CONNS INC (Form: 10-Q, Received: 09/04/2018 12:56:32)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended July 31, 2018



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

For the transition period from to .

Commission File Number 001-34956

CONN'S, INC.

(Exact name of registrant as specified in its charter)



Delaware		06-1672840
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2445 Technology Forest Blvd., Suite 800, The Woodlands, TX		77381
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (936) 230-5899

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

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



Large accelerated filer	o		Accelerated filer	ý

Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

			Emerging growth company	o

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 28, 2018 :



Class		Outstanding
Common stock, $0.01 par value per share		31,685,279

Table of Contents

CONN'S, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE FISCAL QUARTER ENDED JULY 31, 2018

TABLE OF CONTENTS



		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
	Exhibit Index	48
	Signature	49

This Quarterly Report on Form 10-Q includes our trademarks such as “Conn's,” “Conn's HomePlus,” “YES Money,” “YE$ Money,” and our logos, which are protected under applicable intellectual property laws and are the property of Conn's, Inc. This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Quarterly Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn's, Inc. and, as apparent from the context, its consolidated bankruptcy-remote variable-interest entities (“VIEs”), and its wholly-owned subsidiaries.

Table of Contents


PART I.	FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

CONN'S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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



	July 31, 2018		January 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	4,435	$	9,286
Restricted cash (includes VIE balance of $50,107 and $85,322, respectively)	51,657		86,872
Customer accounts receivable, net of allowances (includes VIE balance of $270,627 and $459,708, respectively)	622,009		636,825
Other accounts receivable	87,797		71,186
Inventories	195,728		211,894
Income taxes receivable	704		32,362
Prepaid expenses and other current assets	13,831		31,592
Total current assets	976,161		1,080,017
Long-term portion of customer accounts receivable, net of allowances (includes VIE balance of $220,014 and $455,002, respectively)	647,494		650,608
Property and equipment, net	142,631		143,152
Deferred income taxes	23,086		21,565
Other assets	7,129		5,457
Total assets	$	1,796,501	$	1,900,799
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of capital lease obligations	$	1,149	$	907
Accounts payable	85,001		71,617
Accrued compensation and related expenses	17,365		21,366
Accrued expenses	72,556		44,807
Income taxes payable	3,149		2,939
Deferred revenues and other credits	22,763		22,475
Total current liabilities	201,983		164,111
Deferred rent	85,255		87,003
Long-term debt and capital lease obligations (includes VIE balance of $429,363 and $787,979, respectively)	916,081		1,090,105
Other long-term liabilities	23,535		24,512
Total liabilities	1,226,854		1,365,731
Commitments and contingencies
Stockholders' equity:
Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding)	—		—
Common stock ($0.01 par value, 100,000,000 shares authorized; 31,694,414 and 31,435,775 shares issued, respectively)	317		314
Additional paid-in capital	104,964		101,087
Retained earnings	464,366		433,667
Total stockholders' equity	569,647		535,068
Total liabilities and stockholders' equity	$	1,796,501	$	1,900,799

See notes to condensed consolidated financial statements.

Table of Contents

CONN'S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)



	Three Months Ended July 31,				Six Months Ended July 31,
	2018		2017		2018		2017
Revenues:
Product sales	$	267,179	$	259,593	$	516,493	$	510,955
Repair service agreement commissions	25,662		23,519		48,525		48,215
Service revenues	3,472		3,301		7,051		6,528
Total net sales	296,313		286,413		572,069		565,698
Finance charges and other revenues	88,307		80,234		170,938		156,775
Total revenues	384,620		366,647		743,007		722,473
Costs and expenses:
Cost of goods sold	173,627		172,306		340,216		344,256
Selling, general and administrative expense	120,690		111,632		235,568		218,169
Provision for bad debts	50,751		49,449		94,907		105,379
Charges and credits	300		4,068		300		5,295
Total costs and expenses	345,368		337,455		670,991		673,099
Operating income	39,252		29,192		72,016		49,374
Interest expense	15,566		20,039		32,386		44,047
Loss on extinguishment of debt	1,367		2,097		1,773		2,446
Income before income taxes	22,319		7,056		37,857		2,881
Provision for income taxes	5,308		2,783		8,114		1,188
Net income	$	17,011	$	4,273	$	29,743	$	1,693
Income per share:
Basic	$	0.54	$	0.14	$	0.94	$	0.05
Diluted	$	0.53	$	0.14	$	0.92	$	0.05
Weighted average common shares outstanding:
Basic	31,652,017		31,093,746		31,597,225		31,033,880
Diluted	32,242,463		31,434,501		32,210,759		31,292,305

See notes to condensed consolidated financial statements.

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CONN'S, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)



	Six Months Ended July 31,
	2018			2017
Cash flows from operating activities:
Net income	$	29,743		$	1,693
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	15,434			15,356
Amortization of debt issuance costs	6,382			11,024
Provision for bad debts and uncollectible interest	118,765			125,491
Stock-based compensation expense	5,562			4,188
Charges, net of credits, for store and facility closures and relocations	—			388
Deferred income tax benefit	(1,776		)	(992		)
Gain on sale/disposal of property and equipment	(402		)	(371		)
Tenant improvement allowances received from landlords	4,362			1,997
Change in operating assets and liabilities:
Customer accounts receivable	(100,331		)	(53,563		)
Other accounts receivables	(14,679		)	8,537
Inventories	16,167			(31,912		)
Other assets	17,761			127
Accounts payable	11,091			(3,060		)
Accrued expenses	22,910			13,792
Income taxes	31,868			(383		)
Deferred rent, revenues and other credits	(7,205		)	(1,771		)
Net cash provided by operating activities	155,652			90,541
Cash flows from investing activities:
Purchase of property and equipment	(12,166		)	(6,135		)
Net cash used in investing activities	(12,166		)	(6,135		)
Cash flows from financing activities:
Proceeds from issuance of asset-backed notes	—			469,814
Payments on asset-backed notes	(481,883		)	(583,299		)
Borrowings from Revolving Credit Facility	839,236			844,941
Payments on Revolving Credit Facility	(655,036		)	(822,441		)
Borrowings from warehouse facility	173,286			—
Payments on warehouse facility	(52,226		)	—
Payments for debt issuance costs and amendment fees	(3,539		)	(7,595		)
Proceeds from stock issued under employee benefit plans	834			1,905
Tax payments associated with equity-based compensation transactions	(2,516		)	(298		)
Payments from extinguishment of debt	(1,177		)	—
Other	(531		)	(243		)
Net cash used in financing activities	(183,552		)	(97,216		)
Net change in cash, cash equivalents and restricted cash	(40,066		)	(12,810		)
Cash, cash equivalents and restricted cash, beginning of period	96,158			134,264
Cash, cash equivalents and restricted cash, end of period	$	56,092		$	121,454
Non-cash investing and financing activities:
Capital lease asset additions and related obligations	$	508		$	3,196
Property and equipment purchases not yet paid	$	4,363		$	2,796
Supplemental cash flow data:
Cash interest paid	$	25,505		$	33,817
Cash income taxes paid (refunded), net	$	(21,969	)	$	2,563

See notes to condensed consolidated financial statements.

Table of Contents

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Business . Conn's, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its subsidiaries. References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn’s, Inc. and, as apparent from the context, its consolidated bankruptcy-remote variable interest entities (“VIEs”) and its wholly owned subsidiaries. Conn's is a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to proprietary credit solutions for its core credit-constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives.

We operate two reportable segments: retail and credit. Our retail stores bear the “Conn's HomePlus” name with all of our stores providing the same products and services to a common customer group. Our stores follow the same procedures and methods in managing their operations. Our retail business and credit business are operated independently from each other. The credit segment is dedicated to providing short- and medium-term financing to our retail customers. The retail segment is not involved in credit approval decisions. Our management evaluates performance and allocates resources based on the operating results of the retail and credit segments.

Basis of Presentation. The accompanying unaudited, Condensed Consolidated Financial Statements of Conn's, Inc. and its wholly-owned subsidiaries, including the VIEs, have been prepared by management in accordance with generally accepted accounting principles in the United States of America ( “ GAAP”) and prevailing industry practice for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 31, 2018 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2018 (the “2018 Form 10-K”), filed with the United States Securities and Exchange Commission (the “SEC”) on April 5, 2018.

Fiscal Year. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.

Principles of Consolidation . The consolidated financial statements include the accounts of Conn's, Inc. and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Variable Interest Entities. VIEs are consolidated if the Company is the primary beneficiary. The primary beneficiary of a VIE is the party that has (i) the power to direct the activities that most significantly impact the performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

We securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. We retain the servicing of the securitized portfolio and have a variable interest in each corresponding VIE by holding the residual equity. We have determined that we are the primary beneficiary of each respective VIE because (i) our servicing responsibilities for the securitized portfolio give us the power to direct the activities that most significantly impact the performance of the VIE and (ii) our variable interest in the VIE gives us the obligation to absorb losses and the right to receive residual returns that potentially could be significant. As a result, we consolidate the respective VIEs within our consolidated financial statements.

Refer to Note 5, Debt and Capital Lease Obligations , and Note 7, Variable Interest Entities , for additional information.

Use of Estimates . The preparation of financial statements in accordance with GAAP requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ, even significantly, from these estimates. Management evaluates its estimates and related assumptions regularly, including those related to the allowance for doubtful accounts and allowances for no-interest option credit programs, which are particularly sensitive given the size of our customer portfolio balance.

Cash and Cash Equivalents . As of July 31, 2018 , cash and cash equivalents included cash and credit card deposits in transit. As of January 31, 2018 , cash and cash equivalents included cash, credit card deposits in transit, and highly liquid debt instruments purchased with a maturity of three months or less. Cash and cash equivalents included credit card deposits in transit of $2.2 million and $2.0 million as of July 31, 2018 and January 31, 2018 , respectively.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Cash. The restricted cash balance as of July 31, 2018 and January 31, 2018 includes $38.3 million and $58.1 million , respectively, of cash we collected as servicer on the securitized receivables that was subsequently remitted to the VIEs and $11.8 million and $27.2 million , respectively, of cash held by the VIEs as additional collateral for the asset-backed notes.

Customer Accounts Receivable. Customer accounts receivable reported in the Condensed Consolidated Balance Sheet includes total receivables managed, including both those transferred to the VIEs and those not transferred to the VIEs. Customer accounts receivable are recognized at the time the customer takes possession of the product. Based on contractual terms, we record the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months in current assets with the remaining balance in long-term assets on the Condensed Consolidated Balance Sheet. Customer accounts receivable includes the net of unamortized deferred fees charged to customers and origination costs. Customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts along with interest accrued subsequent to the last payment.

In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. In our role as servicer, we may also make modifications to loans held by the VIEs. The loan modifications are intended to maximize net cash flow after expenses and avoid the need to repossess collateral or exercise legal remedies available to us. We may extend or “re-age” a portion of our customer accounts, which involves modifying the payment terms to defer a portion of the cash payments due. Our re-aging of customer accounts does not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly contractual payments. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account, which does not change the interest rate or the total principal amount due from the customer but does reduce the monthly contractual payments and extend the term. We consider accounts that have been re-aged in excess of three months or refinanced as Troubled Debt Restructurings (“TDR” or “Restructured Accounts”).

Interest Income on Customer Accounts Receivable . Interest income, which includes interest income and amortization of deferred fees and origination costs, is recorded using the interest method and is reflected in finance charges and other revenues. Typically, interest income is recorded until the customer account is paid off or charged-off, and we provide an allowance for estimated uncollectible interest. Any contractual interest income received from customers in excess of the interest income calculated using the interest method is recorded as deferred revenue on our balance sheets. At July 31, 2018 and January 31, 2018 , there was $12.0 million and $12.5 million , respectively, of deferred interest included in deferred revenues and other credits and other long-term liabilities. The deferred interest will ultimately be brought into income as the accounts pay off or charge-off.

We offer a 12 month no -interest option program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of the interest earned is waived. Interest income is recognized based on estimated accrued interest earned to date on all no -interest option finance programs with an offsetting reserve for those customers expected to satisfy the requirements of the program based on our historical experience.

We recognize interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it equals the present value of expected future cash flows.

We typically only place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the balance of the loan. At July 31, 2018 , customer receivables carried in non-accrual status were $17.4 million , of which $11.6 million were in bankruptcy status and less than 60 days past due. At January 31, 2018 , customer receivables carried in non-accrual status were $16.9 million , of which $14.5 million were in bankruptcy status and less than 60 days past due. At July 31, 2018 and January 31, 2018 , customer receivables that were past due 90 days or more and still accruing interest totaled $96.7 million and $109.7 million , respectively.

Allowance for Doubtful Accounts. The determination of the amount of the allowance for bad debts is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the allowance for bad debts. General economic conditions, changes to state or federal regulations and a variety of other factors that affect the ability of borrowers to service their debts or our ability to collect will impact the future performance of the portfolio.

We establish an allowance for doubtful accounts, including estimated uncollectible interest, to cover probable and estimable losses on our customer accounts receivable resulting from the failure of customers to make contractual payments. Our customer portfolio balance consists of a large number of relatively small, homogeneous accounts. None of our accounts are large enough to warrant individual evaluation for impairment.

We record an allowance for doubtful accounts on our non-TDR customer accounts receivable that we expect to charge-off over the next 12 months based on historical gross charge-off rates over the last 24 months. We incorporate an adjustment to historical gross charge-off rates for a scaled factor of the year-over-year change in six month average first payment default rates and the year-over-year change in the balance of customer accounts receivable that are 60 days or more past due. In addition to adjusted

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

historical gross charge-off rates, estimates of post-charge-off recoveries, including cash payments from customers, amounts realized from the repossession of the products financed, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance policies are also considered.

Qualitative adjustments are made to the allowance for bad debts when, based on management’s judgment, there are internal or external factors impacting probable incurred losses not taken into account by the quantitative calculations. These qualitative considerations are based on the following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in concentrations of credit, and other internal or external factor changes. We utilize an economic qualitative adjustment based on changes in unemployment rates if current unemployment rates in our markets are worse than they were on average over the last 24 months. We also qualitatively limit the impact of changes in first payment default rates and changes in delinquency when those changes result in a decrease to the allowance for bad debts based on a measure of the dispersion of historical charge-off rates. At July 31, 2018, we utilized a qualitative factor related to changes in the nature of the portfolio.

We determine allowances for those accounts that are TDR based on the discounted present value of cash flows expected to be collected over the life of those accounts based primarily on the performance of TDR loans over the last 24 months. The cash flows are discounted based on the weighted-average effective interest rate of the TDR accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as an allowance for loss on those accounts.

Debt Issuance Costs. Costs that are direct and incremental to debt issuance are deferred and amortized to interest expense using the effective interest method over the expected life of the debt. All other costs related to debt issuance are expensed as incurred. We present debt issuance costs associated with long-term debt as a reduction of the carrying amount of the debt. Unamortized costs related to the Revolving Credit Facility, as defined in Note 5, Debt and Capital Lease Obligations , are included in other assets on our Condensed Consolidated Balance Sheet and were $7.0 million and $5.2 million as of July 31, 2018 and January 31, 2018 , respectively.

Income Taxes. For the six months ended July 31, 2018 and 2017, we utilized the estimated annual effective tax rate based on our estimated fiscal year 2019 and 2018 pre-tax income, respectively, in determining income tax expense.

Provision for income taxes for interim periods is based on an estimated annual income tax rate, adjusted for discrete tax items. As a result, our interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowered the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. For the three months ended January 31, 2018, we calculated our best estimate of the impact of the Tax Act in our fiscal year 2018 provision for income taxes in accordance with our understanding of the Tax Act and available guidance as of that date.

We continue to analyze additional information and guidance related to the Tax Act as supplemental legislation, regulatory guidance and evolving technical interpretations become available. We will continue to refine such amounts within the measurement period as provided by Staff Accounting Bulletin No. 118 and expect to complete our analysis no later than the fourth quarter of fiscal year 2019.

