the following three categories based on the inputs used to develop their fair values: Level 1 — quoted market prices in active markets for identical assets or liabilities; Level 2 — other observable inputs other than quoted market prices; and Level 3 — unobservable inputs that are not corroborated by market data.
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, 2017
|
|
September 30, 2016
|
|
Financial Assets (Liabilities):
|
|
Balance Sheet Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Guarantee asset — Level 3
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
1,209
|
|
|
Guarantee liability — Level 3
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
—
|
|
|
(1,258
|
)
|
|
2019 Convertible Notes Hedges — Level 2
|
|
Other assets, net
|
|
6,591
|
|
|
37,692
|
|
|
2019 Convertible Notes Embedded Derivative — Level 2
|
|
Long-term debt, net
|
|
(6,591
|
)
|
|
(37,692
|
)
|
We initially measured the guarantee asset and liability, discussed below under “Notes Receivable from Grupo Finmart Divestiture,” at fair value and subsequently amortized the guarantees based upon the principal payments received on the associated notes receivable, which approximated the fair value of the guarantees on a recurring basis.
As a result of the early repayment in July 2017 of notes receivable from the divestiture of Grupo Finmart discussed below, we wrote-off the remaining associated guarantee asset and liability in the fourth quarter of fiscal 2017.
We measured the fair value of the 2019 Convertible Notes Hedges and 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. As of
September 30, 2017
the volatility input was revised downward to
36%
, based on observed market inputs including inputs from our recent 2024 Convertible Notes issuance, from
55%
as of
September 30, 2016
. 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
.
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, 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
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
Fair Value Measurement Using
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, net
|
|
$
|
83,065
|
|
|
$
|
83,065
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83,065
|
|
|
Investment in unconsolidated affiliate
|
|
37,128
|
|
|
37,128
|
|
|
37,128
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
2019 Convertible Notes
|
|
$
|
197,954
|
|
|
$
|
227,332
|
|
|
$
|
—
|
|
|
$
|
227,332
|
|
|
$
|
—
|
|
|
Term Loan Facility
|
|
47,965
|
|
|
48,688
|
|
|
—
|
|
|
48,688
|
|
|
—
|
|
Based on the short-term nature of cash and cash equivalents, pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable, we estimate that their carrying value approximates fair value. We consider our cash and cash equivalents to be measured using Level 1 inputs and our pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable to be measured using Level 3 inputs. Significant increases or decreases in the underlying assumptions used to value pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable could significantly increase or decrease these fair value estimates.
For background information regarding the notes receivable, see “Notes Receivable from Grupo Finmart Divestiture” below. The fair value of the notes receivable as of
September 30, 2017
approximated their carrying value taking into account the stated interest rates of
10%
and
14.5%
and estimated credit ratings for Grupo Finmart and AlphaCredit. We measured the fair value of the notes receivable as of
September 30, 2016
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
8%
to
15%
. Certain of the significant inputs used for the valuation were not observable in the market. Included in the fair value of the notes receivable as of September 30, 2017 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 and the 2024 Convertible Notes using quoted price inputs from Bloomberg. Neither the 2019 Convertible Notes nor the 2014 Convertible Notes are actively traded, and thus the price inputs represent a Level 2 measurement. The quoted price inputs obtained from Bloomberg are highly variable from day to day, and thus the fair value estimates disclosed above could significantly increase or decrease. See
Note 8
for discussion of the use of proceeds from the 2024 Convertible Notes to repurchase and retire a portion of the 2019 Convertible Notes in July 2017.
The fair value of the Term Loan Facility, described in
Note 8
, approximated its carrying value, inclusive of issuance costs and exclusive of deferred financing costs, as of September 30, 2016. See
Note 8
for discussion of the repayment of the Term Loan Facility in July 2017.
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 2017, we collected
$29.5 million
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 has been 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 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.
The following table presents the carrying amount and classification of the assets and liabilities compared to the maximum exposure to loss for each asset and liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Instrument
|
|
Balance Sheet Location
|
|
Asset Recorded in Consolidated Balance Sheet
|
|
Maximum Exposure to Loss
|
|
Asset (Liability) Recorded in Consolidated Balance Sheet
|
|
Maximum Exposure to Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Notes receivable
|
|
Notes receivable, net (including accreted deferred compensation of $0.1 million)
|
|
$
|
60,975
|
|
|
$
|
60,975
|
|
|
$
|
83,065
|
|
|
$
|
83,065
|
|
|
Guarantee asset
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
—
|
|
|
1,209
|
|
|
—
|
|
|
Guarantee liability
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
—
|
|
|
—
|
|
|
(1,258
|
)
|
|
—
|
|
NOTE 6: PROPERTY AND EQUIPMENT
Major classifications of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
Carrying
Amount
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
Carrying
Amount
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Land
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
Buildings and improvements
|
80,828
|
|
|
(55,077
|
)
|
|
25,751
|
|
|
77,160
|
|
|
(52,934
|
)
|
|
24,226
|
|
|
Furniture and equipment
|
105,319
|
|
|
(78,581
|
)
|
|
26,738
|
|
|
98,066
|
|
|
(67,191
|
)
|
|
30,875
|
|
|
Software
|
34,022
|
|
|
(32,623
|
)
|
|
1,399
|
|
|
33,279
|
|
|
(31,729
|
)
|
|
1,550
|
|
|
In progress
|
4,067
|
|
|
—
|
|
|
4,067
|
|
|
1,800
|
|
|
—
|
|
|
1,800
|
|
|
|
$
|
224,240
|
|
|
$
|
(166,281
|
)
|
|
$
|
57,959
|
|
|
$
|
210,309
|
|
|
$
|
(151,854
|
)
|
|
$
|
58,455
|
|
During fiscal 2015, we recorded impairment charges of
$4.3 million
and
$1.3 million
related to long-lived assets of our U.S. Pawn and Mexico Pawn segments, respectively. These impairment charges were recorded under “Operations” expense in our consolidated statements of operations.
NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Intangible Asset Balances
The following table presents the balance of each major class of indefinite-lived intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pawn licenses
|
$
|
9,535
|
|
|
$
|
8,836
|
|
|
Trade name
|
4,000
|
|
|
4,000
|
|
|
|
$
|
13,535
|
|
|
$
|
12,836
|
|
The following table presents the changes in the carrying value of goodwill by segment, in addition to discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pawn
|
|
Mexico Pawn
|
|
Discontinued Operations
|
|
Consolidated Including Held for Sale
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balances as of September 30, 2015
|
$
|
244,330
|
|
|
$
|
7,316
|
|
|
$
|
79,133
|
|
|
$
|
330,779
|
|
|
Acquisitions
|
3,208
|
|
|
—
|
|
|
—
|
|
|
3,208
|
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
(73,244
|
)
|
|
(73,244
|
)
|
|
Effect of foreign currency translation changes
|
—
|
|
|
(878
|
)
|
|
(5,889
|
)
|
|
(6,767
|
)
|
|
Balances as of September 30, 2016
|
$
|
247,538
|
|
|
$
|
6,438
|
|
|
$
|
—
|
|
|
$
|
253,976
|
|
|
Acquisitions
|
356
|
|
|
—
|
|
|
—
|
|
|
356
|
|
|
Effect of foreign currency translation changes
|
—
|
|
|
428
|
|
|
—
|
|
|
428
|
|
|
Balances as of September 30, 2017
|
$
|
247,894
|
|
|
$
|
6,866
|
|
|
$
|
—
|
|
|
$
|
254,760
|
|
In August 2017, we acquired certain assets of
two
pawn stores in Central Texas and
one
pawn store in Las Vegas, Nevada and recorded
$0.4 million
in goodwill. On February 1, 2016, we acquired
six
pawn stores in the Houston, Texas area doing business under the "Pawn One" brand and recorded $
3.2 million
in goodwill. These acquisitions were made as part of our continuing strategy to enhance our earnings over the long-term. The factors contributing to the recognition of goodwill were based on several strategic and synergistic benefits we expect to realize from the acquisitions. These benefits include a greater presence in the Central Texas and Las Vegas markets, as well as the ability to further leverage our expense structure through increased scale. Goodwill from these acquisitions was recorded in the U.S. Pawn segment. We expect substantially all goodwill
attributable to the fiscal 2017 acquisitions will be deductible and none of the goodwill attributable to the “Pawn One” acquisition will be deductible for tax purposes. See
Note 2
for additional information regarding these acquisitions.
The following table presents the gross carrying amount and accumulated amortization for each major class of definite-lived intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Real estate finders’ fees
|
$
|
1,167
|
|
|
$
|
(847
|
)
|
|
$
|
320
|
|
|
$
|
1,902
|
|
|
$
|
(796
|
)
|
|
$
|
1,106
|
|
|
Non-compete agreements
|
3,659
|
|
|
(3,102
|
)
|
|
557
|
|
|
3,581
|
|
|
(2,920
|
)
|
|
661
|
|
|
Favorable lease
|
1,102
|
|
|
(708
|
)
|
|
394
|
|
|
909
|
|
|
(637
|
)
|
|
272
|
|
|
Internally developed software
|
29,741
|
|
|
(12,597
|
)
|
|
17,144
|
|
|
23,503
|
|
|
(8,674
|
)
|
|
14,829
|
|
|
Other
|
879
|
|
|
(409
|
)
|
|
470
|
|
|
1,362
|
|
|
(385
|
)
|
|
977
|
|
|
|
$
|
36,548
|
|
|
$
|
(17,663
|
)
|
|
$
|
18,885
|
|
|
$
|
31,257
|
|
|
$
|
(13,412
|
)
|
|
$
|
17,845
|
|
Impairment of Goodwill and Intangible Assets
We test goodwill and intangible assets with an indefinite useful life for potential impairment annually, or more frequently when there are events or circumstances that indicate that it is more likely than not that an impairment exists. During the fourth quarter of fiscal 2017, we performed our required annual impairment test for all reporting units utilizing the income approach. The income approach uses future cash flows and estimated terminal values (discounted using a market participant perspective) to determine the fair value of each intangible asset. We performed a quantitative analysis and determined that the fair value of each of our reporting units exceeded their carrying value. As of
September 30, 2017
, the calculated fair value of the U.S. Pawn and Mexico Pawn reporting units exceeded their carrying values by approximately
18%
and
95%
, respectively.
