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, 20152016
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)
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 No¨o
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 No¨o
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).
Yes¨o Noþ
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 13, 2015,14, 2016, the registrant had outstanding 9,497,6899,497,860 shares of common stock, no$0.001 par value per share.
Western Capital Resources, Inc.
Index
2
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONTENTS
Page | |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | |
Condensed Consolidated Balance Sheets | 4 |
Condensed Consolidated Statements of Income | 5 |
Condensed Consolidated Statements of Cash Flows | 6 |
Notes to Condensed Consolidated Financial Statements | 7 |
3
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2015 (Unaudited) | December 31, 2014 | September 30, 2016 | December 31, 2015 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash | $ | 3,548,728 | $ | 4,273,350 | $ | 7,895,897 | $ | 7,847,669 | ||||||||
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 | ||||||||||||||
Loans receivable (less allowance for losses of $993,000 and $1,177,000, respectively) | 4,411,062 | 4,884,438 | ||||||||||||||
Accounts receivable (less allowance for losses of $166,000 and $272,000, respectively) | 2,260,911 | 1,963,192 | ||||||||||||||
Inventory | 7,583,661 | 2,340,824 | 8,856,267 | 7,617,850 | ||||||||||||
Prepaid expenses and other | 2,756,249 | 1,435,918 | 2,805,092 | 2,589,749 | ||||||||||||
Deferred income taxes | 600,000 | 644,000 | ||||||||||||||
TOTAL CURRENT ASSETS | 21,741,233 | 15,160,485 | 26,229,229 | 24,902,898 | ||||||||||||
PROPERTY AND EQUIPMENT, net | 8,518,038 | 1,197,710 | 9,314,175 | 8,561,321 | ||||||||||||
GOODWILL | 13,788,612 | 12,956,868 | 13,355,592 | 13,355,591 | ||||||||||||
INTANGIBLE ASSETS, net | 8,126,180 | 7,248,793 | 7,677,512 | 8,018,616 | ||||||||||||
OTHER | 439,402 | 198,408 | 877,494 | 783,907 | ||||||||||||
TOTAL ASSETS | $ | 52,613,465 | $ | 36,762,264 | $ | 57,454,002 | $ | 55,622,333 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 9,381,954 | $ | 6,025,920 | ||||||||||||
Accounts payable | $ | 3,836,177 | $ | 4,577,118 | ||||||||||||
Accrued expenses and other liabilities | 5,486,943 | 6,232,267 | ||||||||||||||
Income taxes payable | 923,827 | 755,615 | 151,869 | 1,135,031 | ||||||||||||
Current portion notes payable | 4,900,008 | 3,500,000 | ||||||||||||||
Note payable – short-term | 84,009 | - | ||||||||||||||
Current portion long-term debt | 1,100,000 | 4,900,008 | ||||||||||||||
Current portion capital lease obligations | 27,128 | 42,240 | 60,464 | 23,860 | ||||||||||||
Deferred revenue and other | 960,604 | 638,068 | 1,226,142 | 1,796,338 | ||||||||||||
TOTAL CURRENT LIABILITIES | 16,193,521 | 10,961,843 | 11,945,604 | 18,664,622 | ||||||||||||
LONG-TERM LIABILITIES | ||||||||||||||||
Notes payable, net of current portion | 3,571,454 | 1,625,000 | 6,776,829 | 3,096,452 | ||||||||||||
Capital lease obligations, net of current portion | 48,922 | 31,481 | 106,167 | 33,347 | ||||||||||||
Deferred income taxes | 4,268,000 | 3,939,000 | 4,521,000 | 3,889,000 | ||||||||||||
Other | 93,262 | 114,514 | 120,539 | 80,403 | ||||||||||||
TOTAL LONG-TERM LIABILITIES | 7,981,638 | 5,709,995 | 11,524,535 | 7,099,202 | ||||||||||||
TOTAL LIABILITIES | 24,175,159 | 16,671,838 | 23,470,139 | 25,763,824 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 16) | ||||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 13) | ||||||||||||||||
EQUITY | ||||||||||||||||
WESTERN SHAREHOLDERS’ EQUITY | ||||||||||||||||
Common stock, no par value, 12,500,000 shares authorized, 9,497,689 and 5,997,588 issued and outstanding. | - | - | ||||||||||||||
Common stock, $0.001 and no par value, 12,500,000 shares authorized, 9,497,860 and 9,497,534 issued and outstanding. (Note 8) | 950 | - | ||||||||||||||
Additional paid-in capital | 28,903,681 | 22,703,745 | 28,982,705 | 28,934,392 | ||||||||||||
Accumulated deficit | (486,233 | ) | (2,621,692 | ) | ||||||||||||
Retained earnings | 4,959,387 | 898,038 | ||||||||||||||
TOTAL WESTERN SHAREHOLDERS’ EQUITY | 28,417,448 | 20,082,053 | 33,943,042 | 29,832,430 | ||||||||||||
NONCONTROLLING INTERESTS | 20,858 | 8,373 | 40,821 | 26,079 | ||||||||||||
TOTAL EQUITY | 28,438,306 | 20,090,426 | 33,983,863 | 29,858,509 | ||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 52,613,465 | $ | 36,762,264 | $ | 57,454,002 | $ | 55,622,333 |
See notes to condensed consolidated financial statements.statements
4
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
September 30, 2015 | September 30, 2014 | September 30, 2015 | September 30, 2014 | September 30, 2016 | September 30, 2015 | September 30, 2016 | September 30, 2015 | |||||||||||||||||||||||||
REVENUES | ||||||||||||||||||||||||||||||||
Sales and associated fees | $ | 13,403,791 | $ | 5,710,322 | $ | 27,039,059 | $ | 15,680,700 | $ | 13,066,705 | $ | 13,403,791 | $ | 52,146,348 | $ | 27,039,059 | ||||||||||||||||
Financing fees and interest | 2,865,842 | 2,919,822 | 8,007,438 | 8,229,216 | 2,562,569 | 2,865,842 | 7,387,757 | 8,007,438 | ||||||||||||||||||||||||
Royalty and franchise fees, net | 2,803,405 | - | 7,883,214 | - | 3,056,046 | 2,803,405 | 8,446,416 | 7,883,214 | ||||||||||||||||||||||||
Other revenue | 2,878,430 | 928,600 | 6,259,541 | 2,901,385 | 3,840,147 | 2,878,430 | 10,152,658 | 6,259,541 | ||||||||||||||||||||||||
21,951,468 | 9,558,744 | 49,189,252 | 26,811,301 | |||||||||||||||||||||||||||||
Total Revenues | 22,525,467 | 21,951,468 | 78,133,179 | 49,189,252 | ||||||||||||||||||||||||||||
COST OF REVENUES | ||||||||||||||||||||||||||||||||
Cost of sales | 7,324,815 | 2,982,059 | 15,329,353 | 8,841,356 | 6,544,212 | 7,324,815 | 26,360,046 | 15,329,353 | ||||||||||||||||||||||||
Provisions for loans receivable losses | 572,959 | 514,763 | 1,351,427 | 1,268,330 | 444,689 | 572,959 | 1,176,174 | 1,351,427 | ||||||||||||||||||||||||
Other | 200,303 | - | 730,143 | - | 662,410 | 200,303 | 1,819,491 | 730,143 | ||||||||||||||||||||||||
Total Cost of Revenues | 8,098,077 | 3,496,822 | 17,410,923 | 10,109,686 | 7,651,311 | 8,098,077 | 29,355,711 | 17,410,923 | ||||||||||||||||||||||||
GROSS PROFIT | 13,853,391 | 6,061,922 | 31,778,329 | 16,701,615 | 14,874,156 | 13,853,391 | 48,777,468 | 31,778,329 | ||||||||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
Salaries, wages and benefits | 6,236,073 | 2,706,386 | 14,733,576 | 7,702,265 | 7,040,838 | 6,236,073 | 20,467,591 | 14,733,576 | ||||||||||||||||||||||||
Occupancy | 2,016,406 | 1,122,669 | 4,729,718 | 3,409,951 | 2,081,592 | 2,016,406 | 5,949,389 | 4,729,718 | ||||||||||||||||||||||||
Selling, marketing and development | 1,142,751 | 91,164 | 1,513,578 | 260,831 | ||||||||||||||||||||||||||||
Advertising, marketing and development | 1,076,102 | 1,142,751 | 5,293,633 | 1,513,578 | ||||||||||||||||||||||||||||
Depreciation | 234,122 | 87,150 | 444,814 | 258,644 | 309,584 | 234,122 | 881,333 | 444,814 | ||||||||||||||||||||||||
Amortization | 141,783 | 28,373 | 359,133 | 82,962 | 140,647 | 141,783 | 422,510 | 359,133 | ||||||||||||||||||||||||
Other | 2,280,809 | 1,053,371 | 5,754,519 | 2,972,548 | 2,795,326 | 2,280,809 | 8,049,581 | 5,754,519 | ||||||||||||||||||||||||