For the six months ended July 31, 2018 and 2017, the effective tax rate was 21.4% and 41.2% , respectively. The primary factors affecting our effective tax rate for the six months ended July 31, 2018 were a decrease in the Federal Tax Rate as a result of the Tax Act, an increase in pre-tax earnings, and excess tax benefits related to the vesting of equity compensation.

Stock-based Compensation.

Stock-based compensation expense is recorded, net of estimated forfeitures, for share-based compensation awards over the requisite service period using the straight-line method. An adjustment is made to compensation cost for any difference between the estimated forfeitures and the actual forfeitures related to the awards. For equity-classified share-based compensation awards, expense is recognized based on the grant-date fair value. For stock option grants, we use the Black-Scholes model to determine fair value. For grants of restricted stock units, the fair value of the grant is the market value of our stock at the date of issuance.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the restricted stock unit awards (“RSUs”), performance stock awards (“PSUs”) and stock options granted during the three and six months ended July 31, 2018 and 2017 :



	Three Months Ended July 31,				Six Months Ended July 31,
	2018		2017		2018		2017
RSUs ⁽¹⁾	69,478		318,806		149,889		643,293
PSUs ⁽²⁾	—		72,012		—		501,012
Stock Options ⁽³⁾	—		—		620,166		—
Total stock awards granted	69,478		390,818		770,055		1,144,305
Aggregate grant date fair value (in thousands)	$	1,673	$	6,785	$	17,184	$	14,546

(1) The RSUs issued during the three and six months ended July 31, 2018 and 2017 are scheduled to vest ratably over periods of three to four years from the date of grant.

(2) The PSUs issued during the three and six months ended July 31, 2017 will vest, if at all, upon the certification, after fiscal year 2020, by the compensation committee of the satisfaction of the annual and cumulative Earnings Before Interest, Taxes, Depreciation and Amortization performance conditions over the three fiscal years commencing with fiscal year 2018.

(3) The weighted-average assumptions for the option awards granted during the six months ended July 31, 2018 included expected volatility of 68.0% , an expected term of 6.5 years and risk-free interest rate of 2.67% . No dividend yield was included in the weighted-average assumptions for the option awards granted during the six months ended July 31, 2018 .

For the three months ended July 31, 2018 and 2017, stock-based compensation expense was $3.1 million and $2.6 million , respectively. For the six months ended July 31, 2018 and 2017, stock-based compensation expense was $5.6 million and $4.2 million , respectively.

Earnings per Share . Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effects of any stock options, RSUs and PSUs, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations:



	Three Months Ended July 31,		Six Months Ended July 31,
	2018	2017	2018	2017
Weighted-average common shares outstanding - Basic	31,652,017	31,093,746	31,597,225	31,033,880
Dilutive effect of stock options, RSUs and PSUs	590,446	340,755	613,534	258,425
Weighted-average common shares outstanding - Diluted	32,242,463	31,434,501	32,210,759	31,292,305

For the three months ended July 31, 2018 and 2017 , the weighted-average number of stock options, RSUs and PSUs not included in the calculation due to their anti-dilutive effect was 624,291 and 386,130 , respectively. For the six months ended July 31, 2018 and 2017 , the weighted-average number of stock options, RSUs and PSUs not included in the calculation due to their anti-dilutive effect was 497,224 and 546,102 , respectively.

Fair Value of Financial Instruments . Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to subjectivity associated with the inputs to fair value measurements as follows:


•	Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).


•	Level 3 – Inputs that are not observable from objective sources such as our internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in our internally developed present value of future cash flows model that underlies the fair-value measurement).

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In determining fair value, we use observable market data when available, or models that incorporate observable market data. When we are required to measure fair value and there is not a market-observable price for the asset or liability or for a similar asset or liability, we use the cost or income approach depending on the quality of information available to support management’s assumptions. The cost approach is based on management’s best estimate of the current asset replacement cost. The income approach is based on management’s best assumptions regarding expectations of future net cash flows and discounts the expected cash flows using a commensurate risk-adjusted discount rate. Such evaluations involve significant judgment, and the results are based on expected future events or conditions such as sales prices, economic and regulatory climates, and other factors, most of which are often outside of management’s control. However, we believe assumptions used reflect a market participant’s view of long-term prices, costs, and other factors and are consistent with assumptions used in our business plans and investment decisions.

In arriving at fair-value estimates, we use relevant observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based on the lowest level of input that is significant to the fair-value measurement.

The fair value of cash and cash equivalents, restricted cash and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a Level 3 discounted cash flow analysis, approximates their carrying amount, which includes the allowance for doubtful accounts. The fair value of our Revolving Credit Facility approximates carrying value based on the current borrowing rate for similar types of borrowing arrangements. At July 31, 2018 , the fair value of the Senior Notes outstanding, which was determined using Level 1 inputs, was $227.9 million as compared to the carrying value of $227.0 million , excluding the impact of the related discount. At July 31, 2018 , the fair value of the asset-backed notes approximates their carrying value and was determined using Level 2 inputs based on inactive trading activity.

Recent Accounting Pronouncements Adopted. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Upon adoption of ASU 2014-09, entities are required to recognize revenue using the following comprehensive model: (1) identify contracts with customers, (2) identify the performance obligations in such contracts, (3) determine transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue as each performance obligation is satisfied. The FASB also issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing ; ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting ; and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, all of which were issued to improve and clarify the guidance in ASU 2014-09. Effective February 1, 2018, the Company adopted these ASUs using the modified retrospective method applied to those contracts that were not completed as of February 1, 2018, with no restatement of comparative periods. Results for reporting periods beginning after February 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies under ASC Topic 605. We recognized a net after-tax cumulative effect adjustment to retained earnings of $1.0 million as of the date of adoption. The details of our current revenue recognition policy, as well as the change due to ASC Topic 606, are described below.

Revenue Recognition . The Company has the following material revenue streams: the sale of products (e.g. appliances, electronics) including delivery; the sale of third party warranty and insurance programs, including retrospective income; service income; interest income generated from the financing of point of sale transactions; and volume rebate incentives received from a third party financer. Interest income related to our customer accounts receivable balance and loan origination costs (including sales commissions) meet the scope exception of ASC 606 and are therefore not impacted by the adoption of this standard. For our twelve month no-interest option program, as a practical expedient acceptable under ASC 606, we do not adjust for the time value of money.

Sale of Products Including Delivery : The Company has a single performance obligation associated with these contracts: the delivery of the product to the customer, at which point control transfers. Revenue for the sale of products is recognized at the time of delivery, net of any adjustments for sales incentives such as discounts, coupons, rebates or other free products or services. Sales financed through third-party no-interest option programs typically require us to pay a fee to the third party on each completed sale, which is recorded as a reduction of net sales in the retail segment.

Sale of Third Party Warranty and Insurance Programs, Including Retrospective Income: We sell repair service agreements (“RSA”) and credit insurance contracts on behalf of unrelated third-parties. The Company has a single performance obligation associated with these contracts: the delivery of the product to the customer, at which point control transfers. Commissions related to these contracts are recognized in revenue upon delivery of the product. We also may serve as the administrator of the RSAs sold and defer 5% of the revenue received from the sale of RSAs as compensation for this performance obligation as 5% represents the estimated stand-alone sales price to serve as the administrator. The deferred RSA administration fee is recorded in income ratably over the life of the RSA contract sold. Retrospective income on

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RSA contracts is recognized upon delivery of the product based on an estimate of claims and is adjusted throughout the life of the contracts as actual claims materialize. Retrospective income on insurance contracts is recognized when earned as that is the point at which we no longer believe a significant reversal of income is probable as the consideration is highly susceptible to factors outside of our influence.

Service Income: The Company has a single performance obligation associated with these contracts: the servicing of the RSA claims. Service revenues are recognized at the time service is provided to the customer.

Volume Rebate Incentive: As part of our agreement with our third-party provider of no-interest option programs, we may receive a volume rebate incentive based on the total dollar value of sales made under our third-party provider. The Company has a single performance obligations associated with this contract: the delivery of the product to the customer, at which point control transfers. Revenue for the volume rebate incentive is recognized upon delivery of the product to the customer based on the projected total annual dollar value of sales to be made under our third-party provider.

ASC 606 requires disaggregation of revenue recognized from contracts with customers to depict how the nature, amount, timing and uncertainty of revenue is affected by economic factors. The Company concluded that the disaggregated discrete financial information presented in Note 8, Segment Reporting , and Note 4, Finance Charges and Other Revenues , reviewed by our chief operating decision maker in evaluating the financial performance of our operating segments adequately addresses the disaggregation of revenue requirements of ASC 606.

Deferred Revenue. Deferred revenue related to contracts with customers as defined by ASC 606 consists of deferred customer deposits and deferred RSA administration fees. During the three and six months ended July 31, 2018 , we recognized $1.5 million and $1.8 million , respectively, of revenue for customer deposits as of the beginning of those periods. During the three and six months ended July 31, 2018 , we recognized $1.4 million and $2.7 million respectively, of revenue for RSA administrative fees deferred as of the beginning of those periods.

Changes in Revenue Recognition Due to ASC 606. The adoption of ASC 606 resulted in a change to our accounting policy related to retrospective income on RSAs. We participate in profit sharing agreements with the underwriters of our RSA products, payment from which is contingent upon the actual performance of the portfolio of the RSAs sold. Prior to the adoption of ASC 606, we recognized this revenue and related receivable as the amount due to us at each reporting date based on the performance of the portfolio through such date. The Company concluded that this retrospective income represents variable consideration under ASC 606 for which the Company’s performance obligation is satisfied when the RSA is sold to the customer. Under ASC 606, an estimate of variable consideration, subject to constraints, is to be included in the transaction price and recognized when or as the performance obligation is satisfied. As a result of the adoption of ASC 606, the Company changed its accounting policy related to retrospective income on RSAs to record an estimate of retrospective income when the RSA is sold, subject to constraints in the estimate. The Company's estimate of the amount of variable consideration is recorded as a contract asset, representing a conditional right to payment, and is included within other accounts receivable in the Condensed Consolidated Balance Sheet. The estimated contract asset will be reassessed at the end of each reporting period, with changes thereto recorded as adjustments to revenue.

The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet as a result of the adoption of ASC 606 were as follows (in thousands):



	Impact of Adoption of ASC 606
(in thousands)	Balance at January 31, 2018		Adjustments due to ASC 606			Balance at February 1, 2018
Assets
Other Accounts Receivable	$	71,186	$	1,210		$	72,396
Deferred Income Taxes	21,565		(254		)	21,311
Stockholder's Equity	$	535,068	$	956		$	536,024

The adoption of ASC 606 did not have a material impact on the consolidated financial statements for the three and six months ended July 31, 2018 and no comparative financial statements are presented.

Internal Controls. As a result of the adoption of ASC 606 we evaluated our internal control framework, and there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) . ASU 2016-18 requires that the statement of cash flows provides the change in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. We hold restricted cash related to our asset backed security transactions and lending license requirements. Effective February 1, 2018, the Company adopted the ASU which resulted in us no longer presenting the changes in restricted cash balances as a component of cash flows from financing activities but instead include the balances of both current and long-term restricted cash with cash and cash equivalents in total cash, cash equivalents and restricted cash for the beginning and end of the periods presented. The total cash flow impact for the six months ended July 31, 2017 was an increase in the cash used in financing activities of $24.3 million . The balances of cash and cash equivalents and restricted cash are separately presented within the Condensed Consolidated Balance Sheet as of July 31, 2018 and January 31, 2018.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) . ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice. Among other things, debt prepayment or debt extinguishment costs will be presented as cash outflows for financing activities on the statement of cash flow. Effective February 1, 2018, the Company adopted the ASU, which resulted in us no longer presenting the change in debt extinguishment costs as a component of cash flows from operating activities but instead include the change as a component of cash flows from financing activities. The adoption of this ASU resulted in the classification of $1.2 million in payments on extinguishment of debt as a cash outflow from financing activities for the six months ended July 31, 2018. There was no impact for the six months ended July 31, 2017.

Recent Accounting Pronouncements Yet To Be Adopted.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will change how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. Primarily for those leases currently classified by us as operating leases, we will recognize a single lease cost on a straight line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be required to be accounted for as financing arrangements similar to how we currently account for capital leases. On transition, we will recognize a cumulative-effect adjustment to the retained earnings on the opening balance sheet in the period of adoption using a modified retrospective approach. The final standard will become effective for us beginning in the first quarter of fiscal year 2020. Based on our preliminary assessment, we believe the adoption of this ASU will have a material impact on our financial statements as we will be required to report additional leases on our Condensed Consolidated Balance Sheet. We are the lessee under various lease agreements for our retail stores and equipment that are currently accounted for as operating leases as discussed in Note 8, Leases, of our audited Consolidated Financial Statements included in our 2018 Form 10-K.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The standard will become effective for us in the first quarter of fiscal year 2021 and early adoption is permitted beginning in the first quarter of fiscal year 2020. We have formed a cross-functional working group comprised of individuals from various functional areas including credit, finance, accounting, and information technology. While we are currently evaluating the likely impact the adoption of this ASU will have on our consolidated financial statements, the adoption of ASU 2016-13 is likely to result in a material increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Customer Accounts Receivable

Customer accounts receivable consisted of the following:



	Total Outstanding Balance
	Customer Accounts Receivable						60 Days Past Due ⁽¹⁾				Re-aged ^{(1) (2)}
(in thousands)	July 31, 2018			January 31, 2018			July 31, 2018		January 31, 2018		July 31, 2018		January 31, 2018
Customer accounts receivable	$	1,338,498		$	1,374,269		$	94,722	$	114,120	$	196,964	$	217,952
Restructured accounts	169,863			153,593			41,499		37,687		169,863		153,593
Total customer portfolio balance	$	1,508,361		$	1,527,862		$	136,221	$	151,807	$	366,827	$	371,545
Allowance for uncollectible accounts	(203,609		)	(203,572		)
Allowances for no-interest option credit programs	(19,060		)	(20,960		)
Deferred fees and origination costs, net	(16,189		)	(15,897		)
Total customer accounts receivable, net	1,269,503			1,287,433
Short-term portion of customer accounts receivable, net	(622,009		)	(636,825		)
Long-term portion of customer accounts receivable, net	$	647,494		$	650,608
Securitized receivables held by the VIEs	$	592,279		$	1,085,385		$	70,148	$	124,627	$	228,234	$	300,348
Receivables not held by the VIEs	916,082			442,477			66,073		27,180		138,593		71,197
Total customer portfolio balance	$	1,508,361		$	1,527,862		$	136,221	$	151,807	$	366,827	$	371,545

(1)

Due to the fact that an account can become past due after having been re-aged, accounts could be represented as both past due and re-aged. As of July 31, 2018 and January 31, 2018 , the amounts included within both 60 days past due and re-aged was $82.9 million and $80.8 million , respectively. As of July 31, 2018 and January 31, 2018 , the total customer portfolio balance past due one day or greater was $400.3 million and $401.0 million , respectively. These amounts include the 60 days past due balances shown.


(2)	The re-aged receivables balance as of July 31, 2018 and January 31, 2018 includes $41.6 million and $62.0 million in first time re-ages related to customers within FEMA-designated Hurricane Harvey disaster areas.

