Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C.  20549 
FORM 10-Q
(Mark One) 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2018
 or
o
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 001-34956
CONN'S, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
06-1672840
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
2445 Technology Forest Blvd., Suite 800, The Woodlands, TX
 
77381
(Address of principal executive offices)
 
(Zip Code)
 Registrant's telephone number, including area code:  (936) 230-5899
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) 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 ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
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
o
 
Accelerated filer
ý
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
o
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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 28, 2018
Class
 
Outstanding
Common stock, $0.01 par value per share
 
31,685,279


Table of Contents

CONN'S, INC. AND SUBSIDIARIES

FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 2018

TABLE OF CONTENTS
 
 
 
 
Page No.
PART I.
 
FINANCIAL INFORMATION
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 
This Quarterly Report on Form 10-Q includes our trademarks such as “Conn's,” “Conn's HomePlus,” “YES Money,” “YE$ Money,” and our logos, which are protected under applicable intellectual property laws and are the property of Conn's, Inc. This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Quarterly Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.
References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn's, Inc. and, as apparent from the context, its consolidated bankruptcy-remote variable-interest entities (“VIEs”), and its wholly-owned subsidiaries.



Table of Contents

PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and dollars in thousands, except per share amounts)
 
July 31,
2018

January 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,435


$
9,286

Restricted cash (includes VIE balance of $50,107 and $85,322, respectively)
51,657


86,872

Customer accounts receivable, net of allowances (includes VIE balance of $270,627 and $459,708, respectively)
622,009


636,825

Other accounts receivable
87,797


71,186

Inventories
195,728


211,894

Income taxes receivable
704


32,362

Prepaid expenses and other current assets
13,831


31,592

Total current assets
976,161


1,080,017

Long-term portion of customer accounts receivable, net of allowances (includes VIE balance of $220,014 and $455,002, respectively)
647,494


650,608

Property and equipment, net
142,631


143,152

Deferred income taxes
23,086


21,565

Other assets
7,129


5,457

Total assets
$
1,796,501


$
1,900,799

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Current maturities of capital lease obligations
$
1,149

 
$
907

Accounts payable
85,001

 
71,617

Accrued compensation and related expenses
17,365

 
21,366

Accrued expenses
72,556

 
44,807

Income taxes payable
3,149

 
2,939

Deferred revenues and other credits
22,763

 
22,475

Total current liabilities
201,983


164,111

Deferred rent
85,255


87,003

Long-term debt and capital lease obligations (includes VIE balance of $429,363 and $787,979, respectively)
916,081


1,090,105

Other long-term liabilities
23,535


24,512

Total liabilities
1,226,854


1,365,731

Commitments and contingencies


 


Stockholders' equity:
 

 
 

Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding)

 

Common stock ($0.01 par value, 100,000,000 shares authorized; 31,694,414 and 31,435,775 shares issued, respectively)
317

 
314

Additional paid-in capital
104,964

 
101,087

Retained earnings
464,366

 
433,667

Total stockholders' equity
569,647


535,068

Total liabilities and stockholders' equity
$
1,796,501


$
1,900,799

See notes to condensed consolidated financial statements.

1

Table of Contents

CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product sales
$
267,179

 
$
259,593

 
$
516,493

 
$
510,955

Repair service agreement commissions
25,662

 
23,519

 
48,525

 
48,215

Service revenues
3,472

 
3,301

 
7,051

 
6,528

Total net sales
296,313

 
286,413

 
572,069


565,698

Finance charges and other revenues
88,307

 
80,234

 
170,938


156,775

Total revenues
384,620

 
366,647

 
743,007


722,473

Costs and expenses:
 

 
 

 
 
 
 
Cost of goods sold
173,627

 
172,306

 
340,216

 
344,256

Selling, general and administrative expense
120,690

 
111,632

 
235,568

 
218,169

Provision for bad debts
50,751

 
49,449

 
94,907

 
105,379

Charges and credits
300

 
4,068

 
300

 
5,295

Total costs and expenses
345,368

 
337,455

 
670,991

 
673,099

Operating income
39,252

 
29,192

 
72,016

 
49,374

Interest expense
15,566

 
20,039

 
32,386

 
44,047

Loss on extinguishment of debt
1,367

 
2,097

 
1,773

 
2,446

Income before income taxes
22,319

 
7,056

 
37,857

 
2,881

Provision for income taxes
5,308

 
2,783

 
8,114

 
1,188

Net income
$
17,011

 
$
4,273

 
$
29,743

 
$
1,693

Income per share:
 

 
 

 
 
 
 
Basic
$
0.54

 
$
0.14

 
$
0.94

 
$
0.05

Diluted
$
0.53

 
$
0.14

 
$
0.92

 
$
0.05

Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
31,652,017

 
31,093,746

 
31,597,225

 
31,033,880

Diluted
32,242,463

 
31,434,501

 
32,210,759

 
31,292,305

See notes to condensed consolidated financial statements.

2

Table of Contents

CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Six Months Ended July 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
29,743

 
$
1,693

Adjustments to reconcile net income to net cash from operating activities:
 

 
 

Depreciation
15,434

 
15,356

Amortization of debt issuance costs
6,382

 
11,024

Provision for bad debts and uncollectible interest
118,765

 
125,491

Stock-based compensation expense
5,562

 
4,188

Charges, net of credits, for store and facility closures and relocations

 
388

Deferred income tax benefit
(1,776
)
 
(992
)
Gain on sale/disposal of property and equipment
(402
)
 
(371
)
Tenant improvement allowances received from landlords
4,362

 
1,997

Change in operating assets and liabilities:
 

 
 

Customer accounts receivable
(100,331
)
 
(53,563
)
Other accounts receivables
(14,679
)
 
8,537

Inventories
16,167

 
(31,912
)
Other assets
17,761

 
127

Accounts payable
11,091

 
(3,060
)
Accrued expenses
22,910

 
13,792

Income taxes
31,868

 
(383
)
Deferred rent, revenues and other credits
(7,205
)
 
(1,771
)
Net cash provided by operating activities
155,652

 
90,541

Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(12,166
)
 
(6,135
)
Net cash used in investing activities
(12,166
)
 
(6,135
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of asset-backed notes

 
469,814

Payments on asset-backed notes
(481,883
)
 
(583,299
)
Borrowings from Revolving Credit Facility
839,236

 
844,941

Payments on Revolving Credit Facility
(655,036
)
 
(822,441
)
Borrowings from warehouse facility
173,286

 

Payments on warehouse facility
(52,226
)
 

Payments for debt issuance costs and amendment fees
(3,539
)
 
(7,595
)
Proceeds from stock issued under employee benefit plans
834

 
1,905

Tax payments associated with equity-based compensation transactions
(2,516
)
 
(298
)
Payments from extinguishment of debt
(1,177
)
 

Other
(531
)
 
(243
)
Net cash used in financing activities
(183,552
)
 
(97,216
)
Net change in cash, cash equivalents and restricted cash
(40,066
)
 
(12,810
)
Cash, cash equivalents and restricted cash, beginning of period
96,158

 
134,264

Cash, cash equivalents and restricted cash, end of period
$
56,092

 
$
121,454

Non-cash investing and financing activities:
 
 
 
Capital lease asset additions and related obligations
$
508

 
$
3,196

Property and equipment purchases not yet paid
$
4,363

 
$
2,796

Supplemental cash flow data:
 
 
 
Cash interest paid
$
25,505

 
$
33,817

Cash income taxes paid (refunded), net
$
(21,969
)
 
$
2,563

See notes to condensed consolidated financial statements.

