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EXCEL - IDEA: XBRL DOCUMENT - WESTERN CAPITAL RESOURCES, INC.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - WESTERN CAPITAL RESOURCES, INC.v392691_ex31-1.htm
EX-32 - EXHIBIT 32 - WESTERN CAPITAL RESOURCES, INC.v392691_ex32.htm
EX-31.2 - EXHIBIT 31.2 - WESTERN CAPITAL RESOURCES, INC.v392691_ex31-2.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

x   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2014

 

o   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)

 

Minnesota 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)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 þ No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer  o Accelerated filer  o
   
Non-accelerated filer  o Smaller reporting company  þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No þ

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of November 11, 2014, the registrant had outstanding 5,997,588 shares of common stock, as adjusted for our reverse stock split, no par value per share.

 

 

 

 
 

 

Western Capital Resources, Inc.

 

Index

 

    Page
PART I. FINANCIAL INFORMATION    
Item 1. Financial Statements   2
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   12
     
Item 4. Controls and Procedures   22
     
PART II. OTHER INFORMATION    
Item 5. Other Information   23
     
Item 6. Exhibits   23
     
SIGNATURES   24

 

1
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

CONTENTS

 

   Page
   
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
   
Condensed Consolidated Balance Sheets 3
   
Condensed Consolidated Statements of Income 4
   
Condensed Consolidated Statements of Cash Flows 5
   
Notes to Condensed Consolidated Financial Statements 6

 

2
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

  

   September 30, 2014
(Unaudited)
   December 31, 2013 
ASSETS          
           
CURRENT ASSETS          
Cash  $3,071,565   $1,983,835 
Loans receivable (less allowance for losses of $1,105,000 and $1,215,000)   5,094,099    5,438,202 
Inventory   2,003,077    1,557,886 
Prepaid expenses and other   528,435    889,590 
Deferred income taxes   470,000    498,000 
TOTAL CURRENT ASSETS   11,167,176    10,367,513 
           
PROPERTY AND EQUIPMENT   880,536    928,074 
           
GOODWILL   12,894,069    12,894,069 
           
INTANGIBLE ASSETS   284,134    117,096 
           
OTHER   147,605    132,333 
           
TOTAL ASSETS  $25,373,520   $24,439,085 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
Accounts payable and accrued liabilities  $2,985,640   $2,910,560 
Income taxes payable   252,553    - 
Current portion long-term debt   2,000,000    2,750,000 
Deferred revenue   270,102    296,503 
TOTAL CURRENT LIABILITIES   5,508,295    5,957,063 
           
LONG-TERM LIABILITIES          
Deferred income taxes   1,403,000    1,156,000 
TOTAL LONG-TERM LIABILITIES   1,403,000    1,156,000 
           
TOTAL LIABILITIES   6,911,295    7,113,063 
           
SHAREHOLDERS’ EQUITY          
Common stock, no par value, 12,500,000 shares authorized, 3,010,765 shares issued and outstanding   -    - 
Additional paid-in capital   22,353,212    22,353,600 
Accumulated deficit   (3,890,987)   (5,027,578)
TOTAL SHAREHOLDERS’ EQUITY   18,462,225    17,326,022 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $25,373,520   $24,439,085 

 

See notes to condensed consolidated financial statements.

 

3
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

   Three months ended   Nine months ended 
   September 30, 2014   September 30, 2013   September 30, 2014   September 30, 2013 
REVENUES                    
Retail sales, fees and commissions  $6,638,922   $5,638,044   $18,582,085   $15,469,392 
Financing fees and interest   2,919,822    2,958,226    8,229,216    8,314,070 
    9,558,744    8,596,270    26,811,301    23,783,462 
                     
STORE EXPENSES                    
Phone and accessories cost of sales   2,839,494    2,553,880    8,435,300    6,980,858 
Salaries and benefits   2,038,741    1,958,872    6,191,448    5,468,861 
Occupancy   737,517    677,089    2,140,640    1,953,905 
Provisions for loan losses   514,762    575,355    1,268,330    1,320,546 
Advertising   91,164    88,995    260,831    261,713 
Depreciation   80,550    89,514    238,874    255,595 
Amortization of intangible assets   28,373    36,194    82,962    112,735 
Other   1,204,136    1,141,614    3,539,234    2,903,731 
    7,534,737    7,121,513    22,157,619    19,257,944 
                     
INCOME FROM STORES   2,024,007    1,474,757    4,653,682    4,525,518 
                     
GENERAL & ADMINISTRATIVE EXPENSES                    
Salaries and benefits   667,645    498,488    1,510,817    1,496,730 
Depreciation   6,600    7,200    19,770    20,028 
Interest expense   60,493    83,178    191,823    249,069 
Other   376,953    258,312    1,108,681    798,659 
    1,111,691    847,178    2,831,091    2,564,486 
                     
INCOME BEFORE INCOME TAXES   912,316    627,579    1,822,591    1,961,032 
                     
INCOME TAX EXPENSE   347,000    235,000    686,000    741,000 
                     
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS  $565,316   $392,579   $1,136,591   $1,220,032 
                     
NET INCOME PER COMMON SHARE                    
Basic  $0.19   $0.13   $0.38   $0.40 
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -                    
Basic   3,010,765    3,011,008    3,010,922    3,012,667 

 

See notes to condensed consolidated financial statements.

 

4
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   Nine Months Ended 
   September 30, 2014   September 30, 2013 
         
OPERATING ACTIVITIES          
Net Income  $1,136,591   $1,220,032 
Adjustments to reconcile net income to net cash provided (used) by operating activities:          
Depreciation   258,644    275,623 
Amortization   82,962    112,735 
Deferred income taxes   275,000    211,000 
Changes in operating assets and liabilities          
Loans receivable   344,103    30,885 
Inventory   (445,191)   (473,501)
Prepaid expenses and other assets   345,883    39,556 
Accounts payable and accrued liabilities   327,633    (358,775)
Deferred revenue   (26,401)   (14,392)
Net cash provided by operating activities   2,299,224    1,043,163 
           
INVESTING ACTIVITIES          
Purchases of property and equipment   (211,106)   (276,104)
Purchases of intangible assets   (250,000)   (143,000)
Net cash used by investing activities   (461,106)   (419,104)
           
FINANCING ACTIVITIES          
Payments on notes payable – short-term   -    (405,163)
Payments on notes payable – long-term   (750,000)   (210,065)
Common stock redemption   (388)   (17,762)
Net cash used by financing activities   (750,388)   (632,990)
           
NET INCREASE (DECREASE) IN CASH   1,087,730    (8,931)
           
CASH          
Beginning of period   1,983,835    2,246,619 
End of period  $3,071,565   $2,237,688 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Income taxes paid  $164,838   $481,253 
Interest paid  $200,124   $248,962 
           
Noncash investing and financing activities:          
Accrued purchase of property and equipment  $-   $159,148 

 

See notes to condensed consolidated financial statements.

