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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, 2024

 

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

 

 

AMERICA’S 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.

 

Title of Each Class Outstanding at March 8, 2024
Common stock, par value $.01 per share 6,392,098

 

 

 

 

AMERICAS CAR-MART, INC.

 

TABLE OF CONTENTS

 

   
     

Page

     

No.

PART I.

FINANCIAL INFORMATION

 
 

Item 1.

Financial Statements

 
   

Condensed Consolidated Balance Sheets (Unaudited) – January 31, 2024 and April 30, 2023

3
   

Condensed Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended January 31, 2024 and 2023

4
   

Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended January 31, 2024 and 2023

5
   

Condensed Consolidated Statements of Equity (Unaudited) – Three and Nine Months Ended January 31, 2024

6
   

Condensed Consolidated Statements of Equity (Unaudited) – Three and Nine Months Ended January 31, 2023

7
   

Notes to Consolidated Financial Statements (Unaudited)

8
 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25
 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37
 

Item 4.

Controls and Procedures

37
       

PART II.

OTHER INFORMATION

 
 

Item 1.

Legal Proceedings

38
 

Item 1A.

Risk Factors

38
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38
 

Item 3.

Defaults Upon Senior Securities

38
 

Item 4.

Mine Safety Disclosure

38
 

Item 5.

Other Information

38
 

Item 6.

Exhibits

39
       

SIGNATURES

40
       

 

 

 

 

 

 

 

2

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements Americas Car-Mart, Inc.

 

Condensed Consolidated Balance Sheets (Unaudited)

January 31, 2024 and April 30, 2023

 

(Dollars in thousands except share and per share amounts)

 

January 31, 2024

   

April 30, 2023

 

Assets:

 

(Unaudited)

         

Cash and cash equivalents

  $ 4,239     $ 9,796  

Restricted cash

    90,350       58,238  

Accrued interest on finance receivables

    7,370       6,115  

Finance receivables, net

    1,085,772       1,063,460  

Inventory

    109,313       109,290  

Income tax receivable, net

    814       9,259  

Prepaid expenses and other assets

    30,786       26,039  

Right-of-use asset

    62,906       59,142  

Goodwill

    14,504       11,716  

Property and equipment, net

    60,893       61,682  

Total Assets

  $ 1,466,947     $ 1,414,737  
                 

Liabilities, mezzanine equity and equity:

               

Liabilities:

               

Accounts payable

  $ 25,868     $ 27,196  

Deferred accident protection plan revenue

    51,139       53,065  

Deferred service contract revenue

    67,274       67,404  

Accrued liabilities

    26,985       27,912  

Deferred income tax liabilities, net

    20,348       39,315  

Lease liability

    65,864       62,300  

Non-recourse notes payable, net

    684,688       471,367  

Revolving line of credit, net

    55,374       167,231  

Total liabilities

    997,540       915,790  
                 

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; 13,722,938 and 13,701,468 issued at January 31, 2024 and April 30, 2023, respectively, of which 6,391,061 and 6,373,404 were outstanding at January 31, 2024 and April 30, 2023, respectively     137       137  

Additional paid-in capital

    112,574       109,929  

Retained earnings

    653,953       685,802  

Less: Treasury stock, at cost, 7,331,877 and 7,328,064 shares at January 31, 2024 and April 30, 2023, respectively

    (297,757 )     (297,421 )

Total stockholders' equity

    468,907       498,447  

Non-controlling interest

    100       100  

Total equity

    469,007       498,547  
                 

Total Liabilities, Mezzanine Equity and Equity

  $ 1,466,947     $ 1,414,737  

 

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

 

3

 

 

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

Three and Nine Months Ended January 31, 2024 and 2023

 

   

Three Months Ended
January 31,

   

Nine Months Ended
January 31,

 

(Dollars in thousands except share and per share amounts)

 

2024

   

2023

   

2024

   

2023

 

Revenues:

  (Unaudited)     (Unaudited)  

Sales

  $ 240,401     $ 274,276     $ 854,170     $ 869,775  

Interest and other income

    59,213       51,063       175,051       143,690  
                                 

Total revenues

    299,614       325,339       1,029,221       1,013,465  
                                 

Costs and expenses:

                               

Cost of sales

    158,250       181,823       560,692       578,547  

Selling, general and administrative

    43,562       44,737       134,895       130,881  

Provision for credit losses

    89,582       85,650       321,300       250,719  

Interest expense

    16,731       9,765       47,587       25,460  

Depreciation and amortization

    1,712       1,537       5,101       3,997  

Loss on disposal of property and equipment

    119       68       359       320  

Total costs and expenses

    309,956       323,580       1,069,934       989,924  
                                 

(Loss) Income before taxes

    (10,342 )     1,759       (40,713 )     23,541  
                                 

Provision for income taxes

    (1,800 )     251       (8,894 )     5,197  
                                 

Net (loss) income

  $ (8,542 )   $ 1,508     $ (31,819 )   $ 18,344  
                                 

Less: Dividends on mandatorily redeemable preferred stock

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

Net (loss) income attributable to common stockholders

  $ (8,552 )   $ 1,498     $ (31,849 )   $ 18,314  
                                 

Earnings per share:

                               

Basic

  $ (1.34 )   $ 0.24     $ (4.99 )   $ 2.87  

Diluted

  $ (1.34 )   $ 0.23     $ (4.99 )   $ 2.79  
                                 

Weighted average number of shares used in calculation:

                               

Basic

    6,393,080       6,370,031       6,386,997       6,370,732  

Diluted

    6,393,080       6,536,785       6,386,997       6,562,214  

 

 

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

 

4

 

 

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

Nine Months Ended January 31, 2024 and 2023

 

   

Nine Months Ended
January 31,

 

(In thousands)

 

2024

   

2023

 
    (Unaudited)  

Operating Activities:

               

Net (loss) income

  $ (31,819 )   $ 18,344  
Adjustments to reconcile net (loss) income to net cash used in operating activities:                

Provision for credit losses

    321,300       250,719  

Losses on claims for accident protection plan

    24,480       17,717  

Depreciation and amortization

    5,101       3,997  

Amortization of debt issuance costs

    3,988       4,187  

Loss on disposal of property and equipment

    359       320  

Impairment of goodwill

    212       -  

Stock based compensation

    2,882       4,154  

Deferred income taxes

    (18,967 )     6,884  

Excess tax benefit from share based compensation

    213       206  

Change in operating assets and liabilities:

               

Finance receivable originations

    (794,477 )     (841,445 )

Loan origination costs

    39       (10 )

Finance receivable collections

    324,703       308,671  

Accrued interest on finance receivables

    (1,255 )     (1,323 )

Inventory

    103,451       76,933  

Prepaid expenses and other assets

    (3,734 )     (4,990 )

Accounts payable and accrued liabilities

    (5,824 )     6,760  

Deferred accident protection plan revenue

    (1,926 )     13,987  

Deferred service contract revenue

    (130 )     17,565  

Income taxes, net

    8,232       (6,632 )

Net cash used in operating activities

    (63,172 )     (123,956 )
                 

Investing Activities:

               

Purchase of investments

    (4,815 )     (5,499 )

Purchase of property and equipment

    (4,864 )     (19,002 )

Proceeds from sale of property and equipment

    350       84  

Net cash used in investing activities

    (9,329 )     (24,417 )
                 

Financing Activities:

               

Exercise of stock options

    (455 )     1,216  

Issuance of common stock

    218       222  

Purchase of common stock

    (336 )     (5,196 )

Dividend payments

    (30 )     (30 )

Change in cash overdrafts

    2,183       3,795  

Debt issuance costs

    (5,892 )     (2,001 )

Issuances of non-recourse notes payable

    610,340       400,176  

Payments on non-recourse notes payable

    (394,450 )     (209,327 )

Proceeds from revolving line of credit

    406,844       381,825  

Payments on revolving line of credit

    (519,366 )     (399,424 )

Net cash provided by financing activities

    99,056       171,256  
                 

Increase in cash, cash equivalents, and restricted cash

    26,555       22,883  

Cash, cash equivalents, and restricted cash beginning of period

    68,034       42,587  
                 

Cash, cash equivalents, and restricted cash end of period

  $ 94,589     $ 65,470  

 

 

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

 

5

 

 

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

Three and Nine Months Ended January 31, 2024

 

                   

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, 2023

    13,701,468     $ 137     $ 109,929     $ 685,802     $ (297,421 )   $ 100     $ 498,547  
                                                         

Issuance of common stock

    2,921       -       78       -       -       -       78  

Stock options exercised

    6,493       -       (455 )     -       -       -       (455 )

Purchase of treasury shares

    -       -       -       -       (68 )     -       (68 )

Stock based compensation

    -       -       2,451       -       -       -       2,451  

Dividends on subsidiary preferred stock

    -       -       -       (10 )     -       -       (10 )

Net income

    -       -       -       4,186       -       -       4,186  

Balance at July 31, 2023 (Unaudited)

    13,710,882     $ 137     $ 112,003     $ 689,978     $ (297,489 )   $ 100     $ 504,729  
                                                         

Issuance of common stock

    849       -       65       -       -       -       65  

Stock based compensation

    -       -       (712 )     -       -       -       (712 )

Dividends on subsidiary preferred stock

    -       -       -       (10 )     -       -       (10 )

Net (loss)

    -       -       -       (27,463 )     -       -       (27,463 )

Balance at October 31, 2023 (Unaudited)

    13,711,731     $ 137     $ 111,356     $ 662,505     $ (297,489 )   $ 100     $ 476,609  
                                                         

Issuance of common stock

    11,207       -       75       -       -       -       75  

Purchase of treasury shares

    -       -       -       -       (268 )     -       (268 )

Stock based compensation

    -       -       1,143       -       -       -       1,143  

Dividends on subsidiary preferred stock

    -       -       -       (10 )     -       -       (10 )

Net (loss)

    -       -       -       (8,542 )     -       -       (8,542 )

Balance at January 31, 2024 (Unaudited)

    13,722,938     $ 137     $ 112,574     $ 653,953     $ (297,757 )   $ 100     $ 469,007  

 

 

 

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

 

6

 

 

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

Three and Nine Months Ended January 31, 2023

 

                   

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, 2022

    13,642,185     $ 136     $ 103,113     $ 665,410     $ (292,225 )   $ 100     $ 476,534  
                                                         