3

Table of Contents

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.     Summary of Significant Accounting Policies 
Business. Conn's, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its subsidiaries. References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn’s, Inc. and, as apparent from the context, its consolidated bankruptcy-remote variable interest entities (“VIEs”) and its wholly owned subsidiaries. Conn's is a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to proprietary credit solutions for its core credit-constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives.
We operate two reportable segments: retail and credit. Our retail stores bear the “Conn's HomePlus” name with all of our stores providing the same products and services to a common customer group. Our stores follow the same procedures and methods in managing their operations. Our retail business and credit business are operated independently from each other. The credit segment is dedicated to providing short- and medium-term financing to our retail customers. The retail segment is not involved in credit approval decisions. Our management evaluates performance and allocates resources based on the operating results of the retail and credit segments.
Basis of Presentation. The accompanying unaudited, Condensed Consolidated Financial Statements of Conn's, Inc. and its wholly-owned subsidiaries, including the VIEs, have been prepared by management in accordance with generally accepted accounting principles in the United States of America (GAAP”) and prevailing industry practice for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 31, 2018 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2018 (the “2018 Form 10-K”), filed with the United States Securities and Exchange Commission (the “SEC”) on April 5, 2018.
Fiscal Year. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
Principles of Consolidation. The consolidated financial statements include the accounts of Conn's, Inc. and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. 
Variable Interest Entities. VIEs are consolidated if the Company is the primary beneficiary. The primary beneficiary of a VIE is the party that has (i) the power to direct the activities that most significantly impact the performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
We securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. We retain the servicing of the securitized portfolio and have a variable interest in each corresponding VIE by holding the residual equity. We have determined that we are the primary beneficiary of each respective VIE because (i) our servicing responsibilities for the securitized portfolio give us the power to direct the activities that most significantly impact the performance of the VIE and (ii) our variable interest in the VIE gives us the obligation to absorb losses and the right to receive residual returns that potentially could be significant. As a result, we consolidate the respective VIEs within our consolidated financial statements.
Refer to Note 5, Debt and Capital Lease Obligations, and Note 7, Variable Interest Entities, for additional information.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ, even significantly, from these estimates. Management evaluates its estimates and related assumptions regularly, including those related to the allowance for doubtful accounts and allowances for no-interest option credit programs, which are particularly sensitive given the size of our customer portfolio balance.
Cash and Cash Equivalents. As of July 31, 2018, cash and cash equivalents included cash and credit card deposits in transit. As of January 31, 2018, cash and cash equivalents included cash, credit card deposits in transit, and highly liquid debt instruments purchased with a maturity of three months or less. Cash and cash equivalents included credit card deposits in transit of $2.2 million and $2.0 million as of July 31, 2018 and January 31, 2018, respectively. 

4

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Restricted Cash. The restricted cash balance as of July 31, 2018 and January 31, 2018 includes $38.3 million and $58.1 million, respectively, of cash we collected as servicer on the securitized receivables that was subsequently remitted to the VIEs and $11.8 million and $27.2 million, respectively, of cash held by the VIEs as additional collateral for the asset-backed notes.
Customer Accounts Receivable. Customer accounts receivable reported in the Condensed Consolidated Balance Sheet includes total receivables managed, including both those transferred to the VIEs and those not transferred to the VIEs. Customer accounts receivable are recognized at the time the customer takes possession of the product. Based on contractual terms, we record the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months in current assets with the remaining balance in long-term assets on the Condensed Consolidated Balance Sheet. Customer accounts receivable includes the net of unamortized deferred fees charged to customers and origination costs. Customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts along with interest accrued subsequent to the last payment.
In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. In our role as servicer, we may also make modifications to loans held by the VIEs. The loan modifications are intended to maximize net cash flow after expenses and avoid the need to repossess collateral or exercise legal remedies available to us. We may extend or “re-age” a portion of our customer accounts, which involves modifying the payment terms to defer a portion of the cash payments due. Our re-aging of customer accounts does not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly contractual payments. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account, which does not change the interest rate or the total principal amount due from the customer but does reduce the monthly contractual payments and extend the term. We consider accounts that have been re-aged in excess of three months or refinanced as Troubled Debt Restructurings (“TDR” or “Restructured Accounts”).
Interest Income on Customer Accounts Receivable. Interest income, which includes interest income and amortization of deferred fees and origination costs, is recorded using the interest method and is reflected in finance charges and other revenues. Typically, interest income is recorded until the customer account is paid off or charged-off, and we provide an allowance for estimated uncollectible interest. Any contractual interest income received from customers in excess of the interest income calculated using the interest method is recorded as deferred revenue on our balance sheets. At July 31, 2018 and January 31, 2018, there was $12.0 million and $12.5 million, respectively, of deferred interest included in deferred revenues and other credits and other long-term liabilities. The deferred interest will ultimately be brought into income as the accounts pay off or charge-off.
We offer a 12 month no-interest option program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of the interest earned is waived. Interest income is recognized based on estimated accrued interest earned to date on all no-interest option finance programs with an offsetting reserve for those customers expected to satisfy the requirements of the program based on our historical experience.
We recognize interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it equals the present value of expected future cash flows.
We typically only place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the balance of the loan. At July 31, 2018, customer receivables carried in non-accrual status were $17.4 million, of which $11.6 million were in bankruptcy status and less than 60 days past due. At January 31, 2018, customer receivables carried in non-accrual status were $16.9 million, of which $14.5 million were in bankruptcy status and less than 60 days past due. At July 31, 2018 and January 31, 2018, customer receivables that were past due 90 days or more and still accruing interest totaled $96.7 million and $109.7 million, respectively.
Allowance for Doubtful Accounts. The determination of the amount of the allowance for bad debts is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the allowance for bad debts. General economic conditions, changes to state or federal regulations and a variety of other factors that affect the ability of borrowers to service their debts or our ability to collect will impact the future performance of the portfolio.   
We establish an allowance for doubtful accounts, including estimated uncollectible interest, to cover probable and estimable losses on our customer accounts receivable resulting from the failure of customers to make contractual payments. Our customer portfolio balance consists of a large number of relatively small, homogeneous accounts. None of our accounts are large enough to warrant individual evaluation for impairment.
We record an allowance for doubtful accounts on our non-TDR customer accounts receivable that we expect to charge-off over the next 12 months based on historical gross charge-off rates over the last 24 months. We incorporate an adjustment to historical gross charge-off rates for a scaled factor of the year-over-year change in six month average first payment default rates and the year-over-year change in the balance of customer accounts receivable that are 60 days or more past due.  In addition to adjusted

5

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


historical gross charge-off rates, estimates of post-charge-off recoveries, including cash payments from customers, amounts realized from the repossession of the products financed, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance policies are also considered.               
Qualitative adjustments are made to the allowance for bad debts when, based on management’s judgment, there are internal or external factors impacting probable incurred losses not taken into account by the quantitative calculations. These qualitative considerations are based on the following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in concentrations of credit, and other internal or external factor changes. We utilize an economic qualitative adjustment based on changes in unemployment rates if current unemployment rates in our markets are worse than they were on average over the last 24 months.  We also qualitatively limit the impact of changes in first payment default rates and changes in delinquency when those changes result in a decrease to the allowance for bad debts based on a measure of the dispersion of historical charge-off rates. At July 31, 2018, we utilized a qualitative factor related to changes in the nature of the portfolio.
We determine allowances for those accounts that are TDR based on the discounted present value of cash flows expected to be collected over the life of those accounts based primarily on the performance of TDR loans over the last 24 months. The cash flows are discounted based on the weighted-average effective interest rate of the TDR accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as an allowance for loss on those accounts.
Debt Issuance Costs. Costs that are direct and incremental to debt issuance are deferred and amortized to interest expense using the effective interest method over the expected life of the debt. All other costs related to debt issuance are expensed as incurred. We present debt issuance costs associated with long-term debt as a reduction of the carrying amount of the debt. Unamortized costs related to the Revolving Credit Facility, as defined in Note 5, Debt and Capital Lease Obligations, are included in other assets on our Condensed Consolidated Balance Sheet and were $7.0 million and $5.2 million as of July 31, 2018 and January 31, 2018, respectively.
Income Taxes. For the six months ended July 31, 2018 and 2017, we utilized the estimated annual effective tax rate based on our estimated fiscal year 2019 and 2018 pre-tax income, respectively, in determining income tax expense.
Provision for income taxes for interim periods is based on an estimated annual income tax rate, adjusted for discrete tax items. As a result, our interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.
On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowered the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. For the three months ended January 31, 2018, we calculated our best estimate of the impact of the Tax Act in our fiscal year 2018 provision for income taxes in accordance with our understanding of the Tax Act and available guidance as of that date.
We continue to analyze additional information and guidance related to the Tax Act as supplemental legislation, regulatory guidance and evolving technical interpretations become available. We will continue to refine such amounts within the measurement period as provided by Staff Accounting Bulletin No. 118 and expect to complete our analysis no later than the fourth quarter of fiscal year 2019.
For the six months ended July 31, 2018 and 2017, the effective tax rate was 21.4% and 41.2%, respectively. The primary factors affecting our effective tax rate for the six months ended July 31, 2018 were a decrease in the Federal Tax Rate as a result of the Tax Act, an increase in pre-tax earnings, and excess tax benefits related to the vesting of equity compensation.
Stock-based Compensation.
Stock-based compensation expense is recorded, net of estimated forfeitures, for share-based compensation awards over the requisite service period using the straight-line method. An adjustment is made to compensation cost for any difference between the estimated forfeitures and the actual forfeitures related to the awards. For equity-classified share-based compensation awards, expense is recognized based on the grant-date fair value. For stock option grants, we use the Black-Scholes model to determine fair value. For grants of restricted stock units, the fair value of the grant is the market value of our stock at the date of issuance.