 

5
 

   

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 footnote 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 nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended December 31, 2013. The condensed consolidated balance sheet at December 31, 2013, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

 

Nature of Business

 

Western Capital Resources, Inc. (“WCR”), through its wholly owned operating subsidiaries, Wyoming Financial Lenders, Inc. (“WFL”), Express Pawn, Inc. (“EP”), and PQH Wireless, Inc. (“PQH”), collectively referred to as the “Company,” provides retail financial services to individuals and operates retail cellular and retail pawn stores primarily in the Midwestern and Southwestern United States.  The Company operated 48 “Payday” stores, two combined payday/pawn store, and one pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) as of September 30, 2014. The Company operated 58 cellular retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington) as of September 30, 2014.  The consolidated financial statements include the accounts of WCR, WFL, PQH and EP. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Through our “Consumer Finance” division, we provide non-recourse cash advance and installment loans, collateralized non-recourse pawn loans, check cashing and other money services, and operate retail pawn stores.  The short-term uncollateralized non-recourse consumer loans, known as “cash advance” or “payday” loans, are in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations, and generally ranges from $15 to $22 per each $100 borrowed. To repay a cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. Installment loans provide customers with cash in exchange for a promissory note with a maturity of generally three to six months and are unsecured. The fee and interest rate on installment loans vary based on applicable regulations.

 

Our pawn stores provide collateralized non-recourse loans, commonly known as “pawn loans,” with maturities of one to four months, depending on applicable state regulations. Allowable service charges vary by state. Our pawn loans earn 17.5% to 20% per month. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale value depending on our evaluation of several factors. Customers then have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or else forfeit the merchandise to us upon expiration. At our pawn stores, we sell merchandise acquired through either customer forfeiture of pawn collateral or second-hand merchandise purchased from customers or consigned to us.

 

We also provide title loans and other ancillary consumer financial products and services that are complementary to our cash advance-lending business, such as check-cashing services, money transfers and money orders.  In our check-cashing business, we primarily cash payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts. Our fees for cashing payroll checks average approximately 2.5% of the face amount of the check, subject to local market conditions, and this fee is deducted from the cash given to the customer for the check. We display our check-cashing fees in full view of our customers on a menu board in each store and provide a detailed receipt for each transaction. Although we have established guidelines for approving check-cashing transactions, we have no preset limit on the size of the checks we will cash.

 

Our loans and other related services are subject to state regulations (which vary from state to state), federal regulations and local regulations, where applicable.

 

6
 

 

We also operate a “Cellular Retail” division that is an authorized Cricket dealer, selling cellular phones and accessories, providing ancillary services and accepting service payments from customers.

 

Use of Estimates

 

The preparation of condensed 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 condensed 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 loans receivable allowance, percentage of existing pawn loans that will be forfeited, allocation of and carrying value of goodwill and intangible assets, inventory valuation and obsolescence and deferred taxes and tax uncertainties.

 

Revenue Recognition

 

The Company recognizes fees on cash advance loans on a constant-yield basis ratably over the loans’ terms. Title and 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 redeemed pawn loans on a constant-yield basis ratably over the loans’ terms. No fees are recognized on forfeited pawn loans. The Company records revenue from check cashing fees, sales of phones, accessories, and pawn inventory, and fees from all other services in the period in which the sale or service is completed.  

 

Loans Receivable Allowance

 

The Company maintains a loan loss allowance for anticipated losses for our payday and installment loans. We do not record loan losses or charge-offs of pawn or title loans because the value of the collateral exceeds the loan amount. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loan principal, interest and fees, historical charge offs, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our historical net write off percentage, net charge offs to loan principal, interest and fee amounts that originated during the last 24 months, applied against the balance of loan principal, interest and fees outstanding. The Company also periodically performs a look-back analysis on its loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. The Company is aware that as conditions change, it may also need to make additional allowances in future periods.

 

Included in loans receivable are unpaid principal, interest and fee balances of payday, installment, pawn and title 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.   Loans are carried at cost plus accrued interest or fees less payments made and the loans receivable allowance.  The Company does not specifically reserve for any individual loan.  The Company aggregates 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 the maturity of the store location and charge-off and recovery rates.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.   All returned items are charged-off after 180 days, as collections after that date have not been significant.  The loans receivable allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

 

Combination (Reverse Split) of Common Stock

 

On May 30, 2014, the Company’s Board of Directors approved a 1-to-20 reverse stock split. The reverse stock split became effective on June 20, 2014. The reverse stock split reduced the number of issued and outstanding shares of common stock to 3,010,765 shares. The reverse stock split similarly reduced by a factor of 20 the authorized number of shares of capital stock that the Company may issue to 12,500,000. The accompanying financial statements and footnotes have been adjusted retroactively to reflect the reverse stock split.

 

Net Income Per Common Share

 

Basic net income per common share is computed by dividing the income available to common shareholders by the weighted-average number of common shares outstanding for the period. There were no dilutive securities at September 30, 2014 and 2013.

 

Segment Reporting

 

The Company has grouped its operations into two segments – Consumer Finance division and Cellular Retail division. The Consumer Finance division provides financial and ancillary services and also sells used merchandise at retail pawn stores. The Cellular Retail division is an authorized Cricket premier dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers.

 

7
 

 

Reclassifications

 

Certain Statement of Income reclassifications have been made in the presentation of our prior financial statements and accompanying notes to conform to the presentation as of and for the nine months ended September 30, 2014.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. This converged standard is effective for annual and interim periods beginning after December 15, 2016. The Company is currently assessing the potential effects on our financial condition and results of operations.

