The following financial statements and accountant’s report are included in Item 8 of this Annual Report on Form 10-K:
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
America’s Car-Mart, Inc.
A - Organization and Business
America’s Car-Mart, Inc., a Texas corporation (the “Company”), is one of the largest publicly held automotive retailers in the United States focused exclusively on the “Integrated Auto Sales and Finance” segment of the used car market. References to the Company typically include the Company’s consolidated subsidiaries. The Company’s operations are conducted principally through its two operating subsidiaries, America’s Car Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”). Collectively, Car-Mart of Arkansas and Colonial are referred to herein as “Car-Mart”. The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit difficulties. As of April 30, 2023, the Company operated 156 dealerships located primarily in small cities throughout the South-Central United States.
B - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of America’s Car-Mart, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Segment Information
Each dealership is an operating segment with its results regularly reviewed by the Company’s chief operating decision maker in an effort to make decisions about resources to be allocated to the segment and to assess its performance. Individual dealerships meet the aggregation criteria for reporting purposes under the current accounting guidance. The Company operates in the Integrated Auto Sales and Finance segment of the used car market, also referred to as the Integrated Auto Sales and Finance industry. In this industry, the nature of the sale and the financing of the transaction, financing processes, the type of customer and the methods used to distribute the Company’s products and services, including the actual servicing of the contracts as well as the regulatory environment in which the Company operates, all have similar characteristics. Each individual dealership is similar in nature and only engages in the selling and financing of used vehicles. All individual dealerships have similar operating characteristics. As such, individual dealerships have been aggregated into one reportable segment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant estimates include, but are not limited to, the Company’s allowance for credit losses.
Concentration of Risk
The Company provides financing in connection with the sale of substantially all of its vehicles. These sales are made primarily to customers residing in Alabama, Arkansas, Georgia, Illinois, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, and Texas, with approximately 28.0% of revenues resulting from sales to Arkansas customers.
46
As of April 30, 2023, and periodically throughout the year, the Company maintained cash in financial institutions in excess of the amounts insured by the federal government. The cash is held in several highly rated banking institutions. The Company regularly monitors its counterparty credit risk and mitigates exposure by limiting the amount it invests in one institution.
Restrictions on Distributions/Dividends
The Company’s revolving credit facilities generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow the Company to repurchase the Company’s stock so long as either: (a) the aggregate amount of such repurchases after September 30, 2021 does not exceed $50 million, net of proceeds received from the exercise of stock options, and the total availability under the credit facilities is equal to or greater than 20% of the sum of the borrowing bases, in each case after giving effect to such repurchases (repurchases under this item are excluded from fixed charges for covenant calculations), or (b) the aggregate amount of such repurchases does not exceed 75% of the consolidated net income of the Company measured on a trailing twelve month basis; provided that immediately before and after giving effect to the stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remain available. Thus, although the Company does routinely repurchase stock, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the Company’s lenders.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
Restricted Cash
Restricted cash is related to the financing and securitization transaction discussed below and are held by the securitization trusts.
Restricted cash from collections on auto finance receivables includes collections of principal, interest, and fee payments on auto finance receivables that are restricted for payment to holders of non-recourse notes payable pursuant to the applicable agreements.
The restricted cash on deposit in reserve accounts is for the benefit of holders of non-recourse notes payable and these funds are not expected to be available to the Company or its creditors. If the cash generated by the related receivables in a given period was insufficient to pay the interest, principal, and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts.
Restricted cash consists of the following for the years ending April 30, 2023 and April 30, 2022:
| (In thousands) | | April 30, 2023 | | | April 30, 2022 | |
| | | | | | | | | |
| Restricted cash from collections on auto finance receivables | | $ | 34,442 | | | $ | 24,242 | |
| Restricted cash on deposit in reserve accounts | | | 23,796 | | | | 11,429 | |
| | | | | | | | | |
| Restricted Cash | | $ | 58,238 | | | $ | 35,671 | |
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Financing and Securitization Transactions
The Company utilizes term securitizations to provide long-term funding for a portion of the auto finance receivables initially funded through the debt facilities. In these transactions, a pool of auto finance receivables is sold to a special purpose entity that, in turn, transfers the receivables to a special purpose securitization trust. The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the asset-backed securities are used to finance the securitized receivables.
The Company is required to evaluate term securitization trusts for consolidation. In the Company’s role as servicer, it has the power to direct the activities of the trust that most significantly impact the economic performance of the trust. In addition, the obligation to absorb losses (subject to limitations) and the rights to receive any returns of the trust, remain with the Company. Accordingly, the Company is the primary beneficiary of the trusts and is required to consolidate them.
The Company recognizes transfers of auto finance receivables into the term securitization as secured borrowings, which result in recording the auto finance receivables and the related non-recourse notes payable on our consolidated balance sheet. These auto finance receivables can only be used as collateral to settle obligations of the related non-recourse notes payable. The term securitization investors have no recourse to the Company’s assets beyond the related auto finance receivables, the amounts on deposit in the reserve account, and the restricted cash from collections on auto finance receivables. See Notes C and F for additional information on auto finance receivables and non-recourse notes payable.
Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses
The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts carry a weighted average interest rate of approximately 16.7% using the simple effective interest method including any deferred fees. In December 2022, the Company changed the interest rate on new originations of installment sale contracts to 18% (from 16.5%) in all states in which it operates, except for Arkansas (remains at 16.5%) and Illinois (19.5% – 21.5%). Contract origination costs are not significant. The installment sale contracts are not pre-computed contracts whereby borrowers are obligated to pay back principal plus the full amount of interest that will accrue over the entire term of the contract. Finance receivables are collateralized by vehicles sold and consist of contractually scheduled payments from installment contracts net of unearned finance charges and an allowance for credit losses. Unearned finance charges represent the balance of interest receivable to be earned over the entire term of the related installment contract, less the earned amount ($6.1 million at April 30, 2023 and $4.9 million at April 30, 2022 on the Consolidated Balance Sheets), and as such, have been reflected as a reduction to the gross contract amount in arriving at the principal balance in finance receivables.
An account is considered delinquent when the customer is one day or more behind on their contractual payments. While the Company does not formally place contracts on nonaccrual status, the immaterial amount of interest that may accrue after an account becomes delinquent up until the point of resolution via repossession or write-off, is reserved for against the accrued interest on the Consolidated Balance Sheets. Delinquent contracts are addressed and either made current by the customer, which is the case in most situations, or the vehicle is repossessed or written off if the collateral cannot be recovered quickly. Customer payments are set to match their payday with approximately 79% of payments due on either a weekly or bi-weekly basis. The frequency of the payment due dates combined with the general decline in the value of the collateral lead to prompt resolutions on problem accounts. At April 30, 2023, 3.6% of the Company’s finance receivables balances were 30 days or more past due compared to 3.0% at April 30, 2022.
Substantially all of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit. At the time of originating a finance agreement, the Company requires customers to meet certain criteria that demonstrate their intent and ability to pay for the financed principal and interest on the vehicle they are purchasing. However, the Company recognizes that their customer base is at a higher risk of default given their impaired or limited credit histories.
