SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| ☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended SeptemberJune 30, 20192020
| ☐ | 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
(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)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Emerging growth company ☐ |
| Non-accelerated filer ☑ | Smaller reporting company ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
As of NovemberAugust 14, 2019,2020, the registrant had outstanding 9,348,6959,134,889 shares of common stock, $0.0001 par value per share.
Western Capital Resources, Inc.
Index
2
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONTENTS
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2019 | December 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 22,004,334 | $ | 16,724,983 | ||||
| Short-term investments | 15,408,423 | 22,394,748 | ||||||
| Loans receivable (net of allowance for losses of $602,000 and $818,000, respectively) | 3,685,246 | 4,111,842 | ||||||
| Accounts receivable (net of allowance for losses of $8,000 and $25,000, respectively) | 775,842 | 493,208 | ||||||
| Inventories (net of allowance of $605,000 and $670,000, respectively) | 8,710,879 | 8,467,512 | ||||||
| Prepaid income taxes | 754,237 | 512,099 | ||||||
| Prepaid expenses and other | 2,847,359 | 2,954,794 | ||||||
| Escrow and other receivables | 3,367,939 | 3,312,984 | ||||||
| TOTAL CURRENT ASSETS | 57,554,259 | 58,972,170 | ||||||
| INVESTMENTS | 750,000 | 1,000,000 | ||||||
| PROPERTY AND EQUIPMENT, net | 9,249,706 | 9,945,826 | ||||||
| OPERATING LEASE RIGHT-OF-USE ASSETS | 10,315,859 | — | ||||||
| GOODWILL | 5,796,528 | 5,796,528 | ||||||
| INTANGIBLE ASSETS, net | 3,554,961 | 4,167,110 | ||||||
| LOAN RECEIVABLE | 578,948 | — | ||||||
| OTHER | 532,743 | 558,209 | ||||||
| TOTAL ASSETS | $ | 88,333,004 | $ | 80,439,843 | ||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 8,426,697 | $ | 11,816,050 | ||||
| Current portion operating lease liabilities | 4,619,800 | — | ||||||
| Other current liabilities | 1,398,505 | 1,291,713 | ||||||
| Current portion notes payable | 64,531 | — | ||||||
| Current portion finance lease obligations | 13,936 | 51,211 | ||||||
| Deferred revenue | 580,169 | 1,012,772 | ||||||
| TOTAL CURRENT LIABILITIES | 15,103,638 | 14,171,746 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Notes payable, net of current portion | 1,036,535 | 789,216 | ||||||
| Operating lease liabilities, net of current portion | 5,871,682 | — | ||||||
| Deferred income taxes | 1,154,000 | 795,000 | ||||||
| TOTAL LONG-TERM LIABILITIES | 8,062,217 | 1,584,216 | ||||||
| TOTAL LIABILITIES | 23,165,855 | 15,755,962 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 16) | — | — | ||||||
| EQUITY | ||||||||
| WESTERN SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, $0.0001 par value, 12,500,000 shares authorized, 9,348,695 and 9,388,677 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 935 | 939 | ||||||
| Additional paid-in capital | 29,031,741 | 29,031,741 | ||||||
| Retained earnings | 34,339,217 | 33,774,293 | ||||||
| TOTAL WESTERN SHAREHOLDERS’ EQUITY | 63,371,893 | 62,806,973 | ||||||
| NONCONTROLLING INTERESTS | 1,795,256 | 1,876,908 | ||||||
| TOTAL EQUITY | 65,167,149 | 64,683,881 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 88,333,004 | $ | 80,439,843 |
See notes to condensed consolidated financial statements
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
4
See notes to condensed consolidated financial statements.
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
| Western Capital Resources, Inc. Shareholders | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Retained Earnings | Noncontrolling Interests | Total | |||||||||||||||||||
| BALANCE December 31, 2018 | 9,388,677 | $ | 939 | $ | 29,031,741 | $ | 33,774,293 | $ | 1,876,908 | $ | 64,683,881 | |||||||||||||
| Net Income | — | — | — | 1,050,413 | 249,697 | 1,300,110 | ||||||||||||||||||
| Noncontrolling interest contribution to equity | — | — | — | — | 17,446 | 17,446 | ||||||||||||||||||
| Dividends | — | — | — | (469,434 | ) | (266,600 | ) | (736,034 | ) | |||||||||||||||
| BALANCE March 31, 2019 | 9,388,677 | 939 | 29,031,741 | 34,355,272 | 1,877,451 | 65,265,403 | ||||||||||||||||||
| Net Income | — | — | — | 1,131,200 | 247,531 | 1,378,731 | ||||||||||||||||||
| Noncontrolling interest contribution to equity | — | — | — | — | — | — | ||||||||||||||||||
| Dividends | — | — | — | (469,434 | ) | (470,000 | ) | (939,434 | ) | |||||||||||||||
| BALANCE June 30, 2019 | 9,388,677 | 939 | 29,031,741 | 35,017,038 | 1,654,982 | 65,704,700 | ||||||||||||||||||
| Net Income | — | — | — | (49,692 | ) | 340,274 | 290,582 | |||||||||||||||||
| Stock Redemption | (39,982 | ) | (4 | ) | — | (159,217 | ) | — | (159,221 | ) | ||||||||||||||
| Dividends | — | — | — | (468,912 | ) | (200,000 | ) | (668,912 | ) | |||||||||||||||
| BALANCE – September 30, 2019 | 9,348,695 | $ | 935 | $ | 29,031,741 | $ | 34,339,217 | $ | 1,795,256 | $ | 65,167,149 | |||||||||||||
| Western Capital Resources, Inc. Shareholders | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Retained Earnings | Noncontrolling Interests | Total | |||||||||||||||||||
| BALANCE – December 31, 2019 | 9,265,778 | $ | 927 | $ | 29,031,741 | $ | 33,706,035 | $ | 2,574,834 | $ | 65,313,537 | |||||||||||||
| Net income | — | — | — | 1,904,335 | 462,568 | 2,366,903 | ||||||||||||||||||
| Distributions to Noncontrolling Interests | — | — | — | — | (45,000 | ) | (45,000 | ) | ||||||||||||||||
| Dividends | — | — | — | (463,289 | ) | — | (463,289 | ) | ||||||||||||||||
| BALANCE – March 31, 2020 | 9,265,778 | 927 | 29,031,741 | 35,147,081 | 2,992,402 | 67,172,151 | ||||||||||||||||||
| Net income | — | — | — | 4,613,733 | 453,904 | 5,067,637 | ||||||||||||||||||
| Distributions to Noncontrolling Interests | — | — | — | — | (1,079,602 | ) | (1,079,602 | ) | ||||||||||||||||
| Stock redemption | (130,889 | ) | (14 | ) | — | (547,169 | ) | — | (547,183 | ) | ||||||||||||||
| Dividends | — | — | — | (230,865 | ) | — | (230,865 | ) | ||||||||||||||||
| BALANCE – June 30, 2020 | 9,134,889 | $ | 913 | $ | 29,031,741 | $ | 38,982,780 | $ | 2,366,704 | $ | 70,382,138 | |||||||||||||
| Western Capital Resources, Inc. Shareholders | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Retained Earnings | Noncontrolling Interests | Total | |||||||||||||||||||
| BALANCE December 31, 2017 | 9,390,997 | $ | 939 | $ | 29,031,741 | $ | 37,903,204 | $ | 1,757,686 | $ | 68,693,570 | |||||||||||||
| Net Income (Loss) | — | — | — | (171,017 | ) | 185,091 | 14,074 | |||||||||||||||||
| Dividends | — | — | — | (469,550 | ) | — | (469,550 | ) | ||||||||||||||||
| BALANCE March 31, 2018 | 9,390,997 | 939 | 29,031,741 | 37,262,637 | 1,942,777 | 68,238,094 | ||||||||||||||||||
| Net Income (Loss) | — | — | — | (86,549 | ) | 187,958 | 101,409 | |||||||||||||||||
| Dividends | — | — | — | (469,550 | ) | (339,600 | ) | (809,150 | ) | |||||||||||||||
| BALANCE – June 30, 2018 | 9,390,997 | 939 | 29,031,741 | 36,706,538 | 1,791,135 | 67,530,353 | ||||||||||||||||||
| Net Income (Loss) | — | — | — | (1,172,727 | ) | 188,523 | (984,204 | ) | ||||||||||||||||
| Stock Redemption | (2,320 | ) | — | — | (9,697 | ) | — | (9,697 | ) | |||||||||||||||
| Dividends | — | — | — | (469,550 | ) | (261,600 | ) | (731,150 | ) | |||||||||||||||
| BALANCE – September 30, 2018 | 9,388,677 | 939 | 29,031,741 | 35,054,564 | $ | 1,718,058 | $ | 65,805,302 | ||||||||||||||||
| Western Capital Resources, Inc. Shareholders | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Retained Earnings | Noncontrolling Interests | Total | |||||||||||||||||||
| BALANCE – December 31, 2018 | 9,388,677 | $ | 939 | $ | 29,031,741 | $ | 33,774,293 | $ | 1,876,908 | $ | 64,683,881 | |||||||||||||
| Net income | — | — | — | 1,050,413 | 249,697 | 1,300,110 | ||||||||||||||||||
| Noncontrolling Interest equity contribution | — | — | — | — | 17,446 | 17,446 | ||||||||||||||||||
| Distributions to Noncontrolling Interests | — | — | — | — | (266,600 | ) | (266,600 | ) | ||||||||||||||||
| Dividends | — | — | — | (469,434 | ) | — | (469,434 | ) | ||||||||||||||||
| BALANCE – March 31, 2019 | 9,388,677 | 939 | 29,031,741 | 34,355,272 | 1,877,451 | 65,265,403 | ||||||||||||||||||
| Net income | — | — | — | 1,131,200 | 247,531 | 1,378,731 | ||||||||||||||||||
| Distributions to Noncontrolling Interests | — | — | — | — | (470,000 | ) | (470,000 | ) | ||||||||||||||||
| Dividends | — | — | — | (469,434 | ) | — | (469,434 | ) | ||||||||||||||||
| BALANCE – June 30, 2019 | 9,388,677 | $ | 939 | $ | 29,031,741 | $ | 35,017,038 | $ | 1,654,982 | $ | 65,704,700 | |||||||||||||
See notes to condensed consolidated financial statements.