Issuance of common stock

    30,484       1       84       -       -       -       85  

Stock options exercised

    23,000       -       1,216       -       -       -       1,216  

Purchase of 57,856 treasury shares

    -       -       -       -       (5,196 )     -       (5,196 )

Stock based compensation

    -       -       1,978       -       -       -       1,978  

Dividends on subsidiary preferred stock

    -       -       -       (10 )     -       -       (10 )

Net income

    -       -       -       13,697       -       -       13,697  

Balance at July 31, 2022 (Unaudited)

    13,695,669     $ 137     $ 106,391     $ 679,097     $ (297,421 )   $ 100     $ 488,304  
                                                         

Issuance of common stock

    1,235       -       64       -       -       -       64  

Stock based compensation

    -       -       820       -       -       -       820  

Dividends on subsidiary preferred stock

    -       -       -       (10 )     -       -       (10 )

Net income

    -       -       -       3,139       -       -       3,139  

Balance at October 31, 2022 (Unaudited)

    13,696,904     $ 137     $ 107,275     $ 682,226     $ (297,421 )   $ 100     $ 492,317  
                                                         

Issuance of common stock

    1,191       -       73       -       -       -       73  

Stock based compensation

    -       -       1,356       -       -       -       1,356  

Dividends on subsidiary preferred stock

    -       -       -       (10 )     -       -       (10 )

Net income

    -       -       -       1,508       -       -       1,508  

Balance at January 31, 2023 (Unaudited)

    13,698,095     $ 137     $ 108,704     $ 683,724     $ (297,421 )   $ 100     $ 495,244  

 

 

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

 

7

 

 

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, 2024, the Company operated 154 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, 2023, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of January 31, 2024 and 2023, 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, 2024 are not necessarily indicative of the results that may be expected for the year ending April 30, 2024. 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, 2023.

 

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.

 

Reclassifications

 

Accident protection plan (“APP”) reserves in the amount of approximately $11.0 million and Wholesales Sales of $3.7 million in the prior year financial statements were reclassified to conform with the current year presentation. For the year ended April 30, 2023, APP reserves of $5.7 million were reclassed out of accrued liabilities to reserve against finance receivables and $5.3 million of estimated APP insurance receivables were reclassed out of finance receivables to prepaid expenses and other assets. For the nine months ended January 31, 2023, $3.7 million of Wholesales sales were reclassed out of Wholesales – third party sales to Cost of Goods Sold. The reclassification had no effect on the prior year net income or shareholder’s equity.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) 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 the Company’s allowance for credit losses.

 

8

 

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% of current period revenues resulting from sales to Arkansas customers.

 

As of January 31, 2024, 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.

 

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.

 

Restricted Cash

 

Restricted cash is related to the financing and securitization transaction discussed below and is held by the securitization trust.

 

Restricted cash from collections on auto finance receivables includes collections of principal, interest, and late fee payments on auto finance receivables that are restricted for payment to holders of non-recourse notes payable pursuant to the applicable agreements.

 

The restricted cash on deposit in reserve accounts is for the benefit of holders of non-recourse notes payable, and these funds are not expected to be available to the Company or its creditors. If the cash generated by the related receivables in a given period was insufficient to pay the interest, principal, and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts.

 

Restricted cash consisted of the following at January 31, 2024 and April 30, 2023:

 

(In thousands)

 

January 31, 2024

   

April 30, 2023

 
                 

Restricted cash from collections on auto finance receivables

  $ 45,381     $ 34,442  

Restricted cash on deposit in reserve accounts

    44,969       23,796  
                 

Restricted Cash

  $ 90,350     $ 58,238  

 

Financing and Securitization Transactions

 

The Company utilizes term securitizations to provide long-term funding for a portion of the auto finance receivables initially funded through the debt facilities. In these transactions, a pool of auto finance receivables is sold to a special purpose entity that, in turn, transfers the receivables to a special purpose securitization trust. The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the asset-backed securities are used to finance the securitized receivables.

 

9

 

The Company is required to evaluate term securitization trusts for consolidation. In the Company’s role as servicer for each securitization, it possesses non-substantive voting rights and has the power to direct the activities of the trust that most significantly impact the economic performance of the trust. In addition, the obligation to absorb losses (subject to limitations) and the rights to receive any returns of the trust, remain with the Company. Accordingly, the Company is the primary beneficiary of the trust and is required to consolidate it.

 

The Company recognizes transfers of auto finance receivables into the term securitization as secured borrowings, which results in recording the auto finance receivables and the related non-recourse notes payable on our consolidated balance sheet. These auto finance receivables can only be used as collateral to settle obligations of the related non-recourse notes payable. The term securitization investors have no recourse to the Company’s assets beyond the related auto finance receivables, the amounts on deposit in the reserve account, and the restricted cash from collections on auto finance receivables. See Notes C and F for additional information on auto finance receivables and non-recourse notes payable.

 

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 a weighted average interest rate of approximately 16.9% using the simple effective interest method including any deferred fees. In December 2023, the Company increased the interest rate on new originations of installment sale contracts to 18.25% (from 18.0%) in all states in which it operates, except for Arkansas (increased to 16.75% from 16.5%), Illinois (remains at 19.5% - 21.5%) and Smart Auto dealerships in Tennessee (which originate at up to 23.0%). 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 ($7.4 million at January 31, 2024 and $6.1 million at April 30, 2023 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 three days 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 after 90 days. Customer payments are set to match their payday with approximately 78% 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. On January 31, 2024, 3.3% of the Company’s finance receivable balances were 30 days or more past due, compared to 3.6% at April 30, 2023.

 

Substantially all of the Company’s installment sale 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. At the time of originating an installment sale contract, the Company requires customers to meet certain criteria that demonstrate their intent and ability to pay for the financed principal and interest on the vehicle they are purchasing. However, the Company recognizes that their customer base is at a higher risk of default given their impaired or limited credit histories.

 

The Company strives to keep its delinquency percentages low, and not to repossess vehicles. Accounts one to three days late are contacted by telephone or text messaging notifications. Notes from each contact are electronically maintained in the Company’s computer system. The Company also utilizes text messaging notifications that allow customers the option to receive due date reminders 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.

 

10

 

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 installment sale 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.

 

The Company takes steps to repossess a vehicle when the customer becomes delinquent in his or her payments and management determines that timely collection of future payments is not probable. 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. On average, accounts are approximately 70 days past due at the time of charge-off. For previously charged-off accounts that are subsequently recovered, the amount of such recovery is credited to the allowance for credit losses. The amount of the net repossession and charge-off loss is also reduced by any deferred service contract and accident protection plan revenue at the time of charge-off.

 

During the second quarter of the 2024 fiscal year, the Company implemented third-party software to assist in calculating the Company’s allowance for credit losses. After implementation, the Company’s quantitative portion of the allowance for credit losses was measured using an undiscounted cash flow (“CF”) model. Whereby the undiscounted cash flows are adjusted by a prepayment rate and then the loss rate is applied and compared to the amortized cost basis of finance receivables to reflect management’s estimate of expected credit losses. The CF model is based on installment sale contract level characteristics of the Company’s finance receivables, such as the contractual payment structure, maturity date, payment frequency for recurring payments, and interest rates, as well as the following assumptions:

 

 

a historical loss period, which represents a full economic credit cycle utilizing loss experience, to calculate the historical loss rate; and

 

 

static annualized historical rate based on average time of charge-off; and

 

 

expected prepayment rates based on our historical experience, which also incorporates non-standard contractual payments such as down payments made during the first ninety-days or annual seasonal payments.

 

The Company’s allowance for credit losses also considers qualitative factors not captured within the CF modeled results such as changes in underwriting and collection practices, economic trends, changes in volume and terms of installment sales contracts, credit quality trends, installment sale contract review results, collateral trends, and concentrations of credit. The Company’s qualitative factors incorporate a macroeconomic variable forecast of inflation over a reasonable and supportable forecast period of one year that affects its customers’ non-discretionary income and ability to repay. The reasonable and supportable forecast period of one year is based on management’s current review of the reliability of extended forecasts and is applied as an adjustment to the historical loss rate.

 

As a result of this update to our methodology and the performance of our loan portfolio, the Company increased the provision for credit losses by $28.0 million and decreased net income by $21.8 million, or basic per share loss of $3.40 per share, upon implementation of the third-party software on our condensed consolidated statement of operations during the second quarter of the 2024 fiscal year and had no effect on periods prior to this. During the third quarter of fiscal year 2024, the Company decreased the allowance for credit loss from 26.04% to 25.74%, resulting in a $3.9 million benefit to the provision. The decrease in Q3 2024 was primarily driven by the lower overall inflationary outlook and fewer past due balances at quarter end. 

 

The Company maintains an allowance for credit losses on an aggregate basis at an amount it considers sufficient to cover net credit losses expected over the remaining life of the installment sales contracts in the portfolio at the measurement date. At January 31, 2024, the weighted average total contract term was 47.6 months, with 35.8 months remaining. The allowance for credit losses at January 31, 2024, $335.1 million, was 25.74% of the principal balance in finance receivables of $1.4 billion, less deferred APP revenue of $51.1 million and deferred service contract revenue of $67.3 million, less pending APP claims of $9.1 million. The allowance for credit losses is periodically reviewed by management with any changes reflected in current operations.

 

In most states, the Company offers retail customers who finance their vehicle the option of purchasing an accident protection plan product as an add-on to the installment sale contract. This product contractually obligates the Company to cancel the remaining principal outstanding for any contract where the retail customer has totaled the vehicle, as defined by the product, 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. At January 31, 2024, anticipated losses did not exceed deferred accident protection plan revenues. No such liability was required at January 31, 2024 or April 30, 2023.

 

11

 

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 qualitative 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 unit. The implied goodwill is compared to the carrying value of the goodwill to determine the impairment, if any. There was no impairment of goodwill during the 2023 fiscal year. During the nine months ended January 31, 2024, the Company evaluated goodwill and recorded an immaterial impairment of $212,000 due to a dealership that closed during the first quarter of 2024.

 

Goodwill totaled $14.5 million at January 31, 2024 and $11.7 million at April 30, 2023.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. 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 principally using the straight-line method generally over the following estimated useful lives:

 

Furniture, fixtures and equipment

3 to 7 years

Leasehold improvements

5 to 15 years

Buildings and improvements

18 to 39 years

 

Long-Lived Assets

 

Long-lived assets, such as property and equipment, capitalized internal-use software and operating lease right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares the undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, such assets are considered to be impaired, and the impairment is recognized to the extent that the carrying value exceeds its fair value. There were no impairment charges recognized during any of the periods presented.