6

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following table sets forth the restricted stock unit awards (“RSUs”), performance stock awards (“PSUs”) and stock options granted during the three and six months ended July 31, 2018 and 2017
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2018
 
2017
 
2018
 
2017
RSUs (1)
69,478

 
318,806

 
149,889

 
643,293

PSUs (2)

 
72,012

 

 
501,012

Stock Options (3)

 

 
620,166

 

Total stock awards granted
69,478

 
390,818

 
770,055

 
1,144,305

Aggregate grant date fair value (in thousands)
$
1,673

 
$
6,785

 
$
17,184

 
$
14,546

(1) The RSUs issued during the three and six months ended July 31, 2018 and 2017 are scheduled to vest ratably over periods of three to four years from the date of grant.
(2) The PSUs issued during the three and six months ended July 31, 2017 will vest, if at all, upon the certification, after fiscal year 2020, by the compensation committee of the satisfaction of the annual and cumulative Earnings Before Interest, Taxes, Depreciation and Amortization performance conditions over the three fiscal years commencing with fiscal year 2018.
(3) The weighted-average assumptions for the option awards granted during the six months ended July 31, 2018 included expected volatility of 68.0%, an expected term of 6.5 years and risk-free interest rate of 2.67%No dividend yield was included in the weighted-average assumptions for the option awards granted during the six months ended July 31, 2018.
For the three months ended July 31, 2018 and 2017, stock-based compensation expense was $3.1 million and $2.6 million, respectively. For the six months ended July 31, 2018 and 2017, stock-based compensation expense was $5.6 million and $4.2 million, respectively.
Earnings per Share. Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effects of any stock options, RSUs and PSUs, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations: 
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2018
 
2017
 
2018
 
2017
Weighted-average common shares outstanding - Basic
31,652,017

 
31,093,746

 
31,597,225

 
31,033,880

Dilutive effect of stock options, RSUs and PSUs
590,446

 
340,755

 
613,534

 
258,425

Weighted-average common shares outstanding - Diluted
32,242,463

 
31,434,501

 
32,210,759

 
31,292,305

For the three months ended July 31, 2018 and 2017, the weighted-average number of stock options, RSUs and PSUs not included in the calculation due to their anti-dilutive effect was 624,291 and 386,130, respectively. For the six months ended July 31, 2018 and 2017, the weighted-average number of stock options, RSUs and PSUs not included in the calculation due to their anti-dilutive effect was 497,224 and 546,102, respectively.
Fair Value of Financial Instruments. Fair value is defined 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. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to subjectivity associated with the inputs to fair value measurements as follows:  
Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
Level 3 – Inputs that are not observable from objective sources such as our internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in our internally developed present value of future cash flows model that underlies the fair-value measurement).

7

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In determining fair value, we use observable market data when available, or models that incorporate observable market data. When we are required to measure fair value and there is not a market-observable price for the asset or liability or for a similar asset or liability, we use the cost or income approach depending on the quality of information available to support management’s assumptions. The cost approach is based on management’s best estimate of the current asset replacement cost. The income approach is based on management’s best assumptions regarding expectations of future net cash flows and discounts the expected cash flows using a commensurate risk-adjusted discount rate. Such evaluations involve significant judgment, and the results are based on expected future events or conditions such as sales prices, economic and regulatory climates, and other factors, most of which are often outside of management’s control. However, we believe assumptions used reflect a market participant’s view of long-term prices, costs, and other factors and are consistent with assumptions used in our business plans and investment decisions.
In arriving at fair-value estimates, we use relevant observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based on the lowest level of input that is significant to the fair-value measurement.
The fair value of cash and cash equivalents, restricted cash and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a Level 3 discounted cash flow analysis, approximates their carrying amount, which includes the allowance for doubtful accounts. The fair value of our Revolving Credit Facility approximates carrying value based on the current borrowing rate for similar types of borrowing arrangements. At July 31, 2018, the fair value of the Senior Notes outstanding, which was determined using Level 1 inputs, was $227.9 million as compared to the carrying value of $227.0 million, excluding the impact of the related discount. At July 31, 2018, the fair value of the asset-backed notes approximates their carrying value and was determined using Level 2 inputs based on inactive trading activity.
Recent Accounting Pronouncements Adopted. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Upon adoption of ASU 2014-09, entities are required to recognize revenue using the following comprehensive model: (1) identify contracts with customers, (2) identify the performance obligations in such contracts, (3) determine transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue as each performance obligation is satisfied. The FASB also issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing; ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting; and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, all of which were issued to improve and clarify the guidance in ASU 2014-09. Effective February 1, 2018, the Company adopted these ASUs using the modified retrospective method applied to those contracts that were not completed as of February 1, 2018, with no restatement of comparative periods. Results for reporting periods beginning after February 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies under ASC Topic 605. We recognized a net after-tax cumulative effect adjustment to retained earnings of $1.0 million as of the date of adoption. The details of our current revenue recognition policy, as well as the change due to ASC Topic 606, are described below.
Revenue Recognition. The Company has the following material revenue streams: the sale of products (e.g. appliances, electronics) including delivery; the sale of third party warranty and insurance programs, including retrospective income; service income; interest income generated from the financing of point of sale transactions; and volume rebate incentives received from a third party financer. Interest income related to our customer accounts receivable balance and loan origination costs (including sales commissions) meet the scope exception of ASC 606 and are therefore not impacted by the adoption of this standard. For our twelve month no-interest option program, as a practical expedient acceptable under ASC 606, we do not adjust for the time value of money.
Sale of Products Including Delivery: The Company has a single performance obligation associated with these contracts: the delivery of the product to the customer, at which point control transfers. Revenue for the sale of products is recognized at the time of delivery, net of any adjustments for sales incentives such as discounts, coupons, rebates or other free products or services. Sales financed through third-party no-interest option programs typically require us to pay a fee to the third party on each completed sale, which is recorded as a reduction of net sales in the retail segment. 
Sale of Third Party Warranty and Insurance Programs, Including Retrospective Income: We sell repair service agreements (“RSA”) and credit insurance contracts on behalf of unrelated third-parties. The Company has a single performance obligation associated with these contracts: the delivery of the product to the customer, at which point control transfers. Commissions related to these contracts are recognized in revenue upon delivery of the product. We also may serve as the administrator of the RSAs sold and defer 5% of the revenue received from the sale of RSAs as compensation for this performance obligation as 5% represents the estimated stand-alone sales price to serve as the administrator. The deferred RSA administration fee is recorded in income ratably over the life of the RSA contract sold. Retrospective income on