6
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months Ended | Six Months Ended | |||||||||||||||
| September 30, 2019 | September 30, 2018 | June 30, 2020 | June 30, 2019 | |||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||
| Net income | $ | 2,969,423 | $ | (868,721 | ) | $ | 7,434,540 | $ | 2,678,841 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation | 1,309,035 | 1,457,762 | 989,624 | 867,698 | ||||||||||||
| Amortization | 518,422 | 616,330 | 373,669 | 362,915 | ||||||||||||
| Amortization of operating lease right-of-use assets | 4,200,455 | — | 2,922,642 | 2,779,807 | ||||||||||||
| Deferred income taxes | 359,000 | (411,000 | ) | (164,000 | ) | 234,000 | ||||||||||
| Loss (gain) on disposals | (73,086 | ) | 751,496 | 436,775 | (147,977 | ) | ||||||||||
| Accrued interest from investing activities | (36,295 | ) | (164,295 | ) | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Loans receivable | 426,596 | 198,149 | 1,761,290 | 624,796 | ||||||||||||
| Accounts receivable | (259,146 | ) | (158,237 | ) | (50,239 | ) | (62,492 | ) | ||||||||
| Inventory | (411,322 | ) | 225,819 | 468,408 | 1,228,814 | |||||||||||
| Prepaid expenses and other assets | 28,833 | 292,241 | 493,624 | 93,954 | ||||||||||||
| Operating lease liabilities | (4,675,738 | ) | — | (3,284,320 | ) | (3,110,370 | ) | |||||||||
| Accounts payable and accrued expenses | (3,335,321 | ) | (19,935,308 | ) | 999,780 | (3,202,289 | ) | |||||||||
| Deferred revenue and other current liabilities | (325,811 | ) | (560,848 | ) | ||||||||||||
| Net cash and cash equivalents provided by (used in) operating activities | 731,340 | (18,392,317 | ) | |||||||||||||
| Contract liabilities and other current liabilities | (338,424 | ) | (584,303 | ) | ||||||||||||
| Net cash and cash equivalents provided by operating activities | 12,007,074 | 1,599,099 | ||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||
| Purchases of investments | (23,728,805 | ) | (27,614,974 | ) | (33,981,808 | ) | (18,942,632 | ) | ||||||||
| Proceeds from held-to-maturity investments | 30,965,130 | 36,961,012 | 22,308,707 | 17,967,000 | ||||||||||||
| Purchases of property and equipment | (544,864 | ) | (720,067 | ) | (264,940 | ) | (210,995 | ) | ||||||||
| Acquisition of stores, net of cash acquired | (164,400 | ) | (76,707 | ) | (510,876 | ) | (164,400 | ) | ||||||||
| Advances on note receivable, net | (578,948 | ) | — | |||||||||||||
| Proceeds from installment sale receivable | — | 185,963 | ||||||||||||||
| Advances on loans receivable | (3,184 | ) | — | |||||||||||||
| Proceeds from the disposal of operating assets | 1,195,000 | 10,000 | 382,989 | 1,120,000 | ||||||||||||
| Net cash and cash equivalents provided by investing activities | 7,143,113 | 8,745,227 | ||||||||||||||
| Net cash and cash equivalents used in investing activities | (12,069,112 | ) | (231,027 | ) | ||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||
| Payments on notes payable – short-term, net | — | (51,992 | ) | |||||||||||||
| Payments on notes payable – long-term | (54,226 | ) | — | (32,250 | ) | (38,693 | ) | |||||||||
| Payments on finance leases | (1,161 | ) | (24,688 | ) | ||||||||||||
| Distributions to noncontrolling interests | (1,124,602 | ) | (736,600 | ) | ||||||||||||
| Common stock redemption | (159,221 | ) | (9,697 | ) | (547,183 | ) | — | |||||||||
| Payments on finance leases | (37,275 | ) | (35,130 | ) | ||||||||||||
| Payments of dividends to noncontrolling interests | (936,600 | ) | (601,200 | ) | ||||||||||||
| Payments of dividends | (1,407,780 | ) | (1,408,650 | ) | (694,154 | ) | (938,868 | ) | ||||||||
| Net cash and cash equivalents used in financing activities | (2,595,102 | ) | (2,106,669 | ) | (2,399,350 | ) | (1,738,849 | ) | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 5,279,351 | (11,753,759 | ) | |||||||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (2,461,388 | ) | (370,777 | ) | ||||||||||||
| CASH AND CASH EQUIVALENTS | ||||||||||||||||
| Beginning of period | 16,724,983 | 21,295,819 | 27,132,540 | 16,724,983 | ||||||||||||
| End of period | $ | 22,004,334 | $ | 9,542,060 | $ | 24,671,152 | $ | 16,354,206 | ||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||||||
| Income taxes paid | $ | 576,638 | $ | 19,151,512 | $ | 196,900 | $ | 119,563 | ||||||||
| Interest paid | $ | 69,246 | $ | 103,025 | $ | 31,579 | $ | 44,865 | ||||||||
| Noncash investing and financing activities: | ||||||||||||||||
| Assets received in acquisition (See Note 13) | $ | 1,738,546 | $ | — | ||||||||||||
| Liabilities assumed in acquisition (See Note 13) | $ | 1,369,024 | $ | — | ||||||||||||
| Note payable assumed in acquisition (See Note 13) | $ | 347,918 | $ | — | ||||||||||||
| Noncontrolling interest contribution to subsidiary (See Note 13) | $ | 17,446 | $ | — | ||||||||||||
| Right-of-use assets obtained in exchange for operating lease obligation – other transactions | $ | 244,077 | $ | — | ||||||||||||
| Assets received in acquisition (see Note 13) | $ | 1,179,878 | $ | 1,694,546 | ||||||||||||
| Liabilities assumed in acquisition (see Note 13) | $ | 1,179,878 | $ | 1,325,024 | ||||||||||||
| Note payable assumed in acquisition (see Note 13) | $ | — | $ | 347,918 | ||||||||||||
| Noncontrolling interest contribution to subsidiary (see Note 13) | $ | — | $ | 17,446 | ||||||||||||
| Right-of-use assets obtained and operating lease obligations incurred | $ | 1,426,817 | $ | 963,486 | ||||||||||||
| Right-of-use asset disposals | $ | 1,145,732 | $ | — | ||||||||||||
| Right-of-use liability disposals | $ | 706,030 | $ | — | ||||||||||||
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 note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ninesix month periods ended SeptemberJune 30, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
Management has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of June 30, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.
For further information, refer to the Consolidated Financial Statements and notes thereto included in our Form 10-K for the year ended December 31, 2018.2019. The condensed consolidated balance sheet at December 31, 2018,2019, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP.
Nature of Business
Western Capital Resources, Inc. (WCR)(“WCR”) is a parent company owning operating subsidiaries, with percentage owned shown parenthetically, as summarized below.
| ● | Cellular Retail |
| PQH Wireless, Inc. |
| ● | Direct to Consumer |
| J |
| J |
| ● | Consumer Finance |
| Wyoming Financial Lenders, Inc. |
| 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 as” “PQH,” “JPPA,” “JPRE,” “WFL”“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 provisions of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 810, “Consolidation” applicable to reporting the equity and net income or loss attributable to noncontrolling interests. All significant intercompany balances and transactions of the Company have been eliminated in consolidation.
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 notes and loans receivable allowance, carrying value and impairment of long-lived goodwill, intangible assets, and intangibleright-of-use 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 Statement of Cash FlowsIncome reclassifications have been made in the presentation of our prior financial statements to conform to the presentation as of and for the ninethree and six months ended SeptemberJune 30, 2019.2020.
Recent Accounting Pronouncements
In February 2016,April, 2020 the FASBstaff of the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842), relateda question-and-answer document that says entities can elect not to recognitionevaluate whether a concession provided by a lessor to a lessee in response to the effects of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize the following for all leases: (1)coronavirus pandemic is a lease liability, which ismodification. Retailers may make the present value of a lessee’s obligation to make lease payments, and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified assetelections for the lease term. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company adopted ASU 2016-02 and ASC 842 using the modified retrospective method on January 1, 2019. See Note 8 for further disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326),any lessor-provided concessions related to the measurementeffects of credit losses on financial instruments.the coronavirus pandemic as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The standard requires a financial asset (or a group of financial assets) measured at amortized cost basisCompany has made such election. The Company has received minimal rent concessions and has not entered into any lease modifications to be presented atdate. As such, the net amount expected to be collected. The ASU is effective for annual reporting periods beginning after December 15, 2019 and interim periods within that annual period, with early adoption permitted and the standard to be applied using a modified retrospective approach. The Company does not believe adoption of ASU 2016-13this election will have a material impact on ourits financial condition, results of operations andor consolidated financial statements.
In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements (Topic 842) to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect to not separate non-lease components from leases when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted certain options available under ASU 2018-11on January 1, 2019. See Note 8 for further disclosures.
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 federal, state, and local laws, regulations and rules, which are subject to change. New laws, regulations or rules could be enacted or issued, interpretations of existing laws, regulations or rules may change and enforcement action by regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities of the kind conducted by the Company. After several years of research, debate, and public hearings, in October 2017 the U.S. Consumer Financial Protection Bureau (CFPB)(“CFPB”) adopted a new rule for payday lending. The rule, originally scheduled to go into effect in August 2019, would impose significant restrictions on the industry, and it is expected that a large number of lenders would be forced to close their stores. The CFPB’s studies projected a reduction in the number of lenders by 50%, while industry studies forecast a much higher attrition rate if the rule is implemented as originally adopted.
InHowever, in January 2018, the CFPB issued a statement that it intends to “reconsider” the regulation. The most current information from the CFPB website states the proposals it is considering includes rescinding the mandatory underwriting provisions contained in the ruleregulation and to delaydelayed the August 19, 2019 compliance date for the other provisions to November 19, 2020. At this time it is uncertain whetherIn July 2020, the CFPB issued a final rule applicable to the 2017 rule. The final rule rescinds the mandatory underwriting provisions of the 2017 rule but does not rescind or alter the payments provisions of the 2017 rule. The Bureau will be implemented as announced, rewrittenseek to have these rules go into effect with more favorable termsa reasonable period for entities to come into compliance. The implementation of the industry, or thrown out altogether. If thefinal rule is implemented as written, it could have a significant and negative impact on business conducted within our Consumer Finance segment.
Consumer advocacy groups in many states are actively seeking state law changes which would effectively end the viability of a payday loan business, including Nebraska where in 2019 we generate approximately 30% of our payday lending revenue, or approximately 2% of our consolidated revenue. If these groups are successful in Nebraska, we will likely cease payday lending activities in Nebraska. In June 2020, a Nebraska group submitted signatures for a ballot initiative that would limit all fees charged by payday lenders in Nebraska to an annual interest rate of 36%. As a result, the initiative is expected to be on the Nebraska statewide ballot for the November 3, 2020 election.
The aboveimplementation of the CFPB rule, the passage of the Nebraska ballot initiative or any other adverse change in present federal, state, or local laws or regulations that govern or otherwise affect lending could result in the Consumer Finance segment’s curtailment or cessation of operations in certain or all jurisdictions or locations. Furthermore, any failure to comply with any applicable local, state or federal laws or regulations could result in fines, litigation, closure of one or more store locations or negative publicity. Any such change or 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, or a 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 effects its ability to obtain additional financing as needed.
