WESTERN CAPITAL RESOURCES, INC. 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," "will" 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 headings "Description of Business," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," but are 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 are not undertaking any obligation to update any forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations or may affect the value of the common stock, include, but are not limited to:
? Changes in local, state or federal laws and regulations governing lending
practices, or changes in the interpretation of such laws and regulations;
? Litigation and regulatory actions directed toward the consumer finance industry
or us, particularly in certain key states;
? Our need for additional financing;
? Changes in our authorization to be a dealer for
? Changes in authorized Cricket dealer compensation;
? Lack of advertising support and sales promotions from
markets we operate;
? Direct and indirect effects of COVID-19 on our employees, customers, our supply
chain, the economy and financial markets; and
? Unpredictability or uncertainty in financing and merger and acquisition
markets, which could impair our ability to grow our business through
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 and of this report. 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 are 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"), aDelaware corporation originally incorporated inMinnesota in 2001 and reincorporated inDelaware in 2016, is a holding company having a controlling interest in subsidiaries operating in the following industries and operating segments: [[Image Removed: (GRAPHIC)]]
Our Cellular Retail segment is comprised of an authorizedCricket Wireless dealer and involves the retail sale of cellular phones and accessories to consumers through our wholly owned subsidiaryPQH Wireless, Inc. and its controlled but less than 100% owned subsidiaries. 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 underPark 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 subsidiariesWyoming Financial Lenders, Inc. andExpress Pawn, Inc. Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as "we," the "Company," and "us." 15
Discussion of Critical Accounting Policies
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted inthe United States of America applied on a consistent basis. The preparation of these condensed consolidated 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 condensed consolidated 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 together with our significant accounting policies discussed in Note 1, "Nature of Business and Summary of Significant Accounting Policies," of the
notes to ourDecember 31, 2019 consolidated financial statements included in our Form 10-K for the year endedDecember 31, 2019 . 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.
Receivables and Loss Allowance
Direct to Consumer Receivables are recorded when billed or accrued and represent claims against third parties that will be settled in cash. The carrying value of receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The allowance for doubtful accounts is estimated based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past due receivable balances are written-off when internal collection efforts have been unsuccessful in collecting the amount due. Consumer Finance Included in loans receivable are unpaid principal, interest and fee balances of payday, installment and pawn 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 less payments made and a loans receivable allowance. We do not specifically reserve for any individual payday or installment loan. Instead, we aggregate 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. We utilize a software program to assist with the tracking of our 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. We also periodically perform a look-back analysis on our loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. We are aware that as conditions change, we may also need to make additional allowances in future periods. Loan losses or charge-offs of pawn loans are not recorded because the value of the collateral exceeds the loan amount. See Note 4, "Loans Receivable," and Note 5, "Loans Receivable Allowance," of the notes to our consolidated financial statements included in this report for our outstanding loans receivable aging and loans receivable allowance rollforward as of and for the nine month period endedSeptember 30, 2020 and the year endedDecember 31, 2019 .
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 ofOctober 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.
Management has analyzed the impact of the Coronavirus pandemic ("COVID-19") on
its financial statements as of September 30, 2020 and has determined that the
changes to its significant judgements and estimates did not have a material
impact with respect to goodwill, intangible assets or long-lived assets.
However, the Company's future assessment of the magnitude and duration of
COVID-19 / coronavirus, as well as other factors, could result in material
impacts to the Consolidated Financial Statements in future reporting periods.
16
Operating Leases
We have many retail and office space lease agreements and insignificant
equipment lease agreements which are accounted for as operating leases. The real
property leases typically are for three to five year terms with many containing
options for similar renewal periods. We determine if an arrangement is or
contains a lease at inception.
Under ASC 842, we recognize right-of-use ("ROU") assets and lease liabilities
for operating leases. ROU assets and lease liabilities are recognized at
commencement date based on the present value of future minimum lease payments
over the lease term. For our leased real property asset class, we do not
separate lease and non-lease components when determining the amounts of a lease
payment. As most of our leases do not provide an implicit rate, we use WCR's
collateralized incremental borrowing rate based on the information available at
commencement date in determining the present value of future payments.
The lease payment terms may include fixed payment terms and variable payments.
