10-Q 1 crmt20220131_10q.htm FORM 10-Q crmt20220131_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 January 31, 2022

 

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 number: 0-14939

 

 

AMERICAS CAR-MART, INC.

(Exact name of registrant as specified in its charter)

 

Texas 63-0851141
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

 

1805 North 2nd Street, Suite 401, Rogers, Arkansas 72756

(Address of principal executive offices) (zip code)

 

(479) 464-9944

(Registrant's telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CRMT

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions 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 ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

  Outstanding at
Title of Each Class  March 4, 2022
Common stock, par value $.01 per share 6,439,663

 

 

 

 

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited) Americas Car-Mart, Inc.

 

Condensed Consolidated Balance Sheets

January 31, 2022 and April 30, 2021

 

(Dollars in thousands except share and per share amounts)

 

January 31, 2022

  

April 30, 2021

 

Assets:

 

(Unaudited)

     

Cash and cash equivalents

 $2,603  $2,893 

Accrued interest on finance receivables

  4,220   3,367 

Finance receivables, net

  797,237   625,119 

Inventory

  119,596   82,263 

Income tax receivable, net

  39   - 

Prepaid expenses and other assets

  9,126   6,120 

Right-of-use asset

  57,523   60,398 

Goodwill

  8,598   7,280 

Property and equipment, net

  45,689   34,719 

Total Assets

 $1,044,631  $822,159 
         

Liabilities, mezzanine equity and equity:

        

Liabilities:

        

Accounts payable

 $22,589  $18,208 

Income tax payable, net

  -   150 

Deferred accident protection plan revenue

  40,242   32,704 

Deferred service contract revenue

  42,169   24,106 

Accrued liabilities

  28,993   31,278 

Deferred income tax liabilities, net

  26,397   20,007 

Lease liability

  60,145   62,886 

Debt facilities

  373,156   225,924 
Total liabilities  593,691   415,263 
         

Commitments and contingencies (Note J)

          
         

Mezzanine equity:

        

Mandatorily redeemable preferred stock

  400   400 
         

Equity:

        

Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding

  -   - 

Common stock, par value $.01 per share, 50,000,000 shares authorized; 13,624,782 and 13,591,889 issued at January 31, 2022 and April 30, 2021, espectively, of which 6,446,574 and 6,625,885 were outstanding at January 31, 2022 and April 30, 2021, respectively

  136   136 

Additional paid-in capital

  102,759   98,812 

Retained earnings

  631,575   564,975 
Less: Treasury stock, at cost, 7,178,208 and 6,966,004 shares at January 31, 2022 and April 30, 2021, respectively  (284,030)  (257,527)
Total stockholders' equity  450,440   406,396 

Non-controlling interest

  100   100 
Total equity  450,540   406,496 
         
Total Liabilities, Mezzanine Equity and Equity $1,044,631  $822,159 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

 
 

 

Condensed Consolidated Statements of Operations Americas Car-Mart, Inc.

Three and Nine Months Ended January 31, 2022 and 2021

 

  

Three Months Ended
January 31,

  

Nine Months Ended
January 31,

 

(Dollars in thousands except share and per share amounts)

 

2022

  

2021

  

2022

  

2021

 

Revenues:

 

(Unaudited)

  

(Unaudited)

 

Sales

 $252,918  $199,957  $750,942  $559,440 

Interest and other income

  38,980   28,303   109,586   80,091 
                 

Total revenues

  291,898   228,260   860,528   639,531 
                 

Costs and expenses:

                

Cost of sales

  157,248   118,816   467,179   330,380 

Selling, general and administrative

  39,179   33,423   115,140   94,716 

Provision for credit losses

  66,741   47,639   181,796   127,585 

Interest expense

  2,944   1,705   7,439   5,082 

Depreciation and amortization

  950   906   2,823   2,772 

Loss (gain) on disposal of property and equipment

  42   22   88   (42)

Total costs and expenses

  267,104   202,511   774,465   560,493 
                 

Income before taxes

  24,794   25,749   86,063   79,038 
                 

Provision for income taxes

  6,024   5,867   19,433   18,396 
                 

Net income

 $18,770  $19,882  $66,630  $60,642 
                 

Less: Dividends on mandatorily redeemable preferred stock

  (10)  (10)  (30)  (30)
                 

Net income attributable to common stockholders

 $18,760  $19,872  $66,600  $60,612 
                 

Earnings per share:

                

Basic

 $2.89  $3.00  $10.18  $9.14 

Diluted

 $2.77  $2.85  $9.68  $8.73 
                 

Weighted average number of shares used in calculation:

                

Basic

  6,487,310   6,634,125   6,540,450   6,631,450 

Diluted

  6,779,641   6,966,188   6,880,283   6,939,164 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 
 

 

Condensed Consolidated Statements of Cash Flows Americas Car-Mart, Inc.

Nine Months Ended January 31, 2022 and 2021

 

  

Nine Months Ended
January 31,

 

(In thousands)

 

2022

  

2021

 
  

(Unaudited)

 

Operating Activities:

        

Net income

 $66,630  $60,642 

Adjustments to reconcile net income to net cash used in operating activities:

        

Provision for credit losses

  181,796   127,585 

Losses on claims for payment protection plan

  14,748   13,898 

Depreciation and amortization

  2,823   2,772 

Amortization of debt issuance costs

  559   266 

Loss (gain) on disposal of property and equipment

  88   (42)

Stock based compensation

  4,706   4,969 

Deferred income taxes

  6,390   2,486 

Excess tax benefit from share based compensation

  912   672 

Change in operating assets and liabilities:

        

Finance receivable originations

  (718,275)  (524,820)

Finance receivable collections

  293,458   254,845 

Accrued interest on finance receivables

  (853)  90 

Inventory

  18,822   3,552 

Prepaid expenses and other assets

  (3,006)  (970)

Accounts payable and accrued liabilities

  4,031   10,685 

Deferred accident protection plan revenue

  7,538   4,306 

Deferred service contract revenue

  18,063   3,790 

Income taxes, net

  (1,101)  (4,185)

Net cash used in operating activities

  (102,671)  (39,459)
         

Investing Activities:

        

Purchase of investments

  (1,318)  - 

Purchase of property and equipment

  (13,881)  (7,011)

Proceeds from sale of property and equipment

  -   610 

Net cash used in investing activities

  (15,199)  (6,401)
         

Financing Activities:

        

Exercise of stock options

  (984)  4,561 

Issuance of common stock

  225   193 

Purchase of common stock

  (26,503)  (9,820)

Dividend payments

  (30)  (30)

Change in cash overdrafts

  (1,801)  913 

Debt issuance costs

  (1,787)  (282)

Payments on note payable

  -   (443)

Proceeds from revolving credit facilities

  248,817   11,316 

Payments on revolving credit facilities

  (100,357)  (15,947)

Net cash provided by (used in) financing activities

  117,580   (9,539)
         

Decrease in cash and cash equivalents

  (290)  (55,399)

Cash and cash equivalents, beginning of period

  2,893   59,560 
         

Cash and cash equivalents, end of period

 $2,603  $4,161 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 
 

 

Condensed Consolidated Statements of Equity Americas Car-Mart, Inc.

