SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

xWashington, D.C. 20549

Form 10-Q

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

 

For the quarterly period ended March 31, 20172018

 

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)

 

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

 

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

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

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

N/A

 

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

N/A

 

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

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

 

CheckIndicate by check mark whether the issuerregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ ☑ Noo ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ ☑ Noo ☐

 

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

 

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

 

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

 

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

 

Yeso ☐ Noþ ☑

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of May 15, 2017,2018, the registrant had outstanding 9,390,997 shares of common stock, $0.001 par value per share.

 

 


Western Capital Resources, Inc.

 

Index

 

  Page
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 4. Controls and Procedures1815
   
PART II. OTHER INFORMATIONItem 4. Controls and Procedures 
Item 6. Exhibits1920
   
SIGNATURESPART II. OTHER INFORMATION 20
Item 6. Exhibits21
SIGNATURES22

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

CONTENTS

 

 Page
  
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
  
Condensed Consolidated Balance Sheets4
  
Condensed Consolidated Statements of IncomeOperations5
  
Condensed Consolidated Statements of Cash Flows6
  
Notes to Condensed Consolidated Financial Statements7

 3

 

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

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

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

  March 31, 2017  December 31, 2016 
ASSETS        
         
CURRENT ASSETS        
Cash $11,208,398  $14,159,975 
Loans receivable (less allowance for losses of $880,000 and $1,036,000, respectively)  3,529,939   4,438,276 
Accounts receivable (less allowance for losses of $123,000 and $96,000, respectively)  3,408,305   1,716,867 
Inventory  10,342,291   9,095,460 
Prepaid expenses and other  4,346,777   3,727,284 
TOTAL CURRENT ASSETS  32,835,710   33,137,862 
         
NOTES RECEIVABLE  3,437,956   2,920,112 
         
PROPERTY AND EQUIPMENT, net  10,086,273   9,696,620 
         
GOODWILL  5,796,528   5,796,528 
         
INTANGIBLE ASSETS, net  7,396,426   7,536,945 
         
OTHER  1,220,022   1,122,585 
         
TOTAL ASSETS $60,772,915  $60,210,652 
         
LIABILITIES AND EQUITY        
         
CURRENT LIABILITIES        
Accounts payable and accrued expenses $11,805,009  $13,002,381 
Other current liabilities  2,065,419   2,242,372 
Income taxes payable  1,614,644   265,813 
Note payable – short-term  30,020   55,819 
Current portion long-term debt  1,780,000   1,780,000 
Current portion capital lease obligations  47,100   54,020 
Deferred revenue  1,819,987   1,427,358 
TOTAL CURRENT LIABILITIES  19,162,179   18,827,763 
         
LONG-TERM LIABILITIES        
Notes payable, net of current portion  7,326,332   8,681,545 
Capital lease obligations, net of current portion  82,102   94,762 
Deferred income taxes  1,812,000   1,775,000 
Other  162,272   143,080 
TOTAL LONG-TERM LIABILITIES  9,382,706   10,694,387 
         
TOTAL LIABILITIES  28,544,885   29,522,150 
         
COMMITMENTS AND CONTINGENCIES (Note 12)        
         
EQUITY        
         
WESTERN SHAREHOLDERS’ EQUITY        
Common stock, $0.001 par value, 12,500,000 shares authorized, 9,390,997 and 9,497,871 shares issued and outstanding.  939   950 
Additional paid-in capital  29,008,229   28,997,087 
Retained earnings  3,190,543   1,643,996 
TOTAL WESTERN SHAREHOLDERS’ EQUITY  32,199,711   30,642,033 
         
NONCONTROLLING INTERESTS  28,319   46,469 
         
TOTAL EQUITY  32,228,030   30,688,502 
         
TOTAL LIABILITIES AND EQUITY $60,772,915  $60,210,652 

See notes to condensed consolidated financial statements

.

4 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 Three Months Ended  Three Months Ended March 31, 
 March 31, 2017  March 31, 2016  2018  2017 
REVENUES             
Sales and associated fees $24,559,130  $20,015,542  $23,817,194  $24,559,130 
Financing fees and interest  2,233,409   2,484,220   2,174,546   2,233,409 
Royalty and franchise fees, net  3,032,626   2,794,756 
Other revenue  5,809,841   3,140,768   4,467,019   4,899,158 
  35,635,006   28,435,286   30,458,759   31,691,697 
                
COST OF REVENUES                
Cost of sales  12,058,754   10,437,885   12,166,033   12,067,936 
Provisions for loans receivable losses  237,581   302,872   200,202   237,581 
Other  648,197   553,414 
  12,944,532   11,294,171   12,366,235   12,305,517 
                
