WESTERN CAPITAL RESOURCES, INC. Forward-Looking Statements
Some of the statements made in this report are "forward-looking statements," as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon our current expectations and projections about future events. Whenever used in this report, the words "believe," "anticipate," "intend," "estimate," "expect," "will" and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily located in the material set forth under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," but are found in other parts of this report as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management's current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. We are not undertaking any obligation to update any forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations or may affect the value of the common stock, include, but are not limited to:
? Changes in local, state or federal laws and regulations governing lending
practices, or changes in the interpretation of such laws and regulations;
? Litigation and regulatory actions directed toward the consumer finance industry
or us, particularly in certain key states;
? Our need for additional financing;
? Changes in our authorization to be a dealer for
? Changes in authorized Cricket dealer compensation;
? Lack of advertising support and sales promotions from
markets we operate;
? Direct and indirect effects of COVID-19 on our employees, customers, our supply
chain, the economy and financial markets; and
? Unpredictability or uncertainty in financing and merger and acquisition
markets, which could impair our ability to grow our business through
acquisitions.
Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the "Risk Factors" section and of this report. Industry data and other statistical information used in this report are based on independent publications, government publications, reports by market research firms or other published independent sources. Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above. Although we believe these sources are reliable, we have not independently verified the information. OVERVIEW
Western Capital Resources, Inc. ("WCR"), aDelaware corporation originally incorporated inMinnesota in 2001 and reincorporated inDelaware in 2016, is a holding company having a controlling interest in subsidiaries operating in the following industries and operating segments: [[Image Removed]]
Our Cellular Retail segment is comprised of an authorizedCricket Wireless dealer and involves the retail sale of cellular phones and accessories to consumers through our wholly-owned subsidiaryPQH Wireless, Inc. and its controlled but less than 100% owned subsidiaries. Our Direct to Consumer segment consists of a wholly-owned branded online and direct marketing distribution retailer of live plants, seeds, holiday gifts and garden accessories selling its products underPark Seed , Jackson & Perkins and Wayside Gardens brand names and home improvement and restoration products operating as Van Dyke's Restorers as well as a wholesaler under the Park Wholesale brand. Our manufacturing segment consists of a wholly-owned manufacturer of lawn and garden power equipment and emergency safety shelters selling products primarily under the Swisher brand name, and provides turn-key manufacturing services to third parties. Our Consumer Finance segment consists of retail financial services conducted through our wholly-owned subsidiariesWyoming Financial Lenders, Inc. andExpress Pawn, Inc. Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as "we," the "Company," and "us."
Discussion of Critical Accounting Policies
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted inthe United States of America applied on a consistent basis. The preparation of these condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary materially from these estimates under different assumptions or conditions. 16 Our significant accounting policies are discussed in Note 2, "Summary of Significant Accounting Policies," of the notes to our condensed consolidated financial statements included in this report together with our significant accounting policies discussed in Note 1, "Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies," of the notes to ourDecember 31, 2020 consolidated financial statements included in our Form 10-K for the year endedDecember 31, 2020 . 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 Credit 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 is net of an allowance for credit losses. The allowance for credit losses represents an estimate of expected lifetime credit losses on the asset considering economic conditions and future economic trends. 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 the present value of future collections after that date is not expected to be significant. Loans are carried at cost plus accrued interest or fees less payments made and an allowance for credit losses. We do not specifically reserve for any individual payday or installment loan. Instead, we aggregate loan types for purposes of estimating the allowance for credit losses using a methodology that estimates expected lifetime credit losses on the asset considering economic conditions and future economic trends. In addition, this methodology takes into account current and expected collection patterns, recent trends noted in the portfolio and charge off patterns from loans that originated during the last 24 months, which assists management in estimating future recoveries. Credit losses for pawn loans are not recorded because the value of the collateral exceeds the loan amount.
See Note 5, "Loans Receivable," of the notes to our consolidated financial
statements included in this report for our outstanding loans receivable aging as
of and for the three-month periods ended
Valuation of Long-lived and Intangible Assets
We assess the possibility of impairment of long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry events or trends.Goodwill Goodwill represents the excess of acquisition cost over the fair value of identifiable finite lived net assets acquired and is not amortized.Goodwill is tested for impairment annually as ofOctober 1 , or more frequently if events or changes in circumstances indicate potential impairment. We test for goodwill impairment at the reporting unit level, which aligns with the Company's segments. We perform a qualitative assessment to determine if a quantitative impairment test is necessary. If quantitative testing is necessary based on a qualitative assessment, we apply a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any. Leases
The Company has many retail lease agreements which are accounted for as operating leases. The Company determines if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liabilities (current and noncurrent).
