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, 2019
 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
CONN
NASDAQ Global Select Market
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 every Interactive Data File required to be submitted 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
 
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 29, 2019
Class
 
Outstanding
Common stock, $0.01 par value per share
 
28,903,361


Table of Contents

CONN’S, INC. AND SUBSIDIARIES

FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 2019

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,” “YE$ YOU’RE APPROVED,” “YES Money,” “YE$ Money,” “YES Lease,” “YE$ Lease,” “$i Estas Aprobado,” 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,
2019

January 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,563


$
5,912

Restricted cash (includes VIE balances of $66,444 and $57,475, respectively)
68,219


59,025

Customer accounts receivable, net of allowances (includes VIE balances of $273,685 and $324,064, respectively)
664,980


652,769

Other accounts receivable
67,056


67,078

Inventories
213,513


220,034

Income taxes receivable
763


407

Prepaid expenses and other current assets
9,948


9,169

Total current assets
1,032,042

 
1,014,394

Long-term portion of customer accounts receivable, net of allowances (includes VIE balances of $365,180 and $230,901, respectively)
653,831


686,344

Property and equipment, net
174,225


148,983

Operating lease right-of-use assets
248,707

 

Deferred income taxes
25,612


27,535

Other assets
11,808


7,651

Total assets
$
2,146,225

 
$
1,884,907

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Current maturities of debt and finance lease obligations (includes VIE balances of $1,945 and $53,635, respectively)
$
2,558

 
$
54,109

Accounts payable
73,205

 
71,118

Accrued compensation and related expenses
21,737

 
27,052

Accrued expenses
59,664

 
54,381

Operating lease liability - current
33,398

 

Income taxes payable
4,308

 
8,902

Deferred revenues and other credits
11,229

 
22,006

Total current liabilities
206,099

 
237,568

Deferred rent


93,127

Operating lease liability - non current
331,010

 

Long-term debt and finance lease obligations (includes VIE balances of $554,636 and $407,993, respectively)
945,981


901,222

Other long-term liabilities
26,400


33,015

Total liabilities
1,509,490

 
1,264,932

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; 32,000,548 and 31,788,162 shares issued, respectively)
320

 
318

Treasury stock (at cost; 1,874,846 shares and 0 shares, respectively)
(34,344
)
 

Additional paid-in capital
116,645

 
111,185

Retained earnings
554,114

 
508,472

Total stockholders’ equity
636,735

 
619,975

Total liabilities and stockholders equity
$
2,146,225

 
$
1,884,907

See notes to condensed consolidated financial statements.


1

Table of Contents

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and dollars in thousands, except per share amounts)
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Product sales
$
274,578

 
$
267,179

 
$
509,023

 
$
516,493

Repair service agreement commissions
27,647

 
25,662

 
51,671

 
48,525

Service revenues
3,837

 
3,472

 
7,347

 
7,051

Total net sales
306,062

 
296,313

 
568,041

 
572,069

Finance charges and other revenues
94,997

 
88,307

 
186,530


170,938

Total revenues
401,059

 
384,620

 
754,571

 
743,007

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
182,065

 
173,627

 
339,293

 
340,216

Selling, general and administrative expense
127,484

 
120,690

 
245,398

 
235,568

Provision for bad debts
49,736

 
50,751

 
89,782

 
94,907

Charges and credits

 
300

 
(695
)
 
300

Total costs and expenses
359,285

 
345,368

 
673,778

 
670,991

Operating income
41,774

 
39,252

 
80,793

 
72,016

Interest expense
14,396

 
15,566

 
28,893

 
32,386

Loss on extinguishment of debt

 
1,367

 

 
1,773

Income before income taxes
27,378

 
22,319

 
51,900

 
37,857

Provision for income taxes
7,404

 
5,308

 
12,417

 
8,114

Net income
$
19,974

 
$
17,011

 
$
39,483

 
$
29,743

Income per share:
 
 
 
 
 
 
 
Basic
$
0.64

 
$
0.54

 
$
1.25

 
$
0.94

Diluted
$
0.62

 
$
0.53

 
$
1.23

 
$
0.92

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
31,442,909

 
31,652,017

 
31,660,320

 
31,597,225

Diluted
31,958,704

 
32,242,463

 
32,198,024

 
32,210,759

See notes to condensed consolidated financial statements.


2

Table of Contents

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited and in thousands, except for number of shares)
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
 
 
 
 
Common Stock
 
 
Retained Earnings
 
Treasury Stock
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Total
Balance January 31, 2019
31,788,162

 
$
318

 
$
111,185

 
$
508,472

 

 
$

 
$
619,975

Adoption of ASU 2016-02

 

 

 
6,159

 

 

 
6,159

Exercise of options and vesting of restricted stock, net of withholding tax
136,206

 
1

 
(1,241
)
 

 

 

 
(1,240
)
Issuance of common stock under Employee Stock Purchase Plan
12,158

 

 
198

 

 

 

 
198

Stock-based compensation

 

 
3,217

 

 

 

 
3,217

Net income

 

 

 
19,509

 

 

 
19,509

Balance April 30, 2019
31,936,526

 
$
319

 
$
113,359

 
$
534,140

 

 
$

 
$
647,818

Exercise of options and vesting of restricted stock, net of withholding tax
51,384

