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EX-32 - EXHIBIT 32 - WESTERN CAPITAL RESOURCES, INC.g081935_ex32.htm
EX-31.2 - EXHIBIT 31.2 - WESTERN CAPITAL RESOURCES, INC.g081935_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - WESTERN CAPITAL RESOURCES, INC.g081935_ex31-1.htm
EX-21.1 - EXHIBIT 21.1 - WESTERN CAPITAL RESOURCES, INC.g081935_ex21-1.htm
EX-14 - EXHIBIT 14 - WESTERN CAPITAL RESOURCES, INC.g081935_ex14.htm
EX-10.4 - EXHIBIT 10.4 - WESTERN CAPITAL RESOURCES, INC.g081935_ex10-4.htm
EX-4.1 - EXHIBIT 4.1 - WESTERN CAPITAL RESOURCES, INC.g081935_ex4-1.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark One)

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

or

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ___________________

 

Commission File Number 000-52015

 

 

 

WESTERN CAPITAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

47-0848102

(State of incorporation)

(I.R.S. Employer Identification No.)

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

  Trading Symbol(s)  

 

Name of Each Exchange on which Registered

None

  N/A  

 

N/A

 

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $0.0001 per share

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes    No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes    No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days Yes    No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes    No

  

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 definition of “accelerated filer,” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    Accelerated filer    Non-accelerated filer   Smaller reporting company           Emerging Growth Company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No

 

The aggregate market value of the voting stock held by persons other than officers, directors and more than 5% shareholders of the registrant as of June 30, 2019 was approximately $11,057,000 based on the closing sales price of $3.75 per share as reported on the OTCQB.  As of March 30, 2020, there were 9,265,778 shares of our common stock, $0.0001 par value per share, outstanding.

 

DOCUMENTS INCORPORATED IN PART BY REFERENCE

 

None.

 

 

 

 

Western Capital Resources, Inc.
Form 10-K

 

Table of Contents

 

 

Page

PART I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

17

Item 2.

Properties

17

Item 3.

Legal Proceedings

17

Item 4.

Mine Safety Disclosures

17

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters

18

Item 6.

Selected Financial Data

19

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 8.

Financial Statements and Supplementary Data

27

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

28

Item 9A.

Controls and Procedures

28

Item 9B.

Other Information

29

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

30

Item 11.

Executive Compensation

32

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

33

Item 13.

Certain Relationships and Related Transactions and Director Independence

35

Item 14.

Principal Accountant Fees and Services

36

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

37

 

Signatures

39

 

 

 

 

PART I

 

ITEM 1    BUSINESS

 

OVERVIEW

 

Western Capital Resources, Inc. (“WCR” or “Western Capital”), a Delaware corporation originally incorporated in Minnesota in 2001 and reincorporated in Delaware in 2016, is a holding company having a controlling interest in subsidiaries operating in the following industries and operating segments:

 

 

 

Our “Cellular Retail” segment is comprised of an authorized Cricket Wireless dealer and involves the retail sale of cellular phones and accessories to consumers through our wholly owned subsidiary PQH Wireless, Inc. and its controlled but less than 100% owned subsidiaries.  Our “Direct to Consumer” segment consists of a wholly owned online and direct marketing distribution retailer of live plants, seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins and Wayside Gardens brand names and home improvement and restoration products operating as Van Dyke’s Restorers as well as a wholesaler under the Park Wholesale brand.  Our “Consumer Finance” segment consists of retail financial services conducted through our wholly owned subsidiaries Wyoming Financial Lenders, Inc. and Express Pawn, Inc.  Our investment holdings are included with WCR.  Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as “we,” the “Company,” and “us.”

 

RECENT EVENTS

 

Cellular Retail Segment

 

During 2019 we made many strategic changes to our portfolio of Wireless Retail locations.  We completed three joint venture transactions with other Cricket Wireless authorized retailers acquiring a total of 61 locations, sold 43 locations to other authorized retailers and purchased, launched or closed several others.  In total in 2019, we added 69 locations and sold or closed 52 locations, ending the year operating 222 locations compared to 205 in operation at the beginning of the year.

 

Consumer Finance Segment

 

The payday lending industry continues to suffer from the perception and widespread belief that payday lenders are by their nature, predatory lenders.  Consumer advocacy groups in many states are activity seeking state law changes which would effectively end the viability of a payday loan business, including Nebraska where we generate approximately 30% of our payday lending revenue or approximately 2% of our consolidated revenue.  If these groups are successful in Nebraska, we will likely cease payday lending activities in Nebraska.

 

Release of Escrow Funds

 

In October 2019, we received $3,367,940, the scheduled release of the remaining 50% of the funds held in escrow relating to the 2017 sale of our Franchise segment, together with interest earned. 

 

Common Stock Repurchases

 

During 2019, the Company repurchased 122,899 shares of its common Stock.  Repurchases were made in the open market and through privately negotiated transactions.

 

Acquisitions

 

We are actively searching for acquisition opportunities.  We are industry agnostic and target leaders in niche industries or geographies as well as opportunistic purchases of businesses that we believe we can improve operationally.  We have a particular interest in companies facing succession dilemmas, corporate divestitures and businesses in out-of-favor industries.  In addition, we seek to grow our subsidiaries through add-on acquisitions in the e-commerce, cellular retail and consumer finance segments.  Our overall strategy continues to focus on building a diversified portfolio of strong cash flow generating businesses.  Our financial strength, long-term view and operating expertise allow subsidiary companies to focus on growing and maximizing return on investment.  We expect to be patient and move upon what we believe to be the right investment opportunities.

 

1

 

CELLULAR RETAIL SEGMENT

 

General Description

 

We operate cellular retail stores as an authorized Cricket Wireless retailer, selling cellular phones and accessories, activating Cricket Wireless customers on the Cricket network, providing ancillary services and accepting service payments from Cricket customers.  As an authorized Cricket Wireless dealer, we are only permitted to sell the Cricket line of no-contract cellular phones and service at our Cricket retail stores.

 

We generate revenue in this business through retail sales of cellular phones, receipt of back-end compensation from Cricket, sales of phone accessories (e.g., cases, car chargers and bluetooth speakers), fees charged when a customer changes services (service activations and reactivations, adding lines, phone number changes, etc.), or whenever a customer whom we activated on the Cricket network pays his or her no-contract cellular bill.

 

A summary table of the number of cellular retail stores we operated during the periods ended December 31, 2019 and 2018 follows:

 

 

 

2019

 

 

2018

 

Beginning

 

 

205

 

 

 

278

 

Acquired / Launched / Managed

 

 

69

 

 

 

2

 

Closed

 

 

(52

)

 

 

(75

)

Ending

 

 

222

 

 

 

205

 

 

Market Information and Marketing

 

Cricket Wireless service offers customers simple, no-contract, predictable and affordable nationwide flat rate wireless plans. Cricket Wireless customers have the added advantage of unlimited minutes, text and data access on the AT&T network.

 

No-contract cellular products and services were historically targeted primarily only to market segments that were underserved by traditional communications companies requiring credit approval, a contractual commitment from the subscriber for a period of at least one year, and often included overage charges for minute and data usage in excess of a specified limit.  We believe that a large portion of the U.S. cellular market consists of customers who are price-sensitive and prefer not to enter into these fixed-term contracts.  We believe that the Cricket Wireless cellular retail product and service offerings we offer appeal strongly to both the underserved markets and the greater U.S. cellular market and believe we are positioned to benefit as a Cricket Wireless dealer.

 

Market Strategy

 

We believe that our business model is scalable and we can apply our operational protocols and administrative office functions to continue expanding our cellular retail business.  We will continue to evaluate strategic and opportunistic acquisitions of existing Cricket dealerships and will actively close, dispose or consolidate locations that do not meet our operating criteria in order to streamline operations.

 

Products and Services

 

Our authorized Cricket retail stores offer the following products and services:

 

 

Cricket Wireless service plans, each designed to attract customers by offering simple, predictable and affordable talk, text and high-speed data services that are a competitive alternative to traditional wireless and wireline services (e.g., flat-rate and unlimited talk/text plans, without fixed-term contracts, early termination fees or credit checks);

 

 

Cricket Wireless plan upgrades, such as Cricket International, individual country add-ons, Deezer (an independent music service on a no-contract basis), Cricket Protect and mobile hotspots; and

 

2

 

 

Cricket handsets and accessories.

 

When purchasing a phone, our customers have options among the latest in Apple, Samsung and other Android-based and Windows OS-based smartphones. Because there is no contract for the monthly service, customer phone purchases are paid in full at the time of purchase.

 

Seasonality

 

Our Cellular Retail segment operations are influenced by seasonal effects related to traditional retail selling periods and other factors affecting our customer base.  In particular, we generally expect sales activity to be highest in the first and fourth quarters.  Nevertheless, our revenues can be strongly affected by the launch of new markets, new or improved products such as release of the latest smartphone edition, promotional activity, the timing of federal tax-refunds and the actions of our competitors, any of which have the ability to offset or exacerbate the seasonality we normally experience.

 

Competition

 

There is substantial and ever-increasing competition in the wireless phone industry where customers can choose between many other postpaid and no-contract resellers, including AT&T, Verizon, Sprint/Boost Mobile, T-Mobile/Metro PCS and a larger number of regional providers.  We compete for customers based principally on Cricket’s service/device offerings, price, call quality and coverage area.

 

Competition for the no-contract customers is primarily among MetroPCS, Virgin Mobile and Boost Mobile, but also includes the traditional postpaid carriers that have introduced no-contract products.  There is also competition with other no-contract phone service providers such as Straight Talk by Wal-Mart or Wal-Mart’s Family Mobile powered by T-Mobile, an increase of national retailers offering similar or identical products and services that we provide, such as Cricket phones sold at Game Stop and Wal-Mart, and an increase in mobile virtual network operator (“MVNO”) offerings. 

