SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 20142015
o 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)
Minnesota | 47-0848102 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
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
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.
Yesþ Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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). Yesþ Noo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso¨ Noþ
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 11, 2014,13, 2015, the registrant had outstanding 5,997,5889,497,689 shares of common stock, as adjusted for our reverse stock split, no par value per share.
Western Capital Resources, Inc.
Index
2 |
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONTENTS
3 |
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2014 (Unaudited) | December 31, 2013 | September 30, 2015 (Unaudited) | December 31, 2014 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash | $ | 3,071,565 | $ | 1,983,835 | $ | 3,548,728 | $ | 4,273,350 | ||||||||
Loans receivable (less allowance for losses of $1,105,000 and $1,215,000) | 5,094,099 | 5,438,202 | ||||||||||||||
Loans receivable (less allowance for losses of $1,301,000 and $1,219,000, respectively) | 5,097,418 | 5,331,266 | ||||||||||||||
Accounts receivable (less allowance for losses of $266,000 and $59,405, respectively) | 2,155,177 | 1,135,127 | ||||||||||||||
Inventory | 2,003,077 | 1,557,886 | 7,583,661 | 2,340,824 | ||||||||||||
Prepaid expenses and other | 528,435 | 889,590 | 2,756,249 | 1,435,918 | ||||||||||||
Deferred income taxes | 470,000 | 498,000 | 600,000 | 644,000 | ||||||||||||
TOTAL CURRENT ASSETS | 11,167,176 | 10,367,513 | 21,741,233 | 15,160,485 | ||||||||||||
PROPERTY AND EQUIPMENT | 880,536 | 928,074 | ||||||||||||||
PROPERTY AND EQUIPMENT, net | 8,518,038 | 1,197,710 | ||||||||||||||
GOODWILL | 12,894,069 | 12,894,069 | 13,788,612 | 12,956,868 | ||||||||||||
INTANGIBLE ASSETS | 284,134 | 117,096 | ||||||||||||||
INTANGIBLE ASSETS, net | 8,126,180 | 7,248,793 | ||||||||||||||
OTHER | 147,605 | 132,333 | 439,402 | 198,408 | ||||||||||||
TOTAL ASSETS | $ | 25,373,520 | $ | 24,439,085 | $ | 52,613,465 | $ | 36,762,264 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 2,985,640 | $ | 2,910,560 | $ | 9,381,954 | $ | 6,025,920 | ||||||||
Income taxes payable | 252,553 | - | 923,827 | 755,615 | ||||||||||||
Current portion long-term debt | 2,000,000 | 2,750,000 | ||||||||||||||
Deferred revenue | 270,102 | 296,503 | ||||||||||||||
Current portion notes payable | 4,900,008 | 3,500,000 | ||||||||||||||
Current portion capital lease obligations | 27,128 | 42,240 | ||||||||||||||
Deferred revenue and other | 960,604 | 638,068 | ||||||||||||||
TOTAL CURRENT LIABILITIES | 5,508,295 | 5,957,063 | 16,193,521 | 10,961,843 | ||||||||||||
LONG-TERM LIABILITIES | ||||||||||||||||
Notes payable, net of current portion | 3,571,454 | 1,625,000 | ||||||||||||||
Capital lease obligations, net of current portion | 48,922 | 31,481 | ||||||||||||||
Deferred income taxes | 1,403,000 | 1,156,000 | 4,268,000 | 3,939,000 | ||||||||||||
Other | 93,262 | 114,514 | ||||||||||||||
TOTAL LONG-TERM LIABILITIES | 1,403,000 | 1,156,000 | 7,981,638 | 5,709,995 | ||||||||||||
TOTAL LIABILITIES | 6,911,295 | 7,113,063 | 24,175,159 | 16,671,838 | ||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||
Common stock, no par value, 12,500,000 shares authorized, 3,010,765 shares issued and outstanding | - | - | ||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 16) | ||||||||||||||||
EQUITY | ||||||||||||||||
WESTERN SHAREHOLDERS’ EQUITY | ||||||||||||||||
Common stock, no par value, 12,500,000 shares authorized, 9,497,689 and 5,997,588 issued and outstanding. | - | - | ||||||||||||||
Additional paid-in capital | 22,353,212 | 22,353,600 | 28,903,681 | 22,703,745 | ||||||||||||
Accumulated deficit | (3,890,987 | ) | (5,027,578 | ) | (486,233 | ) | (2,621,692 | ) | ||||||||
TOTAL SHAREHOLDERS’ EQUITY | 18,462,225 | 17,326,022 | ||||||||||||||
TOTAL WESTERN SHAREHOLDERS’ EQUITY | 28,417,448 | 20,082,053 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 25,373,520 | $ | 24,439,085 | ||||||||||||
NONCONTROLLING INTERESTS | 20,858 | 8,373 | ||||||||||||||
TOTAL EQUITY | 28,438,306 | 20,090,426 | ||||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 52,613,465 | $ | 36,762,264 |
See notes to condensed consolidated financial statements.
4 |
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||||||
REVENUES | ||||||||||||||||
Retail sales, fees and commissions | $ | 6,638,922 | $ | 5,638,044 | $ | 18,582,085 | $ | 15,469,392 | ||||||||
Financing fees and interest | 2,919,822 | 2,958,226 | 8,229,216 | 8,314,070 | ||||||||||||
9,558,744 | 8,596,270 | 26,811,301 | 23,783,462 | |||||||||||||
STORE EXPENSES | ||||||||||||||||
Phone and accessories cost of sales | 2,839,494 | 2,553,880 | 8,435,300 | 6,980,858 | ||||||||||||
Salaries and benefits | 2,038,741 | 1,958,872 | 6,191,448 | 5,468,861 | ||||||||||||
Occupancy | 737,517 | 677,089 | 2,140,640 | 1,953,905 | ||||||||||||
Provisions for loan losses | 514,762 | 575,355 | 1,268,330 | 1,320,546 | ||||||||||||
Advertising | 91,164 | 88,995 | 260,831 | 261,713 | ||||||||||||
Depreciation | 80,550 | 89,514 | 238,874 | 255,595 | ||||||||||||
Amortization of intangible assets | 28,373 | 36,194 | 82,962 | 112,735 | ||||||||||||
Other | 1,204,136 | 1,141,614 | 3,539,234 | 2,903,731 | ||||||||||||
7,534,737 | 7,121,513 | 22,157,619 | 19,257,944 | |||||||||||||
INCOME FROM STORES | 2,024,007 | 1,474,757 | 4,653,682 | 4,525,518 | ||||||||||||
GENERAL & ADMINISTRATIVE EXPENSES | ||||||||||||||||
Salaries and benefits | 667,645 | 498,488 | 1,510,817 | 1,496,730 | ||||||||||||
Depreciation | 6,600 | 7,200 | 19,770 | 20,028 | ||||||||||||
Interest expense | 60,493 | 83,178 | 191,823 | 249,069 | ||||||||||||
Other | 376,953 | 258,312 | 1,108,681 | 798,659 | ||||||||||||
1,111,691 | 847,178 | 2,831,091 | 2,564,486 | |||||||||||||
INCOME BEFORE INCOME TAXES | 912,316 | 627,579 | 1,822,591 | 1,961,032 | ||||||||||||
INCOME TAX EXPENSE | 347,000 | 235,000 | 686,000 | 741,000 | ||||||||||||
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | $ | 565,316 | $ | 392,579 | $ | 1,136,591 | $ | 1,220,032 | ||||||||
NET INCOME PER COMMON SHARE | ||||||||||||||||
Basic | $ | 0.19 | $ | 0.13 | $ | 0.38 | $ | 0.40 | ||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - | ||||||||||||||||
Basic | 3,010,765 | 3,011,008 | 3,010,922 | 3,012,667 |
Three months ended | Nine months ended | |||||||||||||||
September 30, 2015 | September 30, 2014 | September 30, 2015 | September 30, 2014 | |||||||||||||
REVENUES | ||||||||||||||||
Sales and associated fees | $ | 13,403,791 | $ | 5,710,322 | $ | 27,039,059 | $ | 15,680,700 | ||||||||
Financing fees and interest | 2,865,842 | 2,919,822 | 8,007,438 | 8,229,216 | ||||||||||||
Royalty and franchise fees, net | 2,803,405 | - | 7,883,214 | - | ||||||||||||
Other revenue | 2,878,430 | 928,600 | 6,259,541 | 2,901,385 | ||||||||||||
21,951,468 | 9,558,744 | 49,189,252 | 26,811,301 | |||||||||||||
COST OF REVENUES | ||||||||||||||||
Cost of sales | 7,324,815 | 2,982,059 | 15,329,353 | 8,841,356 | ||||||||||||
Provisions for loans receivable losses | 572,959 | 514,763 | 1,351,427 | 1,268,330 | ||||||||||||
Other | 200,303 | - | 730,143 | - | ||||||||||||
Total Cost of Revenues | 8,098,077 | 3,496,822 | 17,410,923 | 10,109,686 | ||||||||||||
GROSS PROFIT | 13,853,391 | 6,061,922 | 31,778,329 | 16,701,615 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Salaries, wages and benefits | 6,236,073 | 2,706,386 | 14,733,576 | 7,702,265 | ||||||||||||
Occupancy | 2,016,406 | 1,122,669 | 4,729,718 | 3,409,951 | ||||||||||||
Selling, marketing and development | 1,142,751 | 91,164 | 1,513,578 | 260,831 | ||||||||||||
Depreciation | 234,122 | 87,150 | 444,814 | 258,644 | ||||||||||||
Amortization | 141,783 | 28,373 | 359,133 | 82,962 | ||||||||||||
Other | 2,280,809 | 1,053,371 | 5,754,519 | 2,972,548 | ||||||||||||
12,051,944 | 5,089,113 | 27,535,338 | 14,687,201 | |||||||||||||
OPERATING INCOME | 1,801,447 | 972,809 | 4,242,991 | 2,014,414 | ||||||||||||
OTHER INCOME (EXPENSES): | ||||||||||||||||
Interest income | 995 | - | 3,065 | - | ||||||||||||
Interest expense | (198,048 | ) | (60,493 | ) | (401,299 | ) | (191,823 | ) | ||||||||
(197,053 | ) | (60,493 | ) | (398,234 | ) | (191,823 | ) | |||||||||
INCOME BEFORE INCOME TAXES | 1,604,394 | 912,316 | 3,844,757 | 1,822,591 | ||||||||||||
INCOME TAX EXPENSE | 724,293 | 347,000 | 1,696,813 | 686,000 | ||||||||||||
NET INCOME | 880,101 | 565,316 | 2,147,944 | 1,136,591 | ||||||||||||
Less net income attributable to noncontrolling interests | (6,498 | ) | - | (12,485 | ) | - | ||||||||||
NET INCOME ATTRIBUTABLE TO WESTERN SHAREHOLDERS | $ | 873,603 | $ | 565,316 | $ | 2,135,459 | $ | 1,136,591 | ||||||||
EARNINGS PER SHARE ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS | ||||||||||||||||
Basic and diluted | $ | 0.09 | $ | 0.19 | $ | 0.30 | $ | 0.38 | ||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||||||
Basic and diluted | 9,497,689 | 3,010,765 | 7,177,176 | 3,010,922 |
See notes to condensed consolidated financial statements.
5 |
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(unaudited)
Nine Months Ended | ||||||||||||||||
September 30, 2014 | September 30, 2013 | Nine Months Ended | ||||||||||||||
September 30, 2015 | September 30, 2014 | |||||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net Income | $ | 1,136,591 | $ | 1,220,032 | $ | 2,147,944 | $ | 1,136,591 | ||||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation | 258,644 | 275,623 | 444,814 | 258,644 | ||||||||||||
Amortization | 82,962 | 112,735 | 359,133 | 82,962 | ||||||||||||
Stock based compensation | 76,538 | - | ||||||||||||||
Deferred income taxes | 275,000 | 211,000 | 390,000 | 275,000 | ||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Loans receivable | 344,103 | 30,885 | 233,848 | 344,103 | ||||||||||||
Accounts receivable | (492,684 | ) | - | |||||||||||||
Inventory | (445,191 | ) | (473,501 | ) | (1,645,395 | ) | (445,191 | ) | ||||||||
Prepaid expenses and other assets | 345,883 | 39,556 | (612,532 | ) | 345,883 | |||||||||||
Accounts payable and accrued liabilities | 327,633 | (358,775 | ) | (468,720 | ) | 327,633 | ||||||||||
Deferred revenue | (26,401 | ) | (14,392 | ) | ||||||||||||
Deferred revenue and other current liabilities | (137,896 | ) | - | |||||||||||||
Accrued liabilities and other | (21,252 | ) | (26,401 | ) | ||||||||||||
Net cash provided by operating activities | 2,299,224 | 1,043,163 | 273,798 | 2,299,224 | ||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Purchases of property and equipment | (211,106 | ) | (276,104 | ) | ||||||||||||
Purchases of intangible assets | (250,000 | ) | (143,000 | ) | ||||||||||||
Purchase of property and equipment | (507,075 | ) | (211,106 | ) | ||||||||||||
Purchase of intangible assets | - | (250,000 | ) | |||||||||||||
Acquisition of stores | (2,608,500 | ) | - | |||||||||||||
Cash acquired through acquisition | 2,470,930 | - | ||||||||||||||
Net cash used by investing activities | (461,106 | ) | (419,104 | ) | (644,645 | ) | (461,106 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Payments on notes payable – short-term | - | (405,163 | ) | (120,000 | ) | - | ||||||||||
Payments on notes payable – long-term | (750,000 | ) | (210,065 | ) | ||||||||||||
Payments on notes payable – long-term, net | (191,668 | ) | (750,000 | ) | ||||||||||||
Common stock redemption | (388 | ) | (17,762 | ) | - | (388 | ) | |||||||||
Payments on capital leases | (42,107 | ) | - | |||||||||||||
Net cash used by financing activities | (750,388 | ) | (632,990 | ) | (353,775 | ) | (750,388 | ) | ||||||||
NET INCREASE (DECREASE) IN CASH | 1,087,730 | (8,931 | ) | |||||||||||||
NET (DECREASE) INCREASE IN CASH | (724,622 | ) | 1,087,730 | |||||||||||||
CASH | ||||||||||||||||
Beginning of period | 1,983,835 | 2,246,619 | 4,273,350 | 1,983,835 | ||||||||||||
End of period | $ | 3,071,565 | $ | 2,237,688 | $ | 3,548,728 | $ | 3,071,565 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||||||
Income taxes paid | $ | 164,838 | $ | 481,253 | $ | 1,759,171 | $ | 164,838 | ||||||||
Interest paid | $ | 200,124 | $ | 248,962 | $ | 392,751 | $ | 200,124 | ||||||||
Noncash investing and financing activities: | ||||||||||||||||
Accrued purchase of property and equipment | $ | - | $ | 159,148 | ||||||||||||
Net assets acquired in JPPA/RAI/JPRE acquisition (see Note 13) | $ | 6,123,398 | $ | - | ||||||||||||
Deposit applied to purchase of intangibles | $ | 50,000 | $ | - |
See notes to condensed consolidated financial statements.