 
1

 
(327
)
 

 

 

 
(326
)
Issuance of common stock under Employee Stock Purchase Plan
12,638

 

 
194

 

 

 

 
194

Stock-based compensation

 

 
3,419

 

 

 

 
3,419

Common stock repurchase

 

 

 

 
(1,874,846
)
 
(34,344
)
 
(34,344
)
Net income

 

 

 
19,974

 

 

 
19,974

Balance July 31, 2019
32,000,548

 
$
320

 
$
116,645

 
$
554,114

 
(1,874,846
)
 
$
(34,344
)
 
$
636,735

 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
 
 
 
 
Common Stock
 
 
Retained Earnings
 
Treasury Stock
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Total
Balance January 31, 2018
31,435,775

 
$
314

 
$
101,087

 
$
433,667

 

 
$

 
$
535,068

Adoption of ASU 2014-09

 

 

 
957

 

 

 
957

Exercise of options and vesting of restricted stock, net of withholding tax
143,021

 
2

 
(1,850
)
 

 

 

 
(1,848
)
Issuance of common stock under Employee Stock Purchase Plan
8,031

 

 
226

 

 

 

 
226

Stock-based compensation

 

 
2,520

 

 

 

 
2,520

Net income

 

 

 
12,732

 

 

 
12,732

Balance April 30, 2018
31,586,827

 
$
316

 
$
101,983

 
$
447,356

 

 
$

 
$
549,655

Exercise of options and vesting of restricted stock, net of withholding tax
100,018

 
1

 
(274
)
 

 

 

 
(273
)
Issuance of common stock under Employee Stock Purchase Plan
7,569

 

 
213

 

 

 

 
213

Stock-based compensation

 

 
3,042

 

 

 

 
3,042

Net income

 

 

 
17,011

 

 

 
17,011

Balance July 31, 2018
31,694,414

 
$
317

 
$
104,964

 
$
464,367

 

 
$

 
$
569,648

See notes to condensed consolidated financial statements.


3

Table of Contents

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Six Months Ended July 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
39,483

 
$
29,743

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

 
 

Depreciation
17,682

 
15,434

Amortization of right-of-use asset
13,763

 

Amortization of debt issuance costs
4,210

 
6,382

Provision for bad debts and uncollectible interest
116,272

 
118,765

Stock-based compensation expense
6,636

 
5,562

Charges, net of credits, for facility relocations
(680
)
 

Deferred income taxes
475

 
(1,776
)
Tenant improvement allowances received from landlords
14,254

 
4,362

Change in operating assets and liabilities:
 

 
 

Customer accounts receivable
(95,829
)
 
(100,331
)
Other accounts receivables
(17,356
)
 
(14,679
)
Inventories
6,521

 
16,167

Other assets
(5,818
)
 
17,359

Accounts payable
763

 
11,091

Accrued expenses
(7,368
)
 
22,910

Operating leases
(626
)
 

Income taxes
(4,810
)
 
31,868

Deferred revenues and other credits
1,872

 
(7,205
)
Net cash provided by operating activities
89,444

 
155,652

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(33,330
)
 
(12,166
)
Net cash used in investing activities
(33,330
)
 
(12,166
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of asset-backed notes
381,790

 

Payments on asset-backed notes
(234,162
)
 
(481,883
)
Borrowings from revolving credit facility
778,166

 
839,236

Payments on revolving credit facility
(881,166
)
 
(655,036
)
Borrowings from warehouse facility

 
173,286

Payments on warehouse facility
(51,561
)
 
(52,226
)
Payments of debt issuance costs and amendment fees
(3,492
)
 
(3,539
)
Proceeds from stock issued under employee benefit plans
597

 
834

Tax payments associated with equity-based compensation transactions
(1,781
)
 
(2,516
)
Payment from extinguishment of debt

 
(1,177
)
Purchase of treasury stock
(33,019
)
 

Other
(641
)
 
(531
)
Net cash used in financing activities
(45,269
)
 
(183,552
)
Net change in cash, cash equivalents and restricted cash
10,845

 
(40,066
)
Cash, cash equivalents and restricted cash, beginning of period
64,937

 
96,158

Cash, cash equivalents and restricted cash, end of period
$
75,782

 
$
56,092

Non-cash investing and financing activities:
 
 
 
Right-of-use assets obtained in exchange for new finance lease liabilities
$
968

 
$

Right-of-use assets obtained in exchange for new operating lease liabilities
$
53,974

 
$

Property and equipment purchases not yet paid
$
14,241

 
$
4,363

Share repurchases not yet settled
$
1,325

 
$

Supplemental cash flow data:
 
 
 
Cash interest paid
$
21,559

 
$
25,505

Cash income taxes paid, net
$
16,859

 
$
(21,969
)
See notes to condensed consolidated financial statements.


4

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 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 or collection efforts. 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 its Variable Interest Entities (“VIEs”), have been prepared by management in accordance with U.S. generally accepted accounting principles (“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, 2019 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, 2019 (the “2019 Form 10-K”) filed with the United States Securities and Exchange Commission (the “SEC”) on March 26, 2019.
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 Condensed 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 Condensed Consolidated Financial Statements.
Refer to Note 4, Debt and Financing 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, 2019 and January 31, 2019, cash and cash equivalents included cash, credit card deposits in transit, and highly liquid debt instruments purchased with a maturity date of three months or less. Credit card deposits in transit included in cash and cash equivalents were $2.3 million and $2.5 million as of July 31, 2019 and January 31, 2019, respectively. 