 

Our Cricket store business also competes with other current or potential authorized Cricket Wireless dealers and direct-to-consumer sales through the Cricket Wireless website.  The authorization to sell Cricket products and services is granted by Cricket Wireless, LLC, a wholly owned subsidiary of AT&T.  Our ability to compete with other sellers of Cricket products and services will depend on the success with which we operate our stores and the attractiveness of their locations.

 

DIRECT TO CONSUMER SEGMENT

 

General Description

 

Our direct to consumer segment is a direct marketer of roses, plants, seeds, holiday gifts and home restoration products. The business is composed of: 1) a multi-channel retailer of garden and living gift products; 2) a wholesale seed business; and 3) a multi-channel retailer of home hardware and restoration products.  Our garden products brands are highly recognizable in the rose and garden space as both the Jackson & Perkins and Park Seed brands were founded more than 149 years ago.

 

Products and Services

 

Our direct to consumer segment sells product through catalogs and online under the following brands:

 

Jackson & Perkins, approximately 150 years of history and is the most recognized brand of premium garden roses.  Jackson and Perkins is one of the largest direct to consumer retailers of bare root roses in the United States, selling over 150 active varieties of bare root roses, of which 87 varieties are patented by Jackson and Perkins.  In addition to bare root roses, we sell perennials, flower bulbs, outdoor living products as well as living holiday gifts plants.  Holiday gifts include fresh evergreen wreathes, live decorative Christmas trees and holiday amaryllis.

Park Seed, over 150 years in the business and one of America’s oldest and largest direct to consumer seed retailers.  As a leader within the direct to consumer seed business, Park Seed sells over 2,500 premium vegetable and flower seed varieties, as well as various gardening supplies.  The wholesale seed business sells seeds, plants and other horticultural products in larger quantities to small-medium sized growers, nurseries and garden centers.  Plants and seeds sales are concentrated during the spring months.

Wayside Gardens, sells unique, hard to find high-end flowers, plants and gardening supplies to the master gardener.  The Wayside Gardens customer is extremely selective, very knowledgeable, and seeks high quality plants.  Approximately 60% of sales occur in the three months from March to May, during the spring planting season.

 

3

 

 

  Van Dyke’s, an online and catalog retailer with a vast assortment of vintage home restoration wood products, hardware and antique furniture, many of which are hard to find. Van Dyke’s focus is on hardware, decorative wood, home accents, knobs and pulls and kitchen, bath and other décor.

 

Seasonality

 

Demand for live goods and holiday products is cyclical in nature, sensitive to seasonal growing patterns, general weather conditions, holiday sales patterns and competitive influences.  As such, the direct to consumer segment’s results of

 

operations, financial condition and cash flows could fluctuate significantly from period to period.  The majority of segment revenue is derived in three selling periods, spring, fall, and the December holiday season, while the summer season accounts for a small portion of sales. 

 

Market Strategy

 

As a direct to consumer retailer, we focus our marketing spending on mail order catalogs, internet advertising, and traditional advertising mediums (i.e., public relations, magazines, social media, etc.).  We are focused on niche markets and direct our advertising to repeat and new customers through internet marketing strategies.

 

Competition

 

In the retail garden business, within the bare root rose category, we compete against brick and mortar garden centers and nurseries (approximately 10,000 across the United States), as well as other online and mail-order retailers, including David Austin Roses and Regan Nursery.  Across other plant categories, we compete against Gardens Alive and their portfolio of brands, and other competitors. Our biggest competitive advantages are our recognizable Jackson & Perkins brand name proprietary patented rose varieties and exclusive garden seed products. The most direct competitor for Wayside Gardens is White Flower Farms, which also focuses on high-end, premium plants.

 

Within the holiday gift segment, we compete against larger competitors including Harry and David and 1-800 Flowers, among others. Within the seed business, our primary competitor is Burpee which, in addition to having an online presence, supplies lower-end seed products to mass market retailers, including Wal-Mart. 

 

Our Van Dyke’s Restorers brand competes primarily with other online retailers since brick and mortar stores cannot afford to carry Van Dyke’s breadth of SKUs. Our competitors are Signature Hardware, House of Antique Hardware, and Rejuvenation Hardware (part of Williams Sonoma). The above-mentioned competitors compete primarily in the hardware, lighting and kitchen and bath categories. The decorative wood portion of the Van Dyke’s business is in a very fragmented industry niche and there are no big decorative wood competitors. Van Dyke’s competes primarily through the breadth of its product variety as well as through its established brand name and customer list.

 

CONSUMER FINANCE SEGMENT

 

General Description

 

The majority of short-term consumer loans we provide are commonly referred to as “payday loans” or “cash advance” loans.  Such loans are referred to as “payday loans” because they are typically made to borrowers who have no available cash and promise to repay the loan out of their next paycheck.  We also provide short-term installment and pawn loans as part of this operating segment.

 

We provide short-term consumer loans in amounts that typically range from $100 to $500 with the average loan amount, including fee, being approximately $432. 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. Approximately 91% and 89% of our lending revenue (comprised of payday loan fees and installment and pawn loan interest and fees) in the Consumer Finance segment was derived from payday lending in 2019 and 2018, respectively.  Payday lending revenue made up approximately 76% and 74% of our total revenue (comprised of lending revenue, check cashing fees, pawn fees and miscellaneous other revenue) in the Consumer Finance segment in 2019 and 2018, respectively.

 

4

 

We currently offer short-term installment loans only in Wisconsin but also offered short-term installment loans in Colorado until February 2019. Approximately 3% and 6% of our total revenue in the Consumer Finance segment was derived from installment lending in 2019 and 2018, respectively. We provide our installment loan customers with cash in exchange for a promissory note with a maturity of generally six months. The fee and interest rate on installment loans vary based on applicable regulations.  Like cash advance or payday loans, installment loans are unsecured.

 

We operate three pawn stores in our Consumer Finance segment.  Our pawn stores provide collateralized non-recourse loans, commonly known as “pawn loans” with maturities of one to four months.  Allowable service charges vary by state and loan size. The loan amount varies depending on our valuation of each item pawned.  We generally lend from 30% to 55% of our estimate of the collateral’s resale value.  Customers have the option to redeem the pawned merchandise during the term or at maturity, or else forfeit the merchandise to us on maturity. At our pawn stores we sell merchandise that was acquired through either customer forfeiture of pawn collateral, second-hand merchandise purchased from customers or consigned to us, or new merchandise purchased from vendors.  Pawn store revenues made up approximately 17% of our total revenue in the Consumer Finance segment in 2019 and 2018.

 

All of our Consumer Finance lending activities and other services are subject to state regulations (which vary from state to state), federal regulations and local regulations, where applicable.

 

As part of each payday and installment loan transaction, we enter into a standardized written promissory note with the borrowing customer and obtain proof of income and identity, a personal post-dated check for the principal loan amount plus a specified fee if a payday loan, and other documentation.  Our standardized contracts vary based on state laws, but all of our contracts plainly state in simple terms the annual percentage rate (assuming the fees we charge are computed as interest) in compliance with Regulation Z, the borrower’s right to rescind the transaction, a dispute-resolution clause, a notice of financial privacy rights, an affirmative representation about whether the borrower is a member of the U.S. military, and the consequences of defaulting on the loan.  We retain copies of our written contracts and provide a signed copy to our customers.

 

In general, our lending process and standards are extraordinarily different from those used by banks.  To our knowledge, banks typically order and carefully review credit reports on all loans, engage in extensive underwriting analysis, and will typically make independent verification of earnings history through phone calls, reviews of tax returns and other processes.  As a result, we generally experience a higher default rate on our personal loans than banks do on their personal loans (see caption below, “Risks Associated with Our Loans—Default and Collection”).  At December 31, 2019, we had an aggregate (of all loan types) of approximately:

 

 

$3.70 million in current outstanding loan principal, fees and interest due to us; and

 

$0.83 million of late loans (customers’ repayment checks deposited and returned as NSF within the last 180 days or installment loan balances not past the final installment due date with one or more payments delinquent).

 

A summary table of the number of Consumer Finance locations operated during the periods ended December 31, 2019 and 2018 follows:

 

   2019   2018 
Beginning   41    41 
Acquired / Launched        
Closed   (2)    
Ending   39    41 

 

The Fees We Charge

 

The fee we charge for a payday loan 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.  We do not charge interest in connection with our payday loans but do charge interest and fees where allowable on our short-term installment loans made in Wisconsin.  If, however, we calculate the loan fees we charge as an annual percentage rate of interest (“APR”), such rate would range from 177% for a 31-day loan transacted in Kansas (on the low end) to approximately 536% for a 14-day loan in Wyoming (on the high end), with the actual average loan amount and average actual loan fees we charge involving an imputed annual percentage rate of approximately 439% and 198% for a 14-day and 31-day loan, respectively.  The term of a loan significantly affects the imputed APR of the fees we charge for our loans.  For instance, when a $15 fee is charged for a two-week loan of $100, the resulting APR is 391%.  When the same fee on $100 is charged for a four-week loan, the resulting APR is 195%.  Currently, we do not charge the maximum fee permitted in all of the states where we operate.  We do, however, charge a uniform fee for all transactions processed in any particular state that involve the same range of payday loan amounts and the same term. 

 

5

 

Of the six states in which we presently operate, only one state (Wisconsin) does not limit the loan fees we may charge or the term (i.e., the length) of the loan we may offer our customers.

 

In Wisconsin, we generally offer short-term installment loans in amounts from $300 to $750 payable in six equal monthly payments. Wisconsin installment loans are payable over four to six months at an annual percentage rate of approximately 480%.

 

We also offer pawn loans in Nebraska and Iowa.  Allowable service charges for pawn loans vary by state and loan size. Our pawn loans earn 20% per month for loans under $1,000 and our average pawn loan amount typically ranges between $10 and $250, although may range as high as $5,000.  The loan amount varies depending on our estimated value of each item pawned.