The Company strives to keep its delinquency percentages low, and not to repossess vehicles. Accounts one to three days late are contacted by telephone or text messaging notifications. Notes from each contact are electronically maintained in the Company’s computer system. The Company also utilizes text messaging notifications that allows customers the option to receive due date reminders and late notifications, if applicable. The Company attempts to resolve payment delinquencies amicably prior to repossessing a vehicle. If a customer becomes severely delinquent in his or her payments, and management determines that timely collection of future payments is not probable, the Company will take steps to repossess the vehicle.
Periodically, the Company enters into contract modifications with its customers to extend or modify the payment terms. The Company only enters into a contract modification or extension if it believes such action will increase the amount of money the Company will ultimately realize on the customer’s account and will increase the likelihood of the customer being able to pay off the vehicle contract. At the time of modification, the Company expects to collect amounts due including accrued interest at the contractual interest rate for the period of delay. No other concessions are granted to customers, beyond the extension of additional time, at the time of modifications. Modifications are minor and are made for payday changes, minor vehicle repairs and other reasons. For those vehicles that are repossessed, the majority are returned or surrendered by the customer on a voluntary basis. Other repossessions are performed by Company personnel or third-party repossession agents. Depending on the condition of a repossessed vehicle, it is either resold on a retail basis through a Company dealership or sold for cash on a wholesale basis primarily through physical or online auctions.
The Company takes steps to repossess a vehicle when the customer becomes delinquent in his or her payments and management determines that timely collection of future payments is not probable. Accounts are charged-off after the expiration of a statutory notice period for repossessed accounts, or when management determines that the timely collection of future payments is not probable for accounts where the Company has been unable to repossess the vehicle. For accounts with respect to which the vehicle was repossessed, the fair value of the repossessed vehicle is charged as a reduction of the gross finance receivables balance charged-off. On average, accounts are approximately 69 days past due at the time of charge-off. For previously charged-off accounts that are subsequently recovered, the amount of such recovery is credited to the allowance for credit losses.
The Company maintains an allowance for credit losses on an aggregate basis at an amount it considers sufficient to cover losses expected to be incurred on the portfolio at the measurement date. The Company accrues an estimated loss for the amount it believes will not be collected. The allowance for credit losses represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical credit loss experience and qualitative considerations, such as changes in contract characteristics (i.e., average amount financed, greater than 30 + day delinquencies, term, and interest rates), credit quality trends, collateral values, current and forecasted inflationary economic conditions, underwriting and collection practices, concentration risk, credit review, and other external trends. The allowance for credit losses is periodically reviewed by management with any changes reflected in current operations. The Company believes that it has given appropriate consideration to all relevant factors and has made reasonable assumptions in determining the allowance for credit losses.
The calculation of the allowance for credit losses uses the following primary factors:
| | ● | The probability of default (“PD”) or the number of units repossessed or charged-off divided by the number of units financed over the last five fiscal years (based increments of 1, 1.5, 2, 3, 4, and 5 years). |
| | | |
| | ● | Loss given at default (“LGD”) or the average net repossession and charge-off loss per unit during the last 18 months, segregated by the number of months since the contract origination date, and adjusted for the expected average net charge-off per unit. |
| | | |
| | ● | The timing of repossession and charge-off loss relative to the date of sale (i.e., how long it takes for a repossession or charge-off to occur) for repossessions and charge-offs occurring during the last 18 months. The average number of months since the loan origination date, to charge off, over the last 18 months, is 12.3 months. |
An adjustment is incorporated in calculating the adjusted historical average remaining net loss per unit, for loans originated in the past 12 months to account for asset-specific adjustments, which include financing term, amount financed, credit quality trends and delinquencies.
A historical loss rate is produced by this analysis which is then adjusted by qualitative factors and to reflect current and forecasted inflationary economic conditions over the Company’s reasonable and supportable forecast period of one-year.
The Company considers qualitative macro-economic factors that would affect its customers non-discretionary income, such as changes in inflation, which impact gasoline prices and prices for staple items, to develop reasonable and supportable forecasts for the lifetime expected losses. These economic forecasts are utilized alongside historical loss information in order to estimate expected losses in the portfolio over the following twelve-month period, at which point the Company will immediately revert to the point estimate produced by the Company’s analysis of historical loss information to estimate expected losses from the portfolio for the remaining contractual lives of its finance receivables.
In most states, the Company offers retail customers who finance their vehicle the option of purchasing an accident protection plan product as an add-on to the installment sale contract. This product contractually obligates the Company to cancel the remaining principal outstanding for any contract where the retail customer has totaled the vehicle, as defined by the product, or the vehicle has been stolen. The Company periodically evaluates anticipated losses to ensure that if anticipated losses exceed deferred accident protection plan revenues, an additional liability is recorded for such a difference. At April 30, 2023, anticipated losses did not exceed deferred accident protection plan revenues. No such liability was required at April 30, 2023 or 2022.
Inventory
Inventory consists of used vehicles and is valued at the lower of cost or net realizable value on a specific identification basis. Vehicle reconditioning costs are capitalized as a component of inventory. Repossessed vehicles and trade-in vehicles are recorded at fair value, which approximates wholesale value. The cost of used vehicles sold is determined using the specific identification method.
Goodwill
Goodwill reflects the excess of purchase price over the fair value of specifically identified net assets purchased. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to qualitative annual impairment tests at the Company’s year-end. The impairment tests are based on the comparison of the fair value of the reporting unit to the carrying value of such unit. The implied goodwill is compared to the carrying value of the goodwill to determine the impairment, if any. There was no impairment of goodwill during fiscal 2023 or fiscal 2022.
The Company had $11.7 million and $8.6 million of goodwill for the periods ended April 30, 2023 and 2022, respectively. The increase of $3.1 million during the year ended April 30, 2023 was primarily due to the acquisition of ongoing dealership assets during the current year and changes in the assessment of the fair value of previous acquisitions.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions, remodels and improvements are capitalized. Costs of repairs and maintenance are expensed as incurred. Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the lease period. The lease period includes the primary lease term plus any extensions that are reasonably assured. Depreciation is computed principally using the straight-line method generally over the following estimated useful lives:
| Furniture, fixtures and equipment (years) | 3 | to | 7 |
| Leasehold improvements (years) | 5 | to | 15 |
| Buildings and improvements (years) | 18 | to | 39 |
Long-Lived Assets
Long-lived assets, such as property and equipment, capitalized internal-use software and operating lease right-of-us assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares the undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, such assets are considered to be impaired, and the impairment is recognized to the extent that the carrying value exceeds its fair value. There were no impairment charges recognized during any of the periods presented.