6 |
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 20142015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 2015.
For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended December 31, 2013.2014. The condensed consolidated balance sheet at December 31, 2013,2014, 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
References in these financial statement notes to the “Company” or “we” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies within our enterprise, such as “PQH,” “WFL,” “EPI”, “AGI,”, “JPPA”, “RAI” or “JPRE” are references only to those companies. Western Capital Resources, Inc. (“WCR”), through its wholly owned is a holding company owning operating subsidiaries, Wyoming Financial Lenders, Inc. (“WFL”), Express Pawn, Inc. (“EP”), and PQH Wireless, Inc. (“PQH”), collectively referred towith the percentages owned by WCR of each subsidiary shown parenthetically, as the “Company,” provides retail financial services to individuals and operates retail cellular and retail pawn stores primarily in the Midwestern and Southwestern United States. The Company operated 48 “Payday” stores, two combined payday/pawn store, and one pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming)summarized below.
· | Franchise |
o | AlphaGraphics, Inc. (AGI) (99.2%) – franchisor of 252 domestic and 26 international AlphaGraphics Business Centers, as of September 30, 2015, specializing in the planning, production and management of visual communications for businesses and individuals throughout the world. |
· | Cellular Retail |
o | PQH Wireless, Inc. and subsidiaries (PQH) (100%) – owns and operates 102 cellular retail stores, as of September 30, 2015, as an exclusive dealer of the Cricket brand in 15 states—Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas, Washington and Wisconsin. |
· | Direct to Consumer |
o | J & P Park Acquisitions, Inc. (JPPA) (100%) – a multi-channel retailer of live plants, seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins, and Wayside Gardens brand names as well as a wholesaler under the Park Wholesale brand. JPPA sells over the internet and through direct mail catalogs. |
o | Restorers Acquisition, Inc. (RAI) (100%) – operates primarily as a retail seller of home improvement and restoration products. The company sells over the internet through the domain namewww.Vandykes.com and through direct mail catalogs. |
o | J & P Real Estate, LLC (JPRE) (100%) – owns real estate utilized as JPPA’s distribution and warehouse facility and the corporate offices of JPPA and RAI. |
· | Consumer Finance |
o | Wyoming Financial Lenders, Inc. (WFL) (100%) – owns and operates 50 “payday” stores, as of September 30, 2015, in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, 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, “installment” loans typically ranging from $300 to $800 with a maturity of six months, check cashing and other money services to individuals. |
o | Express Pawn, Inc. (EPI) (100%) – owns and operates three retail pawn stores, as of September 30, 2015, in Nebraska and Iowa, providing collateralized non-recourse pawn loans and retail sales of merchandise obtained from forfeited pawn loans or purchased from customers. |
7 |
Basis of September 30, 2014. The Company operated 58 cellular retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington) as of September 30, 2014. Consolidation
The consolidated financial statements include the accounts of WCR, WFL, PQHits wholly owned subsidiaries and EP.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 guidance of ASC 810 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.
Through our “Consumer Finance” division, we provide non-recourse cash advance and installment loans, collateralized non-recourse pawn loans, check cashing and other money services, and operate retail pawn stores. The short-term uncollateralized non-recourse consumer loans, known as “cash advance” or “payday” loans, are in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations, and generally ranges from $15 to $22 per each $100 borrowed. To repay a cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. Installment loans provide customers with cash in exchange for a promissory note with a maturity of generally three to six months and are unsecured. The fee and interest rate on installment loans vary based on applicable regulations.
Our pawn stores provide collateralized non-recourse loans, commonly known as “pawn loans,” with maturities of one to four months, depending on applicable state regulations.Allowable service charges vary by state. Our pawn loans earn 17.5% to 20% per month. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale value depending on our evaluation of several factors.Customers then have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or else forfeit the merchandise to us upon expiration. At our pawn stores, we sell merchandise acquired through either customer forfeiture of pawn collateral or second-hand merchandise purchased from customers or consigned to us.
We also provide title loans and other ancillary consumer financial products and services that are complementary to our cash advance-lending business, such as check-cashing services, money transfers and money orders. In our check-cashing business, we primarily cash payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts. Our fees for cashing payroll checks average approximately 2.5% of the face amount of the check, subject to local market conditions, and this fee is deducted from the cash given to the customer for the check. We display our check-cashing fees in full view of our customers on a menu board in each store and provide a detailed receipt for each transaction. Although we have established guidelines for approving check-cashing transactions, we have no preset limit on the size of the checks we will cash.
Our loans and other related services are subject to state regulations (which vary from state to state), federal regulations and local regulations, where applicable.
We also operate a “Cellular Retail” division that is an authorized Cricket dealer, selling cellular phones and accessories, providing ancillary services and accepting service payments from customers.
Use of Estimates
The preparation of condensed 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 condensed 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 notes and loans receivable allowance, percentage of existing pawn loans that will be forfeited, allocation of and carrying value and impairment of long-lived goodwill and intangible assets, inventory valuation and obsolescence, estimated useful lives of property and equipment, gift certificate liabilities and deferred taxes and tax uncertainties.
Revenue RecognitionReceivables 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.
Inventory
Direct to Consumer
Inventory is valued at the lower of cost or market using the weighted-average method of determining cost.
Property and Equipment
Direct to Consumer
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets as follows:
Ÿ | Computer equipment and software | 3 – 10 years |
Ÿ | Warehouse improvements and equipment | 3 – 15 years |
Ÿ | Building | 39 years |
The cost of maintenance and repairs is charged to operations as incurred while renewals and betterments are capitalized.
The Company recognizes fees on cash advance loans on a constant-yield basis ratablycapitalizes certain internal costs, including payroll costs, incurred in connection with the development of software for internal use. These costs are capitalized beginning when the Company has entered the application development stage. The capitalization of these costs ceases when the software is substantially complete and ready for its intended use. Costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over the loans’ terms. Titleestimated useful life of the enhancements.
Deferred Revenue
Direct to Consumer
Sales billed or cash received in advance of actual delivery are deferred and installment loan fees and interest are recognized using the interest method, except that installment loan origination fees are recognizedrecorded as they become non-refundable, and installment loan maintenance fees are recognized when earned. The Company recognizes fees on redeemed pawn loans on a constant-yield basis ratably over the loans’ terms. No fees are recognized on forfeited pawn loans. The Company records revenue from check cashing fees, sales of phones, accessories, and pawn inventory, and fees from all other servicesincome in the period in which the sale or service is completed. related deliveries are made.
8 |
Merchandise Credits and Gift Card Liabilities
Loans Receivable AllowanceDirect to Consumer
The Company maintains a loan loss allowanceliability for anticipated lossesunredeemed gift cards, gift certificates and merchandise credits until the earlier of redemption, escheatment or a maximum of two years. The Company has concluded that the likelihood of these liabilities being redeemed beyond two years from the date of issuance is remote.
Advertising
Direct to Consumer
The Company expenses advertising costs as they are incurred, except for our paydaydirect-response advertising, which is capitalized and installment loans.We doamortized over its expected period of future benefits, not record loan lossesto exceed six months. Direct-response advertising consists primarily of catalog book production, printing, and postage costs.
Shipping and Handling Costs
Direct to Consumer
The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs are expensed as incurred and included in cost of sales.
Stock-based Compensation
The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or charge-offs of pawn or title loans becausevesting term.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of the collateral exceeds the loan amount.To estimate the appropriate levelCompany’s stock option awards. The determination of the loan loss allowance, we considerfair value of stock-based payment awards on the amountdate of outstanding loan principal,grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest and fees, historical charge offs, currentrate and expected collection patternsdividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and current economic trends. Our current loan loss allowance is based on our historical net write off percentage, net charge offs to loan principal, interest and feethe estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts that originated duringexpensed in the last 24 months, applied against the 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.Company’s financial statements.
IncludedStock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, 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. Loans are carried at cost plus accrued interest or fees less payments made and the loans receivable allowance. The Company does not specifically reserve for any individual 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 the maturity of the store location and charge-off and recovery rates. The Company utilizes a software program to assist with the tracking of its historical portfolio statistics. All returned items are charged-off after 180 days, as collections after that date have not been significant. The loans receivable allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.
Combination (Reverse Split) of Common Stock
On May 30, 2014, the Company’s Board of Directors approved a 1-to-20 reverse stock split. The reverse stock split became effective on June 20, 2014. The reverse stock split reduced the number of issued and outstanding shares of common stock to 3,010,765 shares. The reverse stock split similarly reduced by a factor of 20 the authorized number of shares of capital stock that the Company may issue to 12,500,000. The accompanying financial statements and footnotes have been adjusted retroactively to reflect the reverse stock split.subsequent periods if actual forfeitures differ from initial estimate.
Net Income Per Common Share
Basic net income per common share is computed by dividing the income available to common shareholders by the weighted-averageweighted average number of common shares outstanding for the period. ThereDiluted earnings per share gives effect to all dilutive potential common shares outstanding during the period, including stock options, using the treasury stock method. Options to purchase 65,000 shares granted under the 2015 Stock Incentive Plan effective February 6, 2015 (see Note 18) were outstanding at September 30, 2015. These options have a strike price in excess of the market price as of September 30, 2015, were antidilutive and therefore not included in the computation of diluted earnings per share. Thus, there were no dilutive securities atcommon shares as of September 30, 20142015 and 2013.2014.
Segment Reporting
The Company has grouped its operations into twofive segments – Franchise, Cellular Retail, Direct to Consumer, Consumer Finance, division and Cellular Retail division.Corporate. The Consumer Finance division provides financialFranchise segment specializes in the planning, production and ancillary servicesmanagement of visual communications for businesses and also sells used merchandise at retail pawn stores.individuals. The Cellular Retail divisionsegment is an authorized Cricket premier dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers. The Direct to Consumer segment consists primarily of online and mail order catalog retailers’ sales of product offerings including seeds, live goods, holiday gifts, garden accessories and home improvement and restoration products. The Consumer Finance segment provides financial and ancillary services and also sells used merchandise at retail pawn stores. The Corporate segment consists of Company activities related to acquisitions and subsequent management of acquired businesses.
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Reclassifications
Certain Statement of Income reclassifications have been made in the presentation of our prior financial statements and accompanying notes, including pro forma presentation, to conform to the presentation as of and for the three and nine months ended September 30, 2014.2015.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. This converged standard is effective for annual and interim periods beginning after December 15, 2016. The Company is currently assessing the potential effects on our financial condition and results of operations.
No new accounting pronouncement issued or effective during the fiscal quarter has had or is expected to have a material impact on theour condensed consolidated financial statements.
2. | Risks Inherent in the Operating Environment – |
Regulatory
Consumer Finance
The Company’s Consumer Finance divisionsegment activities are highly regulated under numerous local, state and federal laws and regulations, which are subject to change. New laws or regulations could be enacted that could have a negative impact on the Company’s lending activities.or issued, interpretations of existing laws or regulations 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 Company’skind conducted by WFL and EPI. The federal Consumer Financial Protection Bureau has indicated that it will use its authority to further regulate the payday lending activities.industry.
Any adverse change in present local, state or federal laws or regulations that govern or otherwise affect lending could result in ourthe Consumer Finance segment’s curtailment or cessation of operations in certain or all jurisdictions or locations. Furthermore, any actual or perceived failure to comply with any applicable local, state or federal laws or regulations could result in fines, litigation, closure of one or more store locations, or negative publicity. Any such change or failureoutcome would have a corresponding impact on ourthe Company’s results of operations and financial condition, primarily through a decrease in revenues, non-cash charges from the write-down of the carrying value of goodwill and intangible assets resulting from the cessation or curtailment of operations, decrease in our operating income throughand increased legal expenditures or fines, and could also negatively affect ourthe Company’s general business prospects as well if we arethe Company is unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects ourits ability to obtain additional financing as needed.
In addition, the passage of federal or state laws and regulations or changes in interpretations of them could, at any point, essentially prohibit the CompanyWFL or EPI 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 and its financial condition and prospects.
Franchise
In August 2015, the National Labor Relations Board (NLRB) changed its long-standing joint-employer standard in a widely discussed decision, Browning Ferris Industries of California, Inc. In that decision, the NLRB asserted that two or more entities are joint employers of a single workforce if they share or co-determine, even indirectly, those matters governing the essential terms and conditions of employment. In terms of franchise business models, the NLRB has to date refused to dismiss various labor and wage-violation complaints alleging that McDonalds is a joint employer together with its franchisees. In the past, courts determining whether a franchisor and franchisee are joint employers of a single workforce have generally examined whether the franchisor exercises direct (as opposed to indirect) and significant control over the franchisees' employment-related decisions-i.e., the hiring, firing or discipline of franchisee employees, payment of their wages, or setting of their work schedules. It is presently uncertain what the ultimate outcome will be of attempts by plaintiffs and regulatory authorities to impose employment-related liabilities upon franchisors under the theory that they are joint employers of their franchisees' employees. Nevertheless, the extension of the Browning Ferris principles to franchise business models, and their application to our AlphaGraphics business, could have material and adverse consequences to the operating results, financial condition and prospects of that business and perhaps even its viability.our Company.
For the nine months ended September 30, 2014 and 2013, the Company had significant revenues by state (shown as a percentage of the applicable division’s revenue when over 10%) as follows:Vendor Concentration
Consumer Finance Division | Cellular Retail Division | |||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||
Nebraska | 30 | % | 28 | % | Nebraska | 28 | % | 27 | % | |||||||||
North Dakota | 18 | % | 19 | % | Colorado | 19 | % | * | % | |||||||||
Wyoming | 14 | % | 15 | % | Texas | * | % | 12 | % | |||||||||
Iowa | 14 | % | 12 | % |
Direct to Consumer
* Less than 10%RAI has an agreement with a third-party fulfillment provider that is in effect through January 31, 2016. The fulfillment provider receives and stores inventory, performs periodic cycle counts, picks, packs and ships customer orders. Additional services such as, order taking, processing of customer payments, personalization, customer services, and order processing are also performed by the fulfillment provider. RAI is currently in negotiations to extend the agreement.
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JPPA has an agreement with a third party wholesale grower that is in effect until 2019. The grower has agreed to perform research for JPPA and maintain JPPA's research crop in exchange for a reduction in royalties to be paid to JPPA for growing JPPA's patented roses. There is an option to renew the agreement for consecutive two year terms and the agreement calls for a 24 month notice prior to termination.