In addition, the passage of federal, state or local laws and regulations or changes in interpretations of them could, at any point, essentially prohibit the Consumer Finance segment from conducting its lending business in its current form. Any such legal or regulatory change would certainly have a material and adverse effect on the Company, its operating results, financial condition and prospects, and perhaps even the viability of the Consumer Finance segment.
Concentrations
The Company has demand deposits at financial institutions, often times in excess of the limit for insurance by the Federal Deposit Insurance Corporation. As of SeptemberJune 30, 2019,2020, the Company had demand deposits in excess of insurance amounts of approximately $3.93$7.93 million.
COVID-19
In December 2019 COVID-19 emerged in Wuhan, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to almost all other countries, including the United States, and infections have been reported globally.
Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future. Since the start of the pandemic, the Company’s Cellular Retail segment had temporarily closed approximately 75 locations, all but 22 of which subsequently re-opened by the end of April 2020. In June 2020, those 22 closed locations plus five others were permanently closed.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations. The significance of the impact of the COVID-19 outbreak on the Company’s businesses and the duration for which it may have an impact cannot be determined at this time.
| 3. | Cash Equivalents and Marketable Investments – |
The following table shows the Company’s cash and cash equivalents and held-to-maturity investments, by significant investment category, recorded as cash and cash equivalents or short- and long-term investments:
| September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
| Cash and cash equivalents | ||||||||||||||||
| Operating accounts | $ | 7,733,121 | $ | 10,901,929 | $ | 16,202,326 | $ | 10,163,845 | ||||||||
| U.S. treasuries | 13,344,202 | 3,014,478 | ||||||||||||||
| Money markets | 927,011 | 2,808,576 | ||||||||||||||
| Money Market – U.S. Treasury obligations | 4,438,931 | 4,450,433 | ||||||||||||||
| U.S. Treasury obligations | 4,029,895 | 12,518,262 | ||||||||||||||
| Subtotal | 22,004,334 | 16,724,983 | 24,671,152 | 27,132,540 | ||||||||||||
| Held-to-maturity investments | ||||||||||||||||
| Certificates of deposit | 12,007,686 | 12,711,069 | ||||||||||||||
| U.S. treasuries | 4,150,737 | 10,683,679 | ||||||||||||||
| Held to Maturity Investments | ||||||||||||||||
| Certificates of deposit (4 – 24 month maturities, FDIC insured) | $ | 17,588,365 | $ | 9,049,787 | ||||||||||||
| U.S. Treasury obligations (less than one year maturities) | 10,359,982 | 7,206,878 | ||||||||||||||
| Subtotal | 16,158,423 | 23,394,748 | 27,948,347 | 16,256,665 | ||||||||||||
| TOTAL | $ | 38,162,757 | $ | 40,119,731 | $ | 52,619,499 | $ | 43,389,205 | ||||||||
As of September 30, 2019 and December 31, 2018, held
Held to maturity investments consisted of the following:
| September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2020 | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost | Accrued Interest | Amortized Discount | Amortized Cost | Unrealized Gain (Loss) | Estimated Fair Value | Cost | Accrued Interest | Amortized Discount | Amortized Cost | Unrealized Gain (Loss) | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||
| Certificates of Deposit | $ | 11,929,316 | $ | 78,370 | $ | — | $ | 12,007,686 | $ | (76,713 | ) | $ | 11,930,973 | $ | 17,525,765 | $ | 62,600 | $ | — | $ | 17,588,365 | $ | 34,074 | $ | 17,622,439 | |||||||||||||||||||||||
| U.S. Treasuries | 4,121,672 | — | 29,065 | 4,150,737 | 3,736 | 4,154,473 | 10,359,214 | — | 768 | 10,359,982 | 18 | 10,360,000 | ||||||||||||||||||||||||||||||||||||
| $ | 16,050,988 | $ | 78,370 | $ | 29,065 | $ | 16,158,423 | $ | (72,977 | ) | $ | 16,085,446 | $ | 27,884,979 | $ | 62,600 | $ | 768 | $ | 27,948,347 | $ | 34,092 | $ | 27,982,439 | ||||||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost | Accrued Interest | Amortized Discount | Amortized Cost | Unrealized Gain (Loss) | Estimated Fair Value | Cost | Accrued Interest | Amortized Discount | Amortized Cost | Unrealized Gain (Loss) | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||
| Certificates of Deposit | $ | 12,670,000 | $ | 41,069 | $ | — | $ | 12,711,069 | $ | (68,087 | ) | $ | 12,642,982 | $ | 9,015,618 | $ | 34,169 | $ | — | $ | 9,049,787 | $ | (32,429 | ) | $ | 9,017,358 | ||||||||||||||||||||||
| U.S. Treasuries | 10,564,160 | 25,707 | 93,812 | 10,683,679 | (30,229 | ) | 10,653,450 | 7,153,587 | — | 53,291 | 7,206,878 | 2,883 | 7,209,761 | |||||||||||||||||||||||||||||||||||
| $ | 23,234,160 | $ | 66,776 | $ | 93,812 | $ | 23,394,748 | $ | (98,316 | ) | $ | 23,296,432 | $ | 16,169,205 | $ | 34,169 | $ | 53,291 | $ | 16,256,665 | $ | (29,546 | ) | $ | 16,227,119 | |||||||||||||||||||||||
Interest income recognized on held-to-maturity investments and other sources was as follows:
| Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||
| Held-to-maturity | $ | 112,158 | $ | 121,906 | $ | 412,855 | $ | 364,454 | $ | 67,733 | $ | 158,551 | $ | 183,808 | $ | 300,697 | ||||||||||||||||||
| Other | 86,659 | 31,833 | 161,481 | 100,971 | 3,987 | 35,425 | 26,639 | 74,822 | ||||||||||||||||||||||||||
| $ | 198,817 | $ | 153,739 | $ | 574,336 | $ | 465,425 | $ | 71,720 | $ | 193,976 | $ | 210,447 | $ | 375,519 | |||||||||||||||||||
The Company deposited in aggregate $1.75 million of cash across seven different accounts at a financial institution as an accommodation to its majority stockholder, who has other business relationships with the financial institution. The funds in these accounts can be withdrawn at any time, do not serve as collateral in any way, and are held on market terms.
| 4. | Loans Receivable – |
The Consumer Finance segment’s outstanding loans receivable aging is as follows:
| September 30, 2019 | ||||||||||||||||||||||||||||||||
| June 30, 2020 | June 30, 2020 | |||||||||||||||||||||||||||||||
| Payday | Installment | Pawn | Total | Payday | Installment | Pawn | Total | |||||||||||||||||||||||||
| Current | $ | 3,119,450 | $ | 73,391 | $ | 308,201 | $ | 3,501,042 | $ | 1,815,634 | $ | 24,059 | $ | 203,730 | $ | 2,043,423 | ||||||||||||||||
| 1-30 | 241,197 | 15,192 | — | 256,389 | 85,070 | 1,812 | — | 86,882 | ||||||||||||||||||||||||
| 31-60 | 155,545 | 7,091 | — | 162,636 | 29,805 | 264 | — | 30,069 | ||||||||||||||||||||||||
| 61-90 | 129,094 | 2,638 | — | 131,732 | 56,317 | — | — | 56,317 | ||||||||||||||||||||||||
| 91-120 | 92,491 | 1,085 | — | 93,576 | 67,655 | — | — | 67,655 | ||||||||||||||||||||||||
| 121-150 | 73,018 | 294 | — | 73,312 | 72,138 | — | — | 72,138 | ||||||||||||||||||||||||
| 151-180 | 68,559 | — | — | 68,559 | 82,637 | — | — | 82,637 | ||||||||||||||||||||||||
| 3,879,354 | 99,691 | 308,201 | 4,287,246 | 2,209,256 | 26,135 | 203,730 | 2,439,121 | |||||||||||||||||||||||||
| Less Allowance | (602,000 | ) | — | — | (602,000 | ) | (340,000 | ) | — | — | (340,000 | ) | ||||||||||||||||||||
| $ | 3,277,354 | $ | 99,691 | $ | 308,201 | $ | 3,685,246 | $ | 1,869,256 | $ | 26,135 | $ | 203,730 | $ | 2,099,121 | |||||||||||||||||
| December 31, 2019 | ||||||||||||||||
| Payday | Installment | Pawn | Total | |||||||||||||
| Current | $ | 3,322,131 | $ | 67,891 | $ | 309,934 | $ | 3,699,956 | ||||||||
| 1-30 | 216,753 | 10,590 | — | 227,343 | ||||||||||||
| 31-60 | 140,872 | 6,234 | — | 147,106 | ||||||||||||
| 61-90 | 117,544 | 2,649 | — | 120,193 | ||||||||||||
| 91-120 | 118,626 | 840 | — | 119,466 | ||||||||||||
| 121-150 | 110,278 | 395 | — | 110,673 | ||||||||||||
| 151-180 | 108,674 | — | — | 108,674 | ||||||||||||
| 4,134,878 | 88,599 | 309,934 | 4,533,411 | |||||||||||||
| Less Allowance | (673,000 | ) | — | — | (673,000 | ) | ||||||||||
| $ | 3,461,878 | $ | 88,599 | $ | 309,934 | $ | 3,860,411 | |||||||||
| December 31, 2018 | ||||||||||||||||
| Payday | Installment | Pawn | Total | |||||||||||||
| Current | $ | 3,314,182 | $ | 254,255 | $ | 321,447 | $ | 3,889,884 | ||||||||
| 1-30 | 224,091 | 41,596 | — | 265,687 | ||||||||||||
| 31-60 | 199,259 | 30,285 | — | 229,544 | ||||||||||||
| 61-90 | 153,449 | 15,189 | — | 168,638 | ||||||||||||
| 91-120 | 131,480 | 9,001 | — | 140,481 | ||||||||||||
| 121-150 | 125,074 | 4,311 | — | 129,385 | ||||||||||||
| 151-180 | 101,619 | 4,604 | — | 106,223 | ||||||||||||
| 4,249,154 | 359,241 | 321,447 | 4,929,842 | |||||||||||||
| Less Allowance | (770,000 | ) | (48,000 | ) | — | (818,000 | ) | |||||||||
| $ | 3,479,154 | $ | 311,241 | $ | 321,447 | $ | 4,111,842 | |||||||||
| 5. | Loans Receivable Allowance – |
A rollforward of the Consumer Finance segment’s loans receivable allowance is as follows:
Nine Months Ended September 30, 2019 | Year Ended December 31, 2018 | Six Months Ended June 30, 2020 | Year Ended December 31, 2019 | |||||||||||||
| Loans receivable allowance, beginning of period | $ | 818,000 | $ | 833,000 | $ | 673,000 | $ | 818,000 | ||||||||
| Provision for loan losses charged to expense | 705,604 | 1,241,638 | 79,397 | 975,938 | ||||||||||||
| Write-offs, net | (921,604 | ) | (1,256,638 | ) | (412,397 | ) | (1,120,938 | ) | ||||||||
| Loans receivable allowance, end of period | $ | 602,000 | $ | 818,000 | $ | 340,000 | $ | 673,000 | ||||||||
6. Accounts Receivable –
| 6. | Accounts Receivable – |
A breakdown of accounts receivables by segment is as follows:
| September 30, 2019 | ||||||||||||||||||||||||||||||||
| June 30, 2020 | June 30, 2020 | |||||||||||||||||||||||||||||||
| Cellular Retail | Direct to Consumer | Consumer Finance | Total | Cellular Retail | Direct to Consumer | Consumer Finance | Total | |||||||||||||||||||||||||
| Accounts receivable | $ | 146,374 | $ | 622,321 | $ | 15,147 | $ | 783,842 | $ | 224,953 | $ | 389,795 | $ | 17,967 | $ | 632,715 | ||||||||||||||||
| Less allowance | — | (8,000 | ) | — | (8,000 | ) | — | (65,000 | ) | — | (65,000 | ) | ||||||||||||||||||||
| Net accounts receivable | $ | 146,374 | $ | 614,321 | $ | 15,147 | $ | 775,842 | $ | 224,953 | $ | 324,795 | $ | 17,967 | $ | 567,715 | ||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2019 | |||||||||||||||||||||||||||||||
| Cellular Retail | Direct to Consumer | Consumer Finance | Total | Cellular Retail | Direct to Consumer | Consumer Finance | Total | |||||||||||||||||||||||||
| Accounts receivable | $ | 130,251 | $ | 372,076 | $ | 15,881 | $ | 518,208 | $ | 184,519 | $ | 318,235 | $ | 27,722 | $ | 530,476 | ||||||||||||||||
| Less allowance | — | (25,000 | ) | — | (25,000 | ) | — | (13,000 | ) | — | (13,000 | ) | ||||||||||||||||||||
| Net accounts receivable | $ | 130,251 | $ | 347,076 | $ | 15,881 | $ | 493,208 | $ | 184,519 | $ | 305,235 | $ | 27,722 | $ | 517,476 | ||||||||||||||||
A portion of accounts receivable are unsettled credit card sales from the prior one to five business days. This makes up 76%79% and 57%68% of the net accounts receivable balance at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.