 

Cloud Computing Implementation Costs

 

The Company enters into cloud computing service contracts to support its sales, inventory management, and administrative activities. The Company capitalizes certain implementation costs for cloud computing arrangements that meet the definition of a service contract. The Company includes these capitalized implementation costs within prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. Once placed in service, the Company amortizes these costs over the remaining subscription term to the same caption on the Condensed Consolidated Statement of Operations as the related cloud subscription.

 

12

 

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 21.9% and 22.1% for the nine months ended January 31, 2024 and January 31, 2023, respectively. Total income tax expense for the nine months ended January 31, 2024 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 $213,000 and $206,000 for the nine months ended January 31, 2024 and 2023, respectively, related to excess tax benefits on share based compensation.

 

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 2019.

 

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, 2024 or April 30, 2023.

 

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, as well as 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. Any unearned revenue from ancillary products is charged-off at the time of repossession. 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.

 

13

 

Sales for the three and nine months ended January 31, 2024 and 2023 consisted of the following:

 

   

Three Months Ended
January 31,

   

Nine Months Ended
January 31,

 

(In thousands)

 

2024

   

2023

   

2024

   

2023

 
                                 

Sales – used autos

  $ 200,341     $ 239,079     $ 735,145     $ 761,875  

Wholesales – third party

    13,479       11,816       39,502       40,325  

Service contract revenue

    17,106       14,577       51,102       41,765  

Accident protection plan revenue

    9,475       8,804       28,421       25,810  
                                 

Total

  $ 240,401     $ 274,276     $ 854,170     $ 869,775  

 

At January 31, 2024 and 2023, finance receivables more than 90 days past due were approximately $6.1 million and $4.0 million, respectively. Late fee revenues totaled approximately $3.6 million and $3.1 million for the nine months ended January 31, 2024 and 2023, 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, 2024 that was included in the April 30, 2023 deferred service contract revenue was $29.6 million.

 

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 $213,000 and $206,000 for the nine months ended January 31, 2024 and 2023, 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.

 

14

 

Recent Accounting Pronouncements

 

Occasionally, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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.

 

Adopted in the Current Period

 

In March 2022, the FASB issued an accounting pronouncement (ASU 2022-02) related to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments in this update eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this standard on May 1, 2023 under a prospective basis. In regard to installment sale contract modifications, management notes that the Company primarily modifies a customer’s installment sale contract to allow for insignificant payment delays. This type of modification is generally done to account for payday changes for the customer and minor vehicle repairs.

 

 

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 a fixed interest rate of 18.25% for all states except Arkansas (originates at 16.75%), Illinois (originates at 19.5% – 21.5%) and Smart Auto dealerships in Tennessee (which originate at up to 23.0%), are collateralized by the vehicle sold and typically provide for payments over periods ranging from 18 to 69 months. The Company’s finance receivables are defined as one segment and one class of contracts, which is sub-prime consumer automobile contracts. The level of risks in the Company’s finance receivables is managed as one homogeneous pool.

 

The components of finance receivables are as follows:

 

(In thousands)

 

January 31, 2024

   

April 30, 2023

 
                 

Gross contract amount

  $ 1,821,447     $ 1,752,149  

Less: unearned finance charges

    (392,539 )     (378,777 )

Principal balance

    1,428,908       1,373,372  

Less: estimated insurance receivables for APP claims

    (4,303 )     (5,694 )

Less: allowance for APP claims

    (4,507 )     (5,310 )

Less: allowance for credit losses

    (334,987 )     (299,608 )

Finance receivables, net

    1,085,111       1,062,760  

Loan origination costs

    661       700  

Finance receivables, net, including loan origination costs

    1,085,772       1,063,460  

 

 

 

 

 

 

 

15

 

Changes in the finance receivables, net are as follows:

 

   

Nine Months Ended
January 31,

 

(In thousands)

 

2024

   

2023

 
                 

Balance at beginning of period

  $ 1,062,760     $ 855,424  

Finance receivable originations

    794,477       841,445  

Finance receivable collections

    (324,703 )     (308,671 )

Provision for credit losses

    (321,300 )     (250,719 )

Losses on claims for accident protection plan

    (24,480 )     (17,717 )

Inventory acquired in repossession and accident protection plan claims

    (101,643 )     (107,882 )
                 

Balance at end of period

  $ 1,085,111     $ 1,011,880  

 

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

 

   

Nine Months Ended
January 31,

 

(In thousands)

 

2024

   

2023

 
                 

Balance at beginning of period

  $ 299,608     $ 237,823  

Provision for credit losses

    321,300       250,719  

Charge-offs

    (386,349 )     (296,154 )

Recovered collateral

    100,428       90,387  
                 

Balance at end of period

  $ 334,987     $ 282,775  

 

Amounts recovered from previously written-off accounts were approximately $2.0 million and $2.0 million for the nine months ended January 31, 2024 and 2023, respectively. These amounts are netted against recovered collateral in the table above.

 

Our allowance for credit losses increased during the first nine months of fiscal year 2024 by $35.4 million or 12%, the majority of the increase relates to the $28.0 million increase in second quarter, which resulted from an increase in the allowance for credit loss from 23.91 % to 26.04%. The Company reduced the allowance for credit loss in the third quarter to 25.74%, resulting in a benefit of $3.9 million to the provision. Structural changes to our portfolio, primarily related to the longer contract terms, continue to drive an increase in the provision for credit losses. The charge-offs, net of recovered collateral, were impacted by a higher frequency of losses compared to the prior year as well as a higher severity of losses driven by lower recovery values and longer contract terms.

 

 

 

 

 

 

16

 

 

Credit quality information for finance receivables is as follows:

 

(Dollars in thousands)

 

January 31, 2024

   

April 30, 2023

   

January 31, 2023

 
   

Principal

   

Percent of

   

Principal

   

Percent of

   

Principal

   

Percent of

 
   

Balance

   

Portfolio

   

Balance

   

Portfolio

   

Balance

   

Portfolio

 

Current

  $ 1,119,120       78.32 %   $ 1,166,860       84.96 %   $ 1,011,877       77.48 %

3 - 29 days past due

    262,200       18.35 %     156,943       11.43 %     245,939       18.83 %

30 - 60 days past due

    34,266       2.40 %     37,214       2.71 %     36,447       2.79 %

61 - 90 days past due

    7,258       0.51 %     8,407       0.61 %     7,700       0.59 %

> 90 days past due

    6,064       0.42 %     3,948       0.29 %     3,993       0.31 %

Total

  $ 1,428,908       100.00 %   $ 1,373,372       100.00 %   $ 1,305,956       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 installment sale 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 monitors customer scores, contract term length, payment to income, down payment percentages, and collections for credit quality indicators.

 

   

Nine Months Ended
January 31,

 
   

2024

   

2023

 
                 

Average total collected per active customer per month

  $ 536     $ 516  

Principal collected as a percent of average finance receivables

    22.7 %     25.4 %

Average down-payment percentage

    5.0 %     5.4 %

Average originating contract term (in months)

    44.0       42.5  

 

    As of  
   

January 31, 2024

   

January 31, 2023

 

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

    47.6       45.4  

 

Although total dollars collected per active customer for the nine months increased 3.9% year over year, principal collections as a percentage of average finance receivables were lower in the nine months ended January 31, 2024 compared to the prior year, primarily due to the average term increases. Overall collections have also been negatively impacted by the current inflationary environment. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $1,003 or 5.6%, from the prior year period.

 

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 installment sales contracts 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. Installment sale contract performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.

 

17

 

The following table presents a summary of finance receivables by credit quality indicator, as of January 31, 2024, segregated by customer score.

 

As of January 31, 2024

 

(Dollars in thousands)

   

Fiscal Year of Origination

   

Prior to

                 

Customer Rating

   

2024

   

2023

   

2022

   

2021

   

2020

   

2020

   

Total

   

%

 
1-2     $ 32,854     $ 18,416     $ 5,298     $ 661     $ 124     $ 13     $ 57,366       4.0 %
3-4     $ 236,351     $ 153,436     $ 50,070     $ 7,414     $ 450     $ 178     $ 447,899       31.4 %
5-6     $ 394,600     $ 352,267     $ 147,133     $ 27,316     $ 1,797     $ 530     $ 923,643       64.6 %

Total

    $ 663,805     $ 524,119     $ 202,501     $ 35,391     $ 2,371     $ 721     $ 1,428,908       100.0 %
                                                                   

Gross charge-offs

    $ 87,675     $ 211,642     $ 72,511     $ 13,111     $ 957     $ 453     $ 386,349          
                                                                   

 

The following table presents a summary of finance receivables by credit quality indicator, as of January 31, 2023, segregated by customer score.

 

As of January 31, 2023

 

(Dollars in thousands)

   

Fiscal Year of Origination

   

Prior to

                 

Customer Rating

   

2023

   

2022

   

2021

   

2020

   

2019

   

2019

   

Total

   

%

 
1-2     $ 31,580     $ 17,295     $ 4,212     $ 545     $ 35     $ 12     $ 53,679       4.1 %
3-4     $ 232,273     $ 135,531     $ 36,562     $ 2,974     $ 332     $ 192     $ 407,864       31.2 %
5-6     $ 437,566     $ 307,513     $ 89,582     $ 8,389     $ 910     $ 453     $ 844,413       64.7 %

Total

    $ 701,419     $ 460,339     $ 130,356     $ 11,908     $ 1,277     $ 657     $ 1,305,956       100.0 %
                                                                   

 

 

D Property and Equipment, Net

 

A summary of property and equipment is as follows:

 

(In thousands)

 

January 31, 2024

   

April 30, 2023

 
                 

Land

  $ 11,998     $ 12,386  

Buildings and improvements

    23,441       20,894  

Furniture, fixtures and equipment

    20,758       18,989  

Leasehold improvements

    50,230       47,315  

Construction in progress

    2,963       7,176  

Less: accumulated depreciation and amortization

    (48,497 )     (45,078 )
                 

Total

  $ 60,893     $ 61,682  

 

 

 

18

 

 

E Accrued Liabilities

 

A summary of accrued liabilities is as follows:

 

(In thousands)

 

January 31, 2024

   

April 30, 2023

 
                 

Employee compensation

  $ 8,258     $ 11,197  

Deferred sales tax (see Note B)