3. | Loans Receivable – |
At September 30, 20142015 and December 31, 2013 our2014, the Company’s outstanding loans receivable aging was as follows:
September 30, 2014 | ||||||||||||||||||||||||||||||||
September 30, 2015 | September 30, 2015 | |||||||||||||||||||||||||||||||
Payday | Installment | Pawn & Title | Total | Payday | Installment | Pawn & Title | Total | |||||||||||||||||||||||||
Current | $ | 4,154,816 | $ | 328,789 | $ | 318,774 | $ | 4,802,379 | $ | 4,234,640 | $ | 263,313 | $ | 326,968 | $ | 4,824,921 | ||||||||||||||||
1-30 | 301,329 | 51,136 | - | 352,465 | 369,269 | 43,826 | - | 413,095 | ||||||||||||||||||||||||
31-60 | 238,424 | 27,765 | - | 266,189 | 278,035 | 21,511 | - | 299,546 | ||||||||||||||||||||||||
61-90 | 232,434 | 13,679 | - | 246,113 | 250,381 | 13,988 | - | 264,369 | ||||||||||||||||||||||||
91-120 | 192,644 | 6,654 | - | 199,298 | 249,758 | 5,757 | - | 255,515 | ||||||||||||||||||||||||
121-150 | 183,369 | 2,914 | - | 186,283 | 168,596 | 1,815 | - | 170,411 | ||||||||||||||||||||||||
151-180 | 139,352 | 7,020 | - | 146,372 | 170,475 | 86 | - | 170,561 | ||||||||||||||||||||||||
5,442,368 | 437,957 | 318,774 | 6,199,099 | 5,721,154 | 350,296 | 326,968 | 6,398,418 | |||||||||||||||||||||||||
Allowance for losses | (1,048,000 | ) | (57,000 | ) | - | (1,105,000 | ) | |||||||||||||||||||||||||
Less Allowance | (1,204,000 | ) | (97,000 | ) | - | (1,301,000 | ) | |||||||||||||||||||||||||
$ | 4,394,368 | $ | 380,957 | $ | 318,774 | $ | 5,094,099 | $ | 4,517,154 | $ | 253,296 | $ | 326,968 | $ | 5,097,418 |
December 31, 2013 | ||||||||||||||||||||||||||||||||
December 31, 2014 | December 31, 2014 | |||||||||||||||||||||||||||||||
Payday | Installment | Pawn & Title | Total | Payday | Installment | Pawn & Title | Total | |||||||||||||||||||||||||
Current | $ | 4,519,839 | $ | 408,782 | $ | 288,788 | $ | 5,217,409 | $ | 4,387,393 | $ | 321,634 | $ | 372,805 | $ | 5,081,832 | ||||||||||||||||
1-30 | 271,967 | 56,807 | - | 328,774 | 305,382 | 47,321 | - | 352,703 | ||||||||||||||||||||||||
31-60 | 202,097 | 31,212 | - | 233,309 | 223,465 | 24,791 | - | 248,256 | ||||||||||||||||||||||||
61-90 | 217,154 | 17,285 | - | 234,439 | 236,072 | 11,799 | - | 247,871 | ||||||||||||||||||||||||
91-120 | 206,885 | 8,660 | - | 215,545 | 206,705 | 5,438 | - | 212,143 | ||||||||||||||||||||||||
121-150 | 199,253 | 2,846 | - | 202,099 | 200,101 | 1,984 | - | 202,085 | ||||||||||||||||||||||||
151-180 | 218,802 | 2,825 | - | 221,627 | 204,804 | 572 | - | 205,376 | ||||||||||||||||||||||||
5,835,997 | 528,417 | 288,788 | 6,653,202 | 5,763,922 | 413,539 | 372,805 | 6,550,266 | |||||||||||||||||||||||||
Allowance for losses | (1,120,000 | ) | (95,000 | ) | - | (1,215,000 | ) | |||||||||||||||||||||||||
Less Allowance | (1,147,000 | ) | (72,000 | ) | - | (1,219,000 | ) | |||||||||||||||||||||||||
$ | 4,715,997 | $ | 433,417 | $ | 288,788 | $ | 5,438,202 | $ | 4,616,922 | $ | 341,539 | $ | 372,805 | $ | 5,331,266 |
4. | Loans Receivable Allowance – |
As a result of the Company’s collection efforts, it historically writes off approximately 42%43% of the returned payday items. Based on days past the check return date, write-offs of payday returned items historically have tracked at the following approximate percentages: 1 to 30 days – 42%43%; 31 to 60 days – 65%; 61 to 90 days – 83%; 91 to 120 days – 88%; 121 to 150 days – 91%; and 121151 to 180 days – 91%93%.
A rollforward of the Company’s loans receivable allowance for the nine months ended September 30, 2014 and 2013 is as follows:
Nine Months Ended September 30, | ||||||||||||||||
2014 | 2013 | Nine Months Ended September 30, 2015 | Year Ended December 31, 2014 | |||||||||||||
Loans receivable allowance, beginning of period | $ | 1,215,000 | $ | 1,191,000 | $ | 1,219,000 | $ | 1,215,000 | ||||||||
Provision for loan losses charged to expense | 1,268,330 | 1,320,546 | 1,351,427 | 1,817,822 | ||||||||||||
Charge-offs, net | (1,378,330 | ) | (1,384,546 | ) | (1,269,427 | ) | (1,813,822 | ) | ||||||||
Loans receivable allowance, end of period | $ | 1,105,000 | $ | 1,127,000 | $ | 1,301,000 | $ | 1,219,000 |
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5. | Accounts Receivable – |
A breakdown of accounts receivables by segment as of September 30, 2015 and December 31, 2014 are as follows:
September 30, 2015 | ||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Total | |||||||||||||
Accounts receivable | $ | 1,423,267 | $ | 103,738 | $ | 894,172 | $ | 2,421,177 | ||||||||
Less allowance | (150,000 | ) | - | (116,000 | ) | (266,000 | ) | |||||||||
Net account receivable | $ | 1,273,267 | $ | 103,738 | $ | 778,172 | $ | 2,155,177 |
December 31, 2014 | ||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Total | |||||||||||||
Accounts receivable | $ | 1,164,532 | $ | - | $ | - | $ | 1,164,532 | ||||||||
Less allowance | (59,405 | ) | - | - | (59,405 | ) | ||||||||||
Net account receivable | $ | 1,135,127 | $ | - | $ | - | $ | 1,135,127 |
6. | Property and Equipment – |
A rollforward of the Company’s property and equipment is as follows:
December 31, 2014 | Merger Transaction | Additions | Deletions | September 30, 2015 | ||||||||||||||||
Furniture and equipment | $ | 2,853,603 | $ | 492,435 | $ | 1,042,617 | $ | (730,468 | ) | $ | 3,658,187 | |||||||||
Leasehold improvements | 787,188 | - | 22,766 | (9,117 | ) | 800,837 | ||||||||||||||
Software | 504,967 | 1,197,839 | 81,243 | (108,081 | ) | 1,675,968 | ||||||||||||||
Building | 85,906 | 5,034,348 | 28,449 | - | 5,148,703 | |||||||||||||||
Land | 9,500 | 1,200,000 | - | - | 1,209,500 | |||||||||||||||
Other | 96,311 | - | - | - | 96,311 | |||||||||||||||
4,337,475 | 7,924,622 | 1,175,075 | (847,666 | ) | 12,589,506 | |||||||||||||||
Accumulated depreciation | (3,139,765 | ) | (1,334,555 | ) | (444,814 | ) | 847,666 | (4,071,468 | ) | |||||||||||
$ | 1,197,710 | $ | 6,590,067 | $ | 730,261 | $ | - | $ | 8,518,038 |
7. | Intangible Assets – |
A rollforward of the Company’s intangible assets consisted of the follows:
December 31, 2014 | Merger Transaction | Additions | Deletions | September 30, 2015 | ||||||||||||||||
Customer relationships | $ | 4,924,912 | $ | - | $ | 1,115,000 | $ | - | $ | 6,039,912 | ||||||||||
Acquired franchise agreements | 5,227,112 | - | - | - | 5,227,112 | |||||||||||||||
Other | - | 227,000 | - | - | 227,000 | |||||||||||||||
Amortizable Intangible assets | 10,152,024 | 227,000 | 1,115,000 | - | 11,494,024 | |||||||||||||||
Less accumulated amortization | (5,685,523 | ) | (105,480 | ) | (359,133 | ) | - | (6,150,136 | ) | |||||||||||
Net Amortizable Intangible Assets | 4,466,501 | 121,520 | 755,867 | - | 5,343,888 | |||||||||||||||
Non-amortizable trademarks | 2,782,292 | - | - | - | 2,782,292 | |||||||||||||||
Intangible Assets, net | $ | 7,248,793 | $ | 121,520 | $ | 755,867 | $ | - | $ | 8,126,180 |
As of September 30, 2015, estimated future amortization expense for the amortizable intangible assets is as follows:
2015 (remainder) | $ | 139,720 | ||
2016 | 550,796 | |||
2017 | 537,740 | |||
2018 | 525,991 | |||
2019 | 515,416 | |||
2020 | 499,165 | |||
Thereafter | 2,575,060 | |||
$ | 5,343,888 |
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8. | Other Non-Current Assets – |
Other Non-Current Assets include $145,800 for a note receivable. Our agreement with the borrower includes an approximate 50% forgiveness of principal if, among other terms and conditions, required payments under the agreement are received. The agreement provides for monthly payments of principal over a five-year term ending March 2020.
9. | Deferred Revenue and Other Liabilities – |
Deferred revenue and other liabilities consist of the following:
September 30, 2015 | December 31, 2014 | |||||||
Deferred financing fees | $ | 269,526 | $ | 284,231 | ||||
Deferred franchise fees | 49,579 | 281,837 | ||||||
Merchandise credits and gift card liability | 447,499 | - | ||||||
Other | 194,000 | 72,000 | ||||||
Total | $ | 960,604 | $ | 638,068 |
10. | Notes Payable – Long Term – |
September 30, 2015 | December 31, 2014 | |||||||
Note payable (with a credit limit of $3,000,000) to River City Equity, Inc., a related party, with interest payable monthly at 12% per annum, due June 30, 2016 and upon certain events can be collateralized by substantially all assets of WCR, excluding any equity interest in AGI | $ | 3,000,000 | $ | 2,000,000 | ||||
Subsidiary note payable to a financial institution with quarterly principal payments of $375,000 plus interest at prime rate plus 2.5% per annum (5.75% as of September 30, 2015), secured by AGI’s assets, due June 2017 | 2,000,000 | 3,125,000 | ||||||
Subsidiary note payable to a financial institution with monthly principal payments of $33,334 plus annual paydowns equal to JPRE’s net cash flow from operations due within 120 days of the calendar year end plus interest at LIBOR plus 3.5% per annum (3.75% as of September 30, 2015), secured by JPRE assets, due June 2019 | 3,471,462 | - | ||||||
Total | 8,471,462 | 5,125,000 | ||||||
Less current maturities | (4,900,008 | ) | (3,500,000 | ) | ||||
$ | 3,571,454 | $ | 1,625,000 |
As part of their lending agreement, AGI may draw on a $1,000,000 line of credit (LOC). The LOC bears interest at the greater of (a) the prime rate plus 2.50% per annum or (b) the LIBOR rate plus 5.50% per annum. The LOC matures in August 2017. There was no activity on this LOC during the period ended September 30, 2015 and there was no balance outstanding as of September 30, 2015.
As part of their lending agreement, JPPA may draw on a $4,250,000 LOC. The LOC bears interest at the LIBOR rate plus 2.75% per annum (3.00% as of September 30, 2015). The LOC matures on July, 2016. There was no activity on this LOC during the period ended September 30, 2015 and there was no balance outstanding as of September 30, 2015.
RAI is party to a $2,000,000 revolving LOC from a financial institution. This revolving LOC is collateralized by substantially all the assets of the RAI and matures in November 2015. Interest is payable monthly at LIBOR plus 3.50% per annum (3.75% as of September 30, 2015). There was no outstanding balance at September 30, 2015.
The Company’s long-term debt isnotes payable with financial institutions includes certain financial covenants. Management has determined that the Company borrowers were in compliance with these financial covenants as follows:of September 30, 2015.
September 30, 2014 | December 31, 2013 | |||||||
Note payable (with a credit limit of $3,000,000) to River City Equity, Inc., a related party, with interest payable monthly at 12%, due June 30, 2015, and upon certain events can be collateralized by substantially all assets of WCR. | $ | 2,000,000 | $ | 2,750,000 | ||||
Total | 2,000,000 | 2,750,000 | ||||||
Less current maturities | (2,000,000 | ) | (2,750,000 | ) | ||||
$ | - | $ | - |
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Other Operating Expense – |
A breakout of other operating expense is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Store expenses | ||||||||||||||||
Bank fees | $ | 114,389 | $ | 109,892 | $ | 334,067 | $ | 316,208 | ||||||||
Collection costs | 102,653 | 118,510 | 324,636 | 356,425 | ||||||||||||
Repairs & maintenance | 59,344 | 81,056 | 258,803 | 194,470 | ||||||||||||
Supplies | 144,572 | 208,665 | 455,986 | 371,426 | ||||||||||||
Telephone | 48,387 | 46,353 | 151,620 | 125,468 | ||||||||||||
Utilities and network lines | 230,969 | 207,372 | 694,977 | 585,422 | ||||||||||||
Other | 503,822 | 369,766 | 1,319,145 | 954,312 | ||||||||||||
$ | 1,204,136 | $ | 1,141,614 | $ | 3,539,234 | $ | 2,903,731 | |||||||||
General & administrative expenses | ||||||||||||||||
Professional fees | $ | 46,799 | $ | 71,494 | $ | 259,791 | $ | 262,855 | ||||||||
Management and consulting fees | 126,163 | 111,826 | 364,148 | 331,335 | ||||||||||||
Other | 203,991 | 74,992 | 484,742 | 204,469 | ||||||||||||
$ | 376,953 | $ | 258,312 | $ | 1,108,681 | $ | 798,659 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Bank fees | $ | 310,419 | $ | 114,391 | $ | 595,164 | $ | 334,069 | ||||||||
Collection costs | 99,587 | 102,653 | 319,890 | 324,635 | ||||||||||||
Conferences | 460,602 | - | 671,287 | - | ||||||||||||
Insurance | 110,788 | 79,339 | 286,783 | 177,003 | ||||||||||||
Management and advisory fees | 125,754 | 126,163 | 400,057 | 364,148 | ||||||||||||
Professional and consulting fees | 483,575 | 106,113 | 1,401,683 | 422,515 | ||||||||||||
Supplies | 167,480 | 150,058 | 496,116 | 474,571 | ||||||||||||
Other | 522,604 | 374,654 | 1,583,539 | 875,607 | ||||||||||||
$ | 2,280,809 | $ | 1,053,371 | $ | 5,754,519 | $ | 2,972,548 |
Income Tax Provision – |
Income tax expense, as a percentage of Income Before Income Taxes, was 45% and 38% for the three months ended September 30, 2015 and 2014, respectively, and 44% and 38% for the nine months ended September 30, 2015 and 2014, respectively. Nondeductible portion of meal and entertainment expense and nondeductible transaction costs contributed to the higher effective tax rates.