The following presents the activity in the allowance for doubtful accounts and uncollectible interest for customer receivables:



	Six Months Ended July 31, 2018									Six Months Ended July 31, 2017
(in thousands)	Customer Accounts Receivable			Restructured Accounts			Total			Customer Accounts Receivable			Restructured Accounts			Total
Allowance at beginning of period	$	148,856		$	54,716		$	203,572		$	158,992		$	51,183		$	210,175
Provision ⁽¹⁾	85,117			33,146			118,263			92,285			33,208			125,493
Principal charge-offs ⁽²⁾	(82,124		)	(25,264		)	(107,388		)	(92,251		)	(26,159		)	(118,410		)
Interest charge-offs	(16,161		)	(4,972		)	(21,133		)	(14,911		)	(4,228		)	(19,139		)
Recoveries ⁽²⁾	7,873			2,422			10,295			3,534			1,002			4,536
Allowance at end of period	$	143,561		$	60,048		$	203,609		$	147,649		$	55,006		$	202,655
Average total customer portfolio balance	$	1,340,360		$	162,951		$	1,503,311		$	1,356,569		$	139,106		$	1,495,675


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


(2)	Charge-offs include the principal amount of losses (excluding accrued and unpaid interest). Recoveries include principal collections of previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Charges and Credits

Charges and credits consisted of the following:



	Three Months Ended July 31,				Six Months Ended July 31,
(in thousands)	2018		2017		2018		2017
Facility closure costs	$	—	$	122	$	—	$	1,349
Securities-related regulatory matter and other legal fees	300		34		300		34
Employee severance	—		1,317		—		1,317
Indirect tax audit reserve	—		2,595		—		2,595
	$	300	$	4,068	$	300	$	5,295

During the three and six months ended July 31, 2018 , we recorded a contingency reserve related to a regulatory matter. During the three months ended July 31, 2017 , we primarily incurred severance costs related to a change in the executive management team and a charge related to an increase in our indirect tax audit reserve. During the six months ended July 31, 2017, we primarily incurred exit costs associated with reducing the square footage of a distribution center, severance costs related to a change in the executive management team, and a charge related to an increase in our indirect tax audit reserve.

4. Finance Charges and Other Revenues

Finance charges and other revenues consisted of the following:



	Three Months Ended July 31,				Six Months Ended July 31,
(in thousands)	2018		2017		2018		2017
Interest income and fees	$	80,435	$	69,490	$	156,781	$	136,621
Insurance income	7,774		10,652		14,045		19,982
Other revenues	98		92		112		172
	$	88,307	$	80,234	$	170,938	$	156,775

Interest income and fees and insurance income are derived from the credit segment operations, whereas other revenues are derived from the retail segment operations. Insurance income is comprised of sales commissions from third-party insurance companies that are recognized when coverage is sold and retrospective income paid by the insurance carrier if insurance claims are less than earned premiums.

During the three months ended July 31, 2018 and 2017, interest income and fees reflected provisions for uncollectible interest of $12.4 million and $10.5 million , respectively. The amount included in interest income and fees related to TDR accounts for the three months ended July 31, 2018 and 2017 are $6.5 million and $4.6 million , respectively. During the six months ended July 31, 2018 and 2017, interest income and fees reflected provisions for uncollectible interest of $23.9 million and $20.5 million , respectively. The amount included in interest income and fees related to TDR accounts for the six months ended July 31, 2018 and 2017 are $12.3 million and $9.1 million , respectively. Insurance income decreased over both the three month and six month periods primarily due to a decrease in retrospective income as a result of higher claim volumes related to Hurricane Harvey.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Debt and Capital Lease Obligations

Debt and capital lease obligations consisted of the following:



(in thousands)	July 31, 2018			January 31, 2018
Revolving Credit Facility	$	261,200		$	77,000
Senior Notes	227,000			227,000
2016-B VIE Asset-backed Class B Notes	—			73,589
2017-A VIE Asset-backed Class A Notes	—			59,794
2017-A VIE Asset-backed Class B Notes	—			106,270
2017-A VIE Asset-backed Class C Notes	—			50,340
2017-B VIE Asset-backed Class A Notes	99,595			292,663
2017-B VIE Asset-backed Class B Notes	132,180			132,180
2017-B VIE Asset-backed Class C Notes	78,640			78,640
Warehouse Notes	121,060			—
Capital lease obligations	4,927			4,949
Total debt and capital lease obligations	924,602			1,102,425
Less:
Discount on debt	(2,247		)	(2,527		)
Deferred debt issuance costs	(5,125		)	(8,886		)
Current maturities of capital lease obligations	(1,149		)	(907		)
Long-term debt and capital lease obligations	$	916,081		$	1,090,105

Senior Notes. On July 1, 2014, we issued $250.0 million of the unsecured Senior Notes due July 2022 bearing interest at 7.25% (the “Senior Notes”), pursuant to an indenture dated July 1, 2014 (the “Indenture”), among Conn's, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National Association, as trustee. The effective interest rate of the Senior Notes after giving effect to the discount and issuance costs is 7.8% .

The Indenture restricts the Company's and certain of its subsidiaries' ability to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock (“restricted payments”); (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. Specifically, limitations on restricted payments are only effective if one or more of the following occurred: (1) a default were to exist under the Indenture, (2) we could not satisfy a debt incurrence test, and (3) the aggregate amount of restricted payments were to exceed an amount tied to consolidated net income. These limitations, however, are subject to two exceptions: (1) an exception that permits the payment of up to $375.0 million in restricted payments, and (2) an exception that permits restricted payments regardless of dollar amount so long as, after giving pro forma effect to the dividends and other restricted payments, we would have had a leverage ratio, as defined under the Indenture, of less than or equal to 2.50 to 1.0 . As a result of these exceptions, as of July 31, 2018 , $200.5 million would have been free from the distribution restriction. During any time when the Senior Notes are rated investment grade by either of Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended and we will cease to be subject to such covenants during such period. Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we fail to make payment of other indebtedness prior to the expiration of any applicable grace period or upon acceleration of indebtedness prior to its stated maturity date in an amount exceeding $25.0 million , as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.

Asset-backed Notes. During fiscal years 2018 and 2017 we securitized customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issued asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.

Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.

The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act of 1933, as amended. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events.

The asset-backed notes consist of the following:



Asset-Backed Notes	Original Principal Amount		Original Net Proceeds ⁽¹⁾		Current Principal Amount		Issuance Date	Maturity Date	Fixed Interest Rate	Effective Interest Rate ⁽²⁾
2017-B Class A Notes	$	361,400	$	358,945	$	99,595	12/20/2017	7/15/2020	2.73%	5.14%
2017-B Class B Notes	132,180		131,281		132,180		12/20/2017	4/15/2021	4.52%	5.23%
2017-B Class C Notes	78,640		77,843		78,640		12/20/2017	11/15/2022	5.95%	6.35%
Warehouse Notes	121,060		118,972		121,060		7/16/2018	1/15/2020	Index + 2.50% (3)	7.62%
Total	$	693,280	$	687,041	$	431,475


(1)	After giving effect to debt issuance costs and restricted cash held by the VIEs.


(2)	For the six months ended July 31, 2018, and inclusive of retrospective adjustments to deferred debt issuance costs based on changes in timing of actual and expected cash flows.


(3)	The rate on the Warehouse Notes is defined as the applicable index plus a 2.50% fixed margin.

On February 15, 2018, affiliates of the Company closed on a $52.2 million financing under a receivables warehouse financing transaction entered into on February 6, 2018 (the “Warehouse Notes”). The net proceeds of the Warehouse Notes were used to prepay in full the Series 2016-B Class B Notes (the “2016-B Redeemed Notes”) that were still outstanding as of February 15, 2018.

On February 15, 2018, the Company completed the redemption of the 2016-B Redeemed Notes at an aggregate redemption price of $73.6 million (which was equal to the entire outstanding principal of, plus accrued interest and the call premiums on, the 2016-B Redeemed Notes). The net funds used to call the notes was $50.3 million, which is equal to the redemption price less adjustments of $23.3 million for funds held in reserve and collection accounts in accordance with the terms of the applicable indenture governing the 2016-B Redeemed Notes. The difference between the net proceeds of the Warehouse Notes and the carrying value of the 2016-B Redeemed Notes at redemption was used to fund fees, expenses and a reserve account related to the Warehouse facility. In connection with the early redemption of the 2016-B Redeemed Notes, we wrote-off $0.4 million as a loss on extinguishment of debt.

On July 16, 2018, affiliates of the Company closed on $121.1 million of additional financing under a receivables warehouse financing transaction entered into on July 9, 2018 (the “Additional Funding”). The net proceeds of the Additional Funding were used to prepay in full the Series 2017-A Class B and C Notes (the “2017-A Redeemed Notes”) that were still outstanding as of July 16, 2018.

On July 16, 2018, the Company completed the redemption of the 2017-A Redeemed Notes at an aggregate redemption price of $127.2 million (which was equal to the entire outstanding principal of, plus accrued interest and the call premiums on the 2017-A Redeemed Notes). The net funds used to call the notes was $119.0 million, which is equal to the redemption price less adjustments of $8.2 million for funds held in reserve and collection accounts in accordance with the terms of the applicable indenture governing the 2017-A Redeemed Notes. The difference between the net proceeds of the Additional Funding and the carrying value of the 2017-A Redeemed Notes at redemption was used to fund fees, expenses and a reserve account related to the warehouse facility. In connection with the early redemption of the 2017-A Redeemed Notes, we wrote-off $1.2 million as a loss on extinguishment of debt.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revolving Credit Facility. On May 23, 2018, Conn's, Inc. and certain of its subsidiaries (the “Borrowers”) entered into a Fourth Amendment to the Fourth Amended and Restated Loan and Security Agreement, dated as of October 30, 2015, with certain lenders, which provides for a $650.0 million asset-based revolving credit facility (the “Revolving Credit Facility”) under which credit availability is subject to a borrowing base.

The Fourth Amendment, among other things, (a) extends the maturity date of the credit facility to May 23, 2022; (b) provides for a reduction in the aggregate commitments from $750 million to $650 million; (c) amends the method by which the applicable margin is calculated to be based on the total leverage ratio (ratio of total liabilities less the sum of qualified cash and ABS qualified cash to tangible net worth), with the applicable margin ranging from 2.50% to 3.25% for LIBOR loans and from 1.50% to 2.25% for base rate loans; (d) eliminates a $10 million availability block in calculating the borrowing base; (e) increases the maximum accounts receivable advance rate from 75% to 80%; (f) decreases the maximum unused line fee by 25 basis points, from 75 basis points to 50 basis points; (g) eliminates the cash recovery covenant; (h) modifies the maximum inventory component of the borrowing base from $175 million to 33.33% of revolving loan commitments in effect; (i) modifies the interest coverage covenant such that the minimum interest coverage on a trailing two quarter basis is 1.5x and the minimum interest coverage during any single quarter is 1.0x; (j) increases the maximum capital expenditures from $75 million to $100 million during any period of four consecutive fiscal quarters; and (k) modifies the ability of the Company to effect future securitizations of its customer receivables portfolio, including adding the ability of the Company to enter into revolving ABS transactions.

Subsequent to the adoption of the Fourth Amendment, loans under the Revolving Credit Facility bear interest, at our option, at a rate equal to LIBOR plus the applicable margin based on facility availability which specified a margin ranging from 2.50% to 3.25% per annum (depending on quarterly average net availability under the borrowing base) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum (depending on quarterly average net availability under the borrowing base). The alternate base rate is the greatest of the prime rate announced by Bank of America, N.A., the federal funds rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. As of July 31, 2018, we also paid an unused fee on the portion of the commitments that was available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.50% per annum, depending on the average outstanding balance and letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the Revolving Credit Facility was 6.5% for the six months ended July 31, 2018 .

The Revolving Credit Facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory, and provides for a $40.0 million sub-facility for letters of credit to support obligations incurred in the ordinary course of business. The obligations under the Revolving Credit Facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As of July 31, 2018 , we had immediately available borrowing capacity of $366.6 million under our Revolving Credit Facility, net of standby letters of credit issued of $2.8 million . We also had $19.4 million that may become available under our Revolving Credit Facility if we grow the balance of eligible customer receivables and total eligible inventory balances.

The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make distributions to the Company and other obligors under the Revolving Credit Facility without restriction. As of July 31, 2018 , we were restricted from making distributions, including repayments of the Senior Notes or other distributions, in excess of $212.3 million as a result of the Revolving Credit Facility distribution restrictions. The Revolving Credit Facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit Facility.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Covenants. We were in compliance with the debt covenants of our Revolving Credit Facility at July 31, 2018 . A summary of the significant financial covenants that govern our Revolving Credit Facility compared to our actual compliance status at July 31, 2018 is presented below:



	Actual	Required Minimum/ Maximum
Interest Coverage Ratio for the quarter must equal or exceed (minimum)	3.75:1.00	1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed (minimum)	3.36:1.00	1.50:1.00
Leverage Ratio must not exceed (maximum)	2.07:1.00	4.00:1.00
ABS Excluded Leverage Ratio must not exceed (maximum)	1.40:1.00	2.00:1.00
Capital Expenditures, net, must not exceed (maximum)	$13.5 million	$100.0 million

All capitalized terms in the above table are defined by the Revolving Credit Facility and may or may not agree directly to the financial statement captions in this document. The covenants are calculated quarterly, except for capital expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter.

6. Contingencies

Securities Class Action Litigation. We and two of our former executive officers are defendants in a consolidated securities class action lawsuit pending in the United States District Court for the Southern District of Texas (the “Court”), captioned In re Conn's Inc. Securities Litigation, Cause No. 14-CV-00548 (the “Consolidated Securities Action”). The Consolidated Securities Action started as three separate purported securities class action lawsuits filed between March 5, 2014 and May 5, 2014 in the Court that were consolidated into the Consolidated Securities Action on June 3, 2014. The plaintiffs in the Consolidated Securities Action allege that the defendants made false and misleading statements or failed to disclose material adverse facts about our business, operations, and prospects. They allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seek to certify a class of all persons and entities that purchased or otherwise acquired Conn's common stock or call options, or sold or wrote Conn's put options between April 3, 2013 and December 9, 2014. The complaint does not specify the amount of damages sought.

On June 30, 2015, the Court held a hearing on the defendants' motion to dismiss plaintiffs' complaint. At the hearing, the Court dismissed Brian Taylor, a former executive officer, and certain other aspects of the complaint. The Court ordered the plaintiffs to further amend their complaint in accordance with its ruling, and the plaintiffs filed their Fourth Consolidated Amended Complaint on July 21, 2015. The remaining defendants filed a motion to dismiss on August 28, 2015. The defendant's motion to dismiss was fully briefed and the Court held a hearing on defendants' motion on March 25, 2016 and on May 5, 2016, the Court issued a ruling that dismissed 78 of 91 alleged misstatements. The parties have submitted their respective briefs in support of, and in opposition to, class certification, and also engaged in discovery pursuant to the Court’s scheduling order. In late June 2017, the Court granted the plaintiffs’ motion for class certification, and shortly thereafter, Defendants filed a petition for permission to appeal to the United States Fifth Circuit Court of Appeals (the "Fifth Circuit"). The Fifth Circuit granted leave to appeal on August 21, 2017.

On June 14, 2018, the parties filed a motion for preliminary approval of a settlement for the Consolidated Securities Action. The Court granted preliminary approval of the settlement terms and stayed the Consolidated Securities Action on June 28, 2018. As a result of the Court's preliminary approval, the settlement amount of $22.5 million was reflected as a liability in accrued expenses on the Condensed Consolidated Balance Sheet with an offsetting receivable from our insurance carriers of $22.5 million reflected in other accounts receivable on the Condensed Consolidated Balance Sheet as of the three months ended July 31, 2018. The settlement will be funded solely by proceeds from our insurance carriers. As part of the settlement, we-along with the other executive officer defendants-have denied and continue to deny any wrongdoing giving rise to any liability or violation of the law, including the U.S. securities laws, as well as each and every one of the claims alleged by plaintiffs in the Consolidated Securities Action. On July 13, 2018, the claims administrator for the settlement began sending court-approved notices of settlement and proof of claim forms to the class members. Class members must submit requests for exclusion from the class, objections to the settlement, or enter an appearance in the final settlement approval hearing by September 20, 2018. The Court has scheduled a final settlement approval hearing on October 11, 2018. As a result of this pending settlement, the Fifth Circuit ordered that the appeal on the class certification ruling be held in abeyance until September 10, 2018.