 

No new accounting pronouncement issued or effective during the fiscal quarter has had or is expected to have a material impact on the condensed consolidated financial statements.

 

2.Risks Inherent in the Operating Environment –

 

The Company’s Consumer Finance division activities are highly regulated under numerous local, state, and federal laws and regulations, which are subject to change. New laws or regulations could be enacted that could have a negative impact on the Company’s lending activities. Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict the Company’s lending activities.

 

Any adverse change in present laws or regulations that govern or otherwise affect lending could result in our curtailment or cessation of operations in certain jurisdictions or locations. Furthermore, any failure to comply with any applicable 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 our results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines, and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing as needed.

 

In addition, the passage of federal or state laws and regulations could, at any point, essentially prohibit the Company 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 its viability.

 

For the nine months ended September 30, 2014 and 2013, the Company had significant revenues by state (shown as a percentage of the applicable division’s revenue when over 10%) as follows:

 

Consumer Finance Division  Cellular Retail Division
   2014   2013      2014   2013 
Nebraska   30%   28%  Nebraska   28%   27%
North Dakota   18%   19%  Colorado   19%   *%
Wyoming   14%   15%  Texas   *%   12%
Iowa   14%   12%             

 

* Less than 10%

 

3.Loans Receivable –

 

At September 30, 2014 and December 31, 2013 our outstanding loans receivable aging was as follows:

 

September 30, 2014
   Payday   Installment   Pawn & Title   Total 
Current  $4,154,816   $328,789   $318,774   $4,802,379 
1-30   301,329    51,136    -    352,465 
31-60   238,424    27,765    -    266,189 
61-90   232,434    13,679    -    246,113 
91-120   192,644    6,654    -    199,298 
121-150   183,369    2,914    -    186,283 
151-180   139,352    7,020    -    146,372 
    5,442,368    437,957    318,774    6,199,099 
Allowance for losses   (1,048,000)   (57,000)   -    (1,105,000)
   $4,394,368   $380,957   $318,774   $5,094,099 

 

8
 

 

December 31, 2013
   Payday   Installment   Pawn & Title   Total 
Current  $4,519,839   $408,782   $288,788   $5,217,409 
1-30   271,967    56,807    -    328,774 
31-60   202,097    31,212    -    233,309 
61-90   217,154    17,285    -    234,439 
91-120   206,885    8,660    -    215,545 
121-150   199,253    2,846    -    202,099 
151-180   218,802    2,825    -    221,627 
    5,835,997    528,417    288,788    6,653,202 
Allowance for losses   (1,120,000)   (95,000)   -    (1,215,000)
   $4,715,997   $433,417   $288,788   $5,438,202 

 

4.Loans Receivable Allowance –

 

As a result of the Company’s collection efforts, it historically writes off approximately 42% of the returned payday items.  Based on days past the check return date, write-offs of payday returned items historically have tracked at the following approximate percentages: 1 to 30 days – 42%; 31 to 60 days – 65%; 61 to 90 days – 83%; 91 to 120 days – 88%; and 121 to 180 days – 91%.  A rollforward of the Company’s loans receivable allowance for the nine months ended September 30, 2014 and 2013 is as follows:

 

   Nine Months Ended
September 30,
 
   2014   2013 
Loans receivable allowance, beginning of period  $1,215,000   $1,191,000 
Provision for loan losses charged to expense   1,268,330    1,320,546 
Charge-offs, net   (1,378,330)   (1,384,546)
Loans receivable allowance, end of period  $1,105,000   $1,127,000 

 

5.Notes Payable – Long Term –

 

The Company’s long-term debt is as follows:

 

   September 30, 2014   December 31, 2013 
Note payable (with a credit limit of $3,000,000) to River City Equity, Inc., a related party, with interest payable monthly at 12%, due June 30, 2015, and upon certain events can be collateralized by substantially all assets of WCR.  $2,000,000   $2,750,000 
Total   2,000,000    2,750,000 
Less current maturities   (2,000,000)   (2,750,000)
   $-   $- 

 

9
 

 

6.Other Expense –

 

A breakout of other expense is as follows:

 

   Three Months Ended 
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
                 
Store expenses                    
Bank fees  $114,389   $109,892   $334,067   $316,208 
Collection costs   102,653    118,510    324,636    356,425 
Repairs & maintenance   59,344    81,056    258,803    194,470 
Supplies   144,572    208,665    455,986    371,426 
Telephone   48,387    46,353    151,620    125,468 
Utilities and network lines   230,969    207,372    694,977    585,422 
Other   503,822    369,766    1,319,145    954,312 
   $1,204,136   $1,141,614   $3,539,234   $2,903,731 
                     
General & administrative expenses                    
Professional fees  $46,799   $71,494   $259,791   $262,855 
Management and consulting fees   126,163    111,826    364,148    331,335 
Other   203,991    74,992    484,742    204,469 
   $376,953   $258,312   $1,108,681   $798,659 

 

7.Segment Information –

 

The Company has grouped its operations into two segments – Consumer Finance and Cellular Retail.  The Consumer Finance segment provides financial and ancillary services.  The Cellular Retail segment is an authorized Cricket Wireless dealer selling cellular phones and accessories, ancillary services and serving as a payment center for customers.

 

Segment information related to the three and nine months ended September 30, 2014 and 2013 is set forth below:

 

   Three Months Ended 
September 30, 2014
   Three Months Ended
September 30, 2013
 
   Consumer Finance   Cellular Retail   Total   Consumer Finance   Cellular Retail   Total 
                         
Revenues from external customers  $3,366,283   $6,192,461   $9,558,744   $3,287,935   $5,308,335   $8,596,270 
Net income  $298,819   $266,497   $565,316   $350,768   $41,811   $392,579 

 

   Nine Months Ended 
September 30, 2014
   Nine Months Ended
September 30, 2013
 
   Consumer Finance   Cellular Retail   Total   Consumer Finance   Cellular Retail   Total 
                         
Revenues from external customers  $9,505,855   $17,305,446   $26,811,301   $9,269,693   $14,513,769   $23,783,462 
Net income  $938,200   $198,391   $1,136,591   $1,038,856   $181,176   $1,220,032 
Total segment assets  $16,748,834   $8,624,686   $25,373,520   $15,694,275   $8,243,296   $23,937,571 

 

10
 

 

8.Subsequent Events –

 

AlphaGraphics Merger Transaction

 

After close of business September 30, 2014, the Company acquired the business of AlphaGraphics, Inc., a Delaware corporation, by completing a merger transaction. The Agreement and Plan of Merger governing the transaction (the “Merger Agreement”) was entered into on August 29, 2014, by and among the Company, WCRS Acquisition Co., LLC, a Delaware limited liability company and wholly owned acquisition subsidiary of the Company, and BC Alpha Holdings II, LLC, a Delaware limited liability company and the parent entity of AlphaGraphics.

