Conns (CONNQ) 10-Q 2021 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C.  20549 

FORM 10-Q

(Mark One) 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended July 31, 2020

 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the transition period from to .

Commission File Number 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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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 ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 27, 2020: 

Class	Outstanding
Common stock, $0.01 par value per share	29,134,544

CONN’S, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE FISCAL QUARTER ENDED JULY 31, 2020

TABLE OF CONTENTS

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosure	38
Item 5.	Other Information	38
Item 6.	Exhibits	40
	Exhibit Index	40
	Signature	41

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,” 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.

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, 2020		January 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	6,385	$	5,485
Restricted cash (includes VIE balances of $61,901 and $73,214, respectively)	63,836		75,370
Customer accounts receivable, net of allowances (includes VIE balances of $254,124 and $393,764, respectively)	514,528		673,742
Other accounts receivable	55,335		68,753
Inventories	180,893		219,756
Income taxes receivable	15,539		4,315
Prepaid expenses and other current assets	9,440		11,445
Total current assets	845,956		1,058,866
Long-term portion of customer accounts receivable, net of allowances (includes VIE balances of $158,264 and $420,454, respectively)	479,632		663,761
Property and equipment, net	192,300		173,031
Operating lease right-of-use assets	266,046		242,457
Deferred income taxes	43,243		18,599
Other assets	14,523		12,055
Total assets	$	1,841,700	$	2,168,769
Liabilities and Stockholders’ Equity
Current liabilities:
Current finance lease obligations	$	758	$	605
Accounts payable	63,269		48,554
Accrued compensation and related expenses	15,567		10,795
Accrued expenses	58,152		52,295
Operating lease liability - current	38,003		35,390
Income taxes payable	2,149		2,394
Deferred revenues and other credits	15,935		12,237
Total current liabilities	193,833		162,270
Operating lease liability - non current	355,577		329,081
Long-term debt and finance lease obligations (includes VIE balances of $455,534 and $768,121, respectively)	748,902		1,025,535
Other long-term liabilities	24,802		24,703
Total liabilities	1,323,114		1,541,589
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($0.01 par value, 1,000,000 shares authorized; NaN issued or outstanding)	0		0
Common stock ($0.01 par value, 100,000,000 shares authorized; 32,615,887 and 32,125,055 shares issued, respectively)	326		321
Treasury stock (at cost; 3,485,441 shares and 3,485,441 shares, respectively)	(66,290)		(66,290)
Additional paid-in capital	126,086		122,513
Retained earnings	458,464		570,636
Total stockholders’ equity	518,586		627,180
Total liabilities and stockholders’ equity	$	1,841,700	$	2,168,769

See notes to condensed consolidated financial statements.

1

CONN’S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and dollars in thousands, except per share amounts)

	Three Months Ended July 31,						Six Months Ended July 31,
	2020		2019		2020		2019
Revenues:
Product sales	$	256,142	$	274,578	$	463,340	$	509,023
Repair service agreement commissions	20,164		27,647		40,265		51,671
Service revenues	3,430		3,837		6,461		7,347
Total net sales	279,736		306,062		510,066		568,041
Finance charges and other revenues	87,180		94,997		174,010		186,530
Total revenues	366,916		401,059		684,076		754,571
Costs and expenses:
Cost of goods sold	176,623		182,065		323,637		339,293
Selling, general and administrative expense	115,278		127,484		228,285		245,398
Provision for bad debts	32,045		49,736		149,371		89,782
Charges and credits	1,534		0		3,589		(695)
Total costs and expenses	325,480		359,285		704,882		673,778
Operating income (loss)	41,436		41,774		(20,806)		80,793
Interest expense	13,222		14,396		28,215		28,893
Income (loss) before income taxes	28,214		27,378		(49,021)		51,900
Provision (benefit) for income taxes	7,694		7,404		(13,339)		12,417
Net income (loss)	$	20,520	$	19,974	$	(35,682)	$	39,483
Income (loss) per share:
Basic	$	0.71	$	0.64	$	(1.23)	$	1.25
Diluted	$	0.70	$	0.62	$	(1.23)	$	1.23
Weighted average common shares outstanding:
Basic	29,070,607		31,442,909		28,948,216		31,660,320
Diluted	29,140,546		31,958,704		28,948,216		32,198,024

See notes to condensed consolidated financial statements.

2

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, 2020	32,125,055	$	321	$	122,513	$	570,636	(3,485,441)		$	(66,290)		$	627,180
Adoption of ASU 2016-13	—	—		—		(76,490)		—		—			(76,490)
Exercise of options and vesting of restricted stock, net of withholding tax	321,468	3		(1,288)		—		—		—			(1,285)
Issuance of common stock under Employee Stock Purchase Plan	47,450	1		176		—		—		—			177
Stock-based compensation	—	—		2,430		—		—		—			2,430
Net loss	—	—		—		(56,202)		—		—			(56,202)
Balance April 30, 2020	32,493,973	$	325	$	123,831	$	437,944	(3,485,441)		$	(66,290)		$	495,810
Exercise of options and vesting of restricted stock, net of withholding tax	70,271	1		(159)		—		—		—			(158)
Issuance of common stock under Employee Stock Purchase Plan	51,643	0		160		—		—		—			160
Stock-based compensation	—	—		2,254		—		—		—			2,254
Net income	—	—		—		20,520		—		—			20,520
Balance July 31, 2020	32,615,887	$	326	$	126,086	$	458,464	(3,485,441)		$	(66,290)		$	518,586

				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

See notes to condensed consolidated financial statements.

3

CONN’S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

	Six Months Ended July 31,
	2020		2019
Cash flows from operating activities:
Net income (loss)	$	(35,682)	$	39,483
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation	19,929		17,682
Change in right-of-use asset	15,328		13,763
Amortization of debt issuance costs	4,237		4,210
Provision for bad debts and uncollectible interest	181,286		116,272
Stock-based compensation expense	4,683		6,636
Charges, net of credits	3,589		(680)
Deferred income taxes	(2,472)		475
Tenant improvement allowances received from landlords	10,277		14,254
Change in operating assets and liabilities:
Customer accounts receivable	63,745		(95,829)
Other accounts receivables	13,068		(17,356)
Inventories	38,863		6,521
Other assets	690		(5,818)
Accounts payable	13,442		763
Accrued expenses	2,485		(7,368)
Operating leases	(20,086)		(626)
Income taxes	(9,578)		(4,810)
Deferred revenues and other credits	1,921		1,872
Net cash provided by operating activities	305,725		89,444
Cash flows from investing activities:
Purchases of property and equipment	(32,459)		(33,330)
Net cash used in investing activities	(32,459)		(33,330)
Cash flows from financing activities:
Proceeds from issuance of asset-backed notes	0		381,790
Payments on asset-backed notes	(315,225)		(234,162)
Borrowings under revolving credit facility	835,717		778,166
Payments on revolving credit facility	(800,917)		(881,166)
Payments on warehouse facility	0		(51,561)
Payments of debt issuance costs and amendment fees	(2,055)		(3,492)
Proceeds from stock issued under employee benefit plans	338		597
Tax payments associated with equity-based compensation transactions	(1,444)		(1,781)
Purchase of treasury stock	0		(33,019)
Other	(314)		(641)
Net cash used in financing activities	(283,900)		(45,269)
Net change in cash, cash equivalents and restricted cash	(10,634)		10,845
Cash, cash equivalents and restricted cash, beginning of period	80,855		64,937
Cash, cash equivalents and restricted cash, end of period	$	70,221	$	75,782
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new finance lease liabilities	$	1,045	$	968
Right-of-use assets obtained in exchange for new operating lease liabilities	$	47,950	$	53,974
Property and equipment purchases not yet paid	$	11,662	$	14,241
Share repurchases not yet settled	$	0	$	1,325
Supplemental cash flow data:
Cash interest paid	$	23,976	$	21,559
Cash income taxes paid (refunded), net	$	(1,026)	$	16,859

See notes to condensed consolidated financial statements.

4

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 2 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, 2020 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, 2020 (the “2020 Form 10-K”) filed with the United States Securities and Exchange Commission (the “SEC”) on April 14, 2020.

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 5, 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. During the three months ended July 31, 2020, we refined our historical charge-off estimate in our current expected credit loss model which resulted in an increase to the allowance for bad debt of $15.8 million.

5

CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents. As of July 31, 2020 and January 31, 2020, cash and cash equivalents included cash and credit card deposits in transit. Credit card deposits in transit included in cash and cash equivalents were $4.9 million and $4.0 million as of July 31, 2020 and January 31, 2020, respectively. 

Restricted Cash. The restricted cash balance as of July 31, 2020 and January 31, 2020 includes $48.0 million and $59.7 million, respectively, of cash we collected as servicer on the securitized receivables that was subsequently remitted to the VIEs and $13.9 million and $13.9 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. As discussed in more detail below, Recent Accounting Pronouncements Adopted, effective February 1, 2020 the Company adopted ASC 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the newly adopted standard, expected lifetime losses on customer accounts receivable are recognized upon origination through an allowance for credit losses account that is deducted from the customer account receivable balance and presented net. 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”).

On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law to address the economic impact of the COVID-19 pandemic. Under the CARES Act, modifications deemed to be COVID-19 related are not considered a TDR if the loan was current (not more than 30 days past due as of March 31, 2020) and the deferral was executed between April 1, 2020 and the earlier of 60 days after the termination of the COVID-19 national emergency or December 31, 2020. In response to the CARES Act, the Company implemented short-term deferral programs for our customers. The carrying value of the customer receivables on accounts which were current prior to receiving a COVID-19 related deferment was $79.3 million as of July 31, 2020.

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. We reserve for interest that is more than 60 days past due. 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, 2020 and January 31, 2020, there was $10.0 million and $10.6 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, 2020 and January 31, 2020, the carrying value of customer accounts receivable in non-accrual status was $10.8 million and $12.5 million, respectively. At July 31, 2020 and January 31, 2020, the carrying value of customer accounts receivable that were past due 90 days or more and still accruing interest totaled $96.8 million and $132.7 million, respectively. At July 31, 2020 and January 31, 2020, the carrying value of customer accounts receivable in a

6

CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

bankruptcy status that were less than 60 days past due of $8.7 million and $12.1 million, respectively, were included within the customer receivables balance carried in non-accrual status.

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 Financing Lease Obligations, are included in other assets on our Condensed Consolidated Balance Sheet and were $4.8 million and $3.5 million as of July 31, 2020 and January 31, 2020, respectively.

Income Taxes. For the six months ended July 31, 2020 and 2019, we utilized the estimated annual effective tax rate based on our estimated fiscal year 2021 and 2020 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, 2020 and 2019, the effective tax rate was 27.2% and 23.9%, respectively. The primary factor affecting the increase in our effective tax rate for the six months ended July 31, 2020 was a $4.3 million benefit recognized in the current period as a result of net operating loss provisions within the CARES Act that provide for a five year carryback of losses.

Stock-based Compensation. During the six months ended July 31, 2020, the Company granted performance stock awards (“PSUs”) and restricted stock awards (“RSUs”). The awards had a combined aggregate grant date fair value of $8.0 million. The PSUs will vest after the Company’s fiscal year 2024, if at all, upon certification by the compensation committee of the satisfaction of certain total shareholder return conditions over the three fiscal years commencing with the Company’s fiscal year 2021. The majority of the RSUs will vest, if at all, over periods of three to four years from the date of grant.

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. For grants of performance-based restricted stock units, the fair value is the market value of our stock at the date of issuance adjusted for the market condition using a Monte Carlo model.