 

Many states have laws limiting the amount of fees that may be charged in connection with any lending transaction (including payday and pawn lending transactions) when calculated as an APR, and some states expressly prohibit payday lending.  These limitations, combined with other limitations and restrictions, effectively prohibit us from utilizing our present business model for cash advance or “payday” lending in those jurisdictions. In addition, the federal “2007 Military Authorization Act” prohibits lenders from offering or making payday loans (or similar lending transactions) to members of the U.S. military when the interest or fees exceed a 36% APR.  Like the state limitations discussed above, this limitation effectively prohibits us from providing our cash advance or “payday” lending to members of the U.S. military. As a result of these restrictions, we do not conduct business with U.S. military personnel.

 

The above-described payday fees are the only fees we assess and collect from our customers for payday loans.  Nevertheless, we also charge a flat fee that ranges from $15 to $40 (depending on the state) for returned checks in the event that a post-dated check we attempt to cash as repayment for our loan is returned.

 

Extensions or “Rollovers” of Payday Loans

 

Most states prohibit payday lenders from extending or refinancing a payday loan.  Nevertheless, one state in which we presently provide payday loans (North Dakota) permits a loan to be extended or “rolled over” once.

 

When a customer “rolls over” or extends the term of an outstanding loan, when permitted by state law, we treat that rollover or extension as a brand new loan and we again charge the above-described loan fee for that transaction.  This rollover has no effect on the imputed APR of the loan in those cases where the extended term is equal to the initial term of the loan.  For example, a $100 four-week loan that costs $20 to obtain is the APR equivalent of 261%.  If a customer extends the term of that loan for an additional four-week period, the customer will have paid $40 total in fees to obtain the $100 eight-week loan—which is again the APR equivalent of 261%.  In cases where a customer (1) extends or rolls over a loan for a length of time that is less than the original loan or (2) repays the extended loan prior to the expiration of the fully extended term, the imputed APR will increase.  For example, if a customer who obtained an initial $100 four-week loan for $20 in loan fees (the APR equivalent of 261%) later extends the term of that loan for only two additional weeks and pays the additional $20 loan fee, that customer will have borrowed $100 for a six-week period at a total cost of $40—which is the APR equivalent of 347%.  We do not charge any interest on the unpaid fee from the initial term of the loan because, as a condition to agreeing to a loan extension, we will only accept cash payment of the fee for extending the loan. 

 

Risks Associated With Our Loans—Default and Collection

 

Ordinarily, our customers approach us for a loan because they currently have insufficient funds to meet their present obligations, and so rarely if ever do our customers have sufficient funds in their checking accounts to cover the personal post-dated checks they provide us at the time of the loan transaction.  The nature of our payday loan transactions presents a number of risks, including the ultimate risk that the loan will not be paid back.  In addition, we do not obtain security for our payday loans principally because, even assuming our customers would have potential collateral to offer as security for a payday loan, the small size of each particular lending transaction does not justify the time, effort and expense of identifying the collateral and properly obtaining a security interest in such collateral.  As a consequence, all of our payday loans are unsecured.  This means that, absent court or other legal action compelling a customer to repay our loans, we rely principally on the willingness and ability of our customers to repay amounts they owe us.  In this regard, in many cases the costs of merely attempting to collect the amounts owed to us exceed the amounts we would seek to collect—making it impractical to take formal legal action against a defaulted borrower.

 

6

 

When a customer defaults on a loan, we engage in collection practices that include contacting the customer for repayment and the customer’s bank to determine whether funds are available to satisfy their personal post-dated check.  If funds are available, we present the check to the bank for repayment and an official check from the bank is obtained to pay off the item.  The costs involved in these initial collection efforts are minimal and involve some employee time and possibly a flat $15-30 bank fee to cover the cost of the cashier’s check.  If funds are not available, we generally attempt to collect returned checks for up to 90 days (or up to 180 days in cases where a bank account is still active and the customer has not initiated a stop payment on the postdated check provided), principally through continued attempts to contact the customer.  If our attempts remain unsuccessful after 90 (or 180) days, we generally assign the item to a collection agency.  Assignment to a collection agency may cost us 30-40% of the amount eventually collected (if any) from the customer.  Ordinarily, we do not recoup any costs of collection from our customers.

 

Historically, we collect approximately 60% of the amount of all returned checks, which results in approximately 2.56% of our total payday loan principal and fee volume being uncollectible.  In 2019, we generated approximately 126,000 payday loan transactions.

 

Industry Information

 

According to a December 2017 study by the Center for Financial Services Innovation (“2017 Financially Underserved Market Size Study”) consumers spent approximately $3.2 billion on fees for single payment loan products from storefront payday lenders in 2016, compared to $3.6 million in 2015.  This year over year decline continues a trend that is expected to continue going forward.  According to the Community Financial Services Association of America (“CFSA”) website, industry analysts estimate that 19 million U.S. households use short-term payday advances and estimate that there are 20,600 payday advance locations across the United States, which extend approximately $38.5 billion in short-term credit to households experiencing cash-flow shortfalls.  In addition to being a valuable source of credit for many consumers, the payday loan industry makes significant contributions to the U.S. and state economies employing more than 50,000 Americans who earn $2 billion in wages and generating more than $2.6 billion in federal, state, and local taxes.  Industry trends indicate that there will likely be a net decrease in total payday lending stores over the next few years due to store closings resulting from a combination of regulatory or legal changes, regulatory pressures, a slowdown in new store growth, and general economic conditions.

 

Predatory Lending and Regulatory Concerns

 

In general, the payday lending industry suffers from the perception and widespread belief that payday lenders are by their nature, predatory lenders, offering loans to low income and poorly educated consumers at costs that are too high to be good for consumers.  This perception and belief results in frequent efforts in the U.S. Congress and various state legislatures, often proposed by consumer advocacy groups and lobbyists for traditional financial institutions such as banks, to further regulate and restrict or prohibit payday lending outright.  See “Item 1A – Risk Factors” for further information regarding regulatory risks.

 

We do not believe the payday lending is predatory, nor do we believe that our loans are too costly for consumers if they are judiciously obtained.  In fact, we believe that bank overdraft fees by themselves are typically far more costly for consumers, and bouncing a check can often involve other negative consequences such as independent fees levied by the parties to whom a bad check is written, negative publicity, etc.  In this regard, the FDIC released a November 2008 report called “Study of Bank Overdraft Programs.”  The report indicates that the average amount obtained when bank customers overdraw their accounts is $60, and the average overdraft fee charged by the bank is $27.  This equates to an APR of 1,173% and 587% for a two-week and four-week $60 bank “loan,” respectively.  In sum, we believe that many of the bad perceptions about our industry are fueled primarily by:

 

 

the effects of our loans on consumers who do not judiciously obtain payday loans;

 

a lack of genuine understanding about the choices faced by low and middle-income people facing a critical cash shortage; and

 

anti-payday lending lobbying campaigns, often funded by traditional financial institutions such as banks and credit unions that would economically benefit from the elimination of payday lending.

 

Seasonality

 

Our Consumer Finance segment results are subject to seasonality, 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.

 

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Competition

 

Like most other payday lenders, we believe that the primary competitive factors in our business are location and customer service.  We face intense competition in an industry with relatively low barriers to entry, and we believe that the payday lending markets are becoming more competitive as the industry matures and consolidates.  We compete with other payday lending and check cashing stores, and with financial service entities and retail businesses that offer payday loans or similar financial services.  For example, we consider credit card companies that offer payday features, credit unions, banks that offer small loans, and creditors and loan services that can extend payment terms on outstanding loans to be our competitors.  In addition, we compete in part with services offered by traditional financial institutions, most particularly with respect to the “overdraft protection” services those institutions may offer and the charges they levy for checks written with insufficient funds.

 

Additional areas of competition have arisen.  Businesses offer loans over the Internet as well as “loans by phone,” and these services compete with the services we offer.  There also has been increasing penetration of electronic banking and related services into the check cashing and money transfer industry, including direct deposit of payroll checks, payroll or debit cards, stored-value cards, prepaid credit and debit cards, and electronic transfer of government benefits.

 

We also believe that customer service is critical to developing loyalty.  In our industry, we believe that quality customer service means:

 

 

assisting with the loan application process and helping our customers understand the loan terms;

 

treating customers respectfully; and

 

processing transactions with accuracy, efficiency and speed.

 

Our competitors for pawn store merchandise sales include numerous retail and wholesale stores, including jewelry stores, discount retail stores, consumer electronics stores, other pawn stores, other resale stores, electronic commerce retailers and auction sites.

 

The pawn industry in the United States is large and highly fragmented. The industry consists of approximately 13,000 pawn stores owned primarily by independent operators who own one to three locations.  We consider the industry relatively mature. The three largest pawn store operators account for approximately 10% of the total estimated pawn stores in the United States.

 

Effect of General Economic Conditions on our Consumer Finance Segment

 

Our business has experienced fluctuating changes in our provision for loan losses in recent years.  For example, our provision for loan losses as a percentage of payday, installment and pawn loan revenue was 11.5%, 13.9%, and 12.3% in 2019, 2018, and 2017, respectively.  We are uncertain how the current economic conditions will affect demand for our services or our loan losses after 2019.

 

Credit and financing available to us and our industry has been negatively impacted by recent federal and state legislation and regulation, including the overall negative perception associated with payday lending.  For example, we are aware of federal and state regulatory pressures being exerted on our banking relationships due to the negative perception about payday lending.  For more information, see “Regulation - Regulation of Consumer Financing Activities” below.

 

REGULATION

 

We are subject to regulation by federal, state and local governments that affect the products and services we provide. Generally, these regulations are designed to protect consumers who use our services and are not designed to protect our shareholders.