    8,253       8,543  

Fair value of contingent consideration

    3,193       1,943  

Other

    7,281       6,229  
                 

Total

  $ 26,985     $ 27,912  

 

 

F Debt Facilities

 

A summary of debt facilities is as follows:

 

(In thousands)

 

January 31, 2024

   

April 30, 2023

 

Revolving line of credit

  $ 55,994     $ 168,516  

Debt issuance costs

    (620 )     (1,285 )
                 

Revolving line of credit, net

  $ 55,374     $ 167,231  
                 

Non-recourse notes payable - 2022-1 Issuance

  $ -     $ 134,137  

Non-recourse notes payable - 2023-1 Issuance

    190,674     $ 338,777  

Non-recourse notes payable - 2023-2 Issuance

    248,130       -  

Non-recourse notes payable - 2024-1 Issuance

    250,000       -  

Debt issuance costs

    (4,116 )     (1,547 )
                 

Non-recourse notes payable, net

  $ 684,688     $ 471,367  
                 

Total debt

  $ 740,062     $ 638,598  

 

Revolving Line of Credit

 

At January 31, 2024, the Company and its subsidiaries had $600.0 million of permitted borrowings under a revolving line of credit. 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 with a scheduled maturity date of September 29, 2024. 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 applicable interest rate under the credit facilities at January 31, 2024 was generally SOFR plus 2.75%, with a minimum of 2.25% or for non-SOFR amounts the base rate of 8.50% at January 31, 2024 and 8.25% at April 30, 2023. 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, 2024. 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, 2024, the Company had additional availability of approximately $125.6 million under the revolving credit facilities. The total permitted borrowings and certain terms of the Company’s revolving credit facilities were amended on February 28, 2024. This amendment is described in Note M, Subsequent Events.

 

Non-Recourse Notes Payable

 

The Company has issued four separate series of asset-backed non-recourse notes (known as the “2022 Issuance”, “2023-1 Issuance”, "2023-2 Issuance" and "2024-1 Issuance"). All four issuances are collateralized by installment sale contracts directly originated by the Company. Credit enhancement for the non-recourse notes payable consists of overcollateralization, a reserve account funded with an initial amount of not less than 2.0% of the pool balance, excess interest on the auto finance receivables, and in some cases, the subordination of certain payments to noteholders of less senior classes of notes. The timing of principal payments on the non-recourse notes payable is based on the timing of principal collections and defaults on the related auto finance receivables. In December 2023, the Company fully paid off the 2022 Issuance. The three notes payable related to the remaining term securitization transactions accrue interest predominately at fixed rates and have scheduled maturities through January 22, 2030, June 20, 2030, and January 21, 2031, respectively, but may mature earlier, depending upon repayment rate of the underlying auto finance receivables. The original principal balance and weighted average fixed coupon rate for the three securitizations are as follows:

 

     

Original Principal Balance
(in thousands)

   

Weighted Average Fixed Coupon Rate

 
                   
2023-1     $ 400,200       8.68 %
2023-2       360,300       8.80 %
2024-1       250,000       9.50 %

 

19

 

 

G Fair Value Measurements

 

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value:

 

 

Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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.

 

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

 

Financial Instrument and Other Assets

 

Valuation Methodology

     

Cash, cash equivalents, and restricted cash

 

The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instruments (Level 1).

     
Repossessed inventory   The fair value approximates wholesale value (Level 1).
     

Finance receivables, net

 

The Company estimated 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 has had a third-party appraisal in October 2022 that indicates 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 (Level 2).

     

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 (Level 2).

     
Contingent Consideration   The fair value was based upon inputs from the earn-out projection (Level 2).
     

Revolving line of credit

 

The fair value approximates carrying value due to the variable interest rates charged on the borrowings, which reprice frequently (Level 2).

     

Non-recourse notes payable

 

The fair value was based upon inputs derived from prices for similar instruments at period end (Level 2).

 

20

 

The estimated fair values, and related carrying amounts, of the financial instruments included in the Company’s financial statements at January 31, 2024 and April 30, 2023 are as follows:

 

   

January 31, 2024

   

April 30, 2023

 
   

Carrying
Value

   

Fair
Value

   

Carrying
Value

   

Fair
Value

 

(In thousands)

                               
                                 

Cash and cash equivalents

  $ 4,239     $ 4,239     $ 9,796     $ 9,796  

Restricted cash

    90,350       90,350       58,238       58,238  
Inventory     18,663       18,663       16,451       16,451  

Finance receivables, net

    1,085,772       878,778       1,063,460       844,624  

Accounts payable

    25,868       25,868       27,196       27,196  
Contingent Consideration     3,193       3,193       1,943       1,943  

Revolving line of credit, net

    55,374       55,374       167,231       167,231  

Non-recourse notes payable

    684,688       692,626       471,367       470,209  

 

 

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,

 
   

2024

   

2023

   

2024

   

2023

 
                                 

Weighted average shares outstanding-basic

    6,393,080       6,370,031       6,386,997       6,370,732  

Dilutive options and restricted stock

    -       166,754       -       191,482  
                                 

Weighted average shares outstanding-diluted

    6,393,080       6,536,785       6,386,997       6,562,214  
                                 

Antidilutive securities not included:

                               

Options

    499,986       357,500       947,486       935,000  

Restricted stock

    68,893       24,565       73,926       60,924  

 

 

 

 

 

 

21

 

 

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, 2024 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 $2.4 million ($1.9 million after tax effects) and $4.2 million ($3.2 million after tax effects) for the nine months ended January 31, 2024 and 2023, 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 Option Plan

 

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 Stock Option Plan to June 10, 2025 and increased the number of shares of common stock reserved for issuance under the plan by an additional 300,000 shares to 1,800,000 shares. On August 29, 2018, August 26, 2020, August 30, 2022, and September 28, 2023, the shareholders of the Company approved amendments to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 200,000, 200,000185,000, and 385,000 shares, respectively. Currently, a total of 2,770,000 shares of common stock are reserved for issuance under the plan. 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 2024 through 2033.

 

   

Restated Option Plan

 
         

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

    100%  

Last expiration date for outstanding options

 

January 25, 2034

 

Shares available for grant at January 31, 2024

    487,514  

 

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,

 
   

2024

   

2023

 

Expected terms (years)

    3.9       5.5  

Risk-free interest rate

    4.06 %     3.59 %

Volatility

    56 %     55 %

Dividend yield

    -       -  

 

The expected term of the options is based on evaluations of historical and expected future 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 197,486 and 137,500 options granted during the nine months ended January 31, 2024 and 2023, respectively. The grant-date fair value of options granted during the nine months ended January 31, 2024 and 2023 was $5.7 million and $5.0 million, respectively. The options were granted at fair market value on the date of grant.

 

Stock option compensation expense was $1.5 million ($1.2 million after tax effects) and $3.0 million ($2.3 million after tax effects) for the nine months ended January 31, 2024 and 2023, respectively. As of January 31, 2024, the Company had approximately $2.4 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 2.4 years.

 

22

 

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)

 

2024

   

2023

 
                 

Options exercised

    30,000       23,000  

Cash received from option exercises

  $ -     $ 1,216  

Intrinsic value of options exercised

  $ 1,036     $ 1,204  

 

During the nine months ended January 31, 2024, there were 30,000 options exercised through net settlements in accordance with plan provisions, wherein the shares issued were reduced by 23,507 shares to satisfy the exercise price and applicable withholding taxes to acquire 6,493 shares. There were no options exercised through net settlements during the nine months ended January 31, 2023.

 

The aggregate intrinsic value of outstanding options at January 31, 2024 and 2023 was $2.4 million and $11.5 million, respectively. As of January 31, 2024, there were 450,900 vested and exercisable stock options outstanding with an aggregate intrinsic value of $2.4 million, a weighted average remaining contractual life of 3.0 years, and a weighted average exercise price of $103.22.

 

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 74,647 restricted shares granted during the nine months ended January 31, 2024 and 40,470 restricted shares granted during the nine months ended January 31, 2024. A total of 16,970 shares remained available for award at January 31, 2024. There were 214,057 unvested restricted shares outstanding as of January 31, 2024 with a weighted average grant date fair value of $64.37.

 

As of January 31, 2024, the Company had approximately $7.9 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 3.0 years. The Company recorded compensation cost of approximately $871,000 ($681,000 after tax effects) and $1.1 million ($862,000 after tax effects) related to the Restated Incentive Plan during the nine months ended January 31, 2024 and 2023, respectively.

 

There were no modifications to any of the Company’s outstanding share-based payment awards during fiscal 2023 or during the first nine months of fiscal 2024.

 

 

J Commitments and Contingencies

 

The Company has entered into operating leases for approximately 86% 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 $6.6 million and $6.5 million for the nine-month periods ended January 31, 2024 and 2023, respectively.

 

 

23

 

Scheduled amounts and timing of cash flows arising from operating lease payments as of January 31, 2024, discounted at the weighted average interest rate in effect as of January 31, 2024 of approximately 4.6%, are as follows:

 

Maturity of lease liabilities

       

2024 (remaining)

  $ 2,303  

2025

    9,136  

2026

    8,767  

2027

    8,274  

2028

    7,580  

Thereafter

    49,059  

Total undiscounted operating lease payments

    85,119  

Less: imputed interest

    (19,255 )

Present value of operating lease liabilities

  $ 65,864  

 

The Company has two standby letters of credit relating to insurance policies totaling $3.9 million and $2.9 million at January 31, 2024 and 2023, respectively.

 

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)

 

2024

   

2023

 

Supplemental disclosures:

               

Interest paid

  $ 42,152     $ 25,757  

Income taxes paid, net

    1,628       4,742  
                 

Non-cash transactions:

               

Inventory acquired in repossession and accident protection plan claims

    103,474       93,248  

Reduction in net receivables for deferred ancillary product revenue at time of charge-off

    28,542       13,714  

Net settlement option exercises

    1,646       -  

Right-of-use assets obtained in exchange for operating lease liabilities

    558       384  

Right-of-use assets obtained in exchange for operating lease liabilities through acquisitions

    1,822       1,729  

 

 

M Subsequent Events

 

On February 28, 2024, the Company entered into Amendment No. 6 to the Third Amended and Restated Loan and Security Agreement (the “Agreement”) with certain financial institutions and BMO Harris Bank, N.A., as lead arranger and book manager. Amendment No. 6 to the Agreement (the “Amendment”) extends the term of the Company’s revolving credit facilities to September 30, 2025 and reduces the total permitted borrowings from $600 million to $340 million. The reduction in the facility size relates primarily to the Company’s utilization of funding from recent issuances of asset-backed non-recourse notes, as well as two lenders withdrawing from the facility in connection with the Amendment. The Amendment also restores the accordion feature of the credit facilities back to $100 million as of February 28, 2024 and makes certain other adjustments and modifications to the terms of the Agreement.