| 7. | Inventory – |
Inventories consist of:
| September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
| Finished Goods | ||||||||||||||||
| Cellular Retail | $ | 5,000,129 | $ | 5,456,898 | $ | 5,609,452 | $ | 5,687,771 | ||||||||
| Direct to Consumer | 3,451,829 | 2,848,484 | 2,345,894 | 2,888,483 | ||||||||||||
| Consumer Finance | 863,921 | 832,130 | 723,647 | 819,437 | ||||||||||||
| Reserve | (605,000 | ) | (670,000 | ) | (751,000 | ) | (1,065,000 | ) | ||||||||
| TOTAL | $ | 8,710,879 | $ | 8,467,512 | $ | 7,927,993 | $ | 8,330,691 | ||||||||
As a result of changes in the market for certain Company products and the resulting deteriorating value, carrying amounts for those inventories were reduced by approximately $605,000$751,000 and $670,000$1,065,000 at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. These inventory write-downs have been reflected in adjustments to cost of goods sold in the statement of operations. Management believes that these reductions properly reflect inventory at lower of cost or market, and no additional losses will be incurred upon disposition.
| 8. | Leases – |
The Company adoptedlease accounting policy follows the guidance from ASC 842 - Leases, using the modified retrospective methodwhich provides guidance on January 1, 2019. The Company elected the package of practical expedients relief option offered in ASU 2016-02 and the accounting policy election for lessees not to separate lease and non-lease components (election applies to leased real property asset class).
The most significant impact of the adoption of ASC 842 was the recognition, presentation and disclosure of right-of-use (“ROU”) assets and lease liabilities for operating leases of $11.53 million and $11.76 million, respectively, and a reversal of deferred rent of $0.23 million on January 1, 2019. The Company’s accounting for finance leases, which are insignificant, remained unchanged. The adoption of ASC 842 did not have any impact on the Company’s operating results or cash flows.
The Company has many retail and office space lease agreements and insignificant equipment lease agreements which are accounted for as operating leases. The real property leases typically are for three- to five-year terms with many containing options for similar renewal periods. The Company determines if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease liabilities (current and noncurrent) in theconsolidated condensed consolidated balance sheet. Finance leases are included in property and equipment and finance lease obligations in the condensed consolidated balance sheet.
ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, Management used the Company’s collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.
The lease payment terms may include fixed payment terms and variable payments. Fixed payment terms and variable payments that depend on an index (i.e., Consumer Price Index, or “CPI”) or rate are considered in the determination of the operating lease liabilities. While lease liabilities are not remeasured because of changes to the CPI, changes are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. Variable payments that do not depend on an index or rate are not included in the lease liabilities determination. Rather, these payments are recognized as variable lease expense when incurred. Expenses related to leases with a lease term of one month or less are recognized as variable lease expense when incurred. Variable lease payments are included within operating costs and expenses in the condensed consolidated statement of operations.
Due to the significant assumptions and judgements required in accounting for leases (to include whether a contract contains a lease, the allocation of the consideration, and the determination of the discount rate), the judgements and estimates made could have a significant effect on the amount of assets and liabilities recognized.financial statements.
Total components of operating lease expense for the real property asset class (in thousands) were as follows:
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | |||||||||||||
| Operating lease expense | $ | 1,421 | $ | 4,190 | $ | 1,620 | $ | 3,240 | ||||||||
| Variable lease expense | 633 | 2,008 | 586 | 1,157 | ||||||||||||
| Total lease expense | $ | 2,054 | $ | 6,198 | $ | 2,206 | $ | 4,397 | ||||||||
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
| Operating lease expense | $ | 1,365 | $ | 2,769 | ||||
| Variable lease expense | 684 | 1,375 | ||||||
| Total lease expense | $ | 2,049 | $ | 4,144 | ||||
Other information related to operating leases as of September 30, 2019 was as follows:
| June 30, 2020 | June 30, 2019 | |||||||
| Weighted average remaining lease term, in years | 2.90 | 2.71 | ||||||
| Weighted Average Discount Rate | 5.7 | % | 5.9 | % | ||||
Future minimum lease payments under operating leases as of SeptemberJune 30, 20192020 (in thousands) were as follows:
| Operating Leases | ||||||
| Remainder of 2019 | $ | 1,504 | ||||
| 2020 | 4,577 | |||||
| 2021 | 2,876 | |||||
| 2022 | 1,565 | |||||
| 2023 | 681 | |||||
| Thereafter | 315 | |||||
| Total future minimum lease payments | 11,518 | |||||
| Less: imputed interest | (1,026 | ) | ||||
| Total | $ | 10,492 | ||||
| Current portion operating lease liabilities | $ | 4,620 | ||
| Non-Current operating lease liabilities | 5,872 | |||
| Total | $ | 10,492 |
As previously disclosed in our 2018 Form 10-K under the prior guidance of ASC 840, future minimum payments under operating lease agreements as of December 31, 2018 (in thousands) were as follows:
| Year Ending December 31, | Operating Leases | |||||
| 2019 | $ | 5,896 | ||||
| 2020 | 3,878 | |||||
| 2021 | 2,259 | |||||
| 2022 | 917 | |||||
| 2023 | 290 | |||||
| Thereafter | 33 | |||||
| Total minimum lease payments | $ | 13,273 | ||||
| Operating Leases | |||||
| Remainder of 2020 | $ | 2,875 | |||
| 2021 | 4,464 | ||||
| 2022 | 2,928 | ||||
| 2023 | 1,399 | ||||
| 2024 | 717 | ||||
| 2025 | 113 | ||||
| Thereafter | 28 | ||||
| Total future minimum lease payments | 12,524 | ||||
| Less: imputed interest | (1,093 | ) | |||
| Total | $ | 11,431 | |||
| Current portion operating lease liabilities | $ | 4,789 | |||
| Non-Current operating lease liabilities | 6,642 | ||||
| Total | $ | 11,431 | |||
| 9. | Notes Payable – Long Term – |
| September 30, 2019 | December 31, 2018 | |||||||
| 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 | ||||
| Subsidiary note payable to a financial institution, with monthly principal and interest payments of $6,692, bearing interest at 5.5%, secured by substantially all assets of the subsidiary, and maturing January 4, 2024. | 311,850 | — | ||||||
| Total | 1,101,066 | 789,216 | ||||||
| Less current maturities | (64,531 | ) | — | |||||
| $ | 1,036,535 | $ | 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, with a maturity date of April 21, 2020 and an acquisition loan facility in an aggregate amount of up to $9,000,000, with a maturity date of April 21, 2020. The revolver and the acquisition loan facility bear interest rate 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 September 30, 2019, the entire $12,000,000 of credit was available under the credit facilities. See Note 16 for additional terms and conditions related to the Credit Agreement and Note 17 regarding the termination of the Credit Agreement.
| June 30, 2020 | December 31, 2019 | |||||||
| Subsidiary subordinated note payable to seller with monthly interest only payments at 6%, guaranteed by PQH, maturing August 5, 2022 when the principal balance is due. | $ | 789,216 | $ | 789,216 | ||||
| Subsidiary note payable to a financial institution, with monthly principal and interest payments of $6,692, bearing interest at 5.5%, secured by substantially all assets of the subsidiary, and maturing January 4, 2024. | 263,785 | 296,035 | ||||||
| Total | 1,053,001 | 1,085,251 | ||||||
| Less current maturities | (67,299 | ) | (65,414 | ) | ||||
| $ | 985,702 | $ | 1,019,837 | |||||
| 10. |
The provision for income taxes is 18.70% and 30.80% of income (loss) before the provision for income taxes for the nine month period ended September 30, 2019 and 2018, respectively. The significant difference in rate is the result of the impact of 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.
| Cash Dividends – |
| Date Declared | Record Date | Dividend Per Share | Payment Date | Dividend Paid |
| February 12, 2019 | March 1, 2019 | $0.05 | March 11, 2019 | $469,434 |
| May 2, 2019 | May 23, 2019 | $0.05 | June 3, 2019 | $469,434 |
| August 1, 2019 | August 23, 2019 | $0.05 | September 3, 2019 | $468,912 |
| Date Declared | Record Date | Dividend Per Share | Payment Date | Dividend Paid |
| February 13, 2020 | February 28, 2020 | $0.05 | March 9, 2020 | $463,289 |
| May 5, 2020 | May 22, 2020 | $0.025 | June 2, 2020 | $230,865 |
| Revenue – |
Revenue generated from contracts with customers and recognized per ASC 606 primarily consists of sales of merchandise and services at the point of sale and back-end compensation from Cricket Wireless. As ana Cricket Wireless authorized dealer,retailer, we earn compensation from Cricket Wireless for activating a new customerscustomer on the Cricket Wireless network, activating new devices for existing Cricket Wireless customers (“back-end compensation”) and upon an existing Cricket Wireless customer whom we originally activated on the Cricket Wireless GSM network making a continuing service payment (“CSP”).