GROSS PROFIT  22,690,474   17,141,115   18,092,524   19,386,180 
                
OPERATING EXPENSES                
Salaries, wages and benefits  9,991,391   6,748,950   9,317,793   8,892,652 
Occupancy  2,954,056   1,970,527   3,422,218   2,911,292 
Advertising, marketing and development  2,009,150   1,951,009   2,029,315   1,906,553 
Depreciation  350,288   276,592   558,989   326,196 
Amortization  140,519   140,990   214,808   54,401 
Other  3,540,669   2,742,504   2,695,240   2,741,787 
  18,986,073   13,830,572   18,238,363   16,832,881 
                
OPERATING INCOME  3,704,401   3,310,543 
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS  (145,839)  2,553,299 
                
OTHER INCOME (EXPENSES):                
Interest income  64,075   1,052 
Interest and dividend income  167,511   64,075 
Interest expense  (138,152)  (169,011)  (87,598)  (57,371)
  (74,077)  (167,959)  79,913   6,704 
                
INCOME BEFORE INCOME TAXES  3,630,324   3,142,584 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  (65,926)  2,560,003 
                
INCOME TAX EXPENSE  1,363,000   1,167,000 
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) FOR CONTINUING OPERATIONS  (80,000)  951,000 
                
NET INCOME  2,267,324   1,975,584 
                
Less net income attributable to noncontrolling interests  (5,085)  (4,185)
NET INCOME FROM CONTINUING OPERATIONS  14,074   1,609,003 
                
NET INCOME ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS $2,262,239  $1,971,399 
LESS NET INCOME FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST  (185,091)  — 
                
EARNINGS PER SHARE ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS        
Basic and diluted $0.24  $0.21 
NET INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS  (171,017)  1,609,003 
        
DISCONTINUED OPERATIONS        
Income from operations of discontinued operations  —   1,070,321 
Less provision for income taxes for discontinued operations  —   (412,000)
Net income from discontinued operations  —   658,321 
Less net income from discontinued operations attributable to noncontrolling interests  —   (5,085)
Net income from discontinued operations attributable to Western common shareholders  —   653,236 
NET INCOME (LOSS) ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS $(171,017) $2,262,239 
        
EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS        
FROM CONTINUING OPERATIONS - Basic and diluted $(0.02) $0.17 
FROM DISCONTINUED OPERATIONS - Basic and diluted $—  $0.07 
FROM CONTINUING AND DISCONTINUED OPERATIONS - Basic and diluted $(0.02) $0.24 
                
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                
Basic and diluted  9,472,934   9,497,534   9,390,997   9,472,934 


See notes to condensed consolidated financial statements

5

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 Three Months Ended  Three Months Ended 
 March 31, 2017  March 31, 2016  March 31, 2018  March 31, 2017 
OPERATING ACTIVITIES                
Net Income $2,267,324  $1,975,584 
Net income from continuing operations $14,074  $1,609,003 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation  350,288   276,592   558,989   326,196 
Amortization  140,519   140,990   214,808   54,401 
Share based compensation  11,142   21,071   —   8,899 
Deferred income taxes  37,000   344,000   (77,000)  66,000 
Loss on disposal of property and equipment  (270)  - 
Investments discount amortization  (99,991)  — 
Loss (gain) on disposal of property and equipment  170,448   (270)
Changes in operating assets and liabilities:                
Loans receivable  908,337   938,663   947,505   908,337 
Accounts receivable  (1,691,438)  (1,489,252)  (1,427,672)  (1,085,312)
Inventory  (1,246,831)  (913,193)  (960,909)  (1,246,831)
Prepaid expenses and other assets  (716,930)  574,563   157,752   (831,683)
Accounts payable and accrued expenses  151,459   (1,547,364)  93,186   298,300 
Deferred revenue and other current liabilities  215,676   (145,861)  (65,215)  (15,825)
Accrued liabilities and other – long-term  19,192   (2,643)
Net cash provided by operating activities  445,468   173,150 
Operating cash flows from discontinued operations  —   354,253 
Net cash and cash equivalents provided by (used in) operating activities  (474,025)  445,468 
                
INVESTING ACTIVITIES                
Purchases of property and equipment  (754,130)  (432,211)
Purchases of investments  (11,961,900)  — 
Proceeds from held-to-maturity investments  1,000,000   — 
Purchase of property and equipment  (350,021)  (754,130)
Acquisition of stores, net of cash acquired  -   (466,836)  (76,707)  — 
Proceeds from disposal of property and equipment  14,459   - 
Advances on note receivable, net  (517,844)  -   —   (517,844)
Net cash used by investing activities  (1,257,515)  (899,047)
Proceeds from installment sale receivable  185,963   — 
Proceeds from the disposal of property, plant and equipment  10,000   14,459 
Cash received from discontinued operations  —   3,147,493 
Net cash and cash equivalents provided by (used in) investing activities  (11,192,665)  1,889,978 
                