 

Regulation of Consumer Financing Activities

 

In those states where we currently operate consumer finance activities, we are licensed as a payday lender or pawn broker where required and are subject to various state regulations regarding the terms and conditions of our payday, installment and pawn loans and our lending policies, procedures and operations.  In some states, payday lending is referred to as “deferred presentment,” “cash advance loans,” “deferred deposit loans” or “consumer installment loans.”  State regulations normally limit the amount that we may lend to any single consumer and may limit the number of loans that we may make to any consumer at one time or in the course of a single year.  State regulations also limit the amount of fees that we may assess in connection with any loan transaction and may limit a customer’s ability to extend or “rollover” a loan with us.  Often, state regulations also specify minimum and maximum maturity dates for payday loans and, in some cases, specify mandatory cooling-off periods between transactions. 

 

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Our payday lending practices must also comply with the disclosure requirements of the Federal Truth-In-Lending Act and Regulation Z under that Act.  Our collection activities for delinquent loans are generally subject to consumer protection laws regulating debt-collection practices.  Finally, our payday lending business subjects us to the Equal Credit Opportunity Act and the Gramm-Leach-Bliley Act.

 

During the last few years, legislation has been introduced and passed in the U.S. Congress and in certain state legislatures proposing or effecting various restrictions or an outright prohibition on payday or certain installment lending.  Currently, state laws in Arizona, Colorado, Montana, Oregon, South Dakota and Georgia have effectively eliminated the ability to conduct payday and certain installment lending in those states.  In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which consolidated most federal regulation of financial services offered to consumers, and replaced the Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers, including mortgage lenders, providers of payday loans, other nonbank financial companies, and banks and credit unions with assets over $10 billion, are subject to regulations and oversight by the Consumer Financial Protection Bureau (“CFPB”).  While the CFPB does not have authority to make rules limiting interest rates or fees charged, the scope and extent of its authority is broad enough to impose limits on rollovers and extensions of payday loans, as well as compliance with federal rules and regulations. 

 

After several years of research, debate, and public hearings, in October 2017 the CFPB issued new rules for payday lending.  The proposed rules, originally scheduled to go into effect in August 2019, would impose significant restrictions on the industry, and it is expected that a large number of lenders would be forced to close their stores.  The CFPB’s studies projected a reduction in the number of lenders by 50%, while industry studies forecast a much higher attrition rate.  Included in the new rules are requirements for vetting borrowers (i.e., obtaining a credit report and performing basic underwriting procedures), limits on the number of loans a consumer could obtain in a 12-month period, limiting to two the number of times a consumer’s check may be presented to the consumer’s bank for payment, and provisions requiring paydowns by the consumer on successive loans.  However, in January 2018, the CFPB issued a statement that it intends to “reconsider” the regulation.  The most current information from the CFPB website states the proposals it is considering includes rescinding the mandatory underwriting provisions contained in the rule and to delay the August 19, 2019 compliance date for the other provisions to November 19, 2020.  At this time it is uncertain whether the rule will be implemented as announced, rewritten with more favorable terms for the industry, or thrown out altogether.  If the rule is implemented as written, it could have a significant and negative impact on business conducted within our Consumer Finance segment.

 

In addition, our Consumer Finance segment activities are subject to the following federal consumer laws, regulations and CFPB guidance:

 

 

Unfair, Deceptive or Abusive Acts or Practices (“UDAAP”)

 

Fair Debt Collections Practice Act (“FDCPA”)

 

Consumer Complaint Management

 

Electronic Fund Transfer Act (“EFTA”) (Reg. E)

 

Fair Credit Reporting Act (“FCRA”)

 

Service Members Civil Relief Act

 

For more information, see “PAYDAY LENDING BUSINESS—Predatory Lending and Regulatory Concerns” above.

 

Financial Reporting Regulation

 

Regulations promulgated by the United States Department of the Treasury under the Bank Secrecy Act require us to report all transactions involving currency in an amount greater than $10,000.  Generally, every financial institution must report each deposit, withdrawal, exchange of currency or other payment or transfer that involves an amount greater than $10,000.  In addition, multiple currency transactions must be treated as a single transaction if we have knowledge that the transactions are by or on behalf of any one person and result, in a single business day, in the transfer of cash in or out totaling more than $10,000.  In addition, the regulations require us to maintain information concerning sales of monetary instruments for cash in amounts from $3,000 to $10,000.  The Bank Secrecy Act requires us, under certain circumstances, to file a suspicious activity report.

 

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The Money Laundering Suppression Act of 1994 requires us, as a money service business (“MSB”), to register with the United States Department of the Treasury.  MSBs include check cashers and sellers of money orders.  MSBs must renew their registrations every two years, maintain a list of their agents, update the agent list annually, and make the agent list available for examination.

 

Finally, we have established various procedures designed to comply, and we continue to monitor and evaluate our business methods and procedures to ensure compliance, with the USA PATRIOT Act.

 

Privacy Regulation

 

We are subject to a variety of federal and state laws and regulations restricting the use and seeking to protect the confidentiality of customer identity and other personal nonpublic customer information.  We have identified our systems that capture and maintain nonpublic personal information, as that term is understood under the Gramm-Leach-Bliley Act and associated regulations.  We disclose our public information policies to our customers as required by that law.  We also have systems in place intended to safeguard this information as required by the Gramm-Leach-Bliley Act, which specifically governs certain aspects of our payday lending business.

 

TECHNOLOGY AND INFORMATION

 

We maintain an integrated system of retail points of sale and management software applications and platforms for processing the various types of financial transactions we offer.  These systems provide us with customer service, internal control mechanisms, record-keeping and reporting information.  These systems are designed to provide summary, detailed and exception information to various levels of management.

 

SECURITY

 

We believe the principal security risks to our Consumer Finance and Cellular Retail segments are robbery and employee theft.  We have established extensive security and management information systems to address both areas of potential loss.  To protect against robbery, most payday lending store employees work behind bullet-resistant glass, and the back office, safe and computer areas are locked and closed to customers.  Security measures utilized in our retail locations include mechanical safes, electronic alarm systems monitored by third parties or remote controlled systems, control over entry to customer service representative, motion detection devices, locked cases, and, at times, the use of professional security services.  Consumer Finance segment employees also use cellular phones to ensure safety and security whenever they are outside secured areas. 

 

We implemented critical safeguarding controls, including daily cash and deposit monitoring, unannounced audits of cash and inventory items, and requiring immediate responses from our staff when irregularities in cash balances are discovered.  We primarily self-insure for employee theft and dishonesty at the store level.

 

We regularly receive and store information about our customers, vendors and other third parties. We have programs in place to detect, contain, and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our team members, contractors, and vendors.

 

EMPLOYEES

 

At December 31, 2019, we had approximately 980 employees.  We believe our relationship with our employees is good, and we have not suffered any work stoppages or labor disputes.  We do not have any employees that operate under collective-bargaining agreements.

 

CORPORATE INFORMATION

 

Our principal offices are located at 11550 “I” Street, Suite 150, Omaha, Nebraska 68137, our telephone number at that office is (402) 551-8888 and our internet website is https://www.westerncapitalresources.com.

 

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Our fiscal year ends December 31.  Neither we nor any of our predecessors have been in bankruptcy, receivership or any similar proceeding.

 

ITEM 1A    RISK FACTORS

 

You should consider the following risk factors, in addition to the other information presented or incorporated by reference into this Annual Report on Form 10-K, in evaluating our business and your investment in us.

 

Investment Risks

 

Acquisitions and strategic investments may fail to meet our expectations, and any such failure could have a negative impact on our results of operation or financial condition, and could ultimately result in dilution to our shareholders.

 

Our long-term growth strategy includes acquisitions. We may not successfully execute this strategy.  An acquisition strategy includes numerous risks, including, among others, the risk that our financial projections relating to our acquisitions may turn out to be incorrect and our investment may fail to positively impact our results and growth as anticipated (and may in fact negatively impact our results), the risk of unexpected or unidentified issues not discovered in the due diligence process which could harm our financial condition, risks related to our ability to successfully integrate an acquisition target into the Company, and the need for substantial additional capital which may result in dilution to our shareholders.

 

Acquisitions and strategic investments made wholly or partly on the basis of our issuance of securities to the target companies, or acquisitions made with cash that is obtained from outside investors or lenders, will result in dilution to our shareholders.

 

The structuring of future acquisitions, whether through share exchanges, merger acquisitions or otherwise, may result in dilution to existing shareholders.  In addition, cash-based transactions may not be financed from corporate cash flows and reserves, and may themselves be financed through borrowing arrangements or the sale of equity or equity-linked securities, the latter of which would be dilutive to our shareholders.

 

Acquisitions and strategic investments may be disruptive to our business.

 

The time and expense associated with finding suitable acquisitions or with integrating acquired entities and operations with our Company can be disruptive to our ongoing business and divert our management’s attention.  In addition, the financing of acquisitions may impact our ability to obtain or renew financing for existing operations, or subject us to covenants restricting certain activities.  Any of these outcomes could have a short- or long-term adverse effect on our results of operation and our ability to further execute our acquisition strategy.

 

Unpredictability in financing and other markets could impair our ability to grow our business through acquisitions

 

We anticipate that opportunities to acquire businesses will materially depend on the availability of financing alternatives with acceptable terms as well as acceptable market valuations of prospective acquisitions.  As a result, poor credit and other market conditions, mergers and acquisitions market valuations, any uncertainty in the financing markets, or the adverse regulatory pressures of being involved in the payday lending business in particular, could materially limit our ability to grow through acquisitions since such conditions and uncertainty make obtaining financing and finding attractive opportunities more difficult and more expensive.

 

Our controlling shareholder possesses controlling voting power with respect to our common stock, which will limit other shareholders’ influence on corporate matters.