Due to COVID-19 and at the request of Cricket Wireless, the Cellular Retail segment temporarily closed approximately 75 retail locations in March 2020. In conjunction with the request, Cricket Wireless notified the Company that it would be providing temporary supplemental commissions for the store closures. In addition, Cricket Wireless temporarily increased other supplemental commissions for qualifying activations. COVID-19 related supplemental commissions of approximately $1,245,000 and $1,530,000, as reported to us by Cricket, was included in revenue in the three and six month periods ended June 30, 2020. The closure related supplemental compensation assistance from Cricket ended by June 30, 2020.
Revenue generated from short-term lending agreements in the Consumer Finance segment and from Company investments are recognized in accordance with ASC 825.
Total net sales of merchandise, which exclude sales taxes, are generally recorded as follows:
| ● | Cellular Retail – net sales reflects the transaction price at point of sale when payment is received |
| ● | Direct to Consumer – net sales reflect the transaction price when product is shipped to customers, FOB shipping point, reduced by variable consideration. Shipping and handling fees |
| ● | Consumer Finance - net sales reflects the transaction price at point of sale when payment in full is received and the customer takes control of the merchandise. Sales returns are generally not material to our financial statements. |
Services revenue from customer paid fees is generally recorded at point of sale when payment is received and the customer receives the benefit of the service. OtherCSP compensation from Cricket Wireless is recorded atas of the time certain Cricket Wireless customers make a service payment, as reported to us by Cricket Wireless.
Recognized as revenue per ASC 825, Consumer Finance loan fees and interest on cash advance loans are recognized on a constant-yield basis ratably over a loan’s term. Installment loan fees and interest are recognized using the interest method, except that installment loan origination fees are recognized as they become non-refundable and installment loan maintenance fees are recognized when earned. The Company recognizes fees on pawn loans on a constant-yield basis ratably over the loans’ terms, less an estimated amount for expected forfeited pawn loans which is based primarily on historical forfeiture rates.
See Note 15,14, “Segment Information,” for disaggregation of revenue by segment.
| 12. | Other Operating Expense – |
A breakout of other expense is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Bank fees | $ | 733,415 | $ | 539,586 | $ | 1,294,393 | $ | 1,044,567 | ||||||||
| Collection costs | 79,406 | 82,637 | 157,475 | 160,352 | ||||||||||||
| Insurance | 199,951 | 178,346 | 396,332 | 366,642 | ||||||||||||
| Management and advisory fees | 220,303 | 211,001 | 431,306 | 413,148 | ||||||||||||
| Professional and consulting fees | 269,240 | 236,184 | 649,736 | 789,805 | ||||||||||||
| Supplies | 202,575 | 144,219 | 420,154 | 282,811 | ||||||||||||
| Loss on disposal | 670,259 | 12,613 | 662,522 | 11,198 | ||||||||||||
| Other | 629,551 | 616,692 | 1,277,100 | 1,217,347 | ||||||||||||
| $ | 3,004,700 | $ | 2,021,278 | $ | 5,289,018 | $ | 4,285,870 | |||||||||
| 13. | Acquisitions – |
On February 21,Cellular Retail Acquisitions
In 2020, PQH completed Cricket retail location transactions, acquiring 18 locations.
In 2019, PQH entered into a joint venture agreement with another Cricket Wireless dealer (“dealer”). Pursuant to the agreement, PQH contributed a note payable in exchange for a 51% ownership interest in a newly formed subsidiary Summit JV, LLC (“Summit”) and another Cricket Wireless dealer contributed substantially all its assets, including 28 Cricket Wireless retail locations, and specified liabilities in exchange for a 49% ownership interest in the newly formed subsidiarySummit and receipt of the note payable contributed by PQH. Effective March 1, 2019, we consummated the transaction. Under the
The purchase method of accounting, theprice calculations (in thousands) are as follows:
| 2020 | 2019 | |||||||
| Cash | $ | 506 | $ | — | ||||
| Note payable | — | 18 | ||||||
| Noncontrolling interests/equity | — | 17 | ||||||
| $ | 506 | $ | 35 | |||||
The assets acquired and liabilities assumed (in thousands) were recorded at their estimated fair values as of the purchase datedates as follows:
March 1, 2019 (in thousands) | ||||
| Cash | $ | 14 | ||
| Receivables | 272 | |||
| Inventory | 50 | |||
| Property and equipment | 596 | |||
| Operating lease right-of-use asset | 772 | |||
| Other assets | 48 | |||
| Liabilities | (597 | ) | ||
| Term note payable | (348 | ) | ||
| Operating lease liabilities | (772 | ) | ||
| Net equity | $ | 35 | ||
A breakout of other expense is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Bank fees | $ | 353,064 | $ | 355,333 | $ | 1,397,631 | $ | 1,391,710 | ||||||||
| Collection costs | 82,503 | 78,708 | 242,855 | 244,900 | ||||||||||||
| Insurance | 178,414 | 187,877 | 545,056 | 591,506 | ||||||||||||
| Management and advisory fees | 211,003 | 202,146 | 624,151 | 592,655 | ||||||||||||
| Professional and consulting fees | 325,824 | 415,376 | 1,115,629 | 1,320,387 | ||||||||||||
| Supplies | 170,387 | 165,978 | 453,198 | 553,468 | ||||||||||||
| Loss on disposal | 66,685 | 633,320 | 77,883 | 1,280,085 | ||||||||||||
| Other | 526,854 | 552,560 | 1,744,201 | 1,892,472 | ||||||||||||
| $ | 1,914,734 | $ | 2,591,298 | $ | 6,200,604 | $ | 7,867,183 | |||||||||
| 2020 | 2019 | |||||||
| Cash | $ | 2 | $ | 14 | ||||
| Receivables | — | 272 | ||||||
| Inventory | 66 | 50 | ||||||
| Property and equipment | 234 | 596 | ||||||
| Intangible assets | 234 | — | ||||||
| Operating lease right-of-use assets | 1,124 | 772 | ||||||
| Other assets | 32 | 48 | ||||||
| Other liabilities | (55 | ) | (597 | ) | ||||
| Operating lease liabilities | (1,124 | ) | (772 | ) | ||||
| Term note payable | — | (348 | ) | |||||
| $ | 513 | $ | 35 | |||||
| Segment Information – |
Segment information related to the three and ninesix month periods ended SeptemberJune 30, 20192020 and 20182019 (in thousands) is as follows:
Three Months Ended September 30, 2019
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Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2020 (in thousands) | |||||||||||||||||||||||||||||||||||||||
Cellular | Direct to Consumer | Consumer Finance | Corporate | Total | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||||||||||||||
| Revenue from external customers | $ | 16,969 | $ | 4,925 | $ | 420 | $ | — | $ | 22,314 | $ | 21,488 | $ | 16,340 | $ | 572 | $ | — | $ | 38,400 | ||||||||||||||||||||
| Financing fees and interest income | $ | — | $ | — | $ | 2,203 | $ | — | $ | 2,203 | ||||||||||||||||||||||||||||||
| Total revenues | $ | 16,969 | $ | 4,925 | $ | 2,623 | $ | — | $ | 24,517 | ||||||||||||||||||||||||||||||
| Fees and interest income | $ | — | $ | — | $ | 1,172 | $ | — | $ | 1,172 | ||||||||||||||||||||||||||||||
| Total Revenue | $ | 21,488 | $ | 16,340 | $ | 1,744 | $ | — | $ | 39,572 | ||||||||||||||||||||||||||||||
| Net income (loss) | $ | 690 | $ | (610 | ) | $ | 279 | $ | (69 | ) | $ | 290 | $ | 1,534 | $ | 3,557 | $ | 140 | $ | (163 | ) | $ | 5,068 | |||||||||||||||||
| Expenditures for segmented assets | $ | 185 | $ | 149 | $ | — | $ | — | $ | 334 | $ | 298 | $ | 81 | $ | — | $ | — | $ | 379 | ||||||||||||||||||||
Three Months Ended September 30, 2018
| ||||||||||||||||||||
Cellular | Direct to Consumer | Consumer Finance | Corporate | Total | ||||||||||||||||
| Revenue from external customers | $ | 16,704 | $ | 4,920 | $ | 413 | $ | — | $ | 22,037 | ||||||||||
| Financing fees and interest income | $ | — | $ | — | $ | 2,323 | $ | — | $ | 2,323 | ||||||||||
| Total revenues | $ | 16,704 | $ | 4,920 | $ | 2,736 | $ | — | $ | 24,360 | ||||||||||
| Net income (loss) | $ | (133 | ) | $ | (982 | ) | $ | 281 | $ | (150 | ) | $ | (984 | ) | ||||||
| Expenditures for segmented assets | $ | 148 | $ | 15 | $ | 8 | $ | — | $ | 171 | ||||||||||
Three Months Ended June 30, 2019 (in thousands) | ||||||||||||||||||||
Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | ||||||||||||||||
| Revenue from external customers | $ | 16,283 | $ | 11,473 | $ | 414 | $ | — | $ | 28,170 | ||||||||||
| Fees and interest income | $ | — | $ | — | $ | 1,986 | $ | — | $ | 1,986 | ||||||||||
| Total Revenue | $ | 16,283 | $ | 11,473 | $ | 2,400 | $ | — | $ | 30,156 | ||||||||||
| Net income | $ | 441 | $ | 693 | $ | 228 | $ | 17 | $ | 1,379 | ||||||||||
| Expenditures for segmented assets | $ | 93 | $ | 33 | $ | — | $ | — | $ | 126 | ||||||||||
Nine Months Ended September 30, 2019
| ||||||||||||||||||||
Cellular | Direct to Consumer | Consumer Finance | Corporate | Total | ||||||||||||||||
| Revenue from external customers | $ | 49,753 | $ | 27,339 | $ | 1,236 | $ | — | $ | 78,328 | ||||||||||
| Financing fees and interest income | $ | — | $ | — | $ | 6,304 | $ | — | $ | 6,304 | ||||||||||
| Total revenues | $ | 49,753 | $ | 27,339 | $ | 7,540 | $ | — | $ | 84,632 | ||||||||||
| Net income (loss) | $ | 1,702 | $ | 733 | $ | 741 | $ | (207 | ) | $ | 2,969 | |||||||||
| Total segmented assets | $ | 30,779 | $ | 12,976 | $ | 8,817 | $ | 35,761 | $ | 88,333 | ||||||||||
| Expenditures for segmented assets | $ | 507 | $ | 216 | $ | — | $ | — | $ | 723 | ||||||||||
Six Months Ended June 30, 2020 (in thousands) | ||||||||||||||||||||
Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | ||||||||||||||||
| Revenue from external customers | $ | 41,021 | $ | 27,939 | $ | 993 | $ | — | $ | 69,953 | ||||||||||
| Fees and interest income | $ | — | $ | — | $ | 3,216 | $ | — | $ | 3,216 | ||||||||||
| Total Revenue | $ | 41,021 | $ | 27,939 | $ | 4,209 | $ | — | $ | 73,169 | ||||||||||
| Net income (loss) | $ | 2,719 | $ | 4,732 | $ | 365 | $ | (381 | ) | $ | 7,435 | |||||||||
| Total segment assets | $ | 35,980 | $ | 13,247 | $ | 7,967 | $ | 38,876 | $ | 96,070 | ||||||||||
| Expenditures for segmented assets | $ | 634 | $ | 199 | $ | — | $ | — | $ | 833 | ||||||||||
Nine Months Ended September 30, 2018
| ||||||||||||||||||||
Cellular | Direct to Consumer | Consumer Finance | Corporate | Total | ||||||||||||||||
| Revenue from external customers | $ | 49,415 | $ | 27,310 | $ | 1,304 | $ | — | $ | 78,029 | ||||||||||
| Financing fees and interest income | $ | — | $ | — | $ | 6,570 | $ | — | $ | 6,570 | ||||||||||
| Total revenues | $ | 49,415 | $ | 27,310 | $ | 7,874 | $ | — | $ | 84,599 | ||||||||||
| Net income (loss) | $ | (989 | ) | $ | (128 | ) | $ | 832 | $ | (584 | ) | $ | (869 | ) | ||||||
| Total segmented assets | $ | 24,031 | $ | 13,098 | $ | 7,609 | $ | 35,624 | $ | 80,362 | ||||||||||
| Expenditures for segmented assets | $ | 375 | $ | 400 | $ | 22 | $ | — | $ | 797 | ||||||||||
Six Months Ended June 30, 2019 (in thousands) | ||||||||||||||||||||
Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | ||||||||||||||||
| Revenue from external customers | $ | 32,784 | $ | 22,414 | $ | 815 | $ | — | $ | 56,013 | ||||||||||
| Fees and interest income | $ | — | $ | — | $ | 4,101 | $ | — | $ | 4,101 | ||||||||||
