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EZCORP INC - Quarter Report: 2019 June (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
 
 
FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                         
Commission File No. 0-19424
ezcorplogoa80.jpg
EZCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
74-2540145
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
2500 Bee Cave Road
Bldg One
Suite 200
Rollingwood
TX
78746
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (512) 314-3400
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
 
 
 
 
 
 
Class A Non-voting Common Stock, par value $.01 per share
 
EZPW
 
NASDAQ Stock Market
(NASDAQ Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is the Class B Voting Common Stock, par value $.01 per share, all of which is owned by an affiliate of the registrant. There is no trading market for the Class B Voting Common Stock.
As of July 22, 2019, 52,475,070 shares of the registrant’s Class A Non-voting Common Stock ("Class A Common Stock"), par value $.01 per share, and 2,970,171 shares of the registrant’s Class B Voting Common Stock, par value $.01 per share, were outstanding.


Table of Contents

EZCORP, Inc.
INDEX TO FORM 10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EZCORP, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
June 30,
2019
 
June 30,
2018
 
September 30,
2018
 
 
 
 
 
 
 
(Unaudited)
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
138,922

 
$
284,493

 
$
285,311

Pawn loans
190,299

 
183,054

 
198,463

Pawn service charges receivable, net
29,847

 
26,439

 
30,959

Inventory, net
175,802

 
151,145

 
166,997

Notes receivable, net
16,166

 
37,906

 
34,199

Prepaid expenses and other current assets
37,365

 
43,708

 
33,456

Total current assets
588,401

 
726,745

 
749,385

Investments in unconsolidated affiliates
30,922

 
61,056

 
49,500

Property and equipment, net
66,214

 
71,587

 
73,649

Goodwill
300,700

 
294,335

 
299,248

Intangible assets, net
63,646

 
59,678

 
54,923

Notes receivable, net
10,912

 
13,432

 
3,226

Deferred tax asset, net
3,956

 
6,146

 
7,986

Other assets
4,472

 
3,575

 
3,863

Total assets
$
1,069,223

 
$
1,236,554

 
$
1,241,780

 
 
 
 
 
 
Liabilities and equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt, net
$
215

 
$
195,796

 
$
190,181

Accounts payable, accrued expenses and other current liabilities
59,981

 
61,595

 
57,958

Customer layaway deposits
12,750

 
11,938

 
11,824

Total current liabilities
72,946

 
269,329

 
259,963

Long-term debt, net
235,449

 
222,897

 
226,702

Deferred tax liability, net
7,522

 
4,285

 
8,817

Other long-term liabilities
5,990

 
7,458

 
6,890

Total liabilities
321,907

 
503,969

 
502,372

Commitments and contingencies (Note 8)


 


 


Stockholders’ equity:
 
 
 
 
 
Class A Non-voting Common Stock, par value $.01 per share; shares authorized: 100 million; issued and outstanding: 52,475,070 as of June 30, 2019; 51,494,246 as of June 30, 2018; and 51,614,746 as of September 30, 2018
524

 
515

 
516

Class B Voting Common Stock, convertible, par value $.01 per share; shares authorized: 3 million; issued and outstanding: 2,970,171
30

 
30

 
30

Additional paid-in capital
404,880

 
395,428

 
397,927

Retained earnings
389,808

 
388,014

 
386,622

Accumulated other comprehensive loss
(47,926
)
 
(47,712
)
 
(42,356
)
EZCORP, Inc. stockholders’ equity
747,316

 
736,275

 
742,739

Noncontrolling interest

 
(3,690
)
 
(3,331
)
Total equity
747,316

 
732,585

 
739,408

Total liabilities and equity
$
1,069,223

 
$
1,236,554

 
$
1,241,780

See accompanying notes to unaudited interim condensed consolidated financial statements.

1

Table of Contents

EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Merchandise sales
$
103,902

 
$
104,737

 
$
346,186

 
$
333,270

Jewelry scrapping sales
18,212

 
20,428

 
37,873

 
44,166

Pawn service charges
78,980

 
72,544

 
244,298

 
222,597

Other revenues
1,371

 
1,903

 
4,533

 
6,147

Total revenues
202,465

 
199,612

 
632,890

 
606,180

Merchandise cost of goods sold
70,271

 
66,896

 
225,183

 
210,283

Jewelry scrapping cost of goods sold
15,765

 
17,625

 
32,648

 
37,536

Other cost of revenues
576

 
349

 
1,467

 
1,273

Net revenues
115,853

 
114,742

 
373,592

 
357,088

Operating expenses:
 
 
 
 
 
 
 
Operations
84,727

 
82,932

 
261,756

 
248,758

Administrative
15,053

 
13,268

 
46,795

 
39,688

Depreciation and amortization
7,254

 
6,124

 
21,114

 
18,298

Loss on sale or disposal of assets and other
24

 
314

 
3,643

 
453

Total operating expenses
107,058

 
102,638

 
333,308

 
307,197

Operating income
8,795

 
12,104

 
40,284

 
49,891

Interest expense
9,832

 
7,394

 
27,212

 
19,070

Interest income
(3,172
)
 
(4,358
)
 
(9,637
)
 
(12,896
)
Equity in net income of unconsolidated affiliates
(1,320
)
 
(1,151
)
 
(632
)
 
(3,477
)
Impairment of investment in unconsolidated affiliates

 

 
19,725

 

Other income
(4
)
 
(5,287
)
 
(121
)
 
(5,473
)
Income from continuing operations before income taxes
3,459

 
15,506

 
3,737

 
52,667

Income tax expense
98

 
1,502

 
1,377

 
14,710

Income from continuing operations, net of tax
3,361

 
14,004

 
2,360

 
37,957

(Loss) income from discontinued operations, net of tax
(203
)
 
91

 
(404
)
 
(631
)
Net income
3,158

 
14,095

 
1,956

 
37,326

Net loss attributable to noncontrolling interest

 
(359
)
 
(1,230
)
 
(1,348
)
Net income attributable to EZCORP, Inc.
$
3,158

 
$
14,454

 
$
3,186

 
$
38,674

 
 
 
 
 
 
 
 
Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.06

 
$
0.26

 
$
0.06

 
$
0.72

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.06

 
$
0.25

 
$
0.06

 
$
0.69

 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
55,445

 
54,464

 
55,306

 
54,453

Weighted-average diluted shares outstanding
55,487

 
57,954

 
55,327

 
57,080

See accompanying notes to unaudited interim condensed consolidated financial statements.

2

Table of Contents

EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(in thousands)
Net income
$
3,158

 
$
14,095

 
$
1,956

 
$
37,326

Other comprehensive gain (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss), net of income tax expense (benefit) for our investment in unconsolidated affiliate of $45 and ($470) for the three and nine months ended June 30, 2019 respectively, and ($135) and $76 for the three and nine months ended June 30, 2018, respectively.
2,024

 
(7,464
)
 
(5,570
)
 
(7,993
)
Comprehensive income
5,182

 
6,631

 
(3,614
)
 
29,333

Comprehensive loss attributable to noncontrolling interest


(358
)
 
(1,230
)

(1,241
)
Comprehensive income attributable to EZCORP, Inc.
$
5,182

 
$
6,989

 
$
(2,384
)
 
$
30,574

See accompanying notes to unaudited interim condensed consolidated financial statements.
EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited, except balances as of September 30, 2017)
 
(in thousands)
Balances as of September 30, 2017
54,398

 
$
544

 
$
348,532

 
$
347,885

 
$
(38,157
)
 
$
(2,449
)
 
$
656,355

Stock compensation

 

 
2,889

 

 

 

 
2,889

Release of restricted stock
66

 
1

 

 

 

 

 
1

Taxes paid related to net share settlement of equity awards

 

 
(311
)
 

 

 

 
(311
)
Foreign currency translation loss

 

 

 

 
(6,434
)
 
(40
)
 
(6,474
)
Net income (loss)

 

 

 
12,639

 

 
(615
)
 
12,024

Balances as of December 31, 2017
54,464

 
$
545

 
$
351,110

 
$
360,524

 
$
(44,591
)
 
$
(3,104
)
 
$
664,484

Stock compensation

 

 
2,588

 

 

 

 
2,588

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

 

 

 
1,455

 
(1,455
)
 

 

Foreign currency translation gain

 

 

 

 
5,799

 
146

 
5,945

Net income (loss)

 

 

 
11,581

 

 
(374
)
 
11,207

Balances as of March 31, 2018
54,464

 
$
545

 
$
353,698

 
$
373,560

 
$
(40,247
)
 
$
(3,332
)
 
$
684,224

Stock compensation

 

 
2,673

 

 

 

 
2,673

Foreign currency translation (loss) gain

 

 

 

 
(7,465
)
 
1

 
(7,464
)
Equity portion of convertible notes

 

 
39,057

 

 

 

 
39,057

Net income (loss)

 

 

 
14,454

 

 
(359
)
 
14,095

Balances as of June 30, 2018
54,464

 
$
545

 
$
395,428

 
$
388,014

 
$
(47,712
)
 
$
(3,690
)
 
$
732,585


3

Table of Contents

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited, except balances as of September 30, 2018)
 
(in thousands)
Balances as of September 30, 2018
54,585

 
$
546

 
$
397,927

 
$
386,622

 
$
(42,356
)
 
$
(3,331
)
 
$
739,408

Stock compensation

 

 
2,247

 

 

 

 
2,247

Release of restricted stock
860

 
8

 

 

 

 

 
8

Taxes paid related to net share settlement of equity awards

 

 
(3,288
)
 

 

 

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

 

 
3,195

 

 

 
(3,195
)
 

Foreign currency translation loss

 

 

 

 
(6,383
)
 

 
(6,383
)
Net loss

 

 

 
(3,366
)
 

 
(477
)
 
(3,843
)
Balances as of December 31, 2018
55,445

 
$
554

 
$
400,081

 
$
383,256

 
$
(48,739
)
 
$
(7,003
)
 
$
728,149

Stock compensation

 

 
2,424

 

 

 

 
2,424

Deconsolidation of subsidiary

 

 

 

 

 
7,756

 
7,756

Foreign currency translation loss

 

 

 

 
(1,211
)
 

 
(1,211
)
Net income (loss)

 

 

 
3,394

 

 
(753
)
 
2,641

Balances as of March 31, 2019
55,445

 
$
554

 
$
402,505

 
$
386,650

 
$
(49,950
)
 
$

 
$
739,759

Stock compensation

 

 
2,375

 

 

 

 
2,375

Foreign currency translation gain

 

 

 

 
2,024

 

 
2,024

Net income

 

 

 
3,158

 

 

 
3,158

Balances as of June 30, 2019
55,445

 
$
554

 
$
404,880

 
$
389,808

 
$
(47,926
)
 
$

 
$
747,316

See accompanying notes to unaudited interim condensed consolidated financial statements.

4

Table of Contents

EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended June 30,
 
2019
 
2018
 
 
 
 
 
(Unaudited)
 
(in thousands)
Operating activities:
 
 
 
Net income
$
1,956

 
$
37,326

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
21,114

 
18,298

Amortization of debt discount and deferred financing costs
16,613

 
12,126

Accretion of notes receivable discount and deferred compensation fee
(3,788
)
 
(7,222
)
Deferred income taxes
5,003

 
3,135

Impairment of investment in unconsolidated affiliate
19,725

 

Other adjustments
1,875

 
1,948

Reserve on jewelry scrap receivable
3,646

 

Stock compensation expense
7,036

 
8,216

Income from investment in unconsolidated affiliates
(632
)
 
(3,477
)
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Service charges and fees receivable
1,301

 
2,609

Inventory
1,377

 
988

Prepaid expenses, other current assets and other assets
(4,194
)
 
(3,356
)
Accounts payable, accrued expenses and other liabilities
(1,477
)
 
(4,624
)
Customer layaway deposits
949

 
935

Income taxes, net of excess tax benefit from stock compensation
(5,527
)
 
2,419

Net cash provided by operating activities
64,977

 
69,321

Investing activities:
 
 
 
Loans made
(542,512
)
 
(512,914
)
Loans repaid
328,079

 
318,636

Recovery of pawn loan principal through sale of forfeited collateral
211,979

 
202,078

Additions to property and equipment, net
(24,568
)
 
(33,917
)
Acquisitions, net of cash acquired
(8,116
)
 
(93,165
)
Investment in unconsolidated affiliate

 
(14,036
)
Principal collections on notes receivable
21,900

 
16,210

Net cash used in investing activities
(13,238
)
 
(117,108
)
Financing activities:
 
 
 
Taxes paid related to net share settlement of equity awards
(3,288
)
 
(311
)
Proceeds from borrowings, net of issuance costs
1,064

 
170,496

Payments on borrowings
(195,877
)
 
(28
)
Net cash (used in) provided by financing activities
(198,101
)
 
170,157

Effect of exchange rate changes on cash and cash equivalents and restricted cash
(294
)
 
(1,493
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(146,656
)
 
120,877

Cash, cash equivalents and restricted cash at beginning of period
285,578

 
163,868

Cash, cash equivalents and restricted cash at end of period
$
138,922

 
$
284,745

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
221,940

 
$
197,163


See accompanying notes to unaudited interim condensed consolidated financial statements.