 

As contemplated under the Merger Agreement, all of the outstanding membership interests in BC Alpha Holdings II were exchanged for the issuance by the Company of 2,986,823 shares of common stock of the Company representing approximately 49.8% of the total issued and outstanding common stock of the Company after the merger.

 

Change in Board of Directors

 

On October 1, 2014, and in connection with the AlphaGraphics merger transaction described above, Angel Donchev and Thomas Ripley resigned from their positions as directors of the Company. On that same day, the Board of Directors appointed Gay A. Burke and Lawrence S. Berger to the board vacancies created by the resignations of Messrs. Donchev and Ripley. The appointments of Gay A. Burke and Lawrence S. Berger occurred at the direction of BC Alpha Holdings II, consistent with certain director-appointment rights granted to that company in the Merger Agreement. Lawrence Berger was appointed to serve as a member of the Audit Committee, replacing Angel Donchev.

 

11
 

 

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” 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 heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part I, Item 2), but may be 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 will not necessarily update 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 our industry or us, particularly in certain key states and/or nationally;

 

·our need for additional financing;

 

·unpredictability or uncertainty in financing markets which could impair our ability to grow our business through acquisitions;

 

·changes in Cricket dealer compensation; and

 

·the impact on us, as a Cricket dealer, of the AT&T acquisition of the Cricket Wireless business.

 

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

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.

 

Recent Developments

 

AlphaGraphics Merger Transaction

 

After close of business on September 30, 2014, we acquired the business of AlphaGraphics, Inc., a Delaware corporation, by completing a merger transaction. The Agreement and Plan of Merger governing the transaction (the “Merger Agreement”) was entered into on August 29, 2014, by and among us, WCRS Acquisition Co., LLC, our wholly owned acquisition subsidiary, and BC Alpha Holdings II, LLC, a Delaware limited liability company and the parent entity of AlphaGraphics (collectively “AlphaGraphics”).

 

As contemplated under the Merger Agreement, all of the outstanding membership interests in BC Alpha Holdings II were exchanged for our issuance of 2,986,823 shares of common stock representing approximately 49.8% of our total issued and outstanding common stock after the merger.

 

12
 

 

General Overview

 

Revenues and expenses for our Consumer Finance division, Cellular Retail division and Combined Consumer Finance and Cellular Retail divisions for the three and nine months ended September 30, 2014 and 2013 were as follows:

 

Consumer Finance Division
   Three Months Ended September 30,     
   2014   2013   % Change 
Revenues               
Retail sales, fees and commissions  $446,461   $329,709    35.4%
Financing fees and interest   2,919,822    2,958,226    (1.3)%
    3,366,283    3,287,935    2.4%
                
Expenses               
Store salaries and benefits   686,800    673,420    2.0%
Provisions for loan losses   514,762    575,355    (10.5)%
Occupancy   251,490    263,056    (4.4)%
Other   1,431,412    1,215,336    17.8%
Income tax   183,000    210,000    (12.9)%
    3,067,464    2,937,167    4.4%
                
Net income  $298,819   $350,768    (14.8)%

 

 

Cellular Retail Division
   Three Months Ended September 30,     
   2014   2013   % Change 
Revenues               
Phones and accessories  $6,192,461   $5,308,335    16.7%
                
Expenses               
Phone and accessories cost of sales   2,839,494    2,553,880    11.2%
Store salaries and benefits   1,351,941    1,285,452    5.2%
Occupancy   486,027    414,033    17.4%
Other   1,084,502    988,159    9.7%
Income tax   164,000    25,000    556.0%
    5,925,964    5,266,524    12.5%
                
Net (loss) income  $266,497   $41,811    537.4%

 

 

Combined - Consumer Finance and Cellular Retail Divisions
   Three Months Ended September 30,     
   2014   2013   % Change 
Revenues               
Retail sales, fees and commissions  $6,638,922   $5,638,044    17.8%
Financing fees and interest   2,919,822    2,958,226    (1.3)%
    9,558,744    8,596,270    11.2%
                
Expenses               
Phone and accessories cost of sales   2,839,494    2,553,880    11.2%
Store salaries and benefits   2,038,741    1,958,872    4.1%
Provisions for loan losses   514,762    575,355    (10.5)%
Occupancy   737,517    677,089    8.9%
Other   2,515,914    2,203,495    14.2%
Income tax   347,000    235,000    47.7%
    8,993,428    8,203,691    9.6%
                
Net income  $565,316   $392,579    44.0%

 

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Consumer Finance Division
   Nine Months Ended September 30,     
   2014   2013   % Change 
Revenues               
Retail sales, fees and commissions  $1,276,639   $955,623    33.6%
Financing fees and interest   8,229,216    8,314,070    (1.0)%
    9,505,855    9,269,693    2.5%
                
Expenses               
Store salaries and benefits   2,051,808    1,989,233    3.1%
Provisions for loan losses   1,268,330    1,320,546    (4.0)%
Occupancy   746,344    756,484    (1.3)%
Other   3,934,173    3,534,574    11.3%
Income tax   567,000    630,000    (10.0)%
    8,567,655    8,230,837    4.1%
                
Net income  $938,200   $1,038,856    (9.7)%

  

Cellular Retail Division
   Nine Months Ended September 30,     
   2014   2013   % Change 
Revenues               
Phones and accessories  $17,305,446   $14,513,769    19.2%
                
Expenses               
Phone and accessories cost of sales   8,435,300    6,980,858    20.8%
Store salaries and benefits   4,139,640    3,479,628    19.0%
Occupancy   1,394,296    1,197,421    16.4%
Other   3,018,819    2,563,686    17.8%
Income tax   119,000    111,000    7.2%
    17,107,055    14,332,593    19.4%
                