FINANCING ACTIVITIES                
Payments on notes payable – short-term, net  (25,799)  -   (22,742)  (25,799)
Payments on line of credit, net  (853,544)  -   —   (853,544)
Payments on notes payable – long-term  (501,669)  (975,002)  —   (501,669)
Common stock redemption  (480,928)  -   —   (480,928)
Advances on capital lease  -   185,318 
Payments on capital lease  (19,580)  (26,018)
Subsidiary dividends to noncontrolling interests  (23,235)  - 
Dividend paid  (234,775)  - 
Net cash used in financing activities  (2,139,530)  (815,702)
Payments on capital leases  (11,554)  (11,960)
Payment of dividends  (469,550)  (234,775)
Financing activities of discontinued operations  —   (3,178,348)
Net cash and cash equivalents used in financing activities  (503,846)  (5,287,023)
                
NET DECREASE IN CASH  (2,951,577)  (1,541,599)
NET DECREASE IN CASH AND CASH EQUIVALENTS  (12,170,536)  (2,951,577)
                
CASH        
CASH AND CASH EQUIVALENTS        
Beginning of period  14,159,975   7,847,669   21,295,819   14,159,975 
End of period $11,208,398  $6,306,070  $9,125,283  $11,208,398 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
                
Income taxes paid $7,169  $1,483,301  $2,403  $7,169 
Interest paid $135,686  $166,131  $20,869  $135,686 

   

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”)(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 month period ended March 31, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018.

 

For further information, refer to the Condensed Consolidated Financial Statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2016.2017. The condensed consolidated balance sheet at December 31, 2016,2017, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

 

Nature of Business

 

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

 

·Franchise
oAlphaGraphics, Inc. (AGI) (99.2%) – franchisor of 253 domestic and 25 international AlphaGraphics Business Centers which specialize in the planning, production, and management of visual communications for businesses and individuals throughout the world.

·●Cellular Retail

o○PQH Wireless, Inc. (PQH) (100%) – operates 236 cellular retail stores (191 owned and operated plus 53 operated under management agreement as of March 31, 2017)2018 (179 100% owned plus 57 through a 70% owned subsidiary), as an exclusive dealer of the Cricket brand.

 

·●Direct to Consumer

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

 

oRestorers Acquisition, Inc. (RAI) (100%) – an online and direct marketing distribution retailer of home improvement and restoration products operating under Van Dyke’s Restorers.

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

 

·●Consumer Finance

o○Wyoming Financial Lenders, Inc. (WFL) (100%) – owns and operates “payday” stores (40 as of March 31, 2017)2018) in seven states (Colorado, Iowa, Kansas, Nebraska, North Dakota, Wisconsin and Wyoming) providing sub-prime short-term uncollateralized non-recourse “cash advance” or “payday” loans typically ranging from $100 to $500 with a maturity of generally two to four weeks, sub-prime short-term uncollateralized non-recourse installment loans typically ranging from $300 to $800 with a maturity of six months, check cashing and other money services to individuals.

 

o○Express Pawn, Inc. (EPI) (100%) – owns and operates retail pawn stores (three as of March 31, 2017)2018) in Nebraska and Iowa providing collateralized non-recourse pawn loans and retail sales of merchandise obtained from forfeited pawn loans or purchased from customers.

●Discontinued Operations 2017 - Franchise

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

 

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


Basis of Consolidation

 

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

 

Use of Estimates

 

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

 

Reclassifications

 

Certain Statements of Income and Statements of Cash Flows reclassifications have been made in the presentation of our prior financial statements and accompanying notes to conform to the presentation as of and for the three months ended March 31, 2017.2018.

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

 

Recent Accounting Pronouncements

 

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

 

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) relatedstatements and expects its adoption to the measurement of credit losses on financial instruments. The standard requireshave 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. This ASU is effective for annual reporting periods beginning after December 15, 2018 and interim periods within that annual period, with early adoption permitted and the standard to be applied using a modified retrospective approach. The Company is currently evaluating thematerial impact the ASU will have on our financial condition resultsdue to a material addition of operationsoperating lease assets and consolidated financial statements.liabilities in accordance with the ASU.