5

Table of Contents

EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
June 30, 2019
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
When used in this report, the terms “we,” “us,” “our,” “EZCORP” and the “Company” mean EZCORP, Inc. and its consolidated subsidiaries, collectively.
We are a leading provider of pawn loans in the United States and Latin America. Pawn loans are non-recourse loans collateralized by tangible property. We also sell merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers, and operate a small number of financial services stores in Canada.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Our management has included all adjustments it considers necessary for a fair presentation which are of a normal, recurring nature. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended September 30, 2018 and as corrected below. The balance sheet as of September 30, 2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
Our business is subject to seasonal variations, and operating results for the three and nine months ended June 30, 2019 and 2018 (the "current quarter" and "current year-to-date period" and "prior-year quarter" and "prior-year nine-months," respectively) are not necessarily indicative of the results of operations for the full fiscal year.
There have been no changes in significant accounting policies as described in our Annual Report on Form 10-K for the year ended September 30, 2018, other than those described below.
Use of Estimates and Assumptions
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, loan loss allowances, long-lived and intangible assets, share-based compensation, income taxes, contingencies and litigation. We base our estimates on historical experience, observable trends and various other assumptions that we believe are reasonable under the circumstances. We use this information to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

6

Table of Contents

Corrections to Prior Period Financial Statements
During the second quarter of fiscal 2019, we identified errors in our previously reported financial statements during the ordinary course of account reviews and subsequent investigation of related accounts. None of the identified errors was material to any previously reported period. These have now been corrected in all periods presented. The errors related primarily to the overstatement of historical balances of pawn service charges receivable resulting from errors in the configuration of information technology reports. These errors resulted in an overstatement of October 1, 2017 beginning retained earnings of $3.8 million. The impact of these corrections on the condensed consolidated financial statements is as follows (in thousands except per share amounts):
Condensed Consolidated Balance Sheets
 
June 30, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Cash and cash equivalents
$
285,031

 
$
(538
)
 
$
284,493

Pawn service charges receivable, net
33,388

 
(6,949
)
 
26,439

Prepaid expenses and other current assets
43,448

 
260

 
43,708

Goodwill
292,544

 
1,791

 
294,335

Deferred tax asset, net
616

 
1,245

 
1,861

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

 
(218
)
 
61,595

Retained earnings
392,315

 
(4,301
)
 
388,014

Accumulated other comprehensive loss
(48,040
)
 
328

 
(47,712
)
Condensed Consolidated Statements of Operations
 
Three Months Ended June 30, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Pawn service charges
$
72,874

 
$
(330
)
 
$
72,544

Operations expense
83,032

 
(100
)
 
82,932

Income from continuing operations before income taxes
15,736

 
(230
)
 
15,506

Income tax expense
1,553

 
(51
)
 
1,502

Income from continuing operations, net of tax
14,183

 
(179
)
 
14,004

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

 
$
(0.01
)
 
$
0.26

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

 
$

 
$
0.25

 
Nine Months Ended June 30, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Pawn service charges
$
223,601

 
$
(1,004
)
 
$
222,597

Operations expense
248,802

 
(44
)
 
248,758

Administrative expense
39,927

 
(239
)
 
39,688

Income from continuing operations before income taxes
53,388

 
(721
)
 
52,667

Income tax expense
14,911

 
(201
)
 
14,710

Income from continuing operations, net of tax
38,477

 
(520
)
 
37,957

Basic earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.73

 
$
(0.01
)
 
$
0.72

Diluted earnings per share attributable to EZCORP, Inc. — continuing operations
$
0.70

 
$
(0.01
)
 
$
0.69


7

Table of Contents

Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended June 30, 2018
 
As Previously Reported
 
Corrections
 
As Corrected
 
 
 
 
 
 
Net income
$
37,846

 
$
(520
)
 
$
37,326

Service charges and fees receivable
1,601

 
1,008

 
2,609

Accounts payable, accrued expenses and other liabilities
(4,245
)
 
(379
)
 
(4,624
)
Income taxes, net of excess tax benefit from stock compensation
2,586

 
(167
)
 
2,419

Net cash provided by operating activities*
69,379

 
(58
)
 
69,321

Effect of exchange rate changes on cash and cash equivalents and restricted cash
(1,541
)
 
48

 
(1,493
)

*
As previously reported amount includes the impact of adoption of accounting policies described below.
Recently Adopted Accounting Policies
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification ("ASC") 350-40 to determine which implementation costs to defer and recognize as an asset. This ASU generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. Our hosting arrangements that are service contracts include various third-party software applications. We adopted this ASU during the first quarter of fiscal 2019 on a prospective basis for all service contracts entered into after adoption, with no material impact upon adoption.
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this ASU during the first quarter of fiscal 2019 with no impact on our financial position or results of operations. However, we have recast our statements of cash flows on a retrospective basis to include restricted cash when reconciling the beginning-of-period and end-of-period total amounts.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on eight specific cash flow issues. We adopted this ASU during the first quarter of fiscal 2019 on a prospective basis with no impact on our financial position, results of operations or cash flows.
In May 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10). The amendments in this ASU make targeted improvements to GAAP primarily as it pertains to equity investments (not including equity method of accounting), fair value disclosures, balance sheet presentation, and other items pertaining to financial instruments. We adopted this ASU during the first quarter of fiscal 2019 on a prospective basis, as applicable, with no impact on our financial position, results of operations or cash flows upon adoption.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) to defer the effective date to December 15, 2017 for annual reporting periods beginning after that date, with early adoption permitted, but not before the original effective date of December 15, 2016. The core principle of this ASU, and the subsequently issued ASUs modifying or clarifying this ASU, is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance.

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We adopted this ASU and related guidance as of October 1, 2018 using the modified retrospective method. We evaluated the impact of ASC 606 on our consolidated financial position, results of operations, cash flows and disclosure requirements noting no material impact to our consolidated financial statements or disclosures. See Note 9 for disaggregated information about our sources of revenue. Additionally, we have concluded that ASC 606 does not impact our revenue recognition for pawn service charges or consumer loan fees as we believe neither of those revenue streams are within the scope of ASC 606.
The following is a summary of our current revenue recognition policies.
Pawn Service Charges Revenue
We record pawn service charges using the effective interest method over the life of the loan for all pawn loans we believe to be collectible. We base our estimate of collectible loans on several inputs, including recent redemption rates, historical trends in redemption rates and the amount of loans due in the following months. Unexpected variations in any of these factors could change our estimate of collectible loans, affecting our earnings and financial condition. If a pawn loan is not repaid, we value the forfeited collateral (inventory) at the lower of cost (pawn loan principal) or net realizable value of the item.
Merchandise and Related Sales Revenue
This revenue stream involves the sale of merchandise to retail customers in our pawn stores. The performance obligation is the delivery of the merchandise to the customer. Revenue and the related cost of merchandise sold is recognized at the time of sale. Customers have a limited period of time to return merchandise for a refund or exchange, and actual returns for refunds are insignificant. Sales and value added tax collected on the sale of merchandise is excluded from the amount recognized as sales and instead recorded as a liability in “Accounts payable, accrued expenses and other current liabilities” in our condensed consolidated balance sheets until remitted to the appropriate governmental authorities.
Jewelry Scrapping Sales Revenue
This revenue stream involves the sales of scrap (precious metals and stones) to refiners. The performance obligation is the legal transfer of scrap to the refiner. Revenue, and the related cost of scrap sold, is recognized when scrap inventory is provided to the refiner, which is when the customer obtains control of the promised good. The receivables outstanding at the end of a given reporting period are not material. Payment of the receivable from the customer is generally received within a short period of time after the legal transfer of the scrap materials to the refiner.
Other Revenue
Layaway fees, product protection plan revenues, and jewelry VIP package revenues are not significant.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU, along with subsequently issued related ASUs, requires financial assets (or groups of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected, among other provisions. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A reporting entity should generally apply the amendment on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting periods in which the amendment is effective. We have not identified any impacts to our financial statements that we believe will be material as a result of the adoption of the ASU, although we continue to evaluate the impact of adoption. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption of this ASU which is effective for fiscal 2021.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted based upon guidance issued within the ASU. We are in the process of evaluating the impact of adopting ASU 2016-02 on our consolidated financial position, results of operations and cash flows, and anticipate a material impact on our consolidated financial position. Additionally, we are evaluating the disclosure requirements under this ASU and are identifying and preparing to implement changes to our accounting policies, practices and controls to support adoption of the ASU and have completed upgrades to our third-party

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software solution to support adoption. We will complete our implementation to allow for proper recognition, presentation and disclosure upon adoption of the ASU which is effective for fiscal 2020. We currently plan to adopt this ASU using the optional transition method provided under ASU 2018-11, Leases, (Topic 842): Targeted Improvement which was issued in July 2018, allowing for application of ASU 2016-02 at the adoption date.
Please refer to Note 1 of Notes to Consolidated Financial Statements included in "Part II, Item 8 — Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended September 30, 2018 for discussion of our significant accounting policies and other accounting pronouncements issued but not yet adopted.
NOTE 2: ACQUISITIONS
Fiscal 2019 Acquisitions
In June 2019, we acquired assets related to seven pawn stores operating under the name "Metro Pawn" in Nevada, entering the Reno market and expanding our presence in the Las Vegas metropolitan area, for an aggregate purchase price of $7.0 million in cash, of which $3.6 million was recorded as goodwill. In December 2018, we acquired assets related to five pawn stores in Mexico, for an aggregate purchase price of $0.3 million in cash, of which $0.1 million was recorded as goodwill. We have concluded that these acquisitions were immaterial to our overall consolidated financial results and, therefore, have omitted certain information that would otherwise be required.
Fiscal 2018 Acquisition of Camira Administration Corp. and Subsidiaries (“GPMX”)
On October 6, 2017, we completed the acquisition of 100% of the outstanding stock of Camira Administration Corp. and subsidiaries (“GPMX”), a business that, at the time, owned and operated 112 stores located in Guatemala, El Salvador, Honduras and Peru for a total purchase price of $61.7 million. The GPMX acquisition significantly expanded our store base into Latin American countries outside of Mexico and provides us with a platform for further growth in the region. The accompanying condensed consolidated results of operations for the current year-to-date period include the results of operations for GPMX, while the comparable prior-year period includes the results of GPMX for the period October 6, 2017 to June 30, 2018, affecting comparability of fiscal 2019 and 2018 year-to-date amounts. We have performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the total consideration based on the fair values of those identifiable assets and liabilities.
All Other Fiscal 2018 Acquisitions
On June 25, 2018, June 11, 2018 and December 4, 2017, we acquired pawn stores operating in Mexico under the names “Montepio San Patricio,” "Presta Dinero" and "Bazareño," respectively. These acquisitions significantly strengthened our competitive position in existing regions, gave us a presence in new regions and allowed us to achieve synergies in management and administration. The accompanying condensed consolidated results of operations for the current year-to-date period include the results of operations for these acquisitions, while the comparable prior-year periods only include the results of Bazareño for the period December 4, 2017 to June 30, 2018, affecting comparability of fiscal 2019 and 2018 amounts.
We have performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the total consideration based on the fair values of those identifiable assets and liabilities for these acquisitions. During the first quarter of fiscal 2019, we finalized accounting for the Montepio San Patricio and Presta Dinero acquisitions, which were completed in fiscal 2018, and increased associated deferred tax assets by $1.8 million with an offsetting reduction in goodwill.

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NOTE 3: EARNINGS PER SHARE
Components of basic and diluted earnings per share and excluded antidilutive potential common shares are as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands, except per share amounts)
Net income from continuing operations attributable to EZCORP (A)
$
3,361

 
$
14,363

 
$
3,590

 
$
39,305

(Loss) income from discontinued operations, net of tax (B)
(203
)
 
91

 
(404
)
 
(631
)
Net income attributable to EZCORP (C)
$
3,158

 
$
14,454

 
$
3,186

 
$
38,674

 
 
 
 
 
 
 
 
Weighted-average outstanding shares of common stock (D)
55,445

 
54,464

 
55,306

 
54,453

Dilutive effect of restricted stock and 2024 Convertible Notes*
42

 
3,490

 
21

 
2,627

Weighted-average common stock and common stock equivalents (E)
55,487


57,954


55,327


57,080

 
 
 
 
 
 
 
 
Basic earnings per share attributable to EZCORP:
 
 
 
 
 
 
 
Continuing operations (A / D)
$
0.06

 
$
0.26

 
$
0.06

 
$
0.72

Discontinued operations (B / D)

 

 

 
(0.01
)
Basic earnings per share (C / D)
$
0.06

 
$
0.26

 
$
0.06

 
$
0.71

 
 
 
 
 
 
 
 
Diluted earnings per share attributable to EZCORP:
 
 
 
 
 
 
 
Continuing operations (A / E)
$
0.06

 
$
0.25

 
$
0.06

 
$
0.69

Discontinued operations (B / E)

 

 

 
(0.01
)
Diluted earnings per share (C / E)
$
0.06

 
$
0.25

 
$
0.06

 
$
0.68

 
 
 
 
 
 
 
 
Potential common shares excluded from the calculation of diluted earnings per share above*:
 
 
 
 
 
 
 
Restricted stock**
2,891

 
3,569

 
2,804

 
3,375


*
See Note 6 for discussion of the terms and conditions of the potential impact of the 2019 Convertible Notes Warrants, 2024 Convertible Notes and 2025 Convertible Notes.
**
Includes antidilutive share-based awards as well as performance-based and market conditioned share-based awards that are contingently issuable, but for which the condition for issuance has not been met as of the end of the reporting period.