Three and Nine Months Ended January 31, 2022

 

          

Additional

          

Non-

     
  

Common Stock

  

Paid-In

  

Retained

  

Treasury

  

Controlling

  

Total

 

(In thousands, except share data)

 

Shares

  

Amount

  

Capital

  

Earnings

  

Stock

  

Interest

  

Equity

 
                             

Balance at April 30, 2021

  13,591,889  $136  $98,812  $564,975  $(257,527) $100  $406,496 
                             

Issuance of common stock

  673   -   81   -   -   -   81 

Stock options exercised

  15,281   -   (1,007)  -   -   -   (1,007)

Purchase of 81,742 treasury shares

  -   -   -   -   (11,618)  -   (11,618)

Stock based compensation

  -   -   2,972   -   -   -   2,972 

Dividends on subsidiary preferred stock

  -   -   -   (10)  -   -   (10)

Net income

  -   -   -   24,967   -   -   24,967 

Balance at July 31, 2021 (Unaudited)

  13,607,843  $136  $100,858  $589,932  $(269,145) $100  $421,881 
                             

Issuance of common stock

  7,186   -   68   -   -   -   68 

Stock options exercised

  8,381   -   -   -   -   -   - 

Purchase of 66,701 treasury shares

  -   -   -   -   (8,345)  -   (8,345)

Stock based compensation

  -   -   977   -   -   -   977 

Dividends on subsidiary preferred stock

  -   -   -   (10)  -   -   (10)

Net income

  -   -   -   22,893   -   -   22,893 

Balance at October 31, 2021 (Unaudited)

  13,623,410  $136  $101,903  $612,815  $(277,490) $100  $437,464 
                             

Issuance of common stock

  872   -   76   -   -   -   76 

Stock options exercised

  500   -   23   -   -   -   23 

Purchase of 63,761 treasury shares

  -   -   -   -   (6,540)  -   (6,540)

Stock based compensation

  -   -   757   -   -   -   757 

Dividends on subsidiary preferred stock

  -   -   -   (10)  -   -   (10)

Net income

  -   -   -   18,770   -   -   18,770 

Balance at January 31, 2022 (Unaudited)

  13,624,782  $136  $102,759  $631,575  $(284,030) $100  $450,540 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

Condensed Consolidated Statements of Equity Americas Car-Mart, Inc.

Three and Nine Months Ended January 31, 2021

 

 

          

Additional

          

Non-

     
  

Common Stock

  

Paid-In

  

Retained

  

Treasury

  

Controlling

  

Total

 

(In thousands, except share data)

 

Shares

  

Amount

  

Capital

  

Earnings

  

Stock

  

Interest

  

Equity

 
                             

Balance at April 30, 2020

  13,478,733  $135  $88,559  $460,876  $(246,911) $100  $302,759 
                             

Issuance of common stock

  675   -   50   -   -   -   50 

Stock options exercised

  22,000   -   1,166   -   -   -   1,166 

Stock based compensation

  -   -   2,320   -   -   -   2,320 

Dividends on subsidiary preferred stock

  -   -   -   (10)  -   -   (10)

Net income

  -   -   -   19,564   -   -   19,564 

Balance at July 31, 2020 (Unaudited)

  13,501,408  $135  $92,095  $480,430  $(246,911) $100  $325,849 
                             

Issuance of common stock

  958   -   69   -   -   -   69 

Stock options exercised

  28,066   -   1,212   -   -   -   1,212 

Purchase of 68,870 treasury shares

  -   -   -   -   (6,080)  -   (6,080)

Stock based compensation

  -   -   1,395   -   -   -   1,395 

Dividends on subsidiary preferred stock

  -   -   -   (10)  -   -   (10)

Net income

  -   -   -   21,196   -   -   21,196 

Balance at October 31, 2020 (Unaudited)

  13,530,432  $135  $94,771  $501,616  $(252,991) $100  $343,631 
                             

Issuance of common stock

  787   1   73   -   -   -   74 

Stock options exercised

  43,952   -   2,183   -   -   -   2,183 

Purchase of 31,199 treasury shares

  -   -   -   -   (3,740)  -   (3,740)

Stock based compensation

  -   -   1,254   -   -   -   1,254 

Dividends on subsidiary preferred stock

  -   -   -   (10)  -   -   (10)

Net income

  -   -   -   19,882   -   -   19,882 

Balance at January 31, 2021 (Unaudited)

  13,575,171  $136  $98,281  $521,488  $(256,731) $100  $363,274 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

Notes to Consolidated Financial Statements (Unaudited) Americas Car-Mart, Inc.

 

 

A Organization and Business

 

America’s Car-Mart, Inc., a Texas corporation (the “Company”), is one of the largest publicly held automotive retailers in the United States focused exclusively on the “Integrated Auto Sales and Finance” segment of the used car market. References to the Company typically include the Company’s consolidated subsidiaries. The Company’s operations are principally conducted through its two operating subsidiaries, America’s Car Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”). The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit difficulties. As of January 31, 2022, the Company operated 153 dealerships located primarily in small cities throughout the South-Central United States.

 

 

B Summary of Significant Accounting Policies

 

General

 

The accompanying condensed consolidated balance sheet as of April 30, 2021, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of January 31, 2022 and 2021, have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended January 31, 2022 are not necessarily indicative of the results that may be expected for the year ending April 30, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended April 30, 2021.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of America’s Car-Mart, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Segment Information

 

Each dealership is an operating segment with its results regularly reviewed by the Company’s chief operating decision maker in an effort to make decisions about resources to be allocated to the segment and to assess its performance. Individual dealerships meet the aggregation criteria for reporting purposes under the current accounting guidance. The Company operates in the Integrated Auto Sales and Finance segment of the used car market, also referred to as the Integrated Auto Sales and Finance industry. In this industry, the nature of the sale and the financing of the transaction, financing processes, the type of customer and the methods used to distribute the Company’s products and services, including the actual servicing of the contracts as well as the regulatory environment in which the Company operates, all have similar characteristics. Each individual dealership is similar in nature and only engages in the selling and financing of used vehicles. All individual dealerships have similar operating characteristics. As such, individual dealerships have been aggregated into one reportable segment.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant estimates include, but are not limited to, the Company’s allowance for credit losses.