13. | Acquisitions – |
Cellular Retail
Effective June 1, 2015, PQH consummated the acquisition of all outstanding membership interests in four separate limited liability companies. The entities acquired, when combined, do not meet the 20% significant subsidiaries thresholds under Rule 210.1-02 as modified by Rule 210.3-05(b) of SEC Reg. S-X. Under the equity method of accounting, the assets acquired and liabilities assumed were recorded at their estimated fair values as of the purchase date as follows:
June 1, 2015 | ||||
Cash | $ | 389,000 | ||
Inventory | 427,000 | |||
Other receivables | 405,000 | |||
Property and equipment | 612,000 | |||
Goodwill | 578,000 | |||
Intangible assets | 903,000 | |||
Other assets | 69,000 | |||
Accounts payable and accrued liabilities | (826,000 | ) | ||
$ | 2,557,000 |
JPPA, RAI and JPRE Transaction
Effective July 1, 2015, the Company acquired the businesses of JPPA, RAI and JPRE by completing a merger and contribution transaction. In consideration for the acquisition of these businesses, the Company issued to the former owners an aggregate of 3.5 million shares of the Company’s common stock representing approximately 37% of the total issued and outstanding common stock after consummation of the acquisition.
The entities are affiliated entities under common control and in accordance with Accounting Standards Codification Topic 805, “Business Combinations,” and the Company, as the acquirer, recognized the assets and liabilities of the target entities at their historical values as of the date of merger as follows:
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July 1, 2015 | ||||
Cash | $ | 2,082,000 | ||
Accounts Receivables, net | 527,000 | |||
Inventory | 3,170,000 | |||
Deferred income tax asset | 186,000 | |||
Prepaid expense and other current assets | 525,000 | |||
Property and equipment, net | 6,590,000 | |||
Goodwill | 31,000 | |||
Intangible assets, net | 122,000 | |||
Accounts payable and accrued liabilities | (2,231,000 | ) | ||
Short-term notes payable | (120,000 | ) | ||
Income taxes payable | (547,000 | ) | ||
Deferred revenue and other | (460,000 | ) | ||
Notes payable and capital leases | (3,583,000 | ) | ||
Deferred income tax liability | (169,000 | ) | ||
$ | 6,123,000 |
The results of the operations for the acquired businesses, as well as the acquisition of AGI (see Note 13 to the Company’s December 31, 2014 Notes to Consolidated Financial Statements) on October 1, 2014 have been included in the consolidated financial statements since the respective dates of acquisition. The following table presents the unaudited pro forma results of operations for the three and nine months ended September 30, 2015 and 2014, as if these acquisitions had been consummated at the beginning of 2014. The pro forma net income below excludes the expenses of the transactions and includes a reduction in management and advisory fees that resulted from the AGI transaction. The pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions been consummated at the beginning of the 2014, or the results that may occur in the future.
For the Three Months Ended September 30, 2015 (in thousands except earnings per share) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Pro forma revenue | $ | 3,675 | $ | 9,537 | $ | 5,442 | $ | 3,297 | $ | - | $ | 21,951 | ||||||||||||
Pro forma net income (loss) | $ | 829 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (167 | ) | $ | 926 | ||||||||||
Pro forma net income attributable to noncontrolling interests | $ | 6 | $ | - | $ | - | $ | - | $ | - | $ | 6 | ||||||||||||
Pro forma net income (loss) available to Western shareholders | $ | 823 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (167 | ) | $ | 920 | ||||||||||
Pro forma earnings (loss) per share available to Western common shareholders – basic and diluted | $ | 0.087 | $ | 0.047 | $ | (0.060 | ) | $ | 0.041 | $ | (0.018 | ) | $ | 0.097 |
For the Three Months Ended September 30, 2014 (in thousands except earnings per share) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Pro forma revenue | $ | 3,665 | $ | 9,078 | $ | 5,734 | $ | 3,366 | $ | - | $ | 21,843 | ||||||||||||
Pro forma net income (loss) | $ | 648 | $ | 393 | $ | (606 | ) | $ | 364 | $ | - | $ | 799 | |||||||||||
Pro forma net income attributable to noncontrolling interests | $ | 5 | $ | - | $ | - | $ | - | $ | - | $ | 5 | ||||||||||||
Pro forma net income (loss) available to Western shareholders | $ | 643 | $ | 393 | $ | (606 | ) | $ | 364 | $ | - | $ | 794 | |||||||||||
Pro forma earnings (loss) per share available to Western common shareholders – basic and diluted | $ | 0.068 | $ | 0.041 | $ | (0.064 | ) | $ | 0.039 | $ | - | $ | 0.084 |
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For the Nine Months Ended September 30, 2015 (in thousands except earnings per share) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Pro forma revenue | $ | 9,641 | $ | 29,632 | $ | 30,296 | $ | 9,451 | $ | - | $ | 79,020 | ||||||||||||
Pro forma net income (loss) | $ | 1,585 | $ | 967 | $ | 1,365 | $ | 932 | $ | (408 | ) | $ | 4,441 | |||||||||||
Pro forma net income attributable to noncontrolling interests | $ | 13 | $ | - | $ | - | $ | - | $ | - | $ | 13 | ||||||||||||
Pro forma net income (loss) available to Western shareholders | $ | 1,572 | $ | 967 | $ | 1,365 | $ | 932 | $ | (408 | ) | $ | 4,428 | |||||||||||
Pro forma earnings (loss) per share available to Western common shareholders – basic and diluted | $ | 0.165 | $ | 0.102 | $ | 0.144 | $ | 0.098 | $ | (0.043 | ) | $ | 0.466 |
For the Nine Months Ended September 30, 2014 (in thousands except earnings per share) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Pro forma revenue | $ | 9,568 | $ | 25,215 | $ | 30,587 | $ | 9,506 | $ | - | $ | 74,876 | ||||||||||||
Pro forma net income (loss) | $ | 1,165 | $ | 526 | $ | 480 | $ | 1,076 | $ | - | $ | 3,247 | ||||||||||||
Pro forma net income attributable to noncontrolling interests | $ | 5 | $ | - | $ | - | $ | - | $ | - | $ | 5 | ||||||||||||
Pro forma net income (loss) available to Western shareholders | $ | 1,160 | $ | 526 | $ | 480 | $ | 1,076 | $ | - | $ | 3,242 | ||||||||||||
Pro forma earnings (loss) per share available to Western common shareholders – basic and diluted | $ | 0.122 | $ | 0.055 | $ | 0.051 | $ | 0.113 | $ | - | $ | 0.341 |
14. | Segment Information – |
The Company has grouped its operations into two segments – Consumer Finance and Cellular Retail. The Consumer Finance segment provides financial and ancillary services. The Cellular Retail segment is an authorized Cricket Wireless dealer selling cellular phones and accessories, ancillary services and serving as a payment center for customers.
Segment information related to the three and nine months ended September 30, 2015 and 2014, and 2013 is set forthpresented below:
Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, 2015 (in thousands) | For the Three Months Ended September 30, 2015 (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Consumer Finance | Cellular Retail | Total | Consumer Finance | Cellular Retail | Total | Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||||||||||||||||||||
Revenues from external customers | $ | 3,366,283 | $ | 6,192,461 | $ | 9,558,744 | $ | 3,287,935 | $ | 5,308,335 | $ | 8,596,270 | $ | 3,675 | $ | 9,537 | 5,442 | $ | 3,297 | $ | - | $ | 21,951 | |||||||||||||||||||||||||
Net income | $ | 298,819 | $ | 266,497 | $ | 565,316 | $ | 350,768 | $ | 41,811 | $ | 392,579 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization | $ | 109 | $ | 136 | 102 | $ | 29 | $ | - | $ | 376 | |||||||||||||||||||||||||||||||||||||
Interest expense | $ | 57 | $ | 91 | 50 | $ | - | $ | - | $ | 198 | |||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) | $ | 534 | $ | 221 | (177 | ) | $ | 221 | $ | (75 | ) | $ | 724 | |||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 829 | $ | 443 | (569 | ) | $ | 390 | $ | (213 | ) | $ | 880 | |||||||||||||||||||||||||||||||||||
Expenditures for segmented assets | $ | - | $ | - | 186 | $ | 29 | $ | - | $ | 215 |
Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 | |||||||||||||||||||||||
Consumer Finance | Cellular Retail | Total | Consumer Finance | Cellular Retail | Total | |||||||||||||||||||
Revenues from external customers | $ | 9,505,855 | $ | 17,305,446 | $ | 26,811,301 | $ | 9,269,693 | $ | 14,513,769 | $ | 23,783,462 | ||||||||||||
Net income | $ | 938,200 | $ | 198,391 | $ | 1,136,591 | $ | 1,038,856 | $ | 181,176 | $ | 1,220,032 | ||||||||||||
Total segment assets | $ | 16,748,834 | $ | 8,624,686 | $ | 25,373,520 | $ | 15,694,275 | $ | 8,243,296 | $ | 23,937,571 |
For the Three Months Ended September 30, 2014 (in thousands) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenues from external customers | $ | - | $ | 6,193 | $ | - | $ | 3,366 | $ | - | $ | 9,559 | ||||||||||||
Depreciation and amortization | $ | - | $ | 85 | $ | - | $ | 31 | $ | - | $ | 116 | ||||||||||||
Interest expense | $ | - | $ | 42 | $ | - | $ | 18 | $ | - | $ | 60 | ||||||||||||
Income tax expense (benefit) | $ | - | $ | 164 | $ | - | $ | 183 | $ | - | $ | 347 | ||||||||||||
Net income (loss) | $ | - | $ | 266 | $ | - | $ | 299 | $ | - | $ | 565 | ||||||||||||
Expenditures for segmented assets | $ | - | $ | 34 | $ | - | $ | 9 | $ | - | $ | 43 |
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For the Nine Months Ended September 30, 2015 (in thousands) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenues from external customers | $ | 9,641 | $ | 24,655 | $ | 5,442 | $ | 9,451 | $ | - | $ | 49,189 | ||||||||||||
Depreciation and amortization | $ | 325 | $ | 292 | $ | 102 | $ | 85 | $ | - | $ | 804 | ||||||||||||
Interest expense | $ | 156 | $ | 195 | $ | 50 | $ | - | $ | - | $ | 401 | ||||||||||||
Income tax expense (benefit) | $ | 1,015 | $ | 503 | $ | (177 | ) | $ | 553 | $ | (197 | ) | $ | 1,697 | ||||||||||
Net income (loss) | $ | 1,585 | $ | 910 | $ | (569 | ) | $ | 932 | $ | (710 | ) | $ | 2,148 | ||||||||||
Total segment assets | $ | 9,379 | $ | 12,823 | $ | 13,568 | $ | 16,299 | $ | 544 | $ | 52,613 | ||||||||||||
Expenditures for segmented assets | $ | 91 | $ | 3,656 | $ | 186 | $ | 45 | $ | 14 | $ | 3,992 |
For the Nine Months Ended September 30, 2014 (in thousands) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenues from external customers | $ | - | $ | 17,305 | $ | - | $ | 9,506 | $ | - | $ | 26,811 | ||||||||||||
Depreciation and amortization | $ | - | $ | 256 | $ | - | $ | 86 | $ | - | $ | 342 | ||||||||||||
Interest expense | $ | - | $ | 130 | $ | - | $ | 62 | $ | - | $ | 192 | ||||||||||||
Income tax expense (benefit) | $ | - | $ | 119 | $ | - | $ | 567 | $ | - | $ | 686 | ||||||||||||
Net income (loss) | $ | - | $ | 199 | $ | - | $ | 938 | $ | - | $ | 1,137 | ||||||||||||
Total segment assets | $ | - | $ | 8,625 | $ | - | $ | 16,749 | $ | - | $ | 25,374 | ||||||||||||
Expenditures for segmented assets | $ | - | $ | 401 | $ | - | $ | 60 | $ | - | $ | 461 |
The Company leases retail and office facilities under operating leases with terms ranging from month to month to six years, with rights to extend for additional periods. Future minimum base lease payments (in thousands) are approximately as follows:
Year Ending December 31, | Operating Leases | |||
2015 (remainder) | $ | 938 | ||
2016 | 2,920 | |||
2017 | 2,110 | |||
2018 | 998 | |||
2019 | 554 | |||
2020 | 90 | |||
Thereafter | - | |||
Total minimum base lease payments | $ | 7,610 |
16. | Commitments and Contingencies – |
AlphaGraphics Merger TransactionEmployment Agreements
After closeOn April 11, 2013, the Company entered into an Amended and Restated Employment Agreement with its Chief Executive Officer, Mr. John Quandahl. This agreement has a term of businessthree years and contains, among other terms and conditions, provisions for an annual performance-based cash bonus pool for management.
Effective February 9, 2015, the Company entered into a three-year employment agreement with its Chief Investment Officer (CIO). Pursuant to that agreement, the CIO is eligible for a discretionary annual performance-based bonus up to $200,000. To date no performance-based bonus has been accrued.
17 |
The Company has also entered into several employment agreements with certain members of subsidiary management. The terms of each agreement are different, but may ordinarily include stipulated base salary and bonus potential.
Pursuant to the numerous employment agreements, bonuses of approximately $353,000 and $655,000 were accrued for the three and nine months ended September 30, 2014,2015, respectively.
Vendor Service Agreement
In September 2015, AGI entered into a service agreement with a vendor for approximately $680,000. The vendor will provide services over a three year period.
17. | Management and Advisory Agreement – |
The Company is party to an Amended and Restated Management and Advisory Agreement with Blackstreet Capital Management, LLC, (“Blackstreet”) under which Blackstreet provides certain financial, managerial, strategic and operating advice and assistance to the Company acquired(see Note 17 to the business of AlphaGraphics, Inc., a Delaware corporation, by completing a merger transaction. Company’s December 31, 2014 Notes to Consolidated Financial Statements).
The Agreementamended and Plan of Merger governing the transaction (the “Merger Agreement”) was entered into on August 29, 2014, by and amongrestated agreement requires the Company WCRS Acquisition Co., LLC,to pay Blackstreet a Delaware limited liability company and wholly ownedfee in an amount equal to $400,000 upon the closing of an acquisition subsidiary ofin consideration for Blackstreet’s referral to the Company of such acquisition opportunity, and BC Alpha Holdings II, LLC, a Delaware limited liability companyBlackstreet’s assistance in the performance of due diligence services relating thereto. Any fees which may have been payable per these terms related to the JPPA, RAI and JPRE acquisition (see Note 12) were waived by Blackstreet.
Effective July 1, 2015 the parent entityagreement with Blackstreet was amended. The annual fees under the amended and restated contract will be the greater of AlphaGraphics.(i) $612,100 (subject to annual increases of five percent) or (ii) five percent of Western Capital’s “EBITDA” as defined under the agreement. All other terms and provisions remain unmodified.
18. | Equity – |
Common Stock Issued
As contemplated under the Merger Agreement, allfurther explained in Note 13, on July 1, 2015, WCR issued an aggregate of the outstanding membership interests in BC Alpha Holdings II were exchanged for the issuance by the Company of 2,986,8233.5 million shares of common stock for the acquisition of the Company representingJPPA, RAI and JPRE. This represented approximately 49.8%37% of the total issued and outstanding common stock of the Company after the merger.issuance.