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. Due to the significant assumptions and judgements required in accounting for leases (including whether a contract contains a lease, the allocation of the consideration, and the determination of the discount rate), the judgment and estimates made could have a significant effect on the amount of assets and liabilities recognized
Results of Operations - Three Months Ended
Net income attributable to our common shareholders was$3.91 million , or$0.42 per share (basic and diluted), for the quarter endedMarch 31, 2021 , compared to net income of$1.71 million , or$0.18 per share (basic and diluted), for the quarter endedMarch 31, 2020 .
We expect segment operating results and earnings per share to change throughout 2021 due, at least in part, to the seasonality of the various segments, potential mergers and acquisitions activity and the unknown impact of COVID-19.
17
Following is a discussion of operating results by segment.
The following table provides revenues and net income attributable to WCR common shareholders for the quarters endedMarch 31, 2021 andMarch 31, 2020 (in thousands). Cellular Direct to Consumer Retail Consumer Manufacturing Finance Corporate Total Three Months Ended March 31, 2021
Revenue$ 25,511 $ 14,678 $ 2,523$ 1,474 $ -$ 44,186 % of total revenue 57.8 % 33.2 % 5.7 % 3.3 % - % 100 % Net income (loss)$ 2,522 $ 2,269 $ (18 ) $
162$ (256 ) $ 4,679 Net income attributable to noncontrolling interests$ 769 $ - $ - $ - $ -$ 769 Net income (loss) attributable to WCR common
shareholders$ 1,753 $ 2,269 $ (18 ) $
162$ (256 ) $ 3,910 Three Months Ended March 31, 2020
Revenue$ 19,533 $ 11,599 $ 2,050$ 2,466 $ -$ 35,648 % of total revenue 54.8 % 32.5 % 5.8 % 6.9 % - % 100 % Net income (loss)$ 1,184 $ 1,176 $ (191 ) $
225$ (218 ) $ 2,176 Net income attributable to noncontrolling interests$ 463 $ - $ - $ - $ -$ 463 Net income (loss) attributable to WCR common shareholders$ 721 $ 1,176 $ (191 )$ 225 $ (218 ) $ 1,713 Cellular Retail
A summary table of the number of
2021 2020
Beginning 205 222
Acquired/ Launched 2 7
Closed/Divested (2 ) (8 )
Ending 205 221
Period over period, net income attributable to shareholders increased from$1.18 million in the comparable prior year quarter to$1.75 million in the current quarter. Many factors have contributed to this period over period increase, most notably successful Cricket sales promotions, Cricket's 2020 distribution optimization program under which we closed 27 underperforming locations, our strategic location disposals and additions and COVID-19 stimulus programs contributing to increased sales. Direct to Consumer The Direct to Consumer segment has seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells. For the current quarter, the Direct to Consumer segment had net income of$2.27 million compared to net income of$1.18 million for the comparable prior year period. Revenues for the quarter endedMarch 31, 2021 were$14.68 million compared to$11.60 million for the comparable period in 2020. 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. Manufacturing
Manufacturing segment sales increased from$2.05 million in the comparable prior period to$2.52 million in the current period as demand across product lines has increased. For the current quarter, the Manufacturing segment had a net loss of($0.02) million compared to a net loss of($0.19) million for the comparable prior year period. 18 Consumer Finance
A summary table of the number of consumer finance locations we operated during
the quarters ended
2021 2020
Beginning 22 39
Acquired/ Launched - -
Closed/Divested - -
Ending 22 39
Our Consumer Finance segment continues to struggle due to COVID-19 and industry
regulation and trends with our lending volume being down period over period.
Consumer Finance segment revenues decreased $0.99 million , or 40.2%, for the
quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 mostly
due to the closing of locations in Nebraska and divesting of locations in Iowa
in 2020.
Corporate
Net costs related to our Corporate segment were $0.26 million for the quarter
ended March 31, 2021 compared to $0.22 million for the quarter ended March 31,
2020 . The period over period increase in net costs is primarily due to a
decrease in income from investments.
Consolidated Income Tax Expense
Provision for income tax expense for the quarter endedMarch 31, 2021 was$1.30 million compared to$0.53 million for the quarter endedMarch 31, 2020 for an effective rate of 21.7% and 19.7%, respectively. The effective tax rate is lower than the federal plus state statutory rates and increased period over period due to impact of the noncontrolling interests' share of net income not subject to income tax at the consolidated group level. Excluding the noncontrolling interests' share of net income, the effective rate is 24.9% and 23.8%, respectively. This increase period over period is due to increased state income tax exposure resulting from a change in the number and mix of states in which subsidiaries are subject to state income taxes due to various factors such as changes in multistate activities by members of the consolidated group and its impact on state taxation rules and regulations applicable to us.
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