SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31,September 30, 2018

 

☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number:  000-52015

 

Western Capital Resources, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 47-0848102
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)

 

11550 “I” Street, Suite 150, Omaha, Nebraska 68137

11550 “I” Street, Suite 150, Omaha, Nebraska 68137 
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (402) 551-8888 

N/A

 

Registrant’s telephone number, including area code: (402) 551-8888

N/A

 

 

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

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website,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 ☑   No  ☐

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐  No ☑

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of May 15,November 14, 2018, the registrant had outstanding 9,390,9979,388,677 shares of common stock, $0.001$0.0001 par value per share.

 

 


Western Capital Resources, Inc.

 

Index

 

  Page
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1516
Item 3. Quantitative and Qualitative Disclosures About Market Risk23
   
Item 4. Controls and Procedures 2023
   
PART II. OTHER INFORMATION  
Item 6. Exhibits 2124
   
SIGNATURES 2225


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

CONTENTS

 

 Page
  
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
  
Condensed Consolidated Balance Sheets4
  
Condensed Consolidated Statements of Operations5
  
Condensed Consolidated Statements of Cash Flows6
  
Notes to Condensed Consolidated Financial Statements7

 3


 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
  March 31, 2018 December 31, 2017 
  (Unaudited)   
ASSETS     
      
CURRENT ASSETS     
Cash and cash equivalents $9,125,283 $21,295,819 
Short-term investments  44,386,857  32,292,902 
Loans receivable (net of allowance for losses of $698,000 and $833,000, respectively)  3,362,498  4,310,003 
Accounts receivable (net of allowance for losses of $57,000 and $16,000, respectively)  2,191,743  764,071 
Inventory (net of allowance of $577,000 and $576,000, respectively)  10,010,703  9,130,842 
Prepaid expenses and other  3,691,137  3,762,974 
Escrow and other receivables  3,285,231  3,482,770 
TOTAL CURRENT ASSETS  76,053,452  75,039,381 
        
INVESTMENTS  2,000,000  3,000,000 
        
PROPERTY AND EQUIPMENT, net  11,116,899  11,347,234 
        
GOODWILL  5,796,528  5,796,528 
        
INTANGIBLE ASSETS, net  4,819,669  4,987,769 
        
ESCROW FUNDS RECEIVABLE  3,250,000  3,250,000 
        
OTHER  668,807  823,244 
        
TOTAL ASSETS $103,705,355 $104,244,156 
        
LIABILITIES AND EQUITY       
        
CURRENT LIABILITIES       
Accounts payable and accrued expenses $11,996,557 $11,897,968 
Other current liabilities  1,198,493  1,354,558 
Income taxes payable  18,725,244  18,730,647 
Note payable – short-term  29,250  51,992 
Current portion capital lease obligations  47,858  47,174 
Deferred revenue  1,164,450  1,073,600 
TOTAL CURRENT LIABILITIES  33,161,852  33,155,939 
        
LONG-TERM LIABILITIES       
Notes payable, net of current portion  789,216  789,216 
Capital lease obligations, net of current portion  38,934  51,172 
Deferred income taxes  1,379,000  1,456,000 
Other  98,259  98,259 
TOTAL LONG-TERM LIABILITIES  2,305,409  2,394,647 
        
TOTAL LIABILITIES  35,467,261  35,550,586 
        
COMMITMENTS AND CONTINGENCIES (Note 14)       
        
EQUITY       
        
WESTERN SHAREHOLDERS’ EQUITY       
Common stock, $0.001 par value, 12,500,000 shares authorized, 9,390,997 shares issued and outstanding.  939  939 
Additional paid-in capital  29,031,741  29,031,741 
Retained earnings  37,262,637  37,903,204 
TOTAL WESTERN SHAREHOLDERS’ EQUITY  66,295,317  66,935,884 
        
NONCONTROLLING INTERESTS  1,942,777  1,757,686 
        
TOTAL EQUITY  68,238,094  68,693,570 
        
TOTAL LIABILITIES AND EQUITY $103,705,355 $104,244,156 
 

See notes to condensed consolidated financial statementsWESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  September 30, 2018  December 31, 2017 
  (Unaudited)       
ASSETS        
         
CURRENT ASSETS        
Cash and cash equivalents $9,542,060  $21,295,819 
Short-term investments  20,949,295   32,292,902 
Loans receivable (net of allowance for losses of $736,000 and $833,000, respectively)  4,111,854   4,310,003 
Accounts receivable (net of allowance for losses of $18,000 and $16,000, respectively)  922,308   764,071 
Inventory (net of allowance of $538,000 and $576,000, respectively)  8,823,975   9,130,842 
Prepaid income taxes  390,614   — 
Prepaid expenses and other  3,039,656   3,762,974 
Escrow and other receivables  3,341,203   3,482,770 
TOTAL CURRENT ASSETS  51,120,965   75,039,381 
         
INVESTMENTS  5,008,496   3,000,000 
         
PROPERTY AND EQUIPMENT, net  10,190,374   11,347,234 
         
GOODWILL  5,796,528   5,796,528 
         
INTANGIBLE ASSETS, net  4,418,145   4,987,769 
         
ESCROW FUNDS RECEIVABLE  3,250,000   3,250,000 
         
OTHER  577,102   823,244 
         
TOTAL ASSETS $80,361,610  $104,244,156 
         
LIABILITIES AND EQUITY        
         
CURRENT LIABILITIES        
Accounts payable and accrued expenses $10,693,307  $11,897,968 
Other current liabilities  1,070,839   1,354,558 
Income taxes payable  —   18,730,647 
Note payable – short-term  —   51,992 
Current portion capital lease obligations  49,280   47,174 
Deferred revenue  796,471   1,073,600 
TOTAL CURRENT LIABILITIES  12,609,897   33,155,939 
         
LONG-TERM LIABILITIES        
Notes payable, net of current portion  789,216   789,216 
Capital lease obligations, net of current portion  13,936   51,172 
Deferred income taxes  1,045,000   1,456,000 
Other  98,259   98,259 
TOTAL LONG-TERM LIABILITIES  1,946,411   2,394,647 
         
TOTAL LIABILITIES  14,556,308   35,550,586 
         
COMMITMENTS AND CONTINGENCIES (Note 14)        
         
EQUITY        
         
WESTERN SHAREHOLDERS’ EQUITY        
Common stock, $0.0001 par value, 12,500,000 shares authorized, 9,388,677 and 9,390,997 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively.  939   939 
Additional paid-in capital  29,031,741   29,031,741 
Retained earnings  35,054,564   37,903,204 
TOTAL WESTERN SHAREHOLDERS’ EQUITY  64,087,244   66,935,884 
         
NONCONTROLLING INTERESTS  1,718,058   1,757,686 
         
TOTAL EQUITY  65,805,302   68,693,570 
         
TOTAL LIABILITIES AND EQUITY $80,361,610  $104,244,156 
         
See notes to condensed consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 Three Months Ended March 31,  Three months ended  Nine months ended 
 2018  2017  September
30, 2018		  September 
30, 2017		  September 
30, 2018		  September 
30, 2017		 
REVENUES              
Sales and associated fees $23,817,194  $24,559,130  $17,924,270  $18,535,592  $65,423,204  $67,834,678 
Financing fees and interest  2,174,546   2,233,409   2,323,000   2,342,285   6,569,660   6,695,439 
Other revenue  4,467,019   4,899,158   4,112,813   5,255,124   12,606,335   15,051,477 
  30,458,759   31,691,697 
Total Revenues  24,360,083   26,133,001   84,599,199   89,581,594 
                        
COST OF REVENUES                        
Cost of sales  12,166,033   12,067,936   9,547,567   9,599,712   34,109,230   34,434,610 
Provisions for loans receivable losses  200,202   237,581   386,366   326,998   827,751   815,313 
  12,366,235   12,305,517 
Total Cost of Revenues  9,933,933   9,926,710   34,936,981   35,249,923 
                        