On April 2, 2018, MicroCapital Fund, LP, MicroCapital Fund Ltd, and MicroCapital LLC filed a lawsuit (the “MicroCapital Lawsuit”) against us and certain of our former executive officers in the United States District Court for the Southern District of Texas, Cause No. 4:18-CV-01020 (the "MicroCapital Action"). The plaintiffs in this action allege that the defendants made false and misleading statements or failed to disclose material facts about our credit and underwriting practices, accounting and internal controls. Plaintiffs allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

promulgated thereunder, Texas and Connecticut common law fraud, and Texas common law negligent misrepresentation against all defendants; as well as section 20A of the Securities Exchange Act of 1934; and Connecticut common law negligent misrepresentation against certain defendants arising from plaintiffs’ purchase of Conn’s, Inc. securities between April 3, 2013 and February 20, 2014. The complaint does not specify the amount of damages sought.

On April 27, 2018, the plaintiffs in the MicroCapital Action filed a motion for a ruling that discovery can proceed and a request for a Rule 16 conference. We filed a response in opposition, as well as a cross-motion to stay this action in its entirety on May 18, 2018. On July 10, 2018, the court granted our cross-motion to stay this action pending final approval of settlement in the Consolidated Securities Action.

We intend to vigorously defend our interests in the MicroCapital Action. It is not possible at this time to predict the timing or outcome of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.

Derivative Litigation. On December 1, 2014, an alleged shareholder, purportedly on behalf of the Company, filed a derivative shareholder lawsuit against us and certain of our current and former directors and former executive officers in the Court, captioned as Robert Hack, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director), Brian Taylor (former executive officer) and Michael J. Poppe (former executive officer) and Conn's, Inc., Case No. 4:14-cv-03442 (the "Original Derivative Action"). The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading based on substantially similar factual allegations as those asserted in the Consolidated Securities Action. The plaintiff seeks unspecified damages against these persons and does not request any damages from us. Setting forth substantially similar claims against the same defendants, on February 25, 2015, an additional federal derivative action, captioned 95250 Canada LTEE, derivatively on Behalf of Conn's, Inc. v. Wright et al., Cause No. 4:15-cv-00521, was filed in the Court, which has been consolidated with the Original Derivative Action.

The Court previously approved a stipulation among the parties to stay the action pending resolution of the motion for class certification in the Consolidated Securities Action. The Court has agreed to continue to the stay through the final settlement approval hearing in the Consolidated Securities Action on October 11, 2018, and set a deadline of November 1, 2018, for defendants to respond to the complaint.

Another derivative action was filed on January 27, 2015, captioned as Richard A. Dohn v. Wright, et al., Cause No. 2015-04405, in the 281st Judicial District Court, Harris County, Texas. This action makes substantially similar allegations to the Original Derivative Action against the same defendants. On September 14, 2017, the court entered an order extending the stay until September 7, 2018.

Prior to filing a lawsuit, an alleged shareholder, Robert J. Casey II ("Casey"), submitted a demand under Delaware law, which our Board of Directors refused. On May 19, 2016, Casey, purportedly on behalf of the Company, filed a lawsuit against us and certain of our current and former directors and former executive officers in the 55th Judicial District Court, Harris County, Texas, captioned as Casey, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Michael J. Poppe (former executive officer), Brian Taylor (former executive officer), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director) and William E. Saunders Jr., and Conn's, Inc., Cause No. 2016-33135. The complaint asserts claims for breach of fiduciary duties and unjust enrichment based on substantially similar factual allegations as those asserted in the Original Derivative Action. The complaint does not specify the amount of damages sought. Pursuant to the parties’ agreement, this action is stayed pending the resolution of the Consolidated Securities Action.

Other than Casey, none of the plaintiffs in the other derivative actions made a demand on our Board of Directors prior to filing their respective lawsuits. The defendants in the derivative actions intend to vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of any of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.

Regulatory Matters. We are continuing to cooperate with the SEC's investigation of our underwriting policies and bad debt provisions, which began in November 2014. The investigation is a non-public, fact-finding inquiry, and the SEC has stated that the investigation does not mean that any violations of law have occurred.

In addition, we are involved in other routine litigation and claims incidental to our business from time to time which, individually or in the aggregate, are not expected to have a material adverse effect on us. As required, we accrue estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation. The Company believes that any probable and reasonably estimable loss associated with the foregoing has been adequately reflected in the accompanying financial statements.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Variable Interest Entities

From time to time, we have securitized customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. Under the terms of the respective securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of the asset-backed notes, and then to the residual equity holder. We retain the servicing of the securitized portfolio and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables, and we currently hold all of the residual equity. In addition, we, rather than the VIEs, will retain certain credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as we consolidate the VIEs.

We consolidate VIEs when we determine that we are the primary beneficiary of these VIEs, we have the power to direct the activities that most significantly impact the performance of the VIEs and our obligation to absorb losses and the right to receive residual returns are significant.

The following table presents the assets and liabilities held by the VIEs (for legal purposes, the assets and liabilities of the VIEs will remain distinct from Conn's, Inc.):



(in thousands)	July 31, 2018			January 31, 2018
Assets:
Restricted cash	$	50,107		$	85,322
Due from Conn's, Inc., net	4,528			15,212
Customer accounts receivable:
Customer accounts receivable	496,586			987,418
Restructured accounts	95,693			97,967
Allowance for uncollectible accounts	(88,589		)	(143,115		)
Allowances for no-interest option credit programs	(8,442		)	(18,228		)
Deferred fees and origination costs	(4,607		)	(9,332		)
Total customer accounts receivable, net	490,641			914,710
Total assets	$	545,276		$	1,015,244
Liabilities:
Accrued expenses	$	3,425		$	6,723
Other liabilities	6,111			10,639

Long-term debt:
2016-B Class B Notes	—			73,589
2017-A Class A Notes	—			59,794
2017-A Class B Notes	—			106,270
2017-A Class C Notes	—			50,340
2017-B Class A Notes	99,595			292,663
2017-B Class B Notes	132,180			132,180
2017-B Class C Notes	78,640			78,640
Warehouse Notes	121,060			—
	431,475			793,476
Less: deferred debt issuance costs	(2,112		)	(5,497		)
Total long-term debt	429,363			787,979
Total liabilities	$	438,899		$	805,341

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

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Segment Reporting

Operating segments are defined as components of an enterprise that engage in business activities and for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources and assess performance. We are a leading specialty retailer and offer a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for our core credit-constrained consumers. We have two operating segments: (i) retail and (ii) credit. Our operating segments complement one another. The retail segment operates primarily through our stores and website in the retail furniture and mattresses, home appliances, consumer electronics and home office products business. Our retail segment product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit segment offers affordable financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives. Our operating segments provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next day delivery and installation in the majority of our markets, and product repair service. The operating segments follow the same accounting policies used in our condensed consolidated financial statements.

We evaluate a segment’s performance based upon operating income before taxes. Selling, general and administrative expenses include the direct expenses of the retail and credit operations, allocated corporate overhead expenses, and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment, which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period.

As of July 31, 2018 , we operated retail stores in 14 states with no operations outside of the United States. No single customer accounts for more than 10% of our total revenues.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financial information by segment is presented in the following tables:



	Three Months Ended July 31, 2018							Three Months Ended July 31, 2017
(in thousands)	Retail		Credit			Total		Retail		Credit			Total
Revenues:
Furniture and mattress	$	97,066	$	—		$	97,066	$	95,297	$	—		$	95,297
Home appliance	91,471		—			91,471		89,085		—			89,085
Consumer electronic	55,654		—			55,654		52,946		—			52,946
Home office	19,289		—			19,289		17,862		—			17,862
Other	3,699		—			3,699		4,403		—			4,403
Product sales	267,179		—			267,179		259,593		—			259,593
Repair service agreement commissions	25,662		—			25,662		23,519		—			23,519
Service revenues	3,472		—			3,472		3,301		—			3,301
Total net sales	296,313		—			296,313		286,413		—			286,413
Finance charges and other revenues	98		88,209			88,307		92		80,142			80,234
Total revenues	296,411		88,209			384,620		286,505		80,142			366,647
Costs and expenses:
Cost of goods sold	173,627		—			173,627		172,306		—			172,306
Selling, general and administrative expense ⁽¹⁾	83,003		37,687			120,690		78,667		32,965			111,632
Provision for bad debts	243		50,508			50,751		165		49,284			49,449
Charges and credits	300		—			300		4,068		—			4,068
Total costs and expense	257,173		88,195			345,368		255,206		82,249			337,455
Operating income (loss)	39,238		14			39,252		31,299		(2,107		)	29,192
Interest expense	—		15,566			15,566		—		20,039			20,039
Loss on extinguishment of debt	—		1,367			1,367		—		2,097			2,097
Income (loss) before income taxes	$	39,238	$	(16,919	)	$	22,319	$	31,299	$	(24,243	)	$	7,056

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Six Months Ended July 31, 2018							Six Months Ended July 31, 2017
(in thousands)	Retail		Credit			Total		Retail		Credit			Total
Revenues:
Furniture and mattress	$	194,086	$	—		$	194,086	$	189,740	$	—		$	189,740
Home appliance	169,494		—			169,494		169,207		—			169,207
Consumer electronic	107,956		—			107,956		108,699		—			108,699
Home office	37,599		—			37,599		34,650		—			34,650
Other	7,358		—			7,358		8,659		—			8,659
Product sales	516,493		—			516,493		510,955		—			510,955
Repair service agreement commissions	48,525		—			48,525		48,215		—			48,215
Service revenues	7,051		—			7,051		6,528		—			6,528
Total net sales	572,069		—			572,069		565,698		—			565,698
Finance charges and other revenues	112		170,826			170,938		172		156,603			156,775
Total revenues	572,181		170,826			743,007		565,870		156,603			722,473
Costs and expenses:
Cost of goods sold	340,216		—			340,216		344,256		—			344,256
Selling, general and administrative expense ⁽¹⁾	160,755		74,813			235,568		152,614		65,555			218,169
Provision for bad debts	503		94,404			94,907		395		104,984			105,379
Charges and credits	300		—			300		5,295		—			5,295
Total costs and expense	501,774		169,217			670,991		502,560		170,539			673,099
Operating income (loss)	70,407		1,609			72,016		63,310		(13,936		)	49,374
Interest expense	—		32,386			32,386		—		44,047			44,047
Loss on extinguishment of debt	—		1,773			1,773		—		2,446			2,446
Income (loss) before income taxes	$	70,407	$	(32,550	)	$	37,857	$	63,310	$	(60,429	)	$	2,881

(1)

For the three months ended July 31, 2018 and 2017 , the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $9.3 million and $7.7 million , respectively. For the three months ended July 31, 2018 and 2017 , the amount of reimbursement made to the retail segment by the credit segment was $9.4 million and $9.2 million , respectively. For the six months ended July 31, 2018 and 2017 , the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $ 17.6 million and $14.2 million , respectively. For the six months ended July 31, 2018 and 2017 , the amount of reimbursement made to the retail segment by the credit segment was $ 18.8 million and $18.7 million respectively.


9.	Guarantor Financial Information

Conn's, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. The Senior Notes, which were issued by Conn's, Inc., are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Guarantors. As of July 31, 2018 and January 31, 2018 the direct or indirect subsidiaries of Conn's, Inc. that were not Guarantors (the “Non-Guarantor Subsidiaries”) were the VIEs and minor subsidiaries. There are no restrictions under the Indenture on the ability of any of the Guarantors to transfer funds to Conn's, Inc. in the form of dividends or distributions.

The following financial information presents the Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations, and Condensed Consolidated Statement of Cash Flows for Conn's, Inc. (the issuer of the Senior Notes), the Guarantors, and the Non-Guarantor Subsidiaries, together with certain eliminations. Investments in subsidiaries are accounted for by the parent company using the equity method for purposes of this presentation. Results of operations of subsidiaries are therefore reflected in the parent company's investment accounts and operations. The consolidated financial information includes financial data for:

(i) Conn’s, Inc. (on a parent-only basis),

(ii) Guarantors,

(iii) Non-Guarantor Subsidiaries, and

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(iv) the parent company and the subsidiaries on a consolidated basis at July 31, 2018 and January 31, 2018 (after the elimination of intercompany balances and transactions). Condensed Consolidated Net Income is the same as Condensed Consolidated Comprehensive Income for the periods presented.

Condensed Consolidated Balance Sheet as of July 31, 2018 :



(in thousands)	Conn's, Inc.		Guarantors		Non-guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	4,435	$	—	$	—		$	4,435
Restricted cash	—		1,550		50,107		—			51,657
Customer accounts receivable, net of allowances	—		351,382		270,627		—			622,009
Other accounts receivable	—		87,797		—		—			87,797
Inventories	—		195,728		—		—			195,728
Other current assets	—		16,961		4,528		(6,954		)	14,535
Total current assets	—		657,853		325,262		(6,954		)	976,161
Investment in and advances to subsidiaries	768,987		106,377		—		(875,364		)	—
Long-term portion of customer accounts receivable, net of allowances	—		427,480		220,014		—			647,494
Property and equipment, net	—		142,631		—		—			142,631
Deferred income taxes	23,086		—		—		—			23,086
Other assets	—		7,129		—		—			7,129
Total assets	$	792,073	$	1,341,470	$	545,276	$	(882,318	)	$	1,796,501
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of capital lease obligations	$	—	$	1,149	$	—	$	—		$	1,149
Accounts payable	—		85,001		—		—			85,001
Accrued expenses	686		91,385		3,425		(2,426		)	93,070
Other current liabilities	—		24,585		2,706		(4,528		)	22,763
Total current liabilities	686		202,120		6,131		(6,954		)	201,983
Deferred rent	—		85,255		—		—			85,255
Long-term debt and capital lease obligations	221,740		264,978		429,363		—			916,081
Other long-term liabilities	—		20,130		3,405		—			23,535
Total liabilities	222,426		572,483		438,899		(6,954		)	1,226,854
Total stockholders' equity	569,647		768,987		106,377		(875,364		)	569,647
Total liabilities and stockholders' equity	$	792,073	$	1,341,470	$	545,276	$	(882,318	)	$	1,796,501

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

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheet as of January 31, 2018 :



(in thousands)	Conn's, Inc.		Guarantors		Non-guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	9,286	$	—	$	—		$	9,286
Restricted cash	—		1,550		85,322		—			86,872
Customer accounts receivable, net of allowances	—		177,117		459,708		—			636,825
Other accounts receivable	—		71,186		—		—			71,186
Inventories	—		211,894		—		—			211,894
Other current assets	—		68,621		15,212		(19,879		)	63,954
Total current assets	—		539,654		560,242		(19,879		)	1,080,017
Investment in and advances to subsidiaries	735,272		209,903		—		(945,175		)	—
Long-term portion of customer accounts receivable, net of allowances	—		195,606		455,002		—			650,608
Property and equipment, net	—		143,152		—		—			143,152
Deferred income taxes	21,565		—		—		—			21,565
Other assets	—		5,457		—		—			5,457
Total assets	$	756,837	$	1,093,772	$	1,015,244	$	(965,054	)	$	1,900,799
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of capital lease obligations	$	—	$	907	$	—	$	—		$	907
Accounts payable	—		71,617		—		—			71,617
Accrued expenses	686		66,370		6,723		(4,667		)	69,112
Other current liabilities	—		32,685		5,002		(15,212		)	22,475
Total current liabilities	686		171,579		11,725		(19,879		)	164,111
Deferred rent	—		87,003		—		—			87,003
Long-term debt and capital lease obligations	221,083		81,043		787,979		—			1,090,105
Other long-term liabilities	—		18,875		5,637		—			24,512
Total liabilities	221,769		358,500		805,341		(19,879		)	1,365,731
Total stockholders' equity	535,068		735,272		209,903		(945,175		)	535,068
Total liabilities and stockholders' equity	$	756,837	$	1,093,772	$	1,015,244	$	(965,054	)	$	1,900,799