 

Concentration of Risk

 

The Company provides financing in connection with the sale of substantially all of its vehicles. These sales are made primarily to customers residing in Alabama, Arkansas, Georgia, Illinois, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, and Texas, with approximately 27.6% of current period revenues resulting from sales to Arkansas customers.

 

7

 
 

As of January 31, 2022, and periodically throughout the period, the Company maintained cash in financial institutions in excess of the amounts insured by the federal government. The cash is held in several highly rated banking institutions. The Company regularly monitors its counterparty credit risk and mitigates exposure by limiting the amount it invests in one institution. The Company’s revolving credit facilities mature in September 2024.

 

Restrictions on Distributions/Dividends

 

The Company’s revolving credit facilities generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow the Company to repurchase the Company’s stock so long as either: (a) the aggregate amount of such repurchases after September 30, 2021 does not exceed $50 million, net of proceeds received from the exercise of stock options, and the total availability under the credit facilities is equal to or greater than 20% of the sum of the borrowing bases, in each case after giving effect to such repurchases (repurchases under this item are excluded from fixed charges for covenant calculations), or (b) the aggregate amount of such repurchases does not exceed 75% of the consolidated net income of the Company measured on a trailing twelve month basis; provided that immediately before and after giving effect to the Company’s stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remain available. Thus, although the Company does routinely repurchase stock, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the Company’s lenders.

 

Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

 

Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses

 

The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts carry an average interest rate of approximately 16.5% using the simple effective interest method including any deferred fees. Contract origination costs are not significant. The installment sale contracts are not pre-computed contracts whereby borrowers are obligated to pay back principal plus the full amount of interest that will accrue over the entire term of the contract. Finance receivables are collateralized by vehicles sold and consist of contractually scheduled payments from installment contracts net of unearned finance charges and an allowance for credit losses. Unearned finance charges represent the balance of interest receivable to be earned over the entire term of the related installment contract, less the earned amount ($4.2 million at January 31, 2022 and $3.4 million at April 30, 2021 on the Condensed Consolidated Balance Sheets), and as such, have been reflected as a reduction to the gross contract amount in arriving at the principal balance in finance receivables.

 

An account is considered delinquent when the customer is one day or more behind on their contractual payments. While the Company does not formally place contracts on nonaccrual status, the immaterial amount of interest that may accrue after an account becomes delinquent up until the point of resolution via repossession or write-off is reserved for against the accrued interest on the Condensed Consolidated Balance Sheets. Delinquent contracts are addressed and either made current by the customer, which is the case in most situations, or the vehicle is repossessed or written off if the collateral cannot be recovered quickly. Customer payments are set to match their payday with approximately 75% of payments due on either a weekly or bi-weekly basis. The frequency of the payment due dates combined with the declining value of collateral lead to prompt resolutions on problem accounts. At January 31, 2022, 4.0% of the Company’s finance receivable balances were 30 days or more past due, compared to 2.6% at April 30, 2021. The Omicron variant negatively impacted delinquencies during the third quarter of fiscal year 2022 due to the combination of lost work hours and decreased wages for customers and a loss of hours worked for the Company.

 

Substantially all of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit.

 

The Company strives to keep its delinquency percentages low, and not to repossess vehicles. Accounts three days late are contacted by telephone. Notes from each telephone contact are electronically maintained in the Company’s computer system. The Company also utilizes text messaging notifications which allow customers to elect and receive reminders on their due dates and late notifications, if applicable. The Company attempts to resolve payment delinquencies amicably prior to repossessing a vehicle. If a customer becomes severely delinquent in his or her payments, and management determines that timely collection of future payments is not probable, the Company will take steps to repossess the vehicle.

 

8

 
 

Periodically, the Company enters into contract modifications with its customers to extend or modify the payment terms. The Company only enters into a contract modification or extension if it believes such action will increase the amount of money the Company will ultimately realize on the customer’s account and will increase the likelihood of the customer being able to pay off the vehicle contract. At the time of modification, the Company expects to collect amounts due including accrued interest at the contractual interest rate for the period of delay. No other concessions are granted to customers, beyond the extension of additional time, at the time of modifications. Modifications are minor and are made for payday changes, minor vehicle repairs and other reasons. For those vehicles that are repossessed, the majority are returned or surrendered by the customer on a voluntary basis. Other repossessions are performed by Company personnel or third-party repossession agents. Depending on the condition of a repossessed vehicle, it is either resold on a retail basis through a Company dealership or sold for cash on a wholesale basis primarily through physical or online auctions.

 

Accounts are charged-off after the expiration of a statutory notice period for repossessed accounts, or when management determines that the timely collection of future payments is not probable for accounts where the Company has been unable to repossess the vehicle. For accounts with respect to which the vehicle was repossessed, the fair value of the repossessed vehicle is charged as a reduction of the gross finance receivables balance charged-off. For the quarter ended January 31, 2022, on average, accounts were approximately 77 days past due at the time of charge-off, compared to 59 days past due for the same period in the prior year. The third quarter of the prior year included the impact of the pandemic related stimulus payments which positively impacted collections and net charge-offs. For previously charged-off accounts that are subsequently recovered, the amount of such recovery is credited to the allowance for credit losses.

 

The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover expected losses on the portfolio at the measurement date in the collection of its finance receivables currently outstanding. At January 31, 2022, the weighted average total contract term was 41.2 months with 32.4 months remaining. The reserve amount in the allowance for credit losses at January 31, 2022, $232 million, was 24.5% of the principal balance in finance receivables of $1.03 billion, less unearned accident protection plan revenue of $40.2 million and unearned service contract revenue of $42.2 million.

 

The estimated reserve amount is the Company’s anticipated future net charge-offs for expected losses on the portfolio at the measurement date. The allowance takes into account historical credit loss experience (both timing and severity of losses), with consideration given to recent credit loss trends and changes in contract characteristics (i.e., average amount financed, months outstanding at loss date, term and age of portfolio), delinquency levels, collateral values, economic conditions and underwriting and collection practices. The allowance for credit losses is reviewed at least quarterly by management with any changes reflected in current operations. The calculation of the allowance for credit losses uses the following primary factors:

 

The number of units repossessed or charged-off as a percentage of total units financed over specific historical periods of time from one year to five years.

  

The average net repossession and charge-off loss per unit during the last eighteen months segregated by the number of months since the contract origination date and adjusted for the expected future average net charge-off loss per unit. About 50% of the charge-offs that will ultimately occur in the portfolio are expected to occur within 10-11 months following the balance sheet date. The average age of an account at charge-off date for the eighteen-month period ended January 31, 2022 was 12.5 months.