| Total Revenue | $ | 32,784 | $ | 22,414 | $ | 4,916 | $ | — | $ | 60,114 | ||||||||||
| Net income (loss) | $ | 1,012 | $ | 1,343 | $ | 462 | $ | (138 | ) | $ | 2,679 | |||||||||
| Total segment assets | $ | 34,063 | $ | 10,945 | $ | 8,844 | $ | 35,153 | $ | 89,005 | ||||||||||
| Expenditures for segmented assets | $ | 322 | $ | 67 | $ | — | $ | — | $ | 389 | ||||||||||
| Commitments and Contingencies – |
Employment Agreements
Pursuant to the Company’s numerous employment agreements, bonuses of approximately $180,000$339,000 and $497,000$585,000 were accrued for the three and nine month periodsix months ended SeptemberJune 30, 2019.
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, as amended, requires WCR to meet a minimum liquidity covenant. Subject to certain exceptions, the Credit Agreement contains covenants limiting the Company’s ability to (or to permit the guarantor subsidiaries to) merge or consolidate with, or engage in a sale of substantially all assets to, any party, but WCR or any guarantor subsidiary generally may nonetheless merge with another party if (i) WCR or guarantor subsidiary is the entity surviving such merger, and (ii) immediately after giving effect to such merger, no default shall have occurred and be continuing under the Credit Agreement. Subject to certain exceptions, the Credit Agreement also contains covenants limiting WCR’s ability to (or to permit the guarantor subsidiaries to) create liens on assets, incur additional indebtedness, make certain types of investments, and pay dividends or make certain other types of restricted payments, but WCR may nonetheless pay dividends to its shareholders if (a) there are no outstanding loans or unpaid interest under the revolving credit facility, and (b) no default shall have occurred and be continuing under the Credit Agreement. Some covenant waivers were granted by the financial institution during the period ended September 30, 2018. See Note 17 regarding the termination of the Credit Agreement.2020, respectively.
Assigned Leases
The Company’s Cellular Retail segment has transferred operations of 44many locations to other dealers.dealers and remains contingently liable under many lease agreements. 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 $2,592,000$1,594,000 as of SeptemberJune 30, 2019.2020.
Legal Proceedings
The Company is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company does not believe that such normal and routine litigation will have a material impact on its consolidated financial results.
| Subsequent Events – |
Dividend Declared
Our Board of Directors declared the following dividend:
| Date Declared | Record Date | Dividend Per Share | Payment Date |
| $ |
Entry into Definitive Agreements
On July 25, 2019, Summit, a 51% owned indirect subsidiary of the Company, entered into a joint venture agreement with another Cricket Wireless authorized dealer. Pursuant to the agreement, Summit will contribute $500,000 for a 100% ownership interest in the newly formed subsidiary Smart Acquisition, LLC (“Smart”), followed by dealer contributing substantially all its assets, including 21 Cricket Wireless retail locations, and specified liabilities in exchange for $500,000 and a 25% ownership interest in Smart. Upon completion of the transaction Summit will have a 75% ownership interest in Smart. The Company closed on the transaction on October 3, 2019.
On August 9, 2019, Summit, a 51% owned indirect subsidiary of the Company, entered into a joint venture agreement with another Cricket Wireless authorized dealer. Pursuant to the agreement, Summit will contribute $900,000 for a 100% ownership interest in the newly formed subsidiary Linked Investment, LLC (“Linked”), followed by dealer contributing substantially all its assets, including 14 Cricket Wireless retail locations, and specified liabilities in exchange for $100,000 and a 25% ownership interest in Linked. Upon completion of the transaction Summit will have a 75% ownership interest in Linked. The Company closed on the transaction on October 24, 2019.
As a result of PQH providing more than its pro-rata share of the funding for the Smart and Linked transactions, PQH ownership in Summit was increased from 51% to 60% after the two transactions closed.
Termination of Credit Facility
The Company, as more fully described in Note 9 was party to a Credit Agreement with a financial institution entered into on April 22, 2016 and subject to subsequent amendments. The Credit Agreement provided the Company with a revolving line of credit facility in an aggregate amount up to $3,000,000, with a maturity date of April 21, 2020 and an acquisition loan facility in an aggregate amount of up to $9,000,000, with a maturity date of April 21, 2020. The Company terminated the credit agreement on October 8, 2019.
We evaluated all events or transactions that occurred after SeptemberJune 30, 2019 up2020 through the date we issued these financial statements. During this period we did not have any other material subsequent events that impacted our financial statements.
17
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,” “will” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily located in the material set forth under the headingheadings “Description of Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part I, Item 2),Operations,” but may beare found in other parts of this report as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. We are not undertaking any obligation to update any forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations embodied in our forward-looking statements, or that mightmay affect the value of the common stock, include, but are not limited to:
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Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors” section and of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.this report.
Industry data and other statistical information used in this report are based on independent publications, government publications, reports by market research firms or other published independent sources. Some data isare 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”), a Delaware corporation originally incorporated in Minnesota in 2001 and reincorporated in Delaware in 2016, is a holding company having a controlling interest in subsidiaries operating in the following industries and operating segments:
Our Cellular Retail segment is comprised of an authorized Cricket Wireless dealer and involves the retail sale of cellular phones and accessories to consumers through our wholly owned subsidiary PQH Wireless, Inc. and its subsidiaries, one of which is 70%controlled but less than 100% owned and one of which is 51% owned.subsidiaries. Our Direct to Consumer segment consists of a wholly owned online and direct marketing distribution retailer of live plants, seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins and Wayside Gardens brand names and home improvement and restoration products operating as Van Dyke’s Restorers as well as a wholesaler under the Park Wholesale brand. Our Consumer Finance segment consists of retail financial services conducted through our wholly owned subsidiaries Wyoming Financial Lenders, Inc. and Express Pawn, Inc. Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as “we,” the “Company,” and “us.”
Discussion of Critical Accounting Policies
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis. The preparation of these condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary materially from these estimates under different assumptions or conditions.
Our significant accounting policies are discussed in Note 1, “Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies,” of the notes to our condensed consolidated financial statements included in this report.report together with our significant accounting policies discussed in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the
notes to our December 31, 2019 consolidated financial statements included in our Form 10-K for the year ended December 31, 2019. We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.
Receivables and Loss Allowance
Direct to Consumer
Receivables are recorded when billed or accrued and represent claims against third parties that will be settled in cash. The carrying value of receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The allowance for doubtful accounts is estimated based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past due receivable balances are written-off when internal collection efforts have been unsuccessful in collecting the amount due.
Consumer Finance
Included in loans receivable are unpaid principal, interest and fee balances of payday, installment and pawn loans that have not reached their maturity date, and “late” payday loans that have reached maturity within the last 180 days and have remaining outstanding balances. Late payday loans generally are unpaid loans where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons. All returned items are charged-off after 180 days, as collections after that date have not been significant. Loans are carried at cost plus accrued interest or fees less payments made and a loans receivable allowance.
We do not specifically reserve for any individual payday or installment loan. Instead, we aggregate loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including (1) the amount of loan principal, interest and fee outstanding, (2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trends. We utilize a software program to assist with the tracking of our historical portfolio statistics. A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages by loan type of net charge offs, applied against the applicable balance of loan principal, interest and fees outstanding. We also periodically perform a look-back analysis on our loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. We are aware that as conditions change, we may also need to make additional allowances in future periods. Loan losses or charge-offs of pawn loans are not recorded because the value of the collateral exceeds the loan amount.
See Note 4, “Loans Receivable,” and Note 5, “Loans Receivable Allowance,” of the notes to our consolidated financial statements included in this report for our outstanding loans receivable aging and loans receivable allowance rollforward as of and for the nine monthssix month period ended SeptemberJune 30, 20192020 and the year ended December 31, 2018.2019.
Valuation of Long-lived and Intangible Assets
We assess the possibility of impairment of long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry events or trends.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of identifiable finite lived net assets acquired and is not amortized. Goodwill is tested for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate potential impairment. We test for goodwill impairment at the reporting unit level, which aligns with the Company’s segments. We perform a qualitative assessment to determine if a quantitative impairment test is necessary. If quantitative testing is necessary based on a qualitative assessment, we apply a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any.