8

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


RSA contracts is recognized upon delivery of the product based on an estimate of claims and is adjusted throughout the life of the contracts as actual claims materialize. Retrospective income on insurance contracts is recognized when earned as that is the point at which we no longer believe a significant reversal of income is probable as the consideration is highly susceptible to factors outside of our influence.
Service Income: The Company has a single performance obligation associated with these contracts: the servicing of the RSA claims. Service revenues are recognized at the time service is provided to the customer.
Volume Rebate Incentive: As part of our agreement with our third-party provider of no-interest option programs, we may receive a volume rebate incentive based on the total dollar value of sales made under our third-party provider. The Company has a single performance obligations associated with this contract: the delivery of the product to the customer, at which point control transfers. Revenue for the volume rebate incentive is recognized upon delivery of the product to the customer based on the projected total annual dollar value of sales to be made under our third-party provider.
ASC 606 requires disaggregation of revenue recognized from contracts with customers to depict how the nature, amount, timing and uncertainty of revenue is affected by economic factors. The Company concluded that the disaggregated discrete financial information presented in Note 8, Segment Reporting, and Note 4, Finance Charges and Other Revenues, reviewed by our chief operating decision maker in evaluating the financial performance of our operating segments adequately addresses the disaggregation of revenue requirements of ASC 606.
Deferred Revenue. Deferred revenue related to contracts with customers as defined by ASC 606 consists of deferred customer deposits and deferred RSA administration fees. During the three and six months ended July 31, 2018, we recognized $1.5 million and $1.8 million, respectively, of revenue for customer deposits as of the beginning of those periods. During the three and six months ended July 31, 2018, we recognized $1.4 million and $2.7 million respectively, of revenue for RSA administrative fees deferred as of the beginning of those periods.
Changes in Revenue Recognition Due to ASC 606. The adoption of ASC 606 resulted in a change to our accounting policy related to retrospective income on RSAs. We participate in profit sharing agreements with the underwriters of our RSA products, payment from which is contingent upon the actual performance of the portfolio of the RSAs sold. Prior to the adoption of ASC 606, we recognized this revenue and related receivable as the amount due to us at each reporting date based on the performance of the portfolio through such date. The Company concluded that this retrospective income represents variable consideration under ASC 606 for which the Company’s performance obligation is satisfied when the RSA is sold to the customer. Under ASC 606, an estimate of variable consideration, subject to constraints, is to be included in the transaction price and recognized when or as the performance obligation is satisfied. As a result of the adoption of ASC 606, the Company changed its accounting policy related to retrospective income on RSAs to record an estimate of retrospective income when the RSA is sold, subject to constraints in the estimate. The Company's estimate of the amount of variable consideration is recorded as a contract asset, representing a conditional right to payment, and is included within other accounts receivable in the Condensed Consolidated Balance Sheet. The estimated contract asset will be reassessed at the end of each reporting period, with changes thereto recorded as adjustments to revenue.
The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet as a result of the adoption of ASC 606 were as follows (in thousands):
 
Impact of Adoption of ASC 606
(in thousands)
Balance at January 31, 2018
Adjustments due to ASC 606
Balance at February 1, 2018
Assets
 
 
 
   Other Accounts Receivable
$
71,186

$
1,210

$
72,396

   Deferred Income Taxes
21,565

(254
)
21,311

Stockholder's Equity
$
535,068

$
956

$
536,024

 
 
 
 
The adoption of ASC 606 did not have a material impact on the consolidated financial statements for the three and six months ended July 31, 2018 and no comparative financial statements are presented.
Internal Controls. As a result of the adoption of ASC 606 we evaluated our internal control framework, and there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 


9

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires that the statement of cash flows provides the change in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. We hold restricted cash related to our asset backed security transactions and lending license requirements. Effective February 1, 2018, the Company adopted the ASU which resulted in us no longer presenting the changes in restricted cash balances as a component of cash flows from financing activities but instead include the balances of both current and long-term restricted cash with cash and cash equivalents in total cash, cash equivalents and restricted cash for the beginning and end of the periods presented. The total cash flow impact for the six months ended July 31, 2017 was an increase in the cash used in financing activities of $24.3 million. The balances of cash and cash equivalents and restricted cash are separately presented within the Condensed Consolidated Balance Sheet as of July 31, 2018 and January 31, 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice. Among other things, debt prepayment or debt extinguishment costs will be presented as cash outflows for financing activities on the statement of cash flow. Effective February 1, 2018, the Company adopted the ASU, which resulted in us no longer presenting the change in debt extinguishment costs as a component of cash flows from operating activities but instead include the change as a component of cash flows from financing activities. The adoption of this ASU resulted in the classification of $1.2 million in payments on extinguishment of debt as a cash outflow from financing activities for the six months ended July 31, 2018. There was no impact for the six months ended July 31, 2017.
Recent Accounting Pronouncements Yet To Be Adopted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will change how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. Primarily for those leases currently classified by us as operating leases, we will recognize a single lease cost on a straight line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be required to be accounted for as financing arrangements similar to how we currently account for capital leases. On transition, we will recognize a cumulative-effect adjustment to the retained earnings on the opening balance sheet in the period of adoption using a modified retrospective approach. The final standard will become effective for us beginning in the first quarter of fiscal year 2020. Based on our preliminary assessment, we believe the adoption of this ASU will have a material impact on our financial statements as we will be required to report additional leases on our Condensed Consolidated Balance Sheet. We are the lessee under various lease agreements for our retail stores and equipment that are currently accounted for as operating leases as discussed in Note 8, Leases, of our audited Consolidated Financial Statements included in our 2018 Form 10-K.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The standard will become effective for us in the first quarter of fiscal year 2021 and early adoption is permitted beginning in the first quarter of fiscal year 2020. We have formed a cross-functional working group comprised of individuals from various functional areas including credit, finance, accounting, and information technology. While we are currently evaluating the likely impact the adoption of this ASU will have on our consolidated financial statements, the adoption of ASU 2016-13 is likely to result in a material increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio.

10

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.    Customer Accounts Receivable
Customer accounts receivable consisted of the following:
 
Total Outstanding Balance
 
Customer Accounts Receivable
 
60 Days Past Due (1)
 
Re-aged (1) (2)
(in thousands)
July 31,
2018
 
January 31,
2018
 
July 31,
2018
 
January 31,
2018
 
July 31,
2018
 
January 31,
2018
Customer accounts receivable
$
1,338,498

 
$
1,374,269

 
$
94,722

 
$
114,120

 
$
196,964

 
$
217,952

Restructured accounts
169,863

 
153,593

 
41,499

 
37,687

 
169,863

 
153,593

Total customer portfolio balance
$
1,508,361

 
$
1,527,862

 
$
136,221

 
$
151,807

 
$
366,827

 
$
371,545

Allowance for uncollectible accounts
(203,609
)
 
(203,572
)
 
 
 
 
 
 
 
 
Allowances for no-interest option credit programs
(19,060
)
 
(20,960
)
 
 
 
 
 
 
 
 
Deferred fees and origination costs, net
(16,189
)
 
(15,897
)
 
 
 
 
 
 
 
 
Total customer accounts receivable, net
1,269,503

 
1,287,433

 
 
 
 
 
 
 
 
Short-term portion of customer accounts receivable, net
(622,009
)
 
(636,825
)
 
 
 
 
 
 
 
 
Long-term portion of customer accounts receivable, net
$
647,494

 
$
650,608

 
 
 
 
 
 
 
 
Securitized receivables held by the VIEs
$
592,279

 
$
1,085,385

 
$
70,148

 
$
124,627

 
$
228,234

 
$
300,348

Receivables not held by the VIEs
916,082

 
442,477

 
66,073

 
27,180

 
138,593

 
71,197

Total customer portfolio balance
$
1,508,361

 
$
1,527,862

 
$
136,221

 
$
151,807

 
$
366,827

 
$
371,545

(1)
Due to the fact that an account can become past due after having been re-aged, accounts could be represented as both past due and re-aged. As of July 31, 2018 and January 31, 2018, the amounts included within both 60 days past due and re-aged was $82.9 million and $80.8 million, respectively. As of July 31, 2018 and January 31, 2018, the total customer portfolio balance past due one day or greater was $400.3 million and $401.0 million, respectively. These amounts include the 60 days past due balances shown.
(2)
The re-aged receivables balance as of July 31, 2018 and January 31, 2018 includes $41.6 million and $62.0 million in first time re-ages related to customers within FEMA-designated Hurricane Harvey disaster areas.
The following presents the activity in the allowance for doubtful accounts and uncollectible interest for customer receivables: 
 
Six Months Ended July 31, 2018
 
Six Months Ended July 31, 2017
(in thousands)
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
 
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
Allowance at beginning of period
$
148,856

 
$
54,716

 
$
203,572

 
$
158,992

 
$
51,183

 
$
210,175

Provision (1)
85,117

 
33,146

 
118,263

 
92,285

 
33,208

 
125,493

Principal charge-offs (2)
(82,124
)
 
(25,264
)
 
(107,388
)
 
(92,251
)
 
(26,159
)
 
(118,410
)
Interest charge-offs
(16,161
)
 
(4,972
)
 
(21,133
)
 
(14,911
)
 
(4,228
)
 
(19,139
)
Recoveries (2)
7,873

 
2,422

 
10,295

 
3,534

 
1,002

 
4,536

Allowance at end of period
$
143,561

 
$
60,048

 
$
203,609

 
$
147,649

 
$
55,006

 
$
202,655

Average total customer portfolio balance
$
1,340,360

 
$
162,951

 
$
1,503,311

 
$
1,356,569

 
$
139,106

 
$
1,495,675

(1)
Includes provision for uncollectible interest, which is included in finance charges and other revenues.
(2)
Charge-offs include the principal amount of losses (excluding accrued and unpaid interest). Recoveries include principal collections of previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.