 

Our controlling shareholders, WCR, LLC and BC Alpha Holdings I, LLC, which are under common control (see Item 12), had beneficial ownership of approximately 60.42% of our common stock as of March 20, 2020.  As a result, the controlling shareholders have the ability to outright control our affairs through the election and removal of our entire Board of Directors and all other matters requiring shareholder approval, including a future merger or consolidation of the Company, or a sale of all or substantially all of our assets.  This concentrated control limits the Company’s public float and could discourage others from initiating any such potential merger, consolidation or sale or other change-of-control transaction that may otherwise be beneficial to our shareholders.  Furthermore, this concentrated control will limit the practical effect of your participation in Company matters, through shareholder votes and otherwise.

 

We are subject to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus that recently originated in China.

 

We are exposed to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus that recently originated in China (COVID-19). COVID-19 may have an adverse impact on our operations, supply chains and distribution systems and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. Due to these impacts and measures, we may experience significant and unpredictable reductions or increases in demand for certain of our products and services. In addition to existing travel restrictions, the United States, states or municipalities may impose prolonged quarantines or further restrict travel, which may significantly impact the ability of our employees to get to their places of work, or may significantly hamper our products from moving through the supply and distribution chains. As a result, given the rapid and evolving nature of the virus, COVID-19 could negatively affect our sales, and it is uncertain how COVID-19 will affect our operations generally if these impacts persist or exacerbate over an extended period of time. Any of these impacts could have a material adverse effect on our business, financial condition and results of operations.

 

 

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Our certificate of incorporation grants our Board of Directors the power to issue additional shares of common and preferred stock and to designate other classes of preferred stock, all without shareholder approval.

 

Our authorized capital consists of 12.5 million shares of capital stock.  Pursuant to authority granted by our certificate of incorporation, our Board of Directors, without any action by our shareholders, may designate and issue shares in such classes or series (including other classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights, provided they are consistent with Delaware law.  The rights of holders of other classes or series of stock that may be issued could be superior to the rights of holders of our common shares.  The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore, any issuances of additional stock (common or preferred) will dilute the percentage of ownership interest of then-current holders of our capital stock and may dilute our book value per share.

 

Our common stock trades only in an illiquid trading market.

 

Trading of our common stock is conducted on the OTCQB, a tier of the OTC Markets (symbol: WCRS).  This has an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us and our common stock.  This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.

 

There is not now and there may not ever be an active market for shares of our common stock.

 

In general, there has been minimal trading volume in our common stock.  During 2019, the average daily trading volume  was under 1,500 shares.  The small trading volume will likely make it difficult for our shareholders to sell their shares as and when they choose.  Furthermore, small trading volumes are generally understood to depress market prices.  As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.

 

Failure to achieve and maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely affect our business and stock price.

 

Effective internal controls are necessary for us to provide reliable financial reports.  Nevertheless, all internal control systems, no matter how well designed, have inherent limitations.  Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  As we continue executing on our acquisition strategy, our fraud risks will change and likely increase as the acquired entity may be unfamiliar or uncooperative with proper internal controls and procedures.  Our inability to maintain an effective control environment may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our stock price.

 

Our reliance on information management and transaction systems to operate our business exposes us to potential security breaches of our sensitive information from cyber incidents and hacking. 

 

Effective information security internal controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure.  Despite our efforts to maintain the highest level of security around our information systems, the sophistication of hackers continues to increase.  Our inability to maintain effective controls or utilization of information technology providers that also maintain effective controls may increase our vulnerability to cyber-attacks. Breaches of our information management systems could adversely affect our business reputation.  We could also be subject to lawsuits or fines relating to the unauthorized disclosure of information.  Any of these outcomes could negatively affect our results of operations and the price of our common stock.

 

Any disruption in the availability of our information systems could adversely affect our operations.

 

We rely upon our information systems to manage and operate our business.  Our security measures could fail to prevent a disruption in the availability of our information systems, our back-up systems could fail to operate properly, or we may experience denial of service attacks or corruption of our data.  Any disruption in the availability of our information systems could adversely affect our results of operations by impairing our ability to efficiently effect transactions.

 

12

 

A significant portion of our assets consists of goodwill and other intangible assets.

 

As of December 31, 2019, 10.7% of our assets consisted of goodwill and other intangible assets. Under generally accepted accounting principles, the carrying value of goodwill is subject to periodic review and testing to determine if it is impaired.  The value of our assets will depend on market conditions, regulatory environment, the availability of buyers and similar factors. While the value of these assets is based on management projections and assumptions and is determined by using the discounted cash flow method for purposes of our impairment testing, those values may differ from what could ultimately be realized by us in a sales transaction or otherwise and that difference, while not affecting cash flow, could have a material adverse impact on our operating results and financial position.

 

Industry Risks

 

The payday loan industry is highly regulated under federal, state and local laws and regulations. Changes in federal, state or local laws and regulations governing lending practices, or changes in the interpretation of such laws and regulations, could negatively affect our business.

 

Our Consumer Finance segment activities are highly regulated under numerous federal, state and local laws, regulations and rules, which are subject to change. New laws, regulations or rules could be enacted or issued, interpretations of existing laws, regulations or rules may change and enforcement action by regulatory agencies may intensify.

 

Although states provide the primary regulatory framework under which we offer payday loans, certain federal laws also affect our business.  For example, because payday loans are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and Regulation Z under that Act.  Additionally, we are subject to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act and certain other federal laws. 

 

From a federal standpoint, anti-payday loan legislation has occasionally been introduced in the U.S. Congress.  Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities such as those we conduct. As outlined under “BUSINESS – REGULATION – Regulation of Consumer Financing Activities,” the CFPB released their final rule in October 2017 but announced in January 2018 that it is reconsidering the rule.  If implemented in substantially its present form, the rule may put in question the viability of the entire industry and result in mass store closures.

 

In the states, there are nearly always bills pending to alter the current laws governing payday lending.  There is also a current trend for consumer activist groups to seek law changes through a ballot initiative.  Any of these bills or ballot initiatives, or future proposed legislation or regulations prohibiting payday loans or making them less profitable, could be passed in any state at any time, or existing laws permitting payday lending could expire. From time to time legislation banning payday loans has been introduced in Nebraska but has not been passed into law and there is currently an active ballot initiative in Nebraska to include on the 2020 ballot an initiated state statute capping annual interest on payday lenders to 36%. Since we derive a significant percentage of our payday revenues in Nebraska, the passage of any such legislation in Nebraska would have a highly material and negative effect on our consumer finance business.

 

Statutes authorizing payday loans typically provide state agencies that regulate banks and financial institutions with significant regulatory powers to administer and enforce the laws relating to payday lending.  Under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that affect the way we do business and may force us to terminate or modify our operations in those jurisdictions.  They may also impose rules that are generally adverse to our industry.  Finally, in many states, the attorney general has scrutinized or continues to scrutinize the payday loan statutes and the interpretations of those statutes.

 

In sum, the passage of federal or state laws and regulations that govern or otherwise affect lending, or changes in interpretations of them, could, at any point, result in our curtailment or cessation of operations in certain or all jurisdictions or locations essentially prohibiting us from conducting our lending business in its current form.  Any such legal or regulatory change would certainly have a material and adverse effect on us, our operating results, financial condition and prospects, and perhaps even our viability.  Furthermore, any failure to comply with any applicable federal, state or local laws or regulations could result in fines, litigation, closure of one or more store locations and negative publicity.

 

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Adverse changes in laws or regulations relating to pawn lending services could negatively impact our financial results and/or limit our ability to expand into new markets.

 

Our pawn lending products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations. We face the risk that restrictions or limitations on pawn loan amounts, pawn loan yields and customer acceptance of pawn loan products resulting from the enactment, change or interpretation of laws and regulations could have a negative effect on our business activities. In particular, short-term consumer loans have come under increased scrutiny and increasingly restrictive regulation in recent years. Adoption of such federal, state or local regulation or legislation could restrict, or even eliminate, our ability to conduct our pawn lending operations at a profit level we consider reasonable at some or all of our stores, and could prevent us from expanding into new markets.

 

Litigation and regulatory actions directed toward the consumer finance industry or our Company could adversely affect our operating results, particularly in certain key states.

 

During the last few years, the consumer finance industry has been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of payday loans, and we could suffer losses resulting from interpretations of state laws in those lawsuits or regulatory proceedings, even if we are not a party to those proceedings.  The losses we could suffer could be directly incurred through our involvement in litigation or regulatory proceedings, or could be indirectly incurred through negative publicity regarding the industry in general that is generated by litigation on regulatory proceedings involving third parties.

 

In addition, regulatory actions or enforcement efforts taken with respect to money services businesses could negatively affect our ability to operate our consumer finance segment in our current form.  For example, federal bank regulators are imposing significant costs and regulatory pressure on banks that do business with money services businesses, even though our business is conducted in a manner compliant with applicable law.  As a result, fewer and fewer banks are willing to accept or even retain customers in the MSB industry.  We may be forced to change long-standing banking relationships and change the way we operate our consumer finance operations, incurring additional capital expenditures and paying higher banking fees.

 

Public perception of payday lending as being predatory or abusive could adversely affect our business.

 

In recent years, consumer advocacy groups and media reports have advocated governmental action to prohibit or severely restrict payday loans.  The consumer groups and media reports typically focus on the cost to a consumer for this type of loan, which is higher than the interest typically charged by credit card issuers.  The consumer groups and media reports typically characterize these transactions as predatory or abusive toward consumers.  If this negative characterization of payday lending becomes widely accepted by consumers, demand for our payday loans could significantly decrease, which could adversely affect our results of operations primarily by decreasing our revenues.  Negative perception of payday lending activities could also result in our industry being subject to more restrictive laws and regulations and greater exposure to litigation.

 

Competition in the consumer finance industry is intense and could cause us to lose market share and revenues.

 

We believe that the primary competitive factors in the payday loan industry are store location and customer service.  We face intense competition in the payday and pawn lending industry, and we believe that those markets are becoming more competitive as these industries mature and begin to consolidate.  The payday loan industry has low barriers to entry, and new competitors, such as Wal-Mart, may easily enter the market.  The pawn lending industry has medium level barriers to entry, however, there are several large pawn lending companies with which we directly compete.  We also currently compete with services, such as overdraft protection offered by traditional financial institutions, and with other payday loan and check cashing stores and other financial service entities and retail businesses that offer payday loans or other similar financial services, as well as a rapidly growing internet-based payday loan market.  Some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have.  As a result, we could lose market share and our revenues could decline, thereby affecting our earnings and potential for growth.