5

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


Restricted Cash. The restricted cash balance as of July 31, 2019 and January 31, 2019 includes $53.7 million and $45.3 million, respectively, of cash we collected as servicer on the securitized receivables that was subsequently remitted to the VIEs and $12.7 million and $12.2 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 include 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 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 refinance their account, which typically 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, 2019 and January 31, 2019, there was $11.6 million and $11.2 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 place accounts in non-accrual status when legally required. Payments received on non-accrual loans are applied to principal and reduce the balance of the loan. At July 31, 2019 and January 31, 2019, the carrying value of customer accounts receivable in non-accrual status was $14.6 million and $13.9 million, respectively. At July 31, 2019 and January 31, 2019, the carrying value of customer accounts receivable that were past due 90 days or more and still accruing interest totaled $95.4 million and $106.5 million, respectively. At July 31, 2019 and January 31, 2019, the carrying value of customer accounts receivable in a bankruptcy status that were less than 60 days past due of $12.1 million and $12.0 million, respectively, were included within the customer receivables balance carried in non-accrual status.
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 accounts receivable 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


6

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


year-over-year change in the balance of customer accounts receivable that are 60 days or more past due.  In addition to adjusted 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 and repair service agreement (“RSA”) 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.
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 4, Debt and Financing Lease Obligations, are included in other assets on our Condensed Consolidated Balance Sheet and were $5.2 million and $6.1 million as of July 31, 2019 and January 31, 2019, respectively.
Income Taxes. For the six months ended July 31, 2019 and 2018, we utilized the estimated annual effective tax rate based on our estimated fiscal year 2020 and 2019 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.
For the six months ended July 31, 2019 and 2018, the effective tax rate was 23.9% and 21.4%, respectively. The primary factor affecting the increase in our effective tax rate for the six months ended July 31, 2019 was a decrease in deductible compensation expense compared to the prior year period.
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 (“RSUs”), the fair value of the grant is the market value of our stock at the date of issuance. For grants of performance-based restricted stock units (“PSUs”), the fair value of the grant is the market value of our stock at the date of issuance adjusted for a market condition, a performance condition and a service condition.
The following table sets forth the RSUs, stock options and PSUs granted during the three and six months ended July 31, 2019 and 2018
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2019
 
2018
 
2019
 
2018
RSUs (1)
100,365

 
69,478

 
103,794

 
149,889

Stock Options (2)

 

 

 
620,166

PSUs (3)
33,894

 

 
33,894

 

Total stock awards granted
134,259

 
69,478

 
137,688

 
770,055

Aggregate grant date fair value (in thousands)
$
2,774

 
$
1,673

 
$
2,845

 
$
17,184

(1) The majority of RSUs issued during the three and six months ended July 31, 2019 and 2018 are scheduled to vest ratably over periods of three to four years from the date of grant.


7

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


(2) 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.
(3) The PSUs issued during the three months ended July 31, 2019 will vest, if at all, upon certification, after the Company’s fiscal year 2022 by the Compensation Committee, of the satisfaction of certain performance conditions.
For the three months ended July 31, 2019 and 2018, stock-based compensation expense was $3.4 million and $3.1 million, respectively. For the six months ended July 31, 2019 and 2018, stock-based compensation expense was $6.6 million and $5.6 million, respectively.
Earnings per Share. Basic earnings per share for a particular period 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 are 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,
 
2019
 
2018
 
2019
 
2018
Weighted-average common shares outstanding - Basic
31,442,909

 
31,652,017

 
31,660,320

 
31,597,225

Dilutive effect of stock options, PSUs and RSUs
515,795

 
590,446

 
537,704

 
613,534

Weighted-average common shares outstanding - Diluted
31,958,704

 
32,242,463

 
32,198,024

 
32,210,759

For the three months ended July 31, 2019 and 2018, the weighted-average number of stock options and RSUs not included in the calculation due to their anti-dilutive effect, was 927,969 and 624,291, respectively. For the six months ended July 31, 2019 and 2018, the weighted-average number of stock options and RSUs not included in the calculation due to their anti-dilutive effect, was 892,098 and 497,224, respectively.
As the performance conditions pursuant to the Company’s PSU agreements have not been met in full, 228,477 PSUs are not included in the computation of diluted EPS for the three and six months ended July 31, 2019 and 400,834 PSUs are not included in the computation of diluted EPS for the three and six months ended July 31, 2018.
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).
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.