 

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

 

2.Risks Inherent in the Operating Environment –

 

Regulatory

 

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

 


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


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

 

3.3.Cash Equivalents and Investments –

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

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

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

  Cost  Accrued
Interest		  Amortized Discount  Amortized
Cost		  Unrealized Gain (Loss)  Estimated Fair Value 
                   
Certificates of Deposit $14,250,000  $47,734  $—  $14,297,734  $(87,544) $14,210,190 
Treasury Bills $31,961,012  $—  $128,111  $32,089,123  $(1,897) $32,087,226 

4.Loans Receivable –

 

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

 

March 31, 2017
March 31, 2018March 31, 2018
 Payday  Installment  Pawn &
Title		  Total  Payday  Installment  Pawn &
Title		  Total 
Current $2,911,699  $188,774  $275,963  $3,376,436  $2,773,711  $190,525  $263,650  $3,227,886 
1-30  199,317   32,807   -   232,124   166,548   38,121   —   204,669 
31-60  133,955   20,032   -   153,987   108,590   23,535   —   132,125 
61-90  170,483   15,082   -   185,565   145,640   15,484   —   161,124 
91-120  148,190   11,078   -   159,268   97,171   9,294   —   106,465 
121-150  143,073   7,556   -   150,629   112,903   3,299   —   116,202 
151-180  145,807   6,123   -   151,930   110,344   1,683   —   112,027 
  3,852,524   281,452   275,963   4,409,939   3,514,907   281,941   263,650   4,060,498 
Less Allowance  (812,000)  (68,000)  -   (880,000)  (627,000)  (71,000)  —   (698,000)
 $3,040,524  $213,452  $275,963  $3,529,939  $2,887,907  $210,941  $263,650  $3,362,498 
                
December 31, 2016
 Payday  Installment  Pawn &
Title		  Total 
Current $3,683,603  $272,703  $284,460  $4,240,766 
1-30  253,297   44,433   -   297,730 
31-60  201,375   27,905   -   229,280 
61-90  185,072   18,747   -   203,819 
91-120  159,435   15,737   -   175,172 
121-150  176,625   8,889   -   185,514 
151-180  134,171   7,824   -   141,995 
  4,793,578   396,238   284,460   5,474,276 
Less Allowance  (953,000)  (83,000)  -   (1,036,000)
 $3,840,578  $313,238  $284,460  $4,438,276 


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

 

4.5.Loans Receivable Allowance –

 

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

 

 Three Months Ended 
March 31, 2017		  Year Ended
December 31, 2016		  

Three Months Ended

March 31, 2018 

 

Year Ended 

December 31, 2017 

 
Loans receivable allowance, beginning of period $1,036,000  $1,177,000  $833,000  $1,036,000 
Provision for loan losses charged to expense  237,581   1,605,867   200,202   1,122,144 
Charge-offs, net  (393,581)  (1,746,867)  (335,202)  (1,325,144)
Loans receivable allowance, end of period $880,000  $1,036,000  $698,000  $833,000 

 

5.6.Accounts Receivable –

 

A breakdown of accounts receivables by segment as of March 31, 20172018 and December 31, 20162017 are as follows:

 

March 31, 2017
  Franchise  Cellular
Retail		  Direct to
Consumer		  Consumer
Finance		  Total 
Accounts receivable $1,691,336  $235,525  $1,595,258  $9,186  $3,531,305 
Less allowance  (65,000)  -   (58,000)  -   (123,000)
Net account receivable $1,626,336  $235,525  $1,537,258  $9,186  $3,408,305 

December 31, 2016
March 31, 2018March 31, 2018
 Franchise  Cellular
Retail		  Direct to
Consumer		  Consumer
Finance		  Total  Cellular
Retail		  Direct to Consumer  Consumer Finance  Total 
Accounts receivable $1,103,210  $333,800  $363,426  $12,431  $1,812,867  $315,549  $1,920,585  $12,609  $2,248,743 
Less allowance  (83,000)  -   (13,000)  -   (96,000)  —   (57,000)  —   (57,000)
Net account receivable $1,020,210  $333,800  $350,426  $12,431  $1,716,867  $315,549  $1,863,585  $12,609  $2,191,743 

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

 

7.6.Operating Lease LiabilityInventory –

 

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

 

Year Ending December 31, Operating Leases 
2017 (remainder) $5,221 
2018  5,959 
2019  5,060 
2020  2,992 
2021  2,132 
Thereafter  459 
Total minimum base lease payments $21,823 
  

Three Months Ended

March 31, 2018 

  

Year Ended 

December 31, 2017 

 
Cellular Retail $5,742,969  $5,287,932 
Direct to Consumer  3,457,377   2,988,052 
Consumer Finance  810,357   854,858 
  $10,010,703  $9,130,842 

 


7.8.Notes Payable – Long Term –

 

  March 31, 2017  December 31, 2016 
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% (4.375% at March 31, 2017), secured by substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing April 21, 2018 $144,882  $998,426 
Note payable to a financial institution with monthly principal payment of $58,333 plus interest at LIBOR plus 3.5% (4.375% at March 31, 2017), securedby substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing April 21, 2021  2,916,667   3,091,667 
Note payable to a financial institution with monthly principal payment of $56,667 plus interest at LIBOR plus 3.5% (4.375% at March 31, 2017), securedby substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing December 1, 2021  3,173,333   3,400,000 
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% (4.375% at March 31, 2017), securedby JPRE assets, maturing June 5, 2019 when remaining principal balance is due  2,871,450   2,971,452 
Total  9,106,332   10,461,545 
Less current maturities  (1,780,000)  (1,780,000)
  $7,326,332  $8,681,545 
  March 31, 2018  December 31, 2017 
Subsidiary subordinated note payable to seller with monthly interest only payments at 6%, guaranteed by PQH, maturingAugust 5, 2022 whentheprincipal balance is due.  789,216   789,216 
Total  789,216   789,216 
Less current maturities  —   — 
  $789,216  $789,216 