Net income  $198,391   $181,176    9.5%

  

Combined - Consumer Finance and Cellular Retail Divisions
   Nine Months Ended September 30,     
   2014   2013   % Change 
Revenues               
Retail sales, fees and commissions  $18,582,085   $15,469,392    20.1%
Financing fees and interest   8,229,216    8,314,070    (1.0)%
    26,811,301    23,783,462    12.7%
                
Expenses               
Phone and accessories cost of sales   8,435,300    6,980,858    20.8%
Store salaries and benefits   6,191,448    5,468,861    13.2%
Provisions for loan losses   1,268,330    1,320,546    (4.0)%
Occupancy   2,140,640    1,953,905    9.6%
Other   6,952,992    6,098,260    14.0%
Income tax   686,000    741,000    (7.4)%
    25,674,710    22,563,430    13.8%
                
Net income  $1,136,591   $1,220,032    (6.8)%

 

Consumer finance operations are conducted under our wholly owned subsidiaries, Wyoming Financial Lenders, Inc. and Express Pawn, Inc., primarily in the Midwestern and Southwestern United States. Services provided include short-term loans (non-recourse “cash advance” or “payday” loans, small unsecured installment loans, collateralized non-recourse pawn loans and title loans), check cashing and other money services. As of September 30, 2014, we operated 48 “payday” stores, two payday/pawn stores, and one pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming).  

 

14
 

 

In our consumer finance operations, we provide short-term unsecured consumer cash advance loans in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advance, plus a fee. The fee varies from state to state based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. To repay the cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection.

 

We also provide unsecured installment loans in exchange for a promissory note with a maturity of generally three to six months. The fee and interest rate on installment loans vary based on applicable regulations.

 

We also provide collateralized non-recourse loans, commonly known as “pawn loans,” with a maturity of one to four months. Allowable pawn loan service charges will vary by state and range from 17.5% to 20% per month. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale. Customers have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or forfeit the merchandise to us on expiration. At our pawn stores we sell merchandise acquired through customer forfeiture of pawn collateral or second-hand merchandise purchased from customers or consigned to us.

 

As part of our consumer finance operations, we provide title loans and other ancillary consumer financial products and services that are complementary to its cash advance-lending business, such as check-cashing services, money transfers and money orders.  In our check cashing business, we primarily cash payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts.

 

All of our loan and other services are subject to state regulations (which vary from state to state), federal regulations and local regulation, where applicable.

 

Our cellular retail operations are conducted by our wholly owned subsidiary, PQH Wireless, Inc. We are an authorized Cricket Wireless (“Cricket”) dealer, and operate Cricket retail stores selling cellular phones and accessories, providing ancillary services and accepting Cricket service payments from customers. Cricket brand service offerings provide customers with unlimited nationwide wireless services for a flat rate without requiring a fixed-term contract or a credit check. As an authorized Cricket dealer, we are only permitted to sell Cricket’s services at our Cricket retail stores. As of September 30, 2014, we operated 58 Cricket wireless retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington).

 

Our expenses primarily relate to the operations of our various stores.  The most significant expenses include phones and accessories, salaries and benefits for our store employees, occupancy expenses for our leased real estate and provisions for payday loan losses.  Our other significant expenses are general and administrative, which includes compensation of employees, professional fees for compliance, external reporting, audit and legal services, and management/consulting fees.

 

With respect to our cost structure, phone and accessory cost of sales and salaries and benefits are two of our largest costs and are driven primarily by the size and number of storefronts operated throughout the period and seasonal fluctuation in sales volumes.   Occupancy costs make up our third largest expense item.  Our provision for losses is also a significant expense.  We have experienced seasonality in our Cricket operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors such as holiday spending habits at the end of each year and income tax refunds during the first quarter.

 

We evaluate our stores based on net store profits, revenue growth, gross profit contributions and, for payday stores, loss ratio (which is losses as a percentage of payday loan fees), with consideration given to the length of time the store has been open and its geographic location.  We evaluate store financial and other measures on a routine basis to evaluate its past contributions and to assess its future contributions to profitability. We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally.  To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business could be adversely affected.  

 

To further diversify, our strategic expansion plans involve the expansion and diversification of our existing product and service offerings and our expansion into new lines of business through acquisitions.   We also anticipate Cricket and pawn retail store expansion.   We believe that successful expansion, both geographically and product- and service-wise, may help to mitigate the regulatory and economic risk inherent in our business by making us less reliant on (i) cash advance and installment lending alone and (ii) any particular aspect of our business that is concentrated geographically or by product offering.

 

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 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 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.

 

15
 

 

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.  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.

 

Loans Receivable Allowance

 

We maintain a loan loss allowance for anticipated losses for our payday and installment loans. We do not record loan losses or charge-offs of pawn or title loans because the value of the collateral exceeds the loan amount. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loan principal, interest and fees, historical charge offs, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our historical net write off percentage, net charge offs to loan principal, interest and fee amounts that originated during the last 24 months, applied against the balance of loan principal, interest and fees outstanding. We also periodically perform a look-back analysis on its 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.

 

Included in loans receivable are unpaid principal, interest and fee balances of payday, installment, pawn and title 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.   Loans are carried at cost plus accrued interest or fees less payments made and the loans receivable allowance.  We do not specifically reserve for any individual loan.   For purposes of estimating the loss allowance we use a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolios.  This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates.  We utilize a software program to assist with the tracking of its historical portfolio statistics.   All returned items are charged-off after 180 days, as collections after that date have not been significant.  The loans receivable allowances are reviewed at least at each quarter end and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

 

A rollforward of our loans receivable allowance for the nine months ended September 30, 2014 and 2013 is as follows:

 

   Nine Months Ended
September 30,
 
   2014   2013 
Loans receivable allowance, beginning of period  $1,215,000   $1,191,000 
Provision for loan losses charged to expense   1,268,330    1,320,546 
Charge-offs, net   (1,378,330)   (1,384,546)
Loans receivable allowance, end of period  $1,105,000   $1,127,000 

 

Valuation of Long-lived and Intangible Assets

 

We assess the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is analyzed on an annual basis. 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 trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets’ carrying value over the estimated fair value.