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

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Statement of Operations for the Three Months Ended July 31, 2018 :



(in thousands)	Conn's, Inc.			Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Total net sales	$	—		$	296,313		$	—		$	—		$	296,313
Finance charges and other revenues	—			56,653			31,654			—			88,307
Servicing fee revenue	—			3,035			—			(3,035		)	—
Total revenues	—			356,001			31,654			(3,035		)	384,620
Costs and expenses:
Cost of goods sold	—			173,627			—			—			173,627
Selling, general and administrative expense	—			115,515			8,210			(3,035		)	120,690
Provision for bad debts	—			29,868			20,883			—			50,751
Charges and credits	—			300			—			—			300
Total costs and expenses	—			319,310			29,093			(3,035		)	345,368
Operating income	—			36,691			2,561			—			39,252
Interest expense	4,448			3,733			7,385			—			15,566
Loss on extinguishment of debt	—			142			1,225			—			1,367
Income (loss) before income taxes	(4,448		)	32,816			(6,049		)	—			22,319
Provision (benefit) for income taxes	(1,058		)	7,805			(1,439		)	—			5,308
Net income (loss)	(3,390		)	25,011			(4,610		)	—			17,011
Income (loss) from consolidated subsidiaries	20,401			(4,610		)	—			(15,791		)	—
Consolidated net income (loss)	$	17,011		$	20,401		$	(4,610	)	$	(15,791	)	$	17,011

Condensed Consolidated Statement of Operations for the Three Months Ended July 31, 2017 :



(in thousands)	Conn's, Inc.			Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Total net sales	$	—		$	286,413		$	—		$	—		$	286,413
Finance charges and other revenues	—			40,279			39,955			—			80,234
Servicing fee revenue	—			12,648			—			(12,648		)	—
Total revenues	—			339,340			39,955			(12,648		)	366,647
Costs and expenses:
Cost of goods sold	—			172,306			—			—			172,306
Selling, general and administrative expense	—			111,455			12,825			(12,648		)	111,632
Provision for bad debts	—			25,418			24,031			—			49,449
Charges and credits	—			4,068			—			—			4,068
Total costs and expenses	—			313,247			36,856			(12,648		)	337,455
Operating income	—			26,093			3,099			—			29,192
Interest expense	4,443			743			14,853			—			20,039
Loss on extinguishment of debt	—			—			2,097			—			2,097
Income (loss) before income taxes	(4,443		)	25,350			(13,851		)	—			7,056
Provision (benefit) for income taxes	(1,752		)	9,998			(5,463		)	—			2,783
Net income (loss)	(2,691		)	15,352			(8,388		)	—			4,273
Income (loss) from consolidated subsidiaries	6,964			(8,388		)	—			1,424			—
Consolidated net income (loss)	$	4,273		$	6,964		$	(8,388	)	$	1,424		$	4,273

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Statement of Operations for the Six Months Ended July 31, 2018 :



(in thousands)	Conn's, Inc.			Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Total net sales	$	—		$	572,069		$	—		$	—		$	572,069
Finance charges and other revenues	—			102,308			68,630			—			170,938
Servicing fee revenue	—			19,781			—			(19,781		)	—
Total revenues	—			694,158			68,630			(19,781		)	743,007
Costs and expenses:
Cost of goods sold	—			340,216			—			—			340,216
Selling, general and administrative expense	—			235,308			20,041			(19,781		)	235,568
Provision for bad debts	—			36,876			58,031			—			94,907
Charges and credits	—			300			—			—			300
Total costs and expenses	—			612,700			78,072			(19,781		)	670,991
Operating income (loss)	—			81,458			(9,442		)	—			72,016
Interest expense	8,891			6,766			16,729			—			32,386
Loss on extinguishment of debt	—			142			1,631			—			1,773
Income (loss) before income taxes	(8,891		)	74,550			(27,802		)	—			37,857
Provision (benefit) for income taxes	(1,906		)	15,979			(5,959		)	—			8,114
Net income (loss)	(6,985		)	58,571			(21,843		)	—			29,743
Income (loss) from consolidated subsidiaries	36,728			(21,843		)	—			(14,885		)	—
Consolidated net income (loss)	$	29,743		$	36,728		$	(21,843	)	$	(14,885	)	$	29,743

Condensed Consolidated Statement of Operations for the Six Months Ended July 31, 2017 :



(in thousands)	Conn's, Inc.			Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Total net sales	$	—		$	565,698		$	—		$	—		$	565,698
Finance charges and other revenues	—			77,077			79,698			—			156,775
Servicing fee revenue	—			27,832			—			(27,832		)	—
Total revenues	—			670,607			79,698			(27,832		)	722,473
Costs and expenses:
Cost of goods sold	—			344,256			—			—			344,256
Selling, general and administrative expense	—			217,688			28,313			(27,832		)	218,169
Provision for bad debts	—			19,985			85,394			—			105,379
Charges and credits	—			5,295			—			—			5,295
Total costs and expenses	—			587,224			113,707			(27,832		)	673,099
Operating income (loss)	—			83,383			(34,009		)	—			49,374
Interest expense	8,886			2,521			32,640			—			44,047
Loss on extinguishment of debt	—			349			2,097			—			2,446
Income (loss) before income taxes	(8,886		)	80,513			(68,746		)	—			2,881
Provision (benefit) for income taxes	(3,664		)	33,200			(28,348		)	—			1,188
Net income (loss)	(5,222		)	47,313			(40,398		)	—			1,693
Income (loss) from consolidated subsidiaries	6,915			(40,398		)	—			33,483			—
Consolidated net income (loss)	$	1,693		$	6,915		$	(40,398	)	$	33,483		$	1,693

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Statement of Cash Flows for the Six Months Ended July 31, 2018 :



(in thousands)	Conn's, Inc.			Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(834	)	$	(33	)	$	156,519		$	—		$	155,652
Cash flows from investing activities:
Purchase of customer accounts receivables	—			—			(170,144		)	170,144			—
Sale of customer accounts receivables	—			—			170,144			(170,144		)	—
Purchase of property and equipment	—			(12,166		)	—			—			(12,166		)
Net cash used in investing activities	—			(12,166		)	—			—			(12,166		)
Cash flows from financing activities:
Payments on asset-backed notes	—			(169,803		)	(312,080		)	—			(481,883		)
Borrowings from Revolving Credit Facility	—			839,236			—			—			839,236
Payments on Revolving Credit Facility	—			(655,036		)	—			—			(655,036		)
Borrowings from warehouse facility	—			—			173,286			—			173,286
Payments of debt issuance costs and amendment fees	—			(2,825		)	(714		)	—			(3,539		)
Payments on warehouse facility	—			—			(52,226		)	—			(52,226		)
Proceeds from stock issued under employee benefit plans	834			—			—			—			834
Tax payments associated with equity- based compensation transactions	—			(2,516		)	—			—			(2,516		)
Payments from extinguishment of debt	—			(1,177		)	—			—			(1,177		)
Other	—			(531		)	—			—			(531		)
Net cash provided by (used in) financing activities	834			7,348			(191,734		)	—			(183,552		)
Net change in cash, cash equivalents and restricted cash	—			(4,851		)	(35,215		)	—			(40,066		)
Cash, cash equivalents and restricted cash, beginning of period	—			10,836			85,322			—			96,158
Cash, cash equivalents and restricted cash, end of period	$	—		$	5,985		$	50,107		$	—		$	56,092

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Statement of Cash Flows for the Six Months Ended July 31, 2017 :



(in thousands)	Conn's, Inc.			Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(1,905	)	$	(388,785	)	$	481,231		$	—		$	90,541
Cash flows from investing activities:
Purchase of customer accounts receivables	—			—			(466,056		)	466,056			—
Sale of customer accounts receivables	—			466,056			—			(466,056		)	—
Purchase of property and equipment	—			(6,135		)	—			—			(6,135		)
Net cash provided by (used in) investing activities	—			459,921			(466,056		)	—			(6,135		)
Cash flows from financing activities:
Proceeds from issuance of asset-backed notes	—			—			469,814			—			469,814
Payments on asset-backed notes	—			(78,779		)	(504,520		)	—			(583,299		)
Borrowings from Revolving Credit Facility	—			844,941			—			—			844,941
Payments on Revolving Credit Facility	—			(822,441		)	—			—			(822,441		)
Payments of debt issuance costs and amendment fees	—			(2,864		)	(4,731		)	—			(7,595		)
Proceeds from stock issued under employee benefit plans	1,905			—			—			—			1,905
Tax payments associated with equity-based compensation transactions	—			(298		)	—			—			(298		)
Other	—			(243		)	—			—			(243		)
Net cash provided by (used in) financing activities	1,905			(59,684		)	(39,437		)	—			(97,216		)
Net change in cash, cash equivalents and restricted cash	—			11,452			(24,262		)	—			(12,810		)
Cash, cash equivalents and restricted cash, beginning of period	—			23,566			110,698			—			134,264
Cash, cash equivalents and restricted cash, end of period	$	—		$	35,018		$	86,436		$	—		$	121,454

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Subsequent Events

On August 15, 2018, an affiliate of the Company ("the Issuer") completed the issuance and sale of asset-backed notes at a face amount of $358.3 million secured by the transferred customer accounts receivables and restricted cash held by a VIE, which resulted in net proceeds to us of $355.7 million , net of transaction costs and restricted cash held by the VIE. Net proceeds from the offering were used to repay indebtedness under the Company’s asset-based credit facility and for other general corporate purposes. The asset-backed notes mature on January 17, 2023 and consist of the Issuer’s 3.25% $219.2 million Asset Backed Fixed Rate Notes, Class A, Series 2018-A, 4.65% $69.6 million Asset Backed Fixed Rate Notes, Class B, Series 2018-A, and 6.02% $69.6 Asset Backed Fixed Rate Notes, Class C, Series 2018-A.

CONN'S, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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, and proceeds from accessing debt or equity markets; and other risks detailed in Part I, Item 1A, Risk Factors, in our 2018 Form 10-K, Part II, Item 1A, Risk Factors, in this Form 10-Q 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 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 $384.6 million for the three months ended July 31, 2018 compared to $366.6 million for the three months ended July 31, 2017 , an increase of $18.0 million or 4.9% . Retail revenues were $296.4 million for the three months ended July 31, 2018 compared to $286.5 million for the three months ended July 31, 2017 , an increase of $9.9 million or 3.5% . The increase in retail revenue was primarily driven by an increase in same store sales of 0.3% and by new store growth. Credit revenues were $88.2 million for the three months ended July 31, 2018 compared $80.1 million for the three months ended July 31, 2017 , an increase of $8.1 million or 10.1% . The increase in credit revenue resulted from the origination of our higher-yielding direct loan product, which resulted in an increase in the portfolio yield rate to 21.3% from 18.7% , and by a 1.5% increase in the average balance of the customer receivable portfolio.

Retail gross margin for the three months ended July 31, 2018 was 41.4% , an increase of 160 basis points from the 39.8% reported for the three months ended July 31, 2017 . The increase in retail gross margin was driven by improved product margins in almost all product categories.

Selling, general and administrative expense (“SG&A”) for the three months ended July 31, 2018 was $120.7 million compared to $111.6 million for the three months ended July 31, 2017 , an increase of $9.1 million , or 8.1% . The SG&A increase in the retail segment was primarily due to an increase in new store occupancy costs, an increase in compensation cost and an increase in the corporate overhead allocation, offset by a decrease in advertising expense. The SG&A increase in the credit segment was primarily due to an increase in compensation costs, third-party legal expenses related to bankruptcy collection efforts and an increase in the

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corporate overhead allocation. The increase in the corporate overhead allocation made to each of the segments was driven by investments we are making in information technology, other personnel to support long-term performance improvement initiatives and an increase in accrued compensation.

The provision for bad debts increased to $50.8 million for the three months ended July 31, 2018 from $49.4 million for the three months ended July 31, 2017 , an increase of $1.3 million . The change reflects a greater decrease in the allowance for bad debts during the three months ended July 31, 2017 as compared to the three months ended July 31, 2018, partially offset by a year-over-year reduction in the net charge-offs of $3.0 million . The greater decrease in the allowance for bad debts was primarily driven by the inclusion of changes in first payment default rates and changes in delinquency balances to our allowance for bad debts framework made during the three months ended July 31, 2017.

Interest expense decreased to $15.6 million for the three months ended July 31, 2018 , compared to $20.0 million for the three months ended July 31, 2017 , primarily reflecting a decrease in our cost of borrowing as a result of lower pricing on our securitization transactions coupled with a lower average outstanding balance of debt.

Net income for the three months ended July 31, 2018 was $17.0 million or $0.53 per diluted share, which included net pre-tax charges of $1.7 million , or $0.04 per diluted share, related to the loss on extinguishment of debt from the retirement of our Series 2017-A Class B and C Notes (the “ 2017-A Redeemed Notes ” ) and a contingency reserve related to a regulatory matter. This compares to net income for the three months ended July 31, 2017 of $4.3 million , or $0.14 per diluted share, which included net pre-tax charges of $6.2 million, or $0.12 per diluted share, primarily related to executive management severance costs, an increase in our indirect tax audit reserve, and the loss on extinguishment of debt related to the early redemption of our Series 2015-A Class B Notes (the “ 2015-A Redeemed Notes ” ).

Company Initiatives

In the second quarter of fiscal year 2019, we maintained our focus on enhancing our credit platform to support the pursuit of our long-term growth objectives. Our credit segment continued to improve, reflecting the higher yield we earn on our direct loan product, more sophisticated underwriting, which has led to lower delinquency rates and losses, and better execution and performance in the capital markets, which has led to lower cost of funds. We continue to see the benefit in our credit operations from the structural changes we have made to increase yield, reduce losses and improve overall credit performance. Retail operating margins remained strong, demonstrating our differentiated business model, improved product mix, and emphasis on disciplined cost management. We delivered the following financial and operational results in the second quarter of fiscal year 2019:


•	Recorded our first quarter of positive same store sales in three years;


•	Posted our sixth consecutive quarter of profitability, driven by a 35% increase in operating income compared to the second quarter of fiscal year 2018;


•	Delivered record second quarter retail gross margin of 41.4% , an increase of 160 basis points compared to 39.8% in the second quarter of fiscal year 2018, driven primarily by improved product margins and continued focus on increasing efficiencies;


•	Delivered record quarterly yield on our customer receivables portfolio of 21.3% as a result of the continued seasoning of loans originated under our higher-yielding direct loan program;


•	Reduced, year-over-year, the balance of accounts 60 days past due as a percentage of the customer receivables portfolio to 9.0% at July 31, 2018 from 10.4% at July 31, 2017 ; and


•	Realized a reduction in interest expense as a result of our deleveraging efforts combined with the continued successful execution of our asset-backed securitization program, which led to a 22% reduction in interest expense compared to the second quarter of fiscal year 2018.


•	Successfully renegotiated the terms under our Revolving Credit Facility, including reducing the aggregate commitment from $750 million to $650 million, decreasing the maximum unused fee by 25 basis points and extending the maturity of the facility from three to four years.

We believe that we have laid the foundation to execute our long-term growth strategy and prudently manage financial and operational risk while maximizing shareholder value. We have identified the following strategic priorities for fiscal year 2019:


•	Increase net income by improving performance across our core operational and financial metrics: same store sales, retail margin, portfolio yield, charge-off rate, and interest expense;


•	Open seven to nine new stores in our current geographic footprint to leverage our existing infrastructure, two of which were successfully opened in the first half of fiscal year 2019;


•	Increase interest income on our loan portfolio by continuing to originate higher-yielding loans;

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•	Continue to refine and enhance our underwriting platform;


•	Reduce our interest expense despite a rising rate environment;


•	Optimize our mix of quality, branded products and gain efficiencies in our warehouse, delivery and transportation operations to increase our retail gross margin;


•	Continue to grow our lease-to-own sales; and


•	Maintain disciplined oversight of our selling, general and administrative expenses.