 

The Company is party to a Credit Agreement with a financial institution entered into on April 22, 2016 and subject to subsequent amendments. The Credit Agreement provides the Company with a revolving line of credit facility in an aggregate amount up to $3,000,000, having a maturity date of April 21, 2018 and an acquisition loan facility in an aggregate amount of up to $9,000,000, having a maturity date of April 21, 2018. The revolver and the acquisition loan facility bear interest at a floating per annum rate equal to one-month LIBOR plus 3.50%, adjusted on a monthly basis. Funds advanced under the acquisition loan facility mature five years from the date of advance. At March 31, 2017 approximately $5,765,0002018, the entire $12,000,000 of credit was available under the credit facilities. See Notes 14 and 15 for additional terms, conditions and amendment related to the Credit Agreement.

 

8.9.EquityIncome Taxes –

 

InThe provision for income taxes for continuing operations is 121.3% and 37.1% of income before the provision for income taxes for the three month period ended March 31, 2018 and 2017, respectively. The significant difference in rate is the Company redeemed 106,874 sharesresult of common stock for $480,928 in a private and unsolicited transaction.the 2018 net income attributable to noncontrolling interests not being subjected to income tax at the corporate level. Rather the “passthrough” taxable income is taxed to the noncontrolling interests at an individual level.


9.10.Cash Dividends –

 

Date declared  February 24, 2017  January 18, 2018 
Record date  March 17, 2017  February 9, 2018 
Date paid  March 24, 2017  February 14, 2018 
Dividend per share of common stock $0.025  $0.05 

 

10.11.Other Operating Expense –

 

A breakout of other expense is as follows:

 

 For The Three Months Ended March 31,  For The Three Months Ended March 31, 
 2017  2016  2018  2017 
Bank fees $550,349  $438,034  $502,564  $532,175 
Collection costs  89,894   116,188   84,605   89,894 
Conference expense  289,206   265,405 
Insurance  250,008   181,476   205,295   240,740 
Management and advisory fees  223,481   221,025   193,710   153,481 
Professional and consulting fees  811,130   595,210   543,096   662,089 
Supplies  332,072   183,274   217,436   324,136 
Other  994,529   741,892   948,534   739,272 
 $3,540,669  $2,742,504  $2,695,240  $2,741,787 

 

11.12.Discontinued Operations –

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


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

  Three Months Ended 
  March 31, 2017 
REVENUES OF DISCONTINUED OPERATIONS $3,943,309 
     
COST OF REVENUES OF DISCONTINUED OPERATIONS  648,197 
     
GROSS PROFIT OF DISCONTINUED OPERATIONS  3,295,112 
     
OPERATING EXPENSES OF DISCONTINUED OPERATIONS:    
Salaries, wages and benefits  1,098,739 
Occupancy  42,764 
Advertising, marketing and development  102,597 
Depreciation  24,092 
Amortization  86,118 
Other  789,700 
   2,144,010 
     
OPERATING INCOME OF DISCONTINUED OPERATIONS  1,151,102 
     
OTHER INCOME (EXPENSE) OF DISCONTINUED OPERATIONS    
Interest expense  (80,781)
     
INCOME BEFORE INCOME TAXES OF DISCONTINUED OPERATIONS  1,070,321 
     
PROVISION FOR INCOME TAXES OF DISCONTINUED OPERATIONS  412,000 
     
NET INCOME OF DISCONTINUED OPERATIONS  658,321 
     
Less net income of discontinued operations attributable to noncontrolling interests  (5,085)
     
NET INCOME OF DISCONTINUED OPERATIONS ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS $653,236 


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

  Three Months Ended 
  March 31, 2017 
DISCONTINUED OPERATING ACTIVITIES    
Net income of discontinued operations $658,321 
Adjustments to reconcile net income of discontinued operations to net cash provided by operating activities of discontinued operations:    
Depreciation  24,092 
Amortization  86,118 
Share based compensation  2,243 
Deferred income taxes  (29,000)
Changes in operating assets and liabilities:    
Accounts receivable  (606,126)
Prepaid expenses and other assets  114,753 
Accounts payable and accrued expenses  (597,356)
Deferred revenue and other current liabilities  682,016 
Other liabilities – long-term  19,192 
Net cash provided by operating activities of discontinued operations $354,253 
     
FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS    
Principal payments on capital lease obligations $(7,620)
Dividends to shareholders  (3,170,728)
Net cash used in financing activities of discontinued operations $(3,178,348)

13.Segment Information –

 

Segment information related to the three month periods ended March 31, 2018 and 2017 and 2016for continuing operations is presented below:

Three Months Ended March 31, 2017
(in thousands)
  Franchise  Cellular
Retail		  Direct to
Consumer		  Consumer
Finance		  Corporate  Total 
                   
Revenue from external customers $3,943  $17,045  $11,904  $2,743  $-  $35,635 
Net income (loss) $635  $620  $866  $254  $(108) $2,267 
Total segmented assets $8,879  $24,794  $15,429  $8,047  $3,624  $60,773 

Three Months Ended March 31, 2016
(in thousands)
  Franchise  Cellular
Retail		  Direct to
Consumer		  Consumer
Finance		  Corporate  Total 
                   
Revenue from external customers $3,612  $9,775  $12,064  $2,984  $-  $28,435 
Net income (loss) $523  $371  $904  $312  $(135) $1,975 
Total segmented assets $9,481  $14,746  $16,779  $13,747  $698  $55,451 

 

Three Months Ended March 31, 2018 

(in thousands)

 

  

Cellular
Retail 

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

 

Three Months Ended March 31, 2017 

(in thousands)

 

  

Cellular
Retail 

  Direct to
Consumer		  Consumer
Finance		  Corporate  

Discontinued 

Operations 

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

 

12.14.Commitments and Contingencies –

Employment Agreements

 

Pursuant to the Company’s numerous employment agreements, bonuses for continuing operation of approximately $331,000$73,000 and $256,000 were accrued for the three month periods ended March 31, 2018 and 2017, respectively.


Credit Facility

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

The Credit Agreement requires WCR to meet certain financial tests, 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 period ended March 31, 2017.2018.

Assigned Leases

The Company’s Cellular Retail segment has transferred operations of 37 locations to other dealers. Minimum lease payments of assigned or assumed non-cancelable operating leases related to transferred locations in which a release has not been obtained from the lessor are approximately $3,000,000 as of March 31, 2018.  

 

13.15.Subsequent Events –

Credit Facility

On April 26, 2018 the Company entered into a Fourth Loan Modification Agreement related to the Credit Agreement with a financial institution, pursuant to which, among other things, the maturity date of the Credit Agreement was extended to April 21, 2020 and the financial covenants were modified by removing the consolidated leverage ratio and consolidated fixed charge coverage ratio covenants and adding a minimum liquidity covenant.

Dividend Declared

Our Board of Directors declared the following dividend:

Date declared May 2, 2018 
Record date May 17, 2018 
Date paid May 24, 2018 
Dividend per share of common stock $0.05 

 

We evaluated all events or transactions that occurred after March 31, 20172018 up through the date we issued these financial statements. During this period we did not have any material subsequent events that impacted our financial statements.


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

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

·●our need for additional financing;

 

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

 

·●changes in Cricket dealer compensation;

 

·●failure of or disruption caused by a significant vendor;

 

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

 

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

 

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.

 

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

 


OVERVIEW

 

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


(FLOW CHART)

 

Our “Franchise” segment is comprised of AlphaGraphics, Inc. (99.2% owned), the franchisor of AlphaGraphics® customized print and marketing 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.subsidiaries, one of which is 70% owned. Our “Direct to Consumer” segment consists of (1) a wholly owned online and direct marketing distribution retailer of live plants, seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins and Wayside Gardens brand names and home improvement and restoration products operating as Van Dyke’s Restorers as well as a wholesaler under the Park Wholesale brand, and (2) a wholly owned online and direct marketing distribution retailer of home improvement and restoration products operating as Van Dyke’s Restorers.brand. Our “Consumer Finance” segment consists of retail financial services conducted through our wholly owned subsidiaries Wyoming Financial Lenders, Inc. and Express Pawn, Inc. Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as “we,” the “Company,” and “us.”

 

Following is key financial data for the three month period ended March 31, 2017 and 2016:

Discussion of Critical Accounting Policies

 

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

 

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


Loan Loss Allowance

 

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

 

The Company does not specifically reserve for any individual payday, installment or title loan.  The Company aggregates loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including (1) the amount of loan principal, interest and fee outstanding, (2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trends. The Company utilizes a software program to assist with the tracking of its historical portfolio statistics. A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages by loan type of net charge offs, applied against the applicable balance of loan principal, interest and fees outstanding. The Company also periodically performs a look-back analysis on its loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. The Company is aware that as conditions change, it may also need to make additional allowances in future periods. Loan losses or charge-offs of pawn or title loans are not recorded because the value of the collateral exceeds the loan amount. See Note 45 to our condensed consolidated financial statements included in this report for a rollforward of our loans receivable allowance.