The following table sets forth the RSUs and PSUs granted during the three and six months ended July 31, 2020 and 2019: 

	Three Months Ended July 31,						Six Months Ended July 31,
	2020		2019		2020		2019
RSUs	101,774		100,365		622,195		103,794
PSUs (1)	0		33,894		270,828		33,894
Total stock awards granted	101,774		134,259		893,023		137,688
Aggregate grant date fair value (in thousands)	$	750	$	2,774	$	7,957	$	2,845

(1)The weighted-average assumptions used in the Monte Carlo model for the PSUs granted on February 6, 2020 included expected volatility of 60.0%, an expected term of 3 years and risk-free interest rate of 1.42%.  NaN dividend yield was included in the weighted-average assumptions.

For the three months ended July 31, 2020 and 2019, stock-based compensation expense was $2.3 million and $3.4 million, respectively. For the six months ended July 31, 2020 and 2019, stock-based compensation expense was $4.7 million and $6.6 million, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Earnings (loss) per Share. Basic earnings (loss) per share for a particular period is calculated by dividing net income (loss) 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,
(in thousands)	2020	2019	2020	2019
Weighted-average common shares outstanding - Basic	29,070,607	31,442,909	28,948,216	31,660,320
Dilutive effect of stock options, PSUs and RSUs	69,939	515,795	0	537,704
Weighted-average common shares outstanding - Diluted	29,140,546	31,958,704	28,948,216	32,198,024

For the three months ended July 31, 2020 and 2019, the weighted average number of stock options and RSUs not included in the calculation due to their anti-dilutive effect, was 1,116,730 and 927,969, respectively. For the six months ended July 31, 2020 and 2019, the weighted average number of stock options and RSUs not included in the calculation due to their anti-dilutive effect, was 1,479,599 and 892,098, 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).

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 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, 2020, the fair value of the Senior Notes outstanding, which was determined using Level 1 inputs, was $190.8 million as compared to the carrying value of $227.0 million, excluding the impact of the related discount. At July 31, 2020, the fair value of the asset backed notes was $433.8 million as compared to the carrying value of $457.8 million 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 six months ended July 31, 2020, we recognized $1.2 million of revenue for customer deposits deferred as of January 31, 2020. During the six months ended July 31, 2020, we recognized $2.3 million of revenue for RSA administrative fees deferred as of January 31, 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Leases. In response to the COVID-19 pandemic, during the six months ended July 31, 2020, we began renegotiating our leases as a means of preserving liquidity. On April 10, 2020 the Financial Accounting Standards Board (“FASB”) issued guidance for lease concessions entered into in response to the COVID-19 pandemic that allows lessees to make an election not to evaluate whether a lease concession provided by a lessor should be accounted for as a lease modification if it does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We have elected to apply this allowance to our COVID-19 lease concessions. As a result, for the six months ended July 31, 2020, there were no material modifications to our leases.

Recent Accounting Pronouncements Adopted. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. Under the new guidance entities must reserve an allowance for expected credit losses over the life of the loan. The measurement of expected credit losses is applicable to financial assets measured at amortized cost. The allowance for credit losses is a valuation account that is deducted from the customer account receivable’s amortized cost basis to present the net amount expected to be collected. Customer receivables are charged off against the allowance when management deems an account to be uncollectible. 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.

Effective February 1, 2020, the Company adopted ASU 2016-13 and ASU 2019-04 using the modified retrospective approach. The Company has reviewed its entire portfolio of assets recognized on the balance sheet as of January 31, 2020 and identified Customer Accounts Receivables as the materially impacted asset in-scope of ASC 326. The risk of credit losses from the remaining portfolio of assets was concluded to be immaterial. Upon adoption of ASC 326 the Company recorded a net decrease to retained earnings of $76.5 million as of February 1, 2020. Results for reporting periods prior to February 1, 2020 are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies under previously applicable GAAP.

The allowance for credit losses is measured on a collective (pool) basis where similar risk characteristics exist. Upon adoption of ASC 326, the Company elected to maintain the pools of customer accounts receivable that were previously accounted for under ASC 310 (Non-TDR Non-Re-aged, Non-TDR Re-aged, and TDR). These pools are further segmented based on shared risk attributes, which include the borrower’s FICO score, product class, length of customer relationship and delinquency status. The allowance for credit losses is determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. Changes to the allowance for credit losses after adoption are recorded through provision expense.

We have elected to use a risk-based, pool-level segmentation framework to calculate the expected loss rate. This framework is based on our historical gross charge-off history. In addition to adjusted historical gross charge-off rates, estimates of post-charge-off recoveries, including cash payments from customers, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance and repair service agreement (“RSA”) policies are also considered. We also consider forward-looking economic forecasts based on a statistical analysis of economic factors (specifically, forecast of unemployment rates over the reasonable and supportable forecasting period). To the extent that situations and trends arise which are not captured in our model, management will layer on additional qualitative adjustments.

Pursuant to ASC 326 requirements, the Company has initially determined a 24-month reasonable and supportable forecast period for the Customer Accounts Receivable portfolio. We estimate losses beyond the 24-month forecast period based on historic loss rates experienced over the life of our historic loan portfolio by loan pool type. We will revisit our measurement methodology and assumption annually, or more frequently if circumstances warrant.

The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as a result of the adoption of ASC 326 were as follows:

	Impact of Adoption of ASC 326
(in thousands)	Balance at January 31, 2020		Adjustments due to ASC 326		Balance at February 1, 2020
Assets
Customer accounts receivable	$	673,742	$	(49,700)	$	624,042
Long-term portion of customer accounts receivable	663,761		(48,962)		614,799
Deferred Income Taxes	18,599		22,172		40,771
Stockholders’ Equity
Retained Earnings	$	570,636	$	(76,490)	$	494,146

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Changes due to Securities and Exchange Commission Regulation S-X Rules 13-01 and 13-02. In March 2020, the Securities and Exchange Commission (“SEC”) amended Regulation S-X to create Rules 13-01 and 13-02. These new rules reduce and simplify financial disclosure requirements for issuers and guarantors of registered debt offerings. Previously, with limited exceptions, a parent entity was required to provide detailed disclosures with regard to guarantors of registered debt offerings within the footnotes to the consolidated financial statements. Under the new regulations, disclosure exceptions have been expanded and required disclosures may be provided within the Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations rather than in the notes to the financial statements. Further, summarized guarantor balance sheet and income statements are permitted, with the requirement to provide guarantor cash flow statements eliminated. Summarized guarantor financial statements only need be disclosed for the current fiscal year rather than all years presented in the financial statements as was previously required. The guidance will become effective for filings on or after January 4, 2021, with early adoption permitted.

The Company elected to early adopt the new regulations beginning with the first quarter of fiscal year 2021. Our summarized guarantor financial statements are presented in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

2. Customer Accounts Receivable

Customer accounts receivable consisted of the following:

(in thousands)	July 31, 2020		January 31, 2020
Customer accounts receivable (1)	$	1,357,030	$	1,602,037
Deferred fees and origination costs, net	(14,558)		(15,746)
Allowance for no-interest option credit programs	(11,596)		(14,984)
Allowance for uncollectible interest	(19,976)		(23,662)
Carrying value of customer accounts receivable	1,310,900		1,547,645
Allowance for credit losses (2)	(316,740)		(210,142)
Carrying value of customer accounts receivable, net of allowance for credit losses	994,160		1,337,503
Short-term portion of customer accounts receivable, net	(514,528)		(673,742)
Long-term customer accounts receivable, net	$	479,632	$	663,761

	Carrying Value
(in thousands)	July 31, 2020		January 31, 2020
Customer accounts receivable 60+ days past due (3)	$	131,696	$	193,797
Re-aged customer accounts receivable (4)	392,610		455,704
Restructured customer accounts receivable (5)	201,561		211,857

(1)As of July 31, 2020 and January 31, 2020, the customer accounts receivable balance included $35.9 million and $43.7 million, respectively, in interest receivable. Net of the allowance for uncollectible interest, interest receivable outstanding as of July 31, 2020 and January 31, 2020 was $16.0 million and $20.0 million, respectively.

(2)Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as of July 31, 2020, which incorporated the estimated impact of the global COVID-19 outbreak on the U.S. economy. Our forecast utilized economic projections from a major rating service reflecting an increase in unemployment with some offsetting benefits related to government stimulus. The allowance for credit losses as of January 31, 2020 is based on an incurred loss model, which reserves for incurred losses in the portfolio as of January 31, 2020.

(3)As of July 31, 2020 and January 31, 2020, the carrying value of customer accounts receivable past due one day or greater was $366.9 million and $527.0 million, respectively. These amounts include the 60+ days past due balances shown above.

(4)The re-aged carrying value as of July 31, 2020 and January 31, 2020 includes $79.8 million and $131.4 million, respectively, in carrying value that are both 60+ days past due and re-aged.

(5)The restructured carrying value as of July 31, 2020 and January 31, 2020 includes $38.3 million and $64.8 million, respectively, in carrying value that are both 60+ days past due and restructured.

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The allowance for credit losses included in the current and long-term portion of customer accounts receivable, net as shown in the Condensed Consolidated Balance Sheet were as follows:

(in thousands)	July 31, 2020
Customer accounts receivable - current	$	699,037
Allowance for credit losses for customer accounts receivable - current	(184,509)
Customer accounts receivable, net of allowances	514,528
Customer accounts receivable - non current	631,839
Allowance for credit losses for customer accounts receivable - non current	(152,207)
Long-term portion of customer accounts receivable, net of allowances	479,632
Total customer accounts receivable, net	$	994,160

The following presents the activity in our allowance for credit losses and uncollectible interest for customer receivables: 

	Six Months Ended July 31, 2020										Six Months Ended July 31, 2019
(in thousands)	Customer Accounts Receivable		Restructured Accounts		Total		Customer Accounts Receivable		Restructured Accounts		Total
Allowance at beginning of period, prior to adoption of ASC 326	$	145,680	$	88,123	$	233,803	$	147,123	$	67,756	$	214,879
Impact of adoption ASC 326	95,136		3,526		98,662		—		—		—
Provision for credit loss expense (1)	138,395		42,541		180,936		79,062		37,067		116,129
Principal charge-offs (2)	(101,746)		(47,301)		(149,047)		(80,330)		(30,267)		(110,597)
Interest charge-offs	(29,135)		(13,545)		(42,680)		(18,479)		(6,963)		(25,442)
Recoveries (3)	10,269		4,773		15,042		9,102		3,430		12,532
Allowance at end of period	$	258,599	$	78,117	$	336,716	$	136,478	$	71,023	$	207,501
Average total customer portfolio balance	$	1,271,225	$	222,025	$	1,493,250	$	1,360,643	$	192,212	$	1,552,855

(1)Includes provision for uncollectible interest, which is included in finance charges and other revenues, and changes in expected future recoveries.

(2)Charge-offs include the principal amount of losses (excluding accrued and unpaid interest). The increase in bad debt charge-offs, net of recoveries, was primarily due to higher risk loans originated during the first half of fiscal year 2020 and an increase in new customer mix.

(3)Recoveries include the principal amount collected during the period for previously charged-off balances.