 

The reduction in the total permitted borrowings will reduce the Company’s expense for unused line fees for the unused availability under the credit facilities based on the Company’s recent borrowings. However, the Amendment increases the unused line fee rate from 0.375% to 0.50% if the average daily amount of the revolver loan borrowings outstanding during the immediately preceding month is less than 50% of total revolver commitments. The unused line fee rate for average daily revolver loan borrowings outstanding during the immediately preceding month equal to or exceeding 50% of total revolver commitments remains 0.25%.

 

The Amendment removes the existing pricing tiers for determining the applicable interest rate, which were based on the Company’s consolidated leverage ratio for the preceding fiscal quarter and establishes the applicable margin for determining the interest rate at 1.0% plus a base rate for base rate revolver loans and 3.5% plus the adjusted Term SOFR for SOFR-based revolver loans. The Amendment updates the financial covenants under the Agreement to remove certain provisions that triggered compliance with a fixed charge coverage ratio upon borrowings exceeding certain thresholds and to provide for a full-time fixed charge coverage ratio covenant. The Amendment sets the required fixed charge coverage ratio, which measures the Company’s fixed charges (as defined in the Agreement) to its earnings before interest, taxes, depreciation and amortization (“EBITDA”), at 1.00 to 1.0 through August 31, 2024, 1.15 to 1.0 from September 30, 2024 through December 31, 2024, and 1.25 to 1.0 beginning January 31, 2025 and thereafter. The fixed charge coverage ratio will be calculated on a trailing 12-month basis. The Amendment also redefines EBITDA to exclude allowance provisions or reserves and include net-charge offs for Colonial. In addition, the Amendment updates the calculation of the Company’s borrowing base to allow greater vehicle eligibility by updating the definition of eligible vehicle inventory to include vehicles purchased for less than $20,000 increased from $15,000 (less than $30,000, increased from $25,000, for trucks and sport utility vehicles) and extending the period in which net charge-offs, past due receivables and repossession can exceed a set limit under the Agreement from a maximum of two months to three months.

 

Finally, the Amendment updates the definition of “permitted acquisitions” to allow the Company to make strategic business acquisitions so long as the aggregate cash consideration paid for all acquired businesses in any one fiscal year does not exceed $20.0 million and to provide more flexibility in the financial statement requirements for permitted acquisitions in which the total consideration exceeds $10.0 million.

 

24

 

 

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;

 

customer growth and engagement;
 

gross profit margin percentages;

 

gross profit per retail unit sold;

 

business acquisitions;

  inventory acquisition, reconditioning, transportation and remarketing;
 

technological investments and initiatives;

 

future revenue growth;

 

receivables growth as related to revenue growth;

 

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;

 

future supply, demand and affordability of used vehicles;

 

availability of used vehicle financing;

 

seasonality; and

 

the Company’s business, operating and growth strategies and expectations.

 

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 in this report and in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2023, as well as:

 

 

general economic conditions in the markets in which the Company operates, including but not limited to fluctuations in gas prices, grocery prices and employment levels and inflationary pressure on operating costs;

 

the availability of quality used vehicles at prices that will be affordable to our customers, including the impacts of changes in new vehicle production and sales;

 

the availability of credit facilities and access to capital through securitization financings or other sources on terms acceptable to us to support the Company’s business;

  the ability to leverage the Cox Automotive services agreement to perform reconditioning and improve vehicle quality to reduce the average vehicle cost, improve gross margins, reduce credit loss and enhance cash flow;
 

the Company’s ability to underwrite and collect its contracts effectively;

 

competition;

 

dependence on existing management;

 

ability to attract, develop, and retain qualified general managers;

 

changes in consumer finance laws or regulations, including but not limited to rules and regulations that have recently been enacted or could be enacted by federal and state governments;

 

the ability to keep pace with technological advances and changes in consumer behavior affecting our business;

 

security breaches, cyber-attacks, or fraudulent activity;

 

the ability to identify and obtain favorable locations for new or relocated dealerships at reasonable cost;

 

the ability to successfully identify, complete and integrate new acquisitions; and

 

potential business and economic disruptions and uncertainty that may result from any future public health crises and any efforts to mitigate the financial impact and health risks associated with such developments.

 

The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers and investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.

 

25

 

Overview

 

America’s Car-Mart, Inc., a Texas corporation initially formed in 1981 (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. 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”). References to the Company include the Company’s consolidated subsidiaries. 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, 2024, the Company operated 154 dealerships located primarily in small cities throughout the South-Central United States.

 

The Company has grown its revenues between approximately 4% and 32% per year over the last ten fiscal years (average 12%). Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 1.6% for the first nine months of fiscal 2024 compared to the same period of fiscal 2023, due to a 21.8% increase in interest income and a 5.6% increase in the average retail sales price, partially offset by a 6.9% decrease in retail units sold. Our dealership volume productivity averaged 30.8 sales per month for the first nine months of fiscal 2024, down from 33.1 during the same period last year.

 

The Company has been focused on improving vehicle quality by bringing lower mileage and on average newer model-year vehicles to our consumers, while balancing this with affordability. The Company believes this will aid in driving down our customers’ vehicle repair costs, reduce our service contract repair expenses, and lead to better recovery values in the event of repossession. When combined with inventory procurement efficiencies, these changes are expected to drive improved customer experience and contribute to better gross margins.

 

In February, the Company entered into a strategic partnership with a leading automotive services and technology provider, to improve the efficiencies within the Company’s inventory supply chain process. This partnership will allow the Company to utilize reconditioning and auction facilities, which the Company expects will improve the Company’s vehicle quality.

 

Over the last five fiscal years, the Company’s provision for credit losses as a percentage of sales averaged 23.74%, with a pre-pandemic rate of 23.71% in fiscal 2019. During fiscal 2023, credit losses exceeded pre-pandemic levels, partially due to the inflationary pressure on customers and increasing interest rates from federal monetary policy. For the first nine months of fiscal 2024, the provision for credit losses as a percentage of sales increased to 37.6%, primarily due to the $28 million increase in provision for credit losses during the three months ended October 31, 2023, primarily resulting from increased net charge-offs as well as an increase to the allowance percentage used to reserve for future losses. The allowance for credit losses as a percentage of finance receivables, net of deferred revenue and pending accident protection plan (“APP”) claims, increased from 23.91% at April 30, 2023 to 26.04% at October 31, 2023. Based on the Company’s current analysis of credit losses, the allowance for credit losses at January 31, 2024 was 25.74% of finance receivables, net of deferred revenue and pending APP claims.

 

The Company’s credit losses and charge-offs are impacted by market and economic factors, including macro-economic conditions such as inflation in the price of gasoline, groceries and other staple items, cost of car insurance, and overall unemployment levels, as well as the personal income levels of the Company’s customers. Historically, credit losses, on a percentage basis, also tend to be higher at new and developing dealerships than at longer tenure locations with experienced management. Generally, this is because the management at new and developing dealerships tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned. Normally more mature dealerships have more repeat customers and, on average, repeat customers are a better credit risk than non-repeat customers.

 

The Company continuously looks for ways to operate more efficiently, improve its business practices and adjust underwriting and collection procedures. The Company has a proprietary credit scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. Additionally, the Company has placed significant focus on the collection area. The Company’s head of operations oversees the collections area and provides timely oversight and additional accountability on a consistent basis. The Company believes that the proper execution of its business practices is the single most important determinant of its long-term credit loss experience.

 

The Company’s gross profit dollars per retail unit sold increased by $526, or 8.3%, during the first nine months of fiscal 2024 compared to the first nine months of fiscal 2023, and gross margin as a percentage of sales for the first nine months of fiscal 2024 increased to 34.4% of sales from 33.5% in the prior year period. The increase in gross profit dollars per retail unit sold was primarily related to an increase in the average retail sales price of the vehicles sold during the respective periods. The Company’s initiatives around inventory life cycle efficiencies and a decrease in wholesale losses also contributed to the increase in gross profit dollars. The Company’s gross margin is based upon the cost of the vehicle purchased, with higher-priced vehicles typically having higher gross margin dollars but lower gross margin percentages. Gross margin is also affected by the percentage of wholesale sales to retail sales, which relates, for the most part, to repossessed vehicles sold at or near cost. The Company plans to continue to focus on managing gross margin dollars in the near term, as demonstrated by the increases during fiscal 2024 as well as continuing to focus on improving wholesale results, cost controls, and operational improvement around the acquisition and disposal of vehicles.

 

26

 

The Company consistently focuses on collections. Each dealership is responsible for its own collections with supervisory involvement and oversight from the corporate office. Total collections of principal, interest, and late fees for the first nine months of fiscal 2024 increased by $49.3 million, or 10.9%, over the prior year period. Principal collections, as a percentage of average finance receivables, however, decreased to 22.7%, compared to 25.4% for the same period in prior year, reflecting an increase in the weighted average contract term compared to the prior year period.

 

Hiring, training and retaining qualified associates is critical to the Company’s success. The rate at which the Company adds new dealerships and is able to implement operating initiatives is limited by the number of trained managers and support personnel the Company has at its disposal. Excessive turnover, particularly at the dealership manager level, could impact the Company’s ability to add new dealerships and to meet operational initiatives. The landscape for hiring remains very competitive. The Company has continued to add resources to recruit, train, and develop personnel, especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development of its workforce.

 

The Company continues to prioritize investments to improve its products and services and operate more efficiently over time. One of the Company’s largest recent investments has been improving its processes and technology for credit applications and decision-making through a new loan origination system (“LOS”). This online loan application system allows the consumer to apply for credit faster in anticipation of their vehicle purchase, authorize a soft credit pull during the application process, and receive a response via text message on the status of their application, as well as have access to centralized appointment-setting.  At the end of the third quarter, the Company had implemented the LOS in over 70% of its 154 dealerships and in nearly all of its dealerships at the end of February 2024, with centralized decision-making on approvals of applications submitted via the online platform. Through the LOS, the Company has tightened its credit approval standards, primarily by requiring a higher down payment and shorter terms from certain customers. The Company expects the full implementation of this system to improve the customer experience across the Company’s dealerships, provide enhanced data and visibility into credit decisions, and help reduce credit losses and repossessions.