8

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


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 receivable, determined using a Level 3 discounted cash flow analysis, approximates their carrying value, net of 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, 2019, the fair value of the Senior Notes outstanding, which was determined using Level 1 inputs, was $230.2 million as compared to the carrying value of $227.0 million, excluding the impact of the related discount. At July 31, 2019, the fair value of the asset-backed notes approximates their carrying value and was determined using Level 2 inputs based on inactive trading activity.
Deferred Revenue. Deferred revenue related to contracts with customers consists of deferred customer deposits and deferred RSA administration fees. During the three and six months ended July 31, 2019, we recognized $1.0 million and $1.4 million of revenue for customer deposits deferred as of the beginning of the period. During the three and six months ended July 31, 2019, we recognized $1.3 million and $2.5 million of revenue for RSA administrative fees deferred as of January 31, 2019.
Recent Accounting Pronouncements Adopted. In February 2016 the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for most leases. Effective February 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective approach. For most leases, a liability was 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 recognize a single lease cost on a straight line basis. Other leases are required to be accounted for as financing arrangements similar to how we previously accounted for capital leases. Upon adoption we elected a package of practical expedients permitted under the transition guidance within the new standard. The practical expedients adopted allowed us to carry forward the historical lease classification, allowed us to not separate and allocate the consideration paid between lease and non-lease components included within a contract and allowed us to carry forward our accounting treatment for land easements on existing agreements. We also adopted an optional transition method finalized by the FASB in July 2018 that waives the requirement to apply this ASU in the comparative periods presented within the financial statements in the year of adoption. Therefore, results for reporting periods beginning after February 1, 2019 are presented under ASC Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies under ASC Topic 840.
Additionally, we have elected the short-term policy election for the Company for any lease that, at the commencement date, has a lease term of twelve months or less. We will not recognize a lease liability or right-of-use asset on the balance sheet for any of our short-term leases. Rather, the short-term lease payments will be recognized as an expense on a straight-line basis over the lease term. The current period short-term lease expense reasonably reflects our short-term lease commitments.
The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet as a result of the adoption of ASC 842 were as follows (in thousands):
 
Impact of Adoption of ASC 842
(in thousands)
Balance at January 31, 2019
Adjustments due to ASC 842
Balance at February 1, 2019
Assets
 
 
 
   Current assets (1)
$
1,014,394

$
(2,983
)
$
1,011,411

   Operating lease right-of-use assets (2)

227,421

227,421

   Deferred income taxes (3)
27,535

(1,447
)
26,088

Liabilities
 
 

   Current liabilities (4)
237,568

(12,426
)
225,142

   Operating lease liability - current (5)

29,815

29,815

   Deferred rent (4)
93,127

(93,127
)

   Operating lease liability - non-current (5)

300,170

300,170

   Other long-term liabilities (3)
33,015

(7,606
)
25,409

Stockholder’s equity (3)
619,975

6,159

626,134

(1)
Reclassification of the $3.0 million January 31, 2019 balance of accounts receivable for tenant improvement allowances to a reduction in the operating lease liability.


9

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


(2)
The operating lease right-of-use assets represent the present value of the lease liability offset by the full value of deferred rent and tenant improvement allowances received from the lessor which had not been utilized as of the date of adoption.
(3)
A net cumulative-effect adjustment to increase retained earnings by $6.2 million to recognize the $7.6 million January 31, 2019 balance of deferred gains which resulted from sale and operating leaseback transactions made at off-market terms offset by the $1.4 million impact on our deferred tax asset related to the sale-leaseback transactions.
(4)
Reclassification of the full value of deferred rent and tenant improvement allowances received from lessors, which were previously recorded as liabilities as they had not been utilized as of the date of adoption, to a reduction of the operating lease right-of-use assets.
(5)
The operating lease liability represents the $340.5 million present value of future operating lease obligations as of January 31, 2019, offset by $10.5 million of accounts receivable for tenant improvement allowances.
Recent Accounting Pronouncements Yet To Be Adopted. 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 was permitted beginning in the first quarter of fiscal year 2020. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 2019-04 requires that the current estimate of recoveries are included in the allowance for credit losses. 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 will 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.
2.    Customer Accounts Receivable
Customer accounts receivable consisted of the following:
(in thousands)
July 31,
2019
 
January 31,
2019
Customer accounts receivable portfolio balance
$
1,557,920

 
$
1,589,828

Deferred fees and origination costs, net
(15,742
)
 
(16,579
)
Allowance for no-interest option credit programs
(15,866
)
 
(19,257
)
Allowance for uncollectible interest
(15,213
)
 
(15,555
)
Carrying value of customer accounts receivable
1,511,099

 
1,538,437

Allowance for bad debts
(192,288
)
 
(199,324
)
Carrying value of customer accounts receivable, net of allowance for bad debts
1,318,811

 
1,339,113

  Short-term portion of customer accounts receivable, net
(664,980
)
 
(652,769
)
Long-term customer accounts receivable, net
$
653,831

 
$
686,344

 
Carrying Value
(in thousands)
July 31,
2019
 
January 31,
2019
Customer accounts receivable 60+ days past due (1)
$
132,187

 
$
146,188

Re-aged customer accounts receivable (2)(3)
389,591

 
395,576

Restructured customer accounts receivable (4)
190,654

 
183,641

(1)
As of July 31, 2019 and January 31, 2019, the carrying value of customer accounts receivable past due one day or greater was $420.5 million and $420.9 million, respectively. These amounts include the 60+ days past due balances shown above.
(2)
The re-aged carrying value as of July 31, 2019 and January 31, 2019 includes $86.0 million and $92.4 million in carrying value that are both 60+ days past due and re-aged.