GROSS PROFIT  18,092,524   19,386,180   14,426,150   16,206,291   49,662,218   54,331,671 
                        
OPERATING EXPENSES                        
Salaries, wages and benefits  9,317,793   8,892,652   8,353,536   9,384,142   26,086,862   27,515,294 
Occupancy  3,422,218   2,911,292   3,011,213   3,573,785   9,518,301   9,618,698 
Advertising, marketing and development  2,029,315   1,906,553   1,205,013   998,433   5,673,036   5,117,015 
Depreciation  558,989   326,196   435,670   438,822   1,457,762   1,114,513 
Amortization  214,808   54,401   187,209   216,253   616,330   323,911 
Other  2,695,240   2,741,787   2,591,298   2,550,726   7,867,183   7,959,396 
  18,238,363   16,832,881 
Total Operating Expenses  15,783,939   17,162,161   51,219,474   51,648,827 
                        
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS  (145,839)  2,553,299   (1,357,789)  (955,870)  (1,557,256)  2,682,844 
                        
OTHER INCOME (EXPENSES):                        
Interest and dividend income  167,511   64,075 
Dividend and interest income  153,739   346   465,425   131,985 
Interest expense  (87,598)  (57,371)  (25,154)  (67,362)  (162,890)  (176,439)
  79,913   6,704 
Total Other Income (Expenses)  128,585   (67,016)  302,535   (44,454)
                        
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  (65,926)  2,560,003   (1,229,204)  (1,022,886)  (1,254,721)  2,638,390 
                        
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) FOR CONTINUING OPERATIONS  (80,000)  951,000   (245,000)  (397,000)  (386,000)  906,000 
                        
NET INCOME (LOSS) FROM CONTINUING OPERATIONS  (984,204)  (625,886)  (868,721)  1,732,390 
                        
NET INCOME FROM CONTINUING OPERATIONS  14,074   1,609,003 
        
LESS NET INCOME FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST  (185,091)  — 
LESS NET LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST  (188,523)  (99,865)  (561,572)  (99,865)
                        
NET INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS  (171,017)  1,609,003   (1,172,727)  (725,751)  (1,430,293)  1,632,525 
                        
DISCONTINUED OPERATIONS                        
Income from operations of discontinued operations  —   1,070,321   —   1,197,874   —   3,875,458 
Less provision for income taxes for discontinued operations  —   (412,000)  —   (451,000)  —   (1,468,000)
Net income from discontinued operations  —   658,321   —   746,874   —   2,407,458 
Less net income from discontinued operations attributable to noncontrolling interests  —   (5,085)  —   (4,925)  —   (17,446)
Net income from discontinued operations attributable to Western common shareholders  —   653,236 
Net income from discontinued operations attributable to noncontrolling interests  —   741,949   —   2,390,012 
NET INCOME (LOSS) ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS $(171,017) $2,262,239  $(1,172,727) $16,198  $(1,430,293) $4,022,537 
                        
EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS                        
FROM CONTINUING OPERATIONS - Basic and diluted $(0.02) $0.17  $(0.12) $(0.08) $(0.15) $0.17 
FROM DISCONTINUED OPERATIONS - Basic and diluted $—  $0.07  $—  $0.08  $—  $0.26 
FROM CONTINUING AND DISCONTINUED OPERATIONS - Basic and diluted $(0.02) $0.24  $(0.12) $—  $(0.15) $0.43 
                        
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                        
Basic and diluted  9,390,997   9,472,934   9,390,770   9,390,997   9,390,921   9,418,009 
                
See notes to condensed consolidated financial statements.See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements

 5


WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

  Three Months Ended 
  March 31, 2018  March 31, 2017 
OPERATING ACTIVITIES        
Net income from continuing operations $14,074  $1,609,003 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  558,989   326,196 
Amortization  214,808   54,401 
Share based compensation  —   8,899 
Deferred income taxes  (77,000)  66,000 
Investments discount amortization  (99,991)  — 
Loss (gain) on disposal of property and equipment  170,448   (270)
Changes in operating assets and liabilities:        
Loans receivable  947,505   908,337 
Accounts receivable  (1,427,672)  (1,085,312)
Inventory  (960,909)  (1,246,831)
Prepaid expenses and other assets  157,752   (831,683)
Accounts payable and accrued expenses  93,186   298,300 
Deferred revenue and other current liabilities  (65,215)  (15,825)
Operating cash flows from discontinued operations  —   354,253 
Net cash and cash equivalents provided by (used in) operating activities  (474,025)  445,468 
         
INVESTING ACTIVITIES        
Purchases of investments  (11,961,900)  — 
Proceeds from held-to-maturity investments  1,000,000   — 
Purchase of property and equipment  (350,021)  (754,130)
Acquisition of stores, net of cash acquired  (76,707)  — 
Advances on note receivable, net  —   (517,844)
Proceeds from installment sale receivable  185,963   — 
Proceeds from the disposal of property, plant and equipment  10,000   14,459 
Cash received from discontinued operations  —   3,147,493 
Net cash and cash equivalents provided by (used in) investing activities  (11,192,665)  1,889,978 
         
FINANCING ACTIVITIES        
Payments on notes payable – short-term, net  (22,742)  (25,799)
Payments on line of credit, net  —   (853,544)
Payments on notes payable – long-term  —   (501,669)
Common stock redemption  —   (480,928)
Payments on capital leases  (11,554)  (11,960)
Payment of dividends  (469,550)  (234,775)
Financing activities of discontinued operations  —   (3,178,348)
Net cash and cash equivalents used in financing activities  (503,846)  (5,287,023)
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (12,170,536)  (2,951,577)
         
CASH AND CASH EQUIVALENTS        
Beginning of period  21,295,819   14,159,975 
End of period $9,125,283  $11,208,398 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
         
Income taxes paid $2,403  $7,169 
Interest paid $20,869  $135,686 

See notes to condensed consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

  Nine Months Ended 
  September 30, 2018  September 30, 2017 
OPERATING ACTIVITIES        
Net income from continuing operations $(868,721) $1,732,390 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  1,457,762   1,114,513 
Amortization  616,330   323,911 
Share based compensation  —   27,992 
Deferred income taxes  (411,000)  255,000 
Loss on disposal of property and equipment  751,496   22,030 
Income from investments  (67,737)  — 
Changes in operating assets and liabilities:        
Loans receivable  198,149   356,619 
Accounts receivable  (158,237)  (298,309)
Inventory  225,819   (750,602)
Prepaid expenses and other assets  310,231   (1,746,082)
Accounts payable and accrued expenses  (19,935,308)  (891,043)
Deferred revenue and other current liabilities  (560,848)  (34,563)
Operating cash flows from discontinued operations  —   1,846,005 
Net cash and cash equivalents provided by (used in) operating activities  (18,442,064)  1,957,861 
         
INVESTING ACTIVITIES        
Purchases of investments  (27,565,227)  — 
Proceeds from held-to-maturity investments  36,961,012     
Purchase of property and equipment  (720,067)  (1,999,408)
Acquisition of stores, net of cash acquired  (76,707)  (188,325)
Advances on note receivable, net  —   (513,744)
Proceeds from installment sale receivable  185,963   — 
Proceeds from the disposal of property, plant and equipment  10,000   16,959 
Cash received from discontinued operations  —   4,368,350 
Investing activities of discontinued operations  —   (30,023)
Net cash and cash equivalents provided by investing activities  8,794,974   1,653,809 
         
FINANCING ACTIVITIES        
Payments on notes payable – short-term, net  (51,992)  (63,303)
Payments on line of credit, net  —   (998,426)
Payments on notes payable – long-term  —   (2,457,450)
Common stock redemption  (9,697)  (480,928)
Payments on capital leases  (35,130)  (31,461)
Payment of dividends to noncontrolling interests  (601,200)  — 
Payment of dividends  (1,408,650)  (704,325)
Financing activities of discontinued operations  —   (4,407,355)
Net cash and cash equivalents used in financing activities  (2,106,669)  (9,143,248)
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (11,753,759)  (5,531,578)
         
