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:
? Supply chain disruptions and delays and related lost revenue or increased
costs;
? Potential product liability risks that relate to the design, manufacture, sale
and use of our Swisher products;
? 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 Cellular Retail segment completed a$4.7 million acquisition of 25Cricket Wireless retail stores onSeptember 9, 2021 , which are wholly owned. 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." We expect segment operating results and earnings per share to change throughout 2021 and beyond due, at least in part, to the seasonality of the various segments, recently completed and potential merger and acquisition activity, the unknown impact of COVID-19, the effects of inflationary pressures, as well as supply and labor shortages. We expect supply and labor shortages to be further aggravated, possibly significantly, due to the COVID-19 Vaccination and Testing: Emergency Temporary Standard (ETS) issued by theOccupational Safety and Health Administration (OSHA) which was published onNovember 4, 2021 . The rule was effectiveNovember 5, 2021 and contains various compliance dates for specific provisions. 18
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. 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
Consumer Finance - Included in loans receivable are unpaid principal, interest and fee balances of payday 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. Management estimates the reserve for credit losses which is highly subjective due to many economic variables. Our loans receivable balances as ofSeptember 30, 2021 ,December 31, 2020 andSeptember 30, 2020 were$2.26 million ,$2.26 million and$2.91 million , respectively, while the allowance for credit losses for the corresponding dates was$0.28 million ,$0.32 , and$0.31 million , respectively. In the first nine months of 2021 we experienced negative credit losses on loans receivable, where recoveries exceeded new reserves in large part due to a reduction in new loans as a result of the closing of all our locations inNebraska due to a change in law and divesting of locations inIowa in the fourth quarter of 2020. Management does not expect this event to continue as contributing positive influences dissipate.
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. Management has not identified events or
trends indicating that the carrying value may not be recoverable.
However, the Company has many operating lease agreements across our operating
segments which are accounted for as operating leases and included in noncurrent
assets as operating lease right-of-use ("ROU") assets. Due to the significant
assumptions and judgements required in accounting for leases and impairment of
ROU assets, the judgment and estimates made could have a significant effect on
the amount of assets and results of operations.
Results of Operations - Three Months Ended
Net income attributable to our common shareholders for the current quarter was$0.99 million , or$0.11 per share (basic and diluted) for the quarter endedSeptember 30, 2021 , compared to$1.16 million , or$0.12 per share (basic and diluted) for the quarter endedSeptember 30, 2020 .
Following is a discussion of operating results by segment.
The following table provides revenues and net income attributable to WCR common shareholders for the quarters endedSeptember 30, 2021 andSeptember 30, 2020 (in thousands). Cellular Direct to Consumer Retail Consumer Manufacturing Finance Corporate Total
Three Months EndedSeptember 30, 2021 Revenue$ 25,282 $ 5,951 $ 3,638$ 1,535 $ -$ 36,406 % of total revenue 69.5 % 16.3 % 10.0 % 4.2 % - % 100 % Net income (loss)$ 2,331 $ (477 ) $ 69$ 205 $ (385 ) $ 1,743 Net income attributable to noncontrolling interests$ 750 $ - $ - $ - $ -$ 750 Net income (loss) attributable to WCR common shareholders$ 1,581 $ (477 ) $ 69$ 205 $ (385 ) $ 993 Three Months Ended September 30, 2020 Revenue$ 22,589 $ 5,901 $ 4,433$ 1,798 $ -$ 34,721 % of total revenue 65.0 % 17.0 % 12.8 % 5.2 % - % 100 % Net income (loss)$ 1,717 $ (60 ) $ 161$ 112 $ (192 ) $ 1,738 Net income attributable to noncontrolling interests$ 576 $ - $ - $ - $ -$ 576 Net income (loss) attributable to WCR common shareholders$ 1,141 $ (60 ) $ 161$ 112 $ (192 ) $ 1,162 19 Cellular Retail
A summary table of the number of
2021 2020
Beginning 205 205
Acquired/ Launched 29 1
Closed/Divested (3 ) -
Ending 231 206
As previously noted in this report, on September 9, 2021 we completed a $4.7
million acquisition of 25 Cricket Wireless retail stores. All but four of these
stores are located in markets that we currently operate in, allowing existing
management to efficiently integrate the acquired locations into their
portfolios. Three of the outlier stores were added to an expanded existing
market, while one, in Juneau, Alaska is our first presence in Alaska .
Period over period, net income attributable to shareholders increased from $1.14
million in the comparable prior year quarter to $1.58 million in the current
quarter. Many factors have contributed to this period over period increase. Most
notably is the 11.9% increase in sales period over period, with only 1.9%
attributable to the recently acquired stores. Inflationary pressures have
negatively impacted many expenses, most notably payroll and related payroll
expenses which have increased 12.7% year over year.
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 a net loss of ($0.48)
million compared to net loss of ($0.06) million for the comparable prior year
period. While revenues for the quarter ended September 30, 2021 were $5.95
million compared to $5.90 million for the comparable period in 2020, advertising
expense, the most significant factor contributing to the period over period
increase in segment net loss, was $0.38 million higher in the current period.
Manufacturing
Manufacturing segment sales decreased from$4.43 million in the comparable prior period to$3.64 million in the current period. Management attributes this decline to lost sales in the current period due to supply shortages as well as increased pricing of its products due to inflationary pressure on raw material costs. For the quarter endedSeptember 30, 2021 , the Manufacturing segment had net income of$0.07 million compared to net income of$0.16 million for the comparable prior year period. 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 - (1 )
Ending 22 38
Our Consumer Finance segment continues to decline as a result of state
regulatory changes and negative trends within the industry. Consumer Finance
segment revenues decreased $0.26 million , or 14.6%, for the quarter ended
September 30, 2021 compared to the quarter ended September 30, 2020 primarily
due to the closing of all our locations in Nebraska and divesting of locations
in Iowa in the fourth quarter of 2020. Segment net income did increase slightly
period over period primarily due to recoveries of bad debt from closed
locations.