We manage our Customer Accounts Receivable portfolio using delinquency as a key credit quality indicator. The following table presents the delinquency distribution of the carrying value of customer accounts receivable by year of origination. The information is updated as of July 31, 2020:

(in thousands)
Delinquency Bucket	2020		2019		2018		2017		Prior		Total		% of Total
Current	$	328,980	$	419,220	$	166,168	$	28,066	$	1,600	$	944,034	72.0	%
1-30	31,960		87,577		47,185		13,001		1,197		180,920		13.8	%
31-60	7,513		25,936		15,032		5,078		691		54,250		4.1	%
61-90	4,260		15,848		9,117		3,004		314		32,543		2.5	%
91+	12,889		50,509		24,917		9,412		1,426		99,153		7.6	%
Total	$	385,602	$	599,090	$	262,419	$	58,561	$	5,228	$	1,310,900	100.0	%

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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)	2020		2019		2020		2019
Professional fees	$	1,534	$	0	$	3,589	$	0
Facility relocation costs	0		0		0		(695)
Total charges and credits	$	1,534	$	0	$	3,589	$	(695)

During the three months ended July 31, 2020, we recognized $1.5 million in professional fees associated with non-recurring expenses. During the six months ended July 31, 2020, we recognized $3.6 million in professional fees associated with non-recurring expenses. During the six months ended July 31, 2019, we recognized a $0.7 million gain from increased sublease income related to the consolidation of our corporate headquarters.

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)	2020		2019		2020		2019
Interest income and fees	$	83,599	$	85,204	$	165,442	$	169,221
Insurance income	3,385		9,590		8,137		16,904
Other revenues	196		203		431		405
Total finance charges and other revenues	$	87,180	$	94,997	$	174,010	$	186,530

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, 2020 and 2019, interest income and fees reflected provisions for uncollectible interest of $11.8 million and $14.4 million, respectively. The amounts included in interest income and fees related to TDR accounts for the three months ended July 31, 2020 and 2019 were $10.1 million and $8.6 million, respectively. During the six months ended July 31, 2020 and 2019, interest income and fees reflected provisions for uncollectible interest of $31.9 million and $26.7 million, respectively. The amounts included in interest income and fess related to TDR accounts for the six months ended July 31, 2020 and 2019 were $19.6 million and $16.7 million, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.  Debt and Financing Lease Obligations 

Debt and financing lease obligations consisted of the following:

(in thousands)	July 31, 2020		January 31, 2020
Revolving Credit Facility	$	63,900	$	29,100
Senior Notes	227,000		227,000
2017-B VIE Asset-backed Class C Notes	16,168		59,655
2018-A VIE Asset-backed Class A Notes	12,203		34,112
2018-A VIE Asset-backed Class B Notes	7,359		20,572
2018-A VIE Asset-backed Class C Notes	7,359		20,572
2019-A VIE Asset-backed Class A Notes	36,151		76,241
2019-A VIE Asset-backed Class B Notes	46,427		64,750
2019-A VIE Asset-backed Class C Notes	44,821		62,510
2019-B VIE Asset-backed Class A Notes	118,509		265,810
2019-B VIE Asset-backed Class B Notes	85,540		85,540
2019-B VIE Asset-backed Class C Notes	83,270		83,270
Financing lease obligations	5,855		5,209
Total debt and financing lease obligations	754,562		1,034,341
Less:
Discount on debt	(1,123)		(1,404)
Deferred debt issuance costs	(3,779)		(6,797)
Current maturities of long-term debt and financing lease obligations	(758)		(605)
Long-term debt and financing lease obligations	$	748,902	$	1,025,535

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, 2020, $172.3 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. If an event of default were to occur under the indenture that governs

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 outstanding as of July 31, 2020 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 C Notes	$	78,640	$	77,843	$	16,168	12/20/2017	11/15/2022	5.95%	6.21%
2018-A Class A Notes	219,200		217,832		12,203		8/15/2018	1/17/2023	3.25%	4.80%
2018-A Class B Notes	69,550		69,020		7,359		8/15/2018	1/17/2023	4.65%	5.55%
2018-A Class C Notes	69,550		68,850		7,359		8/15/2018	1/17/2023	6.02%	6.93%
2019-A Class A Notes	254,530		253,026		36,151		4/24/2019	10/16/2023	3.40%	4.25%
2019-A Class B Notes	64,750		64,276		46,427		4/24/2019	10/16/2023	4.36%	4.77%
2019-A Class C Notes	62,510		61,898		44,821		4/24/2019	10/16/2023	5.29%	5.71%
2019-B Class A Notes	317,150		315,417		118,509		11/26/2019	6/17/2024	2.66%	4.27%
2019-B Class B Notes	85,540		84,916		85,540		11/26/2019	6/17/2024	3.62%	4.17%
2019-B Class C Notes	83,270		82,456		83,270		11/26/2019	6/17/2024	4.60%	4.94%
Total	$	1,304,690	$	1,295,534	$	457,807

(1)After giving effect to debt issuance costs.

(2)For the six months ended July 31, 2020, and inclusive of the impact of changes in timing of actual and expected cash flows.

Revolving Credit Facility. On May 23, 2018, Conn’s, Inc. and certain of its subsidiaries (the “Borrowers”) entered into the Fourth Amended and Restated Loan and Security Agreement (as amended from time to time, “Fourth A&R Loan and Security Agreement”), 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.

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, 2020, we had immediately available borrowing capacity of $409.7 million under our Revolving Credit Facility, net of standby letters of credit issued of $12.5 million and prior to giving effect to a minimum liquidity requirement of $125.0 million pursuant to the Third Amendment as defined below. We also had $163.9 million that could have become available under our Revolving Credit Facility were we to grow the balance of eligible customer receivables and total eligible inventory balances.

On June 5, 2020 we entered into the Third Amendment to our Revolving Credit Facility (the “Third Amendment”). Under the Third Amendment, loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 3.00% to 3.75% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 2.00% to 2.75% per annum (depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the federal funds effective 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 4.8% for the six months ended July 31, 2020.

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. We are restricted from making distributions, including

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

repayments of the Senior Notes or other distributions, 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. The Third Amendment waived the interest coverage covenants beginning with the first quarter of fiscal year 2021 and continuing until the date on which the Company delivers financial statements and a compliance certificate for the fourth quarter of fiscal year 2021. After giving effect to the foregoing amendment, as of July 31, 2020, we were in compliance with the covenants in our Revolving Credit Facility. If we were to breach certain covenants under our Revolving Credit Facility in the future, that breach might trigger a default under our Revolving Credit Facility, which, if not remedied, would require a waiver from the lenders under our Revolving Credit Facility or an amendment to our Revolving Credit Facility in order for us to avoid an event of default. There can be no assurances that, in the event of such a covenant breach, we would be able to obtain the necessary waivers or amendments to remain in compliance with the covenants in our Revolving Credit Facility.

A summary of the significant financial covenants that govern our Revolving Credit Facility, as amended, compared to our actual compliance status at July 31, 2020 is presented below: 

	Actual	Required Minimum/ Maximum
Interest Coverage Ratio for the quarter must equal or exceed minimum	Not Tested	1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed minimum	Not Tested	1.50:1.00
Leverage Ratio must not exceed maximum	1.95:1.00	4.50:1.00
ABS Excluded Leverage Ratio must not exceed maximum	1.18:1.00	2.50:1.00
Capital Expenditures, net, must not exceed maximum	$34.0 million	$100.0 million

All capitalized terms in the above table are defined in 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.

6.  Contingencies

Securities Litigation. On May 15, 2020, a putative securities class action lawsuit was filed against us and two of our executive officers in the United States District Court for the Southern District of Texas, captioned Uddin v. Conn’s, Inc., et al., No. 4:20-1705 (“Uddin Action”). The plaintiff alleges that the defendants made false and misleading statements or failed to disclose material adverse facts about our business and operations. Plaintiff alleges violations of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks to certify a class of all persons and entities that purchased or acquired Conn’s securities between September 3, 2019 and December 9, 2019. The complaint does not specify the amount of damages sought.

We intend to vigorously defend our interests in the Uddin 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.

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.

The Court previously 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. On September 25, 2019, the district court adopted the magistrate judge’s report and recommendation, which permitted MicroCapital to file an amended complaint, which MicroCapital filed on October 30, 2019. On November 8, 2019, the parties filed a joint discovery and case management plan, proposing various deadlines.

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Defendants filed their answer to the amended complaint on November 27, 2019. The parties are currently engaging in discovery.

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 Conn’s. 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, and the parties began engaging in discovery. On May 29, 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, but recommended that the plaintiff be permitted to replead his claims. The district court adopted the recommendation on July 5, 2019.

On July 19, 2019, plaintiff filed an amended complaint. On August 13, 2019, the magistrate judge issued a new scheduling order, which permitted defendants to file a motion to dismiss the amended complaint on demand-futility grounds. That briefing was completed on October 15, 2019. On November 1, 2019, the magistrate judge heard argument on the motion to dismiss and postponed certain deadlines. On February 7, 2020, the judge issued a new scheduling order, again postponing deadlines and removing a trial date from the schedule. As ordered by the court, the parties have been engaging in discovery while the motion to dismiss has been pending. On July 22, 2020, the magistrate judge issued a report and recommendation granting in part and denying in part the defendants’ motion to dismiss. The magistrate judge recommended that the district court deny the motion on the breach of fiduciary duty claims and grant the motion on the insider trading claims, and recommended that the plaintiff be granted leave to replead the insider trading allegations as part of the breach of fiduciary duty claims. Defendants filed timely objections to that report and recommendation on August 5, 2020.

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. Conn’s received a copy of the proposed amended petition on October 12, 2018, but the proposed amended 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 October 16, 2020.

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 (former director), 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. Since April 2018, no material activity has occurred in this case, as it has been abated pending the resolution of related cases. By order dated April 21, 2020, the court ordered the parties to take further action in the case before July 10, 2020. At a hearing on July 10, 2020, the parties jointly requested that the case remain abated pending resolution of the Original Derivative Action. This case remains abated until at least September 4, 2020.

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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 certain 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.

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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, 2020		January 31, 2020
Assets:
Restricted cash	$	61,901	$	73,214
Due from Conn’s, Inc., net	5,542		307
Customer accounts receivable:
Customer accounts receivable	442,248		838,210
Restructured accounts	151,039		147,971
Allowance for uncollectible accounts	(173,872)		(151,263)
Allowance for no-interest option credit programs	(2,701)		(12,445)
Deferred fees and origination costs	(4,326)		(8,255)
Total customer accounts receivable, net	412,388		814,218
Total assets	$	479,831	$	887,739
Liabilities:
Accrued expenses	$	3,441	$	5,517
Other liabilities	7,584		7,584
Long-term debt:
2017-B Class C Notes	16,168		59,655
2018-A Class A Notes	12,203		34,112
2018-A Class B Notes	7,359		20,572
2018-A Class C Notes	7,359		20,572
2019-A Class A Notes	36,151		76,241
2019-A Class B Notes	46,427		64,750
2019-A Class C Notes	44,821		62,510
2019-B Class A Notes	118,509		265,810
2019-B Class B Notes	85,540		85,540
2019-B Class C Notes	83,270		83,270
	457,807		773,032
Less: deferred debt issuance costs	(2,273)		(4,911)
Total debt	$	455,534	$	768,121
Total liabilities	$	466,559	$	781,222

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 2 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 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.

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO 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, 2020, we operated retail stores in 14 states with 0 operations outside of the United States. No single customer accounts for more than 10% of our total revenues.