CASH AND CASH EQUIVALENTS        
Beginning of period  21,295,819   14,159,975 
End of period $9,542,060  $8,628,397 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
         
Income taxes paid $19,151,512  $3,648,839 
Interest paid $103,025  $354,601 
         
Noncash investing and financing activities:        
Note receivable balance applied to acquisition of stores $—  $3,433,856 
Financed acquisition of stores (Note 8) $—  $789,216 
Noncontrolling interests’ equity contribution in acquisition of stores $—  $1,550,724 
         
See notes to condensed consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Unaudited)

 

1.Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies –

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periodperiods ended March 31,September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

For further information, refer to the Condensed Consolidated Financial Statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2017. The condensed consolidated balance sheet at December 31, 2017, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

 

Nature of Business

 

Western Capital Resources, Inc. (WCR) is a parent company owning operating subsidiaries, with percentage owned shown parenthetically, as summarized below.

 

●Cellular Retail

○PQH Wireless, Inc. (PQH) (100%) – operates 236206 cellular retail stores as of March 31,September 30, 2018 (179(149 100% owned plus 57 through a 70% owned subsidiary), as an exclusive dealer of the Cricket brand.

 

●Direct to Consumer

○J & P Park Acquisitions, Inc. (JPPA) (100%) – an online and direct marketing distribution retailer of 1) live plants, seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins, and Wayside Gardens brand names and 2) home improvement and restoration products operating under the Van Dyke’s Restorers brand, as well as a seed wholesaler under the Park Wholesale brand.

 

○J & P Real Estate, LLC (JPRE) (100%) – owns real estate utilized as JPPA’s distribution and warehouse facility and the corporate offices of JPPA.

 

●Consumer Finance

○Wyoming Financial Lenders, Inc. (WFL) (100%) – owns and operates “payday” stores (40(41 as of March 31,September 30, 2018) in seven states (Colorado, Iowa, Kansas, Nebraska, North Dakota, Wisconsin and Wyoming) providing sub-prime short-term uncollateralized non-recourse “cash advance” or “payday” loans typically ranging from $100 to $500 with a maturity of generally two to four weeks, sub-prime short-term uncollateralized non-recourse installment loans typically ranging from $300 to $800 with a maturity of six months, check cashing and other money services to individuals.

 

○Express Pawn, Inc. (EPI) (100%) – owns and operates retail pawn stores (three as of March 31,September 30, 2018) in Nebraska and Iowa providing collateralized non-recourse pawn loans and retail sales of merchandise obtained from forfeited pawn loans or purchased from customers.

 

●Discontinued Operations 2017 - Franchise

○AlphaGraphics, Inc. (AGI) – franchisor of domestic and international AlphaGraphics Business Centers which specialize in the planning, production, and management of visual communications for businesses and individuals throughout the world.BusinessCenters. AGI was sold on October 2,3, 2017.

 

References in these financial statement notes to “Company” or “we” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies within our enterprise, such as” “PQH,” “JPPA,” “JPRE,” “WFL,” “EPI” or “AGI” are references only to those companies.


Basis of Consolidation

 

The consolidated financial statements include the accounts of the WCR, its wholly owned subsidiaries and other entities in which the Company owns a controlling financial interest. For financial interests in which the Company owns a controlling financial interest, the Company applies the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) 810, “Consolidation” applicable to reporting the equity and net income or loss attributable to noncontrolling interests. All significant intercompany balances and transactions of the Company have been eliminated in consolidation, with the exception of the presentation of dividends received from discontinued subsidiary operations in the Condensed Consolidated Statement of Cash Flows.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Significant management estimates relate to the loans and accounts receivable allowance, carrying value and impairment of long-lived goodwill and intangible assets, inventory valuation and obsolescence, estimated useful lives of property and equipment, gift certificate and merchandise credits liability and deferred taxes and tax uncertainties.

 

Reclassifications

 

Certain Statements of IncomeOperations and Statements of Cash Flows reclassifications have been made in the presentation of our prior financial statements and accompanying notes to conform to the presentation as of and for the three and nine months ended March 31,September 30, 2018.

 

In accordance with ASC 205-20-45-6, interest on debt required to be paid as a result of our Franchise segment disposal transaction has been allocated to discontinued operations and, in accordance with ASC 205-20-45-9, general corporate overhead has not been allocated to discontinued operations. These re-allocations and related income tax have been made in the presentation of our prior financial statements and accompanying notes.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that will supersedesupersedes nearly all existing revenue recognition guidance under US GAAP. This standard is effective for annual and interim periods beginning after December 15, 2017. The Company has adopted this standard as of January 1, 2018 applying it on a retrospective basis as of the date adopted and determined it had no impact on our financial condition, results of operations and consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), related to recognition of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that annual period, with early adoption permitted and to be applied using a modified retrospective approach. The Company is currently evaluating the impact the ASU will have on our financial condition, results of operations and consolidated financial statements and expects its adoption to have a material impact on our financial condition due to a material addition of operating lease assets and liabilities in accordance with the ASU.

 

No other new accounting pronouncements issued or effective during the fiscal year have had or are expected to have a material impact on the consolidated financial statements.

 

2.Risks Inherent in the Operating Environment –

2.     Risks Inherent in the Operating Environment –

 

Regulatory

 

The Company’s Consumer Finance segment activities are highly regulated under numerous federal, state, and local laws, regulations and rules, which are subject to change. New laws, regulations or rules could be enacted or issued, interpretations of existing laws, regulations or rules may change and enforcement action by regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities of the kind conducted by the Company. After several years of research, debate, and public hearings, in October 2017 the U.S. Consumer Financial Protection Bureau (CFPB) issued new rules for payday lending. The proposed rules, scheduled to go into effect in August 2019, would impose significant restrictions on the industry, and it is expected that a large number of lenders would be forced to close their stores. The CFPB’s studies projected a reduction in the number of lenders by 50%, while industry studies forecast a much higher attrition rate. At this time it is uncertain whether the rule will be implemented as announced, rewritten with more favorable terms for the industry, or thrown out altogether. If the rule is implemented as written, it could have a significant and negative impact on business conducted within our Consumer Finance segment.

 


The above rule or any other adverse change in present federal, state, or local laws or regulations that govern or otherwise affect lending could result in the Consumer Finance segment’s curtailment or cessation of operations in certain or all jurisdictions or locations. Furthermore, any failure to comply with any applicable federal, state or local laws or regulations could result in fines, litigation, closure of one or more store locations or negative publicity. Any such change or failure would have a corresponding impact on the Company’s and segment’s results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in operating income through increased legal expenditures or fines, and could also negatively affect the Company’s general business prospects due to lost or decreased operating income or if negative publicity affects its ability to obtain additional financing as needed.

 

In addition, the passage of federal, state or local laws and regulations or changes in interpretations of them could, at any point, essentially prohibit the Consumer Finance segment from conducting its lending business in its current form. Any such legal or regulatory change would certainly have a material and adverse effect on the Company, its operating results, financial condition and prospects, and perhaps even the viability of the Consumer Finance segment.