 

 

 

 

 

 

27

 

 

Three months ended January 31, 2024 vs. Three months ended January 31, 2023

 

Consolidated Operations

(Operating Statement Dollars in Thousands)

 

                   

% Change

   

As a % of Sales

 
   

Three Months Ended
January 31,

   

2024
vs.

   

Three Months Ended
January 31,

 
   

2024

   

2023

   

2023

   

2024

   

2023

 

Revenues:

                                       

Sales

  $ 240,401     $ 274,276       (12.4 )%     100.0 %     100.0 %

Interest income

    59,213       51,063       16.0       24.6       18.6  

Total

    299,614       325,339       (7.9 )     124.6       118.6  
                                         

Costs and expenses:

                                       

Cost of sales, excluding depreciation shown below

    158,250       181,823       (13.0 )     65.8       66.3  

Selling, general and administrative

    43,562       44,737       (2.6 )     18.1       16.3  

Provision for credit losses

    89,582       85,650       4.6       37.3       31.2  

Interest expense

    16,731       9,765       71.3       7.0       3.6  

Depreciation and amortization

    1,712       1,537       11.4       0.7       0.6  

Loss on disposal of property and equipment

    119       68       75.0       -       -  

Total

    309,956       323,580       (4.2 )     128.9       118.0  
                                         

Pretax (loss) income

  $ (10,342 )   $ 1,759               (4.3 )%     0.6 %
                                         

Operating Data:

                                       

Retail units sold

    11,664       14,508                          

Average dealerships in operation

    154       155                          

Average units sold per dealership per month

    25.2       31.2                          

Average retail sales price

  $ 19,455     $ 18,091                          

Gross profit per retail unit sold

  $ 7,043     $ 6,373                          

Same store revenue growth

    (9.3 )%     12.3 %                        
                                         

Period End Data:

                                       

Dealerships open

    154       157                          

Accounts over 30 days past due

    3.3 %     3.7 %                        

 

Revenues decreased by approximately $25.7 million, or 7.9%, for the three months ended January 31, 2024 as compared to the same period in the prior fiscal year. The decrease resulted from a decline in revenue at dealerships that operated a full three months in both the current and prior year quarter ($30.0 million decrease) and by dealerships that were closed during the prior year quarter ($2.4 million decrease); partially offset by revenue growth from dealerships opened or acquired after the prior year quarter ($6.7 million). The decline in revenue was related to a 19.6% decrease in retail units sold, largely reflecting the challenging macroeconomic environment for our customers, partially offset by a 16.0% increase in interest income and a 7.5% increase in the average retail sales price. Interest income increased approximately $8.2 million for the three months ended January 31, 2024, as compared to the same period in the prior fiscal year, due to the $162.1 million increase in average finance receivables.

 

Cost of sales, as a percentage of sales, decreased to 65.8% for the three months ended January 31, 2024 compared to 66.3% for the same period of the prior fiscal year, resulting in a gross margin as a percentage of sales of 34.2% for the current year period compared to 33.7% for the prior year period. The improvement in gross margin resulted from better operational execution in pricing discipline and our continued focus on inventory efficiencies in procurement, remarketing, and repairs as well as an improvement in APP claims.

 

Gross margin as a percentage of sales is significantly impacted by the average retail sales price of the vehicles the Company sells, which is largely a function of the Company’s purchase cost. The average retail sales price for the third quarter of fiscal 2024 was $19,455, a $1,364 increase over the prior year quarter. The increase in the average retail selling price was equally attributable to the vehicle price as well as increases in the ancillary products. As purchase costs increase, the margin between the purchase cost and the sales price of the vehicles the Company sells generally narrows on a percentage basis because the Company must offer affordable prices to its customers. The Company has implemented initiatives around vehicle reconditioning efforts and scaling that are expected to provide a better volume of affordable units.

 

28

 

Selling, general and administrative expenses, as a percentage of sales, were 18.1% for the three months ended January 31, 2024, an increase of 1.8% from the same period of the prior fiscal year. Selling, general and administrative expenses are, for the most part, more fixed in nature. In dollar terms, overall selling, general and administrative expenses decreased approximately $1.3 million in the third quarter of fiscal 2024 compared to the same period of the prior fiscal year. The decrease resulted from cost cutting measures implemented in the second quarter, combined with a decrease in commissions expense which was partially offset by increased collections costs due primarily to a higher frequency of repossessions.

 

Provision for credit losses as a percentage of sales was 37.3% for the three months ended January 31, 2024 compared to 31.2% for the prior year period.  The provision for credit losses as a percentage of sales was higher during the current year period primarily due to the growth in the balance of finance receivables, net of deferred revenue of $114.9 million, as well as being amplified with a decrease in sales of $33.9 million compared to the prior year period. An increase in net charge-offs also contributed to the higher provision. Net charge-offs as a percentage of average finance receivables increased to 6.8% for the three months ended January 31, 2024 compared to the prior year period of 5.9%. The Company experienced an increase in both the frequency and severity of losses. Severity was driven by longer contract terms and lower recovery values.

 

Interest expense as a percentage of sales increased to 7.0% for the three months ended January 31, 2024, compared to 3.6% for the prior year period. In dollar terms, interest expense increased $7.0 million due to increasing interest rates and an increase in the average borrowings of approximately $145.2 million during the three-month period ended January 31, 2024.

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

Nine months ended January 31, 2024 vs. Nine months ended January 31, 2023

 

Consolidated Operations

(Operating Statement Dollars in Thousands)

 

                   

% Change

   

As a % of Sales

 
   

Nine Months Ended
January 31,

   

2024
vs.

   

Nine Months Ended
January 31,

 
   

2024

   

2023

   

2023

   

2024

   

2023

 
                                         

Revenues:

                                       

Sales

  $ 854,170     $ 869,775       (1.8 )%     100.0 %     100.0 %

Interest income

    175,051       143,690       21.8       20.5       16.5  

Total

    1,029,221       1,013,465       1.6       120.5       116.5  
                                         

Costs and expenses:

                                       

Cost of sales, excluding depreciation shown below

    560,692       578,547       (3.1 )     65.6       66.5  

Selling, general and administrative

    134,895       130,881       3.1       15.8       15.0  

Provision for credit losses

    321,300       250,719       28.2       37.6       28.8  

Interest expense

    47,587       25,460       86.9       5.6       2.9  

Depreciation and amortization

    5,101       3,997       27.6       0.6       0.5  

Loss on disposal of property and equipment

    359       320       12.2       -       -  

Total

    1,069,934       989,924       8.1       125.3       113.8  
                                         

Pretax (loss) income

  $ (40,713 )   $ 23,541               (4.8 )%     2.7 %
                                         

Operating Data:

                                       

Retail units sold

    42,738       45,929                          

Average stores in operation

    154       154                          

Average units sold per store per month

    30.8       33.1                          

Average retail sales price

  $ 19,062     $ 18,059                          

Gross profit per retail unit

  $ 6,867     $ 6,341                          

Same store revenue change

    1.0 %     18.3 %                        
                                         

Period End Data:

                                       

Stores open

    154       157                          

Accounts over 30 days past due

    3.3 %     3.7 %                        

 

Revenues increased by approximately $15.8 million, or 1.6%, for the nine months ended January 31, 2024 as compared to the same period in the prior fiscal year. The increase resulted from revenue growth at dealerships that operated a full nine months in both the current and prior year period ($9.8 million) and revenue growth from dealerships opened or acquired during or after the prior year quarter ($11.7 million), partially offset by dealerships closed after the prior year quarter ($5.7 million). Revenue growth was primarily related to a 21.8% increase in interest income and a 5.6% increase in the average retail sales price, partially offset by a 6.9% decrease in retail units sold. Interest income increased approximately $31.4 million for the nine months ended January 31, 2024, as compared to the same period in the prior fiscal year, due to the $220.2 million increase in average finance receivables.

 

Cost of sales, as a percentage of sales, decreased to 65.6% for the nine months ended January 31, 2024 compared to 66.5% for the same period of the prior fiscal year, resulting in a gross margin as a percentage of sales of 34.4% for the current year period compared to 33.5% for the prior year period. On a dollar basis, our gross margin per retail unit sold increased by $526 for the nine months ended January 31, 2024 compared to the same period in the prior year. The average retail sales price for the nine months ended January 31, 2024 was $19,062, an increase of $1,003 or 5.6% over the prior year period. The primary driver of the decrease in cost of sales was a decrease in wholesale losses and our continued focus on inventory efficiencies in procurement, remarketing, and repairs.

 

30

 

Selling, general and administrative expenses, as a percentage of sales, were 15.8% for the nine months ended January 31, 2024, an increase of 0.8% from the same period of the prior fiscal year. In dollar terms, overall selling, general and administrative expenses increased approximately $4.0 million in the nine months ended January 31, 2024, compared to the same period of the prior fiscal year. The increase primarily relates to the Company’s  investments in several areas including senior management, inventory procurement and management, customer experience and digital efforts. Increased collections costs due primarily to the higher frequency of repossessions, the addition of a new dealership through acquisition since last year and the continuing impact of general inflation contributed to the remaining increase. The Company continues to focus on controlling costs, while at the same time ensuring a solid infrastructure to support a growing customer base with a high level of support for its customers.

 

Provision for credit losses as a percentage of sales was 37.6% for the nine months ended January 31, 2024 compared to 28.8% for the nine months ended January 31, 2023. Net charge-offs as a percentage of average finance receivables were 20.0% for the nine months ended January 31, 2023 and 16.9% for the prior year period. The frequency of losses accounted for over 60% of the credit loss increase. Severity was also higher due to the longer terms and lower recovery values. Rapid vehicle depreciation exhibited last year caused some of the loans originated in calendar years 2021 and 2022 to experience higher frequency and severity of loss. The majority of these loan pools have been paid off at this point in their life cycle. The Company has increased the allowance for credit losses rate from 23.91% at April 30, 2023 to 25.74% at January 31, 2024.

 

Interest expense as a percentage of sales increased to 5.6% for the nine months ended January 31, 2024, compared to 2.9% for the prior year period. In dollar terms, interest expense increased $22.1 million due to increasing interest rates and an increase in the average borrowings of approximately $178.1 million during the nine-month period ended January 31, 2024. Approximately 65% of the increase in interest expense was related to the increase in rates over the same period of the prior fiscal year.