Financial information by segment is presented in the following tables:

	Three Months Ended July 31, 2020										Three Months Ended July 31, 2019
(in thousands)	Retail		Credit		Total		Retail		Credit		Total
Revenues:
Furniture and mattress	$	80,984	$	0	$	80,984	$	99,455	$	0	$	99,455
Home appliance	107,682		0		107,682		99,356		0		99,356
Consumer electronics	47,384		0		47,384		53,692		0		53,692
Home office	14,979		0		14,979		17,883		0		17,883
Other	5,113		0		5,113		4,192		0		4,192
Product sales	256,142		0		256,142		274,578		0		274,578
Repair service agreement commissions	20,164		0		20,164		27,647		0		27,647
Service revenues	3,430		0		3,430		3,837		0		3,837
Total net sales	279,736		0		279,736		306,062		0		306,062
Finance charges and other revenues	196		86,984		87,180		203		94,794		94,997
Total revenues	279,932		86,984		366,916		306,265		94,794		401,059
Costs and expenses:
Cost of goods sold	176,623		0		176,623		182,065		0		182,065
Selling, general and administrative expense (1)	78,584		36,694		115,278		88,147		39,337		127,484
Provision for bad debts	182		31,863		32,045		(19)		49,755		49,736
Charges and credits	1,355		179		1,534		0		0		0
Total costs and expenses	256,744		68,736		325,480		270,193		89,092		359,285
Operating income	23,188		18,248		41,436		36,072		5,702		41,774
Interest expense	0		13,222		13,222		0		14,396		14,396
Income (loss) before income taxes	$	23,188	$	5,026	$	28,214	$	36,072	$	(8,694)	$	27,378

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CONN’S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Six Months Ended July 31, 2020										Six Months Ended July 31, 2019
(in thousands)	Retail		Credit		Total		Retail		Credit		Total
Revenues:
Furniture and mattress	$	149,877	$	0	$	149,877	$	187,819	$	0	$	187,819
Home appliance	188,967		0		188,967		176,646		0		176,646
Consumer electronics	83,160		0		83,160		103,341		0		103,341
Home office	32,345		0		32,345		33,589		0		33,589
Other	8,991		0		8,991		7,628		0		7,628
Product sales	463,340		0		463,340		509,023		0		509,023
Repair service agreement commissions	40,265		0		40,265		51,671		0		51,671
Service revenues	6,461		0		6,461		7,347		0		7,347
Total net sales	510,066		0		510,066		568,041		0		568,041
Finance charges and other revenues	431		173,579		174,010		405		186,125		186,530
Total revenues	510,497		173,579		684,076		568,446		186,125		754,571
Costs and expenses:
Cost of goods sold	323,637		0		323,637		339,293		0		339,293
Selling, general and administrative expense (1)	156,758		71,527		228,285		167,769		77,629		245,398
Provision for bad debts	350		149,021		149,371		110		89,672		89,782
Charges and credits	1,355		2,234		3,589		(695)		0		(695)
Total costs and expenses	482,100		222,782		704,882		506,477		167,301		673,778
Operating income (loss)	28,397		(49,203)		(20,806)		61,969		18,824		80,793
Interest expense	0		28,215		28,215		0		28,893		28,893
Income (loss) before income taxes	$	28,397	$	(77,418)	$	(49,021)	$	61,969	$	(10,069)	$	51,900
	July 31, 2020										July 31, 2019
(in thousands)	Retail		Credit		Total		Retail		Credit		Total
Total assets	$	726,304	$	1,115,396	$	1,841,700	$	699,382	$	1,446,843	$	2,146,225

(1)For the three months ended July 31, 2020 and 2019, the amount of corporate overhead allocated to each segment reflected in SG&A was $8.5 million and $9.7 million, respectively. For the three months ended July 31, 2020 and 2019, the amount of reimbursement made to the retail segment by the credit segment was $8.9 million and $9.7 million, respectively. For the six months ended July 31, 2020 and 2019, the amount of corporate overhead allocated to each segment reflected in SG&A was $15.7 million and $17.6 million, respectively. For the six months ended July 31, 2020 and 2019, the amount of reimbursement made to the retail segment by the credit segment was $18.7 million and $19.4 million, respectively.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

Forward-Looking Statements 

This report contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements containing the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “predict,” “will,” “potential,” or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts. Such forward-looking statements are based on our current expectations. We can give no assurance that such statements will prove to be correct, and actual results may differ materially. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to execute periodic securitizations of future originated customer loans on favorable terms; our ability to continue existing customer financing programs or to offer new customer financing programs; changes in the delinquency status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores; technological and market developments and sales trends for our major product offerings; our ability to manage effectively the selection of our major product offerings; our ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and employees; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our Revolving Credit Facility, proceeds from accessing debt or equity markets; the effects of epidemics or pandemics, including the COVID-19 outbreak; the impact of our previous restatement and correction of the Company’s previously issued financial statements; the previously identified material weakness in the Company’s internal control over financial reporting and the Company’s ability to remediate that material weakness; the initiation of legal or regulatory proceedings with respect to the prior restatement and corrections; the adverse effects on the Company’s business, results of operations, financial condition and stock price as a result of the previous restatement and correction process; and other risks detailed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (the “2020 Form 10-K”) and other reports filed with the SEC. If one or more of these or other risks or uncertainties materialize (or the consequences of such a development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We disclaim any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise, or to provide periodic updates or guidance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

The Company makes available in the investor relations section of its website at ir.conns.com updated monthly reports to the holders of its asset-backed notes. This information reflects the performance of the securitized portfolio only, in contrast to the financial statements contained herein, which reflect the performance of all of the Company’s outstanding receivables, including those originated subsequent to those included in the securitized portfolio.  The website and the information contained on our website is not incorporated in this Quarterly Report on Form 10-Q or any other document filed with the SEC.

Overview

We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.

Executive Summary

Total revenues were $366.9 million for the three months ended July 31, 2020 compared to $401.1 million for the three months ended July 31, 2019, a decrease of $34.2 million or 8.5%. Retail revenues were $279.9 million for the three months ended July 31, 2020 compared to $306.3 million for the three months ended July 31, 2019, a decrease of $26.4 million or 8.6%. The decrease in retail revenue was primarily driven by a decrease in same store sales of 13.2%, partially offset by new store growth. The decrease in same store sales reflects proactive underwriting changes and industry wide supply chain disruptions, each of which was the result of the COVID-19 pandemic. Credit revenues were $87.0 million for the three months ended July 31, 2020 compared to $94.8 million for the three months ended July 31, 2019, a decrease of $7.8 million or 8.2%. The decrease in credit revenue was primarily due to a decrease of 7.3% in the average balance of the customer receivable portfolio, a decrease in insurance commissions due to a decline in the balance of sale of our in-house credit financing, and a decrease in insurance retrospective income. The decrease was partially offset by an increase in the yield rate to 23.2% during the three months ended July 31, 2020, 130 basis points higher than the three months ended July 31, 2019.

21

Retail gross margin for the three months ended July 31, 2020 was 36.9%, a decrease of 360 basis points from the 40.5% reported for the three months ended July 31, 2019. The year-over-year decrease in retail gross margin was primarily driven by the impact of fixed logistics costs on lower sales, a decrease in retrospective income on RSA commissions and a shift in sales from higher margin products to lower margin products.

Selling, general and administrative expense (“SG&A”) for the three months ended July 31, 2020 was $115.3 million compared to $127.5 million for the three months ended July 31, 2019, a decrease of $12.2 million or 9.6%. The SG&A decrease in the retail segment was primarily due to a reduction in advertising costs and labor costs, partially offset by an increase in occupancy costs. The SG&A decrease in the credit segment was primarily due to decreases in general operating expenses and labor costs.

Provision for bad debts decreased to $32.0 million for the three months ended July 31, 2020 from $49.7 million for the three months ended July 31, 2019, a decrease of $17.7 million. The decrease was driven by a greater decrease in the allowance for bad debts during the three months ended July 31, 2020 compared to the three months ended July 31, 2019. The decrease in the allowance for bad debts was primarily driven by the year-over-year decrease in the customer accounts receivable portfolio, a decrease in the estimated loss rate driven by a decline in delinquencies and higher charge-offs.

Interest expense was $13.2 million for the three months ended July 31, 2020 and $14.4 million for the three months ended July 31, 2019, a decrease of $1.2 million or 8.3%. The decrease was driven by a lower average outstanding balance of debt and a lower effective interest rate.

Net income for the three months ended July 31, 2020 was $20.5 million or $0.70 per diluted share, compared to net income of $20.0 million, or $0.62 per diluted share, for the three months ended July 31, 2019.

How We Evaluate Our Operations

Management focuses on certain key indicators to monitor our performance including:

•Same store sales - Our management considers same store sales, which consists of both brick and mortar and eCommerce sales, to be an important indicator of our performance because they are important to our attempts to leverage our SG&A costs, which include rent and other store expenses, and they have a direct impact on our total net sales, net income, cash and working capital. Same store sales is calculated by comparing the reported sales for all stores that were open during both comparative fiscal years, starting in the first period in which the store has been open for a full quarter. Sales from closed stores, if any, are removed from each period. Sales from relocated stores have been included in each period as each such store was relocated within the same general geographic market. Sales from expanded stores have also been included in each period.

•Retail gross margin - Our management views retail gross margin as a key indicator of our performance because it reflects our pricing power relative to the prices we pay for our products. Retail gross margin is calculated by comparing retail total net sales to the cost of goods sold.

•60+ Day Delinquencies - Our management views customer account delinquencies as a key indicator of our performance because it is a reflection of the quality of our credit portfolio, it drives future credit performance and credit offerings, and it impacts the interest rates we pay on our asset-backed securitizations. Delinquencies are measured as the percentage of balances that are 60+ days past due.

•Net yield - Our management considers yield to be a key performance metric because it drives future credit decisions and credit offerings and directly impacts our net income.  Yield reflects the amount of interest we receive from our portfolio. 

Outlook

Our business and industry continue to be impacted by the COVID-19 outbreak in the United States. We are generally classified as an essential business by the government authorities in the jurisdictions in which we operate as we provide essential goods and services to our communities. As a result, despite widespread stay-at-home orders that were in effect in May 2020, most of our stores remained open, though operating on reduced schedules as mandated during the COVID-19 pandemic. As of September 3, 2020, all of our stores are open and conduct regular in-store shopping hours. In addition, during the six months ended July 31, 2020 we enacted the following key actions:

•Supported Customers and Employees: As an essential business, we have maintained store operations throughout the COVID-19 pandemic through a mix of modified operating hours and enhanced employee programs, including temporarily increasing hourly wages by $2 per hour to support our front-line employees and implementing a work from home program for our corporate teams, so that we may continue to assist our customers get the goods they need to shelter-in-place. In addition, we have implemented payment deferral programs to provide relief to credit customers who were economically impacted by COVID-19.

•Strengthened our Capital and Liquidity Positions: As a precautionary measure to increase our cash position and maintain financial flexibility, we borrowed $275 million of cash from our revolving credit facility in March 2020. As

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our need for cash has abated with the reopening of the economy and in order to ensure compliance with our covenants under our Revolving Credit Facility, we paid down the majority of the borrowings on June 5, 2020, and entered into the Third Amendment. See Note 5, Debt and Financing Lease Operations, of the Condensed Consolidated Financial Statements in Part I, Item 1, of this quarterly report on Form 10-Q for further details regarding the Third Amendment. Our cash on balance sheet as of July 31, 2020 was $6.4 million with immediately available borrowing capacity of $409.7 million.

Further, we delayed or eliminated uncommitted capital expenditures, including reducing the number of planned showroom openings in fiscal year 2021 from 16 to 18 to 7 to 9 and delaying the opening of showrooms associated with our planned future expansion.

•Tightened Underwriting Standards: We implemented a series of underwriting changes beginning in March 2020 to control delinquencies and charge-offs. These changes included reducing originations of higher risk applicants, selectively increasing down payments and lowering credit limits.