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NOTE 4: STRATEGIC INVESTMENTS
As of June 30, 2019, we owned 214,183,714 shares, or approximately 34.75%, of Cash Converters International Limited ("Cash Converters International"). The following tables present summary financial information for Cash Converters International’s most recently reported results after translation to U.S. dollars:
 
December 31,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Current assets
$
172,836

 
$
203,664

Non-current assets
151,492

 
151,189

Total assets
$
324,328

 
$
354,853

 
 
 
 
Current liabilities
$
81,165

 
$
128,731

Non-current liabilities
22,109

 
14,559

Shareholders’ equity
221,054

 
211,563

Total liabilities and shareholders’ equity
$
324,328

 
$
354,853

 
Half-Year Ended December 31,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Gross revenues
$
99,390

 
$
95,784

Gross profit
56,884

 
63,212

Net (loss) profit
(3,791
)
 
7,292


Through the first three quarters of fiscal 2019, the fair value of our investment in Cash Converters International, as estimated by reference to its quoted market price per share and the applicable foreign currency exchange rate, declined from its value at September 30, 2018 and ended each quarter below its carrying value. As of March 31, 2019 and December 31, 2018, we determined that our investment was impaired and that such impairment was "other-than-temporary." In reaching this conclusion, we considered all available evidence, including evidence in existence as of September 30, 2018 as discussed in Note 4 of Notes to Consolidated Financial Statements included in "Part II, Item 8 — Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended September 30, 2018. Additionally, we noted the following developments subsequent to September 30, 2018: (i) continued decline in Cash Converters International's share price; and (ii) ongoing uncertainty around the remaining Queensland, Australia class action lawsuit. As a result, we recognized "other-than-temporary" impairments in Cash Converters International of $13.3 million ($10.3 million, net of taxes) and $6.5 million ($5.0 million, net of taxes) during the first and second quarters of fiscal 2019, respectively. As of June 30, 2019, we determined that our investment was impaired by $3.8 million and that such impairment was not "other-than-temporary." In reaching this conclusion, we considered all available evidence including primarily the time and extent to which our investment was impaired during the current quarter. Should the value of our investment continue to decline further, we may record additional impairments.
The above 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 and was recorded in “Impairment of investment in unconsolidated affiliate” in our condensed consolidated statements of operations in the “Other International” segment. We will continue to monitor the fair value of our investment in Cash Converters International for "other-than-temporary" impairments in future reporting periods and may record additional impairment charges should the fair value of our investment in Cash Converters International further decline below its carrying value for an extended period of time. See Note 5 for the fair value and carrying value of our investment in Cash Converters International.

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NOTE 5: FAIR VALUE MEASUREMENTS
Our assets and liabilities discussed below are classified in one of the following three categories based on the inputs used to develop their fair values: Level 1 — Quoted market prices in active markets for identical assets or liabilities; Level 2 — Other observable market-based inputs or unobservable inputs that are corroborated by market data; and Level 3 — Unobservable inputs that are not corroborated by market data.
Recurring Fair Value Measurements
The tables below present our financial assets (liabilities) that were carried and measured at fair value on a recurring basis:
Financial Assets (Liabilities)
 
Balance Sheet Location
 
June 30, 2019
 
June 30, 2018
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2019 Convertible Notes Hedges — Level 2
 
Prepaid expenses and other current assets
 
$

 
$
7,491

 
$
2,552

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

 
(7,491
)
 
(2,552
)

We repaid our outstanding 2.125% Cash Convertible Senior Notes Due 2019 in June 2019 with expiration of the associated cash-settled call options (the “2019 Convertible Notes Hedges”) and the 2019 Convertible Notes derivative instrument (the “2019 Convertible Notes Embedded Derivative”).
There were no transfers in or out of Level 1, Level 2 or Level 3 for financial assets or liabilities measured at fair value on a recurring basis during the periods presented.
Financial Assets and Liabilities Not Measured at Fair Value
The tables below present our financial assets and liabilities that were not measured at fair value on a recurring basis:
 
 
Carrying Value
 
Estimated Fair Value
 
 
June 30, 2019
 
June 30, 2019
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable from Grupo Finmart, net
 
$
18,744

 
$
19,517

 
$

 
$

 
$
19,517

Zero-coupon convertible promissory note due January 2021
 
7,226

 
7,226

 

 

 
7,226

2.89% promissory note receivable due April 2024
 
1,108

 
1,108

 

 

 
1,108

Investments in unconsolidated affiliates
 
30,922

 
27,158

 
24,464

 

 
2,694

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2024 Convertible Notes
 
$
109,909

 
$
161,719

 
$

 
$
161,719

 
$

2025 Convertible Notes
 
124,542

 
159,873

 

 
159,873

 

8.5% unsecured debt due 2024
 
1,148

 
1,148

 

 

 
1,148

CASHMAX secured borrowing facility
 
65

 
804

 

 

 
804



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Carrying Value
 
Estimated Fair Value
 
 
June 30, 2018
 
June 30, 2018
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable from Grupo Finmart, net
 
$
51,338

 
$
57,116

 
$

 
$

 
$
57,116

Investments in unconsolidated affiliates
 
61,056

 
49,205

 
49,205

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
184,823

 
$
197,925

 
$

 
$
197,925

 
$

2024 Convertible Notes
 
104,562

 
195,974

 

 
195,974

 

2025 Convertible Notes
 
118,335

 
168,464

 

 
168,464

 

 
 
Carrying Value
 
Estimated Fair Value
 
 
September 30, 2018
 
September 30, 2018
 
Fair Value Measurement Using
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Notes receivable from Grupo Finmart, net
 
$
37,425

 
$
41,153

 
$

 
$

 
$
41,153

Investments in unconsolidated affiliates
 
49,500

 
49,500

 
49,500

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
2019 Convertible Notes
 
$
187,433

 
$
189,150

 
$

 
$
189,150

 
$

2024 Convertible Notes
 
105,858

 
180,399

 

 
180,399

 

2025 Convertible Notes
 
119,736

 
161,253

 

 
161,253

 

8.5% unsecured debt due 2024
 
1,304

 
1,304

 

 

 
1,304


Based primarily on the short-term nature of cash and cash equivalents, pawn loans, pawn service charges receivable, current consumer loans, fees and interest receivable and other debt, we estimate that their carrying value approximates fair value. We consider our cash and cash equivalents to be measured using Level 1 inputs and our pawn loans, pawn service charges receivable, consumer loans, fees and interest receivable and other debt to be measured using Level 3 inputs. Significant increases or decreases in the underlying assumptions used to value pawn loans, pawn service charges receivable, consumer loans, fees and interest receivable and other debt could significantly increase or decrease these fair value estimates.
In March 2019, we deconsolidated a previously consolidated variable interest entity ("RDC") over which we no longer have the power to direct the activities that most significantly affect its economic performance. After the deconsolidation, we continue to hold the following interests in RDC:
A 5% equity interest and a call option to repurchase an additional 43% equity interest for $1 in September 2019 in the event that RDC has not received a qualified third party investment. These interests were recorded at a combined fair value of $2.8 million and included in "Investment in unconsolidated affiliates" in our condensed consolidated balance sheets.
A $9.1 million non-interest bearing convertible promissory note due January 2021, which is automatically convertible into a 10% equity interest when RDC has received a qualified third party investment. This note was recorded at its fair value of $6.8 million in "Notes receivable, net" in our condensed consolidated balance sheets and will accrete to par value through maturity unless converted.
In conjunction with the deconsolidation and recording of the above amounts, we recognized a loss of $0.3 million, included in "Other income" in our condensed consolidated statements of operations included in our "Other International" segment and in "Other adjustments" in our condensed consolidated statements of cash flows for the current year-to-date period. The retained equity interest, call option and convertible promissory note are valued using weighted discounted cash flow and market approaches using Level 3 inputs. Significant increases or decreases in the underlying assumptions used to value these interests could significantly increase or decrease the fair value estimate.

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In March 2019, we received $1.1 million in previously escrowed seller funds as a result of settling certain indemnification claims with the seller of GPMX. In April 2019, we loaned the $1.1 million back to the seller of GPMX in exchange for a promissory note. The note bears interest at the rate of 2.89% per annum and is secured by certain marketable securities owned by the seller and held in a U.S. brokerage account. All principal and accrued interest is due and payable in April 2024.
Subsequent to the sale of Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart") to Alpha Holding, S.A. de C.V. (“AlphaCredit”) in September 2016, we determined that we retained a variable interest in Grupo Finmart including notes receivable. We determined that we are not the primary beneficiary of Grupo Finmart subsequent to its disposition as we lack a controlling financial interest in Grupo Finmart. We measured the fair value of the notes receivable as of June 30, 2019 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 of primarily 7%. Certain of the significant inputs used for the valuation were not observable in the market. Included in the fair value of the notes receivable is the estimated fair value of the deferred compensation fee negotiated in September 2017. 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 measure 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 2024 and 2025 Convertible Notes using quoted price inputs. The notes are not actively traded, and thus the price inputs represent a Level 2 measurement. As the quoted price inputs are highly variable from day to day, the fair value estimates disclosed above could significantly increase or decrease.
NOTE 6: DEBT
The following tables present our debt instruments outstanding as well as future principal payments due, contractual maturities and interest expense:
 
June 30, 2019
 
June 30, 2018
 
September 30, 2018
 
Gross Amount
 
Debt Discount and Issuance Costs
 
Carrying Amount
 
Gross Amount
 
Debt Discount and Issuance Costs
 
Carrying Amount
 
Gross Amount
 
Debt Discount and Issuance Costs
 
Carrying Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2019 Convertible Notes
$

 
$

 
$

 
$
195,000

 
$
(10,177
)
 
$
184,823

 
$
195,000

 
$
(7,567
)
 
$
187,433

2019 Convertible Notes Embedded Derivative

 

 

 
7,491

 

 
7,491

 
2,552

 

 
2,552

2024 Convertible Notes
143,750

 
(33,841
)
 
109,909

 
143,750

 
(39,188
)
 
104,562

 
143,750

 
(37,892
)
 
105,858

2025 Convertible Notes
172,500

 
(47,958
)
 
124,542

 
172,500

 
(54,165
)
 
118,335

 
172,500

 
(52,764
)
 
119,736

8.5% unsecured debt due 2024*
1,148

 

 
1,148

 

 

 

 
1,304

 

 
1,304

Other debt

 

 

 
3,482

 

 
3,482

 

 

 

CASHMAX secured borrowing facility*
804

 
(739
)
 
65

 

 

 

 

 

 

Total
$
318,202

 
$
(82,538
)
 
$
235,664

 
$
522,223

 
$
(103,530
)
 
$
418,693

 
$
515,106

 
$
(98,223
)
 
$
416,883

Less current portion
215

 

 
215

 
205,973

 
(10,177
)
 
195,796

 
197,748

 
(7,567
)
 
190,181

Total long-term debt
$
317,987

 
$
(82,538
)
 
$
235,449

 
$
316,250

 
$
(93,353
)
 
$
222,897

 
$
317,358

 
$
(90,656
)
 
$
226,702


*
Amount translated from Guatemalan quetzals and Canadian dollars as of applicable period end. Certain disclosures omitted due to materiality considerations.


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Schedule of Contractual Maturities
 
Total
 
Less Than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than 5 Years
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2024 Convertible Notes*
143,750

 

 

 
143,750

 

2025 Convertible Notes*
172,500

 

 

 
172,500

 

8.5% unsecured debt due 2024
1,148

 
215

 
430

 
430

 
73

CASHMAX secured borrowing facility
804

 

 
804

 

 

 
$
318,202

 
$
215

 
$
1,234

 
$
316,680

 
$
73


*
Excludes the potential impact of embedded derivatives.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
2019 Convertible Notes:
 
 
 
 
 
 
 
Contractual interest expense
$
896

 
$
1,069

 
$
3,034

 
$
3,207

Amortization of debt discount and deferred financing costs
2,314

 
2,527

 
7,567

 
7,470

Total interest expense
$
3,210

 
$
3,596

 
$
10,601

 
$
10,677

 
 
 
 
 
 
 
 
2024 Convertible Notes:
 
 
 
 
 
 
 
Contractual interest expense
$
1,033

 
$
1,033

 
$
3,099

 
$
3,099

Amortization of debt discount and deferred financing costs
1,376

 
1,275

 
4,051

 
3,756

Total interest expense
$
2,409

 
$
2,308

 
$
7,150

 
$
6,855

 
 
 
 
 
 
 
 
2025 Convertible Notes:
 
 
 
 
 
 
 
Contractual interest expense
$
1,024

 
$
535

 
$
3,072

 
$
535

Amortization of debt discount and deferred financing costs
1,630

 
836

 
4,806

 
836

Total interest expense
$
2,654

 
$
1,371

 
$
7,878

 
$
1,371

2.375% Convertible Senior Notes Due 2025
In May 2018, we issued $172.5 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2025 (the “2025 Convertible Notes”). The 2025 Convertible Notes were issued pursuant to an indenture dated May 14, 2018 (the "2018 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The 2025 Convertible Notes were issued in a private offering under Rule 144A under the Securities Act of 1933. The 2025 Convertible Notes pay interest semi-annually in arrears at a rate of 2.375% per annum on May 1 and November 1 of each year, commencing November 1, 2018, and mature on May 1, 2025 (the "2025 Maturity Date"), unless converted, redeemed or repurchased in accordance with their terms prior to such date. The carrying amount of the 2025 Convertible Notes as a separate equity-classified instrument (the “2025 Convertible Notes Embedded Derivative”) included in “Additional paid-in capital” in our condensed consolidated balance sheets of June 30, 2019 was $39.0 million. The effective interest rate for the three and nine months ended June 30, 2019 was approximately 9%. As of June 30, 2019, the remaining unamortized debt discount and issuance costs will be amortized through the 2025 Maturity Date assuming no early conversion.
The 2025 Convertible Notes are convertible into cash or shares of Class A Non-Voting Common Stock ("Class A Common Stock"), or any combination thereof, at our option subject to satisfaction of certain conditions and during the periods described in the 2018 Indenture, based on an initial conversion rate of 62.8931 shares of Class A Common Stock per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of $15.90 per share of our Class A Common Stock). We account for the Class A Common Stock issuable upon conversion under the treasury stock method. To the extent our average share price is over $15.90 per share for any fiscal quarter or year-to-date period, we are required to recognize incremental dilution of our earnings per share.
If, among other triggers described in the 2018 Indenture, the market price of our Class A Common Stock meets the threshold based on at least 20 of the final 30 trading days of the quarter for the 2025 Convertible Notes to become convertible at the option of the holders during the subsequent quarter, we may be required to classify the 2025 Convertible Notes as current on our condensed consolidated balance sheets for each quarter in which such triggers are met. The stock trading price condition