During the second quarter of fiscal 2016, we recorded an impairment of
$73.2 million
included under "Loss from discontinued operations, net of tax" in our consolidated statements of operations, the entire amount of the goodwill associated with our previous Grupo Finmart reporting unit. During the fourth quarter of fiscal 2015, we recorded an impairment of
$1.7 million
included under “Operations” expense in our consolidated statements of operations, the entire amount of the goodwill associated with our previous TUYO reporting unit. During the third quarter of fiscal 2015, we recorded an impairment of
$10.6 million
, included under "Loss from discontinued operations, net of tax" in our consolidated statements of operations, the entire amount of the goodwill associated with our previous USFS reporting unit. In the fourth quarter of fiscal 2015, we recorded a
$3.7 million
impairment of internally developed software, included under corporate “Administrative” expenses in our consolidated statements of operations.
Amortization of Definite-Lived Intangibles
The amortization of most definite-lived intangible assets is recorded as amortization expense. The favorable lease asset and other intangibles are amortized to operations expense over the related lease terms.
The following table presents the amount and classification of amortization recognized as expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortization expense in continuing operations
|
$
|
4,184
|
|
|
$
|
4,742
|
|
|
$
|
3,875
|
|
|
Amortization expense in discontinued operations
|
—
|
|
|
2,055
|
|
|
2,397
|
|
|
Operations expense
|
90
|
|
|
87
|
|
|
103
|
|
|
|
$
|
4,274
|
|
|
$
|
6,884
|
|
|
$
|
6,375
|
|
The following table presents our estimate of future amortization expense for definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
Amortization expense
|
|
Operations expense
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2018
|
|
$
|
4,006
|
|
|
$
|
23
|
|
|
2019
|
|
3,772
|
|
|
23
|
|
|
2020
|
|
3,343
|
|
|
23
|
|
|
2021
|
|
2,310
|
|
|
22
|
|
|
2022
|
|
1,390
|
|
|
2
|
|
As acquisitions and dispositions occur in the future, amortization expense may vary from these estimates.
NOTE 8: LONG-TERM DEBT
The following tables present our long-term debt instruments outstanding as well as future principal payments due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
Gross Amount
|
|
Debt Discount and Issuance Costs
|
|
Carrying
Amount
|
|
Gross Amount
|
|
Debt Discount and Issuance Costs
|
|
Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2.125% Cash Convertible Senior Notes Due 2019
|
$
|
195,000
|
|
|
$
|
(17,654
|
)
|
|
$
|
177,346
|
|
|
$
|
230,000
|
|
|
$
|
(32,046
|
)
|
|
$
|
197,954
|
|
|
Cash Convertible Senior Notes Due 2019 embedded derivative
|
6,591
|
|
|
—
|
|
|
6,591
|
|
|
37,692
|
|
|
—
|
|
|
37,692
|
|
|
2.875% Convertible Senior Notes Due 2024
|
143,750
|
|
|
(42,880
|
)
|
|
100,870
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Term Loan Facility
|
—
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
(2,035
|
)
|
|
47,965
|
|
|
|
$
|
345,341
|
|
|
$
|
(60,534
|
)
|
|
$
|
284,807
|
|
|
$
|
317,692
|
|
|
$
|
(34,081
|
)
|
|
$
|
283,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Payment Schedule
|
|
|
Total
|
|
Less Than 1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More Than 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2.125% Cash Convertible Senior Notes Due 2019 (a)
|
$
|
195,000
|
|
|
$
|
—
|
|
|
$
|
195,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2.875% Convertible Senior Notes Due 2024 (a)
|
143,750
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
143,750
|
|
|
|
$
|
338,750
|
|
|
$
|
—
|
|
|
$
|
195,000
|
|
|
$
|
—
|
|
|
$
|
143,750
|
|
|
|
|
|
(a)
|
Excludes the potential impact of the embedded derivative.
|
2.875% Convertible Senior Notes Due 2024
In July 2017, we issued
$143.75 million
aggregate principal amount of
2.875%
Convertible Senior Notes Due 2024 (the “2024 Convertible Notes”). All of the 2024 Convertible Notes were issued pursuant to an indenture dated July 5, 2017 (the "2017 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The 2024 Convertible Notes were issued in a private offering under Rule 144A under the Securities Act of 1933. The 2024 Convertible Notes pay interest semi-annually in arrears at a rate of
2.875%
per annum on January 1 and July 1 of each year, commencing January 1, 2018, and will mature on July 1, 2024 (the "2024 Maturity Date"), unless converted, redeemed or repurchased in accordance with their terms prior to such date. At maturity, the holders of the 2024 Convertible Notes will be entitled to receive cash equal to the principal amount of the 2024 Convertible Notes plus unpaid accrued interest.
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 below, 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). The conversion rate will not be adjusted for any accrued and unpaid interest. The 2024 Convertible Notes contain certain make-whole fundamental change premiums and customary anti-dilution adjustments. We account for the Class A Common Stock issuable upon conversion under the treasury stock
method. To the extent our share priced increases over
$10.00
per share, we are required to recognize incremental dilution of our earnings per share.
Prior to January 1, 2024, the 2024 Convertible Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2017 (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 2017 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 2024 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 2017 Indenture. On or after January 1, 2024 until the close of business on the business day immediately preceding the 2024 Maturity Date, holders of 2024 Convertible Notes may, at their option, convert their 2024 Convertible Notes at any time, regardless of the foregoing circumstances.
We may not redeem the 2024 Convertible Notes prior to July 6, 2021. At our option, we may redeem for cash all or any portion of the 2024 Convertible Notes on or after July 6, 2021, 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 2024 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
We measured the fair value of the liability component of the 2024 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 discount rates slightly above
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 2024 Convertible Notes of
$102.7 million
with an associated original issue discount of
$41.0 million
, exclusive of deferred financing costs, accreted to the face value of the 2024 Convertible Notes based on the effective interest method through the 2024 Maturity Date.
We accounted for the conversion feature of the 2024 Convertible Notes as a separate equity-classified instrument (the “2024 Convertible Notes Embedded Derivative”), initially recorded as
$39.8 million
(
$25.3 million
, net of tax), inclusive of deferred financing costs, on the issuance date and included under “Additional paid-in capital” in our consolidated balance sheet, including an allocated portion of the deferred financing costs. The 2024 Convertible Notes Embedded Derivative is expected to remain recorded in equity in our consolidated balance sheets as long as it continues to meet the criteria as an equity-classified instrument in subsequent reporting periods. The carrying amount of the 2024 Convertible Notes Embedded Derivative included under “Additional paid-in capital” in our consolidated balance sheet of
September 30, 2017
was
$25.3 million
.
We incurred transaction costs of
$4.2 million
related to the issuance of the 2024 Convertible Notes, which we recorded as deferred financing costs and are included under “Long-term debt, net” and “Additional paid-in capital” in our consolidated balance sheets. Deferred financing costs recorded under “Long-term debt, net” are being amortized to interest expense over the expected term of the 2024 Convertible Notes.
Total interest expense pertaining to the 2024 Convertible Notes for fiscal
2017
was
$2.1 million
, comprised of contractual interest expense and amortization of
$1.0 million
and
$1.1 million
, respectively. The effective interest rate for fiscal
2017
was approximately
8%
.
As of
September 30, 2017
, the remaining unamortized issuance discount and financing costs will be amortized over the next
seven years
assuming no early conversion.
Impact of Early Conversion Conditions on Financial Statements
As of
September 30, 2017
, the 2024 Convertible Notes were not convertible as no conditions of conversion had been met. Accordingly, the net balance of the 2024 Convertible Notes was classified as a non-current liability in our consolidated balance sheets as of
September 30, 2017
. The classification of the 2024 Convertible Notes as current or non-current in the consolidated balance sheets is evaluated at each balance sheet date and may change from time to time depending on whether any of the conversion conditions has been met.
If one of the conversion conditions is met in any future fiscal quarter, we will classify our net liability under the 2024 Convertible Notes as a current liability in the consolidated balance sheets as of the end of that fiscal quarter. If none of the
conversion conditions have been met in a future fiscal quarter prior to the
one
-year period immediately preceding the 2024 Maturity Date, we will classify our net liability under the 2024 Convertible Notes as a non-current liability in the consolidated balance sheets as of the end of that fiscal quarter. If the note holders elect to convert their 2024 Convertible Notes prior to maturity, any unamortized discount and transaction costs will be recognized as expense at the time of conversion. If the entire outstanding principal amount had been converted on
September 30, 2017
, we would have recorded an expense associated with the conversion, comprised of
$42.9 million
of unamortized debt discount and issuance costs. As of
September 30, 2017
, none of the note holders had elected to convert their 2024 Convertible Notes.
Term Loan Facility up to $100 Million
On September 12, 2016, we and certain of our subsidiaries (as guarantors) entered into a financing agreement with certain lenders and Fortress Credit Co LLC (as collateral and administrative agent) that provided us with a senior secured credit facility in an aggregate principal amount of
$100 million
, subject to various terms and conditions contained in the financing agreement. The credit facility (the “Term Loan Facility”) consisted of an initial term loan of
$50 million
that was drawn on September 12, 2016 and a delayed draw term loan of up to
$50 million
. Borrowings under the facility bore interest at an annual rate initially equal to the London Interbank Offered Rate (“LIBOR”) plus
7.5%
, and we paid a monthly fee of
2.75%
per annum on the average daily unused portion of the delayed draw term loan facility and a quarterly loan servicing fee of
$15,000
.
Total interest expense pertaining to the Term Loan Facility for fiscal
2017
, exclusive of extinguishment charges, was
$4.7 million
, comprised of contractual interest expense and amortization of
$4.3 million
and
$0.4 million
, respectively.
The Term Loan Facility was fully repaid and terminated July 2017, as discussed below under “Extinguishment of Debt.”
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 being issued in July 2014. All of the 2019 Convertible Notes were issued
pursuant to an indenture dated June 23, 2014 (the "2014 Indenture") by and between EZCORP 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").
Prior to December 15, 2018, the 2019 Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time prior to the close of business on the second scheduled trading day immediately preceding the 2019 Maturity Date. At maturity, the holders of the 2019 Convertible Notes will be entitled to receive cash equal to the principal amount of the 2019 Convertible Notes plus unpaid accrued interest.
The 2019 Convertible Notes are unsubordinated unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2019 Convertible Notes, equal in right of payment with all of our other unsecured unsubordinated indebtedness, and effectively junior to all debt or other obligations (including trade payables) of our wholly-owned subsidiaries.
The 2014 Indenture governing the 2019 Cash Convertible Notes does not contain any financial covenants.