 

Financial Condition

 

The following table sets forth the major balance sheet accounts of the Company as of the dates specified (in thousands):

 

   

January 31, 2024

   

April 30, 2023

 

Assets:

               

Finance receivables, net

  $ 1,085,772     $ 1,063,460  

Inventory

    109,313       109,290  

Income tax receivable, net

    814       9,259  

Property and equipment, net

    60,893       61,682  
                 

Liabilities:

               

Accounts payable and accrued liabilities

    52,853       55,108  

Deferred revenue

    118,413       120,469  

Deferred tax liabilities, net

    20,348       39,315  

Non-recourse notes payable

    684,688       471,367  

Revolving line of credit

    55,374       167,231  

 

Finance receivables, net, have increased 2.1% and 7.2% since April 30, 2023 and January 31, 2023, respectively, while revenues have grown 1.6% compared to the prior year period. This is consistent with the historical pattern of the growth in finance receivables slightly exceeding overall revenue growth on an annual basis due to overall term length increases. The growth rate of finance receivables, net, has started to normalize (only 50 basis points higher than overall revenue growth), and management expects it to continue to normalize as the economic environment improves. 

 

During the first nine months of fiscal 2024, inventory increased by $23,000 compared to inventory at April 30, 2023. The stabilization of inventory reflects the Company’s initiatives around inventory life cycle efficiencies from procurement, reconditioning, wholesale efforts and repairs after the sale. Annualized inventory turns remained relatively consistent for the current year quarter at 5.8 versus the prior year’s third quarter at 5.9.

 

31

 

Property and equipment, net, decreased by $789,000 at January 31, 2024 as compared to property and equipment, net, at April 30, 2023. The Company incurred $4.9 million in expenditures during the first nine months of fiscal 2024 primarily related to remodeling or relocating existing locations in order to support growth. The Company incurred $5.1 million in depreciation expense during the first nine months of fiscal 2024.

 

Accounts payable and accrued liabilities decreased by $2.3 million during the first nine months of fiscal 2024 as compared to accounts payable and accrued liabilities at April 30, 2023, related primarily to the decreased selling, general and administrative expenditures in the most recent quarter.

 

Income taxes receivable, net, was $814,000 at January 31, 2024 compared to income taxes receivable, net, of $9.3 million at April 30, 2023, primarily due applying overpayments of taxes towards current year tax liabilities and refunds of overpaid taxes on prior year returns.

 

Deferred revenue decreased $2.1 million at January 31, 2024 as compared to April 30, 2023, primarily resulting from lower ancillary product sales over the recent months.

 

Deferred income tax liabilities, net, decreased approximately $19 million at January 31, 2024 as compared to April 30, 2023, due primarily to a $13.5 million current year net operating loss.

 

The Company has completed two asset-backed securitization offerings of non-recourse notes during fiscal 2024 in January 2024 and in July 2023 in aggregate principal amounts of $360.3 million and $250.0 million with weighted average fixed coupon rates of 8.8% and 9.5% per annum and scheduled maturities through June 20, 2030 and January 21, 2031, respectively. The net proceeds of these issuances were used to pay outstanding debt under the Company’s revolving credit facilities, provide additional operating liquidity, and make the initial deposits into collection and reserve accounts for the benefit of noteholders. See Note F for further details on these non-recourse notes payable and the revolving line of credit.

 

Borrowings on the Company’s revolving credit facilities fluctuate primarily based upon a number of factors including (i) net income, (ii) finance receivables changes, (iii) funds available from asset-backed securitization offerings, (iv) income taxes, (v) capital expenditures, and (vi) common stock repurchases. Historically, income from operations, as well as borrowings on the revolving credit facilities, have funded the Company’s finance receivables growth, capital asset purchases and common stock repurchases. The Company also utilizes the securitization market to increase its borrowing capacities, with issuances of asset-backed non-recourse notes which may cause the revolving line of credit to fluctuate between securitization issuances. The overall increase in total borrowings during the third quarter of fiscal 2024 was made to support an increase in finance receivables, with longer terms, and a growing customer base. This was partially offset by the payoff in December 2023 of the April 2022 asset-backed notes. In the first nine months of fiscal 2024, the Company funded finance receivables growth of $55.5 million, inventory growth of $23,000, and capital expenditures of $4.9 million with income from operations and a $75.0 million increase in total debt, net of cash.

 

32

 

 

Liquidity and Capital Resources

 

The following table sets forth certain summarized historical information with respect to the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):

 

   

Nine Months Ended
January 31,

 
   

2024

   

2023

 

Operating activities:

               

Net (loss) income

  $ (31,819 )   $ 18,344  

Provision for credit losses

    321,300       250,719  

Losses on claims for accident protection plan

    24,480       17,717  

Depreciation and amortization

    5,101       3,997  

Stock based compensation

    2,882       4,154  

Finance receivable originations

    (794,477 )     (841,445 )

Finance receivable collections

    324,703       308,671  

Inventory

    103,451       76,933  

Accounts payable and accrued liabilities

    (5,824 )     6,760  

Deferred accident protection plan revenue

    (1,926 )     13,987  

Deferred service contract revenue

    (130 )     17,565  

Income taxes, net

    8,232       (6,632 )

Deferred income taxes

    (18,967 )     6,884  

Accrued interest on finance receivables

    (1,255 )     (1,323 )

Other

    1,077       (287 )

Total

    (63,172 )     (123,956 )
                 

Investing activities:

               

Purchase of property and equipment

    (4,864 )     (19,002 )

Other

    (4,465 )     (5,415 )

Total

    (9,329 )     (24,417 )
                 

Financing activities:

               

Revolving credit facilities, net

    (112,522 )     (17,599 )

Non-recourse notes payable, net

    215,890       190,849  

Change in cash overdrafts

    2,183       3,795  

Debt issuance costs

    (5,892 )     (2,001 )

Purchase of common stock

    (336 )     (5,196 )

Dividend payments

    (30 )     (30 )

Exercise of stock options and issuance of common stock

    (237 )     1,438  

Total

    99,056       171,256  
                 

Increase in cash, cash equivalents, and restricted cash

  $ 26,555     $ 22,883  

 

The primary drivers of cash flows include (i) top line sales, (ii) interest income on finance receivables, (iii) gross margin percentages on vehicle sales, and (iv) credit losses, a significant portion of which relates to the collection of principal on finance receivables. Historically, most or all of the cash generated from operations has been used to fund finance receivables growth, capital expenditures, and common stock repurchases. To the extent finance receivables grow, capital expenditures and common stock repurchases exceed income from operations, we have historically increased our borrowings under our revolving credit facilities and more recently through the securitization market.

 

Cash flows used in operating activities for the nine months ended January 31, 2024 compared to the same period in the prior fiscal year decreased primarily as a result of an increase in the provision for credit losses, a decrease in finance receivable originations and an increase in inventory acquired in repossessions, partially offset by a decrease in deferred income taxes and a net loss. Finance receivables, net, increased by $22.3 million from April 30, 2023 to January 31, 2024.

 

33

 

The purchase price the Company pays for a vehicle has a significant effect on liquidity and capital resources. Because the Company bases its selling price on the purchase cost for the vehicle, increases in purchase costs result in increased selling prices. As the selling price increases, it generally becomes more difficult to keep the gross margin percentage and contract term in line with historical results because the Company’s customers have limited incomes and their vehicle payments must remain affordable within their individual budgets. Several external factors can negatively affect the purchase cost of vehicles. Decreases in the overall volume of new vehicle sales, particularly domestic brands, lead to decreased supply in the used vehicle market. Also, constrictions in consumer credit, as well as general economic conditions, can increase overall demand for the types of vehicles the Company purchases for resale as used vehicles become more attractive than new vehicles in times of economic instability. A negative shift in used vehicle supply, combined with strong demand, results in increased used vehicle prices and thus higher purchase costs for the Company.

 

Sustained macro-economic pressures affecting our customers have helped keep demand high in recent years for the types of vehicles we purchase. This strong demand, coupled with modest levels of new vehicle sales in recent years, have led to a generally ongoing tight supply of used vehicles available to the Company in both quality and quantity. Wholesale prices have begun to soften but remain high by historical standards. The Company expects the tight used vehicle supply and strong demand for the types of vehicles we purchase to continue to keep purchase costs and resulting sales prices elevated for the short-term but anticipates that continuing strong wage increases for our customers will cause affordability to improve gradually over the next couple of years.

 

The Company has devoted significant efforts to improving its purchasing processes to ensure adequate supply at appropriate prices, including expanding its purchasing territories to larger cities in close proximity to its dealerships and forming relationships with reconditioning partners to reduce purchasing costs. The Company has also increased the level of accountability for its purchasing agents including updates to sourcing and pricing guidelines. The Company continues to build relationships with national vendors that can supply a large quantity of high-quality vehicles.

 

The Company’s liquidity is also impacted by our credit losses. Macro-economic factors such as unemployment levels and general inflation can significantly affect our collection results and ultimately credit losses. The recent inflationary environment, with rising costs of non-discretionary items, such as groceries and gasoline, has negatively impacted our customers’ ability to make payments on their vehicles and resulted in increased charge-offs in recent periods and may continue to impact customers’ ability to make their vehicle payments in the near term. The Company has made improvements to its business processes within the last few years to strengthen controls and provide stronger infrastructure to support its collections efforts. The Company continues to strive to reduce credit losses in spite of the current economic challenges and continued competitive pressures by improving deal structures. Management continues to focus on improved execution at the dealership level, specifically as related to working individually with customers concerning collection issues.

 

The Company has generally leased the majority of the properties where its dealerships are located. As of January 31, 2024, the Company leased approximately 86% of its dealership properties. The Company expects to continue to lease the majority of the properties where its dealerships are located.

 

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 shares of its common stock so long as either: (a) the aggregate amount of 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 remains 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.

 

At January 31, 2024, the Company had approximately $4.2 million of cash on hand and approximately an additional $125.6 million of availability under its revolving credit facilities (see Note F to the Condensed Consolidated Financial Statements).