 

3.Cash Equivalents and Investments –

3.     Cash Equivalents and Investments –

 

The following table shows the Company’s cash equivalents and held-to-maturity investments, by significant investment category, recorded as cash equivalents or short- and long-term investments as of March 31, 2018 and December 31, 2017:investments:

 

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
Cash and cash equivalents                
Operating accounts $8,778,235  $10,524,923  $9,424,670  $10,524,923 
Certificates of deposit  —   750,000   —   750,000 
Money Market Mutual Funds - U.S. Treasury obligations  347,048   10,020,896   117,390   10,020,896 
Subtotal  9,125,283   21,295,819   9,542,060   21,295,819 
                
Held to Maturity Investments                
Certificates of deposit  14,297,734   13,250,000   15,328,405   13,250,000 
T-Bill Zero CPN  32,089,123   22,042,902 
T-Bills and Notes  10,629,386   22,042,902 
Subtotal  46,386,857   35,292,902   25,957,791   35,292,902 
                
TOTAL $55,512,140  $56,588,721  $35,499,851  $56,588,721 

 

As of March 31,September 30, 2018, held to maturity securities consisted of the following:

 

 Cost  Accrued
Interest		  Amortized Discount  Amortized
Cost		  Unrealized Gain (Loss)  Estimated Fair Value  Cost  Accrued Interest  Amortized Discount  Amortized Cost  Unrealized
Gain (Loss)		  Estimated
Fair Value		 
                          
Certificates of Deposit $14,250,000  $47,734  $—  $14,297,734  $(87,544) $14,210,190  $15,250,000  $78,405  $—  $15,328,405  $(110,330) $15,218,075 
Treasury Bills $31,961,012  $—  $128,111  $32,089,123  $(1,897) $32,087,226 
Treasury Bills and Notes $10,564,159  $8,496  $56,731  $10,629,386  $(21,886) $10,607,500 

 

4.Loans Receivable –

4.     Loans Receivable –

 

The Consumer Finance segment’s outstanding loans receivable aging wasis as follows:

 

March 31, 2018
September 30, 2018September 30, 2018
 Payday  Installment  Pawn &
Title		  Total  Payday Installment Pawn & Title Total 
Current $2,773,711  $190,525  $263,650  $3,227,886  $3,310,116  $275,468  $306,350  $3,891,934 
1-30  166,548   38,121   —   204,669   254,673   49,657   —   304,330 
31-60  108,590   23,535   —   132,125   200,400   21,124   —   221,524 
61-90  145,640   15,484   —   161,124   124,066   12,208   —   136,274 
91-120  97,171   9,294   —   106,465   106,092   6,790   —   112,882 
121-150  112,903   3,299   —   116,202   86,742   5,602   —   92,344 
151-180  110,344   1,683   —   112,027   78,836   9,730   —   88,566 
  3,514,907   281,941   263,650   4,060,498   4,160,925   380,579   306,350   4,847,854 
Less Allowance  (627,000)  (71,000)  —   (698,000)  (677,000)  (59,000)  —   (736,000)
 $2,887,907  $210,941  $263,650  $3,362,498  $3,483,925  $321,579  $306,350  $4,111,854 

December 31, 2017
  Payday  Installment  Pawn & Title  Total 
Current $3,550,077  $271,926  $318,361  $4,140,364 
1-30  216,376   47,356   —   263,732 
31-60  187,916   27,766   —   215,682 
61-90  150,278   17,976   —   168,254 
91-120  110,943   11,870   —   122,813 
121-150  131,171   4,748   —   135,919 
151-180  93,222   3,017   —   96,239 
   4,439,983   384,659   318,361   5,143,003 
Less Allowance  (745,000)  (88,000)  —   (833,000)
  $3,694,983  $296,659  $318,361  $4,310,003 

 


5.     Loans Receivable Allowance –

December 31, 2017
  Payday  Installment  Pawn &
Title		  Total 
Current $3,550,077  $271,926  $318,361  $4,140,364 
1-30  216,376   47,356   —   263,732 
31-60  187,916   27,766   —   215,682 
61-90  150,278   17,976   —   168,254 
91-120  110,943   11,870   —   122,813 
121-150  131,171   4,748   —   135,919 
151-180  93,222   3,017   —   96,239 
   4,439,983   384,659   318,361   5,143,003 
Less Allowance  (745,000)  (88,000)  —   (833,000)
  $3,694,983  $296,659  $318,361  $4,310,003 

5.Loans Receivable Allowance –

 

A rollforward of the Consumer Finance segment’s loans receivable allowance is as follows:

 

 

Three Months Ended

March 31, 2018 

 

Year Ended 

December 31, 2017 

  

Nine Months Ended 

September 30, 2018

 

Year Ended 

December 31, 2017 

 
Loans receivable allowance, beginning of period $833,000  $1,036,000  $833,000  $1,036,000 
Provision for loan losses charged to expense  200,202   1,122,144   827,751   1,122,144 
Charge-offs, net  (335,202)  (1,325,144)  (924,751)  (1,325,144)
Loans receivable allowance, end of period $698,000  $833,000  $736,000  $833,000 

 

6.Accounts Receivable –

6.     Accounts Receivable –

 

A breakdown of accounts receivables by segment as of March 31, 2018 and December 31, 2017 areis as follows:

 

March 31, 2018
September 30, 2018September 30, 2018
 Cellular
Retail		  Direct to Consumer  Consumer Finance  Total  Cellular
Retail		  Direct to
Consumer		  Consumer
Finance		  Total 
Accounts receivable $315,549  $1,920,585  $12,609  $2,248,743  $339,315  $592,106  $8,887  $940,308 
Less allowance  —   (57,000)  —   (57,000)  —   (18,000)  —   (18,000)
Net account receivable $315,549  $1,863,585  $12,609  $2,191,743  $339,315  $574,106  $8,887  $922,308 

 

December 31, 2017
 Cellular
Retail		 Direct to Consumer Consumer Finance Total  Cellular
Retail		  Direct to
Consumer		  Consumer
Finance		  Total 
Accounts receivable $399,459  $365,476  $15,136  $780,071  $399,459  $365,476  $15,136  $780,071 
Less allowance  —   (16,000)  —   (16,000)  —   (16,000)  —   (16,000)
Net account receivable $399,459  $349,476  $15,136  $764,071  $399,459  $349,476  $15,136  $764,071 

 

7.Inventory –

7.     Inventory –

 

Finished goods inventory, net of allowance, by segment consists of the following:

 

 

Three Months Ended

March 31, 2018 

 

Year Ended 

December 31, 2017 

  September 30, 2018  December 31, 2017 
Cellular Retail $5,742,969  $5,287,932  $4,454,231  $5,287,932 
Direct to Consumer  3,457,377   2,988,052   3,472,897   2,988,052 
Consumer Finance  810,357   854,858   896,847   854,858 
 $10,010,703  $9,130,842  $8,823,975  $9,130,842 

10 

 


8.Notes Payable – Long Term –

 

  March 31, 2018  December 31, 2017 
Subsidiary subordinated note payable to seller with monthly interest only payments at 6%, guaranteed by PQH, maturingAugust 5, 2022 whentheprincipal balance is due.  789,216   789,216 
Total  789,216   789,216 
Less current maturities  —   — 
  $789,216  $789,216 

8.     Notes Payable ��� Long Term –

  September 30, 2018  December 31, 2017 
Subsidiary subordinated note payable to seller with monthly interest only payments at 6%, guaranteed by PQH, maturingAugust 5, 2022 whentheprincipal balance is due.  789,216   789,216 
Total  789,216   789,216 
Less current maturities  —   — 
  $789,216  $789,216 

 

The Company is party to a Credit Agreement with a financial institution entered into on April 22, 2016 and subject to subsequent amendments.last amended on April 26, 2018. The Credit Agreement provides the Company with a revolving line of credit facility in an aggregate amount up to $3,000,000, having a maturity date of April 21, 20182020 and an acquisition loan facility in an aggregate amount of up to $9,000,000, having a maturity date of April 21, 2018.2020. The revolver and the acquisition loan facility bear interest at a floating per annum rate equal to one-month LIBOR plus 3.50%, adjusted on a monthly basis. Funds advanced under the acquisition loan facility mature five years from the date of advance. At March 31,September 30, 2018, the entire $12,000,000 of credit was available under the credit facilities. See NotesNote 14 and 15 for additional terms, conditions and amendmentamendments related to the Credit Agreement.