12,051,944 | 5,089,113 | 27,535,338 | 14,687,201 | |||||||||||||||||||||||||||||
Total Operating Expense | 13,444,089 | 12,051,944 | 41,064,037 | 27,535,338 | ||||||||||||||||||||||||||||
OPERATING INCOME | 1,801,447 | 972,809 | 4,242,991 | 2,014,414 | 1,430,067 | 1,801,447 | 7,713,431 | 4,242,991 | ||||||||||||||||||||||||
OTHER INCOME (EXPENSES): | ||||||||||||||||||||||||||||||||
Interest income | 995 | - | 3,065 | - | 955 | 995 | 2,964 | 3,065 | ||||||||||||||||||||||||
Interest expense | (198,048 | ) | (60,493 | ) | (401,299 | ) | (191,823 | ) | (93,665 | ) | (198,048 | ) | (413,390 | ) | (401,299 | ) | ||||||||||||||||
(197,053 | ) | (60,493 | ) | (398,234 | ) | (191,823 | ) | |||||||||||||||||||||||||
Total Other Income (Expenses) | (92,710 | ) | (197,053 | ) | (410,426 | ) | (398,234 | ) | ||||||||||||||||||||||||
INCOME BEFORE INCOME TAXES | 1,604,394 | 912,316 | 3,844,757 | 1,822,591 | 1,337,357 | 1,604,394 | 7,303,005 | 3,844,757 | ||||||||||||||||||||||||
INCOME TAX EXPENSE | 724,293 | 347,000 | 1,696,813 | 686,000 | 551,000 | 724,293 | 2,752,000 | 1,696,813 | ||||||||||||||||||||||||
NET INCOME | 880,101 | 565,316 | 2,147,944 | 1,136,591 | 786,357 | 880,101 | 4,551,005 | 2,147,944 | ||||||||||||||||||||||||
Less net income attributable to noncontrolling interests | (6,498 | ) | - | (12,485 | ) | - | (6,004 | ) | (6,498 | ) | (14,742 | ) | (12,485 | ) | ||||||||||||||||||
NET INCOME ATTRIBUTABLE TO WESTERN SHAREHOLDERS | $ | 873,603 | $ | 565,316 | $ | 2,135,459 | $ | 1,136,591 | ||||||||||||||||||||||||
NET INCOME ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS | $ | 780,353 | $ | 873,603 | $ | 4,536,263 | $ | 2,135,459 | ||||||||||||||||||||||||
EARNINGS PER SHARE ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS | ||||||||||||||||||||||||||||||||
Basic and diluted | $ | 0.09 | $ | 0.19 | $ | 0.30 | $ | 0.38 | $ | 0.08 | $ | 0.09 | $ | 0.48 | $ | 0.30 | ||||||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||||||||||||||||||||||
Basic and diluted | 9,497,689 | 3,010,765 | 7,177,176 | 3,010,922 | 9,497,608 | 9,497,689 | 9,497,559 | 7,177,176 |
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 | Nine Months Ended | |||||||||||||||
September 30, 2015 | September 30, 2014 | September 30, 2016 | September 30, 2015 | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net Income | $ | 2,147,944 | $ | 1,136,591 | $ | 4,551,005 | $ | 2,147,944 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation | 444,814 | 258,644 | 881,333 | 444,814 | ||||||||||||
Amortization | 359,133 | 82,962 | 422,510 | 359,133 | ||||||||||||
Stock based compensation | 76,538 | - | ||||||||||||||
Share based compensation | 49,263 | 76,538 | ||||||||||||||
Deferred income taxes | 390,000 | 275,000 | 632,000 | 390,000 | ||||||||||||
Loss on disposal of property and equipment | 8,014 | - | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Loans receivable | 233,848 | 344,103 | 473,376 | 233,848 | ||||||||||||
Accounts receivable | (492,684 | ) | - | (297,719 | ) | (492,684 | ) | |||||||||
Inventory | (1,645,395 | ) | (445,191 | ) | (1,238,417 | ) | (1,645,395 | ) | ||||||||
Prepaid expenses and other assets | (612,532 | ) | 345,883 | (224,921 | ) | (612,532 | ) | |||||||||
Accounts payable and accrued liabilities | (468,720 | ) | 327,633 | (2,469,429 | ) | (468,720 | ) | |||||||||
Deferred revenue and other current liabilities | (137,896 | ) | - | (570,196 | ) | (137,896 | ) | |||||||||
Accrued liabilities and other | (21,252 | ) | (26,401 | ) | 40,136 | (21,252 | ) | |||||||||
Net cash provided by operating activities | 273,798 | 2,299,224 | 2,256,955 | 273,798 | ||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
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 | - | ||||||||||||||
Purchases of property and equipment | (1,244,715 | ) | (507,075 | ) | ||||||||||||
Acquisition of stores, net of cash acquired | (588,241 | ) | (2,608,500 | ) | ||||||||||||
Cash received through acquisitions | - | 2,470,930 | ||||||||||||||
Proceeds from sale of property and equipment | 109,350 | - | ||||||||||||||
Net cash used by investing activities | (644,645 | ) | (461,106 | ) | (1,723,606 | ) | (644,645 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Payments on notes payable – short-term | (120,000 | ) | - | - | (120,000 | ) | ||||||||||
Advances on line of credit, net | 1,538,708 | - | ||||||||||||||
Advances on note payable – long-term | 418,301 | - | ||||||||||||||
Payments on notes payable – long-term, net | (191,668 | ) | (750,000 | ) | (2,076,640 | ) | (191,668 | ) | ||||||||
Common stock redemption | - | (388 | ) | |||||||||||||
Payments on capital leases | (42,107 | ) | - | |||||||||||||
Net cash used by financing activities | (353,775 | ) | (750,388 | ) | ||||||||||||
Advances (payments) on capital leases, net | 109,424 | (42,107 | ) | |||||||||||||
Dividend paid | (474,914 | ) | - | |||||||||||||
Net cash used in financing activities | (485,121 | ) | (353,775 | ) | ||||||||||||
NET (DECREASE) INCREASE IN CASH | (724,622 | ) | 1,087,730 | |||||||||||||
NET INCREASE (DECREASE) IN CASH | 48,228 | (724,622 | ) | |||||||||||||
CASH | ||||||||||||||||
Beginning of period | 4,273,350 | 1,983,835 | 7,847,669 | 4,273,350 | ||||||||||||
End of period | $ | 3,548,728 | $ | 3,071,565 | $ | 7,895,897 | $ | 3,548,728 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||||||
Income taxes paid | $ | 1,759,171 | $ | 164,838 | $ | 3,103,162 | $ | 1,759,171 | ||||||||
Interest paid | $ | 392,751 | $ | 200,124 | $ | 550,231 | $ | 392,751 | ||||||||
Noncash investing and financing activities: | ||||||||||||||||
Net assets acquired in JPPA/RAI/JPRE acquisition (see Note 13) | $ | 6,123,398 | $ | - | ||||||||||||
Net assets acquired in JPPA/RAI/JPRE acquisition | $ | - | $ | 6,123,398 | ||||||||||||
Deposit applied to purchase of intangibles | $ | 50,000 | $ | - | $ | - | $ | 50,000 | ||||||||
Long-term debt proceeds used to pay off debt and interest | $ | 3,021,699 | $ | - | ||||||||||||
Long-term debt proceeds used to pay prepaid financing costs | $ | 60,000 | $ | - |
See notes to condensed consolidated financial statements.
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. | Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies – |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-three and nine-month periodsnine month period ended September 30, 20152016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.2016.
For further information, refer to the Condensed Consolidated Financial Statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2014.2015. The condensed consolidated balance sheet at December 31, 2014,2015, 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”) is a holdingparent company owning operating subsidiaries, with the percentagespercentage owned by WCR of each subsidiary shown parenthetically, as summarized below.below:
· | Franchise |
o | AlphaGraphics, Inc. |
· | Cellular Retail |
o | PQH Wireless, Inc. and subsidiaries |
· | Direct to Consumer |
o | J & P Park Acquisitions, Inc. |
o | Restorers Acquisition, Inc. |
o | J & P Real Estate, LLC |
· | Consumer Finance |
o | Wyoming Financial Lenders, Inc. |
o | Express Pawn, Inc. |
References in these financial statement notes to “Company” or “we” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies within our enterprise, such “AGI,” “PQH,” “JPPA,” “RAI,” “JPRE,” “WFL” or “EPI” are references only to those companies.