Change inWCR 2015 Stock Incentive Plan
The Board of Directors of WCR adopted WCR’s new 2015 Stock Incentive Plan effective February 6, 2015. The plan replaces the Company’s earlier adopted 2008 Stock Incentive Plan, which the board terminated effective February 6, 2015. There were no incentives issued or outstanding under the terminated plan.
WCR’s Board of Directors, or a committee of the board, will administer the 2015 Stock Incentive Plan and have complete authority to award incentives, interpret the plan and make any other determination it believes necessary and advisable for the proper administration of the plan. A total of 100,000 shares of WCR common stock were reserved in connection with the adoption of the 2015 Stock Incentive Plan.
The new plan permits the granting of incentives in any one or a combination of the following forms:
Ÿ | stock options, including options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, as “qualified” or “incentive” stock options; |
Ÿ | stock appreciation rights (often referred to as “SARs”) payable in cash or shares of common stock; |
Ÿ | restricted stock and restricted stock units; |
Ÿ | performance awards of cash, stock or property; and |
Ÿ | stock awards. |
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The following table summarizes nonvested stock option awards outstanding at September 30, 2015 and the changes for the nine months then ended:
Number of Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding and nonvested at December 31, 2014 | - | $ | - | $ | - | |||||||||||
Granted | 65,000 | 6.00 | 9.37 | - | ||||||||||||
Vested | - | - | - | |||||||||||||
Forfeited | - | - | - | |||||||||||||
Outstanding and nonvested at September 30, 2015 | 65,000 | $ | 6.00 | 9.37 | $ | - | ||||||||||
Exercisable at September 30, 2015 | - |
The option vests in three annual and near-equal installments on each of February 8, 2016, 2017 and 2018, and has a contract life of ten years. There were no vested options at September 30, 2015, and thus no intrinsic value in outstanding vested options at September 30, 2015. As of September 30, 2015, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $119,000, which is expected to be recognized over a weighted-average period of approximately 1.4 years.
JPPA Stock Incentive Plan
The following table summarizes nonvested stock option awards outstanding at September 30, 2015 and the changes for the three months then ended:
Number of Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding and nonvested at June 30, 2015 | 35.1 | $ | 3403.37 | $ | - | |||||||||||
Granted | - | - | 9.4 | - | ||||||||||||
Vested | - | - | - | |||||||||||||
Forfeited | - | - | - | |||||||||||||
Outstanding and nonvested at September 30, 2015 | 35.1 | $ | 3403.37 | 9.4 | $ | - | ||||||||||
Exercisable at September 30, 2015 | - |
Subject to the provisions of the J&P Park Acquisitions, Inc. 2010 Stock Option Plan, the options vest 10% annually beginning on the one year anniversary of the grant until 50% of the options have vested. The remaining options vest upon a sale of the company (as defined in the agreement). The options have a contract life of ten years. There were no vested options at September 30, 2015, and thus no intrinsic value in outstanding vested options at September 30, 2015. As of September 30, 2015, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $108,000. At September 30, 2015 JPPA had 4,645 shares issued and outstanding.
RAI Stock Incentive Plan
The following table summarizes nonvested stock option awards outstanding at September 30, 2015 and the changes for the three months then ended:
Number of Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding and nonvested at June 30, 2015 | - | $ | - | $ | - | |||||||||||
Granted | 73.76 | 3,765.90 | 9.16 | - | ||||||||||||
Vested | - | - | - | |||||||||||||
Forfeited | - | - | - | |||||||||||||
Outstanding and nonvested at September 30, 2015 | 73.76 | $ | 3,765.90 | 9.16 | $ | - | ||||||||||
Exercisable at September 30, 2015 | 2.96 | 6,471.00 | 6.45 | - |
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Subject to the provisions of the Restorers Acquisition, Inc. 2011 Stock Option Plan, the options vest 10% annually beginning on the one year anniversary of the grant until 50% of the options have vested. The remaining options vest upon a sale of the company (as defined in the agreement). The options have a contract life of 10 years. There were no vested options at September 30, 2015 and thus no intrinsic value in outstanding vested options at September 30, 2015. As of September 30, 2015, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $230,000. At September 30, 2015 RAI had 573 shares issued and outstanding.
19. | Subsequent Events – |
On October 1, 2014, and2015, the Consumer Finance segment disposed of all four of its locations in connection with the AlphaGraphics merger transaction described above, Angel Donchev and Thomas Ripley resigned from their positions as directorsan underperforming Utah market for $167,500 in cash, resulting in a loss of the Company. On that same day, the Board of Directors appointed Gay A. Burke and Lawrence S. Berger to the board vacancies created by the resignations of Messrs. Donchev and Ripley. The appointments of Gay A. Burke and Lawrence S. Berger occurred at the direction of BC Alpha Holdings II, consistent with certain director-appointment rights granted to that company in the Merger Agreement. Lawrence Berger was appointed to serve as a member of the Audit Committee, replacing Angel Donchev.approximately $450,000.
On November 10, 2015 PQH executed an Asset Purchase Agreement to acquire 10 Cricket Retail Locations for approximately $450,000. The purchase is expected to close on December 1, 2015.
The Company evaluated all other events or transactions that occurred after September 30, 2015 up through November 16, 2015, the date on which these financial statements were issued. During this period, the Company did not have any other material subsequent events that impacted its financial statements.
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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 maythat might 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 |
· | 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; |
· | the impact on us, as a Cricket dealer, of the AT&T acquisition of the Cricket Wireless |
· | failure of or disruption caused by a significant vendor; and |
· | our ability to successfully integrate our recently acquired businesses. |
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, 2013.2014.
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.
Recent DevelopmentsOVERVIEW
AlphaGraphics Merger TransactionWestern Capital Resources, Inc. (“we”, “WCR” or “Western Capital”) is a holding company that operates, through its subsidiaries, in the following industries and operating segments:
After close
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Our “Franchise” segment involves the franchising of business on September 30, 2014, we acquired the business ofAlphaGraphics® customized print and marketing solutions offered through our majority owned subsidiary AlphaGraphics, Inc., a Delaware corporation, by completing a merger transaction. The Agreement (99.2% owned) (“AlphaGraphics” or “AGI”). Our “Cellular Retail” segment is an authorized Cricket Wireless dealer and Planinvolves the retail sale of Merger governing the transaction (the “Merger Agreement”) was entered into on August 29, 2014, bycellular phones and among us, WCRS Acquisition Co., LLC,accessories to consumers through our wholly owned subsidiary PQH Wireless, Inc. and its subsidiaries (“PQH”). On July 1, 2015, we acquired our “Direct to Consumer” segment, which consists of an online and direct marketing distribution retailer with product offerings including seeds, live goods and garden accessories operating in the retail market under Park Seed, Jackson & Perkins and Wayside Gardens, and in the wholesale market under Park Wholesale, and an online retail seller of home improvement and restoration products operating over the internet through the domain name of www.Vandykes.com and through direct mail catalogs. Our “Consumer Finance” segment consists of retail financial services conducted through our wholly owned subsidiaries Wyoming Financial Lenders, Inc. (“WFL”) and Express Pawn, Inc. (“EPI”). On January 1, 2015, our “Corporate” segment was formed which includes the corporate acquisition subsidiary, and BC Alpha Holdings II, LLC, a Delaware limited liability companydue-diligence team and management of acquired subsidiaries. Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as “we,” the parent entity of AlphaGraphics (collectively “AlphaGraphics”).“Company,” and “us.” References to specific companies within our enterprise, such as “PQH,” “WFL,” “EPI”, “AGI”, “JPPA”, “RAI”, or “JPRE” are references only to those companies.
As contemplated under the Merger Agreement, all of the outstanding membership interests in BC Alpha Holdings II were exchanged for our issuance of 2,986,823 shares of common stock representing approximately 49.8% of our total issuedKey actual and outstanding common stock after the merger.
General Overview
Revenues and expenses for our Consumer Finance division, Cellular Retail division and Combined Consumer Finance and Cellular Retail divisionspro forma financial data for the three and nine months ended September 30, 20142015 and 20132014 were as follows:
Consumer Finance Division | ||||||||||||
Three Months Ended September 30, | ||||||||||||
2014 | 2013 | % Change | ||||||||||
Revenues | ||||||||||||
Retail sales, fees and commissions | $ | 446,461 | $ | 329,709 | 35.4 | % | ||||||
Financing fees and interest | 2,919,822 | 2,958,226 | (1.3 | )% | ||||||||
3,366,283 | 3,287,935 | 2.4 | % | |||||||||
Expenses | ||||||||||||
Store salaries and benefits | 686,800 | 673,420 | 2.0 | % | ||||||||
Provisions for loan losses | 514,762 | 575,355 | (10.5 | )% | ||||||||
Occupancy | 251,490 | 263,056 | (4.4 | )% | ||||||||
Other | 1,431,412 | 1,215,336 | 17.8 | % | ||||||||
Income tax | 183,000 | 210,000 | (12.9 | )% | ||||||||
3,067,464 | 2,937,167 | 4.4 | % | |||||||||
Net income | $ | 298,819 | $ | 350,768 | (14.8 | )% |
Cellular Retail Division | ||||||||||||
Three Months Ended September 30, | ||||||||||||
2014 | 2013 | % Change | ||||||||||
Revenues | ||||||||||||
Phones and accessories | $ | 6,192,461 | $ | 5,308,335 | 16.7 | % | ||||||
Expenses | ||||||||||||
Phone and accessories cost of sales | 2,839,494 | 2,553,880 | 11.2 | % | ||||||||
Store salaries and benefits | 1,351,941 | 1,285,452 | 5.2 | % | ||||||||
Occupancy | 486,027 | 414,033 | 17.4 | % | ||||||||
Other | 1,084,502 | 988,159 | 9.7 | % | ||||||||
Income tax | 164,000 | 25,000 | 556.0 | % | ||||||||
5,925,964 | 5,266,524 | 12.5 | % | |||||||||
Net (loss) income | $ | 266,497 | $ | 41,811 | 537.4 | % |
Combined - Consumer Finance and Cellular Retail Divisions | ||||||||||||
Three Months Ended September 30, | ||||||||||||
2014 | 2013 | % Change | ||||||||||
Revenues | ||||||||||||
Retail sales, fees and commissions | $ | 6,638,922 | $ | 5,638,044 | 17.8 | % | ||||||
Financing fees and interest | 2,919,822 | 2,958,226 | (1.3 | )% | ||||||||
9,558,744 | 8,596,270 | 11.2 | % | |||||||||
Expenses | ||||||||||||
Phone and accessories cost of sales | 2,839,494 | 2,553,880 | 11.2 | % | ||||||||
Store salaries and benefits | 2,038,741 | 1,958,872 | 4.1 | % | ||||||||
Provisions for loan losses | 514,762 | 575,355 | (10.5 | )% | ||||||||
Occupancy | 737,517 | 677,089 | 8.9 | % | ||||||||
Other | 2,515,914 | 2,203,495 | 14.2 | % | ||||||||
Income tax | 347,000 | 235,000 | 47.7 | % | ||||||||
8,993,428 | 8,203,691 | 9.6 | % | |||||||||
Net income | $ | 565,316 | $ | 392,579 | 44.0 | % |
Consumer Finance Division | ||||||||||||
Nine Months Ended September 30, | ||||||||||||
2014 | 2013 | % Change | ||||||||||
Revenues | ||||||||||||
Retail sales, fees and commissions | $ | 1,276,639 | $ | 955,623 | 33.6 | % | ||||||
Financing fees and interest | 8,229,216 | 8,314,070 | (1.0 | )% | ||||||||
9,505,855 | 9,269,693 | 2.5 | % | |||||||||
Expenses | ||||||||||||
Store salaries and benefits | 2,051,808 | 1,989,233 | 3.1 | % | ||||||||
Provisions for loan losses | 1,268,330 | 1,320,546 | (4.0 | )% | ||||||||
Occupancy | 746,344 | 756,484 | (1.3 | )% | ||||||||
Other | 3,934,173 | 3,534,574 | 11.3 | % | ||||||||
Income tax | 567,000 | 630,000 | (10.0 | )% | ||||||||
8,567,655 | 8,230,837 | 4.1 | % | |||||||||
Net income | $ | 938,200 | $ | 1,038,856 | (9.7 | )% |
Cellular Retail Division | ||||||||||||
Nine Months Ended September 30, | ||||||||||||
2014 | 2013 | % Change | ||||||||||
Revenues | ||||||||||||
Phones and accessories | $ | 17,305,446 | $ | 14,513,769 | 19.2 | % | ||||||
Expenses | ||||||||||||
Phone and accessories cost of sales | 8,435,300 | 6,980,858 | 20.8 | % | ||||||||
Store salaries and benefits | 4,139,640 | 3,479,628 | 19.0 | % | ||||||||
Occupancy | 1,394,296 | 1,197,421 | 16.4 | % | ||||||||
Other | 3,018,819 | 2,563,686 | 17.8 | % | ||||||||
Income tax | 119,000 | 111,000 | 7.2 | % | ||||||||
17,107,055 | 14,332,593 | 19.4 | % | |||||||||
Net income | $ | 198,391 | $ | 181,176 | 9.5 | % |
Combined - Consumer Finance and Cellular Retail Divisions | ||||||||||||
Nine Months Ended September 30, | ||||||||||||
2014 | 2013 | % Change | ||||||||||
Revenues | ||||||||||||
Retail sales, fees and commissions | $ | 18,582,085 | $ | 15,469,392 | 20.1 | % | ||||||
Financing fees and interest | 8,229,216 | 8,314,070 | (1.0 | )% | ||||||||
26,811,301 | 23,783,462 | 12.7 | % | |||||||||
Expenses | ||||||||||||
Phone and accessories cost of sales | 8,435,300 | 6,980,858 | 20.8 | % | ||||||||
Store salaries and benefits | 6,191,448 | 5,468,861 | 13.2 | % | ||||||||
Provisions for loan losses | 1,268,330 | 1,320,546 | (4.0 | )% | ||||||||
Occupancy | 2,140,640 | 1,953,905 | 9.6 | % | ||||||||
Other | 6,952,992 | 6,098,260 | 14.0 | % | ||||||||
Income tax | 686,000 | 741,000 | (7.4 | )% | ||||||||
25,674,710 | 22,563,430 | 13.8 | % | |||||||||
Net income | $ | 1,136,591 | $ | 1,220,032 | (6.8 | )% |
Consumer finance operations are conducted under our wholly owned subsidiaries, Wyoming Financial Lenders, Inc. and Express Pawn, Inc., primarily in the Midwestern and Southwestern United States. Services provided include short-term loans (non-recourse “cash advance” or “payday” loans, small unsecured installment loans, collateralized non-recourse pawn loans and title loans), check cashing and other money services. As of September 30, 2014, we operated 48 “payday” stores, two payday/pawn stores, and one pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming).
In our consumer finance operations, we provide short-term unsecured consumer cash advance loans in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advance, plus a fee. The fee varies from state to state based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. To repay the cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection.