The broad appeal of our value proposition to our geographically diverse core demographic, the unit economics of our business and the current retail real estate market should provide the stability necessary to maintain our business. As the COVID-19 outbreak is contained, we expect our brand recognition and long history in our core markets to give us the opportunity to further penetrate our existing footprint, particularly as we leverage existing marketing spend, logistics infrastructure, and service footprint. There are also many markets in the U.S. with demographic characteristics similar to those in our existing footprint, which provides substantial opportunities for future growth. We plan to continue improving our operating results by leveraging our existing infrastructure and seeking to continually optimize the efficiency of our marketing, merchandising, distribution and credit operations. As we expand in existing markets and penetrate new markets, we expect to increase our purchase volumes, achieve distribution efficiencies and strengthen our relationships with our key vendors. Over time, we also expect our increased store base and higher net sales to further leverage our existing corporate and regional infrastructure.

Results of Operations 

The following tables present certain financial and other information, on a condensed consolidated basis: 

Consolidated:	Three Months Ended July 31,										Six Months Ended July 31,
(in thousands)	2020		2019		Change		2020		2019		Change
Revenues:
Total net sales	$	279,736	$	306,062	$	(26,326)	$	510,066	$	568,041	$	(57,975)
Finance charges and other revenues	87,180		94,997		(7,817)		174,010		186,530		(12,520)
Total revenues	366,916		401,059		(34,143)		684,076		754,571		(70,495)
Costs and expenses:
Cost of goods sold	176,623		182,065		(5,442)		323,637		339,293		(15,656)
Selling, general and administrative expense	115,278		127,484		(12,206)		228,285		245,398		(17,113)
Provision for bad debts	32,045		49,736		(17,691)		149,371		89,782		59,589
Charges and credits	1,534		—		1,534		3,589		(695)		4,284
Total costs and expenses	325,480		359,285		(33,805)		704,882		673,778		31,104
Operating income (loss)	41,436		41,774		(338)		(20,806)		80,793		(101,599)
Interest expense	13,222		14,396		(1,174)		28,215		28,893		(678)
Income (loss) before income taxes	28,214		27,378		836		(49,021)		51,900		(100,921)
Provision (benefit) for income taxes	7,694		7,404		290		(13,339)		12,417		(25,756)
Net income (loss)	$	20,520	$	19,974	$	546	$	(35,682)	$	39,483	$	(75,165)

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Supplementary Operating 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 and its 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. We believe our large, attractively merchandised retail stores and credit solutions offer a distinctive value proposition compared to other retailers that target our core customer demographic. 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. SG&A includes 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 calculated using an annual rate of 2.5% multiplied by the average outstanding portfolio balance for each applicable period.

The following table represents total revenues, costs and expenses, operating income (loss) and income (loss) before taxes attributable to these operating segments for the periods indicated:

Retail Segment:	Three Months Ended July 31,										Six Months Ended July 31,
(dollars in thousands)	2020		2019		Change		2020		2019		Change
Revenues:
Product sales	$	256,142	$	274,578	$	(18,436)	$	463,340	$	509,023	$	(45,683)
Repair service agreement commissions	20,164		27,647		(7,483)		40,265		51,671		(11,406)
Service revenues	3,430		3,837		(407)		6,461		7,347		(886)
Total net sales	279,736		306,062		(26,326)		510,066		568,041		(57,975)
Finance charges and other	196		203		(7)		431		405		26
Total revenues	279,932		306,265		(26,333)		510,497		568,446		(57,949)
Costs and expenses:
Cost of goods sold	176,623		182,065		(5,442)		323,637		339,293		(15,656)
Selling, general and administrative expense (1)	78,584		88,147		(9,563)		156,758		167,769		(11,011)
Provision for bad debts	182		(19)		201		350		110		240
Charges and credits	1,355		—		1,355		1,355		(695)		2,050
Total costs and expenses	256,744		270,193		(13,449)		482,100		506,477		(24,377)
Operating income	$	23,188	$	36,072	$	(12,884)	$	28,397	$	61,969	$	(33,572)
Number of stores:
Beginning of period	139		127				137		123
Opened	2		4				4		8
End of period	141		131				141		131

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Credit Segment:	Three Months Ended July 31,										Six Months Ended July 31,
(in thousands)	2020		2019		Change		2020		2019		Change
Revenues:
Finance charges and other revenues	$	86,984	$	94,794	$	(7,810)	$	173,579	$	186,125	$	(12,546)
Costs and expenses:
Selling, general and administrative expense (1)	36,694		39,337		(2,643)		71,527		77,629		(6,102)
Provision for bad debts	31,863		49,755		(17,892)		149,021		89,672		59,349
Charges and credits	179		—		179		2,234		—		2,234
Total costs and expenses	68,736		89,092		(20,356)		222,782		167,301		55,481
Operating income (loss)	18,248		5,702		12,546		(49,203)		18,824		(68,027)
Interest expense	13,222		14,396		(1,174)		28,215		28,893		(678)
Income (loss) before income taxes	$	5,026	$	(8,694)	$	13,720	$	(77,418)	$	(10,069)	$	(67,349)

(1)For the three months ended July 31, 2020 and 2019, the amount of corporate overhead allocated to each segment reflected in SG&A was $8.5 million and $9.7 million, respectively. For the three months ended July 31, 2020 and 2019, the amount of reimbursement made to the retail segment by the credit segment was $8.9 million and $9.7 million, respectively. For the six months ended July 31, 2020 and 2019, the amount of corporate overhead allocated to each segment reflected in SG&A was $15.7 million and $17.6 million, respectively. For the six months ended July 31, 2020 and 2019, the amount of reimbursement made to the retail segment by the credit segment was $18.7 million and $19.4 million, respectively.

Three months ended July 31, 2020 compared to three months ended July 31, 2019

Revenues. The following table provides an analysis of retail net sales by product category in each period, including repair service agreement (“RSA”) commissions and service revenues, expressed both in dollar amounts and as a percent of total net sales:

	Three Months Ended July 31,														%	Same Store
(dollars in thousands)	2020		% of Total		2019		% of Total		Change		Change		% Change
Furniture and mattress	$	80,984	29.0	%	$	99,455	32.5	%	$	(18,471)	(18.6)	%	(21.9)	%
Home appliance	107,682		38.5		99,356		32.5		8,326		8.4		3.6
Consumer electronics	47,384		16.9		53,692		17.5		(6,308)		(11.7)		(16.2)
Home office	14,979		5.4		17,883		5.8		(2,904)		(16.2)		(20.3)
Other	5,113		1.8		4,192		1.4		921		22.0		16.7
Product sales	256,142		91.6		274,578		89.7		(18,436)		(6.7)		(10.9)
Repair service agreement commissions (1)	20,164		7.2		27,647		9.0		(7,483)		(27.1)		(30.2)
Service revenues	3,430		1.2		3,837		1.3		(407)		(10.6)
Total net sales	$	279,736	100.0	%	$	306,062	100.0	%	$	(26,326)	(8.6)	%	(13.2)	%

(1) The total change in sales of RSA commissions includes retrospective commissions, which are not reflected in the change in same store sales.

The decrease in total net sales for the three months ended July 31, 2020 was primarily driven by a decrease in same store sales of 13.2%, partially offset by new store growth. The decrease in same store sales reflects proactive underwriting changes and industry wide supply chain disruptions, each of which was the result of the COVID-19 pandemic.

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The following table provides the change of the components of finance charges and other revenues:

	Three Months Ended July 31,
(in thousands)	2020		2019		Change
Interest income and fees	$	83,599	$	85,204	$	(1,605)
Insurance income	3,385		9,590		(6,205)
Other revenues	196		203		(7)
Finance charges and other revenues	$	87,180	$	94,997	$	(7,817)

The decrease in finance charges and other revenues was primarily due to a decrease of 7.3% in the average balance of the customer receivable portfolio, a decrease in insurance commissions due to a decline in the balance of sale of our in-house credit financing, and a decrease in insurance retrospective income. The decrease was partially offset by an increase in the yield rate to 23.2% during the three months ended July 31, 2020, 130 basis points higher than the three months ended July 31, 2019.

The following table provides key portfolio performance information: 

	Three Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Interest income and fees	$	83,599		$	85,204		$	(1,605)
Net charge-offs	(75,118)			(50,005)			(25,113)
Interest expense	(13,222)			(14,396)			1,174
Net portfolio income (loss)	$	(4,741)		$	20,803		$	(25,544)
Average outstanding portfolio balance	$	1,429,991		$	1,542,849		$	(112,858)
Interest income and fee yield (annualized)	23.2		%	21.9		%
Net charge-off % (annualized)	21.0		%	13.0		%

Retail Gross Margin

	Three Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Retail total net sales	$	279,736		$	306,062		$	(26,326)
Cost of goods sold	176,623			182,065			(5,442)
Retail gross margin	$	103,113		$	123,997		$	(20,884)
Retail gross margin percentage	36.9		%	40.5		%

The year-over-year decrease in retail gross margin was primarily driven by the impact of fixed logistics costs on lower sales, a decrease in retrospective income on RSA commissions and a shift in sales from higher margin products to lower margin products.

Selling, General and Administrative Expense

	Three Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Retail segment	$	78,584		$	88,147		$	(9,563)
Credit segment	36,694			39,337			(2,643)
Selling, general and administrative expense - Consolidated	$	115,278		$	127,484		$	(12,206)
Selling, general and administrative expense as a percent of total revenues	31.4		%	31.8		%

The SG&A decrease in the retail segment was primarily due to a reduction in advertising costs and labor costs, partially offset by an increase in occupancy costs. The SG&A decrease in the credit segment was primarily due to decreases in general operating expenses and labor costs.

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As a percent of average total customer portfolio balance (annualized), SG&A for the credit segment for the three months ended July 31, 2020 increased 0.1% as compared to the three months ended July 31, 2019.

Provision for Bad Debts

	Three Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Retail segment	$	182		$	(19)		$	201
Credit segment	31,863			49,755			(17,892)
Provision for bad debts - Consolidated	$	32,045		$	49,736		$	(17,691)
Provision for bad debts - Credit segment, as a percent of average outstanding portfolio balance (annualized)	8.9		%	12.9		%

The provision for bad debts decreased to $32.0 million for the three months ended July 31, 2020 from $49.7 million for the three months ended July 31, 2019, a decrease of $17.7 million. The decrease was driven by a greater decrease in the allowance for bad debts during the three months ended July 31, 2020 compared to the three months ended July 31, 2019. The decrease in the allowance for bad debts was primarily driven by the year-over-year decrease in the customer accounts receivable portfolio, a decrease in the estimated loss rate driven by a decline in delinquencies and higher charge-offs.

Charges and Credits

During the three months ended July 31, 2020, we recognized $1.5 million in professional fees associated with non-recurring expenses.

Interest Expense

Interest expense was $13.2 million for the three months ended July 31, 2020 and $14.4 million for the three months ended July 31, 2019, a decrease of $1.2 million or 8.3%. The decrease was driven by a lower average outstanding balance of debt and a lower effective interest rate.