Under the terms of the 2019 Convertible Notes, payment of dividends requires a conversion rate adjustment equal to the conversion rate in effect immediately prior to the open of business on the ex-dividend date for such dividend multiplied by the last reported sale price of the Class A Common Stock on the trading day immediately preceding the ex-dividend date for such dividend, divided by the difference between the last reported sale price of the Class A Common Stock on the trading day immediately preceding the ex-dividend date for such dividend and the amount in cash per share we distribute to all or substantially all holders of Class A Common Stock.
Total interest expense pertaining to the 2019 Convertible Notes for fiscal
2017
,
2016
and
2015
, exclusive of extinguishment charges, was
$15.5 million
,
$15.5 million
and
$14.1 million
, respectively, comprised of contractual interest expense and amortization of
$4.7 million
and
$10.8 million
, respectively for fiscal
2017
,
$4.9 million
and
$10.6 million
, respectively for fiscal
2016
, and
$4.9 million
and
$9.2 million
, respectively for fiscal
2015
. The effective interest rate was approximately
8%
.
As of
September 30, 2017
, the remaining unamortized issuance discount and financing costs will be amortized over the next
two years
assuming no early conversion.
A portion of the 2019 Convertible Notes were repurchased and retired in July 2017, as discussed below under “Extinguishment of Debt.”
2019 Convertible Notes Embedded Derivative
We account for the cash conversion feature of the 2019 Convertible Notes as a separate derivative instrument (the “2019
Convertible Notes Embedded Derivative
”), which had a fair value of
$46.5 million
at the time of original issuance that was recognized as the original issue discount of the 2019 Convertible Notes. This original issue discount is amortized to interest expense over the term of the 2019 Convertible Notes using the effective interest method. As of
September 30, 2017
, the 2019 Convertible Notes Embedded Derivative is recorded as a non-current liability under “Long-term debt, less current maturities” in our consolidated balance sheets, and will be marked to market in subsequent reporting periods. The classification of the 2019 Convertible Notes Embedded Derivative liability as current or non-current on the consolidated balance sheets corresponds with the classification of the net balance of the 2019 Convertible Notes as discussed below.
The 2019 Convertible Notes are convertible into cash, subject to satisfaction of certain conditions and during the periods described below, based on an initial “Conversion Rate” of
62.2471
shares of Class A Common Stock per
$1,000
principal amount of 2019 Convertible Notes (equivalent to an initial “Conversion Price” of approximately
$16.065
per share of our Class A Common Stock). Upon conversion of a note, we will pay cash based on a daily conversion value calculated on a proportionate basis for each trading day in the applicable
80
trading day observation period as described in the 2014 Indenture. The Conversion Rate will not be adjusted for any accrued and unpaid interest.
Holders may surrender their 2019 Convertible Notes for conversion into cash prior to December 15, 2018 only under the following circumstances (the “Early Conversion Conditions”):
(1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2014 (and only during such fiscal quarter), if the last reported sale price of our Class A Common Stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the conversion price on each applicable trading day; (2) during the
five
business day period after any
five
consecutive trading day period (the “measurement period”) in which the trading price, as defined in the Indenture, per
$1,000
principal amount of notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of our Class A Common Stock and the Conversion Rate on such trading day; or (3) upon the occurrence of specified corporate events, as defined in the 2014 Indenture.
On or after December 15, 2018 until the close of business on the second scheduled trading day immediately preceding the 2019 Maturity Date, holders may convert their notes into cash at any time, regardless of the foregoing circumstances.
If a holder elects to convert its 2019 Convertible Notes in connection with certain make-whole fundamental changes, as that term is defined in the 2014 Indenture, that occur prior to the 2019 Maturity Date, we will, in certain circumstances, increase the Conversion Rate for 2019 Convertible Notes converted in connection with such make-whole fundamental changes by a specified number of shares of Class A Common Stock. In addition, the conversion rate is subject to customary anti-dilution adjustments
(for example, certain dividend distributions or tender or exchange offer of our Class A Common Stock).
Upon the occurrence of a fundamental change, as defined in the 2014 Indenture, holders may require us to repurchase for cash all or any portion of the then outstanding 2019 Convertible Notes at a repurchase price equal to
100%
of the principal amount of the notes to be repurchased, plus accrued and unpaid interest.
Impact of Early Conversion Conditions on Financial Statements
As of
September 30, 2017
, the 2019 Convertible Notes were not convertible because the
Early Conversion Conditions described above
have not been met. Accordingly, the net balance of the 2019 Convertible Notes was classified as a non-current liability in our consolidated balance sheets as of
September 30, 2017
. The classification of the 2019 Convertible Notes as current or non-current in the consolidated balance sheets is evaluated at each balance sheet date and may change from time to time depending on whether one of the Early Conversion Conditions has been met.
If one of the Early Conversion Conditions is met in any future fiscal quarter, we will classify our net liability under the 2019 Convertible Notes as a current liability in the consolidated balance sheets as of the end of that fiscal quarter. If none of the Early Conversion Conditions have been met in a future fiscal quarter prior to the
one
-year period immediately preceding the 2019 Maturity Date, we will classify our net liability under the 2019 Convertible Notes as a non-current liability in the consolidated balance sheets as of the end of that fiscal quarter. If the note holders elect to convert their 2019 Convertible Notes prior to maturity, any unamortized discount and transaction costs will be recorded to expense at the time of conversion. If the entire outstanding principal amount had been converted on
September 30, 2017
, we would have recorded an expense associated with the conversion, comprised of
$17.7 million
of unamortized debt discount and debt issuance costs. As of
September 30, 2017
, none of the note holders had elected to convert their 2019 Convertible Notes.
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. The 2019 Convertible Notes Hedges have
an expiration date that is the same as the 2019 Maturity Date, subject to earlier exercise
. The 2019 Convertible Notes Hedges have customary anti-dilution provisions similar to 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.
As of
September 30, 2017
, we have not purchased any shares under the 2019 Convertible Notes Hedges.
The aggregate cost of the 2019 Convertible Notes Hedges was
$46.5 million
(or
$21.3 million
net of the total proceeds from the 2019 Convertible Notes Warrants sold, as discussed below). The 2019 Convertible Notes Hedges are accounted for as a derivative asset and are recorded in the consolidated balance sheets at their estimated fair value in “Other assets, net.” The 2019 Convertible Notes Embedded Derivative liability and the 2019 Convertible Notes Hedges asset will be adjusted to fair value each reporting period and unrealized gains and losses will be reflected in the consolidated statements of operations. The 2019 Convertible Notes Embedded Derivative and the 2019 Convertible Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments are expected to offset and not have a net impact on the consolidated statements of operations.
The classification of the 2019 Convertible Notes Hedges asset as current or long-term on the consolidated balance sheet corresponds with the classification of the 2019 Convertible Notes, which is evaluated at each balance sheet date and may change from time to time depending on whether one of the Early Conversion Conditions has been met.
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 for the purchase of up to approximately
14.3 million
shares of our Class A Common Stock at a strike price of
$20.83
per share, for total proceeds of
$25.1 million
, net of issuance costs, which was recorded as an increase in stockholders' equity. The 2019 Convertible Notes Warrants have customary anti-dilution provisions similar to the 2019 Convertible Notes. As a result of the 2019 Convertible Notes Warrants, we will experience dilution to our diluted earnings per share if our average closing stock price exceeds
$20.83
for any fiscal quarter. The 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. Therefore, upon expiration of the 2019 Convertible Notes Warrants, we will issue shares of Class A Common Stock to the purchasers of the 2019 Convertible Notes Warrants that represent the value by which the price of the Class A Common Stock exceeds the strike price stipulated within the particular warrant agreement. As of
September 30, 2017
, there were
12.1 million
2019 Convertible Notes Warrants outstanding.
Extinguishment of Debt
In July 2017, we used
$51.6 million
of net proceeds from the 2024 Convertible Notes offering to repay all outstanding borrowings under the Term Loan Facility and terminated that facility, including the undrawn delayed draw term loan commitment. The lenders have released all related security interests in our assets.
Also 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. We unwound a portion of the 2019 Convertible Notes Hedges and 2019 Convertible Notes Warrants corresponding to the repurchased and retired 2019 Convertible Notes, and received
$0.6 million
in connection with the partial settlement of the 2019 Convertible Notes Hedges and paid
$0.5 million
in connection with the partial settlement of
2.2 million
of the outstanding 2019 Convertible Notes Warrants.
We recorded a one-time charge of
$5.3 million
in the fourth quarter of fiscal 2017 related to these transactions included under “Interest expense” in our consolidated statements of operations, including write-off of unamortized debt discount and issuance costs.
NOTE 9: 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”). The 2010 Plan permits grants of options, restricted stock awards and stock appreciation rights covering up to
1,575,750
shares of our Class A Common Stock plus any shares that become available for issuance under either the 2010 Plan or prior plans as a result of forfeitures or cancellations of awards without delivery of shares or as a result of withholding shares to satisfy tax withholding obligations. In February 2015, March 2015, March 2016 and December 2016, the Board of Directors and the voting stockholder approved the addition of
643,673
,
1,081,200
,
185,026
and
500,000
shares, respectively, to the 2010 Plan.
In November and December 2016 and April 2017 for fiscal 2017, we granted
931,260
restricted stock unit awards to employees and
72,500
restricted stock awards to non-employee directors, each with a grant date fair value of approximately
$9.60
per share. Our long-term incentive awards are generally granted based on our share price as of October 1 each year, which was
$11.06
for these fiscal 2017 awards. The awards granted to employees vest on September 30, 2019 subject to the achievement of certain performance targets. As of
September 30, 2017
, we considered the achievement of these performance targets to be probable. The awards granted to non-employee directors vest over
two
years,
50%
on September 30, 2017 and
50%
on September 30, 2018 and are subject only to service conditions.
In March 2016 for fiscal 2016, we granted
961,718
restricted stock unit awards (exclusive of canceled and replaced awards discussed below) to employees which were allocated based on the October 1, 2015 price of
$6.17
per share and
130,000
restricted stock awards to non-employee directors with a grant date fair value of
$2.96
per share. The awards granted to employees vest on September 30, 2018 subject to the achievement of certain performance targets. As of
September 30, 2017
, we considered the achievement these performance targets with respect to
80%
of the awards probable. The awards granted to non-employee directors vest over
two
years,
50%
on September 30, 2016 and
50%
on September 30, 2017.