11

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.     Charges and Credits
Charges and credits consisted of the following:
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2018
 
2017
 
2018
 
2017
Facility closure costs
$

 
$
122

 
$

 
$
1,349

Securities-related regulatory matter and other legal fees
300

 
34

 
300

 
34

Employee severance

 
1,317

 

 
1,317

Indirect tax audit reserve

 
2,595

 

 
2,595

 
$
300

 
$
4,068

 
$
300

 
$
5,295

During the three and six months ended July 31, 2018, we recorded a contingency reserve related to a regulatory matter. During the three months ended July 31, 2017, we primarily incurred severance costs related to a change in the executive management team and a charge related to an increase in our indirect tax audit reserve. During the six months ended July 31, 2017, we primarily incurred exit costs associated with reducing the square footage of a distribution center, severance costs related to a change in the executive management team, and a charge related to an increase in our indirect tax audit reserve.
4.     Finance Charges and Other Revenues 
Finance charges and other revenues consisted of the following:
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2018
 
2017
 
2018
 
2017
Interest income and fees
$
80,435

 
$
69,490

 
$
156,781

 
$
136,621

Insurance income
7,774

 
10,652

 
14,045

 
19,982

Other revenues
98

 
92

 
112

 
172

 
$
88,307

 
$
80,234

 
$
170,938

 
$
156,775

Interest income and fees and insurance income are derived from the credit segment operations, whereas other revenues are derived from the retail segment operations. Insurance income is comprised of sales commissions from third-party insurance companies that are recognized when coverage is sold and retrospective income paid by the insurance carrier if insurance claims are less than earned premiums.
During the three months ended July 31, 2018 and 2017, interest income and fees reflected provisions for uncollectible interest of $12.4 million and $10.5 million, respectively. The amount included in interest income and fees related to TDR accounts for the three months ended July 31, 2018 and 2017 are $6.5 million and $4.6 million, respectively. During the six months ended July 31, 2018 and 2017, interest income and fees reflected provisions for uncollectible interest of $23.9 million and $20.5 million, respectively. The amount included in interest income and fees related to TDR accounts for the six months ended July 31, 2018 and 2017 are $12.3 million and $9.1 million, respectively. Insurance income decreased over both the three month and six month periods primarily due to a decrease in retrospective income as a result of higher claim volumes related to Hurricane Harvey.

12

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.     Debt and Capital Lease Obligations 
Debt and capital lease obligations consisted of the following:
(in thousands)
July 31,
2018
 
January 31,
2018
Revolving Credit Facility
$
261,200

 
$
77,000

Senior Notes
227,000

 
227,000

2016-B VIE Asset-backed Class B Notes

 
73,589

2017-A VIE Asset-backed Class A Notes

 
59,794

2017-A VIE Asset-backed Class B Notes

 
106,270

2017-A VIE Asset-backed Class C Notes

 
50,340

2017-B VIE Asset-backed Class A Notes
99,595

 
292,663

2017-B VIE Asset-backed Class B Notes
132,180

 
132,180

2017-B VIE Asset-backed Class C Notes
78,640

 
78,640

Warehouse Notes
121,060

 

Capital lease obligations
4,927

 
4,949

Total debt and capital lease obligations
924,602

 
1,102,425

Less:
 
 
 
Discount on debt
(2,247
)
 
(2,527
)
Deferred debt issuance costs
(5,125
)
 
(8,886
)
Current maturities of capital lease obligations
(1,149
)
 
(907
)
Long-term debt and capital lease obligations
$
916,081

 
$
1,090,105

Senior Notes. On July 1, 2014, we issued $250.0 million of the unsecured Senior Notes due July 2022 bearing interest at 7.25% (the “Senior Notes”), pursuant to an indenture dated July 1, 2014 (the “Indenture”), among Conn's, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National Association, as trustee. The effective interest rate of the Senior Notes after giving effect to the discount and issuance costs is 7.8%.
The Indenture restricts the Company's and certain of its subsidiaries' ability to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock (“restricted payments”); (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. Specifically, limitations on restricted payments are only effective if one or more of the following occurred: (1) a default were to exist under the Indenture, (2) we could not satisfy a debt incurrence test, and (3) the aggregate amount of restricted payments were to exceed an amount tied to consolidated net income. These limitations, however, are subject to two exceptions: (1) an exception that permits the payment of up to $375.0 million in restricted payments, and (2) an exception that permits restricted payments regardless of dollar amount so long as, after giving pro forma effect to the dividends and other restricted payments, we would have had a leverage ratio, as defined under the Indenture, of less than or equal to 2.50 to 1.0. As a result of these exceptions, as of July 31, 2018, $200.5 million would have been free from the distribution restriction. During any time when the Senior Notes are rated investment grade by either of Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended and we will cease to be subject to such covenants during such period. Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we fail to make payment of other indebtedness prior to the expiration of any applicable grace period or upon acceleration of indebtedness prior to its stated maturity date in an amount exceeding $25.0 million, as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.
Asset-backed Notes. During fiscal years 2018 and 2017 we securitized customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issued asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.
Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries

13

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.
The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act of 1933, as amended. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events.
The asset-backed notes consist of the following:
Asset-Backed Notes
 
Original Principal Amount
 
Original Net Proceeds(1)
 
Current Principal Amount
 
Issuance Date
 
Maturity Date
 
Fixed Interest Rate
 
Effective Interest Rate(2)
2017-B Class A Notes
 
$
361,400

 
$
358,945

 
$
99,595

 
12/20/2017
 
7/15/2020
 
2.73%
 
5.14%
2017-B Class B Notes
 
132,180

 
131,281

 
132,180

 
12/20/2017
 
4/15/2021
 
4.52%
 
5.23%
2017-B Class C Notes
 
78,640

 
77,843

 
78,640

 
12/20/2017
 
11/15/2022
 
5.95%
 
6.35%
Warehouse Notes
 
121,060

 
118,972

 
121,060

 
7/16/2018
 
1/15/2020
 
Index + 2.50% (3)
 
7.62%
Total
 
$
693,280

 
$
687,041

 
$
431,475

 
 
 
 
 
 
 
 
(1)
After giving effect to debt issuance costs and restricted cash held by the VIEs.
(2)
For the six months ended July 31, 2018, and inclusive of retrospective adjustments to deferred debt issuance costs based on changes in timing of actual and expected cash flows.
(3)
The rate on the Warehouse Notes is defined as the applicable index plus a 2.50% fixed margin.
On February 15, 2018, affiliates of the Company closed on a $52.2 million financing under a receivables warehouse financing transaction entered into on February 6, 2018 (the “Warehouse Notes”). The net proceeds of the Warehouse Notes were used to prepay in full the Series 2016-B Class B Notes (the “2016-B Redeemed Notes”) that were still outstanding as of February 15, 2018.
On February 15, 2018, the Company completed the redemption of the 2016-B Redeemed Notes at an aggregate redemption price of $73.6 million (which was equal to the entire outstanding principal of, plus accrued interest and the call premiums on, the 2016-B Redeemed Notes). The net funds used to call the notes was $50.3 million, which is equal to the redemption price less adjustments of $23.3 million for funds held in reserve and collection accounts in accordance with the terms of the applicable indenture governing the 2016-B Redeemed Notes. The difference between the net proceeds of the Warehouse Notes and the carrying value of the 2016-B Redeemed Notes at redemption was used to fund fees, expenses and a reserve account related to the Warehouse facility. In connection with the early redemption of the 2016-B Redeemed Notes, we wrote-off $0.4 million as a loss on extinguishment of debt.
On July 16, 2018, affiliates of the Company closed on $121.1 million of additional financing under a receivables warehouse financing transaction entered into on July 9, 2018 (the “Additional Funding”). The net proceeds of the Additional Funding were used to prepay in full the Series 2017-A Class B and C Notes (the “2017-A Redeemed Notes”) that were still outstanding as of July 16, 2018.
On July 16, 2018, the Company completed the redemption of the 2017-A Redeemed Notes at an aggregate redemption price of $127.2 million (which was equal to the entire outstanding principal of, plus accrued interest and the call premiums on the 2017-A Redeemed Notes). The net funds used to call the notes was $119.0 million, which is equal to the redemption price less adjustments of $8.2 million for funds held in reserve and collection accounts in accordance with the terms of the applicable indenture governing the 2017-A Redeemed Notes. The difference between the net proceeds of the Additional Funding and the carrying value of the 2017-A Redeemed Notes at redemption was used to fund fees, expenses and a reserve account related to the warehouse facility. In connection with the early redemption of the 2017-A Redeemed Notes, we wrote-off $1.2 million as a loss on extinguishment of debt.