Cloud Computing Implementation Costs
The Company enters into cloud computing service contracts to support its sales, inventory management, and administrative activities. The Company capitalizes certain implementation costs for cloud computing arrangements that meet the definition of a service contract. The Company includes these capitalized implementation costs within Prepaid expenses and other assets on the Consolidated Balance Sheets. Once placed in service, the Company amortizes these costs over the remaining subscription term to the same caption on the Consolidated Statement of Operations as the related cloud subscription. Capitalized implementation costs for cloud computing arrangements accounted for as service contracts were $9.0 million and $6.0 million as of April 30, 2023, and 2022, respectively. Accumulated amortization of capitalized implementation costs for these arrangements was $136,709 and $50,888 as of April 30, 2023 and 2022, respectively.
Cash Overdraft
As checks are presented for payment from the Company’s primary disbursement bank account, monies are automatically drawn against cash collections for the day and, if necessary, are drawn against one of its revolving credit facilities. Any cash overdraft balance principally represents outstanding checks, net of any deposits in transit that as of the balance sheet date had not yet been presented for payment. Any cash overdraft balance is reflected in accrued liabilities on the Company’s Consolidated Balance Sheets.
Deferred Sales Tax
Deferred sales tax represents a sales tax liability of the Company for vehicles sold on an installment basis in the states of Alabama and Texas. Under Alabama and Texas law, for vehicles sold on an installment basis, the related sales tax is due as the payments are collected from the customer, rather than at the time of sale. Deferred sales tax liabilities are reflected in accrued liabilities on the Company’s Consolidated Balance Sheets.
Income Taxes
Income taxes are accounted for under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply in the years in which these differences are expected to be recovered or settled.
Occasionally, the Company is audited by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions comply in all material respects with applicable tax law; however, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies this methodology to all tax positions for which the statute of limitations remains open.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the fiscal years before 2019.
The Company’s policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accrued penalties or interest as of April 30, 2023 and 2022, respectively.
Revenue Recognition
Revenues are generated principally from the sale of used vehicles, which in most cases includes a service contract and an accident protection plan product, as well as interest income and late fees earned on finance receivables. Revenues are net of taxes collected from customers and remitted to government agencies. Cost of vehicle sales include costs incurred by the Company to prepare the vehicle for sale including license and title costs, gasoline, transport services and repairs.
Revenues from the sale of used vehicles are recognized when the sales contract is signed, the customer has taken possession of the vehicle and, if applicable, financing has been approved. Revenues from the sale of vehicles sold at wholesale are recognized at the time the proceeds are received. Revenues from the sale of service contracts are recognized ratably over the expected duration of the product. Service contract revenues are included in sales and the related expenses are included in cost of sales. Accident protection plan revenues are initially deferred and then recognized to income using the “Rule of 78’s” interest method over the life of the contract so that revenues are recognized in proportion to the amount of cancellation protection provided. Accident protection plan revenues are included in sales and related losses are included in cost of sales as incurred. Interest income is recognized on all active finance receivables accounts using the simple effective interest method. Active accounts include all accounts except those that have been paid-off or charged-off.
Sales consist of the following for the years ended April 30, 2023, 2022 and 2021:
| | | Years Ended April 30, | |
| (In thousands) | | 2023 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | |
| Sales – used autos | | $ | 1,057,465 | | | $ | 918,414 | | | $ | 708,431 | |
| Wholesales – third party | | | 59,695 | | | | 51,641 | | | | 34,286 | |
| Service contract sales | | | 57,593 | | | | 42,958 | | | | 30,733 | |
| Accident protection plan revenue | | | 34,526 | | | | 30,685 | | | | 25,679 | |
| | | | | | | | | | | | | |
| Total | | $ | 1,209,279 | | | $ | 1,043,698 | | | $ | 799,129 | |
At April 30, 2023 and 2022, finance receivables more than 90 days past due were approximately $3.9 million and $3.0 million, respectively. Late fee revenues totaled approximately $4.4 million, $3.1 million and $2.5 million for the fiscal years ended 2023, 2022 and 2021, respectively. Late fee revenue is recognized when collected and is reflected within Interest and other income on the Consolidated Statements of Operations.
During the years ended April 30, 2023 and 2022, the Company recognized $26.8 million and $16.5 million of revenues that were included in deferred service contract revenues for the years ended April 30, 2022 and 2021, respectively.
Advertising Costs
Advertising costs are expensed as incurred and consist principally of television, radio, print media and digital marketing costs. Advertising costs amounted to $5.8 million, $5.0 million and $2.9 million for the years ended April 30, 2023, 2022 and 2021, respectively.
Employee Benefit Plans
The Company has 401(k) plans for all of its employees meeting certain eligibility requirements. The plans provide for voluntary employee contributions and the Company matches 50% of employee contributions up to a maximum of 6% of each employee’s compensation. The Company contributed approximately $1.2 million, $1.2 million, and $908,000 to the plans for the years ended April 30, 2023, 2022 and 2021, respectively.
The Company offers employees the right to purchase common shares at a 15% discount from market price under the 2006 Employee Stock Purchase Plan which was approved by shareholders in October 2006. The Company takes a charge to earnings for the 15% discount, included in stock-based compensation. Amounts for fiscal years 2023, 2022 and 2021 were not material individually or in the aggregate. A total of 200,000 shares were registered and 129,254 remain available for issuance under this plan at April 30, 2023.
Earnings per Share
Basic earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period plus dilutive common stock equivalents. The calculation of diluted earnings per share takes into consideration the potentially dilutive effect of common stock equivalents, such as outstanding stock options and non-vested restricted stock, which if exercised or converted into common stock would then share in the earnings of the Company. In computing diluted earnings per share, the Company utilizes the treasury stock method and anti-dilutive securities are excluded.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant over the requisite service period. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards. The Company may issue either new shares or treasury shares upon exercise of these awards. Stock-based compensation plans, related expenses, and assumptions used in the Black-Scholes option pricing model are more fully described in Note K. If an award contains a performance condition, expense is recognized only for those shares for which it is considered reasonably probable as of the current period end that the performance condition will be met. The Company accounts for forfeitures as they occur and records any excess tax benefits or deficiencies from equity awards in the Consolidated Statements of Operations in the reporting period in which the exercises occur. The Company recorded a discrete income tax benefit of approximately $558,000 and $1.4 million during the years ended April 30, 2023 and 2022, respectively. As a result, the Company’s income tax expenses and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and exercise dates of equity awards.
Treasury Stock
The Company purchased 57,856, 304,204, and 106,590 shares of its common stock to be held as treasury stock for a total cost of $5.2 million, $34.7 million and $10.6 million during the years ended April 30, 2023, 2023 and 2021, respectively. Treasury stock may be used for issuances under the Company’s stock-based compensation plans or for other general corporate purposes. The Company has a reserve account of 10,000 shares of treasury stock to secure outstanding service contracts issued in Iowa in accordance with the regulatory requirements of that state and another reserve account of 14,000 shares of treasury stock for its subsidiary, ACM Insurance Company, in accordance with the requirements of the Arkansas Department of Insurance.
Facility Leases
The Company’s leases primarily consist of operating leases related to retail stores, office space, and land. For more information on financing obligations, see Note F.