In connection with the March 2016 grant discussed above, we canceled
720,000
previously issued restricted stock awards that were subject to vesting based on certain stock price levels and had a grant date fair value of
$3.4 million
and replaced them with
421,394
performance-based restricted stock awards described above. The cancellation and replacement of these awards was treated as a modification with unrecognized compensation cost from the original awards of
$1.5 million
plus incremental compensation costs resulting from the modification of
$0.8 million
recognized over the new requisite service period through September 30, 2018.
As of
September 30, 2017
, the unamortized fair value, exclusive of forfeitures, of share awards to be amortized over their remaining vesting periods was approximately
$7.5 million
. The weighted-average period over which these costs will be amortized is approximately
two
years.
The following table presents the compensation costs related to our stock compensation arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Share-based compensation costs
|
$
|
5,866
|
|
|
$
|
5,346
|
|
|
$
|
2,374
|
|
|
Income tax benefits on share-based compensation
|
(841
|
)
|
|
(963
|
)
|
|
—
|
|
|
Net share-based compensation expense
|
$
|
5,025
|
|
|
$
|
4,383
|
|
|
$
|
2,374
|
|
The following table presents a summary of stock compensation activity:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
Outstanding as of September 30, 2016
|
2,411,500
|
|
|
$
|
5.77
|
|
|
Granted
|
1,137,340
|
|
|
9.57
|
|
|
Released (a)
|
(366,775
|
)
|
|
6.55
|
|
|
Forfeited
|
(768,282
|
)
|
|
(2.53
|
)
|
|
Outstanding as of September 30, 2017
|
2,413,783
|
|
|
$
|
6.53
|
|
|
|
|
|
(a)
|
68,087
shares were withheld to satisfy related federal income tax withholding.
|
The following table presents a summary of the fair value of shares granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
(in millions except per share amounts)
|
|
|
Weighted average grant-date fair value per share granted (a)
|
$
|
9.57
|
|
|
$
|
3.53
|
|
|
$
|
10.34
|
|
(b)
|
|
Total grant date fair value of shares vested
|
$
|
3.8
|
|
|
$
|
2.3
|
|
|
$
|
1.8
|
|
|
|
|
|
|
(a)
|
Awards with performance and time-based vesting provisions are generally valued based upon the underlying share price as of the issuance date. Awards with market-conditioned vesting provisions were valued using a Monte Carlo simulation model.
|
|
|
|
|
(b)
|
Fiscal 2015 shares granted exclude phantom share-based awards. Including these shares, weighted average grant-date fair value was
$5.69
per share.
|
NOTE 10: INCOME TAXES
The following table presents the components of our income (loss) from continuing operations before income taxes, including inter-segment amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Domestic
|
$
|
29,740
|
|
|
$
|
(17
|
)
|
|
$
|
(71,426
|
)
|
|
Foreign
|
13,499
|
|
|
380
|
|
|
5,219
|
|
|
|
$
|
43,239
|
|
|
$
|
363
|
|
|
$
|
(66,207
|
)
|
The following table presents the significant components of the income tax provision from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
1,092
|
|
|
$
|
11,120
|
|
|
$
|
(42,001
|
)
|
|
State and foreign
|
6,359
|
|
|
3,193
|
|
|
2,000
|
|
|
|
7,451
|
|
|
14,313
|
|
|
(40,001
|
)
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
5,190
|
|
|
(3,766
|
)
|
|
16,580
|
|
|
State and foreign
|
(1,435
|
)
|
|
(1,186
|
)
|
|
9,396
|
|
|
|
3,755
|
|
|
(4,952
|
)
|
|
25,976
|
|
|
Total income tax expense (benefit)
|
$
|
11,206
|
|
|
$
|
9,361
|
|
|
$
|
(14,025
|
)
|
The following table presents a reconciliation of income taxes calculated at the statutory rate and the provision for income taxes attributable to continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Income tax expense (benefit) at the federal statutory rate
|
$
|
15,134
|
|
|
$
|
128
|
|
|
$
|
(23,172
|
)
|
|
State taxes, net of federal benefit
|
(714
|
)
|
|
2,476
|
|
|
(701
|
)
|
|
Mexico inflation adjustment
|
(1,286
|
)
|
|
(142
|
)
|
|
(302
|
)
|
|
Captive insurance company
|
—
|
|
|
—
|
|
|
(393
|
)
|
|
Non-deductible items
|
1,114
|
|
|
1,860
|
|
|
449
|
|
|
Foreign tax credit
|
(321
|
)
|
|
2,788
|
|
|
(2,413
|
)
|
|
Foreign rate differential
|
(172
|
)
|
|
277
|
|
|
880
|
|
|
Change in net operating loss carryforward
|
1,180
|
|
|
—
|
|
|
—
|
|
|
Change in valuation allowance
|
(3,211
|
)
|
|
1,511
|
|
|
4,846
|
|
|
Stock compensation
|
(386
|
)
|
|
—
|
|
|
—
|
|
|
Uncertain tax positions
|
472
|
|
|
—
|
|
|
1,781
|
|
|
Tax basis balance sheet adjustment
|
—
|
|
|
—
|
|
|
2,516
|
|
|
Other
|
(604
|
)
|
|
463
|
|
|
2,484
|
|
|
Total income tax expense (benefit)
|
$
|
11,206
|
|
|
$
|
9,361
|
|
|
$
|
(14,025
|
)
|
|
Effective tax rate
|
26
|
%
|
|
2,579
|
%
|
|
21
|
%
|
The amount of income tax expense (benefit) allocated to discontinued operations was
$0.1 million
,
$(15.1) million
, and
$(16.4) million
during fiscal
2017
,
2016
, and
2015
, respectively.
The following table shows significant components of our deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
Cash Converters International
|
$
|
13,550
|
|
|
$
|
15,314
|
|
|
Tax over book inventory
|
10,094
|
|
|
8,763
|
|
|
Accrued liabilities
|
6,957
|
|
|
11,276
|
|
|
Pawn service charges receivable
|
8,687
|
|
|
7,871
|
|
|
Note receivable discount
|
—
|
|
|
2,427
|
|
|
Stock compensation
|
3,356
|
|
|
2,065
|
|
|
Foreign tax credit
|
3,132
|
|
|
2,706
|
|
|
Capital loss carryforward
|
5,010
|
|
|
8,017
|
|
|
State and foreign net operating loss carryforwards
|
13,671
|
|
|
12,891
|
|
|
Book over tax depreciation
|
2,678
|
|
|
—
|
|
|
Other
|
162
|
|
|
694
|
|
|
Total deferred tax assets before valuation allowance
|
67,297
|
|
|
72,024
|
|
|
Valuation allowance
|
(17,860
|
)
|
|
(21,078
|
)
|
|
Net deferred tax assets
|
49,437
|
|
|
50,946
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Tax over book amortization
|
20,629
|
|
|
14,060
|
|
|
Tax over book depreciation
|
—
|
|
|
445
|
|
|
Note receivable discount
|
10,569
|
|
|
—
|
|
|
Prepaid expenses
|
1,383
|
|
|
1,138
|
|
|
Total deferred tax liabilities
|
32,581
|
|
|
15,643
|
|
|
Net deferred tax asset
|
$
|
16,856
|
|
|
$
|
35,303
|
|
As of
September 30, 2017
, we had gross state net operating loss carryforwards of approximately
$174.0 million
, which begin to expire in 2018 if not utilized. We also had foreign net operating loss carryforwards of
$34.8 million
, which will expire between 2030 and 2037 if not utilized. Additionally, we have a
$3.1 million
foreign tax credit that will expire during the years 2024 to 2027 that we expect is more likely than not to be fully utilized based on the weight of available evidence.
Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. The valuation allowance decreased by
$3.2 million
in fiscal 2017, primarily due to
$3.0 million
realization of capital loss carryforwards offsetting capital gain realized on the restructuring of our Grupo Finmart notes. Management believes that our results from future operations will generate sufficient taxable income in the appropriate jurisdictions such that it is more likely than not that the remaining deferred tax assets will be realized.
Deferred taxes are not provided for undistributed earnings of foreign subsidiaries of approximately
$20.6 million
which are intended to be reinvested outside of the U.S. Accordingly, no provision for U.S. federal income and foreign withholding taxes associated with a distribution of those earnings has been made. We estimate that, upon distribution of our share of these earnings, we would be subject to U.S. income taxes of approximately
$1.0 million
as of
September 30, 2017
. We provided deferred income taxes on all undistributed earnings from Cash Converters International. Any taxes paid to foreign governments on these earnings may be used in whole or in part as credits against the U.S. tax on any dividends distributed from such earnings.
The following table presents a rollforward of unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Beginning balance
|
$
|
6,058
|
|
|
$
|
6,058
|
|
|
$
|
4,402
|
|
|
Tax positions taken during the current period
|
472
|
|
|
—
|
|
|
1,656
|
|
|
Ending balance
|
$
|
6,530
|
|
|
$
|
6,058
|
|
|
$
|
6,058
|
|
All of the above unrecognized tax benefits, if recognized, would impact our effective tax rate for the respective period of each ending balance. It is reasonably possible that unrecognized tax benefits will decrease by
$4.9 million
in the next 12 months due to the expiration of the statute of limitations.
We are subject to U.S., Mexico and Canada income taxes as well as income taxes levied by various state and local jurisdictions. With few exceptions, we are no longer subject to examinations by tax authorities for years before the tax year ended September 30, 2013. Management believes that adequate provisions have been made for any adjustments that may result from tax examinations.
NOTE 11: RELATED PARTY TRANSACTIONS
Asset Purchase Agreement
The Company entered into an Asset Purchase Agreement, dated June 8, 2017, with Cash Solution Centers, LLC ("CSC"), pursuant to which the Company agreed to acquire, for an aggregate purchase price of
$700,329
in cash, certain assets used in the operation of
two
pawn stores located in Central Texas. Daniel M. Chism, who was appointed Chief Financial Officer of the Company effective May 9, 2017, was the owner of a
28%
interest in CSC. We completed the acquisition on August 14, 2017. Following completion of this transaction, Mr. Chism does not own any interest in any pawn-related businesses outside of his interest in the Company.
The terms of this transaction were reviewed and approved by the Audit Committee of the Board of Directors pursuant to the Company's Policy for Review and Evaluation of Related Party Transactions.