Fixed payment terms and variable payments that depend on an index (i.e.,
Consumer Price Index, or "CPI") or rate are considered in the determination of
the operating lease liabilities. While lease liabilities are not remeasured
because of changes to the CPI, changes are treated as variable lease payments
and recognized in the period in which the obligation for those payments was
incurred. Variable payments that do not depend on an index or rate are not
included in the lease liabilities determination. Rather, these payments are
recognized as variable lease expense when incurred. Expenses related to leases
with a lease term of one month or less are recognized as variable lease expense
when incurred. Variable lease payments are included within operating costs and
expenses in our condensed consolidated statement of operations.
Due to the significant assumptions and judgements required in accounting for
leases (to include whether a contract contains a lease, whether and at what
point the period covered by an option to extend a lease is reasonable certain to
be exercised, the allocation of the consideration, and the determination of the
discount rate), the judgements and estimates made could have a significant
effect on the amount of assets and liabilities recognized.
Results of Operations - Three Months Ended
Net income attributable to our common shareholders was
We expect segment operating results and earnings per share to change throughout 2020 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, potential mergers and acquisitions activity and the unknown impact of COVID-19.
Following is a discussion of operating results by segment.
The following table provides revenues and net income attributable to WCR common shareholders for the quarters endedSeptember 30, 2020 andSeptember 30, 2019 (in thousands). Cellular Direct to Consumer Retail Consumer Finance Corporate Total Three Months Ended September 30, 2020 Revenue$ 22,589 $ 5,901 $ 1,798 $ -$ 30,288 % of total revenue 74.6 % 19.5 % 5.9 % - % 100.0 % Net income (loss)$ 1,717 $ (60 ) $ 112 $ (192 ) $ 1,577 Net income attributable to noncontrolling interests$ 576 $ - $ - $ -$ 576 Net income (loss) attributable to WCR common shareholders$ 1,141 $ (60 ) $ 112 $ (192 ) $ 1,001 Three Months Ended September 30, 2019 Revenue$ 16,969 $ 4,925 $ 2,623 $ -$ 24,517 % of total revenue 69.2 % 20.1 % 10.7 % - % 100.0 % Net income (loss)$ 690 $ (610 ) $ 279 $ (69 ) $ 290 Net income attributable to noncontrolling interests$ 340 $ - $ - $ -$ 340 Net income (loss) attributable to WCR common shareholders$ 350 $ (610 ) $ 279 $ (69 ) $ (50 ) Cellular Retail A summary table of the number ofCricket Wireless retail stores we operated during the three months endedSeptember 30, 2020 andSeptember 30, 2019 follows: 2020 2019 Beginning 205 201 Acquired/ Launched 1 2 Closed/Transferred - (9 ) Ending 206 194
Period over period, net income attributable to shareholders increased from$0.35 million in the comparable prior year quarter to$1.14 million in the current quarter. Many factors have contributed to this period over period increase, most notably successful Cricket sales promotions, Cricket's distribution optimization program, our strategic location disposals and additions and COVID-19 stimulus contributing to increased sales. Direct to Consumer The Direct to Consumer segment has seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells. For the current quarter, the Direct to Consumer segment had net loss of$(0.06) million compared to net loss of$(0.61) million for the comparable prior year period. Revenues for the three month period endedSeptember 30, 2020 were$5.90 million compared to$4.93 million for the comparable period in 2019. Similar to other online retailers, the Direct to Consumer segment has experienced an increase in demand and on-line sales activity due to COVID-19. 17 Consumer Finance
A summary table of the number of consumer finance locations we operated during
the quarters ended
2020 2019
Beginning 39 39
Acquired/ Launched - -
Closed (1 ) -
Ending 38 39
Our Consumer Finance segment continues to struggle due to COVID-19 and industry
trends with our lending volume down period over period. Consumer Finance segment
revenues decreased $0.82 million , or 31.5%, for the quarter ended September 30,
2020 compared to the quarter ended September 30, 2019 . This segment and the
industry continues to experience declines in loan and check cashing activity due
to industry regulation and trends and COVID-19. On November 3, 2020 , Nebraska
voters passed a ballot initiative that limits all fees charged by payday lenders
in Nebraska to an annual interest rate of 36%. This initiative will cause us to
close our Nebraska payday lending operations which we expect to have completed
by mid-December 2020 . The loss of Nebraska operations will have a significant
impact on this segment's contributions to shareholder earnings.
Corporate
Net costs related to our Corporate segment were $0.19 million for the quarter
ended September 30, 2020 compared to $0.07 million for the quarter ended
September 30, 2019 . The period over period increase in net costs is primarily
due to a decrease in income from investments.