The initial term for real property leases is typically 3 to 10 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from 3 to 10 years or more. The Company includes options to renew (or terminate) in the lease term, and as part of the right-of-use (“ROU”) asset and lease liability, when it is reasonably certain that the options will be exercised. The weighted average remaining lease term as of April 30, 2023 was 12.9 years.
The ROU asset and the related lease liability are initially measured at the present value of future lease payments over the lease term. As most leases do not provide an implicit interest rate, the Company obtains a quote for a collateralized debt obligation from a group of lenders each quarter to determine the present value of future payments of leases commenced for that quarter. The weighted average discount rate as of April 30, 2023 was 4.40%.
The Company includes variable lease payments in the initial measurement of ROU assets and lease liabilities only to the extent they depend on an index or rate. Changes in such indices or rates are accounted for in the period the change occurs, and do not result in the remeasurement of the ROU asset or liability. The Company is also responsible for payment of certain real estate taxes, insurance, and other expenses on leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. Non-lease components are generally accounted for separately from lease components. The Company’s leases do not contain any material residual value guarantees or material restricted covenants.
Recent Accounting Pronouncements
Occasionally, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments – Credit Losses. The guidance changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance will affect the Company’s vintage disclosures related to current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022. The company has concluded that there is no expected impact to the consolidated financial statements.
C - Finance Receivables, Net
The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts, which carry a fixed interest rate of 18.0% for all states except Arkansas (which is subject to a usuary cap of 17%) and Illinois (where dealerships originate at 19.5% to 21.5%), are collateralized by the vehicle sold and typically provide for payments over periods ranging from 18 to 69 months. The Company’s finance receivables are defined as one segment and one class of loans, which is sub-prime consumer automobile contracts. The level of risks in our financing receivables is managed as one homogeneous pool. The components of finance receivables as of April 30, 2023, and 2022 are as follows:
| (In thousands) | | April 30, 2023 | | | April 30, 2022 | |
| | | | | | | | | |
| Gross contract amount | | $ | 1,752,149 | | | $ | 1,378,803 | |
| Less unearned finance charges | | | (378,777 | ) | | | (277,306 | ) |
| Principal balance | | | 1,373,372 | | | | 1,101,497 | |
| Less allowance for credit losses | | | (299,608 | ) | | | (237,823 | ) |
| | | | | | | | | |
| Finance receivables, net | | $ | 1,073,764 | | | $ | 863,674 | |
Auto finance receivables collateralizing the non-recourse notes payable related to the financing and securitization transaction completed during the fiscal year 2023 and 2022 were $721.9 million and $550.3 million, respectively.
Changes in the finance receivables, net for the years ended April 30, 2023, 2022 and 2021 are as follows:
| | | Years Ended April 30, | |
| (In thousands) | | 2023 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | |
| Balance at beginning of period | | $ | 863,674 | | | $ | 632,270 | | | $ | 472,401 | |
| Finance receivable originations | | | 1,161,132 | | | | 1,009,858 | | | | 762,717 | |
| Finance receivable collections | | | (434,458 | ) | | | (417,796 | ) | | | (370,254 | ) |
| Provision for credit losses | | | (352,860 | ) | | | (238,054 | ) | | | (153,835 | ) |
| Losses on claims for accident protection plan | | | (25,107 | ) | | | (21,871 | ) | | | (18,954 | ) |
| Inventory acquired in repossession and accident protection plan claims | | | (138,617 | ) | | | (100,734 | ) | | | (59,805 | ) |
| | | | | | | | | | | | | |
| Balance at end of period | | $ | 1,073,764 | | | $ | 863,674 | | | $ | 632,270 | |
Changes in the finance receivables allowance for credit losses for the years ended April 30, 2023, 2022 and 2021 are as follows:
| | | Years Ended April 30, | |
| (In thousands) | | 2023 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | |
| Balance at beginning of period | | $ | 237,823 | | | $ | 177,267 | | | $ | 148,781 | |
| Provision for credit losses | | | 352,860 | | | | 238,054 | | | | 153,835 | |
| Charge-offs, net of recovered collateral | | | (291,075 | ) | | | (177,498 | ) | | | (125,349 | ) |
| | | | | | | | | | | | | |
| Balance at end of period | | $ | 299,608 | | | $ | 237,823 | | | $ | 177,267 | |
Amounts recovered from previously written-off accounts were $2.5 million, $2.4 million, and $1.9 million for the years ended April 30, 2023, 2022 and 2021, respectively.
As a result of improved credit losses during the fiscal year 2021, as well as the Company’s outlook for projected losses, the Company decreased the allowance for credit losses in the fourth quarter of fiscal 2021 from 25.43% to 23.55%, resulting in a $14.2 million pre-tax decrease in the provision for credit losses The allowance for credit losses remained basically flat at 23.57% at April 30, 2022. For the current year credit losses increased primarily due to the ending of federal stimulus programs, continuing inflationary pressure on customers and increasing interest rates from federal monetary policy, and in the fourth quarter of fiscal 2023, the Company increased its allowance for credit losses to 23.91%.
Credit quality information for finance receivables is as follows:
| (Dollars in thousands) | | April 30, 2023 | | | April 30, 2022 | |
| | | | | | | | | | | | | | | | | |
| | | Principal | | | Percent of | | | Principal | | | Percent of | |
| | | Balance | | | Portfolio | | | Balance | | | Portfolio | |
| Current | | $ | 1,166,860 | | | | 84.96 | % | | $ | 958,808 | | | | 87.05 | % |
| 3 - 29 days past due | | | 156,943 | | | | 11.43 | % | | | 109,873 | | | | 9.97 | % |
| 30 - 60 days past due | | | 37,214 | | | | 2.71 | % | | | 22,477 | | | | 2.04 | % |
| 61 - 90 days past due | | | 8,407 | | | | 0.61 | % | | | 7,360 | | | | 0.67 | % |
| > 90 days past due | | | 3,948 | | | | 0.29 | % | | | 2,979 | | | | 0.27 | % |
| Total | | $ | 1,373,372 | | | | 100.00 | % | | $ | 1,101,497 | | | | 100.00 | % |
Accounts one and two days past due are considered current for this analysis, due to the varying payment dates and variation in the day of the week at each period end. Delinquencies may vary from period to period based on the average age of the portfolio, seasonality within the calendar year, the day of the week and overall economic factors. The above categories are consistent with internal operational measures used by the Company to monitor credit results.