Provision for Income Taxes

	Three Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Provision (benefit) for income taxes	$	7,694		$	7,404		$	290
Effective tax rate	27.3		%	27.0		%

Six months ended July 31, 2020 compared to six months ended July 31, 2019

Revenues. The following table provides an analysis of retail net sales by product category in each period, including RSA commissions and service revenues, expressed both in dollar amounts and as a percent of total net sales:

	Six Months Ended July 31,														%	Same Store
(dollars in thousands)	2020		% of Total		2019		% of Total		Change		Change		% Change
Furniture and mattress	$	149,877	29.4	%	$	187,819	33.1	%	$	(37,942)	(20.2)	%	(24.2)	%
Home appliance	188,967		37.0		176,646		31.1		12,321		7.0		1.3
Consumer electronics	83,160		16.3		103,341		18.2		(20,181)		(19.5)		(24.7)
Home office	32,345		6.3		33,589		5.9		(1,244)		(3.7)		(9.3)
Other	8,991		1.8		7,628		1.3		1,363		17.9		12.3
Product sales	463,340		90.8		509,023		89.6		(45,683)		(9.0)		(14.0)
Repair service agreement commissions (1)	40,265		7.9		51,671		9.1		(11,406)		(22.1)		(24.8)
Service revenues	6,461		1.3		7,347		1.3		(886)		(12.1)
Total net sales	$	510,066	100.0	%	$	568,041	100.0	%	$	(57,975)	(10.2)	%	(15.2)	%

(1) The total change in sales of RSA commissions includes retrospective commissions, which are not reflected in the change in same store sales.

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The decrease in total net sales for the six months ended July 31, 2020 was primarily driven by a decrease in same store sales of 15.2%, partially offset by new store growth. The decrease in same store sales reflects proactive underwriting changes, industry wide supply chain disruptions, reductions in store hours and state mandated stay-at-home orders, each of which was the result of the COVID-19 pandemic.

The following table provides the change of the components of finance charges and other revenues:

	Six Months Ended July 31,
(in thousands)	2020		2019		Change
Interest income and fees	$	165,442	$	169,221	$	(3,779)
Insurance income	8,137		16,904		(8,767)
Other revenues	431		405		26
Finance charges and other revenues	$	174,010	$	186,530	$	(12,520)

The decrease in finance charges and other revenues was primarily due to a decrease of 3.8% in the average balance of the customer receivable portfolio, a decrease in insurance commissions due to a decline in the balance of sale of our in-house credit financing and a decrease in insurance retrospective income. The decrease was partially offset by an increase in the yield rate to 22.2% during the six months ended July 31, 2020, 20 basis points higher than the six months ended July 31, 2019.

The following table provides key portfolio performance information: 

	Six Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Interest income and fees	$	165,442		$	169,221		$	(3,779)
Net charge-offs	(134,006)			(98,066)			(35,940)
Interest expense	(28,215)			(28,893)			678
Net portfolio income	$	3,221		$	42,262		$	(39,041)
Average outstanding portfolio balance	$	1,493,250		$	1,552,856		$	(59,606)
Interest income and fee yield (annualized)	22.2		%	22.0		%
Net charge-off % (annualized)	17.9		%	12.6		%

Retail Gross Margin

	Six Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Retail total net sales	$	510,066		$	568,041		$	(57,975)
Cost of goods sold	323,637			339,293			(15,656)
Retail gross margin	$	186,429		$	228,748		$	(42,319)
Retail gross margin percentage	36.5		%	40.3		%

The year-over-year decrease in retail gross margin was primarily driven by the impact of fixed logistics costs on lower sales, a decrease in retrospective income on RSA commissions and a shift in sales from higher margin products to lower margin products.

Selling, General and Administrative Expense

	Six Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Retail segment	$	156,758		$	167,769		$	(11,011)
Credit segment	71,527			77,629			(6,102)
Selling, general and administrative expense - Consolidated	$	228,285		$	245,398		$	(17,113)
Selling, general and administrative expense as a percent of total revenues	33.4		%	32.5		%

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The SG&A decrease in the retail segment was primarily due to a reduction in advertising costs, labor costs and general operating expenses, partially offset by an increase in occupancy costs. The SG&A decrease in the credit segment was primarily due to a decrease in labor costs and general operating expenses, partially offset by increased occupancy costs.

As a percent of average total customer portfolio balance (annualized), SG&A for the credit segment for the six months ended July 31, 2020 decreased 0.4% as compared to the six months ended July 31, 2019.

Provision for Bad Debts

	Six Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Retail segment	$	350		$	110		$	240
Credit segment	149,021			89,672			59,349
Provision for bad debts - Consolidated	$	149,371		$	89,782		$	59,589
Provision for bad debts - Credit segment, as a percent of average outstanding portfolio balance (annualized)	20.0		%	11.5		%

The provision for bad debts increased to $149.4 million for the six months ended July 31, 2020 from $89.8 million for the six months ended July 31, 2019, an increase of $59.6 million. The year-over-year increase was primarily driven by a greater increase in the allowance for bad debts during the six months ended July 31, 2020 compared to the six months ended July 31, 2019. The increase in the allowance for bad debts for the six months ended July 31, 2020 was primarily driven by an increase of $65.5 million related to an increase in forecasted unemployment rates stemming from the COVID-19 pandemic, partially offset by a year-over-year decline in the customer accounts receivable portfolio, a year-over-year decrease in the estimated loss rate driven by a decline in delinquencies and higher charge-offs.

Charges and Credits

During the six months ended July 31, 2020, we recognized $3.6 million in professional fees associated with non-recurring expenses. During the six months ended July 31, 2019, we recognized a $0.7 million gain from increased sublease income related to the consolidation of our corporate headquarters.

Interest Expense

Interest expense was $28.2 million for the six months ended July 31, 2020 and $28.9 million for the six months ended July 31, 2019, a decrease of $0.7 million or 2.4%. The decrease was driven by a lower average outstanding balance of debt and a lower effective interest rate.

Provision for Income Taxes

	Six Months Ended July 31,
(dollars in thousands)	2020			2019			Change
Provision (benefit) for income taxes	$	(13,339)		$	12,417		$	(25,756)
Effective tax rate	27.2		%	23.9		%

The decrease in income tax expense for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 was driven by a $100.9 million decrease in pre-tax earnings at the statutory rate of 21%. An additional $4.3 million benefit was also recognized in the current period as a result of net operating loss provisions within the CARES Act that provides for a five year carryback of losses.

Customer Accounts Receivable Portfolio

We provide in-house financing to individual consumers on a short- and medium-term basis (contractual terms generally range from 12 to 36 months) for the purchase of durable products for the home. A significant portion of our customer credit portfolio is due from customers that are considered higher-risk, subprime borrowers. Our financing is executed using contracts that require fixed monthly payments over fixed terms. We maintain a secured interest in the product financed. If a payment is delayed, missed or paid only in part, the account becomes delinquent. Our collection personnel attempt to contact a customer once their account becomes delinquent. Our loan contracts generally reflect an interest rate of between 18% and 36%. We have implemented our direct consumer loan program across all Texas, Louisiana, Tennessee and Oklahoma locations. The states of Texas, Louisiana, Tennessee and Oklahoma represented approximately 75% of our originations during the six months ended July 31, 2020, with maximum equivalent interest rates of up to 27% in Oklahoma, up to 30% in Texas and Tennessee,

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and up to 36% in Louisiana. In states where regulations do not generally limit the interest rate charged, our loan contracts generally reflect an interest rate between 29.99% and 35.99%. These states represented 12% of our originations during the six months ended July 31, 2020.

We offer qualified customers a 12-month no-interest option finance 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.

We regularly extend or “re-age” a portion of our delinquent customer accounts as a part of our normal collection procedures to protect our investment. Generally, extensions are granted to customers who have experienced a financial difficulty (such as the temporary loss of employment), which is subsequently resolved, and when the customer indicates a willingness and ability to resume making monthly payments. These re-ages involve modifying the payment terms to defer a portion of the cash payments currently required of the debtor to help the debtor improve his or her financial condition and eventually be able to pay the account balance. 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. We may also charge the customer an extension fee, which approximates the interest owed for the time period the contract was past due. Our re-age programs consist of extensions and two payment updates, which include unilateral extensions to customers who make two full payments in three calendar months in certain states. Re-ages are not granted to debtors who demonstrate a lack of intent or ability to service the obligation or have reached our limits for account re-aging. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the 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 extends the term. Under these options, as with extensions, the customer must resolve the reason for delinquency and show a willingness and ability to resume making contractual monthly payments.

On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law to address the economic impact of the COVID-19 pandemic. Under the CARES Act, modifications deemed to be COVID-19 related are not considered a TDR if the loan was current (not more than 30 days past due as of March 31, 2020) and the deferral was executed between April 1, 2020 and the earlier of 60 days after the termination of the COVID-19 national emergency or December 31, 2020. In response to the CARES Act, the Company implemented short-term deferral programs for our customers. The carrying value of the customer receivables on accounts which were current prior to receiving a COVID-19 related deferment was $79.3 million as of July 31, 2020.

The following tables present, for comparison purposes, information about our managed portfolio (information reflects on a combined basis the securitized receivables transferred to the VIEs and receivables not transferred to the VIEs): 

	As of July 31,
	2020			2019
Weighted average credit score of outstanding balances (1)	596			594
Average outstanding customer balance	$	2,589		$	2,711
Balances 60+ days past due as a percentage of total customer portfolio carrying value (2)(3)(4)	10.0		%	8.7		%
Re-aged balance as a percentage of total customer portfolio carrying value (2)(3)(4)	29.9		%	25.8		%
Carrying value of account balances re-aged more than six months (in thousands) (3)	$	103,220		$	97,510
Allowance for bad debts and uncollectible interest as a percentage of total customer accounts receivable portfolio balance (5)	24.8		%	13.3		%
Percent of total customer accounts receivable portfolio balance represented by no-interest option receivables	18.3		%	23.7		%

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	Three Months Ended July 31,									Six Months Ended July 31,
	2020			2019			2020			2019
Total applications processed	326,958			311,062			622,509			569,849
Weighted average origination credit score of sales financed (1)	617			609			613			609
Percent of total applications approved and utilized	20.0		%	28.0		%	21.1		%	27.8		%
Average income of credit customer at origination	$	46,300		$	45,700		$	46,300		$	45,500
Percent of retail sales paid for by:
In-house financing, including down payments received	48.5		%	68.8		%	55.1		%	68.5		%
Third-party financing	23.9		%	17.7		%	20.8		%	16.9		%
Third-party lease-to-own option	8.4		%	6.5		%	8.4		%	7.3		%
	80.8		%	93.0		%	84.3		%	92.7		%

(1)Credit scores exclude non-scored accounts.

(2)Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.

(3)Carrying value reflects the total customer accounts receivable portfolio balance, net of deferred fees and origination costs, the allowance for no-interest option credit programs and the allowance for uncollectible interest.

(4)Increase was primarily driven by higher risk loans originated during the first half of fiscal year 2020 and an increase in new customer mix.

(5)For the period ended July 31, 2020, the allowance for bad debts and uncollectible interest is based on the expected loss methodology. For the period ended July 31, 2019, the allowance for bad debts and uncollectible interest is based on the incurred loss methodology.

Our customer portfolio balance and related allowance for uncollectible accounts are segregated between customer accounts receivable and restructured accounts. Customer accounts receivable include all accounts for which the payment term has not been cumulatively extended over three months or refinanced. Restructured accounts include all accounts for which the payment term has been re-aged in excess of three months or refinanced.

For customer accounts receivable (excluding restructured accounts), the allowance for uncollectible accounts as a percentage of the total customer accounts receivable portfolio balance increased to 22.5% as of July 31, 2020 from 10.0% as of July 31, 2019. The increase in our allowance for uncollectible accounts was primarily related to the implementation of CECL during the first quarter of fiscal year 2021, which transitioned our allowance from an incurred loss reserve to a lifetime reserve, and an increase in our economic adjustment related to the COVID-19 pandemic.

