WESTERN CAPITAL RESOURCES, INC. The following discussion should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report. This discussion contains forward-looking statements that involve significant uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in "Risk Factors" elsewhere in this report. For further information, see "Forward-Looking Statements" below. OVERVIEW 2020 resulted in significant growth in operating results in our Direct to Consumer and Cellular Retail operating segments while results from our Consumer Finance operating segment continue to deteriorate. We believe that maneuvers over the past few years put us in position to do well in the two segments experiencing growth in the unusual and challenging 2020 COVID environment.
RESULTS OF OPERATIONS:
YEAR ENDED
Net income attributable to our common shareholders was$8.21 million , or$0.90 per share, in 2020 compared to$2.32 million , or$0.25 per share, in 2019. Revenues increased from$117 million in 2019 to$135 million in 2020, with the Cellular Retail and Direct to Consumer segments being the largest contributors to the increase, with 24.1% and 10.8% year-over-year growth, respectively.
The following table provides year-over-year revenues and net income attributable to WCR common shareholders by operating segment (in thousands):
Direct to Consumer
Cellular Retail Consumer Finance Corporate Total
Year Ended December 31,
2020
Revenue from external
customers $ 85,209 $ 42,114 $ 1,784 $ - $ 129,107
Fee and interest income $ - $ - $ 5,959 $ - $ 5,959
Total revenue $ 85,209 $ 42,114 $ 7,743 $ - $ 135,066
% of total revenue 63.1 % 31.2 % 5.7 % 0.0 % 100.0 %
Net income (loss) $ 5,934 $ 4,947 $ 440 $ (1,073 ) $ 10,248
Net income attributable to
noncontrolling interests $ 2,035 $ - $ - $ - $ 2,035
Net income (loss)
attributable to WCR common
shareholders $ 3,899 $ 4,947 $ 440 $ (1,073 ) $ 8,213
Year Ended December 31,
2019
Revenue from external
customers $ 68,682 $ 38,024 $ 1,696 $ - $ 108,402
Fee and interest income $ - $ - $ 8,513 $ - $ 8,513
Total revenue $ 68,682 $ 38,024 $ 10,209 $ - $ 116,915
% of total revenue 58.8 % 32.5 % 8.7 % 0.0 % 100.0 %
Net income (loss) $ 2,502 $ 588 $ 1,066 $ (700 ) $ 3,456
Net income attributable to
noncontrolling interests $ 1,135 $ - $ - $ - $ 1,135
Net income (loss)
attributable to WCR common
shareholders $ 1,366 $ 588 $ 1,066 $ (700 ) $ 2,320
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Cellular Retail
The following table summarizes our Cellular Retail segment operating results:
Year Ended December 31,
(in thousands) 2020 % of 2019 % of
2020 2019 Revenues Revenues
Revenues:Retail sales and associated fees$ 65,145 $ 52,377
76.5 % 76.3 %
Other revenue 20,064 16,305 23.5 % 23.7 %
85,209 68,682 100.0 % 100.0 %
Cost of revenues 39,008 28,863 45.8 % 42.0 %
Gross profit 46,201 39,819 54.2 % 58.0 %
Salaries, wages and benefits expense 22,072 21,360 25.9 % 31.1 % Occupancy expense 8,771 8,929 10.3 % 13.0 % Depreciation and amortization expense 2,014 1,960
2.4 % 2.9 %
Interest expense - 62 - % 0.1 %
Other expense 5,936 4,516 7.0 % 6.6 %Provision for income taxes 1,474 490
1.6 % 0.7 %
40,267 37,317 47.2 % 54.4 %
Net income $ 5,934 $ 2,502 7.0 % 3.6 %
Segment contribution to net income before noncontrolling interests was $5.93
million in 2020 compared to $2.50 million in 2019. Contributing to the
year-over-year increase in net income before noncontrolling interests was $1.53
million of supplemental compensation from Cricket Wireless , provided to