Substantially all of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit. The Company monitors customer scores, contract term length, down payment percentages, and collections for credit quality indicators.
| | | Twelve Months Ended
April 30, | |
| | | 2023 | | | 2022 | |
| | | | | | | | | |
| Average total collected per active customer per month | | $ | 534 | | | $ | 513 | |
| Principal collected as a percent of average finance receivables | | | 34.7 | % | | | 43.5 | % |
| Average down-payment percentage | | | 5.4 | % | | | 6.4 | % |
| Average originating contract term (in months) | | | 42.9 | | | | 40.2 | |
| | | | | | | | | |
| | | April 30, 2023 | | | April 30, 2022 | |
| Portfolio weighted average contract term, including modifications (in months) | | | 46.3 | | | | 42.9 | |
Although total dollars collected per active customer increased 4.1% year over year, principal collections as a percentage of average finance receivables were lower in fiscal 2023 compared to fiscal 2022 primarily due to the average term increases. Overall collections have also been negatively impacted by the current inflationary environment and lower overall income tax refunds for consumers in fiscal 2023. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $1,708 or 10.4%, from fiscal year 2022.
When customers apply for financing, the Company’s proprietary scoring models rely on the customers’ credit histories and certain application information to evaluate and rank their risk. The Company obtains credit histories and other credit data that includes information such as number of different addresses, age of oldest record, high risk credit activity, job time, time at residence and other factors. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the relative likelihood of repayment. Customers with the highest probability of repayment are 6 rated customers. Customers assigned a lower grade are determined to have a lower probability of repayment. For loans that are approved, the credit grade influences the terms of the agreement, such as the maximum amount financed, term length and minimum down payment. After origination, credit grades are generally not updated.
The Company uses a combination of the initial credit grades and historical performance to monitor the credit quality of the finance receivables on an ongoing basis, and the accuracy of the scoring model is validated periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.
The following table presents a summary of finance receivables by credit quality indicator, as of April 30, 2023 segregated by customer score and year of origination.
| | | | Customer Score by Fiscal Year of Origination | | | | | | | | | |
| (Dollars in thousands) | | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior to 2019 | | | Total | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-2 | | | $ | 38,743 | | | $ | 12,983 | | | $ | 2,736 | | | $ | 329 | | | $ | 32 | | | $ | 6 | | | $ | 54,829 | | | | 4.0 | % |
| 3-4 | | | | 294,972 | | | | 105,101 | | | | 24,982 | | | | 1,698 | | | | 243 | | | | 137 | | | | 427,133 | | | | 31.1 | % |
| 5-6 | | | | 563,581 | | | | 254,945 | | | | 66,436 | | | | 5,390 | | | | 687 | | | | 371 | | | | 891,410 | | | | 64.9 | % |
| Total | | | $ | 897,296 | | | $ | 373,029 | | | $ | 94,154 | | | $ | 7,417 | | | $ | 962 | | | $ | 514 | | | $ | 1,373,372 | | | | 100.0 | % |
The following table presents a summary of finance receivables by credit quality indicator, as of April 30, 2022 segregated by customer score and year of origination.
| | | | Customer Score by Fiscal Year of Origination | | | | | | | | | |
| (Dollars in thousands) | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior to 2018 | | | Total | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-2 | | | $ | 37,916 | | | $ | 11,493 | | | $ | 2,221 | | | $ | 77 | | | $ | - | | | $ | 2 | | | $ | 51,709 | | | | 4.7 | % |
| 3-4 | | | | 260,298 | | | | 84,118 | | | | 13,537 | | | | 587 | | | | 14 | | | | 15 | | | | 358,569 | | | | 32.5 | % |
| 5-6 | | | | 488,257 | | | | 172,843 | | | | 28,193 | | | | 1,803 | | | | 115 | | | | 8 | | | | 691,219 | | | | 62.8 | % |
| Total | | | $ | 786,471 | | | $ | 268,454 | | | $ | 43,951 | | | $ | 2,467 | | | $ | 129 | | | $ | 25 | | | $ | 1,101,497 | | | | 100.0 | % |
D - Property and Equipment
A summary of property and equipment is as follows:
| (In thousands) | | April 30, 2023 | | | April 30, 2022 | |
| | | | | | | | | |
| Land | | $ | 12,386 | | | $ | 11,749 | |
| Buildings and improvements | | | 20,894 | | | | 13,876 | |
| Furniture, fixtures and equipment(1) | | | 18,989 | | | | 10,163 | |
| Leasehold improvements | | | 47,315 | | | | 36,392 | |
| Construction in progress | | | 7,176 | | | | 14,234 | |
| Accumulated depreciation and amortization | | | (45,078 | ) | | | (41,002 | ) |
| | | | | | | | | |
| Property and equipment, net(1) | | $ | 61,682 | | | $ | 45,412 | |
| | (1) | Property and equipment, net at April 30, 2022 reflects an immaterial reclassification of approximately $6.0 million of capitalized implementation costs related to a cloud-computing arrangement that were reclassified to Prepaid expenses and other assets. |
E - Accrued Liabilities
A summary of accrued liabilities is as follows:
| (In thousands) | | April 30, 2023 | | | April 30, 2022 | |
| | | | | | | | | |
| Employee compensation and benefits | | $ | 11,197 | | | $ | 12,865 | |
| Deferred sales tax (see Note B) | | | 8,543 | | | | 7,388 | |
| Reserve for accident protection plan claims | | | 5,694 | | | | 4,761 | |
| Fair value of contingent consideration | | | 1,943 | | | | 3,544 | |
| Other | | | 6,229 | | | | 4,072 | |
| Accrued liabilities | | $ | 33,606 | | | $ | 32,630 | |
F - Debt
A summary of debt is as follows:
| (In thousands) | | 2023 | | | 2022 | |
| | | | | | | | | |
| Revolving line of credit | | $ | 168,516 | | | $ | 46,674 | |
| Debt issuance costs | | | (1,285 | ) | | | (2,004 | ) |
| | | | | | | | | |
| Revolving line of credit, net | | $ | 167,231 | | | $ | 44,670 | |
| | | | | | | | | |
| Non-recourse notes payable - 2022 Issuance | | $ | 134,137 | | | $ | 399,994 | |
| Non-recourse notes payable - 2023 Issuance | | | 338,777 | | | | | |
| Debt issuance costs | | | (1,547 | ) | | | (4,008 | ) |
| | | | | | | | | |
| Non-recourse notes payable, net | | $ | 471,367 | | | $ | 395,986 | |
| | | | | | | | | |
| Total debt | | $ | 638,598 | | | $ | 440,656 | |
Revolving Line of Credit
At April 30, 2023, the Company and its subsidiaries have $600.0 million of permitted borrowings under a revolving line of credit. The revolving credit facilities are collateralized primarily by finance receivables and inventory, are cross collateralized and contain a guarantee by the Company. Interest is payable monthly under the revolving credit facilities with a scheduled maturity date of September 29, 2024. The credit facilities provide for four pricing tiers for determining the applicable interest rate, based on the Company’s consolidated leverage ratio for the preceding fiscal quarter. The current applicable interest rate under the credit facilities is generally SOFR plus 2.75%, with a minimum of 2.25% or for non-SOFR amounts the base rate of 8.25% at April 30, 2023 and 2.85% at April 30, 2022. The credit facilities contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities and (iv) restrictions on the payment of dividends or distributions (see note B).