Management has analyzed the impact of the Coronavirus pandemic (“COVID-19”) on its financial statements as of June 30, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets. However, the Company’s future assessment of the magnitude and duration of COVID-19 / coronavirus, as well as other factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods.
Operating Leases
We adopted ASC 842 - Leases, using the modified retrospective method on January 1, 2019. We elected the package of practical expedients relief option offered in ASU 2016-02 and the accounting policy election for lessees not to separate lease and non-lease components (election applies to leased real property asset class). We have many retail and office space lease agreements and insignificant equipment lease agreements which are accounted for as operating leases. The real property leases typically are for three-three to five-yearfive year terms with many containing options for similar renewal periods. We determine if an arrangement is or contains a lease at inception.
Under ASC 842, we recognize right-of-use (“ROU”) assets and lease liabilities for operating leases. ROU assets and lease liabilities are recognized at commencement date based on the present value of future minimum lease payments over the lease term. For our leased real property asset class, we do not separate lease and non-lease components when determining the amounts of a lease payment. As most of our leases do not provide an implicit rate, we use WCR’s collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.
The lease payment terms may include fixed payment terms and variable payments. Fixed payment terms and variable payments that depend on an index (i.e., Consumer Price Index, or “CPI”) or rate are considered in the determination of the operating lease liabilities. While lease liabilities are not remeasured because of changes to the CPI, changes are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. Variable payments that do not depend on an index or rate are not included in the lease liabilities determination. Rather, these payments are recognized as variable lease expense when incurred. Expenses related to leases with a lease term of one month or less are recognized as variable lease expense when incurred. Variable lease payments are included within operating costs and expenses in our condensed consolidated statement of operations.
Due to the significant assumptions and judgements required in accounting for leases (to include whether a contract contains a lease, whether and at what point the period covered by an option to extend a lease is reasonable certain to be exercised, the allocation of the consideration, and the determination of the discount rate), the judgements and estimates made could have a significant effect on the amount of assets and liabilities recognized.
Results of Operations – Three Months Ended SeptemberJune 30, 20192020 Compared to Three Months Ended SeptemberJune 30, 20182019
Net lossincome attributable to our common shareholders was $(0.05)$4.61 million, or $(0.01)$0.50 per share (basic and diluted), for the quarter ended SeptemberJune 30, 2019,2020, compared to net lossincome of $(1.17)$1.13 million, or $(0.12)$0.12 per share (basic and diluted), for the quarter ended SeptemberJune 30, 2018.
2019.
We expect segment operating results and earnings per share to change throughout 20192020 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, and potential mergers and acquisitions activity.activity and unknown impact of COVID-19.
Following is a discussion of operating results by segment.
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The following table provides revenues and net income attributable to WCR common shareholders for the quarters ended SeptemberJune 30, 20192020 and SeptemberJune 30, 20182019 (in thousands).
| Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 16,969 | $ | 4,925 | $ | 2,623 | $ | — | $ | 24,517 | $ | 21,488 | $ | 16,340 | $ | 1,744 | $ | — | $ | 39,572 | ||||||||||||||||||||
| % of total revenue | 69.2 | % | 20.1 | % | 10.7 | % | — | % | 100.0 | % | 54.3 | % | 41.3 | % | 4.4 | % | — | % | 100.0 | % | ||||||||||||||||||||
| Net income (loss) | $ | 690 | $ | (610 | ) | $ | 279 | $ | (69 | ) | $ | 290 | $ | 1,534 | $ | 3,557 | $ | 140 | $ | (163 | ) | $ | 5,068 | |||||||||||||||||
| Net income attributable to noncontrolling interests | $ | 340 | $ | — | $ | — | $ | — | $ | 340 | $ | 454 | $ | — | $ | — | $ | — | $ | 454 | ||||||||||||||||||||
| Net income (loss) attributable to WCR common shareholders | $ | 350 | $ | (610 | ) | $ | 279 | $ | (69 | ) | $ | (50 | ) | $ | 1,080 | $ | 3,557 | $ | 140 | $ | (163 | ) | $ | 4,614 | ||||||||||||||||
| Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 16,704 | $ | 4,920 | $ | 2,736 | $ | — | $ | 24,360 | $ | 16,283 | $ | 11,473 | $ | 2,400 | $ | — | $ | 30,156 | ||||||||||||||||||||
| % of total revenue | 68.6 | % | 20.2 | % | 11.2 | % | — | % | 100.0 | % | 54.0 | % | 38.0 | % | 8.0 | % | — | % | 100.0 | % | ||||||||||||||||||||
| Net income (loss) | $ | (133 | ) | $ | (982 | ) | $ | 281 | $ | (150 | ) | $ | (984 | ) | ||||||||||||||||||||||||||
| Net income | $ | 441 | $ | 693 | $ | 228 | $ | 17 | $ | 1,379 | ||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | $ | 189 | $ | — | $ | — | $ | — | $ | 189 | $ | 248 | $ | — | $ | — | $ | — | $ | 248 | ||||||||||||||||||||
| Net income (loss) attributable to WCR common shareholders | $ | (322 | ) | $ | (982 | ) | $ | 281 | $ | (150 | ) | $ | (1,173 | ) | ||||||||||||||||||||||||||
| Net income attributable to WCR common shareholders | $ | 193 | $ | 693 | $ | 228 | $ | 17 | $ | 1,131 | ||||||||||||||||||||||||||||||
Cellular Retail
A summary table of the number of Cricket Wireless retail stores we operated during the three months ended SeptemberJune 30, 2020 and June 30, 2019 and September 30, 2018 follows:
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Beginning | 201 | 225 | 221 | 201 | ||||||||||||
| Acquired/ Launched | 2 | 1 | 12 | — | ||||||||||||
| Closed/Transferred | (9 | ) | (20 | ) | (28 | ) | — | |||||||||
| Ending | 194 | 206 | 205 | 201 | ||||||||||||
Period over period, net income (loss) attributable to shareholders increased from a loss of $(0.32)$1.13 million in the comparable prior year quarter to a positive $0.35$4.61 million in the current quarter. Nonrecurring expenseSignificantly contributing to the increase was $1.25 million of supplemental compensation from Cricket Wireless provided to alleviate the financial strain caused by COVID-19 and the temporary store closings inclosures. Our strategic location disposals and additions from the comparable prior year period amounted to approximately $742,000 compared to approximately $67,000 infirst quarter of 2019 through the current quarter has also resulted in a better mix of stores and contributed to the increased operating results attributable to shareholders period over period.
Due to the impact of COVID-19 and even though our stores were generally deemed to be “essential businesses”, on March 19, 2020 we began the process of temporarily closing approximately 75 of our retail stores. By the end of April 2020, all but 22 had reopened. In June 2020 we permanently closed the 22 remaining un-opened stores and five others. We recorded a loss of $0.67 million due to the closures.
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 lossincome of $(0.61)$3.56 million compared to net lossincome of $(0.98)$0.69 million for the comparable prior year period. Revenues for the three month period ended SeptemberJune 30, 20192020 were $4.93$16.34 million compared to $4.92$11.47 million for the comparable period in 2018.2019. Similar to other online retailers, the Direct to Consumer segment has experienced an increase in demand and on-line sales activity due to COVID-19.
Consumer Finance
A summary table of the number of consumer finance locations we operated during the quarters ended SeptemberJune 30, 2020 and June 30, 2019 and September 30, 2018 follows:
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Beginning | 39 | 41 | 39 | 39 | ||||||||||||
| Acquired/ Launched | — | — | — | — | ||||||||||||
| Closed | — | — | — | — | ||||||||||||
| Ending | 39 | 41 | 39 | 39 | ||||||||||||
Our Consumer Finance segment continues to struggle due to COVID-19 with our lending volume down period over period. Consumer Finance segment revenues decreased $0.11$0.66 million, or 4.12%27.3%, for the quarter ended SeptemberJune 30, 20192020 compared to the quarter ended SeptemberJune 30, 2018.2019. This segment and the industry continues to experience declines in loan and check cashing activity. The decline in volume is having a direct impact on operating results. Our net income decreased 0.71% period over period.activity due to industry regulation and trends and COVID-19.
Corporate
Net expensescosts related to our Corporate segment were $0.07$0.16 million for the quarter ended SeptemberJune 30, 20192020 compared to net expenses of $0.15$0.02 million in benefits for the quarter ended SeptemberJune 30, 2018.2019. The period over period differenceincrease in net costs is primarily due to a combination of lower net corporate overhead expense and an increasedecrease in investment income.income from investments.
Results of Operations – NineSix Months Ended SeptemberJune 30, 20192020 Compared to NineSix Months Ended SeptemberJune 30, 20182019
Net income attributable to our common shareholders was $2.13$6.52 million, or $0.71 per share (basic and diluted), for the six month period ended June 30, 2020, compared to net income of $2.18 million, or $0.23 per share (basic and diluted), for the nine monthssix month period ended SeptemberJune 30, 2019, compared to net loss of $(1.43) million, or $(0.15) per share (basic and diluted), for the nine months ended September 30, 2018.2019.
We expect segment operating results and earnings per share to change throughout 20192020 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, and potential mergers and acquisitions activity.activity and unknown impact of COVID-19.
Following is a discussion of operating results by segment.