10

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


(3)
The re-aged carrying value as of July 31, 2019 and January 31, 2019 includes $15.9 million and $26.5 million in first time re-ages related to customers within FEMA-designated Hurricane Harvey disaster areas.
(4)
The restructured carrying value as of July 31, 2019 and January 31, 2019 includes $44.3 million and $43.9 million in carrying value that are both 60+ days past due and restructured.
The following presents the activity in our allowance for doubtful accounts and uncollectible interest for customer accounts receivable: 
 
Six Months Ended July 31, 2019
 
Six Months Ended July 31, 2018
(in thousands)
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
 
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
Allowance at beginning of period
$
147,123

 
$
67,756

 
$
214,879

 
$
148,856

 
$
54,716

 
$
203,572

Provision (1)
79,062

 
37,067

 
116,129

 
85,117

 
33,146

 
118,263

Principal charge-offs (2)
(80,330
)
 
(30,267
)
 
(110,597
)
 
(82,124
)
 
(25,264
)
 
(107,388
)
Interest charge-offs
(18,479
)
 
(6,963
)
 
(25,442
)
 
(16,161
)
 
(4,972
)
 
(21,133
)
Recoveries (2)
9,102

 
3,430

 
12,532

 
7,873

 
2,422

 
10,295

Allowance at end of period
$
136,478

 
$
71,023

 
$
207,501

 
$
143,561

 
$
60,048

 
$
203,609

Average total customer portfolio balance
$
1,360,643

 
$
192,212

 
$
1,552,855

 
$
1,340,360

 
$
162,951

 
$
1,503,311

(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 the principal amount collected during the period for previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.
3.     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)
2019
 
2018
 
2019
 
2018
Interest income and fees
$
85,204

 
$
80,435

 
$
169,221

 
$
156,781

Insurance income
9,590

 
7,774

 
16,904

 
14,045

Other revenues
203

 
98

 
405

 
112

Total finance charges and other revenues
$
94,997

 
$
88,307

 
$
186,530

 
$
170,938

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, 2019 and 2018, interest income and fees reflected provisions for uncollectible interest of $14.4 million and $12.4 million, respectively. The amount included in interest income and fees related to TDR accounts for the three months ended July 31, 2019 and 2018 were $8.6 million and $6.5 million, respectively. During the six months ended July 31, 2019 and 2018, interest income and fees reflected provisions for uncollectible interest of $26.7 million and $23.9 million, respectively. The amount included in interest income and fees related to TDR accounts for the six months ended July 31, 2019 and 2018 were $16.7 million and $12.3 million, respectively.


11

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


4.     Debt and Financing Lease Obligations 
Debt and financing lease obligations consisted of the following:
(in thousands)
July 31,
2019
 
January 31,
2019
Revolving Credit Facility
$
163,500

 
$
266,500

Senior Notes
227,000

 
227,000

2017-B VIE Asset-backed Class B Notes
29,001

 
98,297

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

 
78,640

2018-A VIE Asset-backed Class A Notes
61,415

 
105,971

2018-A VIE Asset-backed Class B Notes
37,038

 
63,908

2018-A VIE Asset-backed Class C Notes
37,038

 
63,908

2019-A VIE Asset-backed Class A Notes
187,959

 

2019-A VIE Asset-backed Class B Notes
64,750

 

2019-A VIE Asset-backed Class C Notes
62,510

 

Warehouse Notes
2,074

 
53,635

Financing lease obligations
5,402

 
5,075

Total debt and financing lease obligations
956,327

 
962,934

Less:
 
 
 
Discount on debt
(1,684
)
 
(1,966
)
Deferred debt issuance costs
(6,104
)
 
(5,637
)
Current maturities of long-term debt and financing lease obligations
(2,558
)
 
(54,109
)
Long-term debt and financing lease obligations
$
945,981

 
$
901,222

Senior Notes. On July 1, 2014, we issued $250.0 million of unsecured Senior Notes due July 2022 bearing interest at 7.25% (the “Senior Notes”), pursuant to an indenture dated July 1, 2014 (as amended, 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. 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. As of July 31, 2019, $213.8 million would have been free from the restricted payments covenant contained in the Indenture. 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. From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issue 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, if any, 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 related to credit insurance and RSAs 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


12

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


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 outstanding as of July 31, 2019 consisted of the following:
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-Backed Notes
 
Original Principal Amount
 
Original Net Proceeds (1)
 
Current Principal Amount
 
Issuance Date
 
Maturity Date
 
Contractual Interest Rate
 
Effective Interest Rate (2)
2017-B Class B Notes
 
$
132,180

 
$
131,281

 
$
29,001

 
12/20/2017
 
4/15/2021
 
4.52%
 
5.30%
2017-B Class C Notes
 
78,640

 
77,843

 
78,640

 
12/20/2017
 
11/15/2022
 
5.95%
 
6.35%
2018-A Class A Notes
 
219,200

 
217,832

 
61,415

 
8/15/2018
 
1/17/2023
 
3.25%
 
4.82%
2018-A Class B Notes
 
69,550

 
69,020

 
37,038

 
8/15/2018
 
1/17/2023
 
4.65%
 
5.60%
2018-A Class C Notes
 
69,550

 
68,850

 
37,038

 
8/15/2018
 
1/17/2023
 
6.02%
 
6.97%
2019-A Class A Notes
 
254,530

 
253,026

 
187,959

 
4/24/2019
 
10/16/2023
 
3.40%
 
4.71%
2019-A Class B Notes
 
64,750

 
64,276

 
64,750

 
4/24/2019
 
10/16/2023
 
4.36%
 
5.17%
2019-A Class C Notes
 
62,510

 
61,898

 
62,510

 
4/24/2019
 
10/16/2023
 
5.29%
 
6.18%
Warehouse Notes
 
121,060

 
118,972

 
2,074

 
7/16/2018
 
1/15/2020
 
Index + 2.50% (3)
 