The Company was in compliance with the covenants at April 30, 2023. The amount available to be drawn under the credit facilities is a function of eligible finance receivables and inventory; based upon eligible finance receivables and inventory at April 30, 2023, the Company had additional availability of approximately $121.4 million under the revolving credit facilities.
Non-Recourse Notes Payable
The Company has issued two separate series of asset-backed non-recourse notes (known as the “2022 Issuance” and the “2023 Issuance”). The 2022 Issuance consists of $400.0 million in principal amount of non-recourse asset-back notes issued in four classes with a weighted average fixed coupon rate of 5.14% per annum, and the 2023 Issuance consists of $400.2 million in principal amount of non-recourse asset-back notes issued in four classes with a weighted average fixed coupon rate of 8.68% per annum. Both issuances are collateralized by auto loans directly originated by the Company. Credit enhancement for the non-recourse notes payable consists of overcollateralization, a reserve account funded with an initial amount of not less than 2.0% of the pool balance, excess interest on the auto finance receivables, and in some cases, the subordination of certain payments to noteholders of less senior classes of notes. The timing of principal payments on the non-recourse notes payable is based on the timing of principal collections and defaults on the related auto finance receivables. Notes payable related to the term securitization transactions accrue interest predominately at fixed rates have scheduled maturities through April 20, 2029 and January 22, 2030, respectively, but may mature earlier, depending upon repayment rate of the underlying auto finance receivables. See Note B for additional information.
G - Fair Value Measurements
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value:
| | ● | Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities. |
| | ● | Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | ● | Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Because no market exists for certain of the Company’s financial instruments, fair value estimates are based on judgments and estimates regarding yield expectations of investors, credit risk and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
The methodology and assumptions utilized to estimate the fair value of the Company’s financial instruments are as follows:
| Financial Instrument | Valuation Methodology |
| | |
| Cash, cash equivalents, and restricted cash | The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instruments (Level 1). |
| | |
| Finance receivables, net | The Company estimated the fair value of its receivables at what a third-party purchaser might be willing to pay. The Company has had discussions with third parties and has bought and sold portfolios and has had a third-party appraisal in October 2022 that indicates a range of 34% to 39% discount to face would be a reasonable fair value in a negotiated third-party transaction. The sale of finance receivables from Car-Mart of Arkansas to Colonial is made at a 38.5% discount. For financial reporting purposes these sale transactions are eliminated (Level 2). |
| | |
| Accounts payable | The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instrument (Level 2). |
| | |
| Revolving line of credit | The fair value approximates carrying value due to the variable interest rates charged on the borrowings, which reprice frequently (Level 2). |
| | |
| Non-recourse notes payable | The fair value was based upon inputs derived from prices for similar instruments at period end (Level 2). |
The estimated fair values, and related carrying amounts, of the financial instruments included in the Company’s financial statements at April 30, 2023 and 2022 are as follows:
| | | April 30, 2023 | | | April 30, 2022 | |
| (In thousands) | | Carrying
Value | | | Fair
Value | | | Carrying
Value | | | Fair
Value | |
| | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 9,796 | | | $ | 9,796 | | | $ | 6,916 | | | $ | 6,916 | |
| Restricted cash | | | 58,238 | | | | 58,238 | | | | 35,671 | | | | 35,671 | |
| Finance receivables, net | | | 1,073,764 | | | | 844,624 | | | | 863,674 | | | 677,421 | |
| Accounts payable | | | 27,195 | | | | 27,195 | | | | 20,055 | | | | 20,055 | |
| Revolving line of credit | | | 167,231 | | | | 167,231 | | | | 44,670 | | | | 44,670 | |
| Non-recourse notes payable | | | 471,367 | | | | 470,209 | | | | 395,986 | | | 395,986 | |
H - Income Taxes
The provision for income taxes was as follows:
| | | Years Ended April 30, | |
| (In thousands) | | 2023 | | | 2022 | | | 2021 | |
| Provision for income taxes | | | | | | | | | | | | |
| Current | | $ | (3,504 | ) | | $ | 18,871 | | | $ | 23,273 | |
| Deferred | | | 8,866 | | | | 8,750 | | | | 7,239 | |
| Total | | $ | 5,362 | | | $ | 27,621 | | | $ | 30,512 | |
The provision for income taxes is different from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons:
| | | Years Ended April 30, | |
| (In thousands) | | 2023 | | | 2022 | | | 2021 | |
| Tax provision at statutory rate | | $ | 5,417 | | | $ | 25,753 | | | $ | 28,420 | |
| State taxes, net of federal benefit | | | 774 | | | | 3,679 | | | | 4,060 | |
| Tax benefit from option exercises | | | (558 | ) | | | (1,356 | ) | | | (1,401 | ) |
| Other, net | | | (271 | ) | | | (455 | ) | | | (567 | ) |
| Total | | $ | 5,362 | | | $ | 27,621 | | | $ | 30,512 | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax assets and liabilities were as follows:
| | | Years Ended April 30, | |
| (In thousands) | | 2023 | | | 2022 | |
| Deferred income tax liabilities related to: | | | | | | | | |
| Finance receivables | | $ | 47,486 | | | $ | 37,682 | |
| Property and equipment | | | 3,262 | | | | 1,368 | |
| Goodwill | | | 281 | | | | 194 | |
| Total | | | 51,029 | | | | 39,244 | |
| Deferred income tax assets related to: | | | | | | | | |
| Accrued liabilities | | | 3,051 | | | | 2,524 | |
| Inventory | | | 204 | | | | 316 | |
| Share based compensation | | | 4,634 | | | | 3,561 | |
| State net operating loss | | | 164 | | | | 168 | |
| Deferred revenue | | | 3,661 | | | | 2,226 | |
| Total | | | 11,714 | | | | 8,795 | |
| Deferred income tax liabilities, net | | $ | 39,315 | | | $ | 30,449 | |
I - Capital Stock
The Company is authorized to issue up to 50,000,000 shares of common stock, par value $0.01 per share, and up to 1,000,000 shares of preferred stock, par value $0.01 per share. Each share of the Company’s common stock has the same relative rights as, and is identical in all respects to, each other share of the Company’s common stock. The shares of preferred stock may be issued in one or more series having such respective terms, rights and preferences as are designated by the Board of Directors. The Company has not issued any preferred stock.
A subsidiary of the Company has issued 500,000 shares of $1.00 par value preferred stock which carries an 8% cumulative dividend. The Company’s subsidiary can redeem the preferred stock at any time at par value plus any unpaid dividends. After April 30, 2017, a holder of 400,000 shares of the subsidiary preferred stock can require the Company’s subsidiary to redeem such stock for $400,000 plus any unpaid dividends.