 

Results of Operations – Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

 

For the three months ended September 30, 2014, net income was $.57 million compared to $.39 million for the three months ended September 30, 2013. During the three months ended September 30, 2014, income from operations before income taxes was $.91 million compared to $.63 million for the three months ended September 30, 2013. Compared to the prior year comparable three-month period, throughout some point of the current quarter, we operated a similar number of retail storefronts in both divisions. However, we did operate a number of higher volume Cricket retail storefronts added throughout the last year that effectively replaced lower volume storefronts that had been closed over the same period. The three month net income from the Consumer Finance Division fell behind prior year’s while net income from the Cellular Retail division showed positive growth. In the second quarter of 2014 the business disruption and added costs related to the AT&T acquisition of Cricket Wireless significantly contributed to the Cellular Retail division loss. In the third quarter of 2014, the Cricket Wireless promotions, advertising and strength of the AT&T network significantly contributed to an increase in unit sales and strong operating performance of the Cellular Retail division. The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.

 

16
 

 

A summary table of the number of stores operated during the three-month periods ended September 30, 2014 and 2013 follows:

 

   Three Months Ended September 30, 2014   Three Months Ended September 30, 2013 
   Consumer Finance   Payday /
Pawn
   Pawn   Cellular Retail   Consumer Finance   Payday /
Pawn
   Pawn   Cellular Retail 
Beginning   48    2    1    58    51    1    -    52 
Acquired/Launched/Converted   -    -    -    -    -    -    1    9 
Closed   -    -    -    -    -    -    -    (1)
Ending   48    2    1    58    51    1    1    60 

 

Revenues

 

The following table summarizes our revenues for the three months ended September 30, 2014 and 2013, respectively: 

 

   Three Months Ended
September 30,
       Three Months Ended September 30, 
   2014   2013   % Change Year Over Year   2014   2013 
               (percentage of revenues) 
Retail sales, fees and commissions  $6,638,922    5,638,044    17.8%   69.5%   65.6%
Financing fees and interest   2,919,822    2,958,226    (1.3)%   30.5%   34.4%
Total  $9,558,744    8,596,270    11.2%   100.0%   100.0%

 

Revenues totaled $9.56 million for the three months ended September 30, 2014, compared to $8.60 million for the three months ended September 30, 2013. The increase in total revenues resulted primarily from higher Cellular Retail Division revenue, which can be attributed to a higher number of units sold. For the Consumer Finance division, during the three-month periods ended September 30, 2014 and 2013, we originated approximately $17.90 million and $18.12 million in cash advance loans. Our average cash advance loan (including fees) totaled approximately $402 and $393 during the three-month periods ended September 30, 2014 and 2013, respectively. Our average fee for each of the three-month periods ended September 30, 2014 and 2013 was $58 and $57, respectively.

 

Store Expenses

 

The following table summarizes our store expenses for the three months ended September 30, 2014 and 2013, respectively:

 

   Three Months Ended
September 30,
       Three Months Ended September 30, 
   2014   2013   % Change Year Over Year   2014   2013 
               (percentage of revenues) 
Store Expenses:                         
Phone and accessories cost of sales  $2,839,494    2,553,880    11.2%   29.7%   29.7%
Salaries and benefits   2,038,741    1,958,872    4.1%   21.3%   22.8%
Occupancy   737,517    677,089    8.9%   7.7%   7.9%
Provisions for loan losses   514,762    575,355    (10.5)%   5.4%   6.7%
Advertising   91,164    88,995    2.4%   1.0%   1.0%
Depreciation   80,550    89,514    (10.0)%   0.8%   1.0%
Amortization of intangible assets   28,373    36,194    (21.6)%   0.3%   0.4%
Other   1,204,136    1,141,614    5.5%   12.6%   13.3%
   $7,534,737    7,121,513    5.8%   78.8%   82.8%

 

As the table above demonstrates, total expenses associated with store operations for the three months ended September 30, 2014 were $7.53 million, compared to $7.12 million for the three months ended September 30, 2013, representing a 5.8% increase over the prior period. The major components of these expenses are phone and accessories costs of sales, salaries and benefits for our store employees and occupancy costs relating to our store leaseholds. A discussion and analysis of the various components of our store expenses appears below.

 

Phone and Accessories Cost of Sales. For the three months ended September 30, 2014, our costs of sales were $2.84 million compared to $2.55 million for the same period in 2013. The increase in our Cellular Retail segment phone and accessory costs resulted primarily from an increase, albeit at a lower per-unit cost, in phone unit sales year over year.

 

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Salaries and Benefits. Payroll and related costs at the store level were $2.04 million compared to $1.96 million for the three-month periods ended September 30, 2014 and 2013, respectively. The increase in the current period is primarily attributed to slightly higher payroll in our newer Cricket storefronts compared to the lower volume storefronts that have since been closed and the additional pawn store location.

 

Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $.74 million for the three months ended September 30, 2014 versus $.68 million for the three months ended September 30, 2013.

 

Provisions for Loan Losses. For the three months ended September 30, 2014 and 2013, our provisions for loan losses were $.51 million and $.58 million, respectively. Our provisions for loan losses represented approximately 18.1% and 19.9% of our payday and installment loan revenue for the three months ended September 30, 2014 and 2013, respectively. We remain uncertain how significant our total 2014 loan losses may be and how they may differ from 2013.

 

Advertising. Advertising and marketing expenses were $.09 million for the three months ended September 30, 2014 and 2013.

 

Depreciation. Depreciation, primarily relating to store equipment and leasehold improvements, was $.08 million for the three months ended September 30, 2014 compared to $.09 million for the three months ended September 30, 2013.

 

Amortization of Intangible Assets. Amortization of intangible assets decreased to $.03 million for the three months ended September 30, 2014 from $.04 million for the three month period ended September 30, 2013.

 

Other Store Expenses. Other expenses increased to $1.20 million for the three months ended September 30, 2014 from $1.14 million for the three months ended September 30, 2013. This increase is attributable to increases in numerous store operating expenses, such as supplies, repair and maintenance, utilities and cost of pawn store merchandise sold.

