AMERICAS CARMART INC

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued lockdown orders impacting the operations of our stores and consumer demand. Since then, the COVID-19 situation within the U.S. has rapidly escalated with many businesses being closed or operating in limited capacities. While our dealerships have remained open and are operating under all CDC recommendations, the fluidity of the current environment leads to uncertainty in regard to consumer demand and ongoing changes in government mandates, as well as unpredictable risks and challenges stemming from COVID-19. We have taken measures to enhance our liquidity position and provide additional financial flexibility, including drawing down funds on our revolving credit facility and aligning operating expenses to the current state of the business. We continue to monitor the situation closely. Our top priority is ensuring the health and safety of our associates and customers. We have made process updates such as enhanced cleaning and social distancing measures and instituted new efforts like disinfectant spraying. We have distributed personal protective equipment, such as masks and gloves for our associates, and implemented disinfectant spraying and temperature checks across our operations. We have also supported associates impacted by COVID-19 by providing extra paid time off in addition to their other paid and unpaid time off options.

In addition to opening new dealerships, the Company believes that strategic acquisitions of existing dealerships can complement the Company’s business and increase its profitability. The Company recently completed the acquisition of the ongoing dealership assets of Taylor Motor Company and Auto Credit of Southern Illinois (collectively, “Taylor Motors”) based in Benton, Illinois, through which the Company acquired three dealerships located in Illinois and will continue to evaluate other acquisition opportunities. These dealerships are established businesses with an expectation of sales levels similar to mature dealerships. As part of its growth strategy, the Company intends to consider and pursue future strategic acquisition opportunities that the Company believes will enhance our franchise and maximize the return to our shareholders.

The global outbreak of COVID-19 has led to severe disruptions in general economic activities, particularly retail operations, as businesses and federal, state, and local governments implement mandates to mitigate this public health crisis. The pandemic has affected consumer demand and the overall health of the US economy. These conditions could negatively impact all aspects of our business, including used vehicle sales and financing, finance receivable collections, repossession activity and inventory acquisition. Our business is also dependent on the continued health and productivity of our associates, including management teams, throughout this crisis. The consequences of the COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition.

Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, support the origination of vehicle financing, and meet our financial obligations. Currently capital and credit markets have been disrupted by the crisis and our ability to obtain any new or additional financing is not guaranteed and largely dependent upon evolving market conditions and other factors.

The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses inherent in the portfolio at the balance sheet date in the collection of its finance receivables currently outstanding. At April 30, 2020, the weighted average total contract term was 33.3 months with 24.5 months remaining. The reserve amount in the allowance for credit losses at April 30, 2020, $155.0 million, was 26.5% of the principal balance in finance receivables of $621.2 million, less unearned payment protection plan revenue of $24.5 million and unearned service contract revenue of $11.6 million. In the first quarter of fiscal 2020, the Company reduced its allowance for credit losses from 25.0% to 24.5% as a result of improvements in net chargeoffs as a percentage of average receivables, the quality of the portfolio and the allowance analysis. Based on the analysis discussed below and factoring in the uncertainty regarding how the COVID-19 pandemic will impact collections and charge-offs going forward, management decided to increase the allowance for credit losses at April 30, 2020 to 26.5% from 24.5%. The net increase to the allowance for credit losses resulted in a $9.1 million ($7.0 million after tax effects, $1.02 per diluted share) charge to the provision for credit losses for fiscal year 2020.

The Company includes variable lease payments in the initial measurement of ROU assets and lease liabilities only to the extent they depend on an index or rate. Changes in such indices or rates are accounted for in the period the change occurs, and do not result in the remeasurement of the ROU asset or liability. The Company is also responsible for payment of certain real estate taxes, insurance, and other expenses on leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. Non-lease components are generally accounted for separately from lease components. The Company’s leases do not contain any material residual value guarantees or material restricted covenants.