Basis of Consolidation
The consolidated financial statements include the accounts of WCR, its wholly owned subsidiaries and other entities in which the Company owns a controlling financial interest. For financial interests in which the Company owns a controlling financial interest, the Company applies the guidanceprovisions 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.
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, carrying value and impairment of long-lived goodwill and intangible assets, inventory valuation and obsolescence, estimated useful lives of property and equipment, gift certificate liabilitiesand customer credits liability and deferred taxes and tax uncertainties.
Receivables and Loss Allowance
Direct to ConsumerReclassifications
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:
The cost of maintenance and repairs is charged to operations as incurred while renewals and betterments are capitalized.
The Company capitalizes 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 estimated useful life of the enhancements.
Deferred Revenue
Direct to Consumer
Sales billed or cash received in advance of actual delivery are deferred and recorded as income in the period in which the related deliveries are made.
Merchandise Credits and Gift Card Liabilities
Direct to Consumer
The Company maintains a liability for unredeemed 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 direct-response advertising, which is capitalized and amortized over its expected period of future benefits, not to 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 vesting term.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of the Company’s stock option awards. The determination of the fair value of stock-based payment awards on the date of 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 rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the 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 expensed in the Company’s financial statements.
Stock-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 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 average number of common shares outstanding for the period. Diluted 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 common shares as of September 30, 2015 and 2014.
Segment Reporting
The Company has grouped its operations into five segments – Franchise, Cellular Retail, Direct to Consumer, Consumer Finance, and Corporate. The Franchise segment specializes in the planning, production and management of visual communications for businesses and individuals. The Cellular Retail segment 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.
Reclassifications
Certain StatementStatements 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, 2015.2016.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP. This standard, including subsequent updates, is effective for annual and interim periods beginning after December 15, 2017. The Company is currently assessing the potential effects on our financial condition, results of operations and consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. The Company early adopted ASU 2015-17 during our first quarter of fiscal year 2016 on a retrospective basis. Accordingly, we reclassified the current deferred taxes to noncurrent on our December 31, 2015 Condensed Consolidated Balance Sheet, which decreased current deferred tax assets by $0.56 million and decreased noncurrent deferred tax liabilities by $0.56 million.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The standard requires recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted and the standard is to be applied using a modified retrospectively approach. The Company is currently evaluating the impact that ASU 2016-02 will have on our financial condition, results of operations and consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and the standard is to be applied using a modified retrospectively approach. The Company is currently evaluating the impact that ASU 2016-13 will have on our financial condition, results of operations and consolidated financial statements.
No newother accounting pronouncementpronouncements issued or effective during the fiscal quarter hashave had or isare expected to have a material impact on our condensed consolidated financial statements.
2. | Risks Inherent in the Operating Environment – |
Regulatory
Consumer Finance
The Company’s Consumer Finance segment activities are highly regulated under numerous local, state, and federal laws, regulations and regulations,rules, which are subject to change. New laws, regulations or regulationsrules could be enacted or issued, interpretations of existing laws, regulations or regulationsrules may change and enforcement action by regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities of the kind conducted by WFL and EPI.the Company. The federal Consumer Financial Protection Bureau has indicated that it will use its authority to further regulate the payday lending industry.industry and has been actively enforcing existing regulations within its jurisdiction.
Any adverse change in present local, state, orand federal laws or regulations that govern or otherwise affect lending could result in the Consumer Finance segment’s curtailment or cessation of operations in certain or all jurisdictions or locations. Furthermore, any 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 outcomechange or failure would have a corresponding impact on the Company’s and segment’s results of operations and financial condition, primarily through a decrease in revenues, non-cash charges from the write-down of the carrying value of goodwill and intangible assets resulting from the cessation or curtailment of operations, and increased legal expenditures or fines, and could also negatively affect the Company’s general business prospects if the Company is unabledue to effectively replace such revenues in a timely and efficient mannerlost or decreased operating income or if negative publicity effects its 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 WFL or EPIthe Consumer Finance segment from conducting its lending business in its current form. Any such legal or regulatory change would certainly have a material and adverse effect on the Company, its operating results, 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, and perhaps even the viability of that business and our Company.
Vendor Concentration
Direct tothe Consumer
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.
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. Finance segment.
3. | Loans Receivable – |
At September 30, 20152016 and December 31, 2014,2015, the Company’sConsumer Finance segment’s outstanding loans receivable aging was as follows:
September 30, 2015 | ||||||||||||||||||||||||||||||||
September 30, 2016 | September 30, 2016 | |||||||||||||||||||||||||||||||
Payday | Installment | Pawn & Title | Total | Payday | Installment | Pawn & Title | Total | |||||||||||||||||||||||||
Current | $ | 4,234,640 | $ | 263,313 | $ | 326,968 | $ | 4,824,921 | $ | 3,645,540 | $ | 248,820 | $ | 282,212 | $ | 4,176,572 | ||||||||||||||||
1-30 | 369,269 | 43,826 | - | 413,095 | 290,044 | 46,460 | - | 336,504 | ||||||||||||||||||||||||
31-60 | 278,035 | 21,511 | - | 299,546 | 249,995 | 23,836 | - | 273,831 | ||||||||||||||||||||||||
61-90 | 250,381 | 13,988 | - | 264,369 | 175,254 | 15,287 | - | 190,541 | ||||||||||||||||||||||||
91-120 | 249,758 | 5,757 | - | 255,515 | 150,320 | 10,087 | - | 160,407 | ||||||||||||||||||||||||
121-150 | 168,596 | 1,815 | - | 170,411 | 131,000 | 3,684 | - | 134,684 | ||||||||||||||||||||||||
151-180 | 170,475 | 86 | - | 170,561 | 129,724 | 1,799 | - | 131,523 | ||||||||||||||||||||||||
5,721,154 | 350,296 | 326,968 | 6,398,418 | 4,771,877 | 349,973 | 282,212 | 5,404,062 | |||||||||||||||||||||||||
Less Allowance | (1,204,000 | ) | (97,000 | ) | - | (1,301,000 | ) | (920,000 | ) | (73,000 | ) | - | (993,000 | ) | ||||||||||||||||||
$ | 4,517,154 | $ | 253,296 | $ | 326,968 | $ | 5,097,418 | $ | 3,851,877 | $ | 276,973 | $ | 282,212 | $ | 4,411,062 |
December 31, 2014 | ||||||||||||||||||||||||||||||||
December 31, 2015 | December 31, 2015 | |||||||||||||||||||||||||||||||
Payday | Installment | Pawn & Title | Total | Payday | Installment | Pawn & Title | Total | |||||||||||||||||||||||||
Current | $ | 4,387,393 | $ | 321,634 | $ | 372,805 | $ | 5,081,832 | $ | 4,065,706 | $ | 291,947 | $ | 286,514 | $ | 4,644,167 | ||||||||||||||||
1-30 | 305,382 | 47,321 | - | 352,703 | 332,217 | 43,179 | - | 375,396 | ||||||||||||||||||||||||
31-60 | 223,465 | 24,791 | - | 248,256 | 263,486 | 24,233 | - | 287,719 | ||||||||||||||||||||||||
61-90 | 236,072 | 11,799 | - | 247,871 | 199,526 | 16,293 | - | 215,819 | ||||||||||||||||||||||||
91-120 | 206,705 | 5,438 | - | 212,143 | 196,123 | 9,417 | - | 205,540 | ||||||||||||||||||||||||
121-150 | 200,101 | 1,984 | - | 202,085 | 160,386 | 4,985 | - | 165,371 | ||||||||||||||||||||||||
151-180 | 204,804 | 572 | - | 205,376 | 165,237 | 2,189 | - | 167,426 | ||||||||||||||||||||||||
5,763,922 | 413,539 | 372,805 | 6,550,266 | 5,382,681 | 392,243 | 286,514 | 6,061,438 | |||||||||||||||||||||||||
Less Allowance | (1,147,000 | ) | (72,000 | ) | - | (1,219,000 | ) | (1,081,000 | ) | (96,000 | ) | - | (1,177,000 | ) | ||||||||||||||||||
$ | 4,616,922 | $ | 341,539 | $ | 372,805 | $ | 5,331,266 | $ | 4,301,681 | $ | 296,243 | $ | 286,514 | $ | 4,884,438 |
4. | Loans Receivable Allowance – |
As a result of the Company’sConsumer Finance segment’s collection efforts, it historically writes off approximately 43% of 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 – 43%; 31 to 60 days – 65%; 61 to 90 days – 83%; 91 to 120 days – 88%89%; 121 to 150 days – 91%; and 151 to 180+ days – 93%.