The percentage of the carrying value of non-restructured accounts greater than 60 days past due increased 170 basis points over the prior year period to 8.4% as of July 31, 2020 from 6.7% as of July 31, 2019. The increase was primarily due to higher risk loans originated during the first half of fiscal year 2020 and an increase in new customer mix.

For restructured accounts, the allowance for uncollectible accounts as a percentage of the portfolio balance was 37.5% as of July 31, 2020 as compared to 36.2% as of July 31, 2019. The increase in the allowance for uncollectible accounts was due to an increase in delinquencies.

The percent of bad debt charge-offs, net of recoveries, to average outstanding portfolio balance was 21.0% for the three months ended July 31, 2020 compared to 13.0% for the three months ended July 31, 2019. The increase in bad debt charge-offs, net of recoveries, was primarily due to higher risk loans originated during the first half of fiscal year 2020 and an increase in new customer mix.

As of July 31, 2020 and 2019, balances under no-interest programs included within customer receivables were $248.2 million and $368.6 million, respectively.

Liquidity and Capital Resources 

We require liquidity and capital resources to finance our operations and future growth as we add new stores to our operations, which in turn requires additional working capital for increased customer receivables and inventory. We generally finance our operations through a combination of cash flow generated from operations, the use of our Revolving Credit Facility, and through periodic securitizations of originated customer receivables. We plan to execute periodic securitizations of future originated customer receivables.

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We believe, based on our current projections, that we have sufficient sources of liquidity to fund our operations, store expansion and renovation activities, and capital expenditures for at least the next 12 months.

Operating cash flows. For the six months ended July 31, 2020, net cash provided by operating activities was $305.7 million compared to $89.4 million for the six months ended July 31, 2019. The increase in net cash provided by operating activities was primarily driven by an increase in cash provided by working capital, which was primarily due to a decrease in receivables as we increased collections on customer and vendor receivables and an increase in payables as we preserved our liquidity during the COVID-19 pandemic. These increases were partially offset by a decrease in net income when adjusted for non-cash activity.

Investing cash flows.  For the six months ended July 31, 2020, net cash used in investing activities was $32.5 million compared to $33.3 million for the six months ended July 31, 2019. The cash used during the six months ended July 31, 2020 was primarily for capital expenditures related to our two new distribution centers to support long-term growth. The cash used during the six months ended July 31, 2019 was primarily for capital expenditures related to investments in new stores, renovations and expansions of existing stores, a new distribution center and technology investments.

Financing cash flows.  For the six months ended July 31, 2020, net cash used in financing activities was $283.9 million compared to net cash used in financing activities of $45.3 million for the six months ended July 31, 2019. During the period ended July 31, 2020, net borrowings under our Revolving Credit Facility were $34.8 million as compared to net payments of $103.0 million during the period ended July 31, 2019. Payments on asset-backed notes of approximately $315.2 million were made during the six months ended July 31, 2020 compared to approximately $285.7 million in the comparable prior year period. During the six months ended July 31, 2019, we issued 2019-A VIE asset backed notes resulting in net proceeds to us of approximately $379.2 million, net of transaction costs, which were used to pay down the entire balance of the Company’s Revolving Credit Facility outstanding at the time of issuance and for other general corporate purposes. No asset back notes were issued during the six months ended July 31, 2020.

Share Repurchase Program. On May 30, 2019, our Board of Directors approved a stock repurchase program pursuant to which we had the authorization to repurchase up to $75.0 million of our outstanding common stock. The stock repurchase program expired on May 30, 2020. No shares were repurchased for the quarter ended July 31, 2020.

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 (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, 2020, $172.3 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. 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

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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, 2020 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 C Notes	$	78,640	$	77,843	$	16,168	12/20/2017	11/15/2022	5.95%	6.21%
2018-A Class A Notes	219,200		217,832		12,203		8/15/2018	1/17/2023	3.25%	4.80%
2018-A Class B Notes	69,550		69,020		7,359		8/15/2018	1/17/2023	4.65%	5.55%
2018-A Class C Notes	69,550		68,850		7,359		8/15/2018	1/17/2023	6.02%	6.93%
2019-A Class A Notes	254,530		253,026		36,151		4/24/2019	10/16/2023	3.40%	4.25%
2019-A Class B Notes	64,750		64,276		46,427		4/24/2019	10/16/2023	4.36%	4.77%
2019-A Class C Notes	62,510		61,898		44,821		4/24/2019	10/16/2023	5.29%	5.71%
2019-B Class A Notes	317,150		315,417		118,509		11/26/2019	6/17/2024	2.66%	4.27%
2019-B Class B Notes	85,540		84,916		85,540		11/26/2019	6/17/2024	3.62%	4.17%
2019-B Class C Notes	83,270		82,456		83,270		11/26/2019	6/17/2024	4.60%	4.94%
Total	$	1,304,690	$	1,295,534	$	457,807

(1)After giving effect to debt issuance costs.

(2)For the six months ended July 31, 2020, and inclusive of the impact of changes in timing of actual and expected cash flows.

Revolving Credit Facility. On May 23, 2018, Conn’s, Inc. and certain of its subsidiaries (the “Borrowers”) entered into the Fourth Amended and Restated Loan and Security Agreement (as amended from time to time, “Fourth A&R Loan and Security Agreement”), 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.

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, 2020, we had immediately available borrowing capacity of $409.7 million under our Revolving Credit Facility, net of standby letters of credit issued of $12.5 million and prior to giving effect to a minimum liquidity requirement of $125.0 million pursuant to the Third Amendment. We also had $163.9 million that could have become available under our Revolving Credit Facility were we to grow the balance of eligible customer receivables and total eligible inventory balances.

On June 5, 2020 we entered into the Third Amendment to our Revolving Credit Facility (the “Third Amendment”). Under the Third Amendment, loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 3.00% to 3.75% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 2.00% to 2.75% per annum (depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the federal funds effective 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 4.8% for the six months ended July 31, 2020.

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. We are restricted from making distributions, including repayments of the Senior Notes or other distributions, 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.

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Debt Covenants. The Third Amendment waived the interest coverage covenants beginning with the first quarter of fiscal year 2021 and continuing until the date on which the Company delivers financial statements and a compliance certificate for the fourth quarter of fiscal year 2021. After giving effect to the foregoing amendment, as of July 31, 2020, we were in compliance with the covenants in our Revolving Credit Facility. If we were to breach certain covenants under our Revolving Credit Facility in the future, that breach might trigger a default under our Revolving Credit Facility, which, if not remedied, would require a waiver from the lenders under our Revolving Credit Facility or an amendment to our Revolving Credit Facility in order for us to avoid an event of default. There can be no assurances that, in the event of such a covenant breach, we would be able to obtain the necessary waivers or amendments to remain in compliance with the covenants in our Revolving Credit Facility.

A summary of the significant financial covenants that govern our Revolving Credit Facility, as amended, compared to our actual compliance status at July 31, 2020 is presented below: 

	Actual	Required Minimum/ Maximum
Interest Coverage Ratio for the quarter must equal or exceed minimum	Not Tested	1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed minimum	Not Tested	1.50:1.00
Leverage Ratio must not exceed maximum	1.95:1.00	4.50:1.00
ABS Excluded Leverage Ratio must not exceed maximum	1.18:1.00	2.50:1.00
Capital Expenditures, net, must not exceed maximum	$34.0 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.

Capital Expenditures.  We lease the majority of our stores under operating leases and our plans for future store locations anticipate operating leases, but do not exclude store ownership. Our capital expenditures for future new store projects should primarily be for our tenant improvements to the property leased (including any new distribution centers and cross-dock facilities), the cost of which is estimated to be between $1.6 million and $2.5 million per store (before tenant improvement allowances), and for our existing store remodels, estimated to range between $0.7 million and $1.2 million per store remodel (before tenant improvement allowances), depending on store size. In the event we purchase existing properties, our capital expenditures will depend on the particular property and whether it is improved when purchased. We are continuously reviewing new relationships and funding sources and alternatives for new stores, which may include “sale-leaseback” or direct “purchase-lease” programs, as well as other funding sources for our purchase and construction of those projects. If we do not purchase the real property for new stores, our direct cash needs should include only our capital expenditures for tenant improvements to leased properties and our remodel programs for existing stores. We opened four new stores during the first half of fiscal year 2021 and currently plan to open a total of seven to nine new stores during fiscal year 2021. Our anticipated capital expenditures for the remainder of fiscal year 2021 are between $25.0 million and $30.0 million, which includes expenditures for new stores we plan to open in fiscal year 2021.

Cash Flow

We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operating cash needs. To meet our short- and long-term liquidity requirements, including payment of operating expenses, funding of capital expenditures and repayment of debt, we rely primarily on cash from operations. As of July 31, 2020, beyond cash generated from operations, we had (i) immediately available borrowing capacity of $409.7 million under our Revolving Credit Facility and (ii) $6.4 million of cash on hand. However, we have, in the past, sought to raise additional capital.

We expect that, for the next 12 months, cash generated from operations, proceeds from potential accounts receivable securitizations and our Revolving Credit Facility will be sufficient to provide us the ability to fund our operations, provide the increased working capital necessary to support our strategy and fund planned capital expenditures discussed above in Capital Expenditures.

We may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our financial position. These actions could include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, the Company’s cash position, compliance with debt covenants and restrictions and other considerations.

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Off-Balance Sheet Liabilities and Other Contractual Obligations

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. The following table presents a summary of our minimum contractual commitments and obligations as of July 31, 2020: 

			Payments due by period
(in thousands)	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Debt, including estimated interest payments (1):
Revolving Credit Facility (1)	$	68,529	$	2,556	$	65,973	$	—	$	—
Senior Notes	259,194		16,458		242,736		—		—
2017-B Class C Notes (2)	18,374		962		17,412		—		—
2018-A Class A Notes (2)	13,181		397		12,784		—		—
2018-A Class B Notes (2)	8,203		342		7,861		—		—
2018-A Class C Notes (2)	8,452		443		8,009		—		—
2019-A Class A Notes (2)	40,097		1,229		2,458		36,410		—
2019-A Class B Notes (2)	52,926		2,024		4,048		46,854		—
2019-A Class C Notes (2)	52,434		2,371		4,742		45,321		—
2019-B Class A Notes (2)	130,747		3,152		6,305		121,290		—
2019-B Class B Notes (2)	97,562		3,097		6,193		88,272		—
2019-B Class C Notes (2)	98,140		3,830		7,661		86,649		—
Financing lease obligations	8,002		1,112		1,941		1,628		3,321
Operating leases:
Real estate	564,841		78,769		163,453		135,386		187,233
Equipment	1,219		515		577		92		35
Contractual commitments (3)	173,205		166,182		6,603		420		—
Total	$	1,595,106	$	283,439	$	558,756	$	562,322	$	190,589

(1)Estimated interest payments are based on the outstanding balance as of July 31, 2020 and the interest rate in effect at that time.

(2)The payments due by period for the Senior Notes and asset-backed notes were based on their respective maturity dates at their respective fixed annual interest rate. Actual principal and interest payments on the asset-backed notes will reflect actual proceeds from the securitized customer accounts receivables.

(3)Contractual commitments include commitments to purchase inventory of $141.7 million.