NOTE 12: LEASES
We lease and sublease various facilities and certain equipment under operating and capital leases. Future minimum rentals due under non-cancelable leases and annual future minimum rentals expected under subleases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
Operating Lease Payments
|
|
Sublease Revenue
|
|
|
|
|
|
|
|
(in thousands)
|
|
2018
|
$
|
53,829
|
|
|
$
|
3,042
|
|
|
2019
|
46,665
|
|
|
3,211
|
|
|
2020
|
40,081
|
|
|
3,295
|
|
|
2021
|
32,154
|
|
|
3,385
|
|
|
2022
|
21,622
|
|
|
2,908
|
|
|
Thereafter
|
60,757
|
|
|
2,604
|
|
|
|
$
|
255,108
|
|
|
$
|
18,445
|
|
After an initial lease term of generally
three
to
10
years, our real property lease agreements typically allow renewals in
three
to
five
-year increments. Our lease agreements generally include rent escalations throughout the initial lease term. Rent escalations are included in the above amounts, with certain future rental payments contingent on increases in a consumer price index. For financial reporting purposes, the aggregate rentals over the lease term, including lease renewal options that are reasonably assured, are expensed on a straight-line basis.
The following table presents the amount of net rent recognized as expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gross rent expense from continuing operations
|
$
|
56,794
|
|
|
$
|
56,707
|
|
|
$
|
58,890
|
|
|
Sublease rent revenue from continuing operations
|
(56
|
)
|
|
(156
|
)
|
|
(479
|
)
|
|
Net rent expense from continuing operations
|
$
|
56,738
|
|
|
$
|
56,551
|
|
|
$
|
58,411
|
|
In December 2014, we entered into a non-cancelable
13
-year operating lease for our corporate offices, with rent payments beginning February 2016 and ending March 2029. Annual rent escalates from
$3.0 million
at lease inception to
$4.6 million
in the terminal year of the lease. The lease includes
two
five
-year extension options at the end of the initial lease term. The estimated minimum future rental payments under the lease are approximately
$48.2 million
. During fiscal 2017 and 2016, we initiated subleases for a portion of our corporate operating office lease for estimated minimum future sublease payments of approximately
$12.2 million
. In addition to the above subleases, subsequent to September 30, 2017 we entered into an amendment to the operating lease surrendering another
15%
of the initial leased premises. As a result and including the amendment subsequent to September 30, 2017, sublease payments are expected to offset approximately
88%
of our original operating lease obligations through August 2023, with renewal options available until the end of the master operating lease in March 2029.
During the second quarter of fiscal 2015, we entered into non-cancelable subleases for our Miami and Mexico City regional offices for estimated minimum future sublease payments of approximately
$6.7 million
. Sublease payments are expected to offset substantially all of our original operating lease obligations over the
nine
-year period beginning March 2015 and ending September 2024 (in the case of the Miami lease) and the
three
-year period beginning March 2015 and ending June 2018 (in the case of the Mexico City lease).
NOTE 13: EMPLOYMENT AGREEMENTS AND RETIREMENT PLANS
Employment Agreements
We provide the following severance benefits to our executive officers:
|
|
|
|
•
|
Each of our executive officers will receive salary continuation for
one
year if his or her employment is terminated without cause.
|
|
|
|
|
•
|
Generally, restricted stock awards, including those granted to the executive officers, provide for accelerated vesting of some or all of the unvested shares in the event of the holder’s death or disability.
|
Retirement Plans
We sponsor a 401(k) retirement savings plan under which eligible employees may contribute a portion of pre-tax earnings. In our sole discretion, we may match employee contributions in the form of either cash or our Class A Common Stock. A participant vests in the matching contributions pro rata over their first
three
years of service. All of a participant’s matching contributions vest
100%
in the event of the participant’s death or disability or the termination of the plan due to a change in control.
The following table presents matching contribution information for our 401(k) plan which were made in cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Matching contributions to EZCORP Inc. 401(k) Plan and Trust
|
$
|
658
|
|
|
$
|
468
|
|
|
$
|
547
|
|
We also provide a non-qualified Supplemental Executive Retirement Plan for selected executives. Funds in the Supplemental Executive Retirement Plan vest over
three
years from the grant date, with
one-third vesting each year
. All of a participant’s Supplemental Executive Retirement Plan funds from all grants vest
100%
in the event of the participant’s death or disability or the termination of the plan due to a change in control. In addition, the Supplemental Executive Retirement Plan funds are
100%
vested when a participant attains his or her normal retirement age (generally
60
years old and
five
years of active service) while actively employed by us. Expense of contributions to the Supplemental Executive Retirement Plan is recognized based on the vesting schedule.
The following table provides contribution and amortized expense amounts related to the Supplemental Executive Retirement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Contributions to the Supplemental Executive Retirement Plan
|
$
|
536
|
|
|
$
|
636
|
|
|
$
|
356
|
|
|
Amortized expense due to Supplemental Executive Retirement Plan
|
544
|
|
|
153
|
|
|
405
|
|
NOTE 14: 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
September 30, 2017
because we do not believe at this time that any loss is probable or that the amount of any probable loss can be reasonably estimated. The following is a description of significant proceedings.
Shareholder derivative litigation
— On July 28, 2014, Lawrence Treppel, a purported holder of Class A Common Stock, filed a derivative action in the Court of Chancery of the State of Delaware styled
Treppel v. Cohen, et al.
(C.A. No. 9962-VCP). The complaint, as originally filed and as amended on September 23, 2014, names as defendants Phillip E. Cohen, the beneficial owner of all of our outstanding Class B Voting Common Stock; several current and former members of our Board of Directors (Joseph J. Beal, Sterling B. Brinkley, John Farrell, Pablo Lagos Espinosa, William C. Love, Thomas C. Roberts and Paul E. Rothamel);
three
entities controlled by Mr. Cohen (MS Pawn Limited Partnership, the record holder of our Class B Voting Common Stock; MS Pawn Corporation, the general partner of MS Pawn Limited Partnership; and Madison Park LLC); and EZCORP, Inc., as nominal defendant. The amended complaint asserts the following claims:
|
|
|
|
•
|
Claims against the current and former Board members for breach of fiduciary duties and waste of corporate assets in connection with the Board’s decision to enter into advisory services agreements with Madison Park from October 2004 to June 2014 (Counts I and II, respectively);
|
|
|
|
|
•
|
Claims against Mr. Cohen and MS Pawn Limited Partnership for aiding and abetting the breaches of fiduciary duties relating to the advisory services agreements with Madison Park (Count III); and
|
|
|
|
|
•
|
Claims against Mr. Cohen and Madison Park for unjust enrichment for payments under the advisory services agreements (Count IV).
|
The plaintiff seeks (a) recovery for the Company in the amount of the damages the Company has sustained as a result of the alleged breach of fiduciary duties, waste of corporate assets and aiding and abetting, (b) disgorgement by Mr. Cohen and Madison Park of the benefits they received as a result of the related party transactions and (c) reimbursement of costs and expenses, including reasonable attorney’s fees.
On November 13, 2014, pursuant to the parties’ stipulation, the Court dismissed the action as to Mr. Brinkley, Mr. Rothamel and Mr. Lagos.
The remaining defendants filed motions to dismiss, and a hearing on those motions was held before the Court on September 8, 2015. Prior to that hearing, the plaintiff proposed a dismissal without prejudice for the claims against Mr. Beal, Mr. Love and Mr. Farrell. Those defendants continued to seek a dismissal with prejudice that would bind all potential plaintiffs. On January 15, 2016, the Court issued an opinion dismissing the action as to Mr. Beal, Mr. Love and Mr. Farrell with prejudice only as to the plaintiff.
On January 25, 2016, the Court issued a separate opinion granting in part and denying in part the motions to dismiss filed by the remaining defendants. Specifically, the Court granted the motion to dismiss Count IV (unjust enrichment) for failure to state a claim. The Court also dismissed Count III (aiding and abetting) as to Mr. Cohen, but interpreted Count I (breach of fiduciary duty) to state a claim against Mr. Cohen and MS Pawn, as well as Mr. Roberts. The Court otherwise denied the motions to dismiss, including the motion to dismiss Count III (aiding and abetting) against MS Pawn.
On February 4, 2016, the remaining defendants filed an Application for Certification of Interlocutory Appeal, which the plaintiff opposed on February 15, 2016, and the Court set a hearing on the application. On February 22, 2016, the Court denied the Application for Certification of Interlocutory Appeal and provided the plaintiff the opportunity to amend its complaint to add a fiduciary-duty claim as to Mr. Cohen and Madison Park, staying proceedings pending a ruling from the Delaware
Supreme Court. After the Application for Certification of Interlocutory Appeal was denied, Mr. Roberts, MS Pawn Corporation and MS Pawn Limited Partnership filed notices of appeal from the interlocutory opinion and order denying the motions to dismiss. On March 10, 2016, the Delaware Supreme Court denied those petitions for an interlocutory appeal. On March 4, 2016, the plaintiff filed a Second Amended Derivative Complaint against Mr. Roberts, Mr. Cohen, Madison Park, MS Pawn Corporation and MS Pawn Limited Partnership with EZCORP, Inc., as nominal defendant.
On August 23, 2017, the parties agreed to a mediated settlement of all remaining claims and entered into a Memorandum of Understanding regarding that settlement. Under the terms of the proposed settlement, a settlement payment of
$6.5 million
, less attorney fees awarded to the plaintiff’s counsel and administrative costs of settlement, will be paid to the Company. Of such amount,
$5.5 million
will be funded by the Company’s insurance carriers and
$1.0 million
will be funded by Madison Park LLC. The parties have completed confirmatory discovery and are in the process of preparing appropriate settlement papers to be filed with the Court. Those papers will request the Court to set a settlement hearing, at which the Court will consider the fairness and adequacy of the parties’ stipulation and agreement of settlement. The proposed settlement will not be final until approved by the Court.
Federal Securities Litigation (WDT)
— On July 20, 2015, Wu Winfred Huang, a purported holder of Class A Common Stock, for himself and on behalf of other similarly situated holders of Class A Common Stock, filed a lawsuit in the United States District Court for the Western District of Texas styled
Huang v. EZCORP, Inc., et al.
(Case No. 1:15-cv-00608-SS). The complaint names as defendants EZCORP, Inc., Stuart I. Grimshaw (our chief executive officer) and Mark E. Kuchenrither (our former chief financial officer) and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The original complaint related to the Company’s announcement on July 17, 2015 that it will restate the financial statements for fiscal 2014 and the first quarter of fiscal 2015, and alleged generally that the Company issued materially false or misleading statements concerning the Company, its finances, business operations and prospects and that the Company misrepresented the financial performance of the Grupo Finmart business.