Outlook

The broad appeal of the Conn's value proposition to our geographically diverse core demographic, unit economics of our business and current retail real estate market conditions provide us ample opportunity for continued expansion. Our brand recognition and long history in our core markets 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 United States with demographic characteristics similar to those in our existing footprint, which provides substantial opportunities for future growth. We plan to continue to improve 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 consolidated basis:



Consolidated:	Three Months Ended July 31,							Six Months Ended July 31,
(in thousands)	2018		2017		Change			2018		2017		Change
Revenues:
Total net sales	$	296,313	$	286,413	$	9,900		$	572,069	$	565,698	$	6,371
Finance charges and other revenues	88,307		80,234		8,073			170,938		156,775		14,163
Total revenues	384,620		366,647		17,973			743,007		722,473		20,534
Costs and expenses:
Cost of goods sold	173,627		172,306		1,321			340,216		344,256		(4,040		)
Selling, general and administrative expense	120,690		111,632		9,058			235,568		218,169		17,399
Provision for bad debts	50,751		49,449		1,302			94,907		105,379		(10,472		)
Charges and credits	300		4,068		(3,768		)	300		5,295		(4,995		)
Total costs and expenses	345,368		337,455		7,913			670,991		673,099		(2,108		)
Operating income	39,252		29,192		10,060			72,016		49,374		22,642
Interest expense	15,566		20,039		(4,473		)	32,386		44,047		(11,661		)
Loss on extinguishment of debt	1,367		2,097		(730		)	1,773		2,446		(673		)
Income before income taxes	22,319		7,056		15,263			37,857		2,881		34,976
Provision for income taxes	5,308		2,783		2,525			8,114		1,188		6,926
Net income	$	17,011	$	4,273	$	12,738		$	29,743	$	1,693	$	28,050

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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 before taxes. Selling, general and administrative expense 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 estimated using an annual rate of 2.5% multiplied by the average portfolio balance for each applicable period.

The following tables represent 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,
(in thousands)	2018		2017		Change			2018		2017		Change
Revenues:
Product sales	$	267,179	$	259,593	$	7,586		$	516,493	$	510,955	$	5,538
Repair service agreement commissions	25,662		23,519		2,143			48,525		48,215		310
Service revenues	3,472		3,301		171			7,051		6,528		523
Total net sales	296,313		286,413		9,900			572,069		565,698		6,371
Other revenues	98		92		6			112		172		(60		)
Total revenues	296,411		286,505		9,906			572,181		565,870		6,311
Costs and expenses:
Cost of goods sold	173,627		172,306		1,321			340,216		344,256		(4,040		)
Selling, general and administrative expense ⁽¹⁾	83,003		78,667		4,336			160,755		152,614		8,141
Provision for bad debts	243		165		78			503		395		108
Charges and credits	300		4,068		(3,768		)	300		5,295		(4,995		)
Total costs and expenses	257,173		255,206		1,967			501,774		502,560		(786		)
Operating income	$	39,238	$	31,299	$	7,939		$	70,407	$	63,310	$	7,097
Number of stores:
Beginning of period	118		115					116		113
Opened	—		1					2		3
End of period	118		116					118		116

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Credit Segment:	Three Months Ended July 31,									Six Months Ended July 31,
(in thousands)	2018			2017			Change			2018			2017			Change
Revenues:
Finance charges and other revenues	$	88,209		$	80,142		$	8,067		$	170,826		$	156,603		$	14,223
Costs and expenses:
Selling, general and administrative expense ⁽¹⁾	37,687			32,965			4,722			74,813			65,555			9,258
Provision for bad debts	50,508			49,284			1,224			94,404			104,984			(10,580		)
Total cost and expenses	88,195			82,249			5,946			169,217			170,539			(1,322		)
Operating income (loss)	14			(2,107		)	2,121			1,609			(13,936		)	15,545
Interest expense	15,566			20,039			(4,473		)	32,386			44,047			(11,661		)
Loss on extinguishment of debt	1,367			2,097			(730		)	1,773			2,446			(673		)
Loss before income taxes	$	(16,919	)	$	(24,243	)	$	7,324		$	(32,550	)	$	(60,429	)	$	27,879

(1)

For the three months ended July 31, 2018 and 2017 , the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $9.3 million and $7.7 million , respectively. For the three months ended July 31, 2018 and 2017 , the amount of reimbursements made to the retail segment by the credit segment were $9.4 million and $9.2 million , respectively. For the six months ended July 31, 2018 and 2017 , the amount of corporate overhead allocated to each segment reflected in selling, general and administrative expense was $ 17.6 million and $14.2 million , respectively. For the six months ended July 31, 2018 and 2017 , the amount of reimbursement made to the retail segment by the credit segment was $ 18.8 million and $18.7 million , respectively.

Three Months Ended July 31, 2018 Compared to Three Months Ended July 31, 2017

Revenues

The following table provides an analysis of retail net sales by product category in each period, including repair service agreement 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)	2018		% of Total		2017		% of Total		Change			Change		% Change
Furniture and mattress ⁽¹⁾	$	97,066	32.8	%	$	95,297	33.3	%	$	1,769		1.9	%	(2.3	)%
Home appliance	91,471		30.9		89,085		31.1		2,386			2.7		0.4
Consumer electronics ⁽¹⁾	55,654		18.8		52,946		18.5		2,708			5.1		5.3
Home office ⁽¹⁾	19,289		6.5		17,862		6.2		1,427			8.0		8.5
Other	3,699		1.2		4,403		1.5		(704		)	(16.0	)	(18.2	)
Product sales	267,179		90.2		259,593		90.6		7,586			2.9		0.6
Repair service agreement commissions ⁽²⁾	25,662		8.6		23,519		8.2		2,143			9.1		(1.9	)
Service revenues	3,472		1.2		3,301		1.2		171			5.2
Total net sales	$	296,313	100.0	%	$	286,413	100.0	%	$	9,900		3.5	%	0.3	%

(1)

During the three months ended July 31, 2017, we reclassified certain products from the consumer electronics and home office product categories into the furniture and mattress product category. Net sales of these products reflected in the consumer electronics and home office product categories for the three months ended July 31, 2017 were $2.6 million and $0.8 million, respectively. The change in same store sales reflects the current product classification for both periods presented.


(2)	The total change in sales of repair service agreement commissions includes retrospective commissions, which are not reflected in the change in same store sales.

The following provides a summary of the same store sales performance of our product categories during the three months ended July 31, 2018 as compared to the three months ended July 31, 2017 :


•	Furniture unit volume decreased 4.3%, partially offset by a 2.5% increase in average selling price;


•	Mattress unit volume decreased 13.8%, partially offset by a 11.8% increase in average selling price;


•	Home appliance average selling price increased 7.4%, partially offset by a 6.5% decrease in unit volume;

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•	Consumer electronic unit volume increased 2.2% and average sales price increased 3.0%; and


•	Home office unit volume increased 13.7%, partially offset by a 4.5% decrease in average selling price.

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



	Three Months Ended July 31,
(in thousands)	2018		2017		Change
Interest income and fees	$	80,435	$	69,490	$	10,945
Insurance income	7,774		10,652		(2,878		)
Other revenues	98		92		6
Finance charges and other revenues	$	88,307	$	80,234	$	8,073

The increase in interest income and fees was due to a yield rate of 21.3% during the three months ended July 31, 2018 , 260 basis points higher than the three months ended July 31, 2017 , and by an increase of 1.5% in the average balance of the customer receivable portfolio. The increase in the yield rate resulted from the origination of our higher-yielding direct loan product. Insurance income decreased over the prior year period primarily due to a decrease in retrospective income as a result of higher claim volumes related to Hurricane Harvey.

The following table provides key portfolio performance information:



	Three Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Interest income and fees	$	80,435		$	69,490		$	10,945
Net charge-offs	(51,642		)	(54,626		)	2,984
Interest expense	(15,566		)	(20,039		)	4,473
Net portfolio income (loss)	$	13,227		$	(5,175	)	$	18,402
Average portfolio balance	$	1,497,635		$	1,475,822		$	21,813
Interest income and fee yield (annualized)	21.3		%	18.7		%
Net charge-off % (annualized)	13.8		%	14.8		%

Retail Gross Margin



	Three Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Retail total net sales	$	296,313		$	286,413		$	9,900
Cost of goods sold	173,627			172,306			1,321
Retail gross margin	$	122,686		$	114,107		$	8,579
Retail gross margin percentage	41.4		%	39.8		%

The increase in retail gross margin was driven by improved product margins in almost all product categories.

Selling, General and Administrative Expense



	Three Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Selling, general and administrative expense:
Retail segment	$	83,003		$	78,667		$	4,336
Credit segment	37,687			32,965			4,722
Selling, general and administrative expense - Consolidated	$	120,690		$	111,632		$	9,058
Selling, general and administrative expense as a percent of total revenues	31.4		%	30.4		%

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The SG&A increase in the retail segment was primarily due to an increase in new store occupancy costs, an increase in compensation costs and an increase in the corporate overhead allocation, offset by a decrease in advertising expense. The SG&A increase in the credit segment was primarily due to an increase in compensation costs, third-party legal expenses related to bankruptcy collection efforts, and an increase in the corporate overhead allocation. As a percent of average total customer portfolio balance (annualized), SG&A for the credit segment in the three months ended July 31, 2018 increased 120 basis points as compared to the three months ended July 31, 2017 . The increase in the corporate overhead allocation made to each of the segments was driven by investments we are making in information technology, other personnel to support long-term performance improvement initiatives and an increase in accrued compensation.

Provision for Bad Debts



	Three Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Provision for bad debts:
Retail segment	$	243		$	165		$	78
Credit segment	50,508			49,284			1,224
Provision for bad debts - Consolidated	$	50,751		$	49,449		$	1,302
Provision for bad debts - Credit segment, as a percent of average portfolio balance (annualized)	13.5		%	13.4		%

The provision for bad debts increased to $50.8 million for the three months ended July 31, 2018 from $49.4 million for the three months ended July 31, 2017 , an increase of $1.3 million . The change reflects a greater decrease in the allowance for bad debts during the three months ended July 31, 2017 as compared to the three months ended July 31, 2018, partially offset by a year-over-year reduction in net charge-offs of $3.0 million . The greater decrease in the allowance for bad debts was primarily driven by the inclusion of changes in first payment default rates and changes in delinquency balances to our allowance for bad debts framework made during the three months ended July 31, 2017.

Charges and Credits



	Three Months Ended July 31,
(in thousands)	2018		2017		Change
Store and facility closure costs	$	—	$	122	$	(122	)
Securities-related regulatory matter and other legal fees	300		34		266
Employee severance	—		1,317		(1,317		)
Indirect tax audit reserve	—		2,595		(2,595		)
	$	300	$	4,068	$	(3,768	)

During the three months ended July 31, 2018 , we incurred costs associated with a contingency reserve related to a regulatory matter. During the three months ended July 31, 2017 , we primarily incurred charges related to severance costs due to a change in our executive management team and a charge related to an increase to our indirect tax audit reserve.

Interest Expense

For the three months ended July 31, 2018 , net interest expense decreased by $4.5 million from the prior year comparative period primarily reflecting a decrease in our cost of borrowing as a result of lower pricing on our securitization transactions coupled with a lower average outstanding balance of debt.

Loss on Extinguishment of Debt

During the three months ended July 31, 2018 , we recorded a $1.4 million loss on extinguishment of debt related to the early retirement of our 2017-A Redeemed Notes and call premiums. During the three months ended July 31, 2017 , we wrote-off $2.1 million of debt issuance costs related to the early retirement of our 2015-A Redeemed Notes.

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Provision for Income Taxes



	Three Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Provision for income taxes	$	5,308		$	2,783		$	2,525
Effective tax rate	23.8		%	39.4		%

The increase in income tax expense for the three months ended July 31, 2018 compared to the three months ended July 31, 2017 was primarily driven by an increase in taxable income offset by a decrease in our effective tax rate pursuant to H.R. 1, originally known as the Tax Cuts and Jobs Act ( “ The Tax Act ”) , which reduced the federal statutory income tax rate from 35% to 21%.

Six Months Ended July 31, 2018 Compared to Six Months Ended July 31, 2017

Revenues



	Six Months Ended July 31,											%		Same Store
(dollars in thousands)	2018		% of Total		2017		% of Total		Change			Change		% Change
Furniture and mattress ⁽¹⁾	$	194,086	33.9	%	$	189,740	33.5	%	$	4,346		2.3	%	(2.6	)%
Home appliance	169,494		29.6		169,207		29.9		287			0.2		(1.8	)
Consumer electronics ⁽¹⁾	107,956		18.9		108,699		19.2		(743		)	(0.7	)	0.3
Home office ⁽¹⁾	37,599		6.6		34,650		6.1		2,949			8.5		10.6
Other	7,358		1.3		8,659		1.6		(1,301		)	(15.0	)	(17.8	)
Product sales	516,493		90.3		510,955		90.3		5,538			1.1		(1.1	)
Repair service agreement commissions ⁽²⁾	48,525		8.5		48,215		8.5		310			0.6		(4.4	)
Service revenues	7,051		1.2		6,528		1.2		523			8.0
Total net sales	$	572,069	100.0	%	$	565,698	100.0	%	$	6,371		1.1	%	(1.5	)%

(1)

During the three months ended July 31, 2017, we reclassified certain products from the consumer electronics and home office product categories into the furniture and mattress product category. Net sales of these products reflected in the consumer electronics and home office product categories for the six months ended July 31, 2017 were $5.4 million and $1.6 million, respectively. The change in same store sales reflects the current product classification for both periods presented.


(2)	The total change in sales of repair service agreement commissions includes retrospective commissions, which are not reflected in the change in same store sales.

The following provides a summary of the same store sales performance of our product categories during the six months ended July 31, 2018 as compared to the six months ended July 31, 2017 :


•	Furniture unit volume decreased 7.2%, partially offset by a 4.4% increase in average selling price;


•	Mattress unit volume decreased 10.7%, partially offset by a 10.5% increase in average selling price;


•	Home appliance unit volume decreased 6.3%, partially offset by a 4.8% increase in average selling price;


•	Consumer electronic average selling price increased 1.5%, partially offset by a 1.2% decrease in unit volume; and


•	Home office unit volume increased 25.9%, partially offset by a 12.2% decrease in average selling price.

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



	Six Months Ended July 31,
(in thousands)	2018		2017		Change
Interest income and fees	$	156,781	$	136,621	$	20,160
Insurance income	14,045		19,982		(5,937		)
Other revenues	112		172		(60		)
Finance charges and other revenues	$	170,938	$	156,775	$	14,163

The increase in interest income and fees was due to a yield rate of 21.0% during the six months ended July 31, 2018 , 260 basis points higher than the six months ended July 31, 2017 , and by an increase of 0.5% in the average balance of the customer receivable portfolio. The increase in the yield rate resulted from the origination of our higher-yielding direct loan product. Insurance income decreased over the prior year period primarily due to a decrease in retrospective income as a result of higher claim volumes related to Hurricane Harvey.

The following table provides key portfolio performance information:



	Six Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Interest income and fees	$	156,781		$	136,621		$	20,160
Net charge-offs	(97,093		)	(113,874		)	16,781
Interest expense	(32,386		)	(44,047		)	11,661
Net portfolio income (loss)	$	27,302		$	(21,300	)	$	48,602
Average portfolio balance	$	1,503,311		$	1,495,675		$	7,636
Interest income and fee yield (annualized)	21.0		%	18.4		%
Net charge-off % (annualized)	12.9		%	15.2		%

Retail Gross Margin



	Six Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Retail total net sales	$	572,069		$	565,698		$	6,371
Cost of goods sold	340,216			344,256			(4,040		)
Retail gross margin	$	231,853		$	221,442		$	10,411
Retail gross margin percentage	40.5		%	39.1		%

The increase in retail gross margin was driven by improved product margins in almost all product categories.