A rollforward of the Company’sConsumer Finance segment’s loans receivable allowance is as follows:
Nine Months Ended September 30, 2015 | Year Ended December 31, 2014 | |||||||
Loans receivable allowance, beginning of period | $ | 1,219,000 | $ | 1,215,000 | ||||
Provision for loan losses charged to expense | 1,351,427 | 1,817,822 | ||||||
Charge-offs, net | (1,269,427 | ) | (1,813,822 | ) | ||||
Loans receivable allowance, end of period | $ | 1,301,000 | $ | 1,219,000 |
Nine Months Ended September 30, 2016 | Year Ended December 31, 2015 | |||||||
Loans receivable allowance, beginning of period | $ | 1,177,000 | $ | 1,219,000 | ||||
Provision for loan losses charged to expense | 1,176,174 | 1,904,893 | ||||||
Charge-offs, net | (1,360,174 | ) | (1,946,893 | ) | ||||
Loans receivable allowance, end of period | $ | 993,000 | $ | 1,177,000 |
5. | Accounts Receivable – |
A breakdown of accounts receivables by segment as of September 30, 20152016 and December 31, 20142015 are as follows:
September 30, 2015 | ||||||||||||||||||||||||||||||||||||
September 30, 2016 | September 30, 2016 | |||||||||||||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Total | Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Total | ||||||||||||||||||||||||||||
Accounts receivable | $ | 1,423,267 | $ | 103,738 | $ | 894,172 | $ | 2,421,177 | $ | 1,624,351 | $ | 172,813 | $ | 619,568 | $ | 10,179 | $ | 2,426,911 | ||||||||||||||||||
Less allowance | (150,000 | ) | - | (116,000 | ) | (266,000 | ) | (149,000 | ) | - | (17,000 | ) | - | (166,000 | ) | |||||||||||||||||||||
Net account receivable | $ | 1,273,267 | $ | 103,738 | $ | 778,172 | $ | 2,155,177 | $ | 1,475,351 | $ | 172,813 | $ | 602,568 | 10,179 | $ | 2,260,911 |
December 31, 2014 | ||||||||||||||||||||||||||||||||||||
December 31, 2015 | December 31, 2015 | |||||||||||||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Total | Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Total | ||||||||||||||||||||||||||||
Accounts receivable | $ | 1,164,532 | $ | - | $ | - | $ | 1,164,532 | $ | 1,332,446 | $ | 148,346 | $ | 754,400 | $ | - | $ | 2,235,192 | ||||||||||||||||||
Less allowance | (59,405 | ) | - | - | (59,405 | ) | (183,000 | ) | - | (89,000 | ) | - | (272,000 | ) | ||||||||||||||||||||||
Net account receivable | $ | 1,135,127 | $ | - | $ | - | $ | 1,135,127 | $ | 1,149,446 | $ | 148,346 | $ | 665,400 | - | $ | 1,963,192 |
6. |
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 |
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 |
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.
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 |
September 30, 2016 | December 31, 2015 | |||||||
Deferred financing fees | $ | 265,779 | $ | 285,452 | ||||
Deferred franchise development and service fees | 130,500 | 264,000 | ||||||
Merchandise credits and gift card liability | 694,302 | 1,127,470 | ||||||
Other | 135,561 | 119,416 | ||||||
Total | $ | 1,226,142 | $ | 1,796,338 |
Notes Payable – Long Term |
September 30, 2016 | December 31, 2015 | |||||||
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, 2016 and upon certain events can be collateralized by substantially all assets of WCR, excluding any equity interest in AGI (terminated May 2016) | $ | $ | 3,000,000 | |||||
Note payable to a financial institution with monthly principal payment of $58,333 plus interest at LIBOR plus 3.5% (4.125% at September 30, 2016), secured by substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing April 21, 2021 | 3,266,667 | - | ||||||
Revolving credit facility (with a credit limit of $3,000,000) to a financial institution with monthly payments of interest only at LIBOR plus 3.5% (4.125% at September 30, 2016), secured by substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing April 21, 2018 | 1,538,708 | - | ||||||
Subsidiary note payable to a financial institution with quarterly principal payments of $375,000 plus interest at prime rate plus 2.5%, secured by the AGI’s assets, maturing March 2017 (terminated May 2016) | - | 1,625,000 | ||||||
Subsidiary note payable to a financial institution with monthly principal payment 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% (4.125% at September 30, 2016), secured by JPRE assets, maturing June 5, 2019 when remaining principal balance is due | 3,071,454 | 3,371,460 | ||||||
Total | 7,876,829 | 7,996,460 | ||||||
Less current maturities | (1,100,000 | ) | (4,900,008 | ) | ||||
$ | 6,776,829 | $ | 3,096,452 |
Future minimum long-term principal payments are as follows:
Year | Amount | |||
1 | $ | 1,100,000 | ||
2 | 2,638,716 | |||
3 | 2,971,446 | |||
4 | 700,000 | |||
5 | 466,667 | |||
Thereafter | - | |||
$ | 7,876,829 |
On April 22, 2016, WCR entered into a Credit Agreement with a financial institution. The Credit Agreement provides the Company with an acquisition loan facility in an aggregate amount of up to $9,000,000, having a commitment maturity date of April 21, 2018. Funds advanced under the acquisition loan facility bear interest at a floating per annum rate equal to one-month LIBOR plus 3.50%, adjusted on a monthly basis, and mature five years from the date of advance. At closing, $3,500,000 was advanced under the acquisition loan replacing the $3,000,000 River City Equity debt and $500,000 of other term debt. At September 30, 2016 approximately $7,195,000 of credit was available under the acquisition and revolving credit facilities.
See Note 13 for additional terms and conditions related to the Credit Agreement.
8. | Reincorporation – |
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 onOn January 20, 2016, our shareholders approved a $1,000,000 line of credit (LOC). The LOC bears interestplan to reincorporate Western Capital Resources, Inc. in Delaware 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 assetsspecial meeting 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). Thereshareholders called for that purpose. The reincorporation was no outstanding balance at September 30, 2015.completed May 11, 2016.
9. | Cash Dividends – |
The Company’s notes payable with financial institutions includes certain financial covenants. Management has determined that the Company borrowers were in compliance with these financial covenants as of September 30, 2015.
Date declared | May 24, 2016 | August 11, 2016 | |||
Record date | June 6, 2016 | September 14, 2016 | |||
Date paid | June 15, 2016 | September 21, 2016 | |||
Dividend per share of common stock | $ | 0.025 | $ | 0.025 |
Other Operating Expense – |
A breakout of other operating expense is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
Bank fees | $ | 310,419 | $ | 114,391 | $ | 595,164 | $ | 334,069 | $ | 337,939 | $ | 310,419 | $ | 1,273,057 | $ | 595,164 | ||||||||||||||||
Collection costs | 99,587 | 102,653 | 319,890 | 324,635 | 85,306 | 99,587 | 311,457 | 319,890 | ||||||||||||||||||||||||
Conferences | 460,602 | - | 671,287 | - | ||||||||||||||||||||||||||||
Conference expense | 468,124 | 460,602 | 762,680 | 671,287 | ||||||||||||||||||||||||||||
Insurance | 110,788 | 79,339 | 286,783 | 177,003 | 184,106 | 110,788 | 528,995 | 286,783 | ||||||||||||||||||||||||
Management and advisory fees | 125,754 | 126,163 | 400,057 | 364,148 | 195,425 | 125,754 | 619,954 | 400,057 | ||||||||||||||||||||||||
Professional and consulting fees | 483,575 | 106,113 | 1,401,683 | 422,515 | 488,978 | 483,575 | 1,531,923 | 1,401,683 | ||||||||||||||||||||||||
Supplies | 167,480 | 150,058 | 496,116 | 474,571 | 231,995 | 167,480 | 591,919 | 496,116 | ||||||||||||||||||||||||
Other | 522,604 | 374,654 | 1,583,539 | 875,607 | 803,453 | 522,604 | 2,429,596 | 1,583,539 | ||||||||||||||||||||||||
$ | 2,280,809 | $ | 1,053,371 | $ | 5,754,519 | $ | 2,972,548 | $ | 2,795,326 | $ | 2,280,809 | $ | 8,049,581 | $ | 5,754,519 |
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.