We also provide unsecured installment loans in exchange for a promissory note with a maturity of generally three to six months. The fee and interest rate on installment loans vary based on applicable regulations.
We also provide collateralized non-recourse loans, commonly known as “pawn loans,” with a maturity of one to four months. Allowable pawn loan service charges will vary by state and range from 17.5% to 20% per month. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale. Customers have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or forfeit the merchandise to us on expiration. At our pawn stores we sell merchandise acquired through customer forfeiture of pawn collateral or second-hand merchandise purchased from customers or consigned to us.
As part of our consumer finance operations, we provide title loans and other ancillary consumer financial products and services that are complementary to its cash advance-lending business, such as check-cashing services, money transfers and money orders. In our check cashing business, we primarily cash payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts.
All of our loan and other services are subject to state regulations (which vary from state to state), federal regulations and local regulation, where applicable.
Our cellular retail operations are conducted by our wholly owned subsidiary, PQH Wireless, Inc. We are an authorized Cricket Wireless (“Cricket”) dealer, and operate Cricket retail stores selling cellular phones and accessories, providing ancillary services and accepting Cricket service payments from customers.Cricket brand service offerings provide customers with unlimited nationwide wireless services for a flat rate without requiring a fixed-term contract or a credit check. As an authorized Cricket dealer, we are only permitted to sell Cricket’s services at our Cricket retail stores. As of September 30, 2014, we operated 58 Cricket wireless retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington).
Our expenses primarily relate to the operations of our various stores. The most significant expenses include phones and accessories, salaries and benefits for our store employees, occupancy expenses for our leased real estate and provisions for payday loan losses. Our other significant expenses are general and administrative, which includes compensation of employees, professional fees for compliance, external reporting, audit and legal services, and management/consulting fees.
With respect to our cost structure, phone and accessory cost of sales and salaries and benefits are two of our largest costs and are driven primarily by the size and number of storefronts operated throughout the period and seasonal fluctuation in sales volumes. Occupancy costs make up our third largest expense item. Our provision for losses is also a significant expense. We have experienced seasonality in our Cricket operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors such as holiday spending habits at the end of each year and income tax refunds during the first quarter.
We evaluate our stores based on net store profits, revenue growth, gross profit contributions and, for payday stores, loss ratio (which is losses as a percentage of payday loan fees), with consideration given to the length of time the store has been open and its geographic location. We evaluate store financial and other measures on a routine basis to evaluate its past contributions and to assess its future contributions to profitability. We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally. To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business could be adversely affected.
To further diversify, our strategic expansion plans involve the expansion and diversification of our existing product and service offerings and our expansion into new lines of business through acquisitions. We also anticipate Cricket and pawn retail store expansion. We believe that successful expansion, both geographically and product- and service-wise, may help to mitigate the regulatory and economic risk inherent in our business by making us less reliant on (i) cash advance and installment lending alone and (ii) any particular aspect of our business that is concentrated geographically or by product offering.
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.
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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.
Loans ReceivableLoan Loss Allowance
We maintain a loan loss allowance for anticipated losses for our payday and installment loans.We do not record loan losses or charge-offs of pawn or title loans because the value of the collateral exceeds the loan amount.To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loan principal, interest and fees, historical charge offs, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our historical net write off percentage, net charge offs to loan principal, interest and fee amounts that originated during the last 24 months, applied against the balance of loan principal, interest and fees outstanding. We also periodically perform 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. We are aware that, as conditions change, we may also need to make additional allowances in future periods.
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. Loans are carried at cost plus accrued interest or fees less payments made and the loans receivable allowance. We do not specifically reserve for any individual loan. For purposes of estimating the loss allowance we use a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolios. This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates. We utilize a software program to assist with the tracking of its historical portfolio statistics. All returned items are charged-off after 180 days, as collections after that date have not been significant. TheLoans are carried at cost plus accrued interest or fees less payments made and a loans receivable allowances are reviewed at least at each quarter end andallowance.
We do not specifically reserve for any adjustment toindividual payday, installment or title loan. We aggregate loan types for purposes of estimating the loan loss allowance asusing a resultmethodology 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 loan performance,charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trendstrends. We utilize a software program to assist with the tracking of our historical portfolio statistics. A loan loss allowance is recorded.maintained for anticipated losses for payday and installment loans based primarily on our historical percentages 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 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.
A rollforward of our loans receivable allowance for the nine months ended September 30, 2014 and 2013(in thousands) is as follows:
Nine Months Ended September 30, | ||||||||||||||||
2014 | 2013 | Nine Months Ended September 30, 2015 | Year Ended December 31, 2014 | |||||||||||||
Loans receivable allowance, beginning of period | $ | 1,215,000 | $ | 1,191,000 | $ | 1,219 | $ | 1,215 | ||||||||
Provision for loan losses charged to expense | 1,268,330 | 1,320,546 | 1,351 | 1,818 | ||||||||||||
Charge-offs, net | (1,378,330 | ) | (1,384,546 | ) | (1,269 | ) | (1,814 | ) | ||||||||
Loans receivable allowance, end of period | $ | 1,105,000 | $ | 1,127,000 | $ | 1,301 | $ | 1,219 |
Valuation of Long-lived and Intangible Assets
We assess the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is analyzed on an annual basis. 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 trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets’ carrying value over the estimated fair value.
Results of Operations – Three Months Ended September 30, 20142015 Compared to Three Months Ended September 30, 20132014
On July 1, 2015, we acquired our newest segment, Direct to Consumer. In the acquisition, we acquired the assets and businesses of J&P Park Acquisitions, Inc. (“JPPA”), Restorers Acquisition, Inc. (“RAI”), and J&P Real Estate, LLC (“JPRE”) in exchange for our issuance to the former owners of those businesses of an aggregate of 3.5 million shares of our common stock, representing approximately 37% of our total issued and outstanding common stock on a post-acquisition basis. The Direct to Consumer segment is seasonal and historically experiences a loss in the quarter ending September 30 due to a slowdown in sales of the seasonal products it sells (seeds and live goods) and the period ending prior to the start of holiday gift sales. For the three months ended September 30, 2014, netcurrent quarter the Direct to Consumer segment had a loss of ($0.57) million or $0.06 cents per share, which was in line with managements’ expectations, resulting in a drag on consolidated earnings and earnings per share period over period. In addition, our Corporate segment, which was created at the beginning of the 2015, contributed a loss of $0.02 cents per share, which management views as investment in future growth. Net income attributable to our common shareholders was $.57$0.87 million, compared to $.39 millionor $0.09 per share (basic and diluted), for the three months ended September 30, 2013. During the three months ended September 30, 2014, income from operations before income taxes was $.91 million2015, compared to $.63$0.57 million, or $0.19 per share (basic and diluted), for the three months ended September 30, 2013. Compared to the prior year comparable three-month period, throughout some point of2014. For the current quarter, we operated a similar number of retail storefrontsthe Franchise segment, acquired on October 1, 2014, contributed $0.82 million in both divisions. However, we did operate a number of higher volume Cricket retail storefronts added throughout the last year that effectively replaced lower volume storefronts that had been closed over the same period. The three month net income fromwhile the Cellular Retail segment contributed $0.44 million in net income and the Consumer Finance Division fell behind prior year’s whilesegment contributed $0.39 million in net income fromincome. We expect segment contribution to earnings per share to further change in the fourth quarter due, at least in part, to the seasonality of the Direct to Consumer segment, higher holiday sales activity in the Cellular Retail division showed positive growth. Insegment and fluctuating levels of mergers and acquisitions expenditures.
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The following table provides quarter-over-quarter revenues and net income (in thousands) attributable to WCR common shareholders by operating segment:
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Three Months Ended September 30, 2015 | ||||||||||||||||||||||||
Revenues | $ | 3,675 | $ | 9,537 | $ | 5,442 | $ | 3,297 | $ | - | $ | 21,951 | ||||||||||||
% of total revenue | 16.7 | % | 43.5 | % | 24.8 | % | 15.0 | % | - | 100.0 | % | |||||||||||||
Net income (loss) | $ | 829 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (213 | ) | $ | 880 | ||||||||||
Net income (loss) attributable to WCR common shareholders | $ | 823 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (213 | ) | $ | 874 | ||||||||||
Three Months Ended September 30, 2014 | ||||||||||||||||||||||||
Revenues | $ | - | $ | 6,193 | $ | - | $ | 3,366 | $ | - | $ | 9,559 | ||||||||||||
% of total revenue | - | 64.8 | % | - | 35.2 | % | - | 100.0 | % | |||||||||||||||
Net income (loss) | $ | - | $ | 266 | $ | - | $ | 299 | $ | - | $ | 565 | ||||||||||||
Net income (loss) attributable to WCR common shareholders | $ | - | $ | 266 | $ | - | $ | 299 | $ | - | $ | 565 |
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Franchise
Three Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 3,675 | $ | - | 100.0 | % | - | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 200 | - | 5.5 | % | - | % | ||||||||||
Expenses | 2,646 | - | 71.8 | % | - | % | ||||||||||
Net income | $ | 829 | $ | - | 22.7 | % | - | % |
Our U.S. franchisees reported center sales for the second quarterthree months ended September 30 as follows:
2015 | 2014 | |||||||
Total gross U.S. network-wide center sales | $ | 67,194,000 | $ | 63,641,000 |
The table below summarizes the number of AlphaGraphics business centers owned and operated by franchisees during the three-month periods ended September 30, 2015 and 2014:
Beginning | New | Closed | Ending | |||||||||||||
2015 | ||||||||||||||||
US Centers | 250 | 4 | 2 | 252 | ||||||||||||
International Centers | 26 | - | - | 26 | ||||||||||||
Total | 276 | 4 | 2 | 278 | ||||||||||||
2014 | ||||||||||||||||
US Centers | 245 | - | 1 | 244 | ||||||||||||
International Centers | 33 | - | 1 | 32 | ||||||||||||
Total | 278 | - | 2 | 276 |
Revenues and net income for the three months ended September 30, 2015 were $3.68 million and $0.83 million, respectively, compared to pro forma revenues and net income for the comparable period in 2014 of $3.67 million and $0.65 million, respectively. Gross U.S. network-wide center sales as provided by franchisees increased 5.6% over the business disruption and added costs related to the AT&T acquisition of Cricket Wireless significantly contributed to thecomparable periods.
Cellular Retail
The following table summarizes our Cellular Retail division loss. In the third quarter of 2014, the Cricket Wireless promotions, advertising and strength of the AT&T network significantly contributed to an increase in unit sales and strongsegment operating performance of the Cellular Retail division. The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.results:
Three Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 9,537 | $ | 6,193 | 100.0 | % | 100.0 | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 4,461 | 2,839 | 46.8 | % | 45.9 | % | ||||||||||
Expenses | 4,633 | 3,088 | 48.6 | % | 49.8 | % | ||||||||||
Net income (loss) | $ | 443 | $ | 266 | 4.6 | % | 4.3 | % |
A summary table of the number of Cricket cellular retail stores we operated during the three-month periods ended September 30, 20142015 and 20132014 follows:
Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||
Consumer Finance | Payday / Pawn | Pawn | Cellular Retail | Consumer Finance | Payday / Pawn | Pawn | Cellular Retail | 2015 | 2014 | |||||||||||||||||||||||||||||||
Beginning | 48 | 2 | 1 | 58 | 51 | 1 | - | 52 | 110 | 58 | ||||||||||||||||||||||||||||||
Acquired/Launched/Converted | - | - | - | - | - | - | 1 | 9 | ||||||||||||||||||||||||||||||||
Acquired/ Launched | - | - | ||||||||||||||||||||||||||||||||||||||
Closed | - | - | - | - | - | - | - | (1 | ) | (8 | ) | - | ||||||||||||||||||||||||||||
Ending | 48 | 2 | 1 | 58 | 51 | 1 | 1 | 60 | 102 | 58 |
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On June 1, 2015 we acquired 41 Cricket retail stores, seven of which we subsequently closed. We closed one additional underperforming store bringing the number of Cricket retail stores we operated at September 30, 2015 to 102.
Revenues in the Cellular Retail segment increased $3.35 million, or 54.0%, to $9.54 million for the three months ended September 30, 2015, compared to $6.19 million for the three months ended September 30, 2014. This increase is due to a several factors that contributed to an approximate 52% increase in units activated period over period, including our acquisition of additional stores, relocation of underperforming locations, and the effects of AT&T’s acquisition of Cricket Wireless.
Our expenses increased $1.54 million from $3.09 million for the three-month period ended September 30, 2014 to $4.63 million for the three-month period ended September 30, 2015, primarily as a result of adding the new store locations. Stated as a percentage of Cellular Retail revenues, our period-over-period expenses were 48.6% compared to 49.8% the prior period, a decrease of 1.2%.
RevenuesDirect to Consumer
The following table summarizes our revenuesDirect to Consumer segment operating results:
Three Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 5,442 | $ | - | 100.0 | % | - | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 2,703 | - | 49.7 | % | - | % | ||||||||||
Expenses | 3,308 | - | 60.7 | % | - | % | ||||||||||
Net loss | $ | (569 | ) | $ | - | (10.4 | )% | - | % |
Revenues and net loss for the three months ended September 30, 2015 were $5.44 million and ($0.57) million, respectively, compared to pro forma revenues and net loss for the comparable period in 2014 of $5.73 million and 2013, respectively: ($0.61) million, respectively.
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||
2014 | 2013 | % Change Year Over Year | 2014 | 2013 | ||||||||||||||||
(percentage of revenues) | ||||||||||||||||||||
Retail sales, fees and commissions | $ | 6,638,922 | 5,638,044 | 17.8 | % | 69.5 | % | 65.6 | % | |||||||||||
Financing fees and interest | 2,919,822 | 2,958,226 | (1.3 | )% | 30.5 | % | 34.4 | % | ||||||||||||
Total | $ | 9,558,744 | 8,596,270 | 11.2 | % | 100.0 | % | 100.0 | % |
Consumer Finance
Revenues totaled $9.56The following table summarizes our Consumer Finance segment operating results:
Three Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 3,297 | $ | 3,366 | 100.0 | % | 100.0 | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 734 | 657 | 22.3 | % | 19.5 | % | ||||||||||
Expenses | 2,173 | 2,410 | 65.9 | % | 71.6 | % | ||||||||||
Net income | $ | 390 | $ | 299 | 11.8 | % | 8.9 | % |
A summary table of the number of consumer finance locations we operated during the three month periods ended September 30, 2015 and 2014 follows:
2015 | 2014 | |||||||
Beginning | 51 | 51 | ||||||
Acquired/ Launched | - | - | ||||||
Closed | - | - | ||||||
Ending | 51 | 51 |
Our Consumer Finance segment revenues decreased slightly for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. Our cost of revenues, which is made up of pawn merchandise sales and net bad debt, increased from $0.66 million for the three months ended September 30, 2014 compared to $8.60$0.73 million for the three months ended September 30, 2013. The increase in total revenues resulted primarily from higher Cellular Retail Division revenue, which can be attributed to a higher number of units sold. For the Consumer Finance division, during the three-month periods ended September 30, 2014 and 2013, we originated approximately $17.90 million and $18.12 million in cash advance loans.2015. Our average cash advance loan (including fees) totaled approximately $402 and $393 during the three-month periods ended September 30, 2014 and 2013, respectively. Our average fee for each of the three-month periods ended September 30, 2014 and 2013 was $58 and $57, respectively.