14

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Revolving Credit Facility. On May 23, 2018, Conn's, Inc. and certain of its subsidiaries (the “Borrowers”) entered into a Fourth Amendment to the Fourth Amended and Restated Loan and Security Agreement, dated as of October 30, 2015, with certain lenders, which provides for a $650.0 million asset-based revolving credit facility (the “Revolving Credit Facility”) under which credit availability is subject to a borrowing base.
The Fourth Amendment, among other things, (a) extends the maturity date of the credit facility to May 23, 2022; (b) provides for a reduction in the aggregate commitments from $750 million to $650 million; (c) amends the method by which the applicable margin is calculated to be based on the total leverage ratio (ratio of total liabilities less the sum of qualified cash and ABS qualified cash to tangible net worth), with the applicable margin ranging from 2.50% to 3.25% for LIBOR loans and from 1.50% to 2.25% for base rate loans; (d) eliminates a $10 million availability block in calculating the borrowing base; (e) increases the maximum accounts receivable advance rate from 75% to 80%; (f) decreases the maximum unused line fee by 25 basis points, from 75 basis points to 50 basis points; (g) eliminates the cash recovery covenant; (h) modifies the maximum inventory component of the borrowing base from $175 million to 33.33% of revolving loan commitments in effect; (i) modifies the interest coverage covenant such that the minimum interest coverage on a trailing two quarter basis is 1.5x and the minimum interest coverage during any single quarter is 1.0x; (j) increases the maximum capital expenditures from $75 million to $100 million during any period of four consecutive fiscal quarters; and (k) modifies the ability of the Company to effect future securitizations of its customer receivables portfolio, including adding the ability of the Company to enter into revolving ABS transactions.
Subsequent to the adoption of the Fourth Amendment, loans under the Revolving Credit Facility bear interest, at our option, at a rate equal to LIBOR plus the applicable margin based on facility availability which specified a margin ranging from 2.50% to 3.25% per annum (depending on quarterly average net availability under the borrowing base) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum (depending on quarterly average net availability under the borrowing base). The alternate base rate is the greatest of the prime rate announced by Bank of America, N.A., the federal funds rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. As of July 31, 2018, we also paid an unused fee on the portion of the commitments that was available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.50% per annum, depending on the average outstanding balance and letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the Revolving Credit Facility was 6.5% for the six months ended July 31, 2018.
The Revolving Credit Facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory, and provides for a $40.0 million sub-facility for letters of credit to support obligations incurred in the ordinary course of business. The obligations under the Revolving Credit Facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As of July 31, 2018, we had immediately available borrowing capacity of $366.6 million under our Revolving Credit Facility, net of standby letters of credit issued of $2.8 million. We also had $19.4 million that may become available under our Revolving Credit Facility if we grow the balance of eligible customer receivables and total eligible inventory balances.
The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make distributions to the Company and other obligors under the Revolving Credit Facility without restriction. As of July 31, 2018, we were restricted from making distributions, including repayments of the Senior Notes or other distributions, in excess of $212.3 million as a result of the Revolving Credit Facility distribution restrictions. The Revolving Credit Facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit Facility.

15

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Debt Covenants. We were in compliance with the debt covenants of our Revolving Credit Facility at July 31, 2018. A summary of the significant financial covenants that govern our Revolving Credit Facility compared to our actual compliance status at July 31, 2018 is presented below: 
 
Actual
 
Required
Minimum/
Maximum
Interest Coverage Ratio for the quarter must equal or exceed (minimum)
3.75:1.00
 
1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed (minimum)
3.36:1.00
 
1.50:1.00
Leverage Ratio must not exceed (maximum)
2.07:1.00
 
4.00:1.00
ABS Excluded Leverage Ratio must not exceed (maximum)
1.40:1.00
 
2.00:1.00
Capital Expenditures, net, must not exceed (maximum)
$13.5 million
 
$100.0 million
All capitalized terms in the above table are defined by the Revolving Credit Facility and may or may not agree directly to the financial statement captions in this document. The covenants are calculated quarterly, except for capital expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter.
6.     Contingencies
Securities Class Action Litigation. We and two of our former executive officers are defendants in a consolidated securities class action lawsuit pending in the United States District Court for the Southern District of Texas (the “Court”), captioned In re Conn's Inc. Securities Litigation, Cause No. 14-CV-00548 (the “Consolidated Securities Action”). The Consolidated Securities Action started as three separate purported securities class action lawsuits filed between March 5, 2014 and May 5, 2014 in the Court that were consolidated into the Consolidated Securities Action on June 3, 2014. The plaintiffs in the Consolidated Securities Action allege that the defendants made false and misleading statements or failed to disclose material adverse facts about our business, operations, and prospects. They allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seek to certify a class of all persons and entities that purchased or otherwise acquired Conn's common stock or call options, or sold or wrote Conn's put options between April 3, 2013 and December 9, 2014. The complaint does not specify the amount of damages sought.
On June 30, 2015, the Court held a hearing on the defendants' motion to dismiss plaintiffs' complaint. At the hearing, the Court dismissed Brian Taylor, a former executive officer, and certain other aspects of the complaint. The Court ordered the plaintiffs to further amend their complaint in accordance with its ruling, and the plaintiffs filed their Fourth Consolidated Amended Complaint on July 21, 2015. The remaining defendants filed a motion to dismiss on August 28, 2015. The defendant's motion to dismiss was fully briefed and the Court held a hearing on defendants' motion on March 25, 2016 and on May 5, 2016, the Court issued a ruling that dismissed 78 of 91 alleged misstatements. The parties have submitted their respective briefs in support of, and in opposition to, class certification, and also engaged in discovery pursuant to the Court’s scheduling order. In late June 2017, the Court granted the plaintiffs’ motion for class certification, and shortly thereafter, Defendants filed a petition for permission to appeal to the United States Fifth Circuit Court of Appeals (the "Fifth Circuit"). The Fifth Circuit granted leave to appeal on August 21, 2017.
On June 14, 2018, the parties filed a motion for preliminary approval of a settlement for the Consolidated Securities Action. The Court granted preliminary approval of the settlement terms and stayed the Consolidated Securities Action on June 28, 2018.  As a result of the Court's preliminary approval, the settlement amount of $22.5 million was reflected as a liability in accrued expenses on the Condensed Consolidated Balance Sheet with an offsetting receivable from our insurance carriers of $22.5 million reflected in other accounts receivable on the Condensed Consolidated Balance Sheet as of the three months ended July 31, 2018. The settlement will be funded solely by proceeds from our insurance carriers. As part of the settlement, we-along with the other executive officer defendants-have denied and continue to deny any wrongdoing giving rise to any liability or violation of the law, including the U.S. securities laws, as well as each and every one of the claims alleged by plaintiffs in the Consolidated Securities Action. On July 13, 2018, the claims administrator for the settlement began sending court-approved notices of settlement and proof of claim forms to the class members. Class members must submit requests for exclusion from the class, objections to the settlement, or enter an appearance in the final settlement approval hearing by September 20, 2018.  The Court has scheduled a final settlement approval hearing on October 11, 2018. As a result of this pending settlement, the Fifth Circuit ordered that the appeal on the class certification ruling be held in abeyance until September 10, 2018.  
On April 2, 2018, MicroCapital Fund, LP, MicroCapital Fund Ltd, and MicroCapital LLC filed a lawsuit (the “MicroCapital Lawsuit”) against us and certain of our former executive officers in the United States District Court for the Southern District of Texas, Cause No. 4:18-CV-01020 (the "MicroCapital Action").  The plaintiffs in this action allege that the defendants made false and misleading statements or failed to disclose material facts about our credit and underwriting practices, accounting and internal controls.  Plaintiffs allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5