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Issuer and Guarantor Subsidiary Summarized 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, 2020 and January 31, 2020, 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 tables present on a combined basis for the Issuer and the Guarantor Subsidiaries, a summarized Balance Sheet as of July 31, 2020 and January 31, 2020, and a summarized Statement of Operations on a consolidated basis for the six months ended July 31, 2020. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. Investments in subsidiaries are accounted for by the parent company using the equity method for purposes of this presentation. Amounts provided do not represent our total consolidated amounts, as of July 31, 2020 and January 31, 2020, and for the six months ended July 31, 2020:

(in thousands)	July 31, 2020		January 31, 2020
Assets
Cash, cash equivalents and restricted cash	$	8,320	$	7,641
Customer accounts receivable, net of allowances	260,404		279,977
Inventories	180,893		219,756
Net due from non-guarantor subsidiary	—		3,692
Other current assets	80,314		84,514
Total current assets	529,931		595,580
Long-term portion of customer accounts receivable, net of allowances	321,368		243,307
Property and equipment, net	192,300		173,031
Right of use assets, net	266,046		242,457
Other assets	57,766		30,654
Total assets	$	1,367,411	$	1,285,029
Liabilities
Current portion of debt	$	758	$	605
Lease liability operating - current	38,003		35,390
Net due to non-guarantor subsidiary	3,049		—
Other liabilities	149,083		119,856
Total current liabilities	190,893		155,851
Lease liability operating - non current	355,577		329,081
Long-term debt	293,368		257,414
Other long-term liabilities	22,260		21,334
Total liabilities	$	862,098	$	763,680

(in thousands)	Six Months Ended July 31, 2020
Net sales and finances charges	$	602,135
Servicing fee revenue from non-guarantor subsidiary	18,806
Total revenues	620,941
Total costs and expenses	648,467
Net loss	$	(27,526)

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Critical Accounting Policies and Estimates 

The preparation of financial statements and related disclosures in conformity with GAAP requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Certain accounting policies are considered “critical accounting policies” because they are particularly dependent on estimates made by us about matters that are inherently uncertain and could have a material impact to our Condensed Consolidated Financial Statements. We base our estimates on historical experience and on other assumptions that we believe are reasonable. As a result, actual results could differ because of the use of estimates. Other than with respect to the additional policy below, the description of critical accounting policies is included in our 2020 Form 10-K, filed with the SEC on April 14, 2020.

Recent Accounting Pronouncements

The information related to recent accounting pronouncements as set forth in Note 1, Summary of Significant Accounting Policies, of the Condensed Consolidated Financial Statements in Part I, Item 1, of this quarterly report on Form 10-Q is incorporated herein by reference.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in interest rates. We have not been materially impacted by fluctuations in foreign currency exchange rates, as substantially all of our business is transacted in, and is expected to continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. Our Senior Notes and asset-backed notes bear interest at a fixed rate and would not be affected by interest rate changes.

Loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 3.00% to 3.75% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 2.00% to 2.75% per annum (depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the federal funds effective rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. Accordingly, changes in our quarterly total leverage ratio and LIBOR or the alternate base rate will affect the interest rate on, and therefore our costs under, the Revolving Credit Facility. As of July 31, 2020, the balance outstanding under our Revolving Credit Facility was $63.9 million. A 100 basis point increase in interest rates on the Revolving Credit Facility would increase our borrowing costs by $0.6 million over a 12-month period, based on the outstanding balance at July 31, 2020.

ITEM 4.   CONTROLS AND PROCEDURES 

Disclosure Controls and Procedures

As of July 31, 2020, our management (under the supervision and with the participation of our principal executive officer and our principal financial officer and as defined in Rule 13a-15(f) or Rule 15(d)-15(f) under the Exchange Act) assessed the effectiveness of our internal control over financial reporting.  In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).  Based upon this assessment and those criteria, management believes that, as of July 31, 2020, our internal controls over financial reporting were not effective due to the previously disclosed material weakness in our internal controls over financial reporting described in Part II, Item 9A in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020. 

Remediation Plan

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, we began implementing a remediation plan to address the material weakness mentioned above. We have substantially completed the remediation activities as of the date of this report and believe that we have strengthened our information technology general controls to address the identified material weakness. However, control weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We expect to complete the remediation process as early as practicable in fiscal year 2021.

Changes in Internal Controls over Financial Reporting

Other than the changes related to our remediation efforts described above, for the quarter ended July 31, 2020, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II.  OTHER INFORMATION 

ITEM 1.   LEGAL PROCEEDINGS 

The information set forth in Note 6, Contingencies, of the Condensed Consolidated Financial Statements in Part I, Item 1, of this quarterly report on Form 10-Q is incorporated herein by reference. 

ITEM 1A. RISK FACTORS 

As of the date of the filing, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A, of our 2020 Form 10-K.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents information with respect to purchases of Conn’s common stock by Conn’s or its affiliates during the quarter ended July 31, 2020.

Period	Total Number of Shares Purchased (in thousands) (1)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Program (in thousands) (1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions) (1)
May 1 - 31	—	$	—	—	$	8.7
June 1 - 30	—	$	—	—	$	—
July 1 - 31	—	$	—	—	$	—
Total	—			—

(1)On May 30, 2019, our Board of Directors approved a stock repurchase program pursuant to which we could repurchase up to $75.0 million of our outstanding common stock. The stock repurchase program expired on May 30, 2020.

(2)Average price paid per share excludes costs associated with the repurchases.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES 

None. 

ITEM 4.  MINE SAFETY DISCLOSURE 

Not applicable.

ITEM 5.   OTHER INFORMATION

Adoption of Amended and Restated Executive Severance Plan

On September 2, 2020, the Board of Directors, upon the recommendation of the Compensation Committee (the “Committee”), adopted and approved an Amended and Restated Executive Severance Plan (the “Severance Plan”).

Participation in the Severance Plan is limited to employees holding the title of Vice President of the Company or higher, or who are otherwise selected as a participant in the Severance Plan by the Committee. Participants who are party to another agreement with the Company providing for severance benefits may, within 30 days of the effective date of the Severance Plan, elect that the Severance Plan shall apply instead of such other agreement.

Under the Severance Plan, eligible participants are entitled to receive a Termination Payment (as defined in the Severance Plan) which is equal to a multiple of such participant’s annual base salary if the individual's employment is terminated for any reason other than (i) resignation from employment without Good Reason (as defined in the Severance Plan), (ii) death, (iii) Cause (as defined in the Severance Plan), (iv) Disability (as defined in the Severance Plan), or (v) a Good Reason Termination (as defined in the Severance Plan). Such benefit is to be paid in substantially equal installments on the Company’s regularly scheduled payroll dates during the Severance Period (as defined in the Severance Plan). In addition to the cash severance, participants (and their eligible dependents) will also be entitled to receive continued coverage under the Company’s group health plan during the Severance Period at the same cost paid by active employees.

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The multiple used in calculating the Termination Payment is 2x for Mr. Norm Miller, Chief Executive Officer and Chairman of the Board, 1.5x for Mr. Lee Wright, Executive Vice President and Chief Operating Officer, 1.5x for Mr. George Bchara, Executive Vice President and Chief Financial Officer, and 1x for Mr. Rodney Lastinger, President - Retail. The Severance Period as used in the Severance Plan is 24 months for Mr. Miller, 18 months for Messrs. Wright and Bchara, and 12 months for Mr. Lastinger.

In the event of a participant’s termination within 24 months of a Change in Control (as defined in the Severance Plan), the Termination Payment may be subject to an increased multiple and shall be paid as a lump sum within 30 days of the Termination Date (as defined in the Severance Plan). The multiple used in calculating the Termination Payment in the event of a termination within 24 months of a Change in Control is increased to 2x for Messrs. Wright, Bchara and Lastinger. Similarly, if terminated within 24 months of a Change in Control, the Severance Period for Messrs. Wright, Bchara and Lastinger is increased to 24 months.

Further, in the event of a participant’s termination within 24 months of a Change in Control, awards under the Company’s equity compensation plans shall become vested and, if applicable, exercisable as of the Termination Date. Certain participants shall also receive a pro-rated bonus based on Company target performance for the fiscal year in which termination occurs.

The Severance Plan may be amended or terminated by the Committee at any time; provided, however, that (i) no amendment materially adverse to any Severance Plan participant will be effective without such participant’s written consent until one year after its adoption, and (ii) termination of the Severance Plan will not be effective until one year following Board or other corporate action authorizing termination of the Severance Plan.

The forgoing description of the Severance Plan is qualified in its entirety by the full text of the plan, a copy of which is attached hereto and filed herewith as Exhibit 10.1 and incorporated by reference herein.

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ITEM 6.  EXHIBITS 

The exhibits filed as part of this report are as follows (exhibits incorporated by reference are set forth with the name of the registrant, the type of report and registration number or last date of the period for which it was filed, and the exhibit number in such filing):

Exhibit Number	Description of Document
3.1	Certificate of Incorporation of Conn’s, Inc. (incorporated herein by reference to Exhibit 3.1 to Conn’s, Inc. registration statement on Form S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003)
3.1.1	Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. dated June 3, 2004 (incorporated herein by reference to Exhibit 3.1.1 to Form 10-Q for the quarterly period ended April 30, 2004 (File No. 000-50421) as filed with the Securities and Exchange Commission on June 7, 2004)
3.1.2	Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. dated May 30, 2012 (incorporated herein by reference to Exhibit 3.1.2 to Form 10-Q for the quarterly period ended April 30, 2012 (File No. 001-34956) as filed with the Securities and Exchange Commission on June 5, 2012)
3.1.3	Certificate of Correction to the Certificate of Amendment to Conn’s, Inc. Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1.3 to Form 10-K for the annual period ended January 31, 2014 (File No. 001-34956) as filed with the Securities and Exchange Commission on March 27, 2014)
3.1.4	Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. as filed on May 29, 2014 (incorporated herein by reference to Exhibit 3.1.4 to Conn’s, Inc. Form 10-Q for the quarterly period ended April 30, 2014 (File No. 001-34956) as filed with the Securities and Exchange Commission on June 2, 2014)
3.2	Second Amended and Restated Bylaws of Conn’s, Inc. effective as of November 27, 2018 (incorporated herein by reference to exhibit 3.2 to Form 10-Q for the quarterly period ended October 31, 2018 (File No. 001-34956) as filed with the Securities and Exchange Commission on December 4, 2018)
10.1*	Amended and Restated Executive Severance Plan
10.2*	Third Amendment to Fourth Amended and Restated Loan and Security Agreement, dated June 5, 2020, by and among the Company, as parent and guarantor, Conn Appliances, Inc., Conn Credit I, LP and Conn Credit Corporation, Inc., as borrowers, certain banks and financial institutions named therein, as lenders, and JP Morgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (incorporated herein by reference to Exhibit 10.1 to Conn’s, Inc. Form 10-Q for the quarterly period ended April 30, 2020 (File No. 001-34956) as filed with the Securities and Exchange Commission on June 9, 2020)
31.1	Rule 13a-14(Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed herewith)
31.2	Rule 13a-14(d)/15d-14(d) Certification (Chief Financial Officer) (filed herewith)
32.1	Section 1350 Certification (Chief Executive Officer and Chief Financial Officer) (furnished herewith)
101	The following financial information from our Quarterly Report on Form 10-Q for the second quarter of fiscal year 2021, filed with the SEC on September 3, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets at July 31, 2020 and January 31, 2020, (ii) the Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2020 and 2019, (iii) the Condensed Consolidated Statements of Shareholders Equity for the periods ended July 31, 2020 and 2019, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2020 and 2019 and (v) the notes to the Condensed Consolidated Financial Statements.

*Filed herewith

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SIGNATURE

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

CONN’S, INC.
Date:	September 3, 2020
By:	/s/ George L. Bchara
	George L. Bchara
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and duly authorized to sign this report on behalf of the registrant)

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