On August 14, 2015, a substantially identical lawsuit, styled
Rooney v. EZCORP, Inc., et al.
(Case No. 1:15-cv-00700-SS) was also filed in the United States District Court for the Western District of Texas. On September 28, 2015, the plaintiffs in these
two
lawsuits filed an agreed stipulation to be appointed co-lead plaintiffs and agreed that their two actions should be consolidated. On November 3, 2015, the Court entered an order consolidating the
two
actions under the caption
In re EZCORP, Inc. Securities Litigation
(Master File No. 1:15-cv-00608-SS), and appointed the
two
plaintiffs as co-lead plaintiffs, with their respective counsel appointed as co-lead counsel.
On January 11, 2016, the plaintiffs filed an Amended Class Action Complaint (the "Amended Complaint"). In the Amended Complaint, the plaintiffs seek to represent a class of purchasers of our Class A Common Stock between November 6, 2012 and October 20, 2015. The Amended Complaint asserts that the Company and Mr. Kuchenrither violated Section 10(b) of the Securities Exchange Act and Rule 10b-5, issued materially false or misleading statements throughout the proposed class period concerning the Company and its internal controls, specifically regarding the financial performance of Grupo Finmart. The plaintiffs also allege that Mr. Kuchenrither, as a controlling person of the Company, violated Section 20(a) of the Securities Exchange Act. The Amended Complaint does not assert any claims against Mr. Grimshaw. On February 25, 2016, defendants filed a motion to dismiss the lawsuit. The plaintiff filed an opposition to the motion to dismiss on April 11, 2016, and the defendants filed their reply on May 11, 2016. The Court held a hearing on the motion to dismiss on June 22, 2016.
On October 18, 2016, the Court granted the defendants’ motion to dismiss and dismissed the Amended Complaint without prejudice. The Court gave the plaintiffs
20 days
(until November 7, 2016) to file a further amended complaint. On November 4, 2016, the plaintiffs filed a Second Amended Consolidated Class Action Complaint (“Second Amended Complaint”). The Second Amended Complaint raises the same claims dismissed by the Court on October 18, 2016, except plaintiffs now seek to represent a class of purchasers of EZCORP’s Class A Common Stock between November 7, 2013 and October 20, 2015 (instead of between November 6, 2012 and October 20, 2015). On December 5, 2016, defendants filed a motion to dismiss the Second Amended Compliant. The plaintiffs filed their opposition to the motion to dismiss on January 6, 2017, and the defendants filed their reply brief on January 20, 2017.
On May 8, 2017, the Court granted the defendants’ motion to dismiss with regard to claims related to accounting errors relating to Grupo Finmart’s bad debt reserve calculations for “nonperforming” loans, but denied the motion to dismiss with regard to claims relating to accounting errors related to certain sales of loan portfolios to third parties. The case is now in the discovery stage. We cannot predict the outcome of the litigation, but we intend to defend vigorously against all allegations and claims.
SEC Investigation
— On October 23, 2014, we received a notice from the Fort Worth Regional Office of the SEC that it was conducting an investigation into certain matters involving EZCORP, Inc. The notice was accompanied by a subpoena, directing us to produce a variety of documents, including all minutes and materials related to Board of Directors and Board committee meetings since January 1, 2009 and all documents and communications relating to our historical advisory services relationship
with Madison Park (the business advisory firm owned by Mr. Cohen) and LPG Limited (a business advisory firm owned by Lachlan P. Given, our current Executive Chairman of the Board). The SEC has also issued subpoenas to current and former members of our Board of Directors requesting production of similar documents, as well as to certain third parties, and has conducted interviews with certain individuals. We continue to cooperate fully with the SEC in its investigation.
NOTE 15: SEGMENT INFORMATION
Segment information is prepared on the same basis that our chief operating decision maker reviews financial information for operational decision-making purposes. We currently report our segments as follows: U.S. Pawn — all pawn activities in the United States; Mexico Pawn — all pawn activities in Mexico and other parts of Latin America; and Other International — primarily our equity interest in the net income (loss) 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2017
|
|
|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Total Segments
|
|
Corporate Items
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
$
|
351,878
|
|
|
$
|
62,957
|
|
|
$
|
3
|
|
|
$
|
414,838
|
|
|
$
|
—
|
|
|
$
|
414,838
|
|
|
Jewelry scrapping sales
|
48,203
|
|
|
2,986
|
|
|
—
|
|
|
51,189
|
|
|
—
|
|
|
51,189
|
|
|
Pawn service charges
|
238,437
|
|
|
34,643
|
|
|
—
|
|
|
273,080
|
|
|
—
|
|
|
273,080
|
|
|
Other revenues
|
219
|
|
|
645
|
|
|
7,983
|
|
|
8,847
|
|
|
—
|
|
|
8,847
|
|
|
Total revenues
|
638,737
|
|
|
101,231
|
|
|
7,986
|
|
|
747,954
|
|
|
—
|
|
|
747,954
|
|
|
Merchandise cost of goods sold
|
223,475
|
|
|
43,050
|
|
|
—
|
|
|
266,525
|
|
|
—
|
|
|
266,525
|
|
|
Jewelry scrapping cost of goods sold
|
41,434
|
|
|
2,497
|
|
|
—
|
|
|
43,931
|
|
|
—
|
|
|
43,931
|
|
|
Other cost of revenues
|
—
|
|
|
—
|
|
|
1,988
|
|
|
1,988
|
|
|
—
|
|
|
1,988
|
|
|
Net revenues
|
373,828
|
|
|
55,684
|
|
|
5,998
|
|
|
435,510
|
|
|
—
|
|
|
435,510
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
259,977
|
|
|
36,211
|
|
|
8,448
|
|
|
304,636
|
|
|
—
|
|
|
304,636
|
|
|
Administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53,254
|
|
|
53,254
|
|
|
Depreciation and amortization
|
10,171
|
|
|
2,675
|
|
|
191
|
|
|
13,037
|
|
|
10,624
|
|
|
23,661
|
|
|
Loss on sale or disposal of assets
|
198
|
|
|
134
|
|
|
—
|
|
|
332
|
|
|
27
|
|
|
359
|
|
|
Interest expense
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
27,794
|
|
|
27,803
|
|
|
Interest income
|
—
|
|
|
(1,930
|
)
|
|
—
|
|
|
(1,930
|
)
|
|
(10,173
|
)
|
|
(12,103
|
)
|
|
Equity in net income of unconsolidated affiliate
|
—
|
|
|
—
|
|
|
(4,916
|
)
|
|
(4,916
|
)
|
|
—
|
|
|
(4,916
|
)
|
|
Other income
|
(19
|
)
|
|
(69
|
)
|
|
(96
|
)
|
|
(184
|
)
|
|
(239
|
)
|
|
(423
|
)
|
|
Segment contribution
|
$
|
103,501
|
|
|
$
|
18,654
|
|
|
$
|
2,371
|
|
|
$
|
124,526
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
124,526
|
|
|
$
|
(81,287
|
)
|
|
$
|
43,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2016
|
|
|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Total Segments
|
|
Corporate Items
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
$
|
348,771
|
|
|
$
|
60,331
|
|
|
$
|
5
|
|
|
$
|
409,107
|
|
|
$
|
—
|
|
|
$
|
409,107
|
|
|
Jewelry scrapping sales
|
47,810
|
|
|
2,282
|
|
|
21
|
|
|
50,113
|
|
|
—
|
|
|
50,113
|
|
|
Pawn service charges
|
229,893
|
|
|
31,907
|
|
|
—
|
|
|
261,800
|
|
|
—
|
|
|
261,800
|
|
|
Other revenues
|
331
|
|
|
385
|
|
|
8,769
|
|
|
9,485
|
|
|
—
|
|
|
9,485
|
|
|
Total revenues
|
626,805
|
|
|
94,905
|
|
|
8,795
|
|
|
730,505
|
|
|
—
|
|
|
730,505
|
|
|
Merchandise cost of goods sold
|
217,268
|
|
|
41,002
|
|
|
1
|
|
|
258,271
|
|
|
—
|
|
|
258,271
|
|
|
Jewelry scrapping cost of goods sold
|
40,138
|
|
|
1,885
|
|
|
16
|
|
|
42,039
|
|
|
—
|
|
|
42,039
|
|
|
Other cost of revenues
|
—
|
|
|
—
|
|
|
1,965
|
|
|
1,965
|
|
|
—
|
|
|
1,965
|
|
|
Net revenues
|
369,399
|
|
|
52,018
|
|
|
6,813
|
|
|
428,230
|
|
|
—
|
|
|
428,230
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
255,321
|
|
|
38,481
|
|
|
7,585
|
|
|
301,387
|
|
|
—
|
|
|
301,387
|
|
|
Administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,101
|
|
|
68,101
|
|
|
Depreciation and amortization
|
12,242
|
|
|
2,965
|
|
|
218
|
|
|
15,425
|
|
|
11,117
|
|
|
26,542
|
|
|
