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Fair Value Measurements, Derivatives and Other | 12 Months Ended
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Sep. 30, 2016
Fair Value Disclosures [Abstract] |
Fair Value Measurements, Derivatives and Other | NOTE 7: FAIR VALUE MEASUREMENTS, DERIVATIVES AND OTHER In accordance with FASB ASC 820-10, our assets and liabilities discussed below are classified in one of the following three categories based on the inputs used to develop their fair values:
• | Level 1: Quoted market prices in active markets for identical assets or liabilities.
• | Level 2: Other observable inputs other than quoted market prices.
• | 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 measured at fair value on a recurring basis as of September 30, 2016 and 2015:
|  | September 30, 2016 |  | Fair Value Measurements Using
Financial (liabilities) assets: | Level 1 |  | Level 2 |  | Level 3
|  | (in thousands)
Guarantee asset |  | $ | 1,209 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,209 |
Guarantee liability |  | (1,258 | ) |  | — |  |  | — |  |  | (1,258 | )
Convertible Notes Hedges |  | 37,692 |  |  | — |  |  | 37,692 |  |  | — |
Convertible Notes Embedded Derivative |  | (37,692 | ) |  | — |  |  | (37,692 | ) |  | — |
Net financial liabilities |  | $ | (49 | ) |  | $ | — |  |  | $ | — |  |  | $ | (49 | )
|  | September 30, 2015 |  | Fair Value Measurements Using
Financial assets (liabilities): | Level 1 |  | Level 2 |  | Level 3
|  | (in thousands)
Foreign currency forwards — discontinued operations* |  | $ | 14,169 |  |  | $ | — |  |  | $ | 14,169 |  |  | $ | — |
Holding Period Adjustment |  | 4 |  |  | — |  |  | 4 |  |  | — |
Cash Convertible Notes Hedges |  | 10,505 |  |  | — |  |  | 10,505 |  |  | — |
Cash Convertible Notes Embedded Derivative |  | (10,505 | ) |  | — |  |  | (10,505 | ) |  | — |
Phantom share-based awards |  | (3,932 | ) |  | — |  |  | — |  |  | (3,932 | )
Contingent consideration — discontinued operations* |  | (2,601 | ) |  | — |  |  |  |  | (2,601 | )
Net financial assets (liabilities) |  | $ | 7,640 |  |  | $ | — |  |  | $ | 14,173 |  |  | $ | (6,533 | )
* | See Note 1 for discussion of operations discontinued subsequent to the adoption of FASB ASU 2014-08.
We measured the fair value of the guarantee asset and liability under a probability-weighted discounted cash flow approach for the expected cash flows underlying the guarantees utilizing expected forward currency rates, risk-free interest rates and a calculated probability of default, considering the synthetic credit ratings for EZCORP, Grupo Finmart and AlphaCredit. Certain of the significant inputs used for the valuation were not observable in the market and thus were Level 3 inputs. The guarantee asset and liability were recorded in the consolidated balance sheets under “Prepaid expenses and other current assets” and “Accounts payable, accrued expenses and other current liabilities,” respectively. We measured the fair value of the Cash Convertible Notes Hedges and the Cash Convertible Notes Embedded Derivative using an option pricing model based on observable Level 1 and Level 2 inputs such as conversion price of underlying shares, current share price, implied volatility, risk free interest rate and other factors. The Cash Convertible Notes Hedges were recorded in the consolidated balance sheets under “Other assets, net.” The Cash Convertible Notes Embedded Derivative was recorded in the consolidated balance sheets under “Long-term debt, less current maturities.” We previously measured the value of the forward currency forwards using Level 2 inputs such as estimations of expected cash flows, appropriately risk-adjusted discount rates and available observable inputs (term of the forward, notional amount, discount rates based on local and foreign rate curves, and