Cellular Retail
Effective June 1, 2015, PQH consummated the acquisition ofpurchased with cash 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 acquiredcompanies (Green Communications, LLC, an Arizona LLC, Green Communications, LLC, an Oregon LLC, Green Communications, LLC, a Washington LLC 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
Go Green, LLC an Arizona LLC). Effective July 1, 2015, the Company acquired a 100% interest in the businesses of RAI, 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:
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, 2014business have been included in the consolidated financial statements since the respective dates of the acquisition. The following table presents the unaudited results of operations for the three and nine months ended September 30, 2016 and the unaudited pro forma results of operations for the three and nine months ended September 30, 2015 and 2014,(in thousands, except for per share data) as if thesethe acquisitions had been consummated at the beginning of 2014.2015. The pro forma net income below excludes the expensesexpense of the transactions and includes a reduction in management and advisory fees that resulted from the AGI transaction.transactions. 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 consummatedacquisition occurred at the beginning of the 2014,2015 or the results thatwhich 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 | Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 4,278 | $ | 9,294 | $ | 5,944 | $ | 3,009 | $ | - | $ | 22,525 | ||||||||||||||||||||||||||||||||||||
% of total revenue | 19.0 | % | 41.2 | % | 26.4 | % | 13.4 | % | -% | 100.0 | % | |||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 749 | $ | 73 | $ | (325 | ) | $ | 391 | $ | (102 | ) | $ | 786 | ||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interests | $ | 6 | $ | - | $ | - | $ | - | $ | - | $ | 6 | ||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to WCR common shareholders | $ | 743 | $ | 73 | $ | (325 | ) | $ | 391 | $ | (102 | ) | $ | 780 | ||||||||||||||||||||||||||||||||||
Earnings (loss) per share attributable to WCR common shareholders – basic and diluted | $ | 0.078 | $ | 0.008 | $ | (0.034 | ) | $ | 0.041 | $ | (0.011 | ) | $ | 0.082 | ||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
Pro forma revenue | $ | 3,675 | $ | 9,537 | $ | 5,442 | $ | 3,297 | $ | - | $ | 21,951 | $ | 3,675 | $ | 9,537 | $ | 5,442 | $ | 3,297 | $ | - | $ | 21,951 | ||||||||||||||||||||||||
% of total pro forma revenue | 16.7 | % | 43.5 | % | 24.8 | % | 15.0 | % | -% | 100.0 | % | |||||||||||||||||||||||||||||||||||||
Pro forma net income (loss) | $ | 829 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (167 | ) | $ | 926 | $ | 829 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (167 | ) | $ | 926 | ||||||||||||||||||||
Pro forma net income attributable to noncontrolling interests | $ | 6 | $ | - | $ | - | $ | - | $ | - | $ | 6 | $ | 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 | ||||||||||||||||||||||||||||||||||
Pro forma net income (loss) attributable to WCR common shareholders | $ | 823 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (167 | ) | $ | 920 | ||||||||||||||||||||||||||||||||||
Pro forma earnings (loss) per share attributable to WCR 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 |
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
Revenue | $ | 11,452 | $ | 27,152 | $ | 30,699 | $ | 8,830 | $ | - | $ | 78,133 | ||||||||||||
% of total revenue | 14.6 | % | 34.8 | % | 39.3 | % | 11.3 | % | -% | 100.0 | % | |||||||||||||
Net income (loss) | $ | 1,834 | $ | 526 | $ | 1,682 | $ | 964 | $ | (455 | ) | $ | 4,551 | |||||||||||
Net income attributable to noncontrolling interests | $ | 15 | $ | - | $ | - | $ | - | $ | - | $ | 15 | ||||||||||||
Net income (loss) attributable to WCR common shareholders | $ | 1,819 | $ | 526 | $ | 1,682 | $ | 964 | $ | (455 | ) | $ | 4,536 | |||||||||||
Earnings (loss) per share attributable to WCR common shareholders – basic and diluted | $ | 0.192 | $ | 0.055 | $ | 0.177 | $ | 0.102 | $ | (0.048 | ) | $ | 0.478 | |||||||||||
Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||
Pro forma revenue | $ | 9,641 | $ | 29,632 | $ | 30,296 | $ | 9,451 | $ | - | $ | 79,020 | ||||||||||||
% of total pro forma revenue | 12.2 | % | 37.5 | % | 38.3 | % | 12.0 | % | -% | 100.0 | % | |||||||||||||
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) attributable to WCR common shareholders | $ | 1,572 | $ | 967 | $ | 1,365 | $ | 932 | $ | (408 | ) | $ | 4,428 | |||||||||||
Pro forma earnings (loss) per share attributable to WCR common shareholders – basic and diluted | $ | 0.165 | $ | 0.102 | $ | 0.144 | $ | 0.098 | $ | (0.043 | ) | $ | 0.466 |
12. | Segment Information – | |
Segment information related to the three and nine month periods ended September 30, 2016 and 2015 is presented below: |
Three Months Ended September 30, 2016 (in thousands) |
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 |
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenue from external customers | $ | 4,278 | $ | 9,294 | $ | 5,944 | $ | 3,009 | $ | - | $ | 22,525 | ||||||||||||
Net income (loss) | $ | 749 | $ | 73 | $ | (325 | ) | $ | 391 | $ | (102 | ) | $ | 786 | ||||||||||
Expenditures for segmented assets | $ | 3 | $ | 241 | $ | 50 | $ | 21 | $ | - | $ | 315 |
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 |
Three Months Ended September 30, 2015 (in thousands) |
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenue from external customers | $ | 3,675 | $ | 9,537 | $ | 5,442 | $ | 3,297 | $ | - | $ | 21,951 | ||||||||||||
Net income (loss) | $ | 829 | $ | 443 | $ | (569 | ) | $ | 390 | $ | (213 | ) | $ | 880 | ||||||||||
Expenditures for segmented assets | $ | - | $ | - | $ | 186 | $ | 29 | $ | - | $ | 215 |
Nine Months Ended September 30, 2016 (in thousands) |
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenue from external customers | $ | 11,452 | $ | 27,152 | $ | 30,699 | $ | 8,830 | $ | - | $ | 78,133 | ||||||||||||
Net income (loss) | $ | 1,834 | $ | 526 | $ | 1,682 | $ | 964 | $ | (455 | ) | $ | 4,551 | |||||||||||
Total segment assets | $ | 10,111 | $ | 16,472 | $ | 14,723 | $ | 15,735 | $ | 413 | $ | 57,454 | ||||||||||||
Expenditures for segmented assets | $ | 19 | $ | 1,688 | $ | 89 | $ | 39 | $ | - | $ | 1,835 |
Nine Months Ended September 30, 2015 (in thousands) |
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenue from external customers | $ | 9,641 | $ | 24,655 | $ | 5,442 | $ | 9,451 | $ | - | $ | 49,189 | ||||||||||||
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 |
Segment information related to the three and nine months ended September 30, 2015 and 2014, is presented below:
For the Three Months Ended September 30, 2015 (in thousands) | ||||||||||||||||||||||||
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Revenues from external customers | $ | 3,675 | $ | 9,537 | 5,442 | $ | 3,297 | $ | - | $ | 21,951 | |||||||||||||
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 |
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 |
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 |
Commitments and Contingencies – |
Employment Agreements
On April 11, 2013, theThe Company entered intois party to an Amended and Restated Employment Agreement with its Chief Executive Officer, Mr. John Quandahl. ThisAmong other things, this agreement has a term of three years and contains among other terms and conditions, provisions for an annual performance-based cash bonus pool for management.
Effective February 9, 2015, The agreement was amended April 1, 2016 to extend 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.
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.term through March 2019.
Pursuant to the Company’s numerous employment agreements, bonuses of approximately $353,000$390,000 and $655,000$1,083,000 were accrued for the three and nine month periods ended September 30, 2016, respectively.
Credit Facility
On April 22, 2016, WCR entered into a Credit Agreement with a financial institution. Certain company subsidiaries are guarantors of the borrowings and obligations under the Credit Agreement. All borrowings under the Credit Agreement are secured by substantially all assets of WCR and the guarantor subsidiaries.