 

General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the three months ended September 30, 2014 and 2013, respectively:

 

   Three Months Ended
September 30,
       Three Months Ended September 30, 
   2014   2013   % Change Year Over Year   2014   2013 
               (percentage of revenues) 
General & Administrative Expenses:                         
Salaries and benefits  $667,645    498,488    33.9%   7.0%   5.8%
Depreciation   6,600    7,200    (8.3)%   0.1%   0.1%
Interest expense   60,493    83,178    (27.3)%   0.6%   1.0%
Other expense   376,953    258,312    45.9%   3.9%   3.0%
   $1,111,691    847,178    31.2%   11.6%   9.9%

 

Total general and administrative costs for the three months ended September 30, 2014 were $1.11 million compared to $.84 million for the period ended September 30, 2013. For the three months ended September 30 2014 and 2013, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:

 

Salaries and Benefits. Salaries and benefits expenses for the three months ended September 30, 2014 were $.67 million, a $.17 million increase from the $.50 million expense during the period ended September 30, 2013. The increase is primarily due to the timing of the accrual for annual management bonuses current versus prior year.

 

Interest. Interest expense for each of the three months ended September 30, 2014 was $.06 million compared to $.08 million for the three months ended September 30, 2013.

 

Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, increased $.12 million to $.38 million for the three months ended September 30, 2014 compared to $.26 million from the three months ended September 30, 2013. The increase is due to transactional costs incurred in the current quarter.

 

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Income Tax Expense

 

Income tax expense for the three months ended September 30, 2014 was $.35 million compared to income tax expense of $.24 million for the three months ended September 30, 2013, an effective rate of 38% and 37%, respectively.

 

Results of Operations – Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

 

For the nine months ended September 30, 2014, net income was $1.14 million compared to $1.22 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, income from operations before income taxes was $1.82 million compared to $1.96 million for the nine months ended September 30, 2013. Compared to the prior year comparable nine-month period, throughout some point of the current quarter, we operated a similar number of retail storefronts. However, we did add higher-volume Cricket retail storefronts while closing lower-volume storefronts. The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.

 

A summary table of the number of stores operated during the nine-month periods ended September 30, 2014 and 2013 follows:

 

   Nine Months Ended September 30, 2014   Nine Months Ended September 30, 2013 
   Consumer Finance   Payday /
Pawn
   Pawn   Cellular Retail   Consumer Finance   Payday /
Pawn
   Pawn   Cellular Retail 
Beginning   50    1    1    57    51    1    -    57 
Acquired/Launched   (1)   1    -    6    -    -    1    12 
Closed   (1)   -    -    (5)   -    -    -    (9)
Ending   48    2    1    58    51    1    1    60 

 

Revenues

 

The following table summarizes our revenues for the nine months ended September 30, 2014 and 2013, respectively: 

 

   Nine Months Ended
September 30,
       Nine Months Ended
September 30,
 
   2014   2013   % Change Year Over Year   2014   2013 
               (percentage of revenues) 
                     
Retail sales, fees and commissions  $18,582,085    15,469,392    20.1%   69.3%   65.0%
Financing fees and interest   8,229,216    8,314,070    (1.0)%   30.7%   35.0%
Total  $26,811,301    23,783,462    12.7%   100.0%   100.0%

 

Revenues totaled $26.8 million for the nine months ended September 30, 2014, compared to $23.8 million for the nine months ended September 30, 2013. The increase in total revenues resulted primarily from higher Cellular Retail Division revenue, which can be attributed to a higher number of units sold. For the Consumer Finance division, during the nine-month periods ended September 30, 2014 and 2013, we originated approximately $50.36 million and $51.07 million in cash advance loans. Our average cash advance loan (including fees) totaled approximately $402 and $394 during the nine-month periods ended September 30, 2014 and 2013, respectively. Our average fee for the nine-month periods ended September 30, 2014 and 2013 was $58 and $57, respectively.

 

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Store Expenses

 

The following table summarizes our store expenses for the nine months ended September 30, 2014 and 2013, respectively:

 

   Nine Months Ended
September 30,
       Nine Months Ended
September 30,
 
   2014   2013   % Change Year Over Year   2014   2013 
               (percentage of revenues) 
Store Expenses:                         
Phone and accessories cost of sales  $8,435,300    6,980,858    20.8%   31.4%   29.3%
Salaries and benefits   6,191,448    5,468,861    13.2%   23.1%   23.0%
Occupancy   2,140,640    1,953,905    9.6%   8.0%   8.2%
Provisions for loan losses   1,268,330    1,320,546    (4.0)%   4.7%   5.6%
Advertising   260,831    261,713    (0.3)%   1.0%   1.1%
Depreciation   238,874    255,595    (6.5)%   0.9%   1.1%
Amortization of intangible assets   82,962    112,735    (26.4)%   0.3%   0.5%
Other   3,539,234    2,903,731    21.9%   13.2%   12.2%
   $22,157,619    19,257,944    15.1%   82.6%   81.0%

 

As the table above demonstrates, total expenses associated with store operations for the nine months ended September 30, 2014 were $22.16 million, compared to $19.26 million for the nine months ended September 30, 2013, representing a 15.1% increase over the prior period. The major components of these expenses are phone and accessories costs of sales, salaries and benefits for our store employees and occupancy costs relating to our store leaseholds. A discussion and analysis of the various components of our store expenses appears below.

 

Phone and Accessories Cost of Sales. For the nine months ended September 30, 2014, our costs of sales were $8.44 million compared to $6.98 million for the same period in 2013. The increase in our Cellular Retail segment phone and accessory costs resulted from an increase in phone unit sales year over year.

 

Salaries and Benefits. Payroll and related costs at the store level were $6.19 million compared to $5.47 million for the nine-month periods ended September 30, 2014 and 2013, respectively. The increase in the current period is attributed to our operation of higher volume Cricket storefronts and growth within our pawn store locations.

 

Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $2.14 million for the nine months ended September 30, 2014 versus $1.95 million for the nine months ended September 30, 2013.

 

Provisions for Loan Losses. For the nine months ended September 30, 2014 and 2013, our provisions for loan losses were $1.27 million and $1.32 million, respectively. Our provisions for loan losses represented approximately 15.9% and 16.3% of our payday and installment loan revenue for the nine months ended September 30 2014 and 2013, respectively. We remain uncertain how significant our total 2014 loan losses may be and how they may differ from 2013.

 

Advertising. Advertising and marketing expenses were $.26 million for both the nine months ended September 30, 2014 and 2013.