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and other triggers are measured on a quarter-by-quarter basis and were not met as of June 30, 2019. As of June 30, 2019, the if-converted value of the 2025 Convertible Notes did not exceed the principal amount.
2.875% Convertible Senior Notes Due 2024
In July 2017, we issued $143.75 million aggregate principal amount of 2.875% Convertible Senior Notes Due 2024 (the “2024 Convertible Notes”). The 2024 Convertible Notes were issued pursuant to an indenture dated July 5, 2017 (the "2017 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The 2024 Convertible Notes were issued in a private offering under Rule 144A under the Securities Act of 1933. The 2024 Convertible Notes pay interest semi-annually in arrears at a rate of 2.875% per annum on January 1 and July 1 of each year, commencing January 1, 2018, and mature on July 1, 2024 (the "2024 Maturity Date"), unless converted, redeemed or repurchased in accordance with their terms prior to such date. The carrying amount of the 2024 Convertible Notes as a separate equity-classified instrument (the “2024 Convertible Notes Embedded Derivative”) included in “Additional paid-in capital” in our condensed consolidated balance sheets of June 30, 2019 was $25.3 million. The effective interest rate for the three and nine months ended June 30, 2019 was approximately 9%. As of June 30, 2019, the remaining unamortized debt discount and issuance costs will be amortized through the 2024 Maturity Date assuming no early conversion.
The 2024 Convertible Notes are convertible into cash or shares of Class A Common Stock, or any combination thereof, at our option subject to satisfaction of certain conditions and during the periods described in the 2017 Indenture, based on an initial conversion rate of 100 shares of Class A Common Stock per $1,000 principal amount of 2024 Convertible Notes (equivalent to an initial conversion price of $10.00 per share of our Class A Common Stock). We account for the Class A Common Stock issuable upon conversion under the treasury stock method. To the extent our average share price is over $10.00 per share for any fiscal quarter, we are required to recognize incremental dilution of our earnings per share.
If, among other triggers described in the 2017 Indenture, the market price of our Class A Common Stock meets the threshold based on at least 20 of the final 30 trading days of the quarter for the 2024 Convertible Notes to become convertible at the option of the holders during the subsequent quarter, we may be required to classify the 2024 Convertible Notes as current on our condensed consolidated balance sheets for each quarter in which such triggers are met. The stock trading price condition and other triggers are measured on a quarter-by-quarter basis and were not met as of June 30, 2019. As of June 30, 2019, the if-converted value of the 2024 Convertible Notes did not exceed the principal amount.
2.125% Cash Convertible Senior Notes Due 2019
In June 2014, we issued $200 million aggregate principal amount of 2.125% Cash Convertible Senior Notes Due 2019 (the "2019 Convertible Notes"), with an additional $30 million principal amount of 2019 Convertible Notes issued in July 2014. In July 2017, we used $34.4 million of net proceeds from the 2024 Convertible Notes offering to repurchase and retire $35.0 million aggregate principal amount of 2019 Convertible Notes. The 2019 Convertible Notes were issued pursuant to an indenture dated June 23, 2014 (the "2014 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The 2019 Convertible Notes were issued in a private offering and resold under Rule 144A under the Securities Act of 1933. The 2019 Convertible Notes paid interest semi-annually in arrears at a rate of 2.125% per annum on June 15 and December 15 of each year. The 2019 Convertible Notes matured on June 15, 2019 (the "2019 Maturity Date"), and the remaining $195.0 million aggregate principal amount outstanding plus accrued interest was repaid using cash on hand. The effective interest rate for the three and nine months ended June 30, 2019 was approximately 8%. The cash-settled call options (the “2019 Convertible Notes Hedges”) purchased in conjunction with the issuance of the 2019 Convertible Notes expired worthless.
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”). The 2019 Convertible Notes Warrants allow for the purchase of up to approximately 12.1 million shares of our Class A Common Stock at a strike price of $20.83 per share. We account for the Class A Common Stock issuable upon exercise under the treasury stock method. As a result of the 2019 Convertible Notes Warrants, we are required to recognize incremental dilution of our earnings per share to the extent our average share price is over $20.83 for any fiscal quarter. The 2019 Convertible Notes Warrants expire on various dates from September 2019 through February 2020 and must be settled in net shares of our Class A Common Stock.

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CASHMAX Secured Borrowing Facility
In November 2018, we entered into a receivables securitization facility with a third-party lender (the "lender") to provide funding for installment loan originations in our Canadian CASHMAX business. Under the facility, an unconsolidated variable interest entity (the "trust") has the right, subject to various conditions, to borrow up to CAD $25 million from the lender (the "third-party loan") and use the proceeds to purchase interests in installment loan receivables generated by CASHMAX. The trust uses collections on the transferred receivables to pay various amounts in accordance with an agreed priority arrangement, including expenses, its obligations under the third-party loan and, to the extent available, amounts owned to CASHMAX with respect to the purchase price of the transferred receivables and CASHMAX's retained interest in the receivables. CASHMAX has no obligation with respect to the third-party loan or the transferred receivables except to (a) service the underlying installment loans on behalf of the trust and (b) pay amounts owing under or repurchase the underlying installment loans in the event of a breach by CASHMAX or in certain other limited circumstances. The facility is generally nonrecourse to EZCORP, allows borrowing through November 2019, and fully matures in November 2021. The amount outstanding under the facility as of June 30, 2019 was $0.8 million.
NOTE 7: STOCK COMPENSATION
On May 1, 2010 our Board of Directors approved the adoption of the EZCORP, Inc. 2010 Long-Term Incentive Plan (the “2010 Plan”). As of September 30, 2018, the 2010 Plan permitted grants of options, restricted stock awards and stock appreciation rights covering up to 5,085,649 shares of our Class A Common Stock. In November 2018, the Board of Directors and the voting stockholder approved the addition of 400,000 shares to the 2010 Plan.
In the current quarter, we granted our seven new non-employee directors a total of 60,088 restricted stock awards with a grant date fair value of primarily $10.64 per share. In November 2018, we granted 59,812 restricted stock awards to non-employee directors with a grant date fair value of $9.18 per share. The awards granted to non-employee directors vest on September 30, 2019 and are subject only to service conditions.
In November 2018, we granted 971,615 restricted stock unit awards to employees with a grant date fair value of primarily $9.18 per share. The awards granted to employees vest on September 30, 2021, subject to the achievement of certain adjusted net income and adjusted diluted earnings per share performance targets. As of June 30, 2019, we considered the achievement of these performance targets probable.
The number of long-term incentive award shares and units granted are generally determined based on our share price as of October 1 each year, which was $10.51 for these fiscal 2019 awards.
NOTE 8: CONTINGENCIES
Currently and from time to time, we are involved in various claims, suits, investigations and legal proceedings, including the lawsuit described below. While we are unable to determine the ultimate outcome of any current litigation or regulatory actions (except as noted below), we believe their resolution will not have a material adverse effect on our financial condition, results of operations or liquidity.
Federal Securities Litigation — In July 2015 and August 2015, two substantially identical lawsuits were filed in the United States District Court for the Western District of Texas. Those lawsuits were subsequently consolidated into a single action under the caption In re EZCORP, Inc. Securities Litigation (Master File No. 1:15-cv-00608-SS). The original complaint related to the Company’s announcement on July 17, 2015 that it will restate its 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.
In January 2016, the plaintiffs filed an Amended Class Action Complaint (the "Amended Complaint"), which asserted that the Company and Mark E. Kuchenrither, our former Chief Financial Officer, violated Section 10(b) of the Securities Exchange Act and Rule 10b-5, issued materially false or misleading statements 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.
In October 2016, the Court granted the defendants’ motion to dismiss and dismissed the Amended Complaint without prejudice. In November 2016, the plaintiffs filed a Second Amended Consolidated Class Action Complaint (“Second Amended Complaint”), raising the same claims previously dismissed by the Court, but reducing the class period (November 7, 2013 to October 20, 2015 instead of November 6, 2012 to October 20, 2015). In May 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

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“nonperforming” loans, but denied the motion to dismiss with regard to claims relating to accounting errors related to certain sales of loan portfolios to third parties.
Following discovery on the surviving claims, the plaintiff filed a Motion for Leave to File a Third Amended Complaint, seeking to revive the "nonperforming" loan claims that the Court previously dismissed, and on July 26, 2018, the Court granted the plaintiff's motion for leave to amend, thus accepting the Third Amended Consolidated Class Action Complaint. The Court issued an order certifying the class and approving the class representative and class counsel in February 2019, and we appealed that order to the U.S. Fifth Circuit Court of Appeals, which appeal was granted in March 2019.
On May 30, 2019, the parties agreed to a mediated settlement of all remaining claims and entered into a Memorandum of Understanding regarding that settlement. The proposed settlement provides for the payment of $4.875 million by the defendants (which will be covered by applicable directors' and officers' liability insurance). The accrued settlement and offsetting insurance receivable are included in "Accounts payable, accrued expenses and other current liabilities" and "Prepaid expenses and other current assets" in our condensed consolidated balance sheets as of June 30, 2019. On July 18, 2019, the parties entered into a Stipulation and Agreement of Settlement reflecting the terms of the agreed settlement and the lead plaintiff filed an unopposed motion requesting the Court to preliminarily approve the proposed settlement and set a settlement fairness hearing. The parties are awaiting the Court's action on that motion. The proposed settlement remains subject to several conditions, including Court approval.

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NOTE 9: SEGMENT INFORMATION
We currently report our segments as follows: U.S. Pawn — all pawn activities in the United States; Latin America Pawn — all pawn activities in Mexico and other parts of Latin America; and Other International — primarily our equity interest in the net income of Cash Converters International and consumer finance activities in Canada. There are no inter-segment revenues, and the amounts below were determined in accordance with the same accounting principles used in our condensed consolidated financial statements.
 
Three Months Ended June 30, 2019
  
U.S. Pawn
 
Latin America Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
83,904

 
$
19,998

 
$

 
$
103,902

 
$

 
$
103,902

Jewelry scrapping sales
13,889

 
4,323

 

 
18,212

 

 
18,212

Pawn service charges
58,635

 
20,345

 

 
78,980

 

 
78,980

Other revenues
34

 
67

 
1,270

 
1,371

 

 
1,371

Total revenues
156,462

 
44,733

 
1,270

 
202,465

 

 
202,465

Merchandise cost of goods sold
52,855

 
17,416

 

 
70,271

 

 
70,271

Jewelry scrapping cost of goods sold
11,599

 
4,166

 

 
15,765

 

 
15,765

Other cost of revenues

 

 
576

 
576

 

 
576

Net revenues
92,008

 
23,151

 
694

 
115,853

 

 
115,853

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
65,449

 
18,284

 
994

 
84,727

 

 
84,727

Administrative

 

 

 

 
15,053

 
15,053

Depreciation and amortization
2,934

 
1,626

 
72

 
4,632

 
2,622

 
7,254

Loss (gain) on sale or disposal of assets and other
4

 
(8
)
 
6

 
2

 
22

 
24

Interest expense

 
1,491

 
76

 
1,567

 
8,265

 
9,832

Interest income

 
(376
)
 

 
(376
)
 
(2,796
)
 
(3,172
)
Equity in net income of unconsolidated affiliates

 

 
(1,320
)
 
(1,320
)
 

 
(1,320
)
Other (income) expense

 
34

 
6

 
40

 
(44
)
 
(4
)
Segment contribution
$
23,621

 
$
2,100

 
$
860

 
$
26,581

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
26,581

 
$
(23,122
)
 
$
3,459


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

 
$
20,839

 
$

 
$
104,737

 
$

 
$
104,737

Jewelry scrapping sales
17,813

 
2,615

 

 
20,428

 

 
20,428

Pawn service charges
55,536

 
17,008

 

 
72,544

 

 
72,544

Other revenues
55

 
245

 
1,603

 
1,903

 

 
1,903

Total revenues
157,302

 
40,707

 
1,603

 
199,612

 

 
199,612

Merchandise cost of goods sold
52,340

 
14,556

 

 
66,896

 

 
66,896

Jewelry scrapping cost of goods sold
15,329

 
2,296

 

 
17,625

 

 
17,625

Other cost of revenues

 

 
349

 
349

 

 
349

Net revenues
89,633

 
23,855

 
1,254

 
114,742

 

 
114,742

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

 
14,997

 
2,678

 
82,932

 

 
82,932

Administrative

 

 

 

 
13,268

 
13,268

Depreciation and amortization
3,010

 
951

 
48

 
4,009

 
2,115

 
6,124

Loss on sale or disposal of assets and other
74

 
26

 

 
100

 
214

 
314

Interest expense

 
3

 

 
3

 
7,391

 
7,394

Interest income

 
(672
)
 