alleviate the financial strain caused by COVID-19 and the temporary closureof 75 of our stores. Due to the impact of COVID-19 and even though our stores were generally deemed to be "essential businesses," onMarch 19, 2020 , we began the process of temporarily closing approximately 75 of our retail stores. By the end ofApril 2020 , all but 22 had reopened. InJune 2020 , pursuant toCricket Wireless' distribution optimization program, we permanently closed the 22 remaining un-opened stores and five others. In 2020, we recorded a loss of$0.91 million relating to the closures. At the end of fiscal 2020, we were operating 205 locations, approximately 70% of which are performing at levels above their respective performance levels prior to the initiation of the distribution optimization program. Over the last five years we have executed a growth strategy involving launching, acquiring, and selling locations and closing underperforming locations. At the end of 2020 we believe we are positioned with a more profitable mix of locations. 25 Direct to Consumer The following table summarizes our actual Direct to Consumer segment operating results: Year Ended December 31, (in thousands) 2020 % of 2019 % of 2020 2019 Revenues Revenues Revenues$ 42,114 $ 38,024 100.0 % 100.0 % Cost of revenues 19,442 20,324 46.2 % 53.5 % Gross profit 22,672 17,700 53.8 % 46.5 % Salaries, wages and benefits expense 5,887 5,949 14.0 % 15.6 % Occupancy expense 565 531 1.3 % 1.4 % Depreciation and amortization expense 531 513
1.3 % 1.4 %
Interest expense - 2 - % - %
Other expense 9,286 9,942 22.0 % 26.1 %Provision for income taxes 1,456 175
3.5 % 0.5 %
17,725 17,112 42.1 % 45.0 %
Net income $ 4,947 $ 588 11.7 % 1.5 %
The Direct to Consumer segment contributed $4.95 million of net income in 2020
compared to $0.59 million in 2019. Over the past several years, we have focused
on upgrading management and product offerings as well as optimizing marketing
spend. During 2020, the segment experienced an increase in product sales,
benefitting from the industry-wide changes in consumer purchasing methods and
increase in demand for products ordered online, and from increased consumer
interest in gardening and seed-related products. Gross profit increased due to
changes implemented by management in product offerings, shipping promotions, and
the elimination of lower-margin items while promoting higher-margin items.
Consumer Finance
The following table summarizes our Consumer Finance segment operating results:
Year Ended December 31,
(in thousands) 2020 % of 2019 % of
2020 2019 Revenues Revenues
Revenues:
Retail sales $ 1,438 $ 1,369 18.6 % 13.4 %Financing fees and interest 5,959 8,513
76.9 % 83.4 %
Other revenue 347 328 4.5 % 3.2 %
7,744 10,210 100.0 % 100.0 %
Cost of revenues 1,114 1,833 14.4 % 18.0 %
Gross profit 6,630 8,377 85.6 % 82.0 %
Salaries, wages and benefits expense 3,076 3,692 39.7 % 36.2 % Occupancy expense 1,148 1,244 14.8 % 12.2 % Depreciation and amortization expense 20 31 0.3 % 0.3 % Other expense 1,784 1,963 23.0 % 19.2 % Provision for income taxes 162 381
2.1 % 3.7 %
6,190 7,311 79.9 % 71.6 %
Net income $ 440 $ 1,066 5.7 % 10.4 %
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Consumer Finance segment net income decreased to$0.44 million in 2020 from$1.07 million in 2019. The decrease primarily attributable to a sharp decline in lending activity due to COVID-19 and compounded by the closure of our payday business inNebraska inNovember 2020 due to the 36% rate cap passed byNebraska voters. In addition to theNebraska store closures due to the change in law, in 2020 we closed three underperforming locations, two inNebraska and our last installment loan center inWisconsin and we sold five of our six payday store operations inIowa . Through September, the month prior to ceasing new payday loan originations inNebraska and prior to the November sale of our fiveIowa locations, loan originations decreased 29% year-over-year, primarily due to COVID-19. Year-over-year, new loan originations decreased 33%. Corporate Net cost of our Corporate segment was($1.07) million for the year endedDecember 31, 2020 compared to($0.70) million for the year endedDecember 31, 2019 , the increased net cost due primarily to the decrease in investment income and one-time transaction expenses of$0.2 million associated with the Swisher transaction that closed inJanuary 2021 .