6.43%
Total
 
$
1,071,970

 
$
1,062,998

 
$
560,425

 
 
 
 
 
 
 
 
(1)
After giving effect to debt issuance costs.
(2)
For the six months ended July 31, 2019, and inclusive of the impact of 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 April 24, 2019, the Company completed the issuance and sale of asset-backed notes at a face amount of $381.8 million secured by the transferred customer accounts receivables and restricted cash held by a VIE, which resulted in net proceeds to us of $379.2 million, net of debt issuance costs. Net proceeds from the offering were used to repay indebtedness under the Company’s Revolving Credit Facility, as defined below, and for other general corporate purposes. The asset-backed notes mature on October 16, 2023 and consist of $254.5 million of 3.40% Series 2019-A, Class A Asset Backed Fixed Rate Notes, $64.8 million of 4.36% Series 2019-A, Class B Asset Backed Fixed Rate Notes and $62.5 million of 5.29%, Series 2019-A, Class C Asset Backed Fixed Rate Notes.
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 (the “Fourth Amendment”), 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 and a maturity date of May 23, 2022.
Loans under the Revolving Credit Facility bear interest, at our option, at a rate equal to LIBOR plus the applicable margin ranging from 2.50% to 3.25% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum (depending on a pricing grid determined by our total leverage ratio). 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%. We also pay an unused fee on the portion of the commitments that is 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, 2019.
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, 2019, we had immediately available borrowing capacity of $403.0 million under our Revolving Credit Facility, net of standby letters of credit issued of $2.5 million. We also had $81.0 million that may become available under our Revolving Credit Facility if we grow the balance of eligible customer receivables and total eligible inventory balances.


13

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


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, 2019, we were restricted from making distributions, including repayments of the Senior Notes or other distributions, in excess of $266.4 million as a result of the Revolving Credit Facility distribution and payment 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.
Debt Covenants. We were in compliance with our debt covenants, as amended, at July 31, 2019. A summary of the significant financial covenants that govern our Revolving Credit Facility, as amended, compared to our actual compliance status at July 31, 2019 is presented below: 
 
Actual
 
Required Minimum/ Maximum
Interest Coverage Ratio for the quarter must equal or exceed (minimum)
4.69:1.00
 
1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed (minimum)
4.38:1.00
 
1.50:1.00
Leverage Ratio must not exceed (maximum)
1.90:1.00
 
4.00:1.00
ABS Excluded Leverage Ratio must not exceed (maximum)
1.12:1.00
 
2.00:1.00
Capital Expenditures, net, must not exceed (maximum)
$27.3 million
 
$100.0 million
All capitalized terms in the above table are defined by the Revolving Credit Facility and may or may not match 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.
5.     Leases 
We lease most of our current store locations and certain of our facilities and operating equipment under operating leases. The fixed, non-cancelable terms of our real estate leases are generally five to 15 years and generally include renewal options that allow us to extend the term beyond the initial non-cancelable term. However, prior to the expiration of the existing contract, the Company will typically renegotiate any lease contracts as opposed to continuing in the current lease under the renewal terms. As such, the lease renewal options are not recognized as part of the right-of-use assets and liabilities. Most of the real estate leases require payment of real estate taxes, insurance and certain common area maintenance costs in addition to future minimum lease payments. Equipment leases generally provide for initial lease terms of three to five years and provide for a purchase right at the end of the lease term at the then fair market value of the equipment.
Certain operating leases contain tenant allowance provisions, which obligate the landlord to remit cash to us as an incentive to enter into the lease agreement. We record the full amount to be remitted by the landlord as a reduction to the operating lease right-of-use assets upon commencement of the lease and amortize the balance on a straight-line basis over the life of the lease.
Supplemental lease information is summarized below:
(in thousands)
Balance sheet classification
July 31,
2019
Assets
 
 
Operating lease assets
Operating lease right-of-use assets
$
248,707

Finance lease assets
Property and equipment, net
5,993

Total leased assets
 
254,700

Liabilities
 
 
Operating (1)
Operating lease liability - current
$
44,804

Finance
Current maturities of debt and finance lease obligations
613

Operating
Operating lease liability - non current
331,010

Finance
Long-term debt and finance lease obligations
4,789

Total lease liabilities
 
$
381,216

(1)
Represents the gross operating lease liability before tenant improvement allowances. As of July 31, 2019 we had $11.4 million of tenant improvement allowances to be remitted by the landlord.