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

 

 
(1,151
)
 
(1,151
)
 

 
(1,151
)
Other income 

 
(103
)
 

 
(103
)
 
(5,184
)
 
(5,287
)
Segment contribution (loss)
$
21,292

 
$
8,653

 
$
(321
)
 
$
29,624

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
29,624

 
$
(14,118
)
 
$
15,506


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Nine Months Ended June 30, 2019
  
U.S. Pawn
 
Latin America Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
275,639

 
$
70,547

 
$

 
$
346,186

 
$

 
$
346,186

Jewelry scrapping sales
28,357

 
9,516

 

 
37,873

 

 
37,873

Pawn service charges
184,658

 
59,640

 

 
244,298

 

 
244,298

Other revenues
125

 
134

 
4,274

 
4,533

 

 
4,533

Total revenues
488,779

 
139,837

 
4,274

 
632,890

 

 
632,890

Merchandise cost of goods sold
172,931

 
52,252

 

 
225,183

 

 
225,183

Jewelry scrapping cost of goods sold
23,680

 
8,968

 

 
32,648

 

 
32,648

Other cost of revenues

 

 
1,467

 
1,467

 

 
1,467

Net revenues
292,168

 
78,617

 
2,807

 
373,592

 

 
373,592

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
200,884

 
54,703

 
6,169

 
261,756

 

 
261,756

Administrative

 

 

 

 
46,795

 
46,795

Depreciation and amortization
8,951

 
4,543

 
190

 
13,684

 
7,430

 
21,114

Loss on sale or disposal of assets and other
2,856

 
743

 
22

 
3,621

 
22

 
3,643

Interest expense

 
1,570

 
280

 
1,850

 
25,362

 
27,212

Interest income

 
(1,226
)
 

 
(1,226
)
 
(8,411
)
 
(9,637
)
Equity in net income of unconsolidated affiliates

 

 
(632
)
 
(632
)
 

 
(632
)
Impairment of investment in unconsolidated affiliates

 

 
19,725

 
19,725

 

 
19,725

Other (income) expense

 
(63
)
 
290

 
227

 
(348
)
 
(121
)
Segment contribution (loss)
$
79,477

 
$
18,347

 
$
(23,237
)
 
$
74,587

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
74,587

 
$
(70,850
)
 
$
3,737




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Nine Months Ended June 30, 2018
  
U.S. Pawn
 
Latin America Pawn
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
270,145

 
$
63,125

 
$

 
$
333,270

 
$

 
$
333,270

Jewelry scrapping sales
34,515

 
9,651

 

 
44,166

 

 
44,166

Pawn service charges
174,180

 
48,417

 

 
222,597

 

 
222,597

Other revenues
205

 
588

 
5,354

 
6,147

 

 
6,147

Total revenues
479,045

 
121,781

 
5,354

 
606,180

 

 
606,180

Merchandise cost of goods sold
166,965

 
43,318

 

 
210,283

 

 
210,283

Jewelry scrapping cost of goods sold
28,683

 
8,853

 

 
37,536

 

 
37,536

Other cost of revenues

 

 
1,273

 
1,273

 

 
1,273

Net revenues
283,397

 
69,610

 
4,081

 
357,088

 

 
357,088

Segment and corporate expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
196,635

 
44,847

 
7,276

 
248,758

 

 
248,758

Administrative

 

 

 

 
39,688

 
39,688

Depreciation and amortization
9,340

 
2,712

 
142

 
12,194

 
6,104

 
18,298

Loss on sale or disposal of assets and other
197

 
31

 

 
228

 
225

 
453

Interest expense

 
6

 

 
6

 
19,064

 
19,070

Interest income

 
(2,072
)
 

 
(2,072
)
 
(10,824
)
 
(12,896
)
Equity in net income of unconsolidated affiliates

 

 
(3,477
)
 
(3,477
)
 

 
(3,477
)
Other (income) expense
(3
)
 
11

 
(118
)
 
(110
)
 
(5,363
)
 
(5,473
)
Segment contribution
$
77,228

 
$
24,075

 
$
258

 
$
101,561

 
 
 
 
Income from continuing operations before income taxes
 
 
 
 
 
 
$
101,561

 
$
(48,894
)
 
$
52,667



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NOTE 10: SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION AND OTHER
Supplemental Consolidated Financial Information
The following table provides supplemental information on net amounts included in our condensed consolidated balance sheets:
 
June 30, 2019
 
June 30, 2018
 
September 30, 2018
 
 
 
 
 
 
 
(in thousands)
Gross pawn service charges receivable
$
39,443

 
$
36,079

 
$
40,719

Allowance for uncollectible pawn service charges receivable
(9,596
)
 
(9,640
)
 
(9,760
)
Pawn service charges receivable, net
$
29,847

 
$
26,439

 
$
30,959

 
 
 
 
 
 
Gross inventory
$
184,886

 
$
160,159

 
$
176,198

Inventory reserves
(9,084
)
 
(9,014
)
 
(9,201
)
Inventory, net
$
175,802

 
$
151,145

 
$
166,997

 
 
 
 
 
 
Prepaid expenses and other
$
13,189

 
$
10,836

 
$
9,705

Accounts receivable and other
20,335

 
25,129

 
18,901

Income taxes receivable
3,841

 

 
2,031

Restricted cash

 
252

 
267

2019 Convertible Notes Hedges

 
7,491

 
2,552

Prepaid expenses and other current assets
$
37,365

 
$
43,708

 
$
33,456

 
 
 
 
 
 
Property and equipment, gross
$
260,216

 
$
248,880

 
$
253,022

Accumulated depreciation
(194,002
)
 
(177,293
)
 
(179,373
)
Property and equipment, net
$
66,214

 
$
71,587

 
$
73,649

 
 
 
 
 
 
Accounts payable
$
18,329

 
$
12,381

 
$
10,500

Accrued expenses and other
41,652

 
49,214

 
47,458

Accounts payable, accrued expenses and other current liabilities
$
59,981

 
$
61,595

 
$
57,958


Jewelry Scrap Receivable
In November 2018, our principal refiner that processed our scrap jewelry announced Chapter 11 bankruptcy restructuring proceedings in the U.S. As of June 30, 2019, we had a reserve against receivables from this refiner of $3.6 million which is included in "Loss on sale or disposal of assets and other" and "Reserve on jewelry scrap receivable" in our condensed consolidated statements of operations and cash flows, respectively for the current year-to-date period. We continue to monitor the bankruptcy process and may record recoveries of such reserved amounts in a future period as we gather more information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this section contains forward-looking statements that are based on our current expectations. Actual results could differ materially from those expressed or implied by the forward-looking statements due to a number of risks, uncertainties and other factors, including those identified in "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2018, as supplemented by the information set forth in “Part I, Item 3 — Quantitative and Qualitative Disclosures about Market Risk” and "Part II, Item 1A — Risk Factors" of this Quarterly Report.
Overview and Financial Highlights
EZCORP is a Delaware corporation headquartered in Austin, Texas. We are a leading provider of pawn loans in the United States and Latin America.
Our vision is to be the market leader in North America in responsibly and respectfully meeting our customers' desire for access to cash when they want it. That vision is supported by four key imperatives:
Market Leading Customer Satisfaction;
Exceptional Staff Engagement;

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Most Efficient Provider of Cash; and
Attractive Shareholder Returns.
At our pawn stores, we offer pawn loans, which are nonrecourse loans collateralized by tangible personal property, and sell merchandise to customers looking for good value. The merchandise we sell consists of second-hand collateral forfeited from our pawn lending activities or purchased from customers.
We remain focused on growing our balance of pawn loans outstanding (“PLO”) and the resulting higher pawn service charges (“PSC”). The following charts present sources of net revenues, including PSC, merchandise sales gross profit ("Merchandise sales GP") and jewelry scrapping gross profit ("Jewelry scrapping GP"):
chart-804d0bc920335a6ba4d.jpgchart-e9236b6e9cd05c6f808.jpgchart-487b0780596b5b2ca44.jpgchart-fc3e7e7ba04f5b35a0a.jpg

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The following charts present sources of net revenues by geographic disbursement:
chart-09cc0ebcf3935a9cb89.jpgchart-cd3a97b735f15610ba8.jpgchart-589e4837c003573b820.jpgchart-691a5a156d285872b4c.jpg
The following charts present store counts by geographic disbursement:
chart-113fc575669053b8a29.jpgchart-fbbf71e1be225d0f984.jpg

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Pawn Activities
At our pawn stores, we offer pawn loans, which are typically small, nonrecourse loans collateralized by tangible personal property. We earn pawn service charges on our pawn loans, which varies by state and loan size. Collateral for our pawn loans consists of tangible personal property, generally jewelry, consumer electronics, tools, sporting goods and musical instruments. Security for our pawn loans is provided via the estimated resale value of the collateral and the perceived probability of the loan’s redemption.
Our ability to offer quality second-hand goods at prices significantly lower than original retail prices attracts value-conscious customers. The gross profit on sales of inventory depends primarily on our assessment of the loan or purchase value at the time the property is either accepted as loan collateral or purchased. As a significant portion of our inventory and sales involve gold and jewelry, our results can be heavily influenced by the market price of gold.
Growth and Expansion
We plan to expand the number of locations we operate through opening new (“de novo”) locations and through acquisitions in both Latin America and the United States and potential new markets. Our ability to add new stores is dependent on several variables, such as projected achievement of internal investment hurdles, the availability of acceptable sites or acquisition candidates, the alignment of acquirer/seller price expectations, the regulatory environment, local zoning ordinances, access to capital and availability of qualified personnel.
Seasonality and Quarterly Results
Historically, pawn service charges are highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season in the United States and lowest in our third fiscal quarter (April through June) following the tax refund season in the United States. Merchandise sales are highest in our first and second fiscal quarters (October through March) due to the holiday season, jewelry sales in the United States surrounding Valentine’s Day and the availability of tax refunds in the United States. Most of our customers in Latin America receive additional compensation from their employers in December, and many receive additional compensation in June or July, applying downward pressure on loan balances and fueling some merchandise sales in those periods. As a net effect of these and other factors and excluding discrete charges, our consolidated profit before tax is generally highest in our first fiscal quarter (October through December) and lowest in our third fiscal quarter (April through June).
Store Data by Segment
 
Three Months Ended June 30, 2019
 
U.S. Pawn
 
Latin America Pawn
 
Other International
 
Consolidated
 
 
 
 
 
 
 
 
As of March 31, 2019
508

 
466

 
24

 
998

New locations opened

 
4

 

 
4

Locations acquired
7

 

 

 
7

Locations sold, combined or closed
(1
)
 

 
(2
)
 
(3
)
As of June 30, 2019
514

 
470

 
22

 
1,006

 
Three Months Ended June 30, 2018
 
U.S. Pawn
 
Latin America Pawn
 
Other International
 
Consolidated
 
 
 
 
 
 
 
 
As of March 31, 2018
510

 
387

 
27

 
924

New locations opened

 
2

 

 
2

Locations acquired

 
63

 

 
63

Locations sold, combined or closed

 
(1
)
 

 
(1
)
As of June 30, 2018
510

 
451

 
27

 
988


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Nine Months Ended June 30, 2019
 
U.S. Pawn
 
Latin America Pawn
 
Other International
 
Consolidated
 
 
 
 
 
 
 
 
As of September 30, 2018
508

 
453

 
27

 
988

New locations opened

 
12

 

 
12

Locations acquired
7

 
5

 

 
12

Locations sold, combined or closed
(1
)
 

 
(5
)
 
(6
)
As of June 30, 2019
514

 
470

 
22

 
1,006

 
Nine Months Ended June 30, 2018
 
U.S. Pawn
 
Latin America Pawn
 
Other International
 
Consolidated
 
 
 
 
 
 
 
 
As of September 30, 2017
513

 
246

 
27

 
786

New locations opened

 
10

 

 
10

Locations acquired

 
196

 

 
196

Locations sold, combined or closed
(3
)
 
(1
)
 

 
(4
)
As of June 30, 2018
510

 
451

 
27

 
988


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Results of Operations
Three Months Ended June 30, 2019 vs. Three Months Ended June 30, 2018
These tables, as well as the discussion that follows, should be read with the accompanying condensed consolidated financial statements and related notes. All comparisons, unless otherwise noted, are to the prior-year quarter. Prior period results have been corrected for certain out-of-period items identified in the second quarter ended March 31, 2019 but not material to any prior period, as described under "Corrections to Prior Period Financial Statements" in Note 1 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."
U.S. Pawn
The following table presents selected summary financial data for the U.S. Pawn segment:
 
Three Months Ended June 30,
 
Change
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Pawn service charges
$
58,635

 
$
55,536

 
6%
 
 
 
 
 
 
Merchandise sales
83,904

 
83,898

 
—%
Merchandise sales gross profit
31,049

 
31,558

 
(2)%
Gross margin on merchandise sales
37
%
 
38
%
 
(100)bps
 
 
 
 
 
 
Jewelry scrapping sales
13,889

 
17,813

 
(22)%
Jewelry scrapping sales gross profit
2,290

 
2,484

 
(8)%
Gross margin on jewelry scrapping sales
16
%
 
14
%
 
200bps
 
 
 
 
 
 
Other revenues
34

 
55

 
(38)%
Net revenues
92,008

 
89,633

 
3%
 
 
 
 
 
 
Segment operating expenses:
 
 
 
 

Operations
65,449

 
65,257

 
—%
Depreciation and amortization
2,934

 
3,010

 
(3)%
Segment operating contribution
23,625

 
21,366

 
11%
 
 
 
 
 
 
Other segment expense
4

 
74

 
(95)%
Segment contribution
$
23,621

 
$
21,292

 
11%
 
 
 
 
 
 
Other data:
 
 
 
 
 
Net earning assets (a)
$
283,781

 
$
267,104

 
6%
Inventory turnover
1.9

 
2.1

 
(10)%
Average monthly ending pawn loan balance per store (b)
$
280

 
$
270

 
4%
Monthly average yield on pawn loans outstanding
14
%
 
14
%
 
Pawn loan redemption rate
86
%
 
86
%
 
(a)
Balance includes pawn loans and inventory.
(b)
Balance is calculated based upon the average of the monthly ending balances during the applicable period.
Net revenue increased 3%, or $2.4 million, primarily due to a 6%, or $3.1 million, increase in pawn service charges, partially offset by a 2%, or $0.5 million, decrease in merchandise sales gross profit and an 8%, or $0.2 million, decrease in jewelry scrapping sales gross profit. The change in net revenue was attributable to same stores.