16

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


promulgated thereunder, Texas and Connecticut common law fraud, and Texas common law negligent misrepresentation against all defendants; as well as section 20A of the Securities Exchange Act of 1934; and Connecticut common law negligent misrepresentation against certain defendants arising from plaintiffs’ purchase of Conn’s, Inc. securities between April 3, 2013 and February 20, 2014.  The complaint does not specify the amount of damages sought.
On April 27, 2018, the plaintiffs in the MicroCapital Action filed a motion for a ruling that discovery can proceed and a request for a Rule 16 conference. We filed a response in opposition, as well as a cross-motion to stay this action in its entirety on May 18, 2018. On July 10, 2018, the court granted our cross-motion to stay this action pending final approval of settlement in the Consolidated Securities Action.
We intend to vigorously defend our interests in the MicroCapital Action. It is not possible at this time to predict the timing or outcome of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
Derivative Litigation. On December 1, 2014, an alleged shareholder, purportedly on behalf of the Company, filed a derivative shareholder lawsuit against us and certain of our current and former directors and former executive officers in the Court, captioned as Robert Hack, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director), Brian Taylor (former executive officer) and Michael J. Poppe (former executive officer) and Conn's, Inc., Case No. 4:14-cv-03442 (the "Original Derivative Action"). The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading based on substantially similar factual allegations as those asserted in the Consolidated Securities Action. The plaintiff seeks unspecified damages against these persons and does not request any damages from us. Setting forth substantially similar claims against the same defendants, on February 25, 2015, an additional federal derivative action, captioned 95250 Canada LTEE, derivatively on Behalf of Conn's, Inc. v. Wright et al., Cause No. 4:15-cv-00521, was filed in the Court, which has been consolidated with the Original Derivative Action.
The Court previously approved a stipulation among the parties to stay the action pending resolution of the motion for class certification in the Consolidated Securities Action. The Court has agreed to continue to the stay through the final settlement approval hearing in the Consolidated Securities Action on October 11, 2018, and set a deadline of November 1, 2018, for defendants to respond to the complaint. 
Another derivative action was filed on January 27, 2015, captioned as Richard A. Dohn v. Wright, et al., Cause No. 2015-04405, in the 281st Judicial District Court, Harris County, Texas. This action makes substantially similar allegations to the Original Derivative Action against the same defendants. On September 14, 2017, the court entered an order extending the stay until September 7, 2018.
Prior to filing a lawsuit, an alleged shareholder, Robert J. Casey II ("Casey"), submitted a demand under Delaware law, which our Board of Directors refused. On May 19, 2016, Casey, purportedly on behalf of the Company, filed a lawsuit against us and certain of our current and former directors and former executive officers in the 55th Judicial District Court, Harris County, Texas, captioned as Casey, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Michael J. Poppe (former executive officer), Brian Taylor (former executive officer), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director) and William E. Saunders Jr., and Conn's, Inc., Cause No. 2016-33135. The complaint asserts claims for breach of fiduciary duties and unjust enrichment based on substantially similar factual allegations as those asserted in the Original Derivative Action. The complaint does not specify the amount of damages sought. Pursuant to the parties’ agreement, this action is stayed pending the resolution of the Consolidated Securities Action.
Other than Casey, none of the plaintiffs in the other derivative actions made a demand on our Board of Directors prior to filing their respective lawsuits. The defendants in the derivative actions intend to vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of any of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
Regulatory Matters. We are continuing to cooperate with the SEC's investigation of our underwriting policies and bad debt provisions, which began in November 2014.  The investigation is a non-public, fact-finding inquiry, and the SEC has stated that the investigation does not mean that any violations of law have occurred.
In addition, we are involved in other routine litigation and claims incidental to our business from time to time which, individually or in the aggregate, are not expected to have a material adverse effect on us. As required, we accrue estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation. The Company believes that any probable and reasonably estimable loss associated with the foregoing has been adequately reflected in the accompanying financial statements.

17

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.     Variable Interest Entities
From time to time, we have securitized customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. Under the terms of the respective securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of the asset-backed notes, and then to the residual equity holder. We retain the servicing of the securitized portfolio and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables, and we currently hold all of the residual equity. In addition, we, rather than the VIEs, will retain certain credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as we consolidate the VIEs.
We consolidate VIEs when we determine that we are the primary beneficiary of these VIEs, we have the power to direct the activities that most significantly impact the performance of the VIEs and our obligation to absorb losses and the right to receive residual returns are significant.
The following table presents the assets and liabilities held by the VIEs (for legal purposes, the assets and liabilities of the VIEs will remain distinct from Conn's, Inc.):
(in thousands)
July 31,
2018
 
January 31,
2018
Assets:
 
 
 
Restricted cash
$
50,107

 
$
85,322

Due from Conn's, Inc., net
4,528

 
15,212

Customer accounts receivable:
 
 
 
Customer accounts receivable
496,586

 
987,418

Restructured accounts
95,693

 
97,967

Allowance for uncollectible accounts
(88,589
)
 
(143,115
)
Allowances for no-interest option credit programs
(8,442
)
 
(18,228
)
Deferred fees and origination costs
(4,607
)
 
(9,332
)
Total customer accounts receivable, net
490,641

 
914,710

Total assets
$
545,276

 
$
1,015,244

Liabilities:
 
 
 
Accrued expenses
$
3,425

 
$
6,723

Other liabilities
6,111

 
10,639

 
 
 
 
Long-term debt:
 
 
 
2016-B Class B Notes

 
73,589

2017-A Class A Notes

 
59,794

2017-A Class B Notes

 
106,270

2017-A Class C Notes

 
50,340

2017-B Class A Notes
99,595

 
292,663

2017-B Class B Notes
132,180

 
132,180

2017-B Class C Notes
78,640

 
78,640

Warehouse Notes
121,060

 

 
431,475

 
793,476

Less: deferred debt issuance costs
(2,112
)
 
(5,497
)
Total long-term debt
429,363

 
787,979

Total liabilities
$
438,899

 
$
805,341

The assets of the VIEs serve as collateral for the obligations of the VIEs. The holders of the asset-backed notes have no recourse to assets outside of the respective VIEs.

18

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.     Segment Reporting 
Operating segments are defined as components of an enterprise that engage in business activities and for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources and assess performance. We are a leading specialty retailer and offer a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for our core credit-constrained consumers. We have two operating segments: (i) retail and (ii) credit. Our operating segments complement one another. The retail segment operates primarily through our stores and website in the retail furniture and mattresses, home appliances, consumer electronics and home office products business. Our retail segment product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit segment offers affordable financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives. Our operating segments provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next day delivery and installation in the majority of our markets, and product repair service. The operating segments follow the same accounting policies used in our condensed consolidated financial statements.
We evaluate a segment’s performance based upon operating income before taxes. Selling, general and administrative expenses include the direct expenses of the retail and credit operations, allocated corporate overhead expenses, and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment, which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period.
As of July 31, 2018, we operated retail stores in 14 states with no operations outside of the United States. No single customer accounts for more than 10% of our total revenues.

19

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Financial information by segment is presented in the following tables:
 
Three Months Ended July 31, 2018
 
Three Months Ended July 31, 2017
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
97,066

 
$

 
$
97,066

 
$
95,297

 
$

 
$
95,297

Home appliance
91,471

 

 
91,471

 
89,085

 

 
89,085

Consumer electronic
55,654

 

 
55,654

 
52,946

 

 
52,946

Home office
19,289

 

 
19,289

 
17,862

 

 
17,862

Other
3,699

 

 
3,699

 
4,403

 

 
4,403

Product sales
267,179

 

 
267,179

 
259,593

 

 
259,593

Repair service agreement commissions
25,662

 

 
25,662

 
23,519

 

 
23,519

Service revenues
3,472

 

 
3,472

 
3,301

 

 
3,301

Total net sales
296,313

 

 
296,313

 
286,413

 

 
286,413

Finance charges and other revenues
98

 
88,209

 
88,307

 
92

 
80,142

 
80,234

Total revenues
296,411

 
88,209

 
384,620

 
286,505

 
80,142

 
366,647

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
173,627

 

 
173,627

 
172,306

 

 
172,306

Selling, general and administrative expense (1)
83,003

 
37,687

 
120,690

 
78,667

 
32,965

 
111,632

Provision for bad debts
243

 
50,508

 
50,751

 
165

 
49,284

 
49,449

Charges and credits
300

 

 
300

 
4,068

 

 
4,068

Total costs and expense
257,173

 
88,195

 
345,368

 
255,206

 
82,249

 
337,455

Operating income (loss)
39,238

 
14

 
39,252

 
31,299

 
(2,107
)
 