 

We face significant cellular retail competition that may reduce our market share and lower our profits.

 

We face significant competition in our Cellular Retail segment. We compete with the four national wireless service providers (AT&T, Sprint, T-Mobile and Verizon Wireless) as well as other smaller brands or carriers such as U.S. Cellular, Boost Mobile and Metro by T-Mobile and with many mobile virtual network operators (“MVNOs”) such as Walmart’s Straight Talk and Family Mobile plans. We also compete with government-financed “lifeline assurance” programs that offer free or reduced-cost cellular services to individuals and families receiving many types of public assistance.  Our ability to compete effectively will depend on, among other things, the pricing of cellular services and equipment, the quality of our customer service, the reach and quality of our sales and distribution channels and our capital resources. It will also depend on how successfully we anticipate and respond to various factors affecting our industry, including new technologies and business models, changes in consumer preferences, demographic trends and economic conditions. 

 

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The cellular retail industry also faces competition from other communications and technology companies seeking to capture customer revenue and brand dominance with respect to the provision of cellular accessories and services. For example, Apple Inc. packages software applications and content with its handsets, and Google Inc. has developed and deployed an operating system and related applications for mobile devices.

 

Free shipping pressure in the e-commerce industry could decrease our direct to consumer segment’s revenues and profitability.

 

The abundance of free shipping offers from Amazon.com and other online retailers is putting pressure on our Direct to Consumer segment shipping revenues, currently representing 15­­% of Direct to Consumer revenues.  If market forces lead to the elimination of this revenue stream, it may be difficult for the Direct to Consumer segment to make up that lost revenue.

 

General economic conditions affect our loan losses, and accordingly, our results of operations could be adversely affected by a general economic slowdown or other negative economic conditions such as high unemployment.

 

Provision for loan losses, net of recoveries, is one of our largest Consumer Finance segment operating expenses, constituting approximately 11% of our loan fee revenues for the year ended December 31, 2019, with payday loan losses comprising most of the losses.  Any changes in economic factors that adversely affect our customers, such as an economic downturn or high unemployment, could result in higher loan loss experiences than anticipated, which could in turn adversely affect our loan charge-offs and operating results.

 

A sustained deterioration in the economy could reduce demand for our products and services and result in reduced earnings.

 

A sudden or sustained deterioration in the economy could result in decreased demand for our seed, live plant, holiday gifts and home restoration products.  This could result in decreased revenue and, because a significant portion of our sales in the Direct to Consumer segment are of live goods, inventory losses on live product acquired prior to a seasonal selling period could be significant.

 

In addition, a sudden or sustained deterioration in the economy could cause worsening performance of our pawn loans and in consumer demand for and resale value of pre-owned merchandise that we sell in our stores. This, in turn, could reduce the amount that we could effectively lend on an item of collateral. Such reductions could adversely affect pawn loan balances, pawn loan redemption rates, inventory balances, revenues and gross profit margins.

 

Company Risks

 

The concentration of our Consumer Finance revenues in certain states could adversely affect us.

 

We currently provide payday or installment lending services in six states.  For the year ended December 31, 2019, Consumer Finance revenues from our locations in Nebraska represented approximately 35.4% of our total Consumer Finance segment revenues.  For the foreseeable future, we expect that a material portion of our Consumer Finance revenues will continue to be generated in Nebraska.  In addition, for the year ended December 31, 2019, Consumer Finance revenues from our North Dakota, Iowa and Wyoming stores represented approximately 25.3%, 16.4% and 14.5% of our total Consumer Finance revenues, respectively.  Changes to prevailing economic, demographic, competitive, regulatory or any other conditions, including the legislative, regulatory or litigation risks mentioned above, in the markets in which we operate, and in Nebraska in particular, could lead to a reduction in demand for our services and result in a decline in our revenues or an increase in our provision for doubtful accounts, or even an outright legal prohibition on the conduct of our business.  In this regard, we are aware of pending legislation in Nebraska that is aimed at eliminating payday lending in that state and permitting short-term loans in the nature of installment loans and of a ballot initiative capping annual interest on payday lenders to 36%.  Any of these outcomes could in turn result in a material and swift deterioration of our Consumer Finance segment financial condition principally by impairing its revenues and affecting its ability to obtain financing and operating liquidity, its operating results and its business prospects.

 

15

 

If estimates of our loan losses are not adequate to absorb actual losses, our financial condition and results of operations may be adversely affected.

 

We maintain an allowance for loan losses at levels to cover the estimated incurred losses in the collection of our payday and installment loan portfolios outstanding at the end of each applicable period.  At the end of each period, management considers recent collection history to develop expected loss rates, which are used to establish the allowance for loan losses.  Our allowance for loan losses was $0.67 million on December 31, 2019.  Our allowance for loan losses is an estimate, and if actual loan losses are materially greater than our allowance for losses, our financial condition and results of operations could be adversely affected.

 

We face substantial risk through reliance on a single wireless retail carrier.

 

We operate our Cellular Retail segment exclusively as an authorized dealer for Cricket, which means that this segment of our operations is entirely dependent upon continued operations as a Cricket dealer under our dealer agreement with Cricket Wireless, the commitment of Cricket Wireless to advertise and offer competitive product and service offerings in our markets, and the health of our relationship with Cricket Wireless.  If Cricket Wireless were to change certain aspects of its dealer arrangements, including items such as pricing, product supply, credit terms and dealer compensation structure (all of which are primarily determined by Cricket Wireless) in a manner that is adverse to us, our margins and results of operations would likely suffer.  In addition, if Cricket Wireless were to begin growing its relationship with other operators, or were to embark upon an effort to significantly grow corporate-owned locations, our prospects for growth in this segment would suffer.

 

Managing our inventory is complex and may include write-downs of excess or obsolete inventory.

 

Managing our inventory, across our segments, is complicated by a number of factors, including the need to maintain a significant inventory of finished goods to support our cellular retail locations and online orders for our products that we anticipate but may not be received. These issues may cause us to purchase and maintain significant amounts of inventory. If this inventory is not used as expected based on anticipated requirements, it may become excess or obsolete. The existence of excess or obsolete inventory can result in sales price reductions or inventory write-downs, which could adversely affect our business and results of operations.

 

Outside factors may affect our ability to obtain product and fulfill orders in our Direct to Consumer segment.

 

In our Direct to Consumer segment we have year-to-year agreements with third party wholesale growers that could be impacted by changes in their business operations, including, but not limited to plant disease, financial difficulties, labor disruptions, land lease issues and water supplies.  Although J&P Park Acquisition, Inc. ("JPPA") has taken steps to purchase from multiple vendors and identify alternate sources of supply, the long lead time involved in growing operations could mean the Company might not be able to obtain certain crops at certain times.  Certain of the Company’s growers also compete with the Company through their own direct-to-consumer selling operations.  Additionally, the recent COVID-19 virus has caused some imported products to be delayed.  There could be further disruptions, whether caused by the third party wholesaler, pandemic, weather or other environmental or climate influences that could limit the supply of product we rely upon to fulfill orders.

 

Because we maintain a significant supply of cash in our locations, we may experience losses due to employee error and theft.

 

Because our business requires us to maintain a significant supply of cash in our stores, we are subject to the risk of cash shortages resulting from employee error and theft.  We periodically experience employee error and theft in stores, which can significantly increase the operating losses of those stores for the period in which the employee error or theft is discovered.  We self-insure for employee error and theft at the store level.  If our controls to limit our exposure to employee error and theft at the store level and at our corporate headquarters do not operate effectively or are structured ineffectively, our operating margins could be adversely affected by costs associated with increased security and preventative measures.

 

Regular turnover among our location managers and employees makes it more difficult for us to operate our locations and increases our costs of operation.

 

We experience a relatively stable workforce among our location managers and employees.  Turnover interferes with implementation of operating strategies.  Increases in our workforce turnover in the future would likely increase our operating pressures and operating costs and could restrict our ability to grow.  Additionally, high turnover would create challenges for us in maintaining high levels of employee awareness of and compliance with our internal procedures and external regulatory compliance requirements.  In sum, high turnover would increase our training and supervisory costs, and result in decreased earnings with corresponding greater risks of regulatory non-compliance.

 

16

 

A significant disruption in our computer systems and our inability to adequately maintain and update those systems could adversely affect our operations and our ability to maintain the confidence of our customers and business partners.

 

We rely extensively on our computer systems to manage our businesses. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses, malicious attacks, security breaches, and catastrophic events. If our systems are damaged or fail to function properly or reliably, we may incur substantial repair or replacement costs, experience data loss or theft and impediments to our ability to manage inventories or process customer transactions, engage in additional promotional activities to retain our customers, and encounter lost confidence of our customers and other business partners, which could adversely affect our results of operations.

 

We regularly invest to maintain and update our computer systems. Implementing significant system changes increases the risk of computer system disruption. The potential problems and interruptions associated with implementing technology initiatives, as well as providing training and support for those initiatives, could disrupt or reduce our operational efficiency, and could negatively impact customer experience and confidence of our customers and other business partners.

 

If our efforts to protect the security of information about our customers, vendors and other third parties are unsuccessful, we may face costly government enforcement actions and private litigation, and our sales and reputation could suffer.

 

We regularly receive and store information about our customers, vendors and other third parties. We have programs in place to detect, contain, and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our team members, contractors, and vendors.

 

If we, our vendors, or other third parties with whom we do business experience additional significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions or private litigation. In addition, our customers could lose confidence in our ability to protect their information, which could cause them to no longer purchase our products or use our services.