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Pawn service charges increased 6%, or $3.1 million, due primarily to a 4% increase in average ending monthly pawn loan balances outstanding during the current quarter. The higher average loan balance was driven by growth in new loan originations from our continued focus on meeting customers’ desire for cash better than our competitors. A disciplined lending approach resulted in a slight increase in PLO yield and redemption rates compared to the prior-year quarter.
Merchandise sales remained flat with gross margin on merchandise sales of 37%, a 100 basis point decline over the prior-year quarter, but within our target range. Margins were down as we continue to reduce general merchandise aged greater than 360 days, ending at 6%. As a result, merchandise sales gross profit decreased 2% to $31.0 million.
Jewelry scrapping sales gross profit remained relatively flat at 2% of current quarter net revenues, in line with our strategy to sell rather than scrap jewelry, with a 200 basis point increase in gross margin to 16%.
Higher store labor costs and rent, primarily reflecting inflation, were offset by savings in other store expenses and reduction in administrative costs resulting in flat segment expenses compared to the prior-year quarter. As a result, we leveraged a 3% increase in net revenue into an 11% increase in segment contribution.
Non-GAAP Financial Information
In addition to the financial information prepared in conformity with accounting principles generally accepted in the United States ("GAAP"), we provide certain other non-GAAP financial information on a constant currency basis ("constant currency"). We use constant currency results to evaluate our Latin America Pawn operations, which are denominated primarily in Mexican pesos and other Latin American currencies. We believe that presentation of constant currency results is meaningful and useful in understanding the activities and business metrics of our Latin America Pawn operations and reflect an additional way of viewing aspects of our business that, when viewed with GAAP results, provide a more complete understanding of factors and trends affecting our business. We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. We use this non-GAAP financial information to evaluate and compare operating results across accounting periods. Readers should consider the information in addition to, but not instead of or superior to, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Constant currency results reported herein are calculated by translating consolidated balance sheet and consolidated statement of operations items denominated in local currency to U.S. dollars using the exchange rate from the prior-year comparable period, as opposed to the current period, in order to exclude the effects of foreign currency rate fluctuations. We used the end-of-period rate for balance sheet items and the average closing daily exchange rate on a monthly basis during the appropriate period for statement of operations items. The end-of-period and approximate average exchange rates for each applicable currency as compared to U.S. dollars as of and for the three and nine months ended June 30, 2019 and 2018 were as follows:
 
 
June 30,
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Mexican peso
 
19.2

 
19.9

 
19.1

 
19.4

 
19.4

 
19.0

Guatemalan quetzal
 
7.5

 
7.4

 
7.5

 
7.3

 
7.6

 
7.3

Honduran lempira
 
24.3

 
23.9

 
24.2

 
23.6

 
24.1

 
23.5

Peruvian sol
 
3.3

 
3.3

 
3.3

 
3.2

 
3.3

 
3.2

Our statement of operations constant currency results reflect the monthly exchange rate fluctuations and so are not directly calculable from the above rates. Constant currency results, where presented, also exclude the foreign currency gain or loss.

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Latin America Pawn
The following table presents selected summary financial data for the Latin America Pawn segment, including constant currency results, after translation to U.S. dollars from its functional currencies noted above under “Results of Operations — Non-GAAP Financial Information."
 
Three Months Ended June 30,
 
2019 (GAAP)
 
2018 (GAAP)
 
Change (GAAP)
 
2019 (Constant Currency)
 
Change (Constant Currency)
 
 
 
 
 
 
 
 
 
 
 
(in USD thousands)
 
 
 
(in USD thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Pawn service charges
$
20,345

 
$
17,008

 
20%
 
$
20,340

 
20%
 
 
 
 
 

 
 
 

Merchandise sales
19,998

 
20,839

 
(4)%
 
20,059

 
(4)%
Merchandise sales gross profit
2,582

 
6,283

 
(59)%
 
2,757

 
(56)%
Gross margin on merchandise sales
13
%
 
30
%
 
(1,700)bps
 
14
%
 
(1,600)bps
 
 
 
 
 

 
 
 

Jewelry scrapping sales
4,323

 
2,615

 
65%
 
4,339

 
66%
Jewelry scrapping sales gross profit
157

 
319

 
(51)%
 
158

 
(50)%
Gross margin on jewelry scrapping sales
4
%
 
12
%
 
(800)bps
 
4
%
 
(800)bps
 
 
 
 
 

 
 
 

Other revenues
67

 
245

 
(73)%
 
67

 
(73)%
Net revenues
23,151

 
23,855

 
(3)%
 
23,322

 
(2)%
 
 
 
 
 

 
 
 

Segment operating expenses:
 
 
 
 

 
 
 

Operations
18,284

 
14,997

 
22%
 
18,242

 
22%
Depreciation and amortization
1,626

 
951

 
71%
 
1,615

 
70%
Segment operating contribution
3,241

 
7,907

 
(59)%
 
3,465

 
(56)%
 
 
 
 
 

 
 
 

Other segment expense (income) (a)
1,141

 
(746
)
 
*
 
1,049

 
*
Segment contribution
$
2,100

 
$
8,653

 
(76)%
 
$
2,416

 
(72)%
 
 
 
 
 
 
 
 
 
 
Other data:
 
 
 
 
 
 
 
 
 
Net earning assets (b)
$
82,320

 
$
67,090

 
23%
 
$
80,703

 
20%
Inventory turnover
2.3

 
2.7

 
(15)%
 
2.3

 
(15)%
Average monthly ending pawn loan balance per store (c)
$
93

 
$
90

 
3%
 
$
93

 
3%
Monthly average yield on pawn loans outstanding
16
%
 
16
%
 
 
16
%
 
Pawn loan redemption rate
77
%
 
79
%
 
(200)bps
 
77
%
 
(200)bps
*
Represents a percentage computation that is not mathematically meaningful.
(a)
Fiscal 2019 constant currency amount excludes nominal net GAAP basis foreign currency transaction losses resulting from movement in exchange rates. The net foreign currency transaction gains for fiscal 2018 of $0.1 million are included in the above results.
(b)
Balance includes pawn loans and inventory.
(c)
Balance is calculated based upon the average of the monthly ending balances during the applicable period.

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Net revenue decreased $0.7 million, or 3% ($0.5 million, or 2%, on a constant currency basis), primarily due to a 59% decrease (56% on a constant currency basis) in merchandise sales gross profit, mostly offset by a 20% increase (20% on a constant currency basis) in pawn service charges. During the quarter, we recorded a discrete $6.1 million adjustment in Latin America to correct the calculation of certain transaction tax liabilities in prior periods. Of that total, $4.6 million reduced merchandise sales and $1.5 million increased interest expense. The change in net revenue attributable to same stores and new stores added since the prior-year quarter is summarized as follows:
 
Change in Net Revenue
 
Pawn Service Charges
 
Merchandise Sales Gross Profit
 
Total
 
 
 
 
 
 
 
(in millions)
Same stores
$
1.5

 
$
0.1

 
$
1.6

New stores and other
1.8

 
0.8

 
2.6

Discrete transaction tax adjustment

 
(4.6
)
 
(4.6
)
Total
$
3.3

 
$
(3.7
)
 
$
(0.4
)
Change in jewelry scrapping sales gross profit and other revenues
 
 
 
 
(0.3
)
Total change in net revenue
 
 
 
 
$
(0.7
)
 
Change in Net Revenue (Constant Currency)
 
Pawn Service Charges
 
Merchandise Sales Gross Profit
 
Total
 
 
 
 
 
 
 
(in millions)
Same stores
$
1.5

 
$
0.1

 
$
1.6

New stores and other
1.8

 
0.7

 
2.5

Discrete transaction tax adjustment

 
(4.3
)
 
(4.3
)
Total
$
3.3

 
$
(3.5
)
 
$
(0.2
)
Change in jewelry scrapping sales gross profit and other revenues
 
 
 
 
(0.3
)
Total change in net revenue
 
 
 
 
$
(0.5
)
Pawn service charges increased 20% (20% on a constant currency basis), with same store growth of 9%. The average ending monthly pawn loan balance outstanding during the current quarter was up 3% (up 3% on a constant currency basis).
Merchandise sales decreased 4% (4% on a constant currency basis), with same store sales up 7% (6% on a constant currency basis). Excluding the discrete transaction tax adjustment, gross margin on merchandise sales was 29%, or 100 basis points below the prior-year quarter. As a result of these factors and foreign currency impacts, merchandise sales gross profit was down 59% to $2.6 million (56% to $2.8 million on a constant currency basis). Excluding the adjustment, merchandise sales gross profit increased 14% to $7.1 million (up 13% to $7.1 million on a constant currency basis).
Jewelry scrapping sales increased 65% (66% on a constant currency basis) on greater volume, with an 800 basis point decrease in margin to 4%. The lower scrap margin reflects higher processing fees from a new refiner, as well as our stores’ efforts to merchandise higher value jewelry in store rather than scrapping, to obtain a higher overall gross profit.
Other segment expense in the current quarter included interest of $1.5 million related to the previously discussed discrete transaction tax adjustment.
Net revenues decreased 3% (2% on a constant currency basis) as a result of the transaction tax adjustment. The remaining revenues and expenses increased primarily as a result of acquired and newly opened stores. At new stores, net revenue growth typically trails the growth in expenses until new stores begin to mature and until acquired stores are fully integrated and migrated to our operating metrics. Excluding the discrete transaction tax adjustment, net revenue increased 16% (16% on a constant currency basis). Reflecting more stores, higher labor, energy and robbery/security costs, as well as increases in operating supplies, operations expense increased 22% (22% on a constant currency basis). Depreciation and amortization increased 71% (70% on a constant currency basis) from the addition of stores and additional capital investment in existing and acquired operations. The net result was a decrease in segment contribution of $6.6 million or 76% ($6.2 million or 72% on a constant currency basis), including the $6.1 million discrete transaction tax adjustment.

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Other International
The following table presents selected financial data from continuing operations for the Other International segment after translation to U.S. dollars from its functional currency of primarily Australian and Canadian dollars:
 
Three Months Ended June 30,
 
Percentage Change
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Consumer loan fees, interest and other
$
1,270

 
$
1,603

 
(21)%
Consumer loan bad debt
(576
)
 
(349
)
 
65%
Net revenues
694

 
1,254

 
(45)%
 
 
 
 
 

Segment operating expenses (income):
 
 
 
 
 
Operating expenses
1,066

 
2,726

 
(61)%
Equity in net income of unconsolidated affiliates
(1,320
)
 
(1,151
)
 
15%
Segment operating contribution (loss)
948

 
(321
)
 
*
 
 
 
 
 
 
Other segment expense
88

 

 
*
Segment contribution (loss)
$
860

 
$
(321
)
 
*
*
Represents a percentage computation that is not mathematically meaningful.
Segment contribution was $0.9 million, an increase of $1.2 million from the prior-year quarter primarily due a decrease in operating expenses of $1.7 million, partially offset by a decrease in net revenue of $0.6 million as we closed two under-performing CASHMAX stores in the current quarter, consolidating their loan balances into nearby stores. Operating expenses decreased as a result of the deconsolidation of a previously consolidated variable interest entity ("RDC"). As of June 30, 2019, we determined that our investment in Cash Converters International was impaired by $3.8 million but that such impairment was not "other-than-temporary." In reaching this conclusion, we considered all available evidence including primarily the time and extent to which our investment was impaired during the current quarter. Should the value of our investment decline further, we may record additional impairments.
Due partly to regulatory changes that became effective January 1, 2018, we added installment loan products in our Canada CASHMAX business to meet the needs of our customers. In addition to single-pay loans, all CASHMAX stores are now offering installment loans with terms ranging from six to 18 months and average yields of 47% per annum. We entered into a secured borrowing arrangement in November 2018 to provide up to CAD $25.0 million to fund originations of installment loans through November 2019 and have obtained $1.5 million in proceeds from the facility through June 30, 2019. See Note 6 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."