 

9.Income Taxes –

9.     Income Taxes –

 

The provision for income taxes for continuing operations is 121.3%30.8% and 37.1%34.3% of income (loss) before the provision for income taxes for the threenine month period ended March 31,September 30, 2018 and 2017, respectively. The significant difference in rate is the result of the 2018 net income attributable to noncontrolling interests not being subjected to income tax at the corporate level. Rather the “passthrough” taxable income is taxed to the noncontrolling interests at an individual level.

 

10.

10.   Cash Dividends –

Our Board of Directors declared the following dividends payable in 2018:

Date DeclaredRecord DateDividend Per SharePayment Date
January 18, 2018February 9, 2018$          0.05February 14, 2018
May 2, 2018May 17, 2018$          0.05May 24, 2018
July 27, 2018August 19, 2018$          0.05August 26, 2018

 

Date declared January 18, 2018 
Record date February 9, 2018 
Date paid February 14, 2018 
Dividend per share of common stock $0.05 

11.   Other Operating Expense –

11.Other Operating Expense –

 

A breakout of other expense is as follows:

 

 For The Three Months Ended March 31,  Three Months Ended
September 30,		 Nine Months Ended 
September 30,		 
 2018  2017  2018 2017 2018 2017 
Bank fees $502,564  $532,175  $355,333  $379,247  $1,391,710  $1,484,462 
Collection costs  84,605   89,894   78,708   94,198   244,900   275,620 
Insurance  205,295   240,740   187,877   260,420   591,506   757,691 
Management and advisory fees  193,710   153,481   202,146   274,710   592,655   618,853 
Professional and consulting fees  543,096   662,089   415,376   555,978   1,320,387   1,704,804 
Supplies  217,436   324,136   165,978   341,807   553,468   1,080,324 
Other  948,534   739,272   1,185,880   644,366   3,172,557   2,037,642 
 $2,695,240  $2,741,787  $2,591,298  $2,550,726  $7,867,183  $7,959,396 

 

12.Discontinued Operations –

12.   Discontinued Operations –

 

As more fully disclosed in Note 19 of the Notes to Consolidated Financial Statements for the year ended December 31, 2017, on October 3, 2017 the Company closed on the sale of its franchise segment.


In accordance with the provisions of ASC 205-20, the Company has not included the results of operations of the Franchise segment in the results from continuing operations. The results of operations for this business have been reflected as discontinued operations in the unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended March 31,September 30, 2017, and consist of the following:

 

 Three Months Ended  Three Months Ended  Nine Months Ended 
 March 31, 2017  September 30, 2017  September 30, 2017 
REVENUES OF DISCONTINUED OPERATIONS $3,943,309  $4,321,834  $12,298,655 
            
COST OF REVENUES OF DISCONTINUED OPERATIONS  648,197   720,813   2,098,486 
            
GROSS PROFIT OF DISCONTINUED OPERATIONS  3,295,112   3,601,021   10,200,169 
            
OPERATING EXPENSES OF DISCONTINUED OPERATIONS:            
Salaries, wages and benefits  1,098,739   1,081,618   3,194,025 
Occupancy  42,764   58,967   140,428 
Advertising, marketing and development  102,597   251,748   436,566 
Depreciation  24,092   25,437   74,263 
Amortization  86,118   86,120   258,356 
Other  789,700   844,972   2,027,299 
  2,144,010   2,348,862   6,130,937 
            
OPERATING INCOME OF DISCONTINUED OPERATIONS  1,151,102   1,252,159   4,069,232 
            
OTHER INCOME (EXPENSE) OF DISCONTINUED OPERATIONS            
Interest expense  (80,781)  (54,285)  (193,774)
      (54,285)  (193,774)
        
INCOME BEFORE INCOME TAXES OF DISCONTINUED OPERATIONS  1,070,321   1,197,874   3,875,458 
            
PROVISION FOR INCOME TAXES OF DISCONTINUED OPERATIONS  412,000   451,000   1,468,000 
            
NET INCOME OF DISCONTINUED OPERATIONS  658,321   746,874   2,407,458 
            
Less net income of discontinued operations attributable to noncontrolling interests  (5,085)
LESS NET INCOME OF DISCONTINUED OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTERESTS  (4,925)  (17,446)
            
NET INCOME OF DISCONTINUED OPERATIONS ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS $653,236  $741,949  $2,390,012 

 


In accordance with the provisions of ASC 205-20, the Company has separately reported the cash flow activity of the discontinued operations of the Franchise segment in the Consolidated Statements of Cash Flows. The cash flow activityactivities from discontinued operations have been reflected as discontinued operations in the Consolidated Statements of Cash Flows for the threenine month period ended March,September 30, 2017, and consistconsisted of the following:

 

 Three Months Ended  Nine Months Ended 
 March 31, 2017  September 30, 2017 
DISCONTINUED OPERATING ACTIVITIES        
Net income of discontinued operations $658,321  $2,407,458 
Adjustments to reconcile net income of discontinued operations to net cash provided by operating activities of discontinued operations:        
Depreciation  24,092   74,263 
Amortization  86,118   258,356 
Share based compensation  2,243   6,726 
Deferred income taxes  (29,000)  (138,000)
Changes in operating assets and liabilities:        
Accounts receivable  (606,126)  (286,552)
Prepaid expenses and other assets  114,753   30,755 
Accounts payable and accrued expenses  (597,356)  (534,655)
Deferred revenue and other current liabilities  682,016   (38,190)
Other liabilities – long-term  19,192   65,844 
Net cash provided by operating activities of discontinued operations $354,253  $1,846,005 
        
INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS    
Purchase of property, plant and equipment  (30,023)
Net cash used in investing activities of discontinued operations $(30,023)
    
FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS        
Principal payments on capital lease obligations $(7,620)  (7,620)
Dividends to shareholders  (3,170,728)  (4,399,735)
Net cash used in financing activities of discontinued operations $(3,178,348) $(4,407,355)

 

13.Segment Information –

13.   Segment Information –

 

Segment information related to the three and nine month periods ended March 31,September 30, 2018 and 2017 for continuing operations is presented below:

 

Three Months Ended March 31, 2018 

(in thousands)

 

  

Cellular
Retail 

  Direct to
Consumer		  Consumer
Finance		  Corporate  Total 
                
Revenue from external customers $17,107  $10,681  $2,671  $—  $30,459 
Net income (loss) $(375) $329  $331  $(271) $14 
Total segment assets $27,567  $15,092  $7,003  $54,043  $103,705 
Expenditures for segmented assets $117  $310  $—  $—  $427 

 

Three Months Ended March 31, 2017 

(in thousands)

 

  

Cellular
Retail 

  Direct to
Consumer		  Consumer
Finance		  Corporate  

Discontinued 

Operations 

  Total 
                   
Revenue from external customers $17,045  $11,904  $2,743  $—  $—  $31,692 
Net income (loss) $669  $866  $254  $(180) $—  $1,609 
Total segment assets $24,794  $15,429  $8,047  $4,076  $8,879  $61,225 
Expenditures for segmented assets $673  $81  $—  $—  $—  $754 

Three Months Ended September 30, 2018 

(in thousands) 

 
                
  

Cellular
Retail 

  Direct to
Consumer		  Consumer
Finance		  Corporate  Total 
                
Revenue from external customers $16,704  $4,920  $2,736  $—  $24,360 
Net income (loss) $(133) $(982) $281  $(150) $(984)
Expenditures for segmented assets $148  $15  $8  $—  $171 

Three Months Ended September 30, 2017 

(in thousands)

 

                
  

Cellular
Retail

  Direct to
Consumer		  Consumer
Finance		  Corporate  Total 
                
Revenue from external customers $18,301  $4,983  $2,849  $—  $26,133 
Net income (loss) $(190) $(462) $326  $(300) $(626)
Expenditures for segmented assets $6,408  $138  $1  $8  $6,555 