Store Expenses
The following table summarizes our storeoperating expenses for the three months ended September 30, 2014 and 2013, respectively:quarter decreased year-over-year primarily as a result of Company resources being re-directed to other segments.
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||
2014 | 2013 | % Change Year Over Year | 2014 | 2013 | ||||||||||||||||
(percentage of revenues) | ||||||||||||||||||||
Store Expenses: | ||||||||||||||||||||
Phone and accessories cost of sales | $ | 2,839,494 | 2,553,880 | 11.2 | % | 29.7 | % | 29.7 | % | |||||||||||
Salaries and benefits | 2,038,741 | 1,958,872 | 4.1 | % | 21.3 | % | 22.8 | % | ||||||||||||
Occupancy | 737,517 | 677,089 | 8.9 | % | 7.7 | % | 7.9 | % | ||||||||||||
Provisions for loan losses | 514,762 | 575,355 | (10.5 | )% | 5.4 | % | 6.7 | % | ||||||||||||
Advertising | 91,164 | 88,995 | 2.4 | % | 1.0 | % | 1.0 | % | ||||||||||||
Depreciation | 80,550 | 89,514 | (10.0 | )% | 0.8 | % | 1.0 | % | ||||||||||||
Amortization of intangible assets | 28,373 | 36,194 | (21.6 | )% | 0.3 | % | 0.4 | % | ||||||||||||
Other | 1,204,136 | 1,141,614 | 5.5 | % | 12.6 | % | 13.3 | % | ||||||||||||
$ | 7,534,737 | 7,121,513 | 5.8 | % | 78.8 | % | 82.8 | % |
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As the table above demonstrates, total expenses associated with store operations for the three months ended September 30, 2014Corporate
Costs related to our Corporate segment were $7.53 million, compared to $7.12$0.21 million for the three months ended September 30, 2013, representing a 5.8% increase over the prior period. The major components of these expenses are phone and accessories costs of sales, salaries and benefits for our store employees and occupancy costs relating to our store leaseholds. A discussion and analysis of the various components of our store expenses appears below.
Phone and Accessories Cost of Sales. For the three months ended September 30, 2014, our costs of sales were $2.84 million compared to $2.55 million for the same period in 2013. The increase in our Cellular Retail segment phone and accessory costs resulted primarily from an increase, albeit at a lower per-unit cost, in phone unit sales year over year.
Salaries and Benefits. Payroll and related costs at the store level were $2.04 million compared to $1.96 million for the three-month periods ended September 30, 2014 and 2013, respectively. The increase in the current period is primarily attributed to slightly higher payroll in our newer Cricket storefronts compared to the lower volume storefronts that have since been closed and the additional pawn store location.
Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $.74 million for the three months ended September 30, 2014 versus $.68 million for the three months ended September 30, 2013.
Provisions for Loan Losses. For the three months ended September 30, 2014 and 2013, our provisions for loan losses were $.51 million and $.58 million, respectively. Our provisions for loan losses represented approximately 18.1% and 19.9% of our payday and installment loan revenue for the three months ended September 30, 2014 and 2013, respectively. We remain uncertain how significant our total 2014 loan losses may be and how they may differ from 2013.
Advertising. Advertising and marketing expenses were $.09 million for the three months ended September 30, 2014 and 2013.
Depreciation. Depreciation, primarily relating to store equipment and leasehold improvements, was $.08 million for the three months ended September 30, 2014 compared to $.09 million for the three months ended September 30, 2013.
Amortization of Intangible Assets. Amortization of intangible assets decreased to $.03 million for the three months ended September 30, 2014 from $.04 million for the three month period ended September 30, 2013.
Other Store Expenses. Other expenses increased to $1.20 million for the three months ended September 30, 2014 from $1.14 million for the three months ended September 30, 2013. This increase is attributable to increases in numerous store operating expenses, such as supplies, repair and maintenance, utilities and cost of pawn store merchandise sold.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the three months ended September 30, 2014 and 2013, respectively:
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||
2014 | 2013 | % Change Year Over Year | 2014 | 2013 | ||||||||||||||||
(percentage of revenues) | ||||||||||||||||||||
General & Administrative Expenses: | ||||||||||||||||||||
Salaries and benefits | $ | 667,645 | 498,488 | 33.9 | % | 7.0 | % | 5.8 | % | |||||||||||
Depreciation | 6,600 | 7,200 | (8.3 | )% | 0.1 | % | 0.1 | % | ||||||||||||
Interest expense | 60,493 | 83,178 | (27.3 | )% | 0.6 | % | 1.0 | % | ||||||||||||
Other expense | 376,953 | 258,312 | 45.9 | % | 3.9 | % | 3.0 | % | ||||||||||||
$ | 1,111,691 | 847,178 | 31.2 | % | 11.6 | % | 9.9 | % |
Total general and administrative costs for the three months ended September 30, 2014 were $1.11 million compared to $.84 million for the period ended September 30, 2013. For the three months ended September 30 2014 and 2013, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:
Salaries and Benefits. Salaries and benefits expenses for the three months ended September 30, 2014 were $.67 million, a $.17 million increase from the $.50 million expense during the period ended September 30, 2013. The increase is primarily due to the timing of the accrual for annual management bonuses current versus prior year.
Interest. Interest expense for each of the three months ended September 30, 2014 was $.06 million compared to $.08 million for the three months ended September 30, 2013.
Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, increased $.12 million to $.38 million for the three months ended September 30, 2014 compared to $.26 million from the three months ended September 30, 2013. The increase is due to transactional costs incurred in the current quarter.
Income Tax Expense
Income tax expense for the three months ended September 30, 2014 was $.35 million compared to income tax expense of $.24 million for the three months ended September 30, 2013, an effective rate of 38% and 37%, respectively.2015.
Results of Operations – Nine Months Ended September 30, 20142015 Compared to NineSix Months Ended September 30, 20132014
For the nine months ended September 30, 2014, netNet income attributable to our common shareholders was $1.14$2.14 million, compared to $1.22 millionor $0.30 per share (basic and diluted), for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, income from operations before income taxes was $1.82 million2015, compared to $1.96$1.14 million, or $0.38 per share (basic and diluted), for the nine months ended September 30, 2013. Compared2014. The Franchise segment, acquired on October 1, 2014, contributed $1.57 million in net income, the Cellular Retail segment contributed $0.91 million in net income, and the Consumer Finance segment contributed $0.93 million in net income, offset by a ($0.57) million loss in our Direct to Consumer segment, which represents three months of activity since being acquired on July 1, 2015. The Corporate segment had $0.70 million in net costs. As previously indicated, we expect the prior year comparable nine-month period, throughout some pointmix of segment contributions to net income to change in future periods.
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The following table provides quarter-over-quarter revenues and net income (in thousands) attributable to WCR common shareholders by operating segment:
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||
Revenues | $ | 9,641 | $ | 24,655 | $ | 5,442 | $ | 9,451 | $ | - | $ | 49,189 | ||||||||||||
% of total revenue | 19.6 | % | 50.1 | % | 11.1 | % | 19.2 | % | - | 100.0 | % | |||||||||||||
Net income (loss) | $ | 1,585 | $ | 910 | $ | (569 | ) | $ | 932 | $ | (710 | ) | $ | 2,148 | ||||||||||
Net income (loss) attributable to WCR common shareholders | $ | 1,572 | $ | 910 | $ | (569 | ) | $ | 932 | $ | (710 | ) | $ | 2,135 | ||||||||||
Nine Months Ended September 30, 2014 | ||||||||||||||||||||||||
Revenues | $ | - | $ | 17,305 | $ | - | $ | 9,506 | $ | - | $ | 26,811 | ||||||||||||
% of total revenue | - | 64.5 | % | - | 35.5 | % | - | 100.0 | % | |||||||||||||||
Net income (loss) | $ | - | $ | 199 | $ | - | $ | 938 | $ | - | $ | 1,137 | ||||||||||||
Net income (loss) attributable to WCR common shareholders | $ | - | $ | 199 | $ | - | $ | 938 | $ | - | $ | 1,137 |
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Franchise
Nine Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 9,641 | $ | - | 100.0 | % | - | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 730 | - | 7.6 | % | - | % | ||||||||||
Expenses | 7,326 | - | 75.9 | % | - | % | ||||||||||
Net income | $ | 1,585 | $ | - | 16.5 | % | - | % |
Our U.S. franchisees reported center sales for the current quarter, we operated a similarnine months ended September 30, 2015 and 2014, as follows:
2015 | 2014 | |||||||
Total gross U.S. network-wide center sales | $ | 199,347,000 | $ | 189,802,000 |
The table below summarizes the number of retail storefronts. However, we did add higher-volume Cricket retail storefronts while closing lower-volume storefronts. AlphaGraphics business centers owned and operated by franchisees during the nine-month periods ended September 30, 2015 and 2014:
Beginning | New | Closed | Ending | |||||||||||||
2015 | ||||||||||||||||
US Centers | 242 | 14 | 4 | 252 | ||||||||||||
International Centers | 32 | 0 | 6 | 26 | ||||||||||||
Total | 274 | 14 | 10 | 278 | ||||||||||||
2014 | ||||||||||||||||
US Centers | 243 | 7 | �� | 6 | 244 | |||||||||||
International Centers | 34 | 2 | 4 | 32 | ||||||||||||
Total | 277 | 9 | 10 | 276 |
Revenues and net income for the nine-months ended September 30, 2015 were $9.64 million and $1.59 million, respectively, compared to pro forma revenues and net income for the comparable period in 2014 of $9.57 million and $1.17 million, respectively. Gross U.S. network-wide center sales as provided by franchisees increased 5.0% over the comparable periods.
Cellular Retail
The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.following table summarizes our Cellular Retail segment operating results:
Nine Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 24,655 | $ | 17,305 | 100.0 | % | 100.0 | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 12,058 | 8,435 | 48.9 | % | 48.7 | % | ||||||||||
Expenses | 11,687 | 8,671 | 47.4 | % | 50.2 | % | ||||||||||
Net income (loss) | $ | 910 | $ | 199 | 3.7 | % | 1.1 | % |
A summary table of the number of Cricket cellular retail stores we operated during the nine-month periods ended September 30, 20142015 and 20132014 follows:
Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||
Consumer Finance | Payday / Pawn | Pawn | Cellular Retail | Consumer Finance | Payday / Pawn | Pawn | Cellular Retail | 2015 | 2014 | |||||||||||||||||||||||||||||||
Beginning | 50 | 1 | 1 | 57 | 51 | 1 | - | 57 | 61 | 57 | ||||||||||||||||||||||||||||||
Acquired/Launched | (1 | ) | 1 | - | 6 | - | - | 1 | 12 | |||||||||||||||||||||||||||||||
Acquired/ Launched | 49 | 6 | ||||||||||||||||||||||||||||||||||||||
Closed | (1 | ) | - | - | (5 | ) | - | - | - | (9 | ) | (8 | ) | (5 | ) | |||||||||||||||||||||||||
Ending | 48 | 2 | 1 | 58 | 51 | 1 | 1 | 60 | 102 | 58 |
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Revenues in the Cellular Retail segment increased $7.35 million, or 42.5%, to $24.66 million for the nine months ended September 30, 2015, compared to $17.31 million for the nine months ended September 30, 2014. This increase is due to a several factors that contributed to an approximate 68% increase in units sold period over period. Factors include our acquisition of additional stores, relocation or closing of under-performing locations and the effects of AT&T’s acquisition of Cricket Wireless, which effects include Cricket Wireless’ post-acquisition offering of subsidized and/or lower priced handsets to existing Cricket customers migrating off the older CDMA network onto the current GSM network and Cricket Wireless’ increased post-acquisition advertising and marketing. The migration of Cricket customers had a significant contribution to our increased unit sales throughout the year.
Our expenses increased $3.02 million from $8.67 million for the nine-month period ended September 30, 2014 to $11.69 million for the nine-month period ended September 30, 2015, primarily as a result of adding new stores but partially offset by the reduction in costs associated with the closure of a small number of underperforming stores. Stated as a percentage of Cellular Retail revenues, our expenses were 47.4% and 50.1% of revenue for the nine months ended September 30, 2015 and 2014, respectively.
We operate in a highly competitive marketplace and our future growth and success is largely dependent on our relationship with Cricket and the dealer compensation package and operational requirements provided by Cricket Wireless. We expect to continue our strategic acquisitions of other dealers, the opening of additional Cricket stores in new and existing markets, and the consolidation of store locations operating in the same markets to reduce our operating costs.
RevenuesDirect to Consumer
The following table summarizes our Direct to Consumer segment operating results:
Nine Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 5,442 | $ | - | 100.0 | % | - | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 2,703 | - | 49.7 | % | - | % | ||||||||||
Expenses | 3,308 | - | 60.7 | % | - | % | ||||||||||
Net income | $ | (569 | ) | $ | - | (10.4 | )% | - | % |
Revenues and net loss, which include only the three months of activity since acquisition on July 1, 2015,, were $5.44 million and ($0.57) million, respectively. Pro forma revenues and net income for the nine month periods in 2015 and 2014 are $30.3 million and $1.37 million and $30.6 million and $0.48 million, respectively.
Consumer Finance
The following table summarizes our Consumer Finance segment operating results:
Nine Months Ended September 30, (in thousands) | 2015 % of | 2014 % of | ||||||||||||||
2015 | 2014 | Revenues | Revenues | |||||||||||||
Revenues | $ | 9,451 | $ | 9,506 | 100.0 | % | 100.0 | % | ||||||||
Less: | ||||||||||||||||
Cost of revenues | 1,920 | 1,675 | 20.3 | % | 17.6 | % | ||||||||||
Expenses | 6,599 | 6,893 | 69.8 | % | 72.5 | % | ||||||||||
Net income | $ | 932 | $ | 938 | 9.9 | % | 9.9 | % |
A summary table of the number of consumer finance locations we operated during the nine-month periods ended September 30, 2015 and 2014 follows:
2015 | 2014 | |||||||
Beginning | 51 | 52 | ||||||
Acquired/ Launched | - | - | ||||||
Closed | - | (1 | ) | |||||
Ending | 51 | 51 |
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Our Consumer Finance segment revenues increased slightly for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase in our revenues for the nine months ended September 30, 2014 and 2013, respectively: 2015 was due to slight growth in pawn retail sales.