a credit value adjustment to consider the likelihood of nonperformance). Forward contracts were recorded in the consolidated balance sheets under “Current assets held for sale” and "Non-current assets held for sale." We previously measured the fair value of the Holding Period Adjustment using an option pricing model based on observable Level 1 and Level 2 inputs such as conversion price of underlying shares, current share price, implied volatility, risk free interest rate and other factors. The Holding Period Adjustment was recorded in the consolidated balance sheets under "Other assets, net." On April 26, 2013, Grupo Finmart purchased 100% of the outstanding shares of Fondo ACH, S.A. de C.V., a specialty consumer finance company. The total purchase price was performance-based and was to be determined over a period of four years from the date of purchase and was initially due on January 2, 2017 based on interest income generated by the acquired portfolios and new loans made through Fondo ACH's contractual relationships. We previously used an income approach to measure the fair value of the contingent consideration using a probability-weighted discounted cash flow approach. Some of the significant inputs used for the valuation were not observable in the market and thus were Level 3 inputs. Contingent consideration was recorded in the consolidated balance sheets under "Current liabilities held for sale" and "Non-current liabilities held for sale." During the three-months ended June 30, 2016, we negotiated a final settlement amount of the contingent consideration and recorded a valuation adjustment of $1.1 million, included under "Loss from discontinued operations, net of tax" in our consolidated statements of operations, to arrive at the $1.5 million balance of the contingent consideration liability, which was paid during the three-months ended September 30, 2016. During fiscal 2015, we granted awards to employees based upon underlying shares that were not issued, and therefore we accounted for these as phantom share-based awards under FASB ASC 718-30. These awards are recorded in the consolidated balance sheets under “Accounts payable, accrued expenses and other current liabilities” for unvested share-based payment awards. The fair value of fiscal 2015 phantom share-based awards that were estimated using the Monte Carlo simulation model incorporated the closing share price of our Class A Common Stock on the date of grant (considered, for this purpose, to be October 1, 2014), as well as the following assumptions, which we consider to be Level 3 inputs under the fair value hierarchy:
Expected volatility of EZCORP, Inc. Class A Common Stock | 49.7 | %
Risk-free interest rate | 1.9 | %
Expected term in years | 6 |
Cost of equity | 11.5 | %
Dividend yield | — |
During fiscal 2016, we settled and released $0.1 million of phantom share-based awards and reclassified $3.8 million of phantom share-based awards from liability awards to equity awards under "Additional paid-in capital," reducing our balance in phantom share-based awards to zero as of March 31, 2016. There were no transfers in or out of Level 1 or Level 2 for financial assets or liabilities measured at fair value on a recurring basis during the periods presented. Financial Assets, Temporary Equity and Liabilities Not Measured at Fair Value Our financial assets, temporary equity and liabilities as of September 30, 2016 and 2015 that were not measured at fair value in our consolidated balance sheets, inclusive of Grupo Finmart balances as discussed in Note 3, are as follows:
|  | Carrying Value |  | Estimated Fair Value
|  | September 30, 2016 |  | September 30, 2016 |  | Fair Value Measurement Using
|  | Level 1 |  | Level 2 |  | Level 3
|  | (in thousands)
Financial assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 65,737 |  |  | $ | 65,737 |  |  | $ | 65,737 |  |  | $ | — |  |  | $ | — |