  

The timing of repossession and charge-off losses relative to the date of sale (i.e., how long it takes for a repossession or charge-off to occur) for repossessions and charge-offs occurring during the last eighteen months.

 

A historical point estimate is produced by this analysis which is then supplemented by the Company’s forecast, which includes current economic considerations, to arrive at an overall reserve amount that management considers to be a reasonable estimate of expected losses on the portfolio at the measurement date that will be realized via actual charge-offs in the future. Although it is possible that the deterioration in economic conditions and the uncertainty of COVID-19 could lead to additional losses in the portfolio or that other events or circumstances could occur in the future that are not presently foreseen which could cause actual credit losses to be materially different from the recorded allowance for credit losses, the Company believes that it has given appropriate consideration to all relevant factors and has made reasonable assumptions in determining the allowance for credit losses. While challenging economic conditions can negatively impact credit losses, the effectiveness of the execution of internal policies and procedures within the collections area and the competitive environment on the funding side have historically had a more significant effect on collection results than macro-economic issues.

 

In most states, the Company offers retail customers who finance their vehicle the option of purchasing a debt cancellation agreement (referred to as the accident protection plan) as an add-on to the installment sale contract. This product contractually obligates the Company to cancel the outstanding principal balance for any contract where the retail customer has totaled the vehicle, as defined by the contract, or the vehicle has been stolen. The Company periodically evaluates anticipated losses to ensure that if anticipated losses exceed deferred accident protection plan revenues, an additional liability is recorded for such difference. No such liability was required at January 31, 2022 or April 30, 2021.

 

9

 

Inventory

 

Inventory consists of used vehicles and is valued at the lower of cost or net realizable value on a specific identification basis. Vehicle reconditioning costs are capitalized as a component of inventory. Repossessed vehicles and trade-in vehicles are recorded at fair value, which approximates wholesale value. The cost of used vehicles sold is determined using the specific identification method.

 

Goodwill

 

Goodwill reflects the excess of purchase price over the fair value of specifically identified net assets purchased. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests at the Company’s year-end. The impairment tests are based on the comparison of the fair value of the reporting unit to the carrying value of such reporting unit. There was no impairment of goodwill during fiscal 2021 and the first nine months of fiscal 2022.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for additions, remodels, and improvements are capitalized. Costs of repairs and maintenance are expensed as incurred. Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the lease period. The lease period includes the primary lease term plus any extensions that are reasonably assured. Depreciation is computed using the straight-line method, generally over the following estimated useful lives:

 

Furniture, fixtures and equipment (years)

3

to 7

Leasehold improvements (years)

5

to15 

Buildings and improvements (years)

18 

to39 

 

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying values of the impaired assets exceed the fair value of such assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

Cash Overdraft

 

As checks are presented for payment from the Company’s primary disbursement bank account, monies are automatically drawn against cash collections for the day and, if necessary, are drawn against one of the revolving credit facilities. Any cash overdraft balance principally represents outstanding checks that as of the balance sheet date had not yet been presented for payment, net of any deposits in transit. Any cash overdraft balance is reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.

 

Deferred Sales Tax

 

Deferred sales tax represents a sales tax liability of the Company for vehicles sold on an installment basis in the states of Alabama and Texas. Under Alabama and Texas law for vehicles sold on an installment basis, the related sales tax is due as the payments are collected from the customer, rather than at the time of sale. Deferred sales tax liabilities are reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.

 

Income Taxes

 

Income taxes are accounted for under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates expected to apply in the years in which these differences are expected to be recovered or settled. The quarterly provision for income taxes is determined using an estimated annual effective tax rate, which is based on expected annual taxable income, statutory tax rates and the Company’s best estimate of nontaxable and nondeductible items of income and expense. The effective income tax rates were 22.6% and 23.3% for the nine months ended January 31, 2022 and January 31, 2021, respectively. Total income tax expense for the nine months ended January 31, 2022 differed from amounts computed by applying the United States federal statutory tax rates to pre-tax income primarily due to state income taxes and the impact of permanent differences between book and taxable income. The Company recorded a discrete income tax benefit of approximately $912,000 and $672,000 for the nine months ended January 31, 2022 and 2021, respectively, related to excess tax benefits on share based compensation.

 

10

 

Occasionally, the Company is audited by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes.

 

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies this methodology to all tax positions for which the statute of limitations remains open.

 

The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years before fiscal 2018.

 

The Company’s policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accrued penalties or interest as of January 31, 2022 or April 30, 2021.

 

Revenue Recognition

 

Revenues are generated principally from the sale of used vehicles, which in most cases includes a service contract and an accident protection plan product, interest income and late fees earned on finance receivables. Revenues are net of taxes collected from customers and remitted to government agencies. Cost of vehicle sales include costs incurred by the Company to prepare the vehicle for sale including license and title costs, gasoline, transport services, and repairs.

 

Revenues from the sale of used vehicles are recognized when the sales contract is signed, the customer has taken possession of the vehicle and, if applicable, financing has been approved. Revenues from the sale of vehicles sold at wholesale are recognized at the time the proceeds are received. Revenues from the sale of service contracts are recognized ratably over the expected duration of the product. Service contract revenues are included in sales and the related expenses are included in cost of sales. Accident protection plan revenues are initially deferred and then recognized to income using the “Rule of 78’s” interest method over the life of the contract so that revenues are recognized in proportion to the amount of cancellation protection provided. Accident protection plan revenues are included in sales and related losses are included in cost of sales as incurred. Interest income is recognized on all active finance receivables accounts using the simple effective interest method. Active accounts include all accounts except those that have been paid-off or charged-off.

 

Sales for the three and nine months ended January 31, 2022 and 2021 consist of the following:

 

  

Three Months Ended
January 31,

  

Nine Months Ended
January 31,

 

(In thousands)

 

2022

  

2021

  

2022

  

2021

 
                 

Sales – used autos

 $219,995  $177,279  $656,773  $491,726 

Wholesales – third party

  11,706   7,603   35,442   23,835 

Service contract sales

  12,889   8,240   34,506   24,083 

Accident protection plan revenue

  8,328   6,835   24,221   19,796 
                 

Total

 $252,918  $199,957  $750,942  $559,440 

 

At January 31, 2022 and 2021, finance receivables more than 90 days past due were approximately $5.2 million and $2.4 million, respectively. Late fee revenues totaled approximately $2.2 million and $1.7 million for the nine months ended January 31, 2022 and 2021, respectively. Late fees are recognized when collected and are reflected in interest and other income on the Condensed Consolidated Statements of Operations. The amount of revenue recognized for the nine months ended January 31, 2022 that was included in the April 30, 2021 deferred service contract revenue was $14.6 million.