Loss on sale or disposal of assets
|
664
|
|
|
169
|
|
|
4
|
|
|
837
|
|
|
269
|
|
|
1,106
|
|
|
Restructuring
|
993
|
|
|
543
|
|
|
202
|
|
|
1,738
|
|
|
183
|
|
|
1,921
|
|
|
Interest expense
|
125
|
|
|
109
|
|
|
—
|
|
|
234
|
|
|
16,243
|
|
|
16,477
|
|
|
Interest income
|
(2
|
)
|
|
(30
|
)
|
|
—
|
|
|
(32
|
)
|
|
(49
|
)
|
|
(81
|
)
|
|
Equity in net loss of unconsolidated affiliate
|
—
|
|
|
—
|
|
|
255
|
|
|
255
|
|
|
—
|
|
|
255
|
|
|
Impairment of investment
|
—
|
|
|
—
|
|
|
10,957
|
|
|
10,957
|
|
|
—
|
|
|
10,957
|
|
|
Other expense (income)
|
—
|
|
|
1,273
|
|
|
2
|
|
|
1,275
|
|
|
(73
|
)
|
|
1,202
|
|
|
Segment contribution (loss)
|
$
|
100,056
|
|
|
$
|
8,508
|
|
|
$
|
(12,410
|
)
|
|
$
|
96,154
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
96,154
|
|
|
$
|
(95,791
|
)
|
|
$
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2015
|
|
|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Total Segments
|
|
Corporate Items
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
$
|
334,635
|
|
|
$
|
65,408
|
|
|
$
|
2,075
|
|
|
$
|
402,118
|
|
|
$
|
—
|
|
|
$
|
402,118
|
|
|
Jewelry scrapping sales
|
54,343
|
|
|
3,267
|
|
|
363
|
|
|
57,973
|
|
|
—
|
|
|
57,973
|
|
|
Pawn service charges
|
216,211
|
|
|
30,993
|
|
|
—
|
|
|
247,204
|
|
|
—
|
|
|
247,204
|
|
|
Other revenues
|
945
|
|
|
1,021
|
|
|
10,739
|
|
|
12,705
|
|
|
—
|
|
|
12,705
|
|
|
Total revenues
|
606,134
|
|
|
100,689
|
|
|
13,177
|
|
|
720,000
|
|
|
—
|
|
|
720,000
|
|
|
Merchandise cost of goods sold
|
218,953
|
|
|
47,371
|
|
|
1,465
|
|
|
267,789
|
|
|
—
|
|
|
267,789
|
|
|
Jewelry scrapping cost of goods sold
|
42,845
|
|
|
2,954
|
|
|
267
|
|
|
46,066
|
|
|
—
|
|
|
46,066
|
|
|
Other cost of revenues
|
|
|
—
|
|
|
3,125
|
|
|
3,125
|
|
|
—
|
|
|
3,125
|
|
|
Net revenues
|
344,336
|
|
|
50,364
|
|
|
8,320
|
|
|
403,020
|
|
|
—
|
|
|
403,020
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
244,232
|
|
|
43,927
|
|
|
6,780
|
|
|
294,939
|
|
|
—
|
|
|
294,939
|
|
|
Administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,986
|
|
|
72,986
|
|
|
Depreciation and amortization
|
15,227
|
|
|
4,440
|
|
|
616
|
|
|
20,283
|
|
|
10,676
|
|
|
30,959
|
|
|
Loss (gain) on sale or disposal of assets
|
995
|
|
|
258
|
|
|
(1
|
)
|
|
1,252
|
|
|
1,407
|
|
|
2,659
|
|
|
Restructuring
|
4,016
|
|
|
799
|
|
|
2,563
|
|
|
7,378
|
|
|
9,702
|
|
|
17,080
|
|
|
Interest expense
|
60
|
|
|
15
|
|
|
—
|
|
|
75
|
|
|
16,310
|
|
|
16,385
|
|
|
Interest income
|
(42
|
)
|
|
(78
|
)
|
|
—
|
|
|
(120
|
)
|
|
(158
|
)
|
|
(278
|
)
|
|
Equity in net loss of unconsolidated affiliate
|
—
|
|
|
—
|
|
|
5,473
|
|
|
5,473
|
|
|
—
|
|
|
5,473
|
|
|
Impairment of investment
|
—
|
|
|
—
|
|
|
26,837
|
|
|
26,837
|
|
|
—
|
|
|
26,837
|
|
|
Other expense
|
|
|
1,988
|
|
|
7
|
|
|
1,995
|
|
|
192
|
|
|
2,187
|
|
|
Segment contribution (loss)
|
$
|
79,848
|
|
|
$
|
(985
|
)
|
|
$
|
(33,955
|
)
|
|
$
|
44,908
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
44,908
|
|
|
$
|
(111,115
|
)
|
|
$
|
(66,207
|
)
|
The following table presents separately identified segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Assets as of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Pawn loans
|
$
|
148,124
|
|
|
$
|
21,118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
169,242
|
|
|
Pawn service charges receivable, net
|
28,258
|
|
|
3,290
|
|
|
—
|
|
|
—
|
|
|
31,548
|
|
|
Inventory, net
|
132,549
|
|
|
21,859
|
|
|
3
|
|
|
—
|
|
|
154,411
|
|
|
Total assets
|
611,489
|
|
|
82,813
|
|
|
50,462
|
|
|
279,599
|
|
|
1,024,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Pawn loans
|
$
|
149,791
|
|
|
$
|
17,538
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
167,329
|
|
|
Pawn service charges receivable, net
|
28,368
|
|
|
2,694
|
|
|
—
|
|
|
—
|
|
|
31,062
|
|
|
Inventory, net
|
121,183
|
|
|
19,038
|
|
|
3
|
|
|
—
|
|
|
140,224
|
|
|
Total assets
|
596,842
|
|
|
66,082
|
|
|
41,775
|
|
|
278,545
|
|
|
983,244
|
|
The net assets of our Mexico Pawn segment, exclusive of intercompany amounts and inclusive of certain other assets not separately identified above, were
$84.5 million
as of
September 30, 2017
.
The following tables provide geographic information required by ASC 280-10-50-41:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
United States
|
$
|
638,737
|
|
|
$
|
626,805
|
|
|
$
|
606,134
|
|
|
Mexico
|
101,231
|
|
|
94,905
|
|
|
100,689
|
|
|
Canada
|
7,986
|
|
|
8,795
|
|
|
13,177
|
|
|
Total revenues
|
$
|
747,954
|
|
|
$
|
730,505
|
|
|
$
|
720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
(in thousands)
|
|
Long-lived assets:
|
|
|
|
|
United States
|
$
|
326,736
|
|
|
$
|
326,347
|
|
|
Mexico
|
17,033
|
|
|
15,893
|
|
|
Canada and Other
|
1,370
|
|
|
872
|
|
|
Total long-lived assets
|
$
|
345,139
|
|
|
$
|
343,112
|
|
NOTE 16: SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION AND DISCONTINUED OPERATIONS
Supplemental Consolidated Financial Information
The following table provides information on net amounts included in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gross pawn service charges receivable
|
$
|
42,117
|
|
|
$
|
41,458
|
|
|
Allowance for uncollectible pawn service charges receivable
|
(10,569
|
)
|
|
(10,396
|
)
|
|
Pawn service charges receivable, net
|
$
|
31,548
|
|
|
$
|
31,062
|
|
|
|
|
|
|
|
Gross inventory
|
$
|
161,212
|
|
|
$
|
146,367
|
|
|
Inventory reserves
|
(6,801
|
)
|
|
(6,143
|
)
|
|
Inventory, net
|
$
|
154,411
|
|
|
$
|
140,224
|
|
|
|
|
|
|
|
Restricted cash
|
$
|
—
|
|
|
$
|
3,000
|
|
|
Consumer loans, net
|
2,615
|
|
|
2,111
|
|
|
Consumer loan fees and interest receivable, net
|
134
|
|
|
130
|
|
|
Guarantee asset
|
—
|
|
|
1,209
|
|
|
Accounts receivable
|
11,165
|
|
|
15,774
|
|
|
Income taxes receivable
|
2,804
|
|
|
2,533
|
|
|
Prepaid expenses and other
|
12,047
|
|
|
11,088
|
|
|
Prepaid expenses and other current assets
|
$
|
28,765
|
|
|
$
|
35,845
|
|
|
|
|
|
|
|
Other assets
|
$
|
3,124
|
|
|
$
|
2,658
|
|
|
Restricted cash
|
—
|
|
|
4,089
|
|
|
2019 Convertible Notes Hedges
|
6,591
|
|
|
37,692
|
|
|
Other assets
|
$
|
9,715
|
|
|
$
|
44,439
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
13,064
|
|
|
$
|
21,953
|
|
|
Accrued payroll
|
4,860
|
|
|
4,638
|
|
|
Bonus accrual
|
9,010
|
|
|
17,946
|
|
|
Other payroll related expenses
|
3,922
|
|
|
3,485
|
|
|
Accrued interest
|
2,212
|
|
|
1,856
|
|
|
Accrued rent and property taxes
|
11,357
|
|
|
11,201
|
|
|
Deferred revenues
|
2,483
|
|
|
2,852
|
|
|
Other accrued expenses*
|
8,310
|
|
|
14,939
|
|
|
Income taxes payable
|
1,465
|
|
|
2,406
|
|
|
Unrecognized tax benefits
|
4,860
|
|
|
—
|
|
|
Guarantee liability
|
—
|
|
|
1,258
|
|
|
Restructuring reserve
|
—
|
|
|
1,751
|
|
|
Account payable, accrued expenses and other current liabilities
|
$
|
61,543
|
|
|
$
|
84,285
|
|
|
|
|
|
|
|
Unrecognized tax benefits, non-current
|
$
|
1,758
|
|
|
$
|
6,416
|
|
|
Other long-term liabilities
|
5,297
|
|
|
4,034
|
|
|
Other long-term liabilities
|
$
|
7,055
|
|
|
$
|
10,450
|
|
|
|
|
|
*
|
Includes provision for closed stores and accrued lease termination costs, exclusive of stores closed associated with restructuring actions, of
$5.2 million
as of September 30, 2016.
|
Discontinued Operations
Fiscal 2016
In September 2016 we completed the sale of all of our interests in Grupo Finmart to AlphaCredit. The information presented below includes the assets, liabilities, revenues and expenses of variable interest entities which were deconsolidated as a result of the sale of Grupo Finmart. As a result of the decision to sell the Grupo Finmart business, we classified Grupo Finmart as held for sale as of June 30, 2016 and recast all segment operations of Grupo Finmart as discontinued operations. As of the completion of the disposition, Grupo Finmart is no longer a subsidiary of EZCORP and neither Grupo Finmart nor AlphaCredit is considered to be a related party to EZCORP. See
Note 5
for additional information regarding our continuing involvement with Grupo Finmart.