 

Valuation of Long-lived and Intangible Assets

 

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


Goodwill

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

 

Results of Operations – Three Months Ended March 31, 20172018 Compared to Three Months Ended March 31, 20162017

 

Net income (loss) for continuing operations attributable to our common shareholders was $2.26$(0.17) million, or $0.24($0.02) per share (basic and diluted), for the quarter ended March 31, 2017,2018, compared to $1.97$1.61 million, or $0.21$0.17 per share (basic and diluted), for the quarter ended March 31, 2016.2017.

 

We expect segment operating results and earnings per share to change throughout 20172018 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, growthretraction in the Cellular Retail segment, and potential mergers and acquisitions activity.

 


Following is a discussion of operating results by segment.


The following table provides quarter-over-quarter revenues and net income attributable to WCR common shareholders by continuing operating segment for the quarters ended March 31, 2018 and March 31, 2017 (in thousands):

 

 Cellular Retail  Direct to Consumer  Consumer Finance  Corporate  Total 
Three Months Ended March 31, 2018                    
Revenue $17,107  $10,681  $2,671  $—  $30,459 
% of total revenue  56.1%  35.1%  8.8%  —%  100.0%
Net income (loss) $(375) $329  $331  $(271) $14 
Net income (loss) attributable to noncontrolling interests $185  $—  $—  $—  $185 
Net income (loss) attributable to WCR common shareholders $(560) $329  $331  $(271) $(171)
 Franchise  Cellular
Retail		  Direct to
Consumer		  Consumer
Finance		  Corporate  Total                     
Three Months Ended March 31, 2017                                            
Revenues $3,943  $17,045  $11,904  $2,743  $-  $35,635 
Revenue $17,045  $11,904  $2,743  $—  $31,692 
% of total revenue  11.1%  47.8%  33.4%  7.7%  -%  100.0%  53.8%  37.5%  8.7%  —%  100.0%
Net income (loss) $635  $620  $866  $254  $(108) $2,267  $669  $866  $254  $(180) $1,609 
Net income (loss) attributable to noncontrolling interests $—  $—  $—  $—  $— 
Net income (loss) attributable to WCR common shareholders $630  $620  $866  $254  $(108) $2,262  $669  $866  $254  $(180) $1,609 
                        
Three Months Ended March 31, 2016                        
Revenues $3,612  $9,775  $12,064  $2,984  $-  $28,435 
% of total revenue  12.7%  34.4%  42.4%  10.5%  -%  100.0%
Net income (loss) $523  $371  $904  $312  $(135) $1,975 
Net income (loss) attributable to WCR common shareholders $519  $371  $904  $312  $(135) $1,971 


Franchise

The table below summarizes the number of AlphaGraphics business centers owned and operated by franchisees during the quarter ended March 31, 2017 and 2016:

  Beginning  New  Closed  Ending 
2017                
US Centers  256   -   (3)  253 
International Centers  25   -   -   25 
Total  281   -   (3)  278 
                 
2016                
US Centers  254   4   (1)  257 
International Centers  25   -   -   25 
Total  279   4   (1)  282 

Our U.S. franchisees reported approximate center sales for the quarter ended March 31, 2017 and 2016 as follows:

  2017  2016 
Total gross U.S. network-wide center sales $69,084,000  $67,786,000 

Our revenues in the Franchise segment for the quarter ended March 31, 2017 and 2016 were $3.94 million versus $3.61 million, an increase of 9.1%. Segment net income period over period increased 23% to $0.64 million from $0.52 million in the prior year period.

 

Cellular Retail

A summary table of the number of Cricket cellular retail stores we operated during the quarter ended March 31, 20172018 and 20162017 follows:

 

 2017  2016  2018  2017 
Beginning  198   99   278   198 
Acquired/ Launched  46   14   1   46 
Closed  -   (2)
Closed/Transferred  (43)  — 
Ending  244   111   236   244 

 

The Cellular Retail segment revenues and contributionhas achieved substantial growth in location count since the beginning of 2017 as a result of our expansion initiative. While some newly launched locations are performing well, others have been slow to net income each increased period over period. Both increases are primarily attributableramp up. Due to the 53underperformance, as is evident in the number of locations closed or transferred to other Cricket dealers thus far in 2018, we have accelerated store count reductions that we had anticipated occurring at a later date. Because the growth initiative included leased properties with three to five year terms, there will be additional mature stores we operated under a store operating agreement beginning in November 2016. In additioncosts incurred to operating these additional mature locations, we also operated another 80 locations, mostterminate leases or sublet leased properties of which had been launched within the fourth quarter of 2016 and first quarter of 2017.closed locations.