 

11

 

Earnings per Share

 

Basic earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period plus dilutive common stock equivalents. The calculation of diluted earnings per share takes into consideration the potentially dilutive effect of common stock equivalents, such as outstanding stock options and non-vested restricted stock, which if exercised or converted into common stock would then share in the earnings of the Company. In computing diluted earnings per share, the Company utilizes the treasury stock method and anti-dilutive securities are excluded.

 

Stock-Based Compensation

 

The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant over the requisite service period. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards. The Company may issue either new shares or treasury shares upon exercise of these awards. Stock-based compensation plans, related expenses, and assumptions used in the Black-Scholes option pricing model are more fully described in Note I. If an award contains a performance condition, expense is recognized only for those shares for which it is considered reasonably probable as of the current period end that the performance condition will be met. The Company accounts for forfeitures as they occur and records any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Operations in the reporting period in which the exercise occurs. The Company recorded a discrete income tax benefit of approximately $912,000 and $672,000 for the nine months ended January 31, 2022 and 2021, respectively. As a result, the Company’s income tax expenses and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and exercise dates of equity awards.

 

Treasury Stock

 

Treasury stock may be used for issuances under the Company’s stock-based compensation plans or for other general corporate purposes. The Company has a reserve account of 10,000 shares of treasury stock to secure outstanding service contracts issued in Iowa in accordance with the regulatory requirements of that state and another reserve account of 14,000 shares of treasury stock for its subsidiary, ACM Insurance Company, in accordance with the requirements of the Arkansas Department of Insurance.

 

Recent Accounting Pronouncements

 

Occasionally, new accounting pronouncements are issued by the FASB or other standard setting bodies which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.

 

Effective in Future Periods

 

Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. The pronouncement provides optional guidance for a limited period of time to ease the potential burden of accounting for reference rate reform. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company expects to utilize this optional guidance, however, does not expect the impact to be material as it only relates to one debt facility currently indexed to LIBOR.

 

12

 
 
 

C Finance Receivables, Net

 

The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts, which carry an interest rate of 15% or 16.5% per annum (19.5% to 21.5% in Illinois), are collateralized by the vehicle sold and typically provide for payments over periods ranging from 18 to 54 months. The weighted average interest rate for the portfolio was approximately 16.5% at January 31, 2022. The Company’s finance receivables are defined as one segment and one class of loans in sub-prime consumer automobile contracts. The level of risks inherent in the Company’s finance receivables is managed as one homogeneous pool.

 

The components of finance receivables are as follows:

 

(In thousands)

 

January 31, 2022

  

April 30, 2021

 
         

Gross contract amount

 $1,268,390  $980,757 

Less unearned finance charges

  (239,187)  (171,220)

Principal balance

  1,029,203   809,537 

Less allowance for credit losses

  (231,966)  (184,418)
         

Finance receivables, net

 $797,237  $625,119 

 

Changes in the finance receivables, net are as follows:

 

  

Nine Months Ended
January 31,

 

(In thousands)

 

2022

  

2021

 
         

Balance at beginning of period

 $625,119  $466,141 

Finance receivable originations

  718,275   524,820 

Finance receivable collections

  (293,458)  (254,845)

Provision for credit losses

  (181,796)  (127,585)

Losses on claims for accident protection plan

  (14,748)  (13,898)

Inventory acquired in repossession and accident protection plan claims

  (56,155)  (35,692)
         

Balance at end of period

 $797,237  $558,941 

 

Changes in the finance receivables allowance for credit losses are as follows:

 

  

Nine Months Ended
January 31,

 

(In thousands)

 

2022

  

2021

 
         

Balance at beginning of period

 $184,418  $155,041 

Provision for credit losses

  181,796   127,585 

Charge-offs, net of recovered collateral

  (134,248)  (97,046)
         

Balance at end of period

 $231,966  $185,580 

 

The factors which influenced management’s judgment in determining the amount of the current period provision for credit losses are described below.

 

The historical level of charge-offs, net of recovered collateral, is the most important factor in determining the provision for credit losses. This is due to the fact that once a contract becomes delinquent the account is either made current by the customer, the vehicle is repossessed, or the account is written off if the collateral cannot be recovered. Net charge-offs as a percentage of average finance receivables were 14.5% for the nine months ended January 31, 2022 and 2021, respectively. The frequency of losses were up slightly compared to the prior year’s quarter and severity of losses improved on a relative basis.

 

13

 
 

Collections and delinquency levels can have a significant effect on additions to the allowance and are reviewed frequently. Collections as a percentage of average finance receivables were 31.7% for the nine months ended January 31, 2022 compared to 38.0% for the same period in the prior year. Collections remained strong with the reduction in line with the expected change due to the average term increases. The first nine months of the prior year included the impact of the pandemic related stimulus payments which contributed to a higher collection percentage. Delinquencies greater than 30 days were 4.0% at January 31, 2022, and 2.6% at April 30, 2021. The Omicron variant negatively impacted delinquencies during the third quarter of fiscal year 2022 due to the combination of lost work hours and decreased wages for customers and a loss of hours worked for the Company.

 

In addition to the objective factors discussed above, the Company also considers macro-economic factors such as changes in unemployment levels, gasoline prices and prices for staple items to develop reasonable and supportable forecasts about the future. These economic forecasts are utilized alongside historical loss information in order to estimate expected losses in the portfolio over the following twelve-month period, at which point the Company will immediately revert to the point estimate produced by the Company’s analysis of historical loss information to estimate expected losses from the portfolio for the remaining contractual lives of its finance receivables. See “Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses” in Note B for a description of the historical data included in this analysis.

 

Credit quality information for finance receivables is as follows:

 

(Dollars in thousands)

 

January 31, 2022

  

April 30, 2021

  

January 31, 2021

 
                         
  

Principal

  

Percent of

  

Principal

  

Percent of

  

Principal

  

Percent of

 
  

Balance

  

Portfolio

  

Balance

  

Portfolio

  

Balance

  

Portfolio

 

Current

 $841,635   81.78% $717,520   88.64% $655,445   88.04%

3 - 29 days past due

  146,609   14.24%  71,269   8.80%  68,414   9.19%

30 - 60 days past due

  29,062   2.82%  13,058   1.61%  14,147   1.90%

61 - 90 days past due

  6,682   0.65%  5,551   0.69%  4,163   0.56%

> 90 days past due

  5,215   0.51%  2,139   0.26%  2,352   0.32%

Total

 $1,029,203   100.00% $809,537   100.00% $744,521   100.00%

 

 

Accounts one and two days past due are considered current for this analysis, due to the varying payment dates and variation in the day of the week at each period end. Delinquencies may vary from period to period based on the average age of the portfolio, seasonality within the calendar year, the day of the week and overall economic factors. The above categories are consistent with internal operational measures used by the Company to monitor credit results.