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
2014 | 2013 | % Change Year Over Year | 2014 | 2013 | ||||||||||||||||
(percentage of revenues) | ||||||||||||||||||||
Retail sales, fees and commissions | $ | 18,582,085 | 15,469,392 | 20.1 | % | 69.3 | % | 65.0 | % | |||||||||||
Financing fees and interest | 8,229,216 | 8,314,070 | (1.0 | )% | 30.7 | % | 35.0 | % | ||||||||||||
Total | $ | 26,811,301 | 23,783,462 | 12.7 | % | 100.0 | % | 100.0 | % |
Our cost of revenues increased $0.25 million, primarily due to the increased pawn retail sales. Our operating expenses for the period decreased from 72.5% of segment revenue to 69.8%.
Revenues totaled $26.8Corporate
Costs related to our new Corporate segment were $0.71 million for the nine months ended September 30, 2014, compared to $23.8 million for the nine months ended September 30, 2013. The increase in total revenues resulted primarily from higher Cellular Retail Division revenue,2015, which can be attributed to a higher number of units sold. For the Consumer Finance division, during the nine-month periods ended September 30, 2014 and 2013, we originated approximately $50.36 million and $51.07 million in cash advance loans. Our average cash advance loan (including fees) totaled approximately $402 and $394 during the nine-month periods ended September 30, 2014 and 2013, respectively. Our average fee for the nine-month periods ended September 30, 2014 and 2013 was $58 and $57, respectively.
Store Expenses
The following table summarizes our store expenses for the nine months ended September 30, 2014 and 2013, respectively:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
2014 | 2013 | % Change Year Over Year | 2014 | 2013 | ||||||||||||||||
(percentage of revenues) | ||||||||||||||||||||
Store Expenses: | ||||||||||||||||||||
Phone and accessories cost of sales | $ | 8,435,300 | 6,980,858 | 20.8 | % | 31.4 | % | 29.3 | % | |||||||||||
Salaries and benefits | 6,191,448 | 5,468,861 | 13.2 | % | 23.1 | % | 23.0 | % | ||||||||||||
Occupancy | 2,140,640 | 1,953,905 | 9.6 | % | 8.0 | % | 8.2 | % | ||||||||||||
Provisions for loan losses | 1,268,330 | 1,320,546 | (4.0 | )% | 4.7 | % | 5.6 | % | ||||||||||||
Advertising | 260,831 | 261,713 | (0.3 | )% | 1.0 | % | 1.1 | % | ||||||||||||
Depreciation | 238,874 | 255,595 | (6.5 | )% | 0.9 | % | 1.1 | % | ||||||||||||
Amortization of intangible assets | 82,962 | 112,735 | (26.4 | )% | 0.3 | % | 0.5 | % | ||||||||||||
Other | 3,539,234 | 2,903,731 | 21.9 | % | 13.2 | % | 12.2 | % | ||||||||||||
$ | 22,157,619 | 19,257,944 | 15.1 | % | 82.6 | % | 81.0 | % |
As the table above demonstrates, total expenses associated with store operations for the nine months ended September 30, 2014 were $22.16 million, compared to $19.26 million for the nine months ended September 30, 2013, representing a 15.1% increase over the prior period. The major components of these expenses are phone and accessoriesincludes nonrecurring acquisition costs of sales, salaries and benefits for our store employees and occupancyapproximately $0.32 million. As acquisition activity increases or decreases, costs relating to our store leaseholds. A discussion and analysis of the various components of our store expenses appears below.
Phone and Accessories Cost of Sales. For the nine months ended September 30, 2014, our costs of sales were $8.44 million compared to $6.98 million for the same period in 2013. The increase in our Cellular Retailwithin this segment phone and accessory costs resulted from an increase in phone unit sales year over year.
Salaries and Benefits. Payroll and related costs at the store level were $6.19 million compared to $5.47 million for the nine-month periods ended September 30, 2014 and 2013, respectively. The increase in the current period is attributed to our operation of higher volume Cricket storefronts and growth within our pawn store locations.
Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $2.14 million for the nine months ended September 30, 2014 versus $1.95 million for the nine months ended September 30, 2013.
Provisions for Loan Losses. For the nine months ended September 30, 2014 and 2013, our provisions for loan losses were $1.27 million and $1.32 million, respectively. Our provisions for loan losses represented approximately 15.9% and 16.3% of our payday and installment loan revenue for the nine months ended September 30 2014 and 2013, respectively. We remain uncertain how significant our total 2014 loan losses may be and how they may differ from 2013.
Advertising. Advertising and marketing expenses were $.26 million for both the nine months ended September 30, 2014 and 2013.
Depreciation. Depreciation, primarily relating to store equipment and leasehold improvements, was $.24 million for the nine months ended September 30, 2014 and $.26 million for the nine months ended September 30, 2013.
Amortization of Intangible Assets. Amortization of intangible assets decreased to $.08 million for the nine months ended September 30, 2014 from $.11 million for the nine month period ended September 30, 2013.
Other Store Expenses. Other expenses increased to $3.54 million for the nine months ended September 30, 2014 from $2.90 million for the nine months ended September 30, 2013. This increase is attributable to increases in numerous store operating expenses, such as supplies, repair and maintenance and utilities and an increase in cost of pawn store merchandise sold.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the nine months ended September 30, 2014 and 2013, respectively:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
2014 | 2013 | % Change Year Over Year | 2014 | 2013 | ||||||||||||||||
(percentage of revenues) | ||||||||||||||||||||
General & Administrative Expenses: | ||||||||||||||||||||
Salaries and benefits | $ | 1,510,817 | 1,496,730 | 0.9 | % | 5.7 | % | 6.3 | % | |||||||||||
Depreciation | 19,770 | 20,028 | (1.3 | )% | 0.1 | % | 0.1 | % | ||||||||||||
Interest expense | 191,823 | 249,069 | (23.0 | )% | 0.7 | % | 1.0 | % | ||||||||||||
Other expense | 1,108,681 | 798,659 | 38.8 | % | 4.1 | % | 3.4 | % | ||||||||||||
$ | 2,831,091 | 2,564,486 | 10.4 | % | 10.6 | % | 10.8 | % |
Total general and administrative costs for the nine months ended September 30, 2014 were $2.83 million compared to $2.56 million for the nine months ended September 30, 2013. For the nine months ended September 30 2014 and 2013, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:
Salaries and Benefits. Salaries and benefits expenses for the nine months ended September 30, 2014 were $1.51 million, compared to $1.50 million during the period ended September 30, 2013.
Interest. Interest expense for each of the nine months ended September 30, 2014 and 2013 was $.19 million and $.25 million, respectively.
Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, increased $.31 million to $1.11 million for the nine months ended September 30, 2014 compared to $.80 million from the nine months ended September 30, 2013. The increase is attributable primarily to non-recurring transactional expenses.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2014 was $.69 million compared to income tax expense of $.74 million for the nine months ended September 30, 2013, an effective rate of 38% for each period.will show a corresponding change.
Liquidity and Capital Resources
Summary cash flow data is as follows:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
Cash flows provided (used) by: | ||||||||||||||||
Operating activities | $ | 2,299,224 | $ | 1,043,163 | $ | 273,798 | $ | 2,299,224 | ||||||||
Investing activities | (461,106 | ) | (419,104 | ) | (644,645 | ) | (461,106 | ) | ||||||||
Financing activities | (750,388 | ) | (632,990 | ) | (353,775 | ) | (750,388 | ) | ||||||||
Net increase (decrease) in cash | 1,087,730 | (8,931 | ) | (724,622 | ) | 1,087,730 | ||||||||||
Cash, beginning of period | 1,983,835 | 2,246,619 | 4,273,350 | 1,983,835 | ||||||||||||
Cash, end of period | $ | 3,071,565 | $ | 2,237,688 | $ | 3,548,728 | $ | 3,071,565 |
At September 30, 2014,2015, we had cash of $3.07$3.55 million compared to cash of $2.24$3.07 million on September 30, 2013.2014. Cash flows provided by operating activities along with a $1.0 million draw on a credit facility have been utilized for growth in our Cellular Retail division in 2015 and for scheduled repayments of term debt obligations. The cash used in investing activity year-to-date through September 30, 2015 of $0.64 million is net of $2.47 million of cash received in the acquisition of JPPA, RAI and JPRE on July 1, 2015. We believe that our available cash, combined with expected cash flows from operations, will be sufficient to fund our liquidity and capital expenditure requirements through September 30, 2015.2016. Our expected short-term uses of available cash together with utilizing our line of credit facilities include the funding of operating activities, (includingincluding anticipated increases in payday loans),inventory levels, the financing of additional Cellular Retail segment expansion activities including new store openings or store acquisitions, and the reduction of term debt.
Because of the constant threat of regulatory changes to the payday lending industry, we believe it will be difficult for us to obtain debt financing from traditional financial institutions. As a result, financing we may obtain from alternate sources is likely to involve higher interest rates.
Credit Facility - WCR
On October 18, 2011 (and later amended on December 7, 2012, and March 21, 2014)2014 and May 21, 2015), we entered in a borrowing arrangement with River City Equity, Inc. Under this arrangement, as amended, we may borrow up to $3,000,000$3.0 million at an interest rate of 12% per annum, with interest payable on a monthly basis. The note contains no prepayment penalties, and pursuant to the May 21, 2015 amendment, matures on June 30, 2015, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable.2016. The note, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of our assets. As of September 30, 2014, $22015, $3.0 million was due and owing under this arrangement.borrowing agreement.
Credit Facilities - AlphaGraphicsAGI
AlphaGraphicsAGI is a party to term and revolving notes payable with a financial institution. Under the term debt agreements, $4$2.0 million was outstanding at September 30, 2014.2015. The notes accrue interest at prime rate plus 2.5% per annum (5.75% as of September 30, 2014)2015), require quarterly payments of $375,000 principal plus accrued interest, and mature in June 2017. Under the revolving debt agreement, as amended, AlphaGraphicsAGI may borrow up to $1,000,000, payable with$1.0 million, accruing interest at the higher of (a) prime rate plus 2.5% per annum or (b) the LIBOR rate plus 5.5%. AlphaGraphics per annum. AGI has not drawn on the revolving LOC as ofdebt arrangement during the nine-month period ended September 30, 2014.2015. The revolving note matures in August 2017. The notes payable are secured by all the assets of AlphaGraphics, Inc.AGI.
Credit Facilities - JPPA
JPPA is a party to a revolving line of credit with a financial institution. Under the related debt agreement, as amended, JPPA may borrow up to $4.25 million, subject to borrowing base constraints as defined in the agreement, accruing interest at LIBOR plus 2.75% per annum (3.0% as of September 30, 2015). Amounts borrowed under the debt agreement mature in June 2017. The line of credit is secured by substantially all the assets of JPPA. There was no outstanding balance at September 30, 2015.
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Credit Facilities - RAI
RAI is a party to a revolving line of credit with a financial institution. Under the related debt agreement, as amended, RAI may borrow up to $2 million, subject to borrowing base constraints as defined in the agreement, accruing interest at LIBOR plus 3.5% per annum (3.75% as of September 30, 2015). Amounts borrowed under the debt agreement mature in November 2015. The line of credit is secured by substantially all the assets of RAI. There was no outstanding balance at September 30, 2015.
Credit Facilities - JPRE
JPRE is a party to term note payable with a financial institution. Under the term debt agreement, $3.47 million was outstanding at September 30, 2015. The note accrues interest at LIBOR plus 3.5% per annum (3.75% as of September 30, 2015), requires monthly payments of $33,334 principal plus accrued interest, and matures in July 2019. The note payable is secured by substantially all the assets of JPRE.
Off-Balance Sheet Arrangements
The CompanyWe had no off-balance sheet arrangements as of September 30, 2014.2015.
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 September 30, 2014,2015, our Chief Executive Officer and Chief Financial Officer carried out an evaluationassessment 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 that evaluation,this assessment, management identified material weaknesses in our Chief Executive Officer and Chief Financial Officerinternal control over financial reporting, as described below. As a result of these material weaknesses, management concluded our disclosure controls and procedures are effectivethat, as of September 30, 2014.2015, our internal control over financial reporting was not effective based on the Framework. Nevertheless, as a result of the completion of our independent review of certain transactions, and remedial actions taken by management prior to the filing of this quarterly report, we believe that the consolidated financial statements contained in this report present fairly, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented in conformity with generally accepted accounting principles in the Unites States of America (“GAAP”).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The following control deficiencies were identified and were determined to be material weaknesses in our internal control over financial reporting as of September 30, 2015:
· | Effective controls over the period-end financial reporting process with respect to journal entries and proper segregation of duties were not maintained. Journal entries, both recurring and nonrecurring, were not always accompanied by sufficient supporting documentation and were not adequately reviewed and approved for validity, completeness and accuracy. |
· | Proper segregation of duties within the financial application were not maintained. In certain instances, persons responsible for financial reporting lacked restrictions to their access to ensure separation of functions involving custody of assets, authorization or approval of related transactions affecting those assets, and recording or reporting of related transactions were established and maintained. |
· | Effective general computer controls to ensure proper change management policies and procedures existed and were followed for migration of updates and upgrades to our financial application or to maintain separate development, test and production environments were not implemented. |
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MANAGEMENT’S REMEDIATION PLAN
Management has undertaken appropriate remediation efforts to correct the identified material weaknesses as follow:
· | Prior to filing this Quarterly Report on Form 10-Q, a Chief Technology Officer (“CTO”) was hired. The CTO has taken active steps to implement separate development, test and production environments, to develop, adopt and issue comprehensive change management policies and procedures, and ensure proper and ongoing training of staff occurs on a routine basis. |
· | Prior to filing this Quarterly Report on Form 10-Q, realignment of job functions within our financial reporting process to ensure proper segregation of duties began. |
· | We will design and implement role-based security within our financial reporting process and financial application to ensure proper segregation of duties includes the separation of the custody of assets, authorization or approval of related transactions affecting those assets, and recording or reporting of related transactions is established and maintained. |
Changes in Internal Control over Financial Reporting
We began documenting and evaluating the effectiveness of controls and procedures related to the AlphaGraphics subsidiary upon completion of the merger agreement. We will assess and incorporate the design and operating effectiveness of the disclosure controls and internal controls over financial reporting and changes in internal control over financial reporting in our Annual Report on Form 10-K for the fiscal year ending December 31, 2014.
There were no changes in our internal control over financial reporting during the quarter ended September 30, 20142015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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On November 13, 2014, the Company and Blackstreet Capital Management, LLC entered into an amendment to the Amended and Restated Management and Advisory Agreement dated June 21, 2012. The amendment will be effective as of October 1, 2014, and was entered into to document the limited waiver by Blackstreet Capital Management of advisory fees relating to the Company’s acquisition of the business of AlphaGraphics, Inc. and to provide certain clarifications to the manner in which the “EBITDA-Based Fee” is calculated under the Amended and Restated Management and Advisory Agreement.
Exhibit | Description | |
31.1 | Certification 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). | |
32 | 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). |
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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: November | Western Capital Resources, Inc. | |
(Registrant) | ||
By: | /s/ John Quandahl | |
John Quandahl | ||
Chief Executive Officer and Chief Operating Officer | ||
By: | /s/ Stephen Irlbeck | |
Stephen Irlbeck | ||
Chief Financial Officer |
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