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Table of Contents

Other Items
The following table reconciles our consolidated segment contribution discussed above to net income attributable to EZCORP, Inc., including items that affect our consolidated financial results but are not allocated among segments:
 
Three Months Ended June 30,
 
Percentage Change
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands)
 
 
Segment contribution
$
26,581

 
$
29,624

 
(10)%
Corporate expenses (income):
 
 
 
 

Administrative
15,053

 
13,268

 
13%
Depreciation and amortization
2,622

 
2,115

 
24%
Gain on sale or disposal of assets
22

 
214

 
(90)%
Interest expense
8,265

 
7,391

 
12%
Interest income
(2,796
)
 
(3,686
)
 
(24)%
Other income
(44
)
 
(5,184
)
 
(99)%
Income from continuing operations before income taxes
3,459

 
15,506

 
(78)%
Income tax expense
98

 
1,502

 
(93)%
Income from continuing operations, net of tax
3,361

 
14,004

 
(76)%
(Loss) income from discontinued operations, net of tax
(203
)
 
91

 
*
Net income
3,158

 
14,095

 
(78)%
Net loss attributable to noncontrolling interest

 
(359
)
 
(100)%
Net income attributable to EZCORP, Inc.
$
3,158

 
$
14,454

 
(78)%
*
Represents a percentage computation that is not mathematically meaningful.
Segment contribution decreased primarily due to the impact of a $6.1 million discrete transaction tax adjustment in our Latin America Pawn segment, offsetting our improved operating performance and leverage in our U.S. Pawn segment and a $1.2 million improved contribution from our Other International segment.
Administrative expenses increased $1.8 million, or 13%, primarily due to costs of $1.3 million associated with the strategic investment in a new digital platform and other professional fees.
Depreciation and amortization increased $0.5 million, or 24%, primarily due to additional capitalized software costs, including the costs to develop our new point of sale system.
Interest expense increased $0.9 million, or 12%, primarily due to an increase in debt outstanding during the current quarter compared to the prior-year quarter, offset by the reduction of interest expense on our 2.125% Cash Convertible Senior Notes Due 2019 ("2019 Convertible Notes") which were repaid June 17, 2019. Effective interest rates on our outstanding convertible debt were approximately 8% to 9%. We expect interest expense to decrease in future periods due to the June 2019 repayment of the 2019 Convertible Notes, the principal amount of which was $195.0 million.
Interest income decreased $0.9 million, or 24%, primarily due to the declining principal balance on the Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart") notes receivable as they are repaid in accordance with their agreed amortization schedule, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid in June 2019. The remainder of principal outstanding on the Grupo Finmart notes receivable and the first installment of the deferred compensation fee are expected to be received through September 2019, reducing the amount of interest income recognized in the fourth quarter of fiscal 2019 and forward.
Other income in the prior-year quarter was comprised primarily of $5.2 million in net recoveries pertaining to a legal settlement.
Income tax expense decreased $1.4 million due primarily to:
A $12.0 million decrease in income from continuing operations before income taxes;
A discrete transaction tax adjustment with a tax benefit of $1.8 million in the current quarter; and

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A lower maximum U.S. corporate rate of 21% in the current quarter compared to a higher blended rate in the prior-year quarter; partially offset by
A $1.5 million reduction in benefits associated with the expiration of a statute of limitations on uncertain tax positions.
Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate. These items include the net effect of state taxes, non-deductible items and changes in valuation allowances for certain foreign operations.

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Table of Contents

Nine Months Ended June 30, 2019 vs. Nine Months Ended June 30, 2018
These tables, as well as the discussion that follows, should be read with the accompanying condensed consolidated financial statements and related notes. All comparisons, unless otherwise noted, are to the prior year-to-date period.
U.S. Pawn
The following table presents selected summary financial data for the U.S. Pawn segment:
 
Nine Months Ended June 30,
 
Change
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Pawn service charges
$
184,658

 
$
174,180

 
6%
 
 
 
 
 
 
Merchandise sales
275,639

 
270,145

 
2%
Merchandise sales gross profit
102,708

 
103,180

 
—%
Gross margin on merchandise sales
37
%
 
38
%
 
(100)bps
 
 
 
 
 
 
Jewelry scrapping sales
28,357

 
34,515

 
(18)%
Jewelry scrapping sales gross profit
4,677

 
5,832

 
(20)%
Gross margin on jewelry scrapping sales
16
%
 
17
%
 
(100)bps
 
 
 
 
 
 
Other revenues
125

 
205

 
(39)%
Net revenues
292,168

 
283,397

 
3%
 
 
 
 
 
 
Segment operating expenses:
 
 
 
 
 
Operations
200,884

 
196,635

 
2%
Depreciation and amortization
8,951

 
9,340

 
(4)%
Segment operating contribution
82,333

 
77,422

 
6%
 
 
 
 
 
 
Other segment expense
2,856

 
194

 
1,372%
Segment contribution
$
79,477

 
$
77,228

 
3%
 
 
 
 
 
 
Other data:
 
 
 
 
 
Average monthly ending pawn loan balance per store (a)
$
288

 
$
272

 
6%
Monthly average yield on pawn loans outstanding
14
%
 
14
%
 
Pawn loan redemption rate
85
%
 
85
%
 
(a)
Balance is calculated based upon the average of the monthly ending balances during the applicable period.
Net revenue increased $8.8 million, or 3%, primarily due to a 6%, or $10.5 million, increase in pawn service charges, partially offset by a 20%, or $1.2 million, decrease in jewelry scrapping sales gross profit on less scrap volume. The change in net revenue was attributable to same stores.
Pawn service charges increased 6% primarily due to a 6% increase in average ending monthly pawn loan balances outstanding during the current year-to-date period. The higher average loan balance was driven by disciplined lending practices, a focus on meeting customers' need for cash and stronger performance from stores affected by hurricanes in the prior year-to-date period.
Merchandise sales increased 2% with gross margin on merchandise sales of 37%, a 100 basis point decline over the prior year-to-date period, but within our target range. As a result, merchandise sales gross profit was flat at $102.7 million. A portion of the year-over-year improvement is due to the impacts of hurricanes in the prior year-to-date period. We expect sales gross margin for the full fiscal year to be within our target range of 35-38%.

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Jewelry scrapping sales gross profit remained relatively flat at 2% of net revenues, but down 20% from the prior year-to-date period, in line with our strategy to sell rather than scrap jewelry, with a 100 basis point decline in gross margin to 16%.
3% increase in net revenue resulted in a 3% increase in segment contribution primarily as a result of a $2.9 million reserve against a receivable balance from a gold refiner deemed uncollectible due to the refiner's Chapter 11 bankruptcy, offset by cost control initiatives in segment operating expenses.
Latin America Pawn
The following table presents selected summary financial data for the Latin America Pawn segment, including constant currency results, after translation to U.S. dollars from functional currencies. See “Results of Operations — Non-GAAP Financial Information” above.
 
Nine Months Ended June 30,
 
2019 (GAAP)
 
2018 (GAAP)
 
Change (GAAP)
 
2019 (Constant Currency)
 
Change (Constant Currency)
 
 
 
 
 
 
 
 
 
 
 
(in USD thousands)
 
 
 
(in USD thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Pawn service charges
$
59,640

 
$
48,417

 
23%
 
$
61,095

 
26%
 
 
 
 
 
 
 
 
 
 
Merchandise sales
70,547

 
63,125

 
12%
 
72,478

 
15%
Merchandise sales gross profit
18,295

 
19,807

 
(8)%
 
19,045

 
(4)%
Gross margin on merchandise sales
26
%
 
31
%
 
(500)bps
 
26
%
 
(500)bps
 
 
 
 
 
 
 
 
 
 
Jewelry scrapping sales
9,516

 
9,651

 
(1)%
 
9,737

 
1%
Jewelry scrapping sales gross profit
548

 
798

 
(31)%
 
561

 
(30)%
Gross margin on jewelry scrapping sales
6
%
 
8
%
 
(200)bps
 
6
%
 
(200)bps
 
 
 
 
 
 
 
 
 
 
Other revenues
134

 
588

 
(77)%
 
138

 
(77)%
Net revenues
78,617

 
69,610

 
13%
 
80,839

 
16%
 
 
 
 
 
 
 
 
 
 
Segment operating expenses:
 
 
 
 
 
 
 
 
 
Operations
54,703

 
44,847

 
22%
 
56,010

 
25%
Depreciation and amortization
4,543

 
2,712

 
68%
 
4,638

 
71%
Segment operating contribution
19,371

 
22,051

 
(12)%
 
20,191

 
(8)%
 
 
 
 
 
 
 
 
 
 
Other segment expense (income) (a)
1,024

 
(2,024
)
 
*
 
1,004

 
*
Segment contribution
$
18,347

 
$
24,075

 
(24)%
 
$
19,187

 
(20)%
 
 
 
 
 
 
 
 
 
 
Other data:
 
 
 
 
 
 
 
 
 
Average monthly ending pawn loan balance per store (b)
$
91

 
$
90

 
1%
 
$
93

 
3%
Monthly average yield on pawn loans outstanding
16
%
 
16
%
 
 
16
%
 
Pawn loan redemption rate
78
%
 
79
%
 
(100)bps
 
78
%
 
(100)bps
*
Represents a percentage computation that is not mathematically meaningful.
(a)
Fiscal 2019 constant currency amount excludes nominal net GAAP basis foreign currency transaction gains resulting from movement in exchange rates. The net foreign currency transaction gains for fiscal 2018 were $0.1 million and are included in the above results.
(b)
Balance is calculated based upon the average of the monthly ending balances during the applicable period.

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In the current year-to-date period, our Latin America pawn segment acquired five pawn stores and opened twelve de novo stores.
Net revenue increased $9.0 million, or 13% ($11.2 million, or 16%, on a constant currency basis), primarily due to a 23% increase (26% on a constant currency basis) in pawn service charges, offset by an 8% decrease (4% on a constant currency basis) in merchandise sales gross profit, inclusive of a discrete tax adjustment of $4.6 million relating to prior periods. The change in net revenue attributable to same stores and new stores added since the prior year-to-date period is summarized as follows:
 
Change in Net Revenue
 
Pawn Service Charges
 
Merchandise Sales Gross Profit
 
Total
 
 
 
 
 
 
 
(in millions)
Same stores
$
3.9

 
$
0.5

 
$
4.4

New stores and other
7.3

 
2.6

 
9.9

Discrete transaction tax adjustment

 
(4.6
)
 
(4.6
)
Total
$
11.2

 
$
(1.5
)
 
$
9.7

Change in jewelry scrapping sales gross profit and other revenues
 
 
 
 
(0.7
)
Total change in net revenue
 
 
 
 
$
9.0

 
Change in Net Revenue (Constant Currency)
 
Pawn Service Charges
 
Merchandise Sales Gross Profit
 
Total
 
 
 
 
 
 
 
(in millions)
Same stores
$
5.1

 
$
1.0

 
$
6.1

New stores and other
7.6

 
2.6

 
10.2

Discrete transaction tax adjustment

 
(4.4
)
 
(4.4
)
Total
$
12.7

 
$
(0.8
)
 
$
11.9

Change in jewelry scrapping sales gross profit and other revenues
 
 
 
 
(0.7
)
Total change in net revenue
 
 
 
 
$
11.2

Pawn service charges increased 23% (26% on a constant currency basis), with same store growth of 8%. The average ending monthly pawn loan balance per store outstanding during the current year-to-date period was up 1% (up 3% on a constant currency basis), with the average total pawn loan balance outstanding up 22%. Pawn service charges further include $1.1 million in revenue attributable to the receipt of previously escrowed seller funds as a result of settling certain indemnification claims with the sellers of Camira Administration Corp. and subsidiaries (“GPMX”). In the current year-to-date period, we loaned the $1.1 million back to the seller of GPMX in exchange for a promissory note. The note bears interest at the rate of 2.89% per annum and is secured by certain marketable securities owned by the seller and held in a U.S. brokerage account. All principal and accrued interest is due and payable in April 2024.
Merchandise sales increased 12% (15% on a constant currency basis) primarily from newly acquired stores, reduced by a discrete transaction tax adjustment of $4.6 million relating to prior periods. Excluding the discrete transaction tax adjustment, gross margin on merchandise sales was 30%, or 100 basis points below the prior year-to-date period. As a result of these factors, merchandise sales gross profit was down 8% to $18.3 million (4% to $19.0 million on a constant currency basis). Excluding the discrete transaction tax adjustment, merchandise sales gross profit increased 15% to $22.8 million (up 18% to $23.4 million on a constant currency basis).
Jewelry scrapping sales decreased 1% (increased 1% on a constant currency basis) in line with our strategy to sell rather than scrap jewelry, with a 200 basis point decrease in margin.
Other segment expense included interest of $1.5 million related to the previously discussed discrete transaction tax adjustment.
Net revenues and expenses increased primarily as a result of acquired and newly opened stores. At new stores, net revenue growth typically trails the growth in expenses until new stores begin to mature and until acquired stores are fully integrated and migrated to our operating metrics.