Results of Operations - Nine Months Ended
Net income attributable to our common shareholders was$9.30 million , or$1.01 per share (basic and diluted), for the nine month period endedSeptember 30, 2021 , compared to net income of$7.93 million , or$0.83 per share (basic and diluted), for the nine month period endedSeptember 30, 2020 .
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 nine month period ended September 30, 2021 and September
30, 2020 (in thousands).
Cellular Direct to Consumer
Retail Consumer Manufacturing Finance Corporate Total
Nine Months Ended
September 30, 2021
Revenue $ 76,087 $ 33,731 $ 10,363 $ 4,320 $ - $ 124,501
% of total revenue 61.1 % 27.1 % 8.3 % 3.5 % - % 100 %
Net income (loss) $ 7,172 $ 4,301 $ 463 $
494 $ (898 ) $ 11,532
Net income
attributable to
noncontrolling
interests $ 2,235 $ - $ - $ - $ - $ 2,235
Net income (loss)
attributable to
WCR common
shareholders $ 4,937 $ 4,301 $ 463 $ 494 $ (898 ) $ 9,297
Nine Months Ended
September 30, 2020
Revenue $ 63,609 $ 33,841 $ 12,696 $ 6,008 $ - $ 116,154
% of total revenue 54.8 % 29.1 % 10.9 % 5.2 % - % 100 %
Net income (loss) $ 4,435 $ 4,672 $ 408 $
478 $ (574 ) $ 9,419
Net income
attributable to
noncontrolling
interests $ 1,492 $ - $ - $ - $ - $ 1,492
Net income (loss)
attributable to
WCR common
shareholders $ 2,943 $ 4,672 $ 408 $
478 $ (574 ) $ 7,927
Cellular Retail
A summary table of the number of Cricket Wireless retail stores we operated
during the nine months ended September 30, 2021 and September 30, 2020 follows:
2021 2020
Beginning 205 222
Acquired/Launched 31 20
Closed/Divested (5 ) (36 )
Ending 231 206
Period over period, net income attributable to shareholders increased from$2.94 million in the nine month period endedSeptember 30, 2020 to$4.94 million for the nine month period endedSeptember 30, 2021 , while sales increased over the comparable period from$63.61 million to$76.09 million . The prior year period was hampered by COVID-19 while the latter benefited from, among other factors, government stimulus programs which tend to benefit our industry. Also contributing to the growth in sales and net income isCrickets Wireless' 2020 distribution optimization program which has resulted in fewer and, on average, better performing stores combined with our strategic location disposals and additions over the last several years resulting in a better mix of stores. The nine month period endedSeptember 30, 2020 also included a loss of$0.67 million related to store 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 month period endedSeptember 30, 2021 , the Direct to Consumer segment had net income of$4.30 million compared to net income of$4.67 million for the comparable nine month period prior year. Revenues for the nine month period endedSeptember 30, 2021 were$33.73 million compared to$33.84 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 decreased from$12.70 million in the comparable prior period to$10.36 million in the current period. Management attributes this decline to lost sales primarily in the second and third quarters of the current period due to supply shortages as well as increased pricing of its products due to inflationary pressure on raw material costs. For the nine month period endedSeptember 30, 2021 , the Manufacturing segment had net income of$0.46 million compared to net income of$0.41 million for the comparable prior year period. Consumer Finance A summary table of the number of consumer finance locations we operated during the nine month periods endedSeptember 30, 2021 andSeptember 30, 2020 follows: 2021 2020 Beginning 22 39 Acquired/ Launched - - Closed - (1 ) Ending 22 38 Our Consumer Finance segment revenues decreased$1.69 million , or 28.1% period over period. As noted previously, our Consumer Finance segment continues to decline as a result of state regulatory changes and negative trends within the industry, mostly notably the closing of all our locations inNebraska due to a 2020 law change. This segment and the industry continue to experience declines in loan activity due to industry regulations and trends as well as COVID-19. In the later part ofMarch 2020 , the segment began to experience a larger than normal decline in lending activity due to COVID-19, which has carried over into 2021 and is just recently beginning to return back to pre-COVID-19 levels.
21
Corporate
Net costs related to our Corporate segment were$0.90 million for the nine month period endedSeptember 30, 2021 compared to$0.57 million for the nine month period endedSeptember 30, 2020 . The period over period increase in net costs is primarily due to a decrease in income from investments and expensing of failed mergers, acquisitions and financing costs of$0.19 million in the current period.
Consolidated Income Tax Expense
Provision for income tax expense for the nine months endedSeptember 30, 2021 was$3.14 million compared to$2.61 million for the nine months endedSeptember 30, 2020 for an effective rate of 21.4% and 21.7%, respectively. The effective tax rate is lower than the federal plus state statutory rates due to: (1) noncontrolling interests' share of net income is not subject to income tax at the consolidated group level; (2) year-over-year changes in the number and mix of states in which our subsidiaries are subject to state income taxes due to various nexus factors such as changes in multi-state activities by members of the consolidated group and its impact on the application of respective state income tax rules and regulations; and (3) changes in state income tax related statutes and regulations. Excluding the noncontrolling interests' share of net income, the effective tax rate for the comparable periods was 25.2% and 24.8%, 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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