Fifty 1 Labs, Inc.

What they do

The company sells used vehicles (generally 2000 and newer, or less than 10 years old) to credit-impaired customers and finances substantially all purchases through sale-type leases. It operates its own collections department and also purchases installment finance contracts from other independent used vehicle dealerships, with recourse clauses of up to 60 days or two payments. As of March 31, 2011, it had one retail location in Arizona, down from two stores in 2010.

Revenue drivers

• Vehicle sales (sales-type leases) — Primary revenue source, though sales-type lease activity decreased 9% of total revenue in fiscal 2010 vs. 2009. Unit sales declined nearly 50% in the nine months ended March 31, 2011, offset by higher average prices.
• Finance income — Interest and finance charges on lease contracts; increased by approximately $156,000 (about 3% of total revenue) in fiscal 2010 vs. 2009.
• Purchased contracts (new line of business) — In fiscal 2011, the company began buying contracts from other BH/PH dealers. As of the December 2010 quarter, this was projected to produce $391,000 in earnings and interest revenue, recognized over contract life.

Recent performance

For the fiscal second quarter ended December 31, 2010, revenue was $1,039,677 with a net loss of $0.07 per diluted share, versus revenue of approximately $2,141,645 and a net loss of $0.06 per diluted share in the prior year. For the nine months ended March 31, 2011, total revenue was $3,139,420 versus $4,169,382 in the prior-year period. The average sales price per unit increased from about $9,200 to $9,585, but unit sales declined nearly 50%. Gross profit margin for fiscal 2010 improved to 57.7% from 45.4% in fiscal 2009 due to a new reconditioning cost tracking system.

Strategy

Management has implemented new contract terms with lower interest rates and shorter payback periods to improve loan portfolio quality and reduce future credit losses. The company is expanding its business by purchasing contracts from other BH/PH dealerships, all meeting its credit requirements, to supplement in-house sales. It is also investing in training and development of personnel, particularly managers, to support potential store expansion. The company's collections and credit management systems have been upgraded, which management says helped reduce charge-off costs by 34% year-over-year in the December 2010 quarter.

Risks

• Credit risk — Substantially all contracts are with credit-impaired customers, leading to higher risk of delinquency, default, and repossession losses.
• Economic conditions — Local economic contractions, especially in construction, and high unemployment have negatively impacted sales and collection results.
• Inventory availability — Reduced availability or higher costs of vehicles from auctions, wholesales, repossessions, and individuals could hurt profit margins if the company can't pass on costs.
• Management turnover — Excessive turnover, particularly at store manager level, could limit the company's ability to add new stores and grow the loan portfolio.

Outlook

Management expects a difficult environment for the foreseeable future, with ongoing challenges in maintaining accounts and collections. They intend to continue working aggressively with customers to keep contracts active without imposing imprudent demands. The company also expects its purchased contract business to contribute revenue and interest over time, and believes its new contract terms will result in lower credit losses in the future.