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Net revenue increased 13% (16% on a constant currency basis) in the current year-to-date period. Excluding the discrete transaction tax adjustment, net revenues increased 19% (22% on a constant currency basis). Reflecting more stores, higher labor, energy and robbery/security costs, as well as increases in operating supplies, operations expense increased at a slightly faster pace of 22% (25% on a constant currency basis). Depreciation and amortization increased 68% (71% on a constant currency basis) from the addition of stores and additional capital investment in existing and acquired operations. Additionally, we recorded a $0.7 million reserve against a receivable and inventory balance deemed uncollectible from a refiner, consisting of a $1.5 million reserve recorded in the first quarter ended December 31, 2018 and a subsequent $0.8 million recovery in the second quarter of fiscal 2019. These factors resulted in a decrease in segment contribution of $5.7 million or 24% ($4.9 million or 20% on a constant currency basis), including the impact of a $6.1 million discrete transaction tax adjustment.
Other International
The following table presents selected financial data from continuing operations for the Other International segment after translation to U.S. dollars from its functional currency of primarily Australian and Canadian dollars:
 
Nine Months Ended June 30,
 
Percentage Change
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
Consumer loan fees, interest and other
$
4,274

 
$
5,354

 
(20)%
Consumer loan bad debt
(1,467
)
 
(1,273
)
 
15%
Net revenues
2,807

 
4,081

 
(31)%
 
 
 
 
 
 
Segment operating expenses (income):
 
 
 
 
 
Operating expenses
6,359

 
7,418

 
(14)%
Equity in net income of unconsolidated affiliates
(632
)
 
(3,477
)
 
(82)%
Segment operating (loss) contribution
(2,920
)
 
140

 
*
 
 
 
 
 
 
Impairment of investment in unconsolidated affiliates
19,725

 

 
*
Other segment expense (income)
592

 
(118
)
 
*
Segment (loss) contribution
$
(23,237
)
 
$
258

 
*
*
Represents a percentage computation that is not mathematically meaningful.
Segment loss was $23.2 million compared to $0.3 million in income in the prior year-to-date period, primarily due to:
Impairment of our investment in Cash Converters International in the amount of $19.7 million;
A charge of $2.9 million included in our ordinary estimated share of earnings for the current year-to-date period from Cash Converters International for charges relating to the settlement of the Queensland class action litigation in October 2018; and
A decrease in net revenue of $1.3 million as we closed or consolidated five under-performing CASHMAX stores in the current year-to-date period; partially offset by
A decrease in operating expenses of $1.1 million as a result of the deconsolidation of RDC.
As of June 30, 2019, we determined that our investment in Cash Converters International was impaired by $3.8 million and that such impairment was not "other-than-temporary." In reaching this conclusion, we considered all available evidence including primarily the time and extent to which our investment was impaired during the current quarter. Should the value of our investment decline further, we may record additional impairments.
Due partly to regulatory changes that became effective January 1, 2018, we added installment loan products in our Canada CASHMAX business to meet the needs of our customers. In addition to single-pay loans, all CASHMAX stores are now offering installment loans with terms ranging from six to 18 months and average yields of 47% per annum. We entered into a secured borrowing arrangement in November 2018 to provide up to CAD $25.0 million to fund originations of installment loans through November 2019 and have obtained $1.5 million in proceeds from the facility through June 30, 2019. See Note 6 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."

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Other Items
The following table reconciles our consolidated segment contribution discussed above to net income attributable to EZCORP, Inc., including items that affect our consolidated financial results but are not allocated among segments:
 
Nine Months Ended June 30,
 
Percentage Change
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands)
 
 
Segment contribution
$
74,587

 
$
101,561

 
(27)%
Corporate expenses (income):
 
 
 
 
 
Administrative
46,795

 
39,688

 
18%
Depreciation and amortization
7,430

 
6,104

 
22%
Loss on sale or disposal of assets
22

 
225

 
(90)%
Interest expense
25,362

 
19,064

 
33%
Interest income
(8,411
)
 
(10,824
)
 
(22)%
Other income
(348
)
 
(5,363
)
 
(94)%
Income from continuing operations before income taxes
3,737

 
52,667

 
(93)%
Income tax expense
1,377

 
14,710

 
(91)%
Income from continuing operations, net of tax
2,360

 
37,957

 
(94)%
Loss from discontinued operations, net of tax
(404
)
 
(631
)
 
(36)%
Net income
1,956

 
37,326

 
(95)%
Net loss attributable to noncontrolling interest
(1,230
)
 
(1,348
)
 
(9)%
Net income attributable to EZCORP, Inc.
$
3,186

 
$
38,674

 
(92)%
Segment contribution decreased primarily due to a $19.7 million impairment of our investment in Cash Converters International, a $2.9 million charge included in our ordinary estimated share of earnings from Cash Converters International for charges relating to settlement of a Queensland class action litigation in October 2018 and the impact of a $6.1 million discrete transaction tax adjustment in our Latin America Pawn segment, partially offset by improved operating performance in our U.S. Pawn segment.
Administrative expenses increased $7.1 million, or 18%, in the current year-to-date period primarily due to costs of $4.9 million associated with a strategic investment in a new digital platform and other professional fees.
Depreciation and amortization increased $1.3 million, or 22%, primarily due to additional capitalized software costs, including the costs to develop our new point of sale system.
Interest expense increased $6.3 million, or 33%, primarily due to an increase in average debt outstanding during the current year-to-date period compared to the prior year-to-date period, offset by the reduction of interest expense on our 2019 Convertible Notes which were repaid on June 17, 2019. Effective interest rates on our outstanding convertible debt were approximately 8% to 9%. We expect interest expense to decrease in future periods due to the June 2019 repayment of the 2019 Cash Convertible Notes, the principal amount of which was $195.0 million.
Interest income decreased $2.4 million, or 22%, primarily due to the declining principal balance on the Grupo Finmart notes receivable as they are repaid in accordance with their agreed amortization schedule, in addition to the reduction of interest earned on outstanding cash balances after our 2019 Convertible Notes were repaid in June 2019. The remainder of principal outstanding on the Grupo Finmart notes receivable and the first installment of the deferred compensation fee are expected to be received through September 2019, reducing the amount of interest income recognized in the fourth quarter of fiscal 2019 and forward.
Other income in the prior year-to-date period was comprised primarily of $5.2 million in net recoveries pertaining to a legal settlement.
Income tax expense decreased $13.3 million due primarily to:
A $48.9 million decrease in income from continuing operations before income taxes;
A discrete transaction tax adjustment with a tax benefit of $1.8 million in the current year-to-date period; and

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A lower maximum U.S. corporate rate of 21% in the current year-to-date period compared to a higher blended rate in the prior year-to-date period; partially offset by
A first quarter of fiscal 2018 charge related to the impacts of the U.S. Tax Cuts and Jobs Act of 2017; and
A $3.1 million reduction in benefits associated with the expiration of a statute of limitations on uncertain tax positions.
Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate. These items include the net effect of state taxes, non-deductible items and changes in valuation allowances for certain foreign operations.
Liquidity and Capital Resources
Cash Flows
The table and discussion below presents a summary of the selected sources and uses of our cash:
 
Nine Months Ended June 30,
 
Percentage
Change
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands)
 
 
Cash flows from operating activities
$
64,977

 
$
69,321

 
(6)%
Cash flows from investing activities
(13,238
)
 
(117,108
)
 
89%
Cash flows from financing activities
(198,101
)
 
170,157

 
*
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(294
)
 
(1,493
)
 
80%
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(146,656
)
 
$
120,877

 
*
*
Represents a percentage computation that is not mathematically meaningful.
Change in Cash and Cash Equivalents and Restricted Cash for the Nine Months Ended June 30, 2019 vs. Nine Months Ended June 30, 2018
The decrease in cash flows from operating activities year-over-year was due to $6.5 million from changes in working capital offset by a $2.2 million increase in net income, exclusive of non-cash items.
The increase in cash flows from investing activities year-over-year was due to a $99.1 million decrease in cash paid for acquisitions, a $9.3 million decrease in additions to property and equipment and a $5.7 million increase in principal collections on notes receivable, offset by a $10.3 million net investment in customer loan growth.
The decrease in cash flows from financing activities year-over-year was due primarily to repayment of $195.0 million of our 2.125% Cash Convertible Senior Notes Due 2019 in June 2019, the May 2018 issuance of our $172.5 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2025 and a $3.0 million increase in cash paid for employee net share settlement of individual tax liabilities on vested share-based awards.
The net effect of these and other smaller items was a $146.7 million decrease in cash on hand during the current year-to-date period, resulting in a $138.9 million ending cash balance compared to $284.5 million as of June 30, 2018. Of the ending cash balance as of June 30, 2019, $25.4 million was not available to fund domestic operations as we intend to permanently reinvest those funds in our foreign operations.
Sources and Uses of Cash
We anticipate that cash flow from operations and cash on hand will be adequate to fund our contractual obligations, planned de novo store growth, capital expenditures and working capital requirements, as well as a limited amount of acquisitions, through fiscal 2019. In June 2019, we repaid $195.0 million of 2.125% Cash Convertible Senior Notes Due 2019 at maturity using cash on hand. We continue to explore accretive acquisition opportunities, both large and small, and may choose to pursue additional debt, equity or equity-linked financings in the future should the need arise. Depending on the level of acquisition activity and other factors, our ability to repay our longer term debt obligations, including the convertible debt maturing in 2024 and 2025, may require us to refinance these obligations through the issuance of new debt securities, equity securities, convertible securities or through new credit facilities.

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Contractual Obligations
In "Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended September 30, 2018, we reported that we had $795.8 million in total contractual obligations as of September 30, 2018. There have been no material changes to this total obligation since September 30, 2018, other than the repayment of the 2.125% Cash Convertible Senior Notes Due 2019 in June 2019.
We are responsible for the maintenance, property taxes and insurance at most of our locations. In the fiscal year ended September 30, 2018, these collectively amounted to $22.4 million.
Recently Adopted Accounting Policies and Recently Issued Accounting Pronouncements
See Note 1 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."
Cautionary Statement Regarding Risks and Uncertainties that May Affect Future Results
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements, other than statements of historical facts, regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives are forward-looking statements. These statements are often, but not always, made with words or phrases like "may," "should," "could," "will," "predict," "anticipate," "believe," "estimate," "expect," "intend," "plan," "projection" and similar expressions. Such statements are only predictions of the outcome and timing of future events based on our current expectations and currently available information and, accordingly, are subject to substantial risks, uncertainties and assumptions. Actual results could differ materially from those expressed in the forward-looking statements due to a number of risks and uncertainties, many of which are beyond our control. In addition, we cannot predict all of the risks and uncertainties that could cause our actual results to differ from those expressed in the forward-looking statements. Accordingly, you should not regard any forward-looking statements as a representation that the expected results will be achieved. Important risk factors that could cause results or events to differ from current expectations are identified and described in "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2018, supplemented by those described in "Part II, Item 1A — Risk Factors" of this Quarterly Report.
We specifically disclaim any responsibility to publicly update any information contained in a forward-looking statement except as required by law. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates, gold values and foreign currency exchange rates, and are described in detail in "Part II, Item 7A — Quantitative and Qualitative Disclosures about Market Risk" of our Annual Report on Form 10-K for the year ended September 30, 2018. There have been no material changes to our exposure to market risks since September 30, 2018.
ITEM 4. CONTROLS AND PROCEDURES
This report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2019 due to the continuing existence of a material weakness in internal control over financial

42

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reporting described below (which we view as an integral part of our disclosure controls and procedures). Based on the performance of additional procedures designed to ensure the reliability of our financial reporting, we believe that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with GAAP.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2019, we experienced changes in our internal control environment that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Specifically, we have certain deficiencies in our information technology general controls (ITGC) that are designed to prevent or detect unauthorized access or changes to our operating system and databases. We have historically maintained a separate logging system that mitigated the potential impact of those ITGC deficiencies. During the quarter ended March 31, 2019, however, we deemed it necessary to discontinue the separate logging system in order to maintain acceptable system performance at the store level, which eliminated compensating controls that mitigated the potential impact of the ITGC deficiencies. We believe that, without those IT compensating controls and given the lack of sufficiently designed non-IT compensating controls, the underlying ITGC deficiencies represent a material weakness in our internal control over financial reporting. We have not completed our remediation of that material weakness as of June 30, 2019.
As of March 31, 2019, we had hired a Chief Information Security Officer and subsequently further built-out and developed an IT compliance group, whose primary responsibility is to assist us with the design, implementation and maintenance of appropriate controls to safeguard the confidentiality, integrity and availability of our IT operating and reporting systems. We are focused on remediating the underlying ITGC deficiencies, and we are in the process of improving our control environment to adequately prevent or detect unauthorized access or changes to our operating systems and databases. As of the date of filing, we have developed a remediation plan with a combination of control modifications to implement by our fiscal year end and a roadmap for incremental procedures for the optimization of our IT control environment over a longer term period. Our remediation plan is focused on IT control enhancements across our logical access and change management processes, including the evaluation of automation tools, where applicable, and database monitoring activities. See "Part II, Item 1A — Risk Factors."
Inherent Limitations on Internal Controls
Notwithstanding the foregoing, management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Limitations inherent in any control system include the following:
Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes.
Controls can be circumvented by individuals, acting alone or in collusion with others, or by management override.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures.
The design of a control system must reflect the fact that resources are constrained, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 8 of Notes to Interim Condensed Consolidated Financial Statements included in "Part I, Item 1 — Financial Statements."

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ITEM 1A. RISK FACTORS
Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in "Part I, Item 1A — Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2018, as supplemented by the information set forth in "Part II, Item 1A — Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2018 and the information set forth in "Part II, Item 1A — Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
ITEM 6. EXHIBITS
The following exhibits are filed with, or incorporated by reference into, this report.
Exhibit No.
  
Description of Exhibit
 
 
 
  
 
  
101.INS†††
  
XBRL Instance Document
101.SCH†††
  
XBRL Taxonomy Extension Schema Document
101.CAL†††
  
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†††
  
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†††
  
XBRL Taxonomy Label Linkbase Document
101.PRE†††
  
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith.
††
Furnished herewith.
†††
Filed herewith as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2019, June 30, 2018 and September 30, 2018; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2019 and June 30, 2018; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2019 and June 30, 2018; (iv) Condensed Consolidated Statements of Stockholders' Equity for the periods ended June 30, 2019 and June 30, 2018; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2019 and June 30, 2018; and (vi) Notes to Interim Condensed Consolidated Financial Statements.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



EZCORP, INC.




Date:
July 31, 2019

/s/ David McGuire



David McGuire, 
Deputy Chief Financial Officer and Chief Accounting Officer
(principal accounting officer)

45