 

Substantially all of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders; such contracts generally entail a higher risk of delinquency, default, repossession, and losses than contracts made with buyers with better credit. Therefore, the Company manages the level of risks inherent in the Company’s financing receivables as one homogenous pool. The Company monitors contract term length, down payment percentages, and collections as credit quality indicators.

 

  

Nine Months Ended
January 31,

 
  

2022

  

2021

 
         

Average total collected per active customer per month

 $487  $449 

Principal collected as a percent of average finance receivables

  31.7%  38.0%

Average down-payment percentage

  6.1%  6.4%

Average originating contract term (in months)

  39.6   33.7 

 

  

January 31, 2022

  

January 31, 2021

 

Portfolio weighted average contract term, including modifications (in months)

  41.2   35.7 

 

14

 
 

Collections remained strong with the reduction of principal collected in line with the expected change due to the average term increases. The prior year quarter included the impact of the pandemic related stimulus payments which contributed to a higher collection percentage. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $2,892 or 21.7% from the prior year period. The Company may further increase term lengths in order to maintain manageable payments for its customers if the average selling price continues to increase.

 

   

As of January 31, 2022

 
                                  

(Dollars in thousands)

  

Fiscal Year of Origination

  

Prior to

         

Customer Rating

  

2022

  

2021

  

2020

  

2019

  

2018

  

2018

  

Total

  

%

 
1-2  $31,704  $16,129  $3,921  $170  $3  $-  $51,927   5.0%
3-4  $207,084  $112,330  $23,042  $1,205  $36  $17  $343,714   33.4%
5-6  $372,508  $214,120  $43,186  $3,498  $230  $20  $633,562   61.6%

Total

  $611,296  $342,579  $70,149  $4,873  $269  $37  $1,029,203   100.0%

 

 

When customers apply for financing, the Company’s proprietary scoring model relies on the customers’ credit histories and certain application information to evaluate and rank their risk. The Company obtains credit histories and other credit data that includes information such as number of different addresses, age of oldest record, high risk credit activity, job time, time at residence and other factors. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the relative likelihood of repayment. Customers with the highest probability of repayment are 6 rated customers. Customers assigned a lower grade are determined to have a lower probability of repayment. For loans that are approved, the credit grade influences the terms of the agreement, such as the maximum amount financed, term length and minimum down payment. After origination, credit grades are generally not updated.

 

The Company uses a combination of the initial credit grades and historical performance to monitor the credit quality of the finance receivables on an ongoing basis, and the accuracy of the scoring model is validated periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.

 

 

D Property and Equipment

 

A summary of property and equipment is as follows:

 

(In thousands)

 

January 31, 2022

  

April 30, 2021

 
         

Land

 $7,594  $7,594 

Buildings and improvements

  13,777   13,717 

Furniture, fixtures and equipment

  15,874   15,401 

Leasehold improvements

  34,400   33,450 

Construction in progress

  14,307   2,421 

Less accumulated depreciation and amortization

  (40,263)  (37,864)
         

Total

 $45,689  $34,719 

 

15

 
 

E Accrued Liabilities

 

A summary of accrued liabilities is as follows:

 

(In thousands)

 

January 31, 2022

  

April 30, 2021

 
         

Employee compensation

 $10,408  $14,664 

Cash overdrafts (see Note B)

  -   1,802 

Deferred sales tax (see Note B)

  6,884   5,904 

Reserve for APP claims

  5,207   3,737 

Fair value of contingent consideration

  3,519   3,175 

Other

  2,975   1,996 

Total

 $28,993  $31,278 

 

 

F Debt Facilities

 

A summary of debt facilities is as follows:

 

(In thousands)

 

January 31, 2022

  

April 30, 2021

 
         

Revolving lines of credit

 $375,063  $226,602 

Debt issuance costs

  (1,907)  (678)
         

Debt facilities

 $373,156  $225,924 

 

On September 30, 2019, the Company and its subsidiaries, Colonial, Car-Mart of Arkansas (“ACM”) and Texas Car-Mart, Inc. (“TCM”) entered into a Third Amended and Restated Loan and Security Agreement (the “Agreement”), which amended and restated the Company’s revolving credit facilities. Under the Agreement, BMO Harris Bank, N.A. replaced Bank of America, N.A. as agent, lead arranger and book manager, and Wells Fargo Bank, N.A. joined the group of lenders. The Agreement also extended the term of the Company’s revolving credit facilities to September 30, 2022 and increased the total permitted borrowings from $215 million to $241 million, including an increase in the Colonial revolving line of credit from $205 million to $231 million. The ACM-TCM revolving line of credit commitment remained the same at $10 million. The Agreement also increased the accordion feature from $50 million to $100 million.

 

On October 29, 2020, the Company and its subsidiaries entered into Amendment No. 1 to the Agreement to expand the Company’s borrowing base by removing the limitations on the inclusion in the borrowing base of finance receivable balances on medium- and long-term vehicle contracts (those having an original contract term between 36 and 42 months or between 42 and 60 months, respectively), which were previously limited to 15% and 5%, respectively, and an aggregate of 15% of the eligible finance receivable balances for purposes of determining the Company’s borrowing base. Under Amendment No. 1, finance receivables from vehicle contracts not exceeding 60 months in duration that meet certain other conditions are eligible for inclusion in the borrowing base calculation.

 

Amendment No. 1 also allows the Company to make certain strategic business acquisitions and expanded the Company’s ability to dispose of real estate, equipment, and other property, subject to certain limitations. Amendment No. 1 permits the Company to acquire strategic targets engaged in the same or a reasonably related business to the Company’s business, provided that, among other requirements, the aggregate consideration paid for all acquired businesses in any one fiscal year does not exceed $20.0 million. Amendment No. 1 also permits the Company to dispose of up to $5.0 million and $1.0 million of real estate and other property, respectively, subject to certain conditions, and also permits the Company to select one or more additional lenders, subject to the written consent of BMO Harris Bank, N.A., as agent, to participate in any increase of the Colonial revolving line of credit under the Agreement’s accordion feature.

 

On December 31, 2020, the Company through its operating subsidiaries exercised an option under the Agreement to increase its total revolving credit facilities by $85 million from $241 million to $326 million pursuant to the Agreement’s accordion feature. In connection with this increase, MUFG Union Bank, N.A. joined the lending group as a new lender. In addition to the increased permitted borrowings, the Company designated BOKF, NA d/b/a BOK Financial and Wells Fargo Bank, N.A. as co-syndication agents and First Horizon Bank and MUFG Union Bank, N.A. as co-documentation agents under the Agreement.