Restricted cash |  | 7,089 |  |  | 7,089 |  |  | 7,089 |  |  | — |  |  | — |
Pawn loans |  | 167,329 |  |  | 167,329 |  |  | — |  |  | — |  |  | 167,329 |
Pawn service charges receivable, net |  | 31,062 |  |  | 31,062 |  |  | — |  |  | — |  |  | 31,062 |
Notes receivable, net |  | 41,946 |  |  | 41,946 |  |  | — |  |  | — |  |  | 41,946 |
Non-current notes receivable, net |  | 41,119 |  |  | 41,119 |  |  | — |  |  | — |  |  | 41,119 |
Investment in unconsolidated affiliate |  | 37,128 |  |  | 37,128 |  |  | 37,128 |  |  | — |  |  | — |
|  | $ | 391,410 |  |  | $ | 391,410 |  |  | $ | 109,954 |  |  | $ | — |  |  | $ | 281,456 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Cash Convertible Notes |  | $ | 197,954 |  |  | $ | 227,332 |  |  | $ | — |  |  | $ | 227,332 |  |  | $ | — |
Term Loan Facility |  | 47,965 |  |  | — |  |  | — |  |  | — |  |  | 48,688 |
|  | $ | 245,919 |  |  | $ | 227,332 |  |  | $ | — |  |  | $ | 227,332 |  |  | $ | 48,688 |
|  | Carrying Value |  | Estimated Fair Value
|  | September 30, 2015 |  | September 30, 2015 |  | Fair Value Measurement Using
|  | Level 1 |  | Level 2 |  | Level 3
|  | (in thousands)
Financial assets: |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 56,244 |  |  | $ | 56,244 |  |  | $ | 56,244 |  |  | $ | — |  |  | $ | — |
Cash and cash equivalents — discontinued operations* |  | 2,880 |  |  | 2,880 |  |  | 2,880 |  |  |  |  |
Restricted cash |  | 144 |  |  | 144 |  |  | 144 |  |  | — |  |  | — |
Restricted cash — discontinued operations* |  | 14,993 |  |  | 14,993 |  |  | 14,993 |  |  |  |  |  |  |
Pawn loans |  | 159,964 |  |  | 159,964 |  |  | — |  |  | — |  |  | 159,964 |
Consumer loans, net — discontinued operations* |  | 31,824 |  |  | 43,731 |  |  | — |  |  | — |  |  | 43,731 |
Pawn service charges receivable, net |  | 30,852 |  |  | 30,852 |  |  | — |  |  | — |  |  | 30,852 |
Consumer loan fees and interest receivable, net — discontinued operations* |  | 19,105 |  |  | 19,105 |  |  | — |  |  | — |  |  | 19,105 |
Investment in unconsolidated affiliate |  | 56,182 |  |  | 56,182 |  |  | 56,182 |  |  | — |  |  | — |
Restricted cash, non-current — discontinued operations* |  | 2,883 |  |  | 2,883 |  |  | 2,883 |  |  | — |  |  | — |
Non-current consumer loans, net — discontinued operations* |  | 75,824 |  |  | 104,194 |  |  | — |  |  | — |  |  | 104,194 |
|  | $ | 450,895 |  |  | $ | 491,172 |  |  | $ | 133,326 |  |  | $ | — |  |  | $ | 357,846 |
Temporary equity: |  |  |  |  |  |  |  |  |  |
Common stock, subject to possible redemption |  | $ | 11,696 |  |  | $ | 11,438 |  |  | $ | — |  |  | $ | — |  |  | $ | 11,438 |
Redeemable noncontrolling interest — discontinued operations* |  | 4,040 |  |  | 5,467 |  |  | — |  |  | — |  |  | 5,467 |
|  | $ | 15,736 |  |  | $ | 16,905 |  |  | $ | — |  |  | $ | — |  |  | $ | 16,905 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Cash Convertible Notes |  | $ | 187,471 |  |  | $ | 169,050 |  |  | $ | — |  |  | $ | 169,050 |  |  | $ | — |
Foreign currency debt — discontinued operations* |  | 18,505 |  |  | 19,851 |  |  | — |  |  | 19,851 |  |  | — |
Consumer loans facility due 2019 — discontinued operations* |  | 40,493 |  |  | 40,774 |  |  | — |  |  | 40,774 |  |  | — |
Foreign currency unsecured notes — discontinued operations* |  | 20,987 |  |  | 20,477 |  |  | — |  |  | 20,477 |  |  | — |
Foreign currency secured notes — discontinued operations* |  | 20,286 |  |  | 22,476 |  |  | — |  |  | 22,476 |  |  | — |
Secured notes consolidated from VIEs — discontinued operations* |  | 73,264 |  |  | 68,685 |  |  | — |  |  | 68,685 |  |  | — |
|  | $ | 361,006 |  |  | $ | 341,313 |  |  | $ | — |  |  | $ | 341,313 |  |  | $ | — |
* | See Note 1 for discussion of operations discontinued subsequent to the adoption of FASB ASU 2014-08.