 

Depreciation. Depreciation, primarily relating to store equipment and leasehold improvements, was $.24 million for the nine months ended September 30, 2014 and $.26 million for the nine months ended September 30, 2013.

 

Amortization of Intangible Assets. Amortization of intangible assets decreased to $.08 million for the nine months ended September 30, 2014 from $.11 million for the nine month period ended September 30, 2013.

 

Other Store Expenses. Other expenses increased to $3.54 million for the nine months ended September 30, 2014 from $2.90 million for the nine months ended September 30, 2013. This increase is attributable to increases in numerous store operating expenses, such as supplies, repair and maintenance and utilities and an increase in cost of pawn store merchandise sold.

 

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General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2014 and 2013, respectively:

 

   Nine Months Ended
September 30,
       Nine Months Ended September 30, 
   2014   2013   % Change Year Over Year   2014   2013 
               (percentage of revenues) 
General & Administrative Expenses:                         
Salaries and benefits  $1,510,817    1,496,730    0.9%   5.7%   6.3%
Depreciation   19,770    20,028    (1.3)%   0.1%   0.1%
Interest expense   191,823    249,069    (23.0)%   0.7%   1.0%
Other expense   1,108,681    798,659    38.8%   4.1%   3.4%
   $2,831,091    2,564,486    10.4%   10.6%   10.8%

 

Total general and administrative costs for the nine months ended September 30, 2014 were $2.83 million compared to $2.56 million for the nine months ended September 30, 2013. For the nine months ended September 30 2014 and 2013, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:

 

Salaries and Benefits. Salaries and benefits expenses for the nine months ended September 30, 2014 were $1.51 million, compared to $1.50 million during the period ended September 30, 2013.

 

Interest. Interest expense for each of the nine months ended September 30, 2014 and 2013 was $.19 million and $.25 million, respectively.

 

Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, increased $.31 million to $1.11 million for the nine months ended September 30, 2014 compared to $.80 million from the nine months ended September 30, 2013. The increase is attributable primarily to non-recurring transactional expenses.

 

Income Tax Expense

 

Income tax expense for the nine months ended September 30, 2014 was $.69 million compared to income tax expense of $.74 million for the nine months ended September 30, 2013, an effective rate of 38% for each period.

 

Liquidity and Capital Resources

 

Summary cash flow data is as follows:

 

   Nine Months Ended September 30, 
   2014   2013 
         
Cash flows provided (used) by:          
Operating activities  $2,299,224   $1,043,163 
Investing activities   (461,106)   (419,104)
Financing activities   (750,388)   (632,990)
Net increase (decrease) in cash   1,087,730    (8,931)
Cash, beginning of period   1,983,835    2,246,619 
Cash, end of period  $3,071,565   $2,237,688 

 

At September 30, 2014, we had cash of $3.07 million compared to cash of $2.24 million on September 30, 2013. We believe that our available cash, combined with expected cash flows from operations, will be sufficient to fund our liquidity and capital expenditure requirements through September 30, 2015. Our expected short-term uses of available cash include the funding of operating activities (including anticipated increases in payday loans), the financing of expansion activities, including new store openings or store acquisitions, and the reduction of debt.

 

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Because of the constant threat of regulatory changes to the payday lending industry, we believe it will be difficult for us to obtain debt financing from traditional financial institutions. As a result, financing we may obtain from alternate sources is likely to involve higher interest rates.

 

Credit Facility

 

On October 18, 2011 (and later amended on December 7, 2012 and March 21, 2014), we entered in a borrowing arrangement with River City Equity, Inc. Under this arrangement as amended, we may borrow up to $3,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note contains no prepayment penalties matures June 30, 2015, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of our assets. As of September 30, 2014, $2 million was due under this arrangement.

 

Credit Facilities - AlphaGraphics

 

AlphaGraphics is a party to term and revolving notes payable with a financial institution. Under the term debt agreements, $4 million was outstanding at September 30, 2014. The notes accrue interest at prime rate plus 2.5% (5.75% as of September 30, 2014), require quarterly payments of $375,000 principal plus accrued interest and mature in June 2017. Under the revolving debt agreement as amended, AlphaGraphics may borrow up to $1,000,000, payable with interest at the higher of (a) prime rate plus 2.5% or (b) the LIBOR rate plus 5.5%. AlphaGraphics has not drawn on the revolving LOC as of September 30, 2014. The revolving note matures in August 2017. The notes payable are secured by all the assets of AlphaGraphics, Inc.

 

Off-Balance Sheet Arrangements

 

The Company had no off-balance sheet arrangements as of September 30, 2014.

 

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’s Internal 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 September 30, 2014, our Chief Executive Officer and Chief Financial Officer carried out an evaluation 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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of September 30, 2014.

 

Changes in Internal Control over Financial Reporting

 

We began documenting and evaluating the effectiveness of controls and procedures related to the AlphaGraphics subsidiary upon completion of the merger agreement. We will assess and incorporate the design and operating effectiveness of the disclosure controls and internal controls over financial reporting and changes in internal control over financial reporting in our Annual Report on Form 10-K for the fiscal year ending December 31, 2014.

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 5. Other Information

 

On November 13, 2014, the Company and Blackstreet Capital Management, LLC entered into an amendment to the Amended and Restated Management and Advisory Agreement dated June 21, 2012. The amendment will be effective as of October 1, 2014, and was entered into to document the limited waiver by Blackstreet Capital Management of advisory fees relating to the Company’s acquisition of the business of AlphaGraphics, Inc. and to provide certain clarifications to the manner in which the “EBITDA-Based Fee” is calculated under the Amended and Restated Management and Advisory Agreement.

 

Item 6. Exhibits  

 

Exhibit   Description
     
2.1   Agreement and Plan of Merger and Reorganization dated August 29, 2014 (incorporated by reference to exhibit 2.1 to the registrant’s Current Report on Form 8-K filed on September 5, 2014).
     
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  

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(filed herewith).

     
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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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 13, 2014 Western Capital Resources, Inc.
  (Registrant)
   
  By: /s/ John Quandahl
    John Quandahl
    Chief Executive Officer and Chief Operating Officer
     
  By: /s/ Stephen Irlbeck
    Stephen Irlbeck
    Chief Financial Officer

 

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