Consolidated Income Tax Expense
Income tax expense was$2.79 million for 2020 compared to$0.91 million for 2019 for an effective rate of 21.4% and 20.8%, respectively. Income attributable to our noncontrolling interest flows through to the noncontrolling interest and is not taxable at the Company level. Excluding the non-taxable flow-through income to the noncontrolling interest, the effective rate for 2020 and 2019 was 25.4% and 28.1%, respectively. The effective rate decrease year-over-year is due to a combination of many state income taxation factors.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows:
Year Ended December 31,
2020 2019
Cash flows provided by (used in):
Operating activities $ 13,683,109 $ 4,824,658
Investing activities (1,533,986 ) 9,748,911
Financing activities (7,226,728 ) (4,166,012 )
Net increase in cash 4,922,395 10,407,557Cash and cash equivalents, beginning of year 27,132,540 16,724,983
Cash and cash equivalents, end of year
As ofDecember 31, 2020 andDecember 31, 2019 , we had cash and cash equivalents of$32.05 million and$27.13 million , respectively. 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 March of 2022. Our expected short-term uses of available cash include the funding of operating activities and the payment of dividends. In addition to cash and cash equivalents, as ofDecember 31, 2020 , we had$17.34 million invested in certificates of deposit (limited to approximately$250,000 per financial institution per entity).
In
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As of
OnApril 21, 2016 , we entered into a revolver and acquisition credit facility with a financial institution. The facility included a$9 million acquisition facility commitment and a$3 million revolving credit commitment. Interest accrued on advanced funds at LIBOR plus 3.5%. The facility was extended for two years when it was scheduled to mature onApril 21, 2018 . Considering the amount of available cash and cash equivalents and investment holdings, we terminated the credit facility onOctober 8, 2019 . CRITICAL ACCOUNTING POLICIES Our 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 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 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, "Nature of Business and Summary of Significant Accounting Policies," of the notes to our consolidated financial statements included in this report. We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our consolidated financial statements:
Receivables and Allowance for Credit Losses
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.
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See Note 4, "Loans Receivable," and Note 5, "Allowance for Credit Losses on
Loans Receivable," of the notes to our consolidated financial statements
included in this report for our outstanding loans receivable aging and the
allowance for credit losses on loans receivable rollforward as of and for the
year ended
Inventory We value inventories at the lower of cost or market. Reserves for excess and obsolescence are estimated and recorded to reduce the carrying value to estimated net realizable value. The amount of the reserve is determined based on historical usage, projected sales information, plans for discontinued products and other factors. Though management considers these reserves adequate and proper, changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy
of this reserve. Long-lived Assets
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the asset. The cost of maintenance and repairs is charged to operations as incurred while renewals and betterments are capitalized. Finite-lived intangible assets represent the fair values management assigned to assets acquired through business acquisitions, are amortized over periods of three to 15 years based on management's estimates of the useful life of the asset and are subject to impairment evaluations. 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. 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.
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Goodwill
We allocate any excess purchase price over the fair value of the net tangible
and identifiable intangible assets acquired in a business combination to
goodwill. We base the fair value of identifiable intangible assets acquired in a
business combination on valuations that use information and assumptions that a
market participant would use, including assumptions for estimated revenue
projections, growth rates, cash flows, discount rates, useful life, and other
relevant assumptions. We test our goodwill 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. The quantitative
assessment considers whether the carrying amount of a reporting unit exceeds its
fair value, in which case an impairment charge is recorded to the extent the
reporting unit's carrying value exceeds its fair value. During our annual test
of goodwill balances in 2020, which was completed during the fourth quarter of
2020, we determined that the fair value of each reporting unit with goodwill
exceeded the carrying amount by a significant amount.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
CAUTIONARY NOTE REGARDING 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 "Description of Business," "Risk Factors," "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 in which 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.
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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.
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