Nine Months Ended September 30, 2018 

(in thousands)

 

                
  

Cellular
Retail 

  Direct to
Consumer		  Consumer
Finance		  Corporate  Total 
                
Revenue from external customers $49,415  $27,310  $7,874  $—  $84,599 
Net income (loss) $(989) $(128) $832  $(584) $(869)
Total segment assets $24,031  $13,098  $7,609  $35,624  $80,362 
Expenditures for segmented assets $375  $400  $22  $—  $797 

 Nine Months Ended September 30, 2017 

(in thousands)

 

                ��  
  

Cellular
Retail 

  Direct to
Consumer		  Consumer
Finance		  Corporate  

Discontinued 

Operations 

  Total 
                   
Revenue from external customers $52,432  $29,014  $8,136  $—      $89,582 
Net income (loss) $184  $1,506  $781  $(739)     $1,732 
Total segment assets $28,217  $13,112  $8,079  $2,670  $8,684  $60,762 
Expenditures for segmented assets $7,612  $341  $1  $8      $7,962 

 

14.Commitments and Contingencies –

14.   Commitments and Contingencies –

 

Employment Agreements

 

Pursuant to the Company’s numerous employment agreements, bonuses for continuing operation of approximately $73,000$79,000 and $256,000$292,000 were accrued for the three and nine month periods ended March 31,September 30, 2018, and 2017, respectively.


Credit Facility

 

The Company is party to a Credit Agreement with a financial institution. Certain Company subsidiaries are guarantors of the borrowings and obligations under the Credit Agreement. All borrowings under the Credit Agreement are secured by substantially all assets of WCR and the guarantor subsidiaries.

 

The Credit Agreement requires WCR to meet certain financial tests, includingtests. On April 26, 2018 the Company entered into a Fourth Loan Modification Agreement related to the Credit Agreement with a financial institution, pursuant to which, among other things, the maturity date of the Credit Agreement was extended to April 21, 2020 and the financial covenants were modified by (1) removing the consolidated leverage ratio and aconsolidated fixed charge coverage ratio as defined in the Credit Agreement.covenants and (2) adding a minimum liquidity covenant. Subject to certain exceptions, the Credit Agreement contains covenants limiting the Company’s ability to (or to permit the guarantor subsidiaries to) merge or consolidate with, or engage in a sale of substantially all assets to, any party, but WCR or any guarantor subsidiary generally may nonetheless merge with another party if (i) WCR or guarantor subsidiary is the entity surviving such merger, and (ii) immediately after giving effect to such merger, no default shall have occurred and be continuing under the Credit Agreement. Subject to certain exceptions, the Credit Agreement also contains covenants limiting WCR’s ability to (or to permit the guarantor subsidiaries to) create liens on assets, incur additional indebtedness, make certain types of investments, and pay dividends or make certain other types of restricted payments, but WCR may nonetheless pay dividends to its shareholders if (a) there are no outstanding loans or unpaid interest under the revolving credit facility, and (b) no default shall have occurred and be continuing under the Credit Agreement. Some covenant waivers were granted by the financial institution during the nine month period ended March 31,September 30, 2018.

 

Assigned Leases

 

The Company’s Cellular Retail segment has transferred to other dealers the operations of 3735 locations where we are a party to other dealers. Minimum lease payments of assigned or assumed non-cancelable operating leases related to transferred locations in whichand where a release has not been obtained from the lessorlessor. Minimum lease payments under these leases are approximately $3,000,000$2,328,000 as of March 31,September 30, 2018.  

 

15.Subsequent Events –

15.   Subsequent Events –

 

Credit FacilityRelease of Escrow Funds

 

On April 26,In October 2018, we received $3,295,414, the Company entered into a Fourth Loan Modification Agreement relatedscheduled release of 50% of the funds held in escrow relating to the Credit Agreement2017 sale of our Franchise segment, together with a financial institution, pursuant to which, among other things, the maturity date of the Credit Agreement was extended to April 21, 2020 and the financial covenants were modified by removing the consolidated leverage ratio and consolidated fixed charge coverage ratio covenants and adding a minimum liquidity covenant.interest earned.


 

Dividend Declared

 

Our Board of Directors declared the following dividend:

 

Date declared May 2, 2018  November 9, 2018 
Record date May 17, 2018  December 4, 2018 
Date paid May 24, 2018 
Date payable December 14, 2018 
Dividend per share of common stock $0.05  $0.05 

 

We evaluated all events or transactions that occurred after March 31,September 30, 2018 up through the date we issued these financial statements. During this period we did not have any material subsequent events that impacted our financial statements.


15 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Some of the statements made in this report are “forward-looking statements,” as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon our current expectations and projections about future events. Whenever used in this report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part I, Item 2), but may be found in other parts of this report as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. We will not necessarily update forward-looking statements even though our situation may change in the future.

 

Specific factors that might cause actual results to differ from our expectations embodied in our forward-looking statements, or that might affect the value of the common stock, include but are not limited to:

 

●the seasonal nature of the products sold in our Direct to Consumer segment - a significant portion of pre-tax net income contributed by the segment is earned during the months of March through May and December, consequently the third quarter of each year typically results in a net loss;

 

●the success of new stores related to our expansion plans in the Cellular Retail segment;

 

●our efforts to close or dispose of underperforming stores in the Cellular Retail segment and terminate or sublet their leases;

●changes in federal, state or local laws and regulations governing lending practices, or changes in the interpretation of such laws and regulations;

 

●litigation and regulatory actions directed toward us or the industries in which we operate, particularly in certain key states or nationally;

 

●our need for additional financing;

 

●unpredictability or uncertainty in financing markets which could impair our ability to grow our business through acquisitions;

 

●changes in Cricket dealer compensation;

 

●failure of or disruption caused by a significant vendor;

 

●outside factors that affect our ability to obtain product and fulfill orders; and

 

●our ability to successfully operate or integrate recent or future business acquisitions.

 

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

Industry data and other statistical information used in this report are based on independent publications, government publications, reports by market research firms or other published independent sources.  Some data is also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above.  Although we believe these sources are reliable, we have not independently verified the information.

 


OVERVIEW

 

Western Capital Resources, Inc. (WCR or Western Capital), a Delaware corporation originally incorporated in Minnesota in 2001 and reincorporated in Delaware in 2016, is a holding company having a controlling interest in subsidiaries operating in the following industries and operating segments:

 

(FLOW CHART)(GRAPHIC)

 

Our “Cellular Retail” segment is comprised of an authorized Cricket Wireless dealer and involves the retail sale of cellular phones and accessories to consumers through our wholly owned subsidiary PQH Wireless, Inc. and its subsidiaries, one of which is 70% owned. Our “Direct to Consumer” segment consists of a wholly owned online and direct marketing distribution retailer of live plants, seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins and Wayside Gardens brand names and home improvement and restoration products operating as Van Dyke’s Restorers as well as a wholesaler under the Park Wholesale brand. Our “Consumer Finance” segment consists of retail financial services conducted through our wholly owned subsidiaries Wyoming Financial Lenders, Inc. and Express Pawn, Inc. Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as “we,” the “Company,” and “us.”

 

Discussion of Critical Accounting Policies

 

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis.  The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  We evaluate these estimates and assumptions on an ongoing basis.  We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances.  Actual results could vary materially from these estimates under different assumptions or conditions.

 

Our significant accounting policies are discussed in Note 1, “Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies,” of the notes to our condensed consolidated financial statements included in this report.  We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.

 

Loan Loss Allowance

 

Included in loans receivable are unpaid principal, interest and fee balances of payday, installment, pawn and title loans that have not reached their maturity date, and “late” payday loans that have reached maturity within the last 180 days and have remaining outstanding balances.  Late payday loans generally are unpaid loans where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons. All returned items are charged-off after 180 days, as collections after that date have not been significant. Loans are carried at cost plus accrued interest or fees through maturity date, less payments made and a loans receivable allowance.