The Credit Agreement requires WCR to meet certain financial tests, including a leverage ratio and a fixed charge coverage ratio, as defined in the Credit Agreement. Subject to certain exceptions, the Credit Agreement contains covenants limiting the company’s ability to (or to permit the guarantor subsidiaries to) merge or consolidate with, or engage in a sale of substantially all assets to, any party, but WCR or any guarantor subsidiary generally may nonetheless merge with another party if (i) WCR or guarantor subsidiary is the entity surviving such merger, and (ii) immediately after giving effect to such merger, no default shall have occurred and be continuing under the Credit Agreement. Subject to certain exceptions, the Credit Agreement also contains covenants limiting WCR’s ability to (or to permit the guarantor subsidiaries to) create liens on assets, incur additional indebtedness, make certain types of investments, and pay dividends or make certain other types of restricted payments, but WCR may nonetheless pay dividends to its shareholders if (a) there are no outstanding loans or unpaid interest under the revolving credit facility, and (b) no default shall have occurred and be continuing under the Credit Agreement. Some covenant waivers were granted by the financial institution during the three months ended September 30, 2015, respectively.2016.
Vendor Service AgreementCellular Retail Growth Commitment
In September 2015, AGIEffective June 6, 2016, PQH entered into a serviceCricket Wireless Exclusive Dealer Agreement Amendment for Retail Expansion. Per the agreement, with a vendor for approximately $680,000. The vendorPQH commits to open at least 150 locations by December 31, 2017, including 50 locations by December 31, 2016. Also effective June 6, 2016, Cricket Wireless, LLC has increased certain compensation arrangements in the existing dealer agreement and will provide services over a three year period.subsidy for each location opened during the term of the 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 (see Note 17 to the Company’s December 31, 2014 Notes to Consolidated Financial Statements).
The amended and restated agreement requires the Company to pay Blackstreet a fee in an amount equal to $400,000 upon the closing of an acquisition in consideration for Blackstreet’s referral to the Company of such acquisition opportunity, and Blackstreet’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 agreement with Blackstreet was amended. The annual fees under the amended and restated contract will be the greater of (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.
Common Stock Issued
As further explained in Note 13, on July 1, 2015, WCR issued an aggregate of 3.5 million shares of common stock for the acquisition of JPPA, RAI and JPRE. This represented approximately 37% of the total issued and outstanding common stock of the Company after the issuance.
WCR 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:
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 | - |
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.
Subsequent Events – |
On October 1, 2015,Wireless Retail Transaction
PQH entered into an Asset Purchase Agreement for the acquisition of 20 Cricket Wireless retail locations for $2,050,000 and an option to purchase an additional 33 locations for an aggregate purchase price of $7,200,000. In addition, if PQH exercised its option, seller has an option to retain a 30% ownership in the 53 store transaction, with a corresponding adjustment to the purchase price. It is anticipated that the transaction will close in November 2016.
Consumer Finance segment disposed of all four of its locations in an underperforming Utah market for $167,500 in cash, resulting in a loss of approximately $450,000.Segment Law Change
On November 10, 2015 PQH executed an Asset Purchase Agreement8, 2016, South Dakota voters approved a measure effectively banning payday lending in South Dakota. Unless delayed, the effective date of the measure will be November 16, 2016. Revenue generated in South Dakota is approximately 5% of Consumer Finance segment year to acquire 10 Cricket Retail Locations for approximately $450,000. The purchase is expected to close on December 1, 2015.date revenue through September 30, 2016.
The Company evaluated all other events or transactions that occurred after September 30, 20152016 up through November 16, 2015,14, 2016, the date on whichwe issued these financial statements were issued.statements. During this period the Companywe did not have any otheradditional material subsequent events that impacted itsour financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Some of the statements made in this report are “forward-looking statements,” as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon our current expectations and projections about future events. Whenever used in this report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part I, Item 2), but may be found in other parts of this report as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. We will not necessarily update forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations embodied in our forward-looking statements, or that might affect the value of the common stock, include but are not limited to:
· | the seasonal nature of the products sold in our Direct to Consumer segment - a significant portion of pre-tax net income contributed by the segment is earned during the months of March through May and December, consequently the third quarter of each year typically results in a net loss; |
· | the success of new stores related to our expansion plans in the Retail Wireless segment; |
· | 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 us or the industries in which we operate, particularly in certain key states or nationally; |
· | our need for additional financing; |
· | unpredictability or uncertainty in financing markets which could impair our ability to grow our business through acquisitions; |
· | changes in Cricket dealer compensation; |
· | the impact on us, as a Cricket dealer, of the AT&T acquisition of the Cricket Wireless business; |
· | failure of or disruption caused by a significant vendor; |
· | outside factors that affect our ability to obtain product and fulfill orders; and |
· | our ability to successfully operate or integrate |
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, 2014.2015.
Industry data and other statistical information used in this report are based on independent publications, government publications, reports by market research firms or other published independent sources. Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above. Although we believe these sources are reliable, we have not independently verified the information.
OVERVIEW
Western Capital Resources, Inc. (“we”, “WCR”WCR” or “Western Capital”) is a holding company that operates, through itshaving a controlling interest in subsidiaries operating in the following industries and operating segments:
Our “Franchise” segment involvesis comprised of AlphaGraphics, Inc. (99.2% owned), the franchisingfranchisor of AlphaGraphics® customized print and marketing solutions offered through our majority owned subsidiary AlphaGraphics, Inc. (99.2% owned) (“AlphaGraphics” or “AGI”).solutions. Our “Cellular Retail” segment is comprised of an authorized Cricket Wireless dealer and involves the retail sale of cellular phones and accessories to consumers through our wholly owned subsidiary PQH Wireless, Inc. and its subsidiaries (“PQH”). On July 1, 2015, we acquired oursubsidiaries. Our “Direct to Consumer” segment which consists of an(1) a wholly owned online and direct marketing distribution retailer with product offerings includingand distributor of live plants, seeds, live goodsholiday gifts and garden accessories operating in the retail market under the Park Seed, Jackson & Perkins and Wayside Gardens trade names, and in the wholesale market under the Park Wholesale trade name, and an(2) a wholly owned online retail sellerand direct marketing distribution retailer of home improvement and restoration products operating over the internet through the domain name of www.Vandykes.com and through direct mail catalogs.as Van Dyke’s Restorers. 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 and due-diligence team and management of acquired subsidiaries. Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as “we,” the “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.
KeyFollowing are actual andpro forma financial datarevenues by operating segment for the three and nine monthsmonth periods ended September 30, 20152016 and 2014 were as follows:2015:
Discussion of Critical Accounting Policies
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary materially from these estimates under different assumptions or conditions.
Our significant accounting policies are discussed in Note 1, “Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies,” of the notes to our condensed consolidated financial statements included in this report. We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.
Loan Loss Allowance
Included in loans receivable are unpaid principal, interest and fee balances of payday, installment, pawn and title loans that have not reached their maturity date, and “late” payday loans that have reached maturity within the last 180 days and have remaining outstanding balances. Late payday loans generally are unpaid loans where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons. All returned items are charged-off after 180 days, as collections after that date have not been significant. Loans are carried at cost plus accrued interest or fees through maturity date, less payments made and a loans receivable allowance.
We doThe Company does not specifically reserve for any individual payday, installment or title loan. We aggregateThe Company aggregates loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including (1) the amount of loan principal, interest and fee outstanding, (2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trends. We utilizeThe Company utilizes a software program to assist with the tracking of ourits historical portfolio statistics. A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages by loan type of net charge offs, applied against the applicable balance of loan principal, interest and fees outstanding. WeThe Company also periodically performperforms a look-back analysis on ourits loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. We areThe Company is aware that as conditions change, weit may also need to make additional allowances in future periods. Loan losses or charge-offs of pawn or title loans are not recorded because the value of the collateral exceeds the loan amount.
A See Note 4 to our condensed consolidated financial statements included in this report for a rollforward of our loans receivable allowance (in thousands) is as follows:allowance.
Nine Months Ended September 30, 2015 | Year Ended December 31, 2014 | |||||||
Loans receivable allowance, beginning of period | $ | 1,219 | $ | 1,215 | ||||
Provision for loan losses charged to expense | 1,351 | 1,818 | ||||||
Charge-offs, net | (1,269 | ) | (1,814 | ) | ||||
Loans receivable allowance, end of period | $ | 1,301 | $ | 1,219 |
Valuation of Long-lived and Intangible Assets
We assess the possibility of 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 events or trends. When management determines thatIn addition, we conduct an annual goodwill impairment test as of October 1 each year. We assess our goodwill for impairment at the reporting unit level by applying a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of long-lived and intangibleour net assets may notto our fair value. If the fair value is determined to be recoverable, impairmentless than the carrying value, a second step is measured based onperformed to measure the excessamount of the assets’ carrying value over the estimated fair value.impairment, if any.