14

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


Lease Cost
 
Three Months Ended July 31, 2019
 
Six Months Ended July 31, 2019
(in thousands)
Income statement classification
 
 
 
Operating lease costs (1)
Selling, general and administrative expense
$
14,587

 
$
28,515

(1)
Includes short-term and variable lease costs, which are not significant.
Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Additional details regarding the Company’s leasing activities as a lessee are presented below:
Other Information
Six Months Ended 
 July 31, 2019
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows for operating leases
$
33,408

Weighted-average remaining lease term (in years)
 
Finance leases
11.4

Operating leases
7.3

Weighted-average discount rate
 
Finance leases
6.1
%
Operating leases (1)
8.5
%
(1)
 Upon adoption of ASC 842, discount rates for existing operating leases were established as of February 1, 2019.
The following table presents a summary of our minimum contractual commitments and obligations as of July 31, 2019:

Operating Leases
 
Finance Leases
 
Total
(in thousands)
 
 

 
 
 
 
 
2020
$
74,187

 
$
925

 
$
75,112

2021
73,119

 
889

 
74,008

2022
72,213

 
763

 
72,976

2023
68,284

 
731

 
69,015

2024
61,316

 
771

 
62,087

Thereafter
157,042

 
3,576

 
160,618

Total undiscounted cash flows
506,161

 
7,655

 
513,816

Less: Interest
130,347

 
2,253

 
132,600

Total lease liabilities
$
375,814

 
$
5,402

 
$
381,216

6.     Contingencies
Securities Litigation. On April 2, 2018, MicroCapital Fund, LP, MicroCapital Fund, Ltd., and MicroCapital LLC (collectively, “MicroCapital”) filed a lawsuit against us and certain of our former executive officers in the U.S. 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 promulgated thereunder, Texas and Connecticut common law fraud, and Texas common law negligent misrepresentation against all defendants; as well as violations of 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.


15

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


The Court previously had stayed the MicroCapital Action pending resolution of other outstanding litigation (In re Conn’s Inc. Sec. Litig., Cause No. 14-CV-00548 (S.D. Tex.) (the “Consolidated Securities Action”)), which was settled in October 2018. After that settlement, the stay was lifted, and the defendants filed a motion to dismiss plaintiff’s complaint in the MicroCapital Action on November 6, 2018. Briefing on the motion to dismiss was completed on January 16, 2019. On July 26, 2019, the magistrate judge to which defendants’ motion to dismiss had been assigned issued a report and recommendation, recommending that defendants’ motion to dismiss the complaint be granted in part and denied in part.  Both parties filed timely objections to that report and recommendation on August 9, 2019.  Those objections currently are pending before the Court.
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 U.S. District Court for the Southern District of Texas, 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 U.S. District Court for the Southern District of Texas, which has been consolidated with the Original Derivative Action.
The Court previously approved a stipulation among the parties to stay the Original Derivative Action pending resolution of the Consolidated Securities Action. The stay was lifted on November 1, 2018, and the defendants filed a motion to dismiss plaintiff’s complaint. Briefing on the motion to dismiss was completed December 3, 2018. The Court’s ruling is pending. The parties are currently engaging in discovery.
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. We received a copy of the proposed amended petition on October 12, 2018, but the amended proposed petition has not yet been filed. The parties jointly requested a stay on this case pending resolution of the Original Derivative Action. This case remains stayed until at least June 27, 2019.
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. No further activity has occurred in this case since the Final Order and Judgment was entered in 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. On July 15, 2019, we reached a settlement with the SEC relating to the previously disclosed SEC investigation commenced in November 2014 into the Company’s underwriting policies and bad debt provisions from July 31, 2012 to July 31, 2014. In connection with the settlement process, on July 15, 2019, the SEC filed a civil complaint and agreed judgment against the Company and a former officer in the U.S. District Court for the Southern District of Texas.
Without admitting or denying the allegations in the SEC’s complaint, the Company consented to entry of a final judgment pursuant to which it paid a civil monetary penalty of $1.1 million to the SEC.
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


16

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


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.
7.     Variable Interest Entities
From time to time, we securitize 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 all credit insurance income together with certain recoveries related to credit insurance and RSAs 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.


17

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


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,
2019
 
January 31,
2019
Assets:
 
 
 
Restricted cash
$
66,444

 
$
57,475

Due from Conn’s, Inc., net
8,874

 
5,504

Customer accounts receivable:
 
 
 
Customer accounts receivable
625,436

 
538,826

Restructured accounts
152,062

 
135,834

Allowance for uncollectible accounts
(125,142
)
 
(106,327
)
Allowance for no-interest option credit programs
(7,278
)
 
(8,047
)
Deferred fees and origination costs
(6,213
)
 
(5,321
)
Total customer accounts receivable, net
638,865

 
554,965

Total assets
$
714,183

 
$
617,944

Liabilities:
 
 
 
Accrued expenses
$
4,465

 
$
3,939

Other liabilities
5,086

 
5,513

Short-term debt:
 
 
 
Warehouse Notes
1,945

 
53,635

 
 
 
 
Long-term debt:
 
 
 
2017-B Class B Notes
29,001

 
98,297

2017-B Class C Notes
78,640

 
78,640

2018-A Class A Notes
61,415

 
105,971

2018-A Class B Notes
37,038

 
63,908

2018-A Class C Notes
37,038

 
63,908

2019-A Class A Notes
187,959

 