 

34

 

On a short-term basis, the Company’s principal sources of liquidity include income from operations and borrowings under its revolving credit facilities. On a long-term basis, the Company expects its principal sources of liquidity to consist of income from operations, borrowings under revolving credit facilities or fixed interest term loans and proceeds from the issuance of non-recourse asset-backed notes. The Company’s revolving credit facilities mature in September 2025 and the Company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature. The Company continues to access the securitization market, with its most recent issuance in January 2024. The Company expects that it will continue to access this market in diversifying and growing the business. Furthermore, while the Company has no other specific plans to issue further debt or equity securities, the Company believes, if necessary, it could raise additional capital through the issuance of such securities.

 

The Company expects to use cash from operations and borrowings to (i) grow its finance receivables portfolio, (ii) purchase fixed assets of approximately $10 million in the next 12 months as we complete facility updates and general fixed asset requirements, (iii) fund dealership acquisitions as opportunities arise on terms acceptable to the Company, (iv) repurchase shares of common stock when favorable conditions exist and (v) reduce debt to the extent excess cash is available.

 

The Company believes it will have adequate liquidity to continue to grow its revenues and to satisfy its capital needs for the foreseeable future.

 

Off-Balance Sheet Arrangements

 

The Company has two standby letters of credit relating to insurance policies totaling $3.9 million at January 31, 2024.

 

Other than its letters of credit, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Related Finance Company Contingency

 

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 by approximately 250 basis points. 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.

 

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, 2024.

 

 

 

 

 

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Critical Accounting Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions in determining 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 reporting period. Actual results could differ from the Company’s estimates. The Company believes the most significant estimate made in the preparation of the accompanying Condensed Consolidated Financial Statements relates to the determination of its allowance for credit losses, which is discussed below. The Company’s accounting policies are discussed in Note B to the Condensed Consolidated Financial Statements.

 

During the second quarter of the 2024 fiscal year, the Company implemented third-party software to assist in calculating the Company’s allowance for credit losses. After implementation, the Company’s quantitative portion of the allowance for credit losses is measured using an undiscounted cash flow (“CF”) model, whereby the undiscounted cash flows are adjusted by a prepayment rate and then the loss rate is applied and compared to the amortized cost basis of finance receivables to reflect management’s estimate of expected credit losses. The CF model is based on relevant installment sale contract level characteristics of the Company’s finance receivables, such as contract terms and interest rates, as well as the following assumptions:

 

 

a historical loss period, which represents a full economic credit cycle utilizing loss experience, to calculate the historical loss rate; and

 

 

expected prepayment rates based on our historical experience.

 

The Company’s allowance for credit losses also considers qualitative factors not captured within the CF modeled results such as changes in underwriting and collection practices, economic trends, changes in volume and terms of installment sales contracts, credit quality trends, installment sale contract review results, collateral trends, and concentrations of credit. The Company’s qualitative factors incorporate a macroeconomic variable forecast of inflation over a reasonable and supportable forecast period of one year that affects its customers’ non-discretionary income and ability to repay. The reasonable and supportable forecast period of one year is based on management’s current review of the reliability of extended forecasts and is applied as an adjustment to the historical loss rate.

 

The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses expected to be incurred on the portfolio at the measurement date in the collection of its finance receivables currently outstanding. At January 31, 2024, the weighted average contract term was 47.6 months with 35.8 months remaining. The allowance for credit losses at January 31, 2024 of $335.1 million, was 25.74% of the principal balance in finance receivables of $1.4 billion, less unearned accident protection plan revenue of $51.1 million and unearned service contract revenue of $67.3 million, less APP claims of $9.1 million.

 

The allowance for credit losses is a critical accounting estimate for the following reasons:

 

 

estimates relating to the allowance for credit losses require management to project future loan performance, including cash flows, prepayments, and charge-offs;

 

the allowance for credit losses is influenced by factors outside of management’s control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions including, but not limited to, inflation; and

 

judgment is required to determine whether the model used to generate the allowance for credit losses produces results that appropriately reflect a current estimate of lifetime expected credit losses.

 

Because management’s estimate of the allowance for credit losses involves a high degree of judgment, such as the subjectivity of the assumptions used, there is uncertainty inherent in such estimates. Changes in these estimates could significantly impact the allowance and provision for credit losses.

 

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.

 

Adopted in Current Period

 

In March 2022, the FASB issued an accounting pronouncement (ASU 2022-02) related to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments in this update eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. In regard to loan modifications, management notes that the Company primarily modifies a customer’s installment sale contract to allow for insignificant payment delays. This type of modification is generally done to account for payday changes for the customer and minor vehicle repairs.

 

Seasonality

 

Historically, the Company’s third fiscal quarter (November through January) has been the slowest period for vehicle sales. Conversely, the Company’s first and fourth fiscal quarters (May through July and February through April) have historically been the busiest times for vehicle sales. Therefore, the Company generally realizes a higher proportion of its revenue and operating profit during the first and fourth fiscal quarters. The Company expects this pattern to continue in future years.

 

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If conditions arise that impair vehicle sales during the first or fourth fiscal quarters, the adverse effect on the Company’s revenues and operating results for the year could be disproportionately large.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The Company is exposed to market risk on its financial instruments from changes in interest rates. In particular, the Company has historically had exposure to changes in the federal primary credit rate and has exposure to changes in the prime interest rate of its lender. The Company does not use financial instruments for trading purposes but has in the past entered into an interest rate swap agreement to manage interest rate risk.

 

Interest rate risk.  The Company’s exposure to changes in interest rates relates primarily to its debt obligations. The Company is exposed to changes in interest rates as a result of its revolving credit facilities, and the interest rates charged to the Company under its credit facilities fluctuate based on its primary lender’s base rate of interest. The Company had an outstanding balance on its revolving line of credit of $55.4 million at January 31, 2024. The impact of a 1% increase in interest rates on this amount of debt would result in increased annual interest expense of approximately $554,000 and a corresponding decrease in net income before income tax.

 

The Company’s earnings are impacted by its net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest-bearing notes payable. During the third quarter, the Company increased the interest rate by 0.25%. The Company’s finance receivables now carry a fixed annual interest rate of 18.25% (up from 18.0%) for all states, except Arkansas at 16.75% (which is subject to a usury cap of 17.0%), Illinois (remains at 19.5% – 21.5%), and Smart Auto dealerships in Tennessee (which originate at up to 23.0%), based on the Company’s contract interest rate as of the contract origination date, while its revolving credit facilities contain variable interest rates that fluctuate with market interest rates.

 

Item 4. Controls and Procedures

 

 

a)

Evaluation of Disclosure Controls and Procedures

 

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of  January 31, 2024. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of January 31, 2024. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure.

 

 

b)

Changes of Disclosure Controls and Procedures

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

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Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In the ordinary course of business, the Company has become a defendant in various types of legal proceedings. While the outcome of these proceedings cannot be predicted with certainty, the Company does not expect the final outcome of any of these proceedings, individually or in the aggregate, to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

 

There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A to Part I of the Company’s Form 10-K for the fiscal year ended April 30, 2023.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company is authorized to repurchase shares of its common stock under its common stock repurchase program. On December 14, 2020, the Board of Directors authorized the repurchase of up to an additional one million shares along with the balance remaining under its previous authorization approved and announced on November 16, 2017. No shares were repurchased under the Company’s stock repurchase program during the third quarter of fiscal 2024.

 

The Company has not historically issued any dividends and does not expect to do so in the foreseeable future. Payment of cash dividends in the future will be determined by the Company’s Board of Directors and will depend upon, among other things, the Company’s future earnings, operations, capital requirements and surplus, general financial condition, contractual restrictions that may exist, and such other factors as the Board of Directors may deem relevant. The Company is also limited in its ability to pay dividends or make other distributions to its shareholders without the consent of its lender. Please see “Liquidity and Capital Resources” under Item 2 of Part I for more information regarding this limitation.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

 

Item 5. Other Information

 

During the three months ended January 31, 2024, none of the Company’s directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

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Item 6. Exhibits

 

Exhibit 
Number
  Description of Exhibit
     

3.1

 

Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibits 4.1-4.8 to the Company's Registration Statement on Form S-8 filed with the SEC on November 16, 2005 (File No. 333-129727)).

     

3.2

 

Amended and Restated Bylaws of the Company dated December 4, 2007. (Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2007 filed with the SEC on December 7, 2007).

     

3.3

 

Amendment No. 1 to the Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed with the SEC on February 19, 2014).

     

4.1

 

Indenture, dated January 31, 2024, by and between ACM Auto Trust 2024-1 and Wilmington Trust, National Association, as Indenture Trustee (Incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed with the SEC on February 2, 2024).

     

10.1

 

Amended and Restated Employment Agreement, dated December 19, 2023, between America’s Car Mart, Inc., an Arkansas corporation, and Douglas Campbell (Incorporated by reference to Exhibit 10.1 to the Company Report on Form 8-K/A filed with the SEC on December 26, 2023).

     

10.2

 

Amendment No. 1, dated January 24, 2024, to the Amended and Restated Employment Agreement, dated December 19, 2023, between America’s Car Mart, Inc., an Arkansas corporation, and Douglas Campbell (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed with SEC on January 30, 2024).

     
10.3   Retirement and Transition Agreement, dated December 21, 2023, between America’s Car Mart, Inc., an Arkansas corporation, and Jeffrey A. Williams (Incorporated by reference to Exhibit to 10.2 to the Company Report on Form 8-K/A filed with the SEC on December 26, 2023).
     
10.4   Purchase Agreement, dated January 31, 2024, by and between Colonial Auto Finance, Inc. and ACM Funding, LLC (Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed with the SEC on February 2, 2024).
     

10.5

 

Sale and Servicing Agreement, dated January 31, 2024, by and between ACM Auto Trust 2024-1, ACM Funding, LLC, America’s Car Mart, Inc. and Wilmington Trust, National Association, as Indenture Trustee, Backup Servicer, Calculation Agent, and Paying Agent (Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed with SEC on February 2, 2024).

     

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)

     

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.

     

32.1

 

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

101.INS

 

Inline XBRL Instance Document

     

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

     

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

     

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

     

101.LAB

 

Inline XBRL Taxonomy Extension Labels Linkbase Document

     

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

     

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)

 

 

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SIGNATURES

 

 

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

 

 

  Americas Car-Mart, Inc.
   
   
  By: /s/ Douglas Campbell
    Douglas Campbell
    President and Chief Executive Officer
     
     
     
  By: /s/ Vickie D. Judy
    Vickie D. Judy
    Chief Financial Officer
    (Principal Financial Officer)

 

 

Dated: March 11, 2024

 

 

 

 

 

 

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