 

The Company does not specifically reserve for any individual payday, installment or title loan.  The Company aggregates loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including (1) the amount of loan principal, interest and fee outstanding, (2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trends. The Company utilizes a software program to assist with the tracking of its historical portfolio statistics. A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages by loan type of net charge offs, applied against the applicable balance of loan principal, interest and fees outstanding. The Company also periodically performs a look-back analysis on its loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. The Company is aware that as conditions change, it may also need to make additional allowances in future periods. Loan losses or charge-offs of pawn or title loans are not recorded because the value of the collateral exceeds the loan amount. See Note 5 to our condensed consolidated financial statements included in this report for a rollforward of our loans receivable allowance.

 

Valuation of Long-lived and Intangible Assets

 

We assess the possibility of impairment of long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry events or trends.


Goodwill

 

Goodwill represents the excess of acquisition cost over the fair value of identifiable finite lived net assets acquired and is not amortized. Goodwill is tested for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate potential impairment. We test for goodwill impairment at the reporting unit level, which aligns with the Company’s segments. We perform a qualitative assessment to determine if a quantitative impairment test is necessary. If quantitative testing is necessary based on a qualitative assessment, we apply a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any.

 

Results of Operations – Three Months Ended March 31,September 30, 2018 Compared to Three Months Ended March 31,September 30, 2017

 

Net income (loss) forloss from continuing operations attributable to our common shareholders was $(0.17)($1.17) million, or ($0.02)0.12) per share (basic and diluted), for the quarterthree months ended March 31,September 30, 2018, compared to $1.61($0.73) million, or $0.17($0.08) per share (basic and diluted), for the quarterthree months ended March 31,September 30, 2017.

 

We expect segment operating results and earnings per share to change throughout 2018 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, retraction in the Cellular Retail segment, and potential mergers and acquisitions activity.

 


Following is a discussion of operating results by segment.


The following table provides revenues and net income attributable to WCR common shareholders by continuing operating segment for the quartersthree months ended March 31,September 30, 2018 and March 31,September 30, 2017 (in thousands):

 

  Cellular Retail  Direct to Consumer  Consumer Finance  Corporate  Total 
Three Months Ended March 31, 2018                    
Revenue $17,107  $10,681  $2,671  $—  $30,459 
% of total revenue  56.1%  35.1%  8.8%  —%  100.0%
Net income (loss) $(375) $329  $331  $(271) $14 
Net income (loss) attributable to noncontrolling interests $185  $—  $—  $—  $185 
Net income (loss) attributable to WCR common shareholders $(560) $329  $331  $(271) $(171)
                     
Three Months Ended March 31, 2017                    
Revenue $17,045  $11,904  $2,743  $—  $31,692 
% of total revenue  53.8%  37.5%  8.7%  —%  100.0%
Net income (loss) $669  $866  $254  $(180) $1,609 
Net income (loss) attributable to noncontrolling interests $—  $—  $—  $—  $— 
Net income (loss) attributable to WCR common shareholders $669  $866  $254  $(180) $1,609 

  Cellular Retail  Direct to Consumer  Consumer Finance  Corporate  Total 
Three Months Ended September 30, 2018                    
Revenue $16,704  $4,920  $2,736  $—  $24,360 
% of total revenue  68.6%  20.2%  11.2%  0.0%  100.0%
Net income (loss) $(133) $(982) $281  $(150) $(984)
Net income attributable to noncontrolling interests $189  $—  $—  $—  $189 
Net income (loss) attributable to WCR common shareholders $(322) $(982) $281  $(150) $(1,173)
                     
Three Months Ended September 30, 2017                    
Revenue $18,301  $4,983  $2,849  $—  $26,133 
% of total revenue  70.0%  19.1%  10.9%  0.0%  100.0%
Net income (loss) $(190) $(462) $326  $(300) $(626)
Net income attributable to noncontrolling interests $100 $—  $—  $—  $100
Net income (loss) attributable to WCR common shareholders $(290) $(462) $326  $(300) $(726)

Cellular Retail

 

A summary table of the number of Cricket cellular retail stores we operated during the quarterthree months ended March 31,September 30, 2018 and 2017 follows:

 

 2018  2017  2018  2017 
Beginning  278   198   225   268 
Acquired/ Launched  1   46   1   15 
Closed/Transferred  (43)  —   (20)  (3)
Ending  236   244   206   280 

 

The Cellular Retail segment has achieved substantial growth in location count since the beginning ofin 2016 and 2017 as a result of our expansion initiative. While some newly launched locations are performing well, others have been slow to ramp up. Due to the underperformance of some expansion stores as is evident in the number of locations closed or transferred to other Cricket dealers thus far in 2018,well as some mature stores, we have accelerated store count reductions that we had anticipated occurringclosures and disposals, reducing the number of retail stores operated from 225 at a later date.the beginning of the quarter to 206 at quarter end. Because the growth initiative included leased properties with three to five year terms, there will beare additional costs incurred to terminate leases or sublet leased properties of closed locations. The nonrecurring expense of store closings, which includes costs for lease termination agreements executed within the quarter, but not store operating losses, amounted to approximately $742,000 for the quarter.

 

Direct to Consumer

 

The Direct to Consumer segment has seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells. For the current quarter,three months ended September 30, 2018, the Direct to Consumer segment had net incomeloss of $0.33($0.98) million compared to net incomeloss of $0.87($0.46) million for the comparable prior year period. Revenuesperiod in 2017, while revenues for the three month period ended March 31,September 30, 2018 were $10.68$4.92 million compared to $11.90$4.98 million for the comparable period in 2017. In 2018 we have experienced some delaysA 1.26% decrease in sales duerevenues, increases in product costs, shipping costs, advertising and payroll and a reduced tax benefit from the lower federal corporate income tax rate contributed to weather conditions and shipping zones not opening up as early as 2017. In the quarter ended March 31, 2018 we incurred approximately $222,000 of nonrecurring expenses to relocate distribution for our Van Dyke’s Restorers brand. Distribution services previously provided by an outsourced 3PL will now be performed in-house from our South Carolina facility.increase in loss period over period.

 

Consumer Finance

 

A summary table of the number of consumer finance locations we operated during the quartersthree month periods ended March 31,September 30, 2018 and 2017 follows:

 

  2018  2017 
Beginning  41   41 
Acquired/ Launched  —   — 
Closed  —   — 
Ending  41   41 

 

Our Consumer Finance segment revenues decreased $0.72$0.11 million, or 2.6%4.0%, primarily from a decrease in pawn sales, for the quarterthree month period ended March 31,September 30, 2018 compared to the quarterthree month period ended March 31,September 30, 2017. Our net income for the samethree month period increased 30.3%ended September 30, 2018 decreased 13.8% over the samethree month period of the prior yearended September 30, 2017 largely due to reduction of ongoing expensesthe lower pawn sales and an increase in net bad debt, offset by a reduced federal corporate income tax expense.

 

Corporate

 

CostsNet expenses related to our Corporate segment were $0.27$0.15 million for the quarterthree month period ended March 31,September 30, 2018 compared to $0.18$0.30 million for the quarterthree month period ended March 31,September 30, 2017. The period over period increasedecrease is primarily due to investment income of $0.15 million in the current period only.

Results of Operations – Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Net income (loss) for continuing operations attributable to our common shareholders was $(1.43) million, or ($0.15) per share (basic and diluted), for the nine months ended September 30, 2018, compared to $1.63 million, or $0.17 per share (basic and diluted), for the nine months ended September 30, 2017.

We expect segment operating results and earnings per share to change throughout 2018 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, retraction in the Cellular Retail segment, and potential mergers and acquisitions activity.