Selling, General and Administrative Expense



	Six Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Selling, general and administrative expense:
Retail segment	$	160,755		$	152,614		$	8,141
Credit segment	74,813			65,555			9,258
Selling, general and administrative expense - Consolidated	$	235,568		$	218,169		$	17,399
Selling, general and administrative expense as a percent of total revenues	31.7		%	30.2		%

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in the credit segment was primarily due to an increase in compensation costs, third-party legal expenses related to bankruptcy collection efforts, and an increase in the corporate overhead allocation. As a percent of average total customer portfolio balance (annualized), SG&A for the credit segment in the six months ended July 31, 2018 increased 120 basis points as compared to the six months ended July 31, 2017 . The increase in the corporate overhead allocation made to each of the segments was driven by investments we are making in information technology, other personnel to support long-term performance improvement initiatives and an increase in accrued compensation.

Provision for Bad Debts



	Six Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Provision for bad debts:
Retail segment	$	503		$	395		$	108
Credit segment	94,404			104,984			(10,580		)
Provision for bad debts - Consolidated	$	94,907		$	105,379		$	(10,472	)
Provision for bad debts - Credit segment, as a percent of average portfolio balance (annualized)	12.6		%	14.0		%

The provision for bad debts decreased to $94.9 million for the six months ended July 31, 2018 from $105.4 million for the six months ended July 31, 2017 , a decrease of $10.5 million . The decrease was driven by a year-over-year reduction in net charge-offs of $16.8 million , partially offset by a greater decrease in the allowance for bad debts during the six months ended July 31, 2017 as compared to the six months ended July 31, 2018 . The greater decrease in the allowance for bad debts was primarily driven by the inclusion of changes in first payment default rates and changes in delinquency balances to our allowance for bad debts framework made during the six months ended July 31, 2017.

Charges and Credits



	Six Months Ended July 31,
(in thousands)	2018		2017		Change
Store and facility closure costs	$	—	$	1,349	$	(1,349	)
Securities-related regulatory matter and other legal fees	300		34		266
Employee severance	—		1,317		(1,317		)
Indirect tax audit reserve	—		2,595		(2,595		)
	$	300	$	5,295	$	(4,995	)

During the six months ended July 31, 2018 , we incurred costs associated with a contingency reserve related to a regulatory matter. During the six months ended July 31, 2017 , we primarily incurred exit costs associated with reducing the square footage of a distribution center, charges for severance and transition costs due to changes in our executive management team and an increase to our indirect tax audit reserve.

Interest Expense

For the six months ended July 31, 2018 , net interest expense decreased by $11.7 million from the prior year comparative period primarily reflecting a decrease in our cost of borrowing as a result of lower pricing on our securitization transactions coupled with a lower average outstanding balance of debt.

Loss on Extinguishment of Debt

During the six months ended July 31, 2018 , we recorded a $1.7 million loss on extinguishment of debt primarily related to the early retirement of our 2016-B Redeemed Notes and 2017-A Redeemed Notes. During the six months ended July 31, 2017 , we wrote-off $2.4 million of debt issuance costs related to an amendment to our Revolving Credit Facility for lenders that did not continue to participate and the early retirement of our 2015-A Redeemed Notes.

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Provision for Income Taxes



	Six Months Ended July 31,
(dollars in thousands)	2018			2017			Change
Provision for income taxes	$	8,114		$	1,188		$	6,926
Effective tax rate	21.4		%	41.2		%

The increase in income tax expense for the six months ended July 31, 2018 compared to the six months ended July 31, 2017 was primarily driven by an increase in taxable income offset by a decrease in our effective tax rate pursuant to The Tax Act, which reduced the federal statutory income tax rate from 35% to 21%, and a $0.8 million tax benefit related to the vesting of equity compensation.

Customer 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 between 18% and 30%. During the third quarter of fiscal year 2017, we implemented our direct consumer loan program across all Texas locations. During the first quarter of fiscal year 2018, we implemented our direct consumer loan program in all Louisiana locations. During the third quarter of fiscal year 2018, we implemented our direct consumer loan program in all Tennessee and Oklahoma locations. The states of Texas, Louisiana, Tennessee and Oklahoma represented approximately 78% of our originations during the six months ended July 31, 2018 , which, under our previous offerings, had a maximum equivalent interest rate of approximately 21%, compared to an interest rate of up to 27% in Oklahoma and up to 30% in Texas, Louisiana and Tennessee under our new direct consumer loan programs. In states where regulations do not generally limit the interest rate charged, we increased our rates in the third quarter of fiscal year 2017 to 29.99%. These states represented 10% of our originations during the six months ended July 31, 2018 .

We offer 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 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.

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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,
	2018			2017
Weighted average credit score of outstanding balances ⁽¹⁾	594			589
Average outstanding customer balance	$	2,503		$	2,375
Balances 60+ days past due as a percentage of total customer portfolio balance ⁽²⁾	9.0		%	10.4		%
Re-aged balance as a percentage of total customer portfolio balance ⁽²⁾⁽³⁾	24.3		%	16.0		%
Account balances re-aged more than six months (in thousands)	$	84,148		$	75,694
Allowance for bad debts as a percentage of total customer portfolio balance	13.5		%	13.7		%
Percent of total customer portfolio balance represented by no-interest option receivables	20.9		%	24.1		%



	Three Months Ended July 31,						Six Months Ended July 31,
	2018			2017			2018			2017
Total applications processed	295,564			297,587			579,050			587,914
Weighted average origination credit score of sales financed ⁽¹⁾	610			609			609			608
Percent of total applications approved and utilized	31.4		%	32.8		%	30.9		%	32.1		%
Average down payment	2.6		%	3.0		%	2.8		%	3.3		%
Average income of credit customer at origination	$	43,700		$	42,300		$	43,700		$	42,200
Percent of retail sales paid for by:
In-house financing, including down payment received	70.5		%	72.6		%	70.3		%	71.6		%
Third-party financing	16.4		%	17.2		%	15.7		%	16.2		%
Third-party lease-to-own option	6.4		%	3.8		%	6.9		%	5.7		%
	93.3		%	93.6		%	92.9		%	93.5		%


(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)	The re-aged balance as a percentage of total customer portfolio as of July 31, 2018 includes $41.6 million , or 2.8% , in first time re-ages related to customers affected by Hurricane Harvey within FEMA-designated disaster areas.

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 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 outstanding portfolio balance decreased to 10.7% as of July 31, 2018 from 11.0% as of July 31, 2017 . The percentage of non-restructured accounts greater than 60 days past due decreased 130 basis points over the prior year period to 7.1% as of July 31, 2018 from 8.4% as of July 31, 2017 .

For restructured accounts, the allowance for uncollectible accounts as a percentage of the portfolio balance was 35.4% as of July 31, 2018 as compared to 38.6% as of July 31, 2017 . This 320 basis point decrease reflects the impact of improved delinquency rates.

The percent of bad debt charge-offs, net of recoveries, to average portfolio balance was 13.8% for the three months ended July 31, 2018 as compared to 14.8% for the three months ended July 31, 2017 . The decrease was primarily due to the seasoning of loans originated with tighter underwriting standards and improvements in recoveries due to enhancements in our collections program.

As of July 31, 2018 and 2017 , balances under no-interest programs included within customer receivables were $315.1 million and $356.6 million , respectively.

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Liquidity and Capital Resources

We require liquidity and capital resources to finance our operations and future growth as we add new stores and markets 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.

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, 2018 , net cash provided by operating activities was $155.7 million compared to $90.5 million for the six months ended July 31, 2017 . The increase in net cash provided by operating activities was primarily driven by an increase in cash provided by working capital due to the collection of an income tax receivable and an increase in net income when adjusted for non-cash activity.

Investing cash flows. For the six months ended July 31, 2018 , net cash used in investing activities was $12.2 million compared to $6.1 million for the six months ended July 31, 2017 . The change was primarily the result of higher capital expenditures due to investments in new stores and technology investments we are making to support long-term growth.

Financing cash flows. For the six months ended July 31, 2018 , net cash used in financing activities was $183.6 million compared to $97.2 million for the six months ended July 31, 2017 . During the six months ended July 31, 2018 , the issuance of additional funding under the Warehouse Notes resulted in net proceeds of $169.7 million , net of transaction costs and restricted cash. The proceeds from the multiple fundings of the Warehouse Notes were used to early retire our Series 2016-B Class B Notes (the “2016-B Redeemed Notes”) and our Series 2017-A Class B and C Notes (the “2017-A Redeemed Notes”). Cash collections from the securitized receivables were used to make payments on the asset-backed notes of approximately $534.1 million during the six months ended July 31, 2018 compared to approximately $583.3 million in the comparable prior year period. During the six months ended July 31, 2018 , net borrowings under our Revolving Credit Facility were $184.2 million compared to $22.5 million for the six months ended July 31, 2017 . During the six months ended July 31, 2017 , the 2017-A VIE issued asset-backed notes resulting in net proceeds to us of approximately $456.7 million , net of transaction costs and restricted cash held by the 2017-A VIE, which were used to pay down the entire balance on our Revolving Credit Facility and for other general corporate purposes.

Senior Notes. On July 1, 2014, we issued $250.0 million of the unsecured Senior Notes due July 2022 bearing interest at 7.25% , pursuant to an indenture dated July 1, 2014 (the “Indenture”), among Conn's, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National Association, as trustee. The effective interest rate of the Senior Notes after giving effect to the discount and issuance costs is 7.8% .

The Indenture restricts the Company's and certain of its subsidiaries' ability to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock (“restricted payments”); (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. Specifically, limitations on restricted payments are only effective if one or more of the following occurred: (1) a default were to exist under the Indenture, (2) we could not satisfy a debt incurrence test, and (3) the aggregate amount of restricted payments were to exceed an amount tied to consolidated net income. These limitations, however, are subject to two exceptions: (1) an exception that permits the payment of up to $375.0 million in restricted payments, and (2) an exception that permits restricted payments regardless of dollar amount so long as, after giving pro forma effect to the dividends and other restricted payments, we would have had a leverage ratio, as defined under the Indenture, of less than or equal to 2.50 to 1.0. As a result of these exceptions, as of July 31, 2018 , $200.5 million would have been free from the distribution restriction. During any time when the Senior Notes are rated investment grade by either of Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended and we will cease to be subject to such covenants during such period. Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we fail to make payment of other indebtedness prior to the expiration of any applicable grace period or upon acceleration of indebtedness prior to its stated maturity date in an amount exceeding $25.0 million , as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.

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securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.

The asset-backed notes consist of the following:



Asset-Backed Notes	Original Principal Amount		Original Net Proceeds ⁽¹⁾		Current Principal Amount		Issuance Date	Maturity Date	Fixed Interest Rate	Effective Interest Rate ⁽²⁾
2017-B Class A Notes	$	361,400	$	358,945	$	99,595	12/20/2017	7/15/2020	2.73%	5.14%
2017-B Class B Notes	132,180		131,281		132,180		12/20/2017	4/15/2021	4.52%	5.23%
2017-B Class C Notes	78,640		77,843		78,640		12/20/2017	11/15/2022	5.95%	6.35%
Warehouse Notes	121,060		118,972		121,060		7/16/2018	1/15/2020	Index + 2.50% ⁽³⁾	7.62%
Total	$	693,280	$	687,041	$	431,475


(1)	After giving effect to debt issuance costs and restricted cash held by the VIEs.


(2)	For the six months ended July 31, 2018, and inclusive of retrospective adjustments to deferred debt issuance costs based on changes in timing of actual and expected cash flows.


(3)	The rate on the Warehouse Notes is defined as the applicable index plus a 2.50% fixed margin.

On February 15, 2018, affiliates of the Company closed on a $52.2 million financing under a receivables warehouse financing transaction entered into on February 6, 2018 (the “Warehouse Notes”). The net proceeds of the Warehouse Notes were used to prepay in full the 2016-B Redeemed Notes that were still outstanding as of February 15, 2018.

See “Item 1. Financial Statements—Note 10” for more information on our Subsequent Event related to our asset-backed notes.

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Debt Covenants. We were in compliance with our debt covenants at July 31, 2018 . A summary of the significant financial covenants that govern our Revolving Credit Facility, as amended, compared to our actual compliance status at July 31, 2018 is presented below:



	Actual	Required Minimum/ Maximum
Interest Coverage Ratio must equal or exceed minimum	3.75:1.00	1.00:1.00
Leverage Ratio must not exceed maximum	2.07:1.00	4.00:1.00
ABS Excluded Leverage Ratio must not exceed maximum	1.40:1.00	2.00:1.00
Capital Expenditures, net, must not exceed maximum	$13.5 million	$100.0 million

All capitalized terms in the above table are defined by the Revolving Credit Facility, as amended, and may or may not agree directly to the financial statement captions in this document. The covenants are calculated quarterly, except for the 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 under existing GAAP, 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 $1.5 million and $2.0 million per store (before tenant improvement allowances), and for our existing store remodels, estimated to range between $0.3 million and $1.5 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 two new stores during the first half of fiscal year 2019, and currently plan to open a total of seven to nine new stores during fiscal year 2019. Additionally, we plan to upgrade several of our facilities and continue to enhance our IT systems during fiscal year 2019. Our anticipated capital expenditures for the remainder of fiscal year 2019 are between $23 million and $27 million.

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 and repayment of debt, we rely primarily on cash from operations. As of July 31, 2018 , beyond cash generated from operations we had (i) immediately available borrowing capacity of $366.6 million under our Revolving Credit Facility, (ii) $19.4 million that may become available under our Revolving Credit Facility if we grow the balance of eligible customer receivables and our total eligible inventory balances and (iii) $4.4 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 covenant 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, 2018 :



			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⁾	$	308,517	$	12,407	$	24,814	$	271,296	$	—
Senior Notes	292,154		16,458		32,915		242,781		—
2017-B Class A Notes ⁽²⁾	104,921		2,719		102,202		—		—
2017-B Class B Notes ⁽²⁾	148,369		5,975		142,394		—		—
2017-B Class C Notes ⁽²⁾	98,741		4,679		9,358		84,704		—
Warehouse Notes ⁽¹⁾	130,350		6,362		123,988		—		—
Capital lease obligations	7,187		1,219		1,221		917		3,830
Operating leases:
Real estate	443,632		62,772		123,194		115,215		142,451
Equipment	3,021		1,179		1,425		417		—
Contractual commitments ⁽³⁾	84,127		78,507		5,494		126		—
Total	$	1,621,019	$	192,277	$	567,005	$	715,456	$	146,281


(1)	Estimated interest payments are based on the outstanding balance as of July 31, 2018 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 and 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 primarily includes commitments to purchase inventory of $64.4 million .

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States 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 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. The description of critical accounting policies is included in our 2018 Form 10-K.

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 2.50% to 3.25% per annum (depending on quarterly average net availability under the borrowing base) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum (depending on quarterly average net availability under the borrowing base). The alternate base rate is a rate per annum equal to the greatest of the prime rate announced by Bank of America, N.A., the federal

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funds rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. Accordingly, changes in our quarterly average net availability under the borrowing base 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, 2018 , the balance outstanding under our Revolving Credit Facility was $261.2 million. A 100 basis point increase in interest rates on the Revolving Credit Facility would increase our borrowing costs by $2.6 million over a 12-month period, based on the balance outstanding at July 31, 2018 .


ITEM 4.	CONTROLS AND PROCEDURES

Based on management's evaluation (with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

For the quarter ended July 31, 2018 , 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.