J - Weighted Average Shares Outstanding
Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:
| | | Years Ended April 30, | |
| | | 2023 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding-basic | | | 6,371,229 | | | | 6,509,673 | | | | 6,628,749 | |
| Dilutive options and restricted stock | | | 195,667 | | | | 313,808 | | | | 332,826 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding-diluted | | | 6,566,896 | | | | 6,823,481 | | | | 6,961,575 | |
| | | | | | | | | | | | | |
| Antidilutive securities not included: | | | | | | | | | | | | |
| Options | | | 315,625 | | | | 120,000 | | | | 152,500 | |
| Restricted Stock | | | 15,231 | | | | 4,784 | | | | 2,479 | |
K - Stock-Based Compensation Plans
The Company has stock-based compensation plans available to grant non-qualified stock options, incentive stock options and restricted stock to employees, directors and certain advisors of the Company. The current stock-based compensation plans being utilized at April 30, 2023 are the Amended and Restated Stock Option Plan and the Amended and Restated Stock Incentive Plan. The Company recorded total stock-based compensation expense for all plans of approximately $5.3 million ($4.1 million after tax effects), $5.5 million ($4.2 million after tax effects) and $6.0 million ($4.6 million after tax effects) for the years ended April 30, 2023, 2022 and 2021, respectively. Tax benefits were recognized for these costs at the Company’s overall effective tax rate, excluding discrete income tax benefits related to excess benefits on share-based compensation.
Stock Option Plan
The Company has options outstanding under a stock option plan approved by the shareholders, the Amended and Restated Stock Option Plan. The shareholders of the Company approved the Amended and Restated Stock Option Plan (the “Restated Option Plan”) on August 5, 2015, which extended the term of the Stock Option Plan to June 10, 2025 and increased the number of shares of common stock reserved for issuance under the plan by an additional 300,000 shares to 1,800,000 shares. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 200,000 shares to 2,000,000 shares. On August 26, 2020, the shareholders of the Company approved an amendment to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 200,000 shares to 2,200,000 shares. On August 30, 2022, the shareholders of the Company approved an amendment to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 185,000 shares to 2,385,000 shares. The Restated Option Plan provides for the grant of options to purchase shares of the Company’s common stock to employees, directors and certain advisors of the Company at a price not less than the fair market value of the stock on the date of grant and for periods not to exceed ten years. Options outstanding under the Company’s stock option plans expire in the calendar years 2022 through 2033.
| | | Restated Option Plan | |
| Minimum exercise price as a percentage of fair market value at date of grant | | | 100% | |
| Last expiration date for outstanding options | | February 20, 2033 | |
| Shares available for grant at April 30, 2023 | | | 260,000 | |
The aggregate intrinsic value of outstanding options at April 30, 2023 and 2022 was $9.1 million and $8.4 million, respectively.
The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions in the table below.
| | | Years Ended April 30, | |
| | | 2023 | | | 2022 | | | 2021 | |
| Expected term (years) | | | 5.5 | | | | 5.5 | | | | 5.5 | |
| Risk-free interest rate | | | 3.60 | % | | | 0.86 | % | | | 0.36 | % |
| Volatility | | | 55 | % | | | 51 | % | | | 50 | % |
| Dividend yield | | | - | | | | - | | | | - | |
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on the historical volatility of the Company’s common stock. The Company has not historically issued dividends and does not expect to do so in the foreseeable future.
There were 140,000 options granted during fiscal 2023 and 30,000 granted during each of 2022 and fiscal 2021. The grant-date fair value of options granted during fiscal 2023, 2022 and 2021 was $5.1 million, $2.1 million and $2.0 million, respectively. The options were granted at fair market value on the date of grant. Generally, options vest after three to five years, except for options issued to directors which are immediately vested at date of grant.
The following is an aggregate summary of the activity in the Company’s stock option plans from April 30, 2020 to April 30, 2023:
| | | Number | | | Exercise | | | Proceeds | | | Weighted Average | |
| | | of | | | Price | | | on | | | Exercise Price per | |
| | | Options | | | per Share | | | Exercise | | | Share | |
| | | | | | | | | | | (in thousands) | | | | | |
| Outstanding at April 30, 2020 | | | 667,750 | | | | | | | $ | 45,777 | | | $ | 68.55 | |
| Granted | | | 30,000 | | | | $ 65.95 | | | | 1,979 | | | | 65.95 | |
| Exercised | | | (131,350 | ) | | | 24.6969 to99.05.05 | | | | (6,730 | ) | | | 51.24 | |
| Cancelled | | | - | | | | | | | | - | | | | | |
| Outstanding at April 30, 2021 | | | 566,400 | | | | | | | $ | 41,026 | | | $ | 72.43 | |
| Granted | | | 30,000 | | | | $ 150.83 | | | | 4,525 | | | | 150.83 | |
| Exercised | | | (94,000 | ) | | | 24.3737 to150.83.83 | | | | (6,276 | ) | | | 66.76 | |
| Cancelled | | | (1,000 | ) | | | $ 41.86 | | | | (42 | ) | | | 41.86 | |
| Outstanding at April 30, 2022 | | | 501,400 | | | | | | | $ | 39,232 | | | $ | 78.25 | |
| Granted | | | 140,000 | | | | 61.0202 to94.59.59 | | | | 9,687 | | | | 69.19 | |
| Exercised | | | (28,000 | ) | | | 44.5252 to53.02.02 | | | | (1,439 | ) | | | 51.38 | |
| Cancelled | | | - | | | | | | | | - | | | | | |
| Outstanding at April 30, 2023 | | | 613,400 | | | | | | | $ | 47,480 | | | $ | 77.41 | |
Stock option compensation expense on a pre-tax basis was $3.7 million ($2.9 million after tax effects), $4.5 million ($3.4 million after tax effects) and $3.9 million ($3.0 million after tax effects) for the years ended April 30, 2023, 2022 and 2021, respectively. As of April 30, 2023, the Company had approximately $3.8 million of total unrecognized compensation cost related to unvested options that are expected to vest. These options have a weighted average remaining vesting period of 1.1 years.
The Company had the following options exercised for the periods indicated. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statements of Cash Flows.
| | | Years Ended April 30, | |
| (Dollars in thousands) | | 2023 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | |
| Options Exercised | | | 28,000 | | | | 94,000 | | | | 131,350 | |
| Cash Received from Options Exercised | | $ | 1,216 | | | $ | 591 | | | $ | 5,120 | |
| Intrinsic Value of Options Exercised | | $ | 1,412 | | | $ | 7,124 | | | $ | 7,894 | |
During the year ended April 30, 2023, there were 5,000 options exercised through net settlements in accordance with plan provisions, wherein the shares issued were reduced by 2,584 shares to satisfy the exercise price to acquire 2,416 shares.
As of April 30, 2023, there were 303,400 vested and exercisable stock options outstanding with an aggregate intrinsic value of $4.4 million and a weighted average remaining contractual life of 5.6 years and a weighted average exercise price of $82.89.
Stock Incentive Plan
On August 5, 2015, the shareholders of the Company approved the Amended and Restated Stock Incentive Plan (the “Restated Incentive Plan”), which extended the term of the Company’s Stock Incentive Plan to June 10, 2025. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Stock Incentive Plan that increased the number of shares of common stock that may be issued under the Restated Incentive Plan by 100,000 shares to 450,000. For shares issued under the Stock Incentive Plan, the associated compensation expense is generally recognized equally over the vesting periods established at the award date and is subject to the employee’s continued employment by the Company.