 

16

 

On February 10, 2021, the Company and its subsidiaries entered into Amendment No. 2 to the Agreement to increase the Company’s permissible capital expenditure amount from $10 million to $25 million in the aggregate during any fiscal year.

 

On September 29, 2021, the Company and its subsidiaries entered into Amendment No. 3 to the Agreement, which extends the term of the revolving credit facilities to September 29, 2024 and increases the total permitted borrowings by $274 million from $326 million to $600 million. In connection with the increase, CIBC Bank USA and Axos Bank joined the group of lenders. Additionally, Amendment No. 3 amended the distribution limitation to renew the aggregate limit on the Company’s repurchases of its common stock, increased the Company’s permissible capital expenditure amount from $25 million to $35 million in the aggregate, during any fiscal year, restores the accordion feature back to $100 million, and adds certain mechanics for the replacement of LIBOR as the applicable benchmark interest rate under the Agreement, including mechanics to transition upon the cessation of LIBOR to a rate based upon the secured overnight financing rate published by the Federal Reserve Bank of New York.

 

The revolving credit facilities are collateralized primarily by finance receivables and inventory, are cross collateralized and contain a guarantee by the Company. Interest is payable monthly under the revolving credit facilities. The credit facilities provide for four pricing tiers for determining the applicable interest rate, based on the Company’s consolidated leverage ratio for the preceding fiscal quarter. The current applicable interest rate under the credit facilities is generally LIBOR plus 2.35%, with a minimum of 2.85%. At January 31, 2022 and April 30, 2021, the interest rate under the credit facilities was 2.85%. The credit facilities contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities and (iv) restrictions on the payment of dividends or distributions (see note B).

 

The Company was in compliance with the covenants at January 31, 2022. The amount available to be drawn under the credit facilities is a function of eligible finance receivables and inventory. Based upon eligible finance receivables and inventory at January 31, 2022, the Company had additional availability of approximately $84.4 million under the revolving credit facilities.

 

The Company recognized approximately $559,000 and $266,000 of amortization for the nine months ended January 31, 2022 and 2021, respectively, related to debt issuance costs. The amortization is reflected as interest expense in the Company’s Condensed Consolidated Statements of Operations.

 

During the first nine months of fiscal 2022 and fiscal 2021, the Company incurred approximately $1.8 million and $282,000, respectively, in debt issuance costs related to the Agreement. Debt issuance costs of approximately $1.9 million and $678,000 as of January 31, 2022 and April 30, 2021, respectively, are reflected as a reduction of the debt facilities in the Condensed Consolidated Balance Sheets.

 

 

G Fair Value Measurements

 

The table below summarizes information about the fair value of financial instruments included in the Company’s financial statements at January 31, 2022 and April 30, 2021:

 

  

January 31, 2022

  

April 30, 2021

 
 (In thousands) 

Carrying
Value

  

Fair
Value

  

Carrying
Value

  

Fair
Value

 
                 

Cash

 $2,603  $2,603  $2,893  $2,893 

Finance receivables, net

  797,237   632,960   625,119   497,865 

Accounts payable

  22,589   22,589   18,208   18,208 

Debt facilities

  373,156   373,156   225,924   225,924 

 

 

Because no market exists for certain of the Company’s financial instruments, fair value estimates are based on judgments and estimates regarding yield expectations of investors, credit risk and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

 

17

 

The methodology and assumptions utilized to estimate the fair value of the Company’s financial instruments are as follows:

 

 

Financial Instrument

Valuation Methodology

  

Cash

The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instrument.

  

Finance receivables, net

The Company estimates the fair value of its receivables at what a third-party purchaser might be willing to pay. The Company has had discussions with third parties and has bought and sold portfolios and had a third-party appraisal in January 2019 that indicated a range of 34% to 39% discount to face would be a reasonable fair value in a negotiated third-party transaction. The sale of finance receivables from Car-Mart of Arkansas to Colonial is made at a 38.5% discount. For financial reporting purposes these sale transactions are eliminated. Since the Company does not intend to offer the receivables for sale to an outside third party, the expectation is that the net book value at January 31, 2022, will ultimately be collected. By collecting the accounts internally, the Company expects to realize more than a third-party purchaser would expect to collect with a servicing requirement and a profit margin included.

  

Accounts payable

The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instrument.

  

Debt facilities

The fair value approximates carrying value due to the variable interest rates charged on the revolving credit facilities, which reprice frequently.

 

 

 

H Weighted Average Shares Outstanding

 

Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:

 

  

Three Months Ended
January 31,

  

Nine Months Ended
January 31,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Weighted average shares outstanding-basic

  6,487,310   6,634,125   6,540,450   6,631,450 

Dilutive options and restricted stock

  292,331   332,063   339,833   307,714 
                 

Weighted average shares outstanding-diluted

  6,779,641   6,966,188   6,880,283   6,939,164 
                 

Antidilutive securities not included:

                

Options

  205,000   160,000   86,667   203,333 

Restricted stock

  4,000   5,690   2,667   3,305 

 

18

 
 
 

I Stock-Based Compensation

 

The Company has stock-based compensation plans available to grant non-qualified stock options, incentive stock options and restricted stock to employees, directors and certain advisors of the Company. The stock-based compensation plans being utilized at January 31, 2022 are the Amended and Restated Stock Option Plan and the Amended and Restated Stock Incentive Plan. The Company recorded total stock-based compensation expense for all plans of approximately $4.7 million ($3.6 million after tax effects) and $5.0 million ($3.8 million after tax effects) for the nine months ended January 31, 2022 and 2021, respectively. Tax benefits were recognized for these costs at the Company’s overall effective tax rate, excluding discrete income tax benefits related to excess benefits on share-based compensation.

 

Stock Options

 

The Company has options outstanding under a stock option plan approved by the shareholders, the Amended and Restated Stock Option Plan. The shareholders of the Company approved the Amended and Restated Stock Option Plan (the “Restated Option Plan”) on August 5, 2015, which extended the term of the Restated Option Plan to June 10, 2025 and increased the number of shares of common stock reserved for issuance under the plan to 1,800,000 shares. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 200,000 shares to 2,000,000 shares. On August 26, 2020, the shareholders of the Company approved an amendment to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 200,000 shares to 2,200,000 shares. The Restated Option Plan provides for the grant of options to purchase shares of the Company’s common stock to employees, directors and certain advisors of the Company at a price not less than the fair market value of the stock on the date of grant and for periods not to exceed ten years. Options outstanding under the Company’s stock option plans expire in the calendar years 2022 through 2031.

 

 

  

Restated Option Plan

 
     

Minimum exercise price as a percentage of fair market value at date of grant

  100%

Last expiration date for outstanding options

 

May 1, 2031

 

Shares available for grant at January 31, 2022

  215,000 

 

 

The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions in the table below.