 

ITEM 1B    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2    PROPERTIES

 

Our headquarters is in Omaha, Nebraska.  We lease a 12,420-square-foot space which is used as our corporate headquarters as well as headquarters for our Cellular Retail and Consumer Finance segments, with additional space available, which is sufficient for our projected near-term future growth.  Our monthly lease amount is currently $13,943 and the lease expires on January 31, 2025.  The corporate phone number is (402) 551-8888. 

 

Our Direct to Consumer segment, acquired on July 1, 2015, owns a 100-acre property with a 382,790 square foot facility in Greenwood, South Carolina.  This facility is utilized as JPPA distribution and warehouse facility and corporate offices.  The real estate is not encumbered as of December 31, 2019.

 

ITEM 3    LEGAL PROCEEDINGS

 

We are involved in a variety of legal claims and proceedings incidental to our business, including customer bankruptcy and employment-related matters from time to time, and other legal matters that arise in the normal course of business.  We believe these claims and proceedings are not out of the ordinary course for a business of the type and size in which we are engaged.  While we are unable to predict the ultimate outcome of these claims and proceedings, management believes there is not a reasonable possibility that the costs and liabilities of such matters, individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or consolidated results of operations.

 

ITEM 4   MINE SAFETY DISCLOSURES

 

Not applicable.

 

17

 

PART II

 

ITEM 5    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS

 

MARKET INFORMATION

 

Our common stock is listed for trading under the symbol “WCRS” on the “OTCQB,” which is the OTC Markets’ middle-tier over-the-counter quotation platform.  The transfer agent and registrar for our common stock is Corporate Stock Transfer, Inc., located at 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.   

 

HOLDERS

 

As of the date of this report, we had 9,265,778 shares of common stock outstanding held by approximately 250 holders of record.

 

18

 

 

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

The following table provides information about purchases of Western Capital Resources, Inc. common stock by us during the three months ended December 31, 2019.

 

Share Repurchases
 

Period Beginning

 

Period
Ending

 

 

Total Number of Shares Purchased

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of Board Approved Plans or Programs

 

 

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (1)

 

October 1, 2019

 

 

October 31, 2019

 

 

 

 

 

$

 

 

 

 

 

$

831,500

 

November 1, 2019

 

 

November 30, 2019

 

 

 

22,100

 

 

 

4.15

 

 

 

22,100

 

 

 

739,700

 

December 1, 2019

 

 

December 31, 2019

 

 

 

60,817

 

 

 

4.32

 

 

 

60,817

 

 

 

476,900

 

 

 

 

 

 

 

 

82,917

 

 

$

 

 

 

82,917

 

 

 

 

 

 

(1)

On September 13, 2018, our Board of Directors authorized a share repurchase program under which we may repurchase up to $1 million of common stock. Repurchases may be made from time to time on the open market or through privately negotiated transactions. 

   
  In March 2020, our Board of Directors amended the repurchase program, increasing the amount of share repurchases authorized from $1 million to $2 million.

 

DESCRIPTION OF EQUITY SECURITIES

 

Our authorized capital stock consists of 12.5 million shares of common stock, $0.0001 par value per share (unless otherwise determined by the Board of Directors).  All shares of common stock have equal voting rights and are entitled to one vote per share on all matters to be voted upon by our shareholders.  Shares of our common stock have no preemptive, subscription, conversion or redemption rights and may be issued only as fully paid and non-assessable shares.  Cumulative voting in the election of directors is not permitted.  In the event of our liquidation, each holder of our common stock is entitled to receive a proportionate share of our assets available for distribution to stockholders after the payment of liabilities.  All shares of our common stock issued and outstanding are fully paid and non-assessable.

 

ITEM 6

SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.

 

19

 

OVERVIEW

 

Our growth focus in 2016 and 2017 was in the Cellular Retail segment.  We began 2016 operating 99 Cricket retail locations and by the end of 2017 we were operating 278.  The growth came from a combination of launching new locations and acquiring existing stores from other Cricket dealers.  Many of the locations did not develop as anticipated; therefore, by transferring some stores to other authorized Cricket dealers while closing other retail locations we reduced the number of retail stores operated within our Cellular Retail segment to 205 during fiscal year 2018.  This strategy continued throughout 2019, when we added 69 locations, primarily through joint ventures, and shed 52 locations in sales or closures.  At the end of 2019 our Cellular Retail segment operated 222 locations.  We believe these maneuvers will play a significant role in further developing the profitability of the Cellular Retail segment.  As the industry undergoes changes, we are continually reviewing opportunities to take strategic action.

 

RESULTS OF OPERATIONS:

YEAR ENDED DECEMBER 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 2018

 

Net income (loss) attributable to our common shareholders was $2.32 million, or $0.25 per share, in 2019 compared to ($2.24) million, or ($0.24) per share, in 2018.  Both the Cellular Retail and Direct to Consumer segments experienced losses in 2018 and returned to profitability in 2019.  Revenues increased from $114 million in 2018 to $117 million in 2019, with the Cellular Retail segment being the contributor to the increase.

 

20

 

The following table provides year-over-year revenues and net income attributable to WCR common shareholders by operating segment (in thousands):

 

 

 

Cellular
Retail

 

 

Direct to
Consumer

 

 

Consumer
Finance

 

 

Corporate

 

 

Total

 

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 (loss) attributable to noncontrolling interests

 

$

1,135

 

 

$

 

 

$

 

 

$

 

 

$

1,135

 

Net income (loss) attributable to WCR common shareholders

 

$

1,366

 

 

$

588

 

 

$

1,066

 

 

$

(700

)

 

$

2,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

65,096

 

 

$

38,433

 

 

$

1,813

 

 

$

 

 

$

105,342

 

Fee and interest income

 

$

 

 

$

 

 

$

8,923

 

 

$

 

 

$

8,923

 

Total revenue

 

$

65,096

 

 

$

38,433

 

 

$

10,736

 

 

$

 

 

$

114,265

 

% of total revenue

 

 

57.0

%

 

 

33.6

%

 

 

9.4

%

 

 

%

 

 

100.0

%

Net income (loss)

 

$

(1,272

)

 

$

(481

)

 

$

1,117

 

 

$

(885

)

 

$

(1,521

)

Net income (loss) attributable to noncontrolling interests

 

$

720

 

 

$

 

 

$

 

 

$

 

 

$

720

 

Net income (loss) attributable to WCR common shareholders

 

$

(1,992

)

 

$

(481

)

 

$

1,117

 

 

$

(885

)

 

$

(2,241

)

 

21

 

Cellular Retail

 

The following table summarizes our Cellular Retail segment operating results:

 

    Year Ended December 31,
(in thousands)
      2019 % of       2018 % of  
    2019     2018     Revenues       Revenues  
Revenues:                                
Retail sales and associated fees   $ 52,377     $ 49,013       76.3 %     75.3 %
Other revenue     16,305       16,083       23.7 %     24.7 %
      68,682       65,096       100.0 %     100.0 %
Cost of revenues     28,863       25,747       42.0 %     39.6 %
Gross profit     39,819       39,349       58.0 %     60.4 %
                                 
Salaries, wages and benefits expense     21,360       22,033       31.1 %     33.8 %
Occupancy expense     8,929       10,286       13.0 %     15.8 %
Depreciation and amortization expense     1,960       2,121       2.9 %     3.3 %
Interest expense     62       47       0.1 %     0.1 %
Other expense     4,516       6,707       6.6 %     10.3 %
Provision for income taxes     490       (573 )     0.7 %     (0.9 )%
      37,317       40,621       54.4 %     62.4 %
Net (loss) income   $ 2,502     $ (1,272 )     3.6 %     (2.0 )%

 

Segment contribution to net income (loss) before noncontrolling interests was $2.50 million in 2019 compared to ($1.27) million in 2018.  Many of our 2016 and 2017 growth initiative store launches did not meet sales growth expectations resulting in store operating losses and costs of closures being a drag on operating results in 2018. Expense to close or transfer stores to other dealers, including losses on disposal of fixed assets, was in excess of $1.70 million in 2018, and is included above in other expense.  

 

Direct to Consumer

 

The following table summarizes our actual Direct to Consumer segment operating results:

 

    Year Ended December 31,
(in thousands)
      2019 % of       2018 % of  
    2019     2018     Revenues       Revenues  
Revenues   $ 38,024     $ 38,433       100.0 %     100.0 %
Cost of revenues     19,800       20,936       52.1 %     54.5 %
Gross profit     18,224       17,497       47.9 %     45.5 %
                                 
Salaries, wages and benefits expense     6,474       6,297       17.0 %     16.4 %
Occupancy expense     531       549       1.4 %     1.4 %
Depreciation and amortization expense     513       512       1.4 %     1.3 %
Interest expense     2       5       %     %
Other expense     9,941       10,751       26.1 %     28.0 %
Provision for income taxes     175       (136 )     0.5 %     (0.4 )%
      17,636       17,978       46.3 %     46.7 %
Net income (loss)   $ 588     $ (481 )     1.5 %     (1.2 )%

 

The Direct to Consumer segment contributed $0.59 million of net income in 2019 compared to ($0.48) million of net loss in 2018.  The segment was challenged with lost sales in 2018 due to unfavorable weather patterns.  In 2019, the segment experienced a decrease in product sales but was able to partially mitigate the decrease with less free or discounted shipping promotions and better expense management.