Results of Operations – Three Months Ended September 30, 20152016 Compared to Three Months Ended September 30, 20142015
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 current 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 $0.78 million, or $0.08 per share (basic and diluted), for the quarter ended September 30, 2016, compared to $0.87 million, or $0.09 per share (basic and diluted), for the three monthsquarter ended September 30, 2015, compared to $0.57 million, or $0.19 per share (basic and diluted), for the three months ended September 30, 2014. For the current quarter, the Franchise segment, acquired on October 1, 2014, contributed $0.82 million in net income while the Cellular Retail segment contributed $0.44 million in net income and the Consumer Finance segment contributed $0.39 million in net income. 2015.
We expect segment contribution tooperating results and earnings per share to further change in the fourth quarterthroughout 2016 due, at least in part, to the seasonality of the Direct to Consumer segment, higher holiday sales activityand Cellular Retail segments, growth in the Cellular Retail segment and fluctuating levels ofpotential mergers and acquisitions expenditures.activity.
Following is a discussion of operating results by segment.
The following table provides quarter-over-quarter revenues and net income (in thousands) attributable to WCR common shareholders by operating segment:segment (in thousands):
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 |
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||
Revenues | $ | 4,278 | $ | 9,294 | $ | 5,944 | $ | 3,009 | $ | - | $ | 22,525 | ||||||||||||
% of total revenue | 19.0 | % | 41.2 | % | 26.4 | % | 13.4 | % | -% | 100.0 | % | |||||||||||||
Net income (loss) | $ | 749 | $ | 73 | $ | (325 | ) | $ | 391 | $ | (102 | ) | $ | 786 | ||||||||||
Net income (loss) attributable to WCR common shareholders | $ | 743 | $ | 73 | $ | (325 | ) | $ | 391 | $ | (102 | ) | $ | 780 | ||||||||||
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 | ||||||||||
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 three 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 periodsquarters ended September 30, 20152016 and 2014:2015:
Beginning | New | Closed | Ending | |||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
US Centers | 258 | 1 | (1 | ) | 258 | |||||||||||||||||||||||||||
International Centers | 25 | - | - | 25 | ||||||||||||||||||||||||||||
Total | 283 | 1 | (1 | ) | 283 | |||||||||||||||||||||||||||
Beginning | New | Closed | Ending | |||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
US Centers | 250 | 4 | 2 | 252 | 250 | 4 | (2 | ) | 252 | |||||||||||||||||||||||
International Centers | 26 | - | - | 26 | 26 | - | - | 26 | ||||||||||||||||||||||||
Total | 276 | 4 | 2 | 278 | 276 | 4 | (2 | ) | 278 | |||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
US Centers | 245 | - | 1 | 244 | ||||||||||||||||||||||||||||
International Centers | 33 | - | 1 | 32 | ||||||||||||||||||||||||||||
Total | 278 | - | 2 | 276 |
Our U.S. franchisees reported approximate center sales for the quarters ended September 30 as follows:
2016 | 2015 | |||||||
Total gross U.S. network-wide center sales | $ | 69,849,000 | $ | 67,193,000 |
Revenues and net income for the three monthsquarters ended September 30, 2016 and 2015 were $4.28 million versus $3.68 million and $0.75 million versus $0.83 million, respectively, comparedrespectively. Contributing to pro forma revenuesthe revenue growth of 16.40% was a 9.01% increase in royalty and franchise development fee revenue and a 150.78% increase in services revenue which includes revenue from new low margin services added in 2016. The revenue growth of 3.89% was offset with the increase direct cost of services provided and a 13.61% increase in operating costs, resulting in the segment net income fordecrease to $0.75 million from $0.83 million in the prior year 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 comparable periods.quarter.
Cellular Retail
The following table summarizes our Cellular Retail segment operating 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 periodsquarters ended September 30, 20152016 and 20142015 follows:
2015 | 2014 | |||||||
Beginning | 110 | 58 | ||||||
Acquired/ Launched | - | - | ||||||
Closed | (8 | ) | - | |||||
Ending | 102 | 58 |
2016 | 2015 | |||||||
Beginning | 116 | 110 | ||||||
Acquired/ Launched | 10 | - | ||||||
Closed | - | (8 | ) | |||||
Ending | 126 | 102 |
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 theThe Cellular Retail segment increased $3.35 million, or 54.0%,division revenues and contribution 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 increasenet income each decreased period over period. A significant portion of revenue is due to a severalfrom phone sales and there are two factors that contributedhave influenced a decline in phone revenue period over period. Prior year comparable quarter volume was positively influenced by customer migrations to an approximate 52% increase in units activatedCricket Wireless’ new GSM network, so a volume decrease was anticipated. Discounting of phones is also a significant factor affecting revenue and discounts increased approximately $1.35 million period over period. These discounts also reduce cost of phones and do not impact gross profit or net income. While phone sales revenue decreased period over period, including our acquisition of additional stores, relocation of underperforming locations,dealer compensation and customer fees increased 17.9%. Other factors contributing to the effects of AT&T’s acquisition of Cricket Wireless.
Our expensesdecline in net income are growth related and include 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%.marketing and development costs, infrastructure costs and depreciation expense.
Direct to Consumer
The following table summarizes our Direct 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 | )% | - | % |
Revenueshas seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells. For the current quarter, the Direct to Consumer segment had net loss of ($0.33) million compared to a net loss of ($0.57) million for the comparable prior year period. Revenues for the three monthsmonth period ended September 30, 20152016 were $5.44$5.94 million and ($0.57) million, respectively, compared to pro forma revenues and net loss for the comparable period in 20142015 of $5.73$5.44 million, and ($0.61) million, respectively.an increase in of 9.2%
Consumer Finance
The 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 periodsquarters ended September 30, 20152016 and 20142015 follows:
2015 | 2014 | 2016 | 2015 | |||||||||||||
Beginning | 51 | 51 | 46 | 51 | ||||||||||||
Acquired/ Launched | - | - | - | - | ||||||||||||
Closed | - | - | (1 | ) | - | |||||||||||
Ending | 51 | 51 | 45 | 51 |
Our Consumer Finance segment revenues decreased slightly8.7% for the three monthsquarter ended September 30, 20152016 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 to $0.73 million for the three monthsquarter ended September 30, 2015. OurWe sold or closed 6 underperforming store locations between the comparable periods and regional economic downturns in the Midwest, primarily Wyoming, North Dakota and South Dakota, continue to contribute to revenue declines. Reductions in net bad debt and operating expenses forcosts have helped to keep the net income flat quarter decreased year-over-year primarily as a result of Company resources being re-directed to other segments.over quarter.
Corporate
Costs related to our Corporate segment were $0.10 million for the quarter ended September 30, 2016 compared to $0.21 million for the three monthsquarter ended September 30, 2015.
Results of Operations – Nine Months Ended September 30, 20152016 Compared to SixNine Months Ended September 30, 20142015
Net income attributable to our common shareholders was $2.14$4.54 million, or $0.30$0.48 per share (basic and diluted), for the nine months ended September 30, 2015,2016, compared to $1.14$2.14 million, or $0.38$0.30 per share (basic and diluted), for the nine months ended September 30, 2014.comparable period in 2015 and compared to pro forma net income for the prior comparable period of $4.43 million or $0.47 per share (basic and diluted). As further discussed below, The Franchise, segment, acquired on October 1, 2014,Direct to Consumer and Consumer Finance operating segments each contributed $1.57 millionto the increase in net income for the year over year period, while the Retail Wireless segment decreased.
As previously noted, we expect segment operating results and earnings per share to change throughout 2016 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, growth in 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 mix of segment contributions to net income to change in future periods.potential mergers and acquisitions activity.
Following is a discussion of operating results by segment.