PART II.	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

The information set forth in Note 6, Contingencies , of the 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

Other than with respect to the amendment and restatement of the risk factor included below, 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 2018 Form 10-K. The risks described in our 2018 Form 10-K and in this quarterly report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

Our corporate actions may be substantially controlled by our principal stockholders and affiliated entities. A large proportion of our outstanding common stock is beneficially owned by a small group of principal stockholders and their affiliates, including Stephens Inc., Stephens Group, PAR Capital Management, Inc., and Anchorage Capital Group, LLC (“Anchorage”). Large holders, such as these, may be able to affect matters requiring approval by Company stockholders, including the election of directors and the approval of mergers or other business combination transactions. Additionally, we have granted a waiver of the applicability of the provisions of Section 203 of the DGCL to Anchorage such that Anchorage may increase its position in our common stock up to 20% of the outstanding shares without being subject to Section 203’s restrictions on business combinations. The concentration of ownership of our shares of common stock by the relatively small number of investors and hedge funds may:


•	Have significant influence in determining the outcome of any matter submitted to stockholders for approval, including the election of directors, mergers, consolidations, and the sale of all or substantially of our assets or other significant corporate actions;


•	Delay or deter a change of control of the Company;


•	Deprive stockholders of an opportunity to receive a premium for their shares as part of a sale of the Company; and


•	Affect the market price volatility and liquidity of our shares of common stock.

The interests of these investors and their respective affiliates may differ from or be adverse to the interests of our other stockholders. If any of these investors sells a substantial number of shares in the public market, the market price of our shares could fall. The perception among the public that these sales will occur could also contribute to a decline in the market price of the shares.


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

None.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4.	MINE SAFETY DISCLOSURE

Not applicable.


ITEM 5.	OTHER INFORMATION

None.

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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		Amended and Restated Bylaws of Conn's, Inc. effective as of December 3, 2013 (incorporated herein by reference to Exhibit 3.2 to Form 10-Q for the quarterly period ended October 31, 2013 (File No. 001-34956) as filed with the Securities and Exchange Commission on December 6, 2013)
4.1		Specimen of certificate for shares of Conn's, Inc.'s common stock (incorporated herein by reference to Exhibit 4.1 to registration statement on Form S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on October 29, 2003)
10.1		Fourth Amended and Restated Loan and Security Agreement, dated May 23, 2018, 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 Bank of America N.A., in its capacity as agent for lenders (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-34956) as filed with the Securities and Exchange Commission on May 24, 2018)
10.2*		Letter Agreement, dated as of June 6, 2018, by and between Conn’s Inc. and Anchorage Capital Group, L.L.C.
11.1		Statement re: computation of earnings per share (incorporated by reference to Note 1 to the condensed consolidated financial statements included in this Form 10-Q)
31.1		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 2019, filed with the SEC on September 4, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated balance sheets at July 31, 2018 and January 31, 2018, (ii) the consolidated statements of operations for the three and six months ended July 31, 2018 and 2017, (iii) the consolidated statements of cash flows for the six months ended July 31, 2018 and 2017 and (iv) the notes to 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 4, 2018

	By:	/s/ Lee A. Wright
		Lee A. Wright
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and duly authorized to sign this report on behalf of the registrant)

Exhibit 10.2

Anchorage Capital Group, L.L.C.

610 Broadway

6 ^th Floor

New York, NY 10012

Tel: 212.432.4600

Fax: 212.432.4601

June 6, 2018

Conn's, Inc .

2445 Technology Forest Blvd., Suite 800

The Woodlands, Texas 77381

This Agreement is entered into as of June 6, 2018 (this "Agreement" ) between Conn's, Inc., a Delaware corporation (the "Company" ), and Anchorage Capital Group, L.L.C. ( "Anchorage" or " we "). We have discussed with you our desire to be able to acquire shares of common stock, $0.01 par value per share (including securities convertible or exercisable into shares of such common stock, the "Common Stock" ) , of the Company. In consideration of and reliance upon the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged , the Company and Anchorage agree as follows:

We acknowledge that, as of the date hereof, Anchorage, its funds and accounts under management and its and their Affiliates and Associates (each, as defined in Section 203 of the Delaware General Corporation Law ( "Section 203" )) and any other person or entity through which any of them owns ( "own" as used throughout this Agreement, including the term "owner", as defined in Section 203) shares of Common Stock (together, the "Restricted Persons" ) own less than 15 % (the "Threshold Percentage" ) of the outstanding Common Stock. We represent that as of the date hereof, we are not a member of a group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act " ), a " Group " ) with respect to the Common Stock with any person other than our funds and accounts under management and our and their Affiliates and Associates .

For purposes of this Agreement, provided that the ownership of the outstanding Common Stock by the Restricted Persons exceeds the Threshold Percentage on or before September 30, 2019 (the “ Outside Date ”), any acquisition of shares of Common Stock (or instrument exercisable or convertible into Common Stock) by any Restricted Person after the date of this Agreement and prior to the first date , if ever, on which the Restricted Persons collectively own less than 10.0 % of the outstanding shares of Common Stock for a period of at least three consecutive months, which acquisition does not, as to Associates to Anchorage's knowledge , result in the Restricted Persons collectively owning more than 20% of the outstanding shares of Common Stock (as adjusted to take into account any stock split, stock

dividend or distribution, reclassification , restructuring, combination, exchange of shares or similar transaction) shall be a "Permitted Additional Acquisition" . The Company and the Board of Directors of the Company (the "Board" ) have approved all Permitted Additional Acquisitions for purposes of Section 203. The Company and Board represent, warrant and agree that, provided that the ownership of the outstanding Common Stock by the Restricted Persons exceeds the Threshold Percentage on or before the Outside Date, and the Restricted Persons do not , as to Associates to Anchorage's knowledge, own at any time after the date of this Agreement more than 20% of the outstanding shares of Common Stock (as adjusted to take into account any stock split, stock dividend or distribution, reclassification, restructuring, combination, exchange of shares or similar transaction): (i) all Permitted Additional Acquisitions by any of the Restricted Persons are approved for purposes of Section 203, (ii) each of the Restricted Persons has been approved as an "interested stockholder" under Section 203, and (iii) the Restricted Persons shall not be subject to any of the limitations applicable to "interested stockholders" under Section 203 and shall not be restricted from engaging in any "business combination " (as defined in Section 203) with the Company as a result of any Permitted Additional Acquisition. The Board shall not adversely modify , amend or revoke such approvals.

To the extent that any of the Restricted Persons acquire Common Stock such that that as a result of such acquisition the Restricted Persons own more than 15% of the outstanding Common Stock, and thereafter any of the Restricted Persons sells shares such that as a result of such sale the Restricted Persons own less than 15% of the outstanding Common Stock, then all subsequent acquisitions of Common Stock (or securities convertible or exercisable into Common Stock) by the Restricted Persons that do not, as to Associates to Anchorage's knowledge, result in the Restricted Persons owning more than 20% of the outstanding shares of Common Stock (as adjusted to take into account any stock split, stock dividend or distribution, reclassification, restructuring, combination, exchange of shares or similar transaction), shall be Permitted Additional Acquisitions. The Company may periodically request that Anchorage provide information to the Company regarding the amount of Common Stock owned by Anchorage as of any date or dates and Anchorage shall promptly provide such information to the Company upon such requests.


4.	Except as otherwise set forth herein, Anchorage agrees that, until the earlier of : (i) the termination of this Agreement and (ii) the Outside Date, Anchorage shall not and shall cause its Affiliates not to, without the prior written consent of the Company:

make, or in any way participate, directly or indirectly, in any "solicitation" (as such term is used in the proxy rules of the Securities and Exchange Commission (the "SEC" )) of proxies or consents, conduct or suggest any binding or nonbinding referendum or resolution or seek to advise, encourage or influence any individual, partnership, corporation, limited liability company, Group, association or entity (collectively, a "Person" ) with respect to the voting of any of the Common Stock;


b.	propose or nominate, or cause or encourage any Person to propose or nominate, any candidates to stand for election to the Board, or seek the removal of any member of the Board;


c.	vote for any nominee or nominees for election to the Board, other than those nominated or supported by the Board;

form, join or otherwise participate in any "partnership, limited partnership, syndicate or other group" (other than any group that includes only some or all of the Restricted Persons) within the meaning of Section 13(d)(3) of the Exchange Act with respect to the Common Stock, or deposit any shares of Common Stock in a voting trust or similar arrangement, or subject any shares of Common Stock to any voting agreement or pooling

arrangement, or grant any proxy with respect to any shares of Common Stock (other than to a designated representative of the Company pursuant to a proxy statement of the Company); provided that the foregoing shall not be deemed to restrict any discussions or other interactions among the Restricted Persons and any other Persons in connection with any debt securities or instruments of the Company;

separately, or in conjunction with any other person or entity in which it is or proposes to be either a principal, partner or financing source or is acting or proposes to act as broker or agent for compensation, propose publicly or participate in, effect or seek to effect, any of the following involving the Company or any of its material subsidiaries or its or their securities or a material amount of the assets or businesses of the Company or any of its material subsidiaries: any tender offer or exchange offer, rights offering, spin-off, public offering of securities, merger, acquisition, business combination, reorganization, restructuring, recapitalization, sale or acquisition of material assets, liquidation or dissolution; provided , however , that nothing herein shall limit the ability of Anchorage or any of its Affiliates to propose, participate in, effect or seek to effect any such transaction in connection with a potential restructuring of the Company following the commencement, whether voluntary or involuntary, of any bankruptcy or similar proceeding with respect to the Company, the appointment of a receiver, trustee, assignee, liquidator or similar official with respect to the Company, a general assignment by the Company for the benefit of its creditors, or the Company admitting in writing that it is generally unable to pay its debts as they become due;


f.	seek to call, or to request the call of, or call a special meeting of the stockholders of the Company, or make a request for a list of the Company's stockholders or other Company records;

take any public action to act alone, as part of a Group or in concert with others to control or seek to control, or to influence or seek to influence, the management, the Board or the policies of the Company; provided , however , that nothing herein shall prohibit Anchorage and its Affiliates, in a manner not for the purpose of circumventing the provisions of this subparagraph (g), from complying with legal or regulatory requirements, including, without limitation, the filing of any report or schedule required to be filed with the SEC;

transfer, pledge, hypothecate, encumber, assign, or otherwise dispose of, directly or indirectly, any shares of Common Stock to (x) any person that Anchorage can determine from publicly available information beneficially owns, or as a result of such transfer or other disposition would beneficially own, 14.99% or more of the then-outstanding shares of Common Stock or (y) any person that reasonably can be determined from publicly available information is an Affiliate or Associate of such stockholder described in the foregoing clause (x); provided , that, for the avoidance of doubt, nothing herein shall be deemed to prohibit Anchorage and its Affiliates from holding shares of Common Stock in margin accounts in the ordinary course of business;


i.	sell, offer or agree to sell all or substantially all, directly or indirectly, through swap or hedging transactions, derivative agreements or otherwise, voting rights decoupled from the underlying Common Stock held by Anchorage and its Affiliates to any third party;


j.	publicly request or express a desire that the Company amend, waive, grant any consent under or otherwise not enforce any provision of this Section 4; or


k.	otherwise take, or solicit, cause or encourage others to take, any action inconsistent with any of the foregoing.

Notwithstanding the foregoing, nothing in this Agreement shall in any way be deemed to limit the ability of Anchorage or any of its Affiliates to (i) vote or tender shares of Common Stock in its sole discretion, except as provided in Section 4(c), (ii) make any public statement or announcement with respect to an Extraordinary Transaction (as defined below) proposed by the Company that requires a vote of the Company's stockholders and that is publicly announced by the Company after the date of this Agreement or (iii) engage in any Open Market Transaction.

The parties hereto acknowledge and agree that money damages would not be a sufficient remedy for any breach or threatened breach of any provision of this Agreement, and that in addition to all other remedies which we or the Company may have, each of the parties hereto will be entitled to seek specific performance and injunctive or other equitable relief as a remedy for any such breach, without the necessity of posting any bond.


6.	It is understood and agreed that no failure or delay by a party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder.


7.	The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect.

This Agreement, including, without limitation, the provisions of this Paragraph 8, may not be amended, modified, terminated or waived, in whole or in part, except upon the prior approval of a majority of the members of the Board who are not Associates or Affiliates of ours and who have not been nominated to serve on the Board by us or any of our Affiliates, Associates or any persons with whom we have formed a Group (the " Disinterested Directors ") and by a separate writing signed by the Company, if so authorized by such Disinterested Directors, and us expressly so amending, modifying, terminating or waiving such agreement or any part hereof. Any amendment, modification, termination or waiver of this Agreement or any part hereof made that does not comply with the provisions of this Paragraph 8 shall be void and of no legal effect. Notwithstanding anything herein to the contrary, this Agreement shall terminate and cease to be of any further effect immediately upon the acquisition by any of the Restricted Persons of shares of Common Stock (or securities convertible or exercisable into Common Stock) that does not constitute a Permitted Additional Acquisition.

This Agreement will be binding upon the parties hereto and their respective heirs, successors and assigns, and will inure to the benefit of the parties hereto (and in our case, the Restricted Persons) and their respective heirs, successors and assigns; provided , however , that Anchorage may not assign, or cause to be assigned, any of its rights under this Agreement or delegate, or cause to be delegated, any of the obligations relating to Anchorage or its Affiliates under this Agreement by operation of law or otherwise, without the prior written consent of the Company. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than Anchorage and the Company and their respective permitted successors and permitted assigns, any right or remedy under or by reason of this Agreement.

10.

For purposes of this Agreement, (i) "Extraordinary Transaction" means any merger, consolidation, amalgamation, arrangement, tender or exchange offer, purchase, disposition, sale or transfer of assets or securities, dissolution, liquidation, reorganization, recapitalization, change in authorized or outstanding capital stock, issuances of capital stock other than in employee or director compensatory plans, dividend, share repurchase or other business combination or transaction involving the Company, its subsidiaries or its business and (ii) "Open Market Transaction" means any purchase or sale of debt or securities (i) from the Company or its agent or (ii) on a securities

exchange or trading system where the identity of the counterparty to such purchase or sale is unknown to any Restricted Person.

11.

This Agreement may be executed in two (2) or more counterparts (including by means of facsimile), each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of this executed Agreement shall be deemed to be originals thereof.


12.	Each party agrees and consents to the exclusive jurisdiction of and venue in the Court of Chancery of the State of Delaware for the purposes of any action, suit or proceeding arising out of or relating to this Agreement. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regards to its conflicts of law principles.

[Remainder of Page Intentionally Left Blank]



Very truly yours,

ANCHORAGE CAPITAL GROUP, L.L.C.

By:	/s/ Daniel Allen
Name:	Daniel Allen
Title:	President



	Confirmed and agreed to as of the date first written above:
	Confirmed and agreed to as of the date first written above:



	CONN'S, INC.

	By:	/s/ Mark Prior
	Name:	Mark Prior
	Title:	VP, General Counsel

EXHIBIT 31.1

CERTIFICATION

I, Norman L. Miller, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



	/s/ Norman L. Miller
	Norman L. Miller
	Chairman of the Board, Chief Executive Officer and President
	(Principal Executive Officer)

Date: September 4, 2018

EXHIBIT 31.2

CERTIFICATION

I, Lee A. Wright, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



	/s/ Lee A. Wright
	Lee A. Wright
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

Date: September 4, 2018

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Conn's, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2018 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Norman L. Miller, Chairman of the Board, Chief Executive Officer and President of the Company, and Lee A. Wright, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:


(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



	/s/ Norman L. Miller
	Norman L. Miller
	Chairman of the Board, Chief Executive Officer and President
	(Principal Executive Officer)



	/s/ Lee A. Wright
	Lee A. Wright
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

Date: September 4, 2018

A signed original of this written statement required by Section 906 has been provided to Conn's, Inc. and will be retained by Conn's, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.