 

Direct to Consumer

 

The Direct to Consumer segment has seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells. For the current quarter, the Direct to Consumer segment had net income of $0.87$0.33 million compared to net income of $0.90$0.87 million for the comparable prior year period. Revenues for the three month period ended March 31, 20172018 were $10.68 million compared to $11.90 million compared tofor the comparable period in 20162017. In 2018 we have experienced some delays in sales due to weather conditions and shipping zones not opening up as early as 2017. In the quarter ended March 31, 2018 we incurred approximately $222,000 of $12.06 million.nonrecurring expenses to relocate distribution for our Van Dyke’s Restorers brand. Distribution services previously provided by an outsourced 3PL will now be performed in-house from our South Carolina facility.


Consumer Finance

 

A summary table of the number of consumer finance locations we operated during the quarters ended March 31, 20172018 and 20162017 follows:

 

 2017  2016  2018  2017 
Beginning  41   47   41   41 
Acquired/ Launched  -   -   —   — 
Closed  -   -   —   — 
Ending  41   47   41   41 

 

Our Consumer Finance segment revenues decreased $0.72 million, or 2.6%, for the quarter ended March 31, 20172018 compared to the quarter ended March 31, 2016. We closed two underperforming store locations and another 4 locations2017. Our net income for the same period increased 30.3% over the same period of the prior year largely due to state legislative changes between the comparable periods. Revenue decreased 8.1% period over period while netreduction of ongoing expenses and income decreased 18.6%.tax expense.

 

Corporate

 

Costs related to our Corporate segment were $0.11$0.27 million for the quarter ended March 31, 2018 compared to $0.18 million for the quarter ended March 31, 2017. The period over period increase is primarily due to interest expense. Because we have no outstanding balances on the parent level credit facility and no operating segment is receiving direct benefit from it, current period unused line fees and amortization of loan costs have been treated as a corporate expense.

Consolidated Income Tax Expense

Provision for income tax benefit for continuing operations for the quarter ended March 31, 2018 was ($0.08) million compared to income tax expense of $0.95 million for the quarter ended March 31, 2017 comparedfor an effective rate of 121.30% and 37.10%, respectively. 

The significant difference in rate is the result of the 2018 net income attributable to $0.14 million fornoncontrolling interests not being subjected to income tax at the quarter ended March 31, 2016.corporate level. Rather the “passthrough” taxable income is taxed to the noncontrolling interests at an individual level.

 


Liquidity and Capital Resources

 

Summary cash flow data is as follows:

 

 Three Months Ended March 31,  Three Months Ended March 31, 
 2017  2016  2018  2017 
Cash flows provided (used) by:                
Operating activities $445,468  $173,150  $(474,025) $445,468 
Investing activities  (1,257,515)  (899,047)  (11,192,665)  1,889,978 
Financing activities  (2,139,530)  (815,702)  (503,846)  (5,287,023)
Net decrease in cash  (2,951,577)  (1,541,599)  (12,170,536)  (2,951,577)
Cash, beginning of period  14,159,975   7,847,669   21,295,819   14,159,975 
Cash, end of period $11,208,398  $6,306,070  $9,125,283  $11,208,398 

 

At March 31, 2017,2018, we had cash and cash equivalents of $11.21$9.13 million and highly liquid investments of $46.4 million compared to cash and cash equivalents of $6.31$11.21 million on March 31, 2017. Both comparable periods include cash flows utilized for growth in our Cellular Retail segment. WeFor 2018, we believe that our available cash, combined with expected cash flows from operations and available financing under credit facilities of approximately $5.77 million,our held-to-maturity investments, will be sufficient to fund our scheduled debt repaymentsliquidity and capital expenditure requirements through March of 2019. We also have a $3,000,000 revolving credit facility and a $9,000,000 acquisition credit facility available to us. Our expected short-term uses of available cash include the funding of operating activities, payment of income tax liabilities related to our sale of the Franchise segment and the Cellular Retail segment anticipated capital expenditures through March 31, 2018.payment of dividends.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of March 31, 2017.2018.


Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

As of March 31, 2017,2018, our Chief Executive Officer and Chief Financial Officer carried out an assessment of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934.Based on this assessment, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of March 31, 20172018.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended March 31, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 6. Exhibits

 

Exhibit Description
   
31.110.1 Consent and Fourth Amendment Agreement, dated April 26, 2018, by and among the Company, certain subsidiaries named therein and Fifth Third Bank (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on May 2, 2018).
31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
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Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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

 

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SIGNATURES

 

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

 

Dated: May 15, 20172018Western Capital Resources, Inc.
 (Registrant)
  
 By:/s/ John Quandahl
  John Quandahl
  Chief Executive Officer and Chief Operating Officer
   
 By:/s/ Stephen IrlbeckAngel Donchev
  Stephen IrlbeckAngel Donchev
  Chief Financial Officer

 

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