The following table provides quarter-over-quarterperiod over period revenues and net income (in thousands) attributable to WCR common shareholders by operating segment:segment (in thousands):
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 |
Franchise | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
Revenues | $ | 11,452 | $ | 27,152 | $ | 30,699 | $ | 8,830 | $ | - | $ | 78,133 | ||||||||||||
% of total revenue | 14.6 | % | 34.8 | % | 39.3 | % | 11.3 | % | -% | 100.0 | % | |||||||||||||
Net income (loss) | $ | 1,834 | $ | 526 | $ | 1,682 | $ | 964 | $ | (455 | ) | $ | 4,551 | |||||||||||
Net income (loss) attributable to WCR common shareholders | $ | 1,819 | $ | 526 | $ | 1,682 | $ | 964 | $ | (455 | ) | $ | 4,536 | |||||||||||
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 | ||||||||||
Pro Forma Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||
Pro Forma Revenues | $ | 9,641 | $ | 29,632 | $ | 30,296 | $ | 9,451 | $ | - | $ | 79,020 | ||||||||||||
Pro Forma % of total revenue | 12.2 | % | 37.5 | % | 38.3 | % | 12.0 | % | -% | 100.0 | % | |||||||||||||
Pro Forma Net income (loss) | $ | 1,585 | $ | 967 | $ | 1,365 | $ | 932 | $ | (408 | ) | $ | 4,441 | |||||||||||
Pro Forma Net income (loss) attributable to WCR common shareholders | $ | 1,572 | $ | 967 | $ | 1,365 | $ | 932 | $ | (408 | ) | $ | 4428 |
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 nine 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 AlphaGraphics business centers owned and operated by franchisees during the nine-monthnine month periods ended September, 2016 and 2015:
Beginning | New | Closed | Ending | |||||||||||||
2016 | ||||||||||||||||
US Centers | 254 | 7 | (3 | ) | 258 | |||||||||||
International Centers | 25 | - | - | 25 | ||||||||||||
Total | 279 | 7 | (3 | ) | 283 | |||||||||||
2015 | ||||||||||||||||
US Centers | 242 | 14 | (4 | ) | 252 | |||||||||||
International Centers | 32 | - | (6 | ) | 26 | |||||||||||
Total | 274 | 14 | (10 | ) | 278 |
Our U.S. franchisees reported approximate center sales for the nine month periods ended September 30 2015 and 2014:as follows:
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 |
2016 | 2015 | |||||||
Total gross U.S. network-wide center sales | $ | 208,510,000 | $ | 199,346,000 |
Revenues and net income for the nine-monthsnine month period ended September 30, 2016 and 2015 were $11.45 million and $9.64 million, respectively. Contributing to the revenue growth of 18.78% was a 7.14% increase in royalty and franchise development fee revenue and a 122.04% increase in services revenue, primarily attributable to revenue from new low margin services added in 2016. The revenue growth, net of direct costs and together with a 6.18% increase in operating costs period over period resulted in the segment net income increase to $1.83 million from $1.59 million respectively, compared to pro forma revenues and net income for the prior year 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.period.
Cellular Retail
The 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-monthnine month periods ended September 30, 20152016 and 20142015 follows:
2015 | 2014 | |||||||
Beginning | 61 | 57 | ||||||
Acquired/ Launched | 49 | 6 | ||||||
Closed | (8 | ) | (5 | ) | ||||
Ending | 102 | 58 |
2016 | 2015 | |||||||
Beginning | 99 | 61 | ||||||
Acquired/ Launched | 33 | 49 | ||||||
Closed | (6 | ) | (8 | ) | ||||
Ending | 126 | 102 |
RevenuesAverage store revenue and gross profit was down period over period as expected since the prior period volume was positively influenced by customer migrations to Cricket Wireless’ new GSM network. Discounted phone prices (with a corresponding decrease 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 thatcost) have also contributed to an approximate 68% increasethe decrease in units sold period over period. Factors include our acquisitionrevenue. However, dealer compensation and customer fee revenue, both with no direct cost 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 costsrevenues associated with the closurerevenue, each have increased. Increased operating costs include one-time store consolidation costs in addition to cost incurred related to expansion efforts. Management expects to realize the benefit 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 operatingthese non-recurring costs in the same markets to reduce our operating costs.mid-term.
Direct to Consumer
The following table summarizesOn July 1, 2015, we added our newest segment, Direct to Consumer. Revenues for the nine month period ended September 30, 2016 were $30.70 million, up a marginal 1.3% from pro forma revenues for the comparable period in 2015 of $30.30 million. For the nine month period ended September 30, 2016, the 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 andhad net loss, which include only the three monthsincome of activity since acquisition on July 1, 2015,, were $5.44$1.68 million and ($0.57) million, respectively. Propro forma revenues and net income for the nine month periods in 2015 and 2014 are $30.3 million andof $1.37 million and $30.6 million and $0.48 million, respectively.in the comparable period of the prior year, a 22.6% increase.
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-monthnine month periods ended September 30, 20152016 and 20142015 follows:
2015 | 2014 | |||||||
Beginning | 51 | 52 | ||||||
Acquired/ Launched | - | - | ||||||
Closed | - | (1 | ) | |||||
Ending | 51 | 51 |
2016 | 2015 | |||||||
Beginning | 47 | 51 | ||||||
Acquired/ Launched | - | - | ||||||
Closed | (2 | ) | - | |||||
Ending | 45 | 51 |
Our Consumer Finance segment revenues increased slightlydecreased 6.57% for the nine months ended September 30, 2015 compared to2016 from the comparable nine monthsmonth period ended September 30, 2014.2015. Same store payday and installment lending revenue decreased 3.76%. The increaseimpact of the regional economic downturns in our revenues for the nine months ended September 30, 2015 was due to slight growth in pawn retail sales.
Our cost of revenues increased $0.25 million,Midwest, primarily dueWyoming, North Dakota and South Dakota, have contributed significantly to the increased pawn retail sales. Ourdecrease in same store revenue period over period. Similarly to the quarter over quarter results, reductions in net bad debt and operating expenses forcosts have helped to keep the net results relatively stable period decreased from 72.5% of segment revenue to 69.8%.over period.
Corporate
Costs related to our new Corporate segment were $0.46 million for the nine months ended September 30, 2016 compared to $0.71 million for the nine months ended September 30, 2015. The nine month period in 2015 which includes nonrecurring acquisition costs ofincluded approximately $0.32 million. As acquisition activity increases or decreases, costs within this segment will show a corresponding change.million in transaction related costs.
Liquidity and Capital Resources
Summary cash flow data is as follows:
Nine Months Ended September 30, | ||||||||||||||||
2015 | 2014 | Nine Months Ended September 30, | ||||||||||||||
2016 | 2015 | |||||||||||||||
Cash flows provided (used) by: | ||||||||||||||||
Operating activities | $ | 273,798 | $ | 2,299,224 | $ | 2,256,955 | $ | 273,798 | ||||||||
Investing activities | (644,645 | ) | (461,106 | ) | (1,723,606 | ) | (644,645 | ) | ||||||||
Financing activities | (353,775 | ) | (750,388 | ) | (485,121 | ) | (353,775 | ) | ||||||||
Net increase (decrease) in cash | (724,622 | ) | 1,087,730 | 48,228 | (724,622 | ) | ||||||||||
Cash, beginning of period | 4,273,350 | 1,983,835 | 7,847,669 | 4,273,350 | ||||||||||||
Cash, end of period | $ | 3,548,728 | $ | 3,071,565 | $ | 7,895,897 | $ | 3,548,728 |
At September 30, 2015,2016, we had cash of $3.55$7.90 million compared to cash of $3.07$3.55 million on September 30, 2014. Cash2015. Both comparable periods include 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.segment. We believe that our available cash, combined with expected cash flows from operations and available financing, will be sufficient to fund our liquidityscheduled debt repayments and the Cellular Retail segment anticipated capital expenditure requirementsexpenditures through September 30, 2016. Our expected short-term uses of available cash together with utilizing our line of credit facilities include the funding of operating activities, including anticipated increases in inventory levels, the financing of additional Cellular Retail segment expansion activities and the reduction of term debt.
Credit Facility - WCR
On October 18, 2011 (and later amended on December 7, 2012, March 21, 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 $3.0 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, 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, 2015, $3.0 million was due and owing under this borrowing agreement.
Credit Facilities - AGI
AGI is a party to term and revolving notes payable with a financial institution. Under the term debt agreements, $2.0 million was outstanding at September 30, 2015. The notes accrue interest at prime rate plus 2.5% per annum (5.75% as of September 30, 2015), require quarterly payments of $375,000 principal plus accrued interest, and mature in June 2017. Under the revolving debt agreement, as amended, AGI may borrow up to $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% per annum. AGI has not drawn on the revolving debt arrangement during the nine-month period ended September 30, 2015. The revolving note matures in August 2017. The notes payable are secured by all the assets of 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.
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
We had no off-balance sheet arrangements as of September 30, 2015.2016.
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, 2015,2016, our Chief Executive Officer and Chief Financial Officer carried out an assessment of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934.Based on this assessment, management identified material weaknesses in our internal control over financial reporting, as described below. As a result of these material weaknesses, managementChief Executive Officer and Chief Financial Officer concluded that,our disclosure controls and procedures are effective as of September 30, 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”)2016.
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:
MANAGEMENT’S REMEDIATION PLAN
Management has undertaken appropriate remediation efforts to correct the identified material weaknesses as follow:
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 20152016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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). |
26
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 |