Based on the short-term nature of cash and cash equivalents, restricted cash, pawn loans and pawn service charges receivable, we estimate that their respective carrying values approximate their fair values. Significant increases or decreases in the underlying assumptions used to value the pawn loans and pawn service charges receivable could significantly increase or decrease the fair value estimates disclosed above. We measured the fair value of the notes receivable under a discounted cash flow approach considering the synthetic credit ratings for Grupo Finmart and AlphaCredit, as applicable, with discount rates ranging from 9% to 22%. Certain of the significant inputs used for the valuation were not observable in the market and thus were Level 3 inputs. The notes receivable were recorded in the consolidated balance sheets under “Notes receivable, net” and “Non-current notes receivable, net.” The inputs used to generate the fair value of our 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. See Note 6 for discussion of the fair value compared to the carrying value of our investment in Cash Converters International. We measured the fair value of our Cash Convertible Notes using quoted price inputs from Bloomberg. The Cash Convertible Notes are not actively traded and thus the price inputs represent a Level 2 measurement. As the Cash Convertible Notes are not actively traded, the quoted price inputs obtained from Bloomberg are highly variable from day to day and thus the fair value estimates disclosed above could significantly increase or decrease. The fair value of our Term Loan Facility approximated its carrying value, inclusive of issuance costs and exclusive of deferred financing costs, given the short duration between funding and September 30, 2016. The fair value is based on Level 3 inputs that are not observable in the market. We estimated the fair value of the Grupo Finmart consumer loans by applying an income approach (the present value of future cash flows). Key assumptions included an annualized probability of default as well as a discount rate based on the funding rate plus the portfolio liquidity risk. The fair value of the redeemable noncontrolling interest was estimated by applying an income approach based on significant Level 3 inputs that are not observable in the market. Key assumptions included discount rates of 5% to 10%, representing the discount that market participants would consider when estimating the fair value of the noncontrolling interest. The fair value of the common stock, subject to possible redemption was estimated by applying an income approach. This fair value measurement was based on significant Level 3 inputs that were not observable in the market. Key assumptions included a discount rate of 7%, which approximated the Company’s incremental borrowing rate. We utilize credit quality-related zero rate curves, quoted price and yield inputs for Mexican Pesos built by a price vendor authorized by the Comisión Nacional Bancaria y de Valores to determine the fair value measurements of the remaining financial liabilities that are classified as Level 2 measurements. Notes Receivable from Grupo Finmart Divestiture Subsequent to the sale of Grupo Finmart in September 2016, we determined that we retained a variable interest in Grupo Finmart, including notes receivable and a guarantee liability of the future cash outflows of certain Grupo Finmart foreign exchange forward contracts with a backup guarantee provided by AlphaCredit for any payments we make under the our guarantee. We determined that we are not the primary beneficiary of Grupo Finmart subsequent to its disposition as we lack a controlling financial interest in Grupo Finmart. We recorded a $60.2 million gross notes receivable balance, comprising two notes payable by Grupo Finmart and guaranteed by AlphaCredit, which provide for quarterly interest payments and principal repayment in annual installments over three years on the anniversary dates of the closing (30% on the first anniversary, 40% on the second anniversary and 30% on the third anniversary). The note governing Mexican Peso denominated debt (principal amount of approximately $8.2 million) is payable in Mexican Pesos at a 7.5% per annum interest rate with an effective interest rate of 15%, and the note governing the U.S. Dollar denominated debt (principal amount of $52.0 million) is payable in U.S. Dollars at a 4% per annum interest rate with an effective interest rate of 10%. These notes receivable are net of total issuance discounts of $5.8 million as of September 30, 2016 resulting from below market interest rates. We further recorded a $29.6 million gross notes receivable balance, comprising six notes payable by Grupo Finmart for which EZCORP stepped into the position of previous lenders, including related collateral. Two of these notes receivable totaling $5.5 million gross are payable in monthly installments of principal and interest through May 2017 in Mexican Pesos at per annum interest rates of 14% to 15%. These notes receivable, including the four discussed below, are net of total discounts of $0.9 million, with effective interest rates between 19% and 25%, as of September 30, 2016. The other four notes relate to previously consolidated VIE debt supported by certain foreign currency hedge obligations of Grupo Finmart. We had previously guaranteed