Results of Operations - Nine Months Ended
Net income attributable to our common shareholders was$7.52 million , or$0.82 per share (basic and diluted), for the nine month period endedSeptember 30, 2020 , compared to net income of$2.13 million , or$0.23 per share (basic and diluted), for the nine month period endedSeptember 30, 2019 . We expect segment operating results and earnings per share to change throughout 2020 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, potential mergers and acquisitions activity and the unknown impact of COVID-19.
Following is a discussion of operating results by segment.
The following table provides revenues and net income attributable to WCR common shareholders for the nine month period endedSeptember 30, 2020 andSeptember 30, 2019 (in thousands). Cellular Direct to Consumer Retail Consumer Finance Corporate Total Nine Months Ended September 30, 2020 Revenue$ 63,609 $ 33,841 $ 6,008 $ -$ 103,458 % of total revenue 61.5 % 32.7 % 5.8 % - % 100.0 % Net income (loss)$ 4,435 $ 4,672 $ 478 $ (574 ) $ 9,011 Net income attributable to noncontrolling interests$ 1,492 $ - $ - $ -$ 1,492 Net income (loss) attributable to WCR common shareholders$ 2,943 $ 4,672 $ 478 $ (574 ) $ 7,519 Nine Months Ended September 30, 2019 Revenue$ 49,753 $ 27,339 $ 7,540 $ -$ 84,632 % of total revenue 58.8 % 32.3 % 8.9 % - % 100.0 % Net income (loss)$ 1,702 $ 733 $ 741 $ (207 ) $ 2,969 Net income attributable to noncontrolling interests$ 837 $ - $ - $ -$ 837 Net income (loss) attributable to WCR common shareholders$ 865 $ 733 $ 741 $ (207 ) $ 2,132 Cellular Retail A summary table of the number ofCricket Wireless retail stores we operated during the nine months endedSeptember 30, 2020 andSeptember 30, 2019 follows: 2020 2019 Beginning 222 205 Acquired/ Launched 20 33 Closed/Transferred (36 ) (44 ) Ending 206 194
Period over period, net income attributable to shareholders increased from$0.87 million in the nine month period endedSeptember 30, 2019 to$2.94 million for the nine month period endedSeptember 30, 2020 . Significantly contributing to the increase was$1.53 million of supplemental compensation fromCricket Wireless provided to alleviate the financial strain caused by COVID-19 and temporary closure of 75 of our stores. Our strategic location disposals and additions from the first quarter of 2019 through the current quarter has resulted in a better mix of stores and contributed to the increased operating results attributable to shareholders period over period. Due to the impact of COVID-19 and even though our stores were generally deemed to be "essential businesses", onMarch 19, 2020 we began the process of temporarily closing approximately 75 of our retail stores. By the end ofApril 2020 , all but 22 had reopened.
In
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 month period endedSeptember 30, 2020 , the Direct to Consumer segment had net income of$4.67 million compared to net income of$0.73 million for the comparable nine month period prior year. Revenues for the nine month period endedSeptember 30, 2020 were$33.84 million compared to$27.34 million for the comparable period in 2019. Similar to other online retailers, the Direct to Consumer segment has experienced an increase in demand and on-line sales activity due to COVID-19. 18 Consumer Finance A summary table of the number of consumer finance locations we operated during the nine month periods endedSeptember 30, 2020 andSeptember 30, 2019 follows: 2020 2019 Beginning 39 41 Acquired/ Launched - - Closed (1 ) (2 ) Ending 38 39 Our Consumer Finance segment revenues decreased$1.53 million , or 20.3%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This segment and the industry continues to experience declines in loan and check cashing activity due to industry regulation and trends and COVID-19. In the later part ofMarch 2020 , the segment began to experience a larger than normal decline in lending activity due to COVID-19. Corporate
Net costs related to our Corporate segment were$0.57 million for the nine month period endedSeptember 30, 2020 compared to$0.21 million for the nine month period endedSeptember 30, 2019 . The period over period increase in net costs is primarily due to a decrease in investment income.
Consolidated Income Tax Expense
Provision for income tax expense for the nine months endedSeptember 30, 2020 was$2.40 million compared to$0.68 million for the nine months endedSeptember 30, 2019 for an effective rate of 21.0% and 18.7%, respectively. The effective tax rate is lower than the federal plus state statutory rates and increased period over period due to impact of the noncontrolling interests' share of net income not subject to income tax at the consolidated group level.
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