The following table presents the reconciliation of the major line items constituting "Loss from discontinued operations, net of tax" of Grupo Finmart and other operations discontinued prior to the adoption of ASU 2014-08 that are presented in the consolidated statements of operations, excluding immaterial amounts in fiscal 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
(in thousands)
|
|
Revenues
|
$
|
45,256
|
|
|
$
|
68,369
|
|
|
Consumer loan bad debt
|
(30,081
|
)
|
|
(26,446
|
)
|
|
Operations expense
|
(111,984
|
)
|
|
(32,664
|
)
|
|
Interest expense, net
|
(16,464
|
)
|
|
(24,487
|
)
|
|
Depreciation, amortization and other expenses
|
(12,732
|
)
|
|
(7,008
|
)
|
|
Gain on disposition
|
34,237
|
|
|
—
|
|
|
Loss from discontinued operations before income taxes of Grupo Finmart
|
(91,768
|
)
|
|
(22,236
|
)
|
|
Income tax benefit
|
12,896
|
|
|
7,508
|
|
|
Loss from discontinued operations, net of tax of operations discontinued prior to the adoption of ASU 2014-08
|
(560
|
)
|
|
(27,317
|
)
|
|
Loss from discontinued operations, net of tax
|
$
|
(79,432
|
)
|
|
$
|
(42,045
|
)
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax of Grupo Finmart
|
$
|
(78,872
|
)
|
|
$
|
(14,728
|
)
|
|
Loss from discontinued operations, net of tax of Grupo Finmart attributable to noncontrolling interest
|
6,661
|
|
|
4,150
|
|
|
Loss from discontinued operations, net of tax of Grupo Finmart attributable to EZCORP, Inc.
|
$
|
(72,211
|
)
|
|
$
|
(10,578
|
)
|
There were immaterial cash flows from Grupo Finmart operating and investing activities for fiscal 2017. Cash flows from Grupo Finmart operating activities for fiscal 2016 and 2015 were
$2.2 million
and
$11.1 million
, respectively. Cash flows from Grupo Finmart investing activities for fiscal 2016 and 2015 were
$42.7 million
and
$(41.1) million
, respectively.
Fiscal 2015
During the fourth quarter of fiscal 2015, in the context of a transformational change in strategy following an intensive six-month review of all Company activities, we implemented a plan that included:
|
|
|
|
•
|
Exiting our USFS business and ceasing the employment of the employees related to that business; and
|
|
|
|
|
•
|
Streamlining our structure and operating model to improve overall efficiency and reduce costs, which includes additional store closures, consolidations and relocations; additional headcount reductions in the remaining business and in the corporate support center; termination of various real property leases; and write-down and write-offs of various assets no longer to be used in the business.
|
The following table summarizes the pre-tax charges pertaining to the above discontinued operations in fiscal 2015, in thousands:
|
|
|
|
|
|
|
|
Goodwill impairment
|
$
|
10,550
|
|
|
Long-lived assets impairment
|
1,685
|
|
|
Other (a)
|
21,045
|
|
|
Asset disposals
|
7,443
|
|
|
Lease termination costs
|
1,720
|
|
|
|
$
|
42,443
|
|
|
|
|
|
(a)
|
Includes a
$10.5 million
one-time charge associated with the settlement of outstanding issues with the U.S. Consumer Financial Protection Bureau and a
$4.0 million
charge related to the resolution of regulatory compliance issues in our Cash Genie U.K online lending business, which was a part of fiscal 2014 discontinued operations, in addition to employee severance and accelerated amortization of prepaid expenses and other assets.
|
Total revenue included in “Loss from discontinued operations, net of tax” was
$2.1 million
and
$124.7 million
during fiscal 2016 and 2015, respectively, exclusive of Grupo Finmart revenue.
Valuation and Qualifying Accounts
The following table provides information on our valuation and qualifying accounts not disclosed elsewhere:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
Description
|
Balance at Beginning of Period
|
|
Charged to Expense
|
|
Charged to Revenue
|
|
Deductions
|
|
Balance at End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Allowance for valuation of inventory:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017
|
$
|
6,143
|
|
|
$
|
658
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,801
|
|
|
Year Ended September 30, 2016
|
7,090
|
|
|
—
|
|
|
—
|
|
|
947
|
|
|
6,143
|
|
|
Year Ended September 30, 2015
|
16,043
|
|
|
—
|
|
|
—
|
|
|
8,953
|
|
|
7,090
|
|
|
Allowance for uncollectible pawn service charges receivable:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017
|
$
|
10,396
|
|
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
10,569
|
|
|
Year Ended September 30, 2016
|
9,025
|
|
|
—
|
|
|
1,371
|
|
|
—
|
|
|
10,396
|
|
|
Year Ended September 30, 2015
|
10,307
|
|
|
—
|
|
|
—
|
|
|
1,282
|
|
|
9,025
|
|
|
Allowance for uncollectible consumer loan fees and interest receivable:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017
|
$
|
241
|
|
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
283
|
|
|
Year Ended September 30, 2016
|
12,045
|
|
|
—
|
|
|
—
|
|
|
11,804
|
|
*
|
241
|
|
|
Year Ended September 30, 2015
|
13,685
|
|
|
—
|
|
|
—
|
|
|
1,640
|
|
|
12,045
|
|
|
Allowance for valuation of deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017
|
$
|
21,078
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,218
|
|
|
$
|
17,860
|
|
|
Year Ended September 30, 2016
|
19,567
|
|
|
1,511
|
|
|
—
|
|
|
—
|
|
|
21,078
|
|
|
Year Ended September 30, 2015
|
14,721
|
|
|
4,846
|
|
|
—
|
|
|
—
|
|
|
19,567
|
|
|
|
|
|
*
|
Includes
$9.2 million
in allowance that was deconsolidated as a result of the disposition of Grupo Finmart as discussed above.
|
NOTE 17: QUARTERLY INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Year Ended September 30, 2017
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
192,624
|
|
|
$
|
189,628
|
|
|
$
|
183,633
|
|
|
$
|
182,069
|
|
|
Net revenues
|
111,965
|
|
|
109,897
|
|
|
105,555
|
|
|
108,093
|
|
|
Income from continuing operations, net of tax
|
8,266
|
|
|
8,231
|
|
|
5,467
|
|
|
10,069
|
|
|
Income (loss) from discontinued operations, net of tax
|
(1,228
|
)
|
|
(375
|
)
|
|
(265
|
)
|
|
43
|
|
|
Net income
|
7,038
|
|
|
7,856
|
|
|
5,202
|
|
|
10,112
|
|
|
Net loss attributable to noncontrolling interest
|
(127
|
)
|
|
(167
|
)
|
|
(58
|
)
|
|
(1,298
|
)
|
|
Net income attributable to EZCORP, Inc.
|
$
|
7,165
|
|
|
$
|
8,023
|
|
|
$
|
5,260
|
|
|
$
|
11,410
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to EZCORP, Inc.:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.10
|
|
|
$
|
0.21
|
|
|
Discontinued operations
|
(0.02
|
)
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
Basic earnings per share
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
$
|
0.10
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to EZCORP, Inc.:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.10
|
|
|
$
|
0.21
|
|
|
Discontinued operations
|
(0.02
|
)
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
Diluted earnings per share
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
$
|
0.10
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Year Ended September 30, 2016
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
187,557
|
|
|
$
|
188,213
|
|
|
$
|
170,150
|
|
|
$
|
184,585
|
|
|
Net revenues
|
112,610
|
|
|
108,365
|
|
|
100,394
|
|
|
106,861
|
|
|
(Loss) income from continuing operations, net of tax
|
3,419
|
|
|
2,307
|
|
|
2,778
|
|
|
(17,502
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
(11,685
|
)
|
|
(78,250
|
)
|
|
(9,133
|
)
|
|
19,636
|
|
|
Net income (loss)
|
(8,266
|
)
|
|
(75,943
|
)
|
|
(6,355
|
)
|
|
2,134
|
|
|
Net loss attributable to noncontrolling interest
|
(792
|
)
|
|
(5,131
|
)
|
|
(666
|
)
|
|
(1,097
|
)
|
|
Net income (loss) attributable to EZCORP, Inc.
|
$
|
(7,474
|
)
|
|
$
|
(70,812
|
)
|
|
$
|
(5,689
|
)
|
|
$
|
3,231
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share attributable to EZCORP, Inc.:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
(0.31
|
)
|
|
Discontinued operations
|
(0.19
|
)
|
|
(1.34
|
)
|
|
(0.16
|
)
|
|
0.37
|
|
|
Basic earnings (loss) per share
|
$
|
(0.13
|
)
|
|
$
|
(1.29
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share attributable to EZCORP, Inc.:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
(0.31
|
)
|
|
Discontinued operations
|
(0.19
|
)
|
|
(1.34
|
)
|
|
(0.16
|
)
|
|
0.37
|
|
|
Diluted earnings (loss) per share
|
$
|
(0.13
|
)
|
|
$
|
(1.29
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.06
|
|
Financial information in the table above has been adjusted to reflect reclassification of all discontinued operations as discussed in
Note 16
.
Fiscal 2017 Quarterly Impacts
During the fourth quarter of fiscal 2017, we recorded a gain of
$3.0 million
included under “Interest income” in our consolidated statements of operations as a result of the amendment of notes receivable from Grupo Finmart, as further discussed in
Note 5
.
During the fourth quarter of fiscal 2017, we recorded an extinguishment loss of
$5.3 million
included under “Interest expense” in our consolidated statements of operations as a result of the repurchase and retirement of
$35 million
aggregate principal amount of 2019 Convertible Notes and the full retirement of our Term Loan Facility using proceeds from the issuance of our 2024 Convertible Senior Notes, as further discussed in
Note 8
.
Fiscal 2016 Quarterly Impacts
During the second quarter of fiscal 2016, we recorded an impairment in goodwill of
$73.2 million
pertaining to discontinued operations as further discussed in
Note 7
.
We recorded a gain of
$34.2 million
, before consideration of total associated transaction costs of approximately
$9.8 million
, with approximately
$1.8 million
of the total costs to be recorded in future periods due to ongoing employee service requirements, and a
$2.1 million
loss on assumption of existing Grupo Finmart debt, during the fourth quarter of fiscal 2016 on disposition of Grupo Finmart as further discussed in
Note 16
, included in discontinued operations.
During the fourth quarter of fiscal 2016, we recorded an impairment of our unconsolidated affiliate of
$11.0 million
(
$7.2 million
, net of taxes), as further discussed in
Note 4
. Further, our equity in net loss of unconsolidated affiliate during the fourth quarter of fiscal 2016 included pre-tax charges totaling
$11.8 million
including restructuring costs, compliance provision and other.
NOTE 18: SUBSEQUENT EVENTS
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. We paid
$53.4 million
in cash upon closing, with an additional
$2.25 million
to be paid contingent upon performance of GPMX’s business during the 24 months following the closing date. At the time of closing, GPMX owed
$6.6 million
in indebtedness to members of the seller’s affiliated group, and under the terms of the stock purchase agreement, GPMX repaid such indebtedness during October 2017. The initial accounting for the business combination was incomplete as of the date these financial statements were issued, due to efforts required to finalize the purchase price and related allocation to acquired assets and liabilities at fair values. We have incurred
$1.2 million
in acquisition-related costs through September 30, 2017, which were expensed as incurred and included under “Administrative” expense in our consolidated statements of operations.