2019-A Class B Notes
64,750

 

2019-A Class C Notes
62,510

 

 
558,351

 
410,724

Less: deferred debt issuance costs
(3,715
)
 
(2,731
)
Total long-term debt
554,636

 
407,993

Total debt
$
556,581

 
$
461,628

Total liabilities
$
566,132

 
$
471,080

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


18

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


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 (“SG&A”) includes the direct expenses of the retail and credit operations, allocated 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 calculated using an annual rate of 2.5% times the average outstanding portfolio balance for each applicable period.
As of July 31, 2019, 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, 2019
 
Three Months Ended July 31, 2018
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
99,455

 
$

 
$
99,455

 
$
97,066

 
$

 
$
97,066

Home appliance
99,356

 

 
99,356

 
91,471

 

 
91,471

Consumer electronics
53,692

 

 
53,692

 
55,654

 

 
55,654

Home office
17,883

 

 
17,883

 
19,289

 

 
19,289

Other
4,192

 

 
4,192

 
3,699

 

 
3,699

Product sales
274,578

 

 
274,578

 
267,179

 

 
267,179

Repair service agreement commissions
27,647

 

 
27,647

 
25,662

 

 
25,662

Service revenues
3,837

 

 
3,837

 
3,472

 

 
3,472

Total net sales
306,062

 

 
306,062

 
296,313

 

 
296,313

Finance charges and other revenues
203

 
94,794

 
94,997

 
98

 
88,209

 
88,307

Total revenues
306,265

 
94,794

 
401,059

 
296,411

 
88,209

 
384,620

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
182,065

 

 
182,065

 
173,627

 

 
173,627

Selling, general and administrative expense (1)
88,147

 
39,337

 
127,484

 
83,003

 
37,687

 
120,690

Provision for bad debts
(19
)
 
49,755

 
49,736

 
243

 
50,508

 
50,751

Charges and credits

 

 

 
300

 

 
300

Total costs and expenses
270,193

 
89,092

 
359,285

 
257,173

 
88,195

 
345,368

Operating income
36,072

 
5,702

 
41,774

 
39,238

 
14

 
39,252

Interest expense

 
14,396

 
14,396

 

 
15,566

 
15,566

Loss on extinguishment of debt

 

 

 

 
1,367

 
1,367

Income (loss) before income taxes
$
36,072

 
$
(8,694
)
 
$
27,378

 
$
39,238

 
$
(16,919
)
 
$
22,319



20

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


 
Six Months Ended July 31, 2019
 
Six Months Ended July 31, 2018
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
187,819

 
$

 
$
187,819

 
$
194,086

 
$

 
$
194,086

Home appliance
176,646

 

 
176,646

 
169,494

 

 
169,494

Consumer electronics
103,341

 

 
103,341

 
107,956

 

 
107,956

Home office
33,589

 

 
33,589

 
37,599

 

 
37,599

Other
7,628

 

 
7,628

 
7,358

 

 
7,358

Product sales
509,023

 

 
509,023

 
516,493

 

 
516,493

Repair service agreement commissions
51,671

 

 
51,671

 
48,525

 

 
48,525

Service revenues
7,347

 

 
7,347

 
7,051

 

 
7,051

Total net sales
568,041

 

 
568,041

 
572,069

 

 
572,069

Finance charges and other revenues
405

 
186,125

 
186,530

 
112

 
170,826

 
170,938

Total revenues
568,446

 
186,125

 
754,571

 
572,181

 
170,826

 
743,007

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
339,293

 

 
339,293

 
340,216

 

 
340,216

Selling, general and administrative expense (1)
167,769

 
77,629

 
245,398

 
160,755

 
74,813

 
235,568

Provision for bad debts
110

 
89,672

 
89,782

 
503

 
94,404

 
94,907

Charges and credits
(695
)
 

 
(695
)
 
300

 

 
300

Total costs and expenses
506,477

 
167,301

 
673,778

 
501,774

 
169,217

 
670,991

Operating income
61,969

 
18,824

 
80,793

 
70,407

 
1,609

 
72,016

Interest expense

 
28,893

 
28,893

 

 
32,386

 
32,386

Loss on extinguishment of debt

 

 

 

 
1,773

 
1,773

Income (loss) before income taxes
$
61,969

 
$
(10,069
)
 
$
51,900

 
$
70,407

 
$
(32,550
)
 
$
37,857

 
July 31, 2019
 
July 31, 2018
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Total assets
$
699,382

 
$
1,446,843

 
$
2,146,225

 
$
416,166

 
$
1,380,335

 
$
1,796,501

(1)
For the three months ended July 31, 2019 and 2018, the amount of corporate overhead allocated to each segment reflected in SG&A was $9.7 million and $9.3 million, respectively. For the three months ended July 31, 2019 and 2018, the amount of reimbursement made to the retail segment by the credit segment was $9.7 million and $9.4 million, respectively. For the six months ended July 31, 2019 and 2018, the amount of corporate overhead allocated to each segment reflected in SG&A was $17.6 million and $17.6 million, respectively. For the six months ended July 31, 2019 and 2018, the amount of reimbursement made to the retail segment by the credit segment was $19.4 million and $18.8 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 is