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;
? Inflationary pressures on cost of sales and fluctuations in commodity prices;
? 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;
? Our dependence on information systems;
? 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 of our Form 10-K for the year endedDecember 31, 2021 . 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. and Express Pawn,
Inc.
17
Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as "we," the "Company," and "us."
Acquisitions: OnMarch 11, 2022 , our Cellular Retail segment entered into a series of definitive agreements to purchase 80% ofGateway Wireless, LLC , an operator of 56Cricket Wireless locations inMissouri and several other states. We completed the transaction onMay 9, 2022 . OnJanuary 14, 2022 , the Company's Direct to Consumer segment acquired From Seed to Spoon, a garden planning App that makes growing food easier. From Seed to Spoon is yet another tool inPark Seed's tool shed designed to inspire, teach, and reach customers where they get information today - on their phones. From Seed to Spoon calculates planting dates based on GPS location taking the guesswork out of when to plant seeds. In addition to providing personalized planting dates, the App also includes companion planting guides, recipes, organic pest treatments, and beneficial insect guides. It even enables users to filter plants by health benefit. The App also provides an easy and direct path to purchasing seeds from ourPark Seed business. We expect segment operating results and earnings per share to change throughout 2022 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.
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, 2021 consolidated financial statements included in our Form 10-K for the year endedDecember 31, 2021 . 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 is$2.25 million of unpaid principal, interest and fee balances of payday loans that have not reached their maturity date. Payday loans by their nature are high risk loans and require significant assumptions when determining a reserve for credit losses, including the default rate and the amount of subsequent collections on those defaulted loans. These two factors have remained relatively stable over the past two years and we therefore use historical rates to assist in determining anticipated future credit losses. In addition, we must consider future economic factors. Any significant downturn in the economy which is greater than our assumptions will increase the default rates and reduce subsequent collections on those defaulted loans. As ofMarch 31, 2022 , we have estimated credit losses from the$2.25 million loans receivable balance to be approximately$40,000 . Inventory Direct to Consumer Inventory is valued at the lower of cost or market using the weighted-average method of determining cost. The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. Two subcategories of inventory, live plants and restoration products, are most susceptible to write-downs and the application of key assumptions. Live plants have a limited life and any unsold product is disposed of at the end of a selling season. Should the demand for product not meet expectations, larger write-downs may occur during interim periods until written off. Management will assess the need for write-downs based on inventory levels, the length of time remaining in the live-goods season, and current and expected demand which could be impacted by many current market and economic factors as discussed in the Risk Factors section of our Form 10-K for the year endedDecember 31, 2021 . We have a significant number of home hardware products in this segment's inventory. Due to the uniqueness of many of these items, the sales volume of an individual SKU may be low. Management evaluates the value of items in inventory to estimate an allowance against carrying costs. This evaluation includes a look-back of sales volume of the respective SKU over the prior twelve month period to estimate the allowance. Manufacturing Inventory is valued at the lower of cost or market using the standard costing method of determining cost. The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. Key assumptions used are the future quantity to be sold, the future selling price of an item, and the cost of raw materials, primarily steel. Unknown economic factors or supply factors could materially affect these assumptions. A sharp downturn in the economy would negatively impact the future quantity sold. Dropping steel or other raw materials costs will negatively impact assumptions used for future sales prices and the underlying cost under the lower of cost or market methodology. Future sales prices and the underlying cost under the lower of cost or market methodology could also be negatively impacted by an unforeseen introduction of comparable products, possibly from foreign sources or otherwise, at a lower price point. 18
Results of Operations - Three Months Ended
Net income attributable to our common shareholders for the current quarter was
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, 2022 andMarch 31, 2021 (in thousands). Cellular Direct to Consumer Retail Consumer Manufacturing Finance Corporate Total
Three Months EndedMarch 31, 2022 Revenue$ 26,259 $ 15,979 $ 2,620$ 1,595 $ -$ 46,453 % of total revenue 56.5 % 34.4 % 5.7 % 3.4 % - % 100 % Net income (loss)$ 2,389 $ 2,723 $ (19 )$ 182 $ (334 ) $ 4,941 Net income attributable to noncontrolling interests$ 759 $ - $ - $ - $ -$ 759 Net income (loss) attributable to WCR common shareholders$ 1,630 $ 2,723 $ (19 )$ 182 $ (334 ) $ 4,182 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 Cellular Retail
A summary table of the number of
2022 2021
Beginning 229 205
Acquired/ Launched - 2
Closed/Divested - (2 )
Ending 229 205
The increase in the store count above was primarily due to our
Period over period, net income attributable to shareholders decreased from$1.75 million in the comparable prior year quarter to$1.63 million in the current quarter. Many factors have contributed to this period over period decrease. Most notable is a 2.9% increase in segment revenue period over period on a store count that increased 12%. We attribute the decline in same store revenue year over year primarily to consumers receiving both tax refunds and COVID-19 relief funds at approximately the same time in the prior year quarter, while the COVID-19 relief funds are significantly down in the comparable current year period. In addition inflationary pressures have negatively impacted many expenses, most notably salaries, wages and benefits and occupancy expenses.
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 income of$2.72 million compared to net income of$2.27 million for the comparable prior year period. Revenues for the quarter endedMarch 31, 2022 were$15.98 million compared to$14.68 million for the comparable period in 2021,an 8.9% increase. The gains in revenue in the Direct to Consumer segment were partially offset by higher selling and advertising expenses versus the prior year comparable period. Manufacturing
Manufacturing segment sales increased from$2.52 million in the comparable prior period to$2.62 million in the current period. For each of the quarters endedMarch 31, 2022 and 2021, the Manufacturing segment had a net loss of$0.02
million. Consumer Finance
A summary table of the number of consumer finance locations we operated during
the quarters ended
2021 2020
Beginning 22 22
Acquired/Launched - -
Closed/Divested - -
Ending 22 22
19
Consumer Finance segment revenues increased
Corporate
Net costs related to our Corporate segment were
Consolidated Income Tax Expense
Provision for income tax expense for the three months endedMarch 31, 2022 was$1.34 million compared to$1.30 million for the three months endedMarch 31, 2021 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 24.3% and 24.9%, respectively. This decrease period over period is due to changing 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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