Following is a discussion of operating results by segment.


The following table provides revenues and net income attributable to WCR common shareholders by continuing operating segment for the nine month period ended September 30, 2018 and September 30, 2017 (in thousands):

  Cellular Retail  Direct to Consumer  Consumer Finance  Corporate  Total 
Nine Months Ended September 30, 2018                    
Revenue $49,415  $27,310  $7,874  $—  $84,599 
% of total revenue  58.4%  32.3%  9.3%  0.0%  100.0%
Net income (loss) $(989) $(128) $832  $(584) $(869)
Net income attributable to noncontrolling interests $561  $—  $—  $—  $561 
Net income (loss) attributable to WCR common shareholders $(1,550) $(128) $832  $(584) $(1,430)
                     
Nine Months Ended September 30, 2017                    
Revenue $52,432  $29,014  $8,136  $—  $89,582 
% of total revenue  58.5%  32.4%  9.1%  0.0%  100.0%
Net income (loss) $183  $1,507  $781  $(739) $1,732 
Net income attributable to noncontrolling interests $100 $—  $—  $—  $100
Net income (loss) attributable to WCR common shareholders $84  $1,507  $781  $(739) $1,633 

 21

Cellular Retail

A summary table of the number of Cricket cellular retail stores we operated during the nine months ended September 30, 2018 and 2017 follows:

  2018  2017 
Beginning  278   198 
Acquired/ Launched  2   93 
Closed/Transferred  (74)  (11)
Ending  206   280 

As previously noted, the Cellular Retail segment achieved substantial growth in location count in 2016 and 2017. Also as noted in the quarterly discussion, due to the underperformance of some of the expansion locations as well as some mature stores, we have accelerated store closures and disposals. Year to date, we have reduced the number of retail stores operated from 278 at the beginning of the year to 206 at the end of September 2018. These closures have temporarily increased costs, but once the process is completed over the next three to six months, we expect to realize the benefits of the closings. The nonrecurring expense of store closings, which includes costs for lease termination agreements executed within the quarter, but not including store operating losses, amounted to approximately $1.51 million year to date through September 30, 2018.

Direct to Consumer

The Direct to Consumer segment has seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells. For the nine months ended September 30, 2018, the Direct to Consumer segment had net loss of ($0.13) million compared to net income of $1.51 million for the comparable period in 2017. Revenues for the nine month period ended September 30, 2018 were $27.31 million compared to $29.01 million for the comparable period in 2017. In 2018, we experienced delays in sales due to weather conditions and shipping zones not opening up as early as 2017 and sales volume never fully recovered from the delays. The segment is experiencing a decline in shipping fees passed on to customers, consistent with industry trends where there is pressure to offer no or reduced shipping charges to customers, and an increase is shipping costs. Also, over the same period of the prior year, advertising and marketing costs have increased $0.7 million. By the end of March 2018 we had substantially completed the relocation of the Van Dyke’s Restorers brand distribution from the outsourced 3PL to in-house, which added approximately $225,000 of nonrecurring expense in 2018.

Consumer Finance

A summary table of the number of consumer finance locations we operated during the nine month periods ended September 30, 2018 and 2017 follows:

  2018  2017 
Beginning  41   41 
Acquired/ Launched  —   — 
Closed  —   — 
Ending  41   41 

Our Consumer Finance segment revenues decreased $0.26 million, or 3.2%, for the nine month period ended September 30, 2018 compared to the nine month period ended September 30, 2017. Our net income for the nine month period ended September 30, 2018 increased 6.5% over the nine month period ended September 30, 2017 largely due to reduction of ongoing operating expenses and income tax expense, which was partially offset by reduced gross profit on lower sales.

Corporate

Net costs related to our Corporate segment were $0.58 million for the nine month period ended September 30, 2018 compared to $0.74 million for the nine month period ended September 30, 2017. Period over period, there was an increase in interest expense.expense allocated to the Corporate segment, a reduction in the provision for income tax benefit due to the change in the federal corporate income tax rate and $0.35 million interest and dividends income, net of income taxes, in the current period only. Because we have no outstanding balances on the parent level credit facility and no operating segment is receiving direct benefit from it, current period unused line fees and amortization of loan costs have been treated as a corporate overhead expense.

 

Consolidated Income Tax Expense

 

Provision for income tax benefit for continuing operations for the quarternine month period ended March 31,September 30, 2018 was ($0.08)0.39) million compared to income tax expense of $0.95$0.91 million for the quarternine month period ended March 31,September 30, 2017 for an effective rate of 121.30%30.8% and 37.10%34.3%, respectively.

The significant difference in rate is the result of the 2018 net income attributable to noncontrolling interests not being subjected to income tax at the corporate level. Ratherlevel, rather the “passthrough” taxable income is taxed to the noncontrolling interests at an individual level.level, combined with the impact of the lower federal corporate income tax rate.

 


Liquidity and Capital Resources

 

Summary cash flow data is as follows:

 

 Three Months Ended March 31,  Nine Months Ended September 30, 
 2018  2017  2018  2017 
Cash flows provided (used) by:                
Operating activities $(474,025) $445,468  $(18,442,064) $1,957,861 
Investing activities  (11,192,665)  1,889,978   8,794,974   1,653,809 
Financing activities  (503,846)  (5,287,023)  (2,106,669)  (9,143,248)
Net decrease in cash  (12,170,536)  (2,951,577)  (11,753,759)  (5,531,578)
Cash, beginning of period  21,295,819   14,159,975   21,295,819   14,159,975 
Cash, end of period $9,125,283  $11,208,398  $9,542,060  $8,628,397 

Included in the cash flows used by operating activities for the nine month period ended September 30, 2018 are income tax payments of $19.15 million. The liability associated with these payments relate primarily to our 2017 sale of our Franchise segment.

 

At March 31,September 30, 2018, we had cash and cash equivalents of $9.13$9.54 million and highly liquid investments of $46.4$25.96 million compared to cash and cash equivalents of $11.21$8.63 million on March 31,September 30, 2017. For 2018, weWe believe that our available cash and cash equivalents, combined with expected cash flows from operations and our held-to-maturity investments, will be sufficient to fund our liquidity and capital expenditure requirements through MarchSeptember of 2019. We also have a $3,000,000 revolving credit facility and a $9,000,000 acquisition credit facility available to us. Our expected short-term uses of available cash include the funding of operating activities payment of income tax liabilities related to our sale of the Franchise segment and the payment of dividends.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of March 31,September 30, 2018.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 

 Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

 

We utilize the Committee of Sponsoring Organization’sInternal Control – Integrated Framework, 2013 version,for the design, implementation and assessment of the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

 

As of March 31,September 30, 2018, our Chief Executive Officer and Chief Financial Officer carried out an assessment of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934.Based on this assessment, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of March 31,September 30, 2018.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended March 31,September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


 


PART II. OTHER INFORMATION

 

Item 6. Exhibits

 

Exhibit Description
   
10.131.1 Consent and Fourth Amendment Agreement, dated April 26, 2018, by and among the Company, certain subsidiaries named therein and Fifth Third Bank (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on May 2, 2018).
31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
3232.1 

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

   
101.INS XBRL Instance Document (filed herewith).
   
101.SCH XBRL Schema Document (filed herewith).
   
101.CAL XBRL Calculation Linkbase Document (filed herewith).
   
101.DEF XBRL Definition Linkbase Document (filed herewith).
   
101.LAB XBRL Label Linkbase Document (filed herewith).
   
101.PRE XBRL Presentation Linkbase Document (filed herewith).


SIGNATURES

 

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

 

Dated: May 15,November 14, 2018Western Capital Resources, Inc.
 (Registrant)
  
 By:/s/ John Quandahl
  John Quandahl
  Chief Executive Officer and Chief Operating Officer
   
 By:/s/ Angel Donchev
  Angel Donchev
  Chief Financial Officer

 


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