The following is a summary of the activity in the Company’s Stock Incentive Plan:
| | | Number
of
Shares | | | Weighted Average
Grant Date
Fair Value | |
| | | | | | | | | |
| Unvested shares at April 30, 2020 | | | 184,828 | | | $ | 49.71 | |
| Shares granted | | | 7,690 | | | | 98.43 | |
| Shares vested | | | - | | | | - | |
| Shares cancelled | | | (500 | ) | | | 35.00 | |
| Unvested shares at April 30, 2021 | | | 192,018 | | | $ | 51.70 | |
| Shares granted | | | 11,287 | | | | 121.17 | |
| Shares vested | | | (6,500 | ) | | | 39.14 | |
| Shares cancelled | | | (15,691 | ) | | | 59.99 | |
| Unvested shares at April 30, 2022 | | | 181,114 | | | $ | 55.76 | |
| Shares granted | | | 40,470 | | | | 68.78 | |
| Shares vested | | | (29,500 | ) | | | 35.31 | |
| Shares cancelled | | | (10,301 | ) | | | 69.14 | |
| Unvested shares at April 30, 2023 | | | 181,783 | | | $ | 61.22 | |
The fair value at vesting for Awards under the stock incentive plan was $11.1 million, $10.1 million, and $9.9 million in fiscal 2023, 2022 and 2021, respectively.
The Company recorded compensation cost of approximately $1.6 million ($1.2 million after tax effects), $981,000 ($749,000 after tax effects) and $1.1 million ($878,000 after tax effects) related to the Restated Incentive Plan during the years ended April 30, 2023, 2022 and 2021, respectively. As of April 30, 2023, the Company had $5.9 million of total unrecognized compensation cost related to unvested awards granted under the Restated Incentive Plan, which the Company expects to recognize over a weighted-average remaining period of 3.9 years.
L - Commitments and Contingencies
Letter of Credit
The Company has two standby letters of credit relating to insurance policies totaling $2,850,000 at April 30, 2023.
Facility Leases
The Company leases certain dealership and office facilities under various non-cancelable operating leases. Dealership leases are generally for periods from three to five years and contain multiple renewal options. As of April 30, 2023, the aggregate rentals due under such leases, including renewal options that are reasonably assured, were as follows:
| Years Ending | | | Amount | |
| April 30, | | | (In thousands) | |
| | | | | | |
| 2024 | | | $ | 7,782 | |
| 2025 | | | | 7,770 | |
| 2026 | | | | 7,232 | |
| 2027 | | | | 6,720 | |
| 2028 | | | | 6,137 | |
| Thereafter | | | | 46,546 | |
| Total undiscounted operating lease payments | | | | 82,187 | |
| Less: imputed interest | | | | 19,887 | |
| Present value of operating lease liabilities | | | $ | 62,300 | |
The $82.2 million of operating lease commitments includes $13.3 million of non-cancelable lease commitments under the lease terms, and $68.9 million of lease commitments for renewal periods at the Company’s option that are reasonably assured. For the years ended April 30, 2023, 2022 and 2021, rent expense for all operating leases amounted to approximately $9.0 million, $8.0 million and $8.0 million, respectively.
Litigation
In the ordinary course of business, the Company has become a defendant in various types of legal proceedings. The Company does not expect the final outcome of any of these actions, individually or in the aggregate, to have a material adverse effect on the Company’s financial position, annual results of operations or cash flows. The results of legal proceedings cannot be predicted with certainty, however, and an unfavorable resolution of one or more of these legal proceedings could have a material adverse effect on the Company’s financial position, annual results of operations or cash flows.
Related Finance Company
Car-Mart of Arkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal and state income tax returns. Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under the provisions of the Internal Revenue Code as described in the Treasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation, and a deferred income tax liability has been recorded for this timing difference. The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of reducing the Company’s overall effective state income tax rate. The actual interpretation of the regulations is in part a facts and circumstances matter. The Company believes it satisfies the material provisions of the regulations. Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold and have the effect of increasing the Company’s overall effective income tax rate as well as the timing of required tax payments.
M - Supplemental Cash Flow Information
Supplemental cash flow disclosures for the years ended April 30, 2023, 2022 and 2021 are as follows:
| | | Years Ended April 30, | |
| (in thousands) | | 2023 | | | 2022 | | | 2021 | |
| Supplemental disclosures: | | | | | | | | | | | | |
| Interest paid | | $ | 36,605 | | | $ | 10,421 | | | $ | 7,029 | |
| Income taxes paid, net | | | 5,480 | | | | 19,238 | | | | 26,964 | |
| | | | | | | | | | | | | |
| Non-cash transactions: | | | | | | | | | | | | |
| Inventory acquired in repossession and accident protection plan claims | | | 127,035 | | | | 84,096 | | | | 50,868 | |
| Net settlement option exercises | | | 223 | | | | 5,685 | | | | 1,616 | |
| Right-of-use assets obtained in exchange for operating lease liabilities | | | 2,307 | | | | 3,176 | | | | 2,510 | |
| Right-of-use assets obtained in exchange for operating lease liabilities through acquisitions | | | - | | | | - | | | | - | |
N - Correction of an Immaterial Error in Previously Issued Financial Statements
Subsequent to the issuance of our interim financial statements for the period ended July 31, 2022, certain immaterial errors were identified and have been corrected in our historical information related to the classification of deferred revenue of ancillary products at the time an account is charged off and the calculation for allowance for credit losses. The amount of deferred revenue related to ancillary products for a customer account that is charged off has historically been recognized as sales revenue at the time of charge-off because the performance obligations for the deferred revenue are no longer required to be delivered by the Company at the time of charge-off. It was determined that this amount should be recorded as a reduction to customer accounts receivable at the time of charge-off, thus reducing the amounts historically reported in sales revenue, net charge-offs, the provision for credit losses and the allowance for credit losses as well as the corresponding deferred tax liability. As a result, certain amounts for sales revenue, provision for credit losses, charge-offs, net of collateral recovered, the allowance for credit losses and other related amounts have been revised from the amounts previously reported to correct these errors. Management has evaluated the materiality of these corrections to its prior period financial statements from a quantitative and qualitative perspective and has concluded that this change was not material to any prior annual or interim period.
The effects of the corrections to each of the individual affected line items in our Consolidated Balance Sheets and Consolidated Statements of Operations were as follows (in thousands):
| | | April 30, 2022 | |
| (in thousands) | | As Previously Reported | | | Corrections | | | As Corrected | |
| | | | | | | | | | | | | |
| Finance receivables, net | | $ | 854,290 | | | $ | 9,384 | | | $ | 863,674 | |
| Deferred income tax liabilities, net | | | 28,233 | | | | 2,216 | | | | 30,449 | |
| Retained earnings | | | 658,242 | | | | 7,168 | | | | 665,410 | |
O - Subsequent Events
None.