The following table provides revenues and net income attributable to WCR common shareholders by continuing operating segment for the ninesix month periodsperiod ended SeptemberJune 30, 20192020 and SeptemberJune 30, 20182019 (in thousands).
| Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | Cellular Retail | Direct to Consumer | Consumer Finance | Corporate | Total | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 49,753 | $ | 27,339 | $ | 7,540 | $ | — | $ | 84,632 | ||||||||||||||||||||||||||||||
| % of total revenue | 58.8 | % | 32.3 | % | 8.9 | % | — | % | 100.0 | % | ||||||||||||||||||||||||||||||
| Net income (loss) | $ | 1,702 | $ | 733 | $ | 741 | $ | (207 | ) | $ | 2,969 | |||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | $ | 837 | $ | — | $ | — | $ | — | $ | 837 | ||||||||||||||||||||||||||||||
| Net income attributable to WCR common shareholders | $ | 865 | $ | 733 | $ | 741 | $ | (207 | ) | $ | 2,132 | |||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 49,415 | $ | 27,310 | $ | 7,874 | $ | — | $ | 84,599 | $ | 41,021 | $ | 27,939 | $ | 4,209 | $ | — | $ | 73,169 | ||||||||||||||||||||
| % of total revenue | 58.4 | % | 32.3 | % | 9.3 | % | — | % | 100.0 | % | 56.1 | % | 38.2 | % | 5.7 | % | — | % | 100.0 | % | ||||||||||||||||||||
| Net income (loss) | $ | (989 | ) | $ | (128 | ) | $ | 832 | $ | (584 | ) | $ | (869 | ) | $ | 2,719 | $ | 4,732 | $ | 365 | $ | (381 | ) | $ | 7,435 | |||||||||||||||
| Net income attributable to noncontrolling interests | $ | 561 | $ | — | $ | — | $ | — | $ | 561 | $ | 917 | $ | — | $ | — | $ | — | $ | 917 | ||||||||||||||||||||
| Net income (loss) attributable to WCR common shareholders | $ | (1,550 | ) | $ | (128 | ) | $ | 832 | $ | (584 | ) | $ | (1,430 | ) | $ | 1,802 | $ | 4,732 | $ | 365 | $ | (381 | ) | $ | 6,518 | |||||||||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 32,784 | $ | 22,414 | $ | 4,916 | $ | — | $ | 60,114 | ||||||||||||||||||||||||||||||
| % of total revenue | 54.5 | % | 37.3 | % | 8.2 | % | — | % | 100.0 | % | ||||||||||||||||||||||||||||||
| Net income (loss) | $ | 1,012 | $ | 1,343 | $ | 462 | $ | (138 | ) | $ | 2,679 | |||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | $ | 497 | $ | — | $ | — | $ | — | $ | 497 | ||||||||||||||||||||||||||||||
| Net income (loss) attributable to WCR common shareholders | $ | 515 | $ | 1,343 | $ | 462 | $ | (138 | ) | $ | 2,182 | |||||||||||||||||||||||||||||
Cellular Retail
A summary table of the number of Cricket Wireless retail stores we operated during the ninesix months ended SeptemberJune 30, 2020 and June 30, 2019 and 2018 follows:
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Beginning | 205 | 278 | 222 | 205 | ||||||||||||
| Acquired/ Launched | 33 | 2 | 19 | 31 | ||||||||||||
| Closed/Transferred | (44 | ) | (74 | ) | (36 | ) | (35 | ) | ||||||||
| Ending | 194 | 206 | 205 | 201 | ||||||||||||
ThePeriod over period, net income attributable to shareholders increased from $0.52 million in the six month period ended June 30, 2019 compared to $1.80 million for the six month period ended June 30, 2020. Significantly contributing to the increase was $1.53 million of supplemental compensation from Cricket Wireless provided to alleviate the financial strain caused by COVID-19 and temporary closure of 75 of our stores. Our strategic initiative that beganlocation disposals and additions from the first quarter of 2019 through the current quarter has resulted in 2017 to shed underperforming locations and to consolidate within markets is allowing us to more effectively focus our efforts on a better mix of stores. These actions have resulted in a $2.69 million increase in net income applicablestores and contributed to ourthe increased operating results attributable to shareholders from the net loss in the comparable prior year-to-date period. Excluding nonrecurring expense of store closings in the comparable prior year period of approximately $1.51 million and approximately $0.08 million in the current period, the period over period increaseperiod.
Due to net income is $1.26 million.the impact of COVID-19 and even though our stores were generally deemed to be “essential businesses”, on March 19, 2020 we began the process of temporarily closing approximately 75 of our retail stores. By the end of April 2020, all but 22 had reopened. In June 2020 we permanently closed the 22 remaining un-opened stores and five others. We recorded a loss of $0.67 million due to the closures.
Direct to Consumer
The Direct to Consumer segment has seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells. For the nine monthssix month period ended SeptemberJune 30, 2019,2020, the Direct to Consumer segment had net income of $0.73$4.73 million compared to net lossincome of $(0.13)$1.34 million for the comparable six month period prior year period.year. Revenues for the ninesix month period ended SeptemberJune 30, 20192020 were $27.34$27.94 million compared to $27.31$22.41 million for the comparable period in 2018. Cost reductions primarily for freight2019. Similar to other online retailers, the Direct to Consumer segment has experienced an increase in demand and shipping and advertising have contributedon-line sales activity due to the positive change in operating results.COVID-19.
Consumer Finance
A summary table of the number of consumer finance locations we operated during the quarterssix month periods ended SeptemberJune 30, 2020 and June 30, 2019 and 2018 follows:
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Beginning | 41 | 41 | 39 | 41 | ||||||||||||
| Acquired/ Launched | — | — | — | — | ||||||||||||
| Closed | (2 | ) | — | — | (2 | ) | ||||||||||
| Ending | 39 | 41 | 39 | 39 | ||||||||||||
Our Consumer Finance segment revenues decreased $0.33$0.71 million, or 4.24%14.4%, for the nine month periodsix months ended SeptemberJune 30, 20192020 compared to the nine month periodsix months ended SeptemberJune 30, 2018.2019. This segment and the industry continues to experience declines in loan and check cashing activity. Theactivity due to industry regulation and trends and COVID-19. In the later part of March 2020 the segment began to experience a larger than normal decline in volume is having a direct impact on operating results. Our net income period over period decreased 10.94%.lending activity due to COVID-19.
Corporate
Net expensescosts related to our Corporate segment were $0.21$0.38 million for the ninesix month period ended SeptemberJune 30, 20192020 compared to net expenses of $0.58$0.14 million for the comparablesix month period ended SeptemberJune 30, 2018.2019. The period over period differenceincrease in net costs is primarily due to a combination of lower net corporate overhead expense and an increasedecrease in investment income.
Consolidated Income Tax Expense
Provision for income tax expense for continuing operations for the nine month periodsix months ended SeptemberJune 30, 20192020 was $0.68$2.01 million compared to income tax benefit of $0.39$0.68 million for the nine month periodsix months ended SeptemberJune 30, 20182019 for an effective rate of 18.7%21.3% and 30.8%20.1%, respectively. The significant difference ineffective tax rate is lower than the resultfederal plus state effective rates and increased period over period due to impact of the impactnoncontrolling interests’ share of net income attributable to noncontrolling interests not being subjectedsubject to income tax at the corporateconsolidated group level. Rather, the “passthrough” taxable income is taxed to the noncontrolling interests at an individual level.
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Liquidity and Capital Resources
Summary cash flow data is as follows:
| Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
| Cash flows provided (used) by: | ||||||||||||||||
| Operating activities | $ | 731,340 | $ | (18,392,317 | ) | $ | 12,007,074 | $ | 1,599,099 | |||||||
| Investing activities | 7,143,113 | 8,745,227 | (12,069,112 | ) | (231,027 | ) | ||||||||||
| Financing activities | (2,595,102 | ) | (2,106,669 | ) | (2,399,350 | ) | (1,738,849 | ) | ||||||||
| Net decrease in cash and cash equivalents | 5,279,351 | (11,753,759 | ) | (2,461,388 | ) | (370,777 | ) | |||||||||
| Cash and cash equivalents, beginning of period | 16,724,983 | 21,295,819 | 27,132,540 | 16,724,983 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 22,004,334 | $ | 9,542,060 | $ | 24,671,152 | $ | 16,354,206 | ||||||||
At SeptemberJune 30, 2019,2020, we had cash and cash equivalents of $22.00 million and highly liquid investments of $16.16$24.67 million compared to cash and cash equivalents of $9.54 million and highly liquid investments of $25.96$16.35 million on SeptemberJune 30, 2018.2019, the increase coming primarily from a combination of converting investments to cash and cash equivalents in the latter part of 2019 and cash flows provided by current year operating activities being partially invested. We believe that our available cash, combined with expected cash flows from operations and our held-to-maturity investments, will be sufficient to fund our liquidity and capital expenditure requirements through SeptemberJune of 2020.2021. Our expected short-term uses of available cash include the funding of operating activities and the payment of dividendsdividends.
In addition to cash and usecash equivalents, at June 30, 2020, we had $17.59 million invested in acquisitions.certificates of deposit (limited to $250,000 per financial institution per entity) and $10.36 million in short-term T-Bills or Notes. This is an increase of $11.69 million over our investment holdings at December 31, 2019 and a result of investing excess cash and cash equivalents.
At June 30, 2020, our outstanding debt and capital lease obligations were $1.05 million compared to $1.09 million at December 31, 2019.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of SeptemberJune 30, 2019.2020.
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 SeptemberJune 30, 2019,2020, 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 SeptemberJune 30, 2019.2020.
Changes in Internal Control over Financial Reporting
On January 1, 2019, we adopted ASC 842, Leases, which required us to makesThere were no changes toin our policies, update our processes, and modify existing internal controls over financial reporting. Other than these changes to support the implementation of ASC 842, there were no other changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019fiscal year covered by this report that have materially affected, or arewere reasonably likely to materially affect, our internal control over financial reporting.
such controls.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides information about purchases of Western Capital Resources, Inc. common stock by us during the three months ended SeptemberJune 30, 2019.2020.
Share Repurchases
| ||||||||||||||||||||
| Period Beginning | Period Ending | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Board Approved Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program(1) | |||||||||||||||
| July 1, 2019 | July 31, 2019 | — | $ | — | — | $ | 990,300 | |||||||||||||
| August 1, 2019 | August 31, 2019 | 10,425 | $ | 3.75 | 10,425 | $ | 951,200 | |||||||||||||
| September 1, 2019 | September 30, 2019 | 29,557 | $ | 4.05 | 29,557 | $ | 831,500 | |||||||||||||
| 39,982 | 39,982 | |||||||||||||||||||
Share Repurchases
| ||||||||||||||||||||
| Period Beginning | Period Ending | sTotal Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Board Approved Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (1) | |||||||||||||||
| April 1, 2020 | April 30, 2020 | — | $ | — | — | $ | 1,476,900 | |||||||||||||
| May 1, 2020 | May 31, 2020 | 130,889 | $ | 4.18 | 130,889 | $ | 929,700 | |||||||||||||
| June 1, 2020 | June 30, 2020 | — | $ | — | — | $ | 929,700 | |||||||||||||
| 130,889 | 130,889 | |||||||||||||||||||
| (1) | On September 13, 2018, our Board of Directors authorized a share repurchase program under which we may repurchase up to $1 million of common In March 2020, our Board of Directors amended the repurchase program, increasing the amount of share repurchases authorized from $1 million to $2 million. |
| 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 | ||
| 101.INS | XBRL Instance Document (filed herewith). | |
| 101.SCH | XBRL Schema Document (filed herewith). | |
| 101.CAL | XBRL Calculation Linkbase Document (filed herewith). | |
| 101.DEF | XBRL Definition Linkbase Document (filed herewith). | |
| 101.LAB | XBRL Label Linkbase Document (filed herewith). | |
| 101.PRE | XBRL Presentation Linkbase Document (filed herewith). |
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: | Western Capital Resources, Inc. | |
| (Registrant) | ||
| By: | /s/ John Quandahl | |
| John Quandahl | ||
| Chief Executive Officer and Chief Operating Officer | ||
| By: | /s/ Angel Donchev | |
| Angel Donchev | ||
| Chief Financial Officer | ||
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