 

  

Nine Months Ended
January 31,

 
  

2022

  

2021

 

Expected term (years)

  5.5   5.5 

Risk-free interest rate

  0.86%  0.36%

Volatility

  51%  50%

Dividend yield

  -   - 

 

The expected term of the options is based on evaluations of historical actual and future expected employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of the Company’s common stock. The Company has not historically issued any dividends and does not expect to do so in the foreseeable future.

 

There were 30,000 options granted during the nine months ended January 31, 2022 and 2021, respectively. The grant-date fair value of options granted during the nine months ended January 31, 2022 and 2021 was $2.1 million and $886,000, respectively. The options were granted at fair market value on the date of grant.

 

Stock option compensation expense was $4.0 million ($3.1 million after tax effects) and $4.1 million ($3.1 million after tax effects) for the nine months ended January 31, 2022 and 2021, respectively. As of January 31, 2022, the Company had approximately $2.9 million of total unrecognized compensation cost related to unvested options that are expected to vest. These unvested outstanding options have a weighted-average remaining vesting period of 1.1 years.

 

19

 
 

The Company had the following options exercised for the periods indicated. The impact of these cash receipts is included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows.

 

 

  

Nine Months Ended
January 31,

 

(Dollars in thousands)

 

2022

  

2021

 
         

Options exercised

  57,000   107,000 

Cash received from option exercises

 $274  $4,731 

Intrinsic value of options exercised

 $4,924  $4,868 

 

 

During the nine months ended January 31, 2022, there were 50,000 options exercised through net settlements in accordance with plan provisions, wherein the shares issued were reduced by 32,838 shares to satisfy the exercise price and applicable withholding taxes to acquire 17,162 shares.

 

The aggregate intrinsic value of outstanding options at January 31, 2022 and 2021 was $14.2 million and $28.4 million, respectively. As of January 31, 2022, there were 288,400 vested and exercisable stock options outstanding with an aggregate intrinsic value of $8.7 million, a weighted average remaining contractual life of 5.4 years, and a weighted average exercise price of $72.60.

 

Stock Incentive Plan

 

On August 5, 2015, the shareholders of the Company approved the Amended and Restated Stock Incentive Plan (the “Restated Incentive Plan”), which extended the term of the Company’s Stock Incentive Plan to June 10, 2025. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Stock Incentive Plan that increased the number of shares of common stock that may be issued under the Restated Incentive Plan by 100,000 shares to 450,000. For shares issued under the Stock Incentive Plan, the associated compensation expense is generally recognized equally over the vesting periods established at the award date and is subject to the employee’s continued employment by the Company.

 

There were 10,250 restricted shares granted during the nine months ended January 31, 2022 and 7,690 restricted shares granted during the nine months ended January 31, 2021. A total of 91,684 shares remained available for award at January 31, 2022. There were 180,843 unvested restricted shares outstanding as of January 31, 2022 with a weighted average grant date fair value of $55.86.

 

As of January 31, 2022, the Company had approximately $5.7 million of total unrecognized compensation cost related to unvested awards granted under the Restated Incentive Plan, which the Company expects to recognize over a weighted-average remaining period of 4.7 years. The Company recorded compensation cost of approximately $656,000 ($497,000 after tax effects) and $839,000 ($638,000 after tax effects) related to the Restated Incentive Plan during the nine months ended January 31, 2022 and 2021, respectively.

 

There were no modifications to any of the Company’s outstanding share-based payment awards during fiscal 2021 or during the first nine months of fiscal 2022.

 

20

 
 
 

J Commitments and Contingencies

 

The Company has entered into operating leases for approximately 79% of its dealership and office facilities. Generally, these leases are for periods of three to five years and usually contain multiple renewal options. The Company uses leasing arrangements to maintain flexibility in its dealership locations and to preserve capital. The Company expects to continue to lease the majority of its dealership and office facilities under arrangements substantially consistent with the past. Rent expense for all operating leases amounted to approximately $5.9 million and $6.0 million for the nine month periods ended January 31, 2022 and 2021, respectively.

 

Scheduled amounts and timing of cash flows arising from operating lease payments as of January 31, 2022, discounted at the weighted average interest rate in effect as of January 31, 2022 of approximately 4.3%, are as follows:

 

Maturity of lease liabilities

   

2022 (remaining)

$1,780 

2023

 7,084 

2024

 6,572 

2025

 6,433 

2026

 5,920 

Thereafter

$53,060 

Total undiscounted operating lease payments

 80,849 

Less: imputed interest

 (20,704)

Present value of operating lease liabilities

$60,145 

 

 

The Company has two standby letters of credit relating to insurance policies totaling $750,000 at January 31, 2022.

 

Car-Mart of Arkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal and state income tax returns. Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under the provisions of the Internal Revenue Code as described in the Treasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation, and a deferred income tax liability has been recorded for this timing difference. The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of reducing the Company’s overall effective state income tax rate. The actual interpretation of the regulations is in part a facts and circumstances matter. The Company believes it satisfies the material provisions of the regulations. Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold and have the effect of increasing the Company’s overall effective income tax rate as well as the timing of required tax payments.

 

 

K - Supplemental Cash Flow Information

 

Supplemental cash flow disclosures are as follows:

 

  

Nine Months Ended
January 31,

 

(In thousands)

 

2022

  

2021

 

Supplemental disclosures:

        

Interest paid

 $7,278  $5,463 

Income taxes paid, net

  13,232   19,423 
         

Non-cash transactions:

        

Inventory acquired in repossession and accident protection plan claims

  56,155   35,692 

Net settlement option exercises

  4,291   1,214 

 

21

 
 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this report.

 

Forward-Looking Information

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address the Company’s future objectives, plans and goals, as well as the Company’s intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such as “may,” “will,” “should,” “could,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” and other similar words or phrases. Specific events addressed by these forward-looking statements include, but are not limited to:

 

 

operational infrastructure investments;

 

same dealership sales and revenue growth;

 

future revenue growth;

 

receivables growth as related to revenue growth;

 

customer growth;

 

gross margin percentages;

 

gross profit per retail unit sold;

 

new dealership openings;

 

performance of new dealerships;

 

interest rates;

 

future credit losses;

 

the Company’s collection results, including, but not limited to, collections during income tax refund periods;

 

seasonality;

 

technological investments and initiatives;
 

compliance with tax regulations;

 

the Company’s business, operating and growth strategies;

 

financing the majority of growth from profits; and

 

having adequate liquidity to satisfy the Company’s capital needs.

 

These forward-looking statements are based on the Company’s current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors that may cause actual results to differ materially from the Company’s projections include those risks described elsewhere