29,192

Interest expense

 
15,566

 
15,566

 

 
20,039

 
20,039

Loss on extinguishment of debt

 
1,367

 
1,367

 

 
2,097

 
2,097

Income (loss) before income taxes
$
39,238

 
$
(16,919
)
 
$
22,319

 
$
31,299

 
$
(24,243
)
 
$
7,056



20

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Six Months Ended July 31, 2018
 
Six Months Ended July 31, 2017
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
194,086

 
$

 
$
194,086

 
$
189,740

 
$

 
$
189,740

Home appliance
169,494

 

 
169,494

 
169,207

 

 
169,207

Consumer electronic
107,956

 

 
107,956

 
108,699

 

 
108,699

Home office
37,599

 

 
37,599

 
34,650

 

 
34,650

Other
7,358

 

 
7,358

 
8,659

 

 
8,659

Product sales
516,493

 

 
516,493

 
510,955

 

 
510,955

Repair service agreement commissions
48,525

 

 
48,525

 
48,215

 

 
48,215

Service revenues
7,051

 

 
7,051

 
6,528

 

 
6,528

Total net sales
572,069

 

 
572,069

 
565,698

 

 
565,698

Finance charges and other revenues
112

 
170,826

 
170,938

 
172

 
156,603

 
156,775

Total revenues
572,181

 
170,826

 
743,007

 
565,870

 
156,603

 
722,473

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold
340,216

 

 
340,216

 
344,256

 

 
344,256

Selling, general and administrative expense (1)
160,755

 
74,813

 
235,568

 
152,614

 
65,555

 
218,169

Provision for bad debts
503

 
94,404

 
94,907

 
395

 
104,984

 
105,379

Charges and credits
300

 

 
300

 
5,295

 

 
5,295

Total costs and expense
501,774

 
169,217

 
670,991

 
502,560

 
170,539

 
673,099

Operating income (loss)
70,407

 
1,609

 
72,016

 
63,310

 
(13,936
)
 
49,374

Interest expense

 
32,386

 
32,386

 

 
44,047

 
44,047

Loss on extinguishment of debt

 
1,773

 
1,773

 

 
2,446

 
2,446

Income (loss) before income taxes
$
70,407

 
$
(32,550
)
 
$
37,857

 
$
63,310

 
$
(60,429
)
 
$
2,881

(1)
For the three months ended July 31, 2018 and 2017, the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $9.3 million and $7.7 million, respectively. For the three months ended July 31, 2018 and 2017, the amount of reimbursement made to the retail segment by the credit segment was $9.4 million and $9.2 million, respectively. For the six months ended July 31, 2018 and 2017, the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $17.6 million and $14.2 million, respectively. For the six months ended July 31, 2018 and 2017, the amount of reimbursement made to the retail segment by the credit segment was $18.8 million and $18.7 million respectively.
9.
Guarantor Financial Information 
Conn's, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. The Senior Notes, which were issued by Conn's, Inc., are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Guarantors. As of July 31, 2018 and January 31, 2018 the direct or indirect subsidiaries of Conn's, Inc. that were not Guarantors (the “Non-Guarantor Subsidiaries”) were the VIEs and minor subsidiaries. There are no restrictions under the Indenture on the ability of any of the Guarantors to transfer funds to Conn's, Inc. in the form of dividends or distributions.
The following financial information presents the Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations, and Condensed Consolidated Statement of Cash Flows for Conn's, Inc. (the issuer of the Senior Notes), the Guarantors, and the Non-Guarantor Subsidiaries, together with certain eliminations. Investments in subsidiaries are accounted for by the parent company using the equity method for purposes of this presentation. Results of operations of subsidiaries are therefore reflected in the parent company's investment accounts and operations. The consolidated financial information includes financial data for:
(i) Conn’s, Inc. (on a parent-only basis),
(ii) Guarantors,
(iii) Non-Guarantor Subsidiaries, and

21

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(iv) the parent company and the subsidiaries on a consolidated basis at July 31, 2018 and January 31, 2018 (after the elimination of intercompany balances and transactions). Condensed Consolidated Net Income is the same as Condensed Consolidated Comprehensive Income for the periods presented.
Condensed Consolidated Balance Sheet as of July 31, 2018:
(in thousands)
Conn's, Inc.
 
Guarantors
 
Non-guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
4,435

 
$

 
$

 
$
4,435

Restricted cash

 
1,550

 
50,107

 

 
51,657

Customer accounts receivable, net of allowances

 
351,382

 
270,627

 

 
622,009

Other accounts receivable

 
87,797

 

 

 
87,797

Inventories

 
195,728

 

 

 
195,728

Other current assets

 
16,961

 
4,528

 
(6,954
)
 
14,535

Total current assets

 
657,853

 
325,262

 
(6,954
)
 
976,161

Investment in and advances to subsidiaries
768,987

 
106,377

 

 
(875,364
)
 

Long-term portion of customer accounts receivable, net of allowances

 
427,480

 
220,014

 

 
647,494

Property and equipment, net

 
142,631

 

 

 
142,631

Deferred income taxes
23,086

 

 

 

 
23,086

Other assets

 
7,129

 

 

 
7,129

Total assets
$
792,073

 
$
1,341,470

 
$
545,276

 
$
(882,318
)
 
$
1,796,501

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of capital lease obligations
$

 
$
1,149

 
$

 
$

 
$
1,149

Accounts payable

 
85,001

 

 

 
85,001

Accrued expenses
686

 
91,385

 
3,425

 
(2,426
)
 
93,070

Other current liabilities

 
24,585

 
2,706

 
(4,528
)
 
22,763

Total current liabilities
686

 
202,120

 
6,131

 
(6,954
)
 
201,983

Deferred rent

 
85,255

 

 

 
85,255

Long-term debt and capital lease obligations
221,740

 
264,978

 
429,363

 

 
916,081

Other long-term liabilities

 
20,130

 
3,405

 

 
23,535

Total liabilities
222,426

 
572,483

 
438,899

 
(6,954
)
 
1,226,854

Total stockholders' equity
569,647

 
768,987

 
106,377

 
(875,364
)
 
569,647

Total liabilities and stockholders' equity
$
792,073

 
$
1,341,470

 
$
545,276

 
$
(882,318
)
 
$
1,796,501

Deferred income taxes related to tax attributes of the Guarantor Subsidiaries and Non-Guarantor Subsidiaries are reflected under Conn's, Inc.


22

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Condensed Consolidated Balance Sheet as of January 31, 2018:
(in thousands)
Conn's, Inc.
 
Guarantors
 
Non-guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
9,286

 
$

 
$

 
$
9,286

Restricted cash

 
1,550

 
85,322

 

 
86,872

Customer accounts receivable, net of allowances

 
177,117

 
459,708

 

 
636,825

Other accounts receivable

 
71,186

 

 

 
71,186

Inventories

 
211,894

 

 

 
211,894

Other current assets

 
68,621

 
15,212

 
(19,879
)
 
63,954

Total current assets

 
539,654

 
560,242

 
(19,879
)
 
1,080,017

Investment in and advances to subsidiaries
735,272

 
209,903

 

 
(945,175
)
 

Long-term portion of customer accounts receivable, net of allowances

 
195,606

 
455,002

 

 
650,608

Property and equipment, net

 
143,152

 

 

 
143,152

Deferred income taxes
21,565

 

 

 

 
21,565

Other assets

 
5,457

 

 

 
5,457

Total assets
$
756,837

 
$
1,093,772

 
$
1,015,244

 
$
(965,054
)
 
$
1,900,799

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of capital lease obligations
$

 
$
907

 
$

 
$

 
$
907

Accounts payable

 
71,617

 

 

 
71,617

Accrued expenses
686

 
66,370

 
6,723

 
(4,667
)
 
69,112

Other current liabilities

 
32,685

 
5,002

 
(15,212
)
 
22,475

Total current liabilities
686

 
171,579

 
11,725

 
(19,879
)
 
164,111

Deferred rent

 
87,003

 

 

 
87,003

Long-term debt and capital lease obligations
221,083

 
81,043

 
787,979

 

 
1,090,105

Other long-term liabilities

 
18,875

 
5,637

 

 
24,512

Total liabilities
221,769

 
358,500

 
805,341

 
(19,879
)
 
1,365,731

Total stockholders' equity
535,068