Grupo Finmart’s obligations under those hedge contracts, and our guarantee was unaffected by the sale. However, because our guarantee relates to underlying debt that is now owed to us, we do not anticipate any losses arising from the guarantee. Further, AlphaCredit, subject to certain exceptions, has agreed to reimburse us for any amounts we are required to pay under the guarantee. These notes receivable had a face value, plus future interest, of $25.3 million and were recorded as $24.0 million gross. They are scheduled to be repaid to us in biweekly principal and interest payments through December 2017, including interest at 11% per annum. The guarantee liability represented by our guarantee of the Grupo Finmart obligations and the guarantee asset represented by AlphaCredit’s backup guarantee to us are in effect through our first quarter of fiscal 2018, and are revalued to fair market value each reporting period with the net amount recorded under “Other expense” in our consolidated statements of operations. We neither received nor made cash payments pertaining to these notes receivable or our guarantee during fiscal 2016. The following table presents the carrying amount and classification of the assets and liabilities compared to the maximum exposure to loss for each asset and liability:
|  |  |  | September 30, 2016
Instrument |  | Balance Sheet Location |  | Asset (Liability) Recorded in Consolidated Balance Sheet |  | Maximum Exposure to Loss
|  |  |  | (in thousands)
Notes receivable |  | Notes receivable, net (including discount of $3.8 million) |  | $ | 41,946 |  |  | $ | 41,946 |
Guarantee asset |  | Prepaid expenses and other current assets |  | 1,209 |  |  | — |
Notes receivable |  | Non-current notes receivable, net (including discount of $2.9 million) |  | 41,119 |  |  | 41,119 |
Guarantee liability |  | Accounts payable, accrued expenses and other current liabilities |  | (1,258 | ) | * | — |
* | Maximum exposure to loss under the guarantee liability is $25.3 million. However such amount is included within the maximum exposure to loss for the notes receivable above, as the guarantee liability is a guarantee by us of Grupo Finmart’s repayment of our notes receivable owed by Grupo Finmart.
Derivatives and Hedging See Note 10 for a discussion of the Cash Convertible Notes Hedges and Cash Convertible Notes Embedded Derivative presented below. See above for discussion of the guarantee asset and liability presented below. During fiscal 2015, Grupo Finmart entered into cross-currency forward contracts to hedge foreign exchange rate fluctuations in connection with the formation of VIEs and related transfer of certain loans. During the three-months ended June 30, 2013, Grupo Finmart completed a $30.0 million cross-border debt offering for which it had to pay interest on a semiannual basis at a fixed rate. Grupo Finmart used derivative instruments (the “foreign currency forwards”) to manage its exposure related to changes in foreign currency exchange rate on this instrument through its maturity on November 16, 2015. At the beginning of the quarter ended December 31, 2014, we discontinued hedge accounting for our foreign currency forwards due to a determination that repayment of the $30.0 million cross-border debt was to occur prior to maturity. Grupo Finmart received proceeds of $2.3 million from settlement of the portion of the foreign currency forwards attributable to the repaid cross-border debt during the three-months ended December 31, 2014. Grupo Finmart received proceeds of $3.6 million, net with the settlement of remaining foreign currency forwards attributable to the cross-border debt which was repaid during the three-months ended December 31, 2015. As of June 30, 2016, Grupo Finmart was classified as held for sale and all segment operations of Grupo Finmart were classified as discontinued operations as discussed in Note 3. The following tables set forth certain information regarding our derivative instruments not designated as hedging instruments:
|  |  |  | Fair Value Asset (Liability) of Derivative Instruments
Derivative Instrument |  | Balance Sheet Location |  | September 30, 2016 |  | September 30, 2015
|  |  |  | (in thousands)
Foreign currency forwards — discontinued operations |  | Current and non-current assets held for sale |  | $ | — |  |  | $ | 14,169 |
Guarantee asset |  | Prepaid expenses and other current assets |  | 1,209 |  |  | — |
Guarantee liability |  | Accounts payable, accrued expenses and other current liabilities |  | (1,258 | ) |  | — |
Convertible Notes Hedges |  | Other assets, net |  | 37,692 |  |  | 10,505 |
Cash Convertible Notes Embedded Derivative |  | Long-term debt, less current maturities |  | (37,692 | ) |  | (10,505 | )
|  |  |  | Amount of Unrealized (Loss) Gain on Derivatives
|  |  |  | Fiscal Year Ended September 30,
Derivative Instrument |  | Income Statement Location |  | 2016 |  | 2015 |  | 2014
|  |  |  | (in thousands)
Foreign currency forwards — discontinued operations |  | Loss from discontinued operations, net of tax* |  | $ | (3,848 | ) |  | $ | 9,529 |  |  | $ | 1,152 |
* | Amount is partially offset by gains and losses caused by related foreign currency fluctuations. The fiscal 2016 amount represents the loss on derivative prior to disposition of Grupo Finmart discussed in Note 3.

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