 

22

 

Consumer Finance

 

The following table summarizes our Consumer Finance segment operating results:

 

    Year Ended December 31,
(in thousands)
    2019 % of     2018 % of  
    2019     2018     Revenues     Revenues  
Revenues:                                
Retail sales   $ 1,369     $ 1,448       13.4 %     13.5 %
Financing fees and interest     8,513       8,923       83.4 %     83.1 %
Other revenue     328       364       3.2 %     3.4 %
      10,210       10,735       100.0 %     100.0 %
Cost of revenues     1,833       2,179       18.0 %     20.3 %
Gross profit     8,377       8,556       82.0 %     79.7 %
                                 
Salaries, wages and benefits expense     3,692       3,689       36.2 %     34.3 %
Occupancy expense     1,244       1,284       12.2 %     12.0 %
Depreciation and amortization expense     31       51       0.3 %     0.5 %
Other expense     1,963       2,018       19.2 %     18.8 %
Provision for income taxes     381       397       3.7 %     3.7 %
      7,311       7,439       71.6 %     69.3 %
Net income   $ 1,066     $ 1,117       10.4 %     10.4 %

 

Consumer Finance segment net income decreased to $1.07 million in 2019 from $1.12 million in 2018, the decrease being directly attributable to the continued industry decline in payday lending activity and the closing of our Colorado location. Consumer Finance had full-year operations in six states during 2019 compared to seven states in 2018.

 

Corporate

 

Net cost of our Corporate segment was ($0.70) million for the year ended December 31, 2019 compared to ($0.89) million for the year ended December 31, 2018, the reduced net cost due in part the reduced interest expense and increased investment income. 

 

Consolidated Income Tax Expense

 

Income tax expense was $0.91 million for 2019 compared to tax benefit of $0.62 million for 2018 for an effective rate of 20.8% and 28.9%, respectively.  Income before income taxes attributable to noncontrolling interest flows through to the noncontrolling interest and thus is not taxable at the Company level.  Excluding the non-taxable flow-through income to the non-controlling interest, the effective rate for 2019 and 2018 is 28.1% and 21.6%, respectively.  The effective rate increase year over year is a due to a combination of many state income taxation factors, including forfeited net operating losses in states we exited in 2018 or 2019, changes in apportionment of taxable income (loss) among states and the impact of minimum state taxes in a loss year.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Summary cash flow data is as follows:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Cash flows provided (used) by:

 

 

 

 

 

 

 

 

Operating activities

 

$

4,824,658

 

 

$

(16,287,103

)

Investing activities

 

 

9,748,911

 

 

 

14,304,374

 

Financing activities

 

 

(4,166,012

)

 

 

(2,588,107

)

Net increase in cash

 

 

10,407,557

 

 

 

(4,570,836

)

Cash and cash equivalents, beginning of year

 

 

16,724,983

 

 

 

21,295,819

 

Cash and cash equivalents, end of year

 

$

27,132,540

 

 

$

16,724,983

 

 

23

 

At December 31, 2019, we had cash and cash equivalents of $27.13 million compared to cash and cash equivalents of $16.72 million on December 31, 2018.  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 2021.  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, at December 31, 2019, we had $9.05 million invested in certificates of deposit (limited to $250,000 per financial institution per entity) and approximately $7.21 million in short-term T-Bills or Notes.

 

In October 2019, we received $3,367,940, the scheduled release of the remaining 50% of the funds held in escrow relating to the 2017 sale of our Franchise segment, together with interest earned.

 

At December 31, 2019, our outstanding debt and capital lease obligations were $1.09 million compared to $0.84 million at December 31, 2018. 

 

On April 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 on April 21, 2018.  Considering the amount of our cash and cash equivalent and investment holdings available, on October 8, 2019, we terminated the credit facility.

 

CRITICAL ACCOUNTING POLICIES

 

Our 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 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 Loss Allowance

 

Direct to Consumer

 

Receivables are recorded when billed or accrued and represent claims against third parties that will be settled in cash.  The carrying value of receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.  The allowance for doubtful accounts is estimated based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions.  If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly.  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, 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.  All returned items are charged-off after 180 days, as collections after that date have not been significant.  Loans are carried at cost plus accrued interest or fees less payments made and a loans receivable allowance.

 

24

 

We do not specifically reserve for any individual payday, installment or title loan.  Instead, we aggregate 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 (1) the amount of loan principal, interest and fee outstanding, (2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trends.  We utilize a software program to assist with the tracking of our historical portfolio statistics.  A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages by loan type of net charge offs, applied against the applicable balance of loan principal, interest and fees outstanding.  We also periodically perform a look-back analysis on our 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. Loan losses or charge-offs of pawn loans are not recorded because the value of the collateral exceeds the loan amount. 

 

See Note 4, “Loans Receivable,” and Note 5, “Loans Receivable Allowance,” of the notes to our consolidated financial statements included in this report for our outstanding loans receivable aging and loans receivable allowance rollforward as of and for the year ended December 31, 2019 and December 31, 2018.

 

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 provided on 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 (to include 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.

 

Goodwill

 

Goodwill represents the excess of acquisition cost over the fair value of identifiable finite lived net assets acquired and is not amortized.  Goodwill is tested for impairment annually as 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.  If quantitative testing is necessary based on a qualitative assessment, we apply a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any. 

 

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.

 

25

 

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 Cricket Wireless;

 

Changes in authorized Cricket dealer compensation;

 

Lack in advertising support and sales promotions from Cricket Wireless in the markets we operate;

  Direct and indirect effects of COVID-19 on our employees, customers, our supply chain, the economy and financial markets; and

 

Unpredictability or uncertainty in financing and merger and acquisition markets, which could impair our ability to grow our business through acquisitions.

 

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors” section and of this report.

 

Industry data and other statistical information used in this report are based on independent publications, government publications, reports by market research firms or other published independent sources.  Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above.  Although we believe these sources are reliable, we have not independently verified the information.

 

ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

26

 

 

ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX OF FINANCIAL INFORMATION

 

CONTENTS

 

 

 

Page(s)

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

 

F-1

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

Consolidated Balance Sheets

 

F-2

 

 

 

Consolidated Statements of Operations

 

F-3

 

 

 

Consolidated Statements of Shareholders’ Equity

 

F-4

 

 

 

Consolidated Statements of Cash Flows

 

F-5

 

 

 

Notes to Consolidated Financial Statements

 

F-6

 

27

 

image

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Western Capital Resources, Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Western Capital Resources, Inc. (“the Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

  

/s/ Sadler, Gibb & Associates, LLC

 

We have served as the Company’s auditor since 2017.

 

Salt Lake City, UT

March 30, 2020

 

office   801.783.2950

fax       801.783.2960

 

www.sadlergibb.com | Main: 2455 East Parleys Way Suite 320, Salt Lake City, UT 84109 | Provo: 3507 N University Ave #100, Provo, UT 84604

F-1

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,132,540

 

 

$

16,724,983

 

Short-term investments

 

 

14,756,665

 

 

 

22,394,748

 

Loans receivable (less allowance for losses of $673,000 and $818,000, respectively)

 

 

3,860,411

 

 

 

4,111,842

 

Accounts receivable (less allowance for losses of $13,000 and $25,000, respectively)

 

 

517,476

 

 

 

493,208

 

Inventory (less reserve of $1,065,000 and $670,000, respectively)

 

 

8,330,691

 

 

 

8,467,512

 

Prepaid income taxes

 

 

 

 

 

512,099

 

Prepaid expenses and other

 

 

2,679,859

 

 

 

2,954,794

 

Escrow and other receivables

 

 

 

 

 

3,312,984

 

TOTAL CURRENT ASSETS

 

 

57,277,642

 

 

 

58,972,170

 

 

 

 

 

 

 

 

 

 

INVESTMENTS

 

 

1,500,000

 

 

 

1,000,000

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

 

9,725,043

 

 

 

9,945,826

 

 

 

 

 

 

 

 

 

 

OPERATING LEASE RIGHT-OF-USE ASSETS

 

 

12,344,894

 

 

 

 

 

 

 

 

 

 

 

 

 

INTANGIBLE ASSETS, net

 

 

4,041,650

 

 

 

4,167,110

 

 

 

 

 

 

 

 

 

 

LOAN RECEIVABLE

 

 

694,987

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER

 

 

525,884

 

 

 

558,209

 

                 
GOODWILL     5,796,528       5,796,528  

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

91,906,628

 

 

$

80,439,843

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,710,222

 

 

$

10,106,182

 

Accrued payroll

 

 

2,572,331

 

 

 

1,709,868

 

Current portion operating lease liabilities

 

 

5,079,745

 

 

 

 

Other current liabilities

 

 

1,276,613

 

 

 

1,291,713

 

Income taxes payable

 

 

243,149

 

 

 

 

Current portion notes payable

 

 

65,414

 

 

 

 

Current portion finance lease obligations

 

 

1,161

 

 

 

51,211

 

Deferred revenue

 

 

794,830

 

 

 

1,012,772

 

TOTAL CURRENT LIABILITIES

 

 

17,743,465

 

 

 

14,171,746

 

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Notes payable

 

 

1,019,837

 

 

 

789,216

 

Operating lease liabilities, net of current portion

 

 

7,444,789

 

 

 

 

Deferred income taxes

 

 

385,000

 

 

 

795,000

 

TOTAL LONG-TERM LIABILITIES

 

 

8,849,626

 

 

 

1,584,216

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

26,593,091

 

 

 

15,755,962

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WESTERN SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 12,500,000 shares authorized, 9,265,778 and 9,388,677 issued and outstanding as of December 31, 2019 and December 31, 2018, respectively.

 

 

927

 

 

 

939

 

Additional paid-in capital

 

 

29,031,741

 

 

 

29,031,741

 

Retained earnings

 

 

33,706,035

 

 

 

33,774,293

 

TOTAL WESTERN SHAREHOLDERS’ EQUITY

 

 

62,738,703

 

 

 

62,806,973

 

 

 

 

 

 

 

 

 

 

NONCONTROLLING INTERESTS

 

 

2,574,834

 

 

 

1,876,908

 

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

65,313,537

 

 

 

64,683,881

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

91,906,628

 

 

$

80,439,843

 

 

See notes to consolidated financial statements.

 

F-2

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

REVENUES

 

 

 

 

 

 

 

 

Sales and associated fees

 

$

91,769,074

 

 

$

88,895,105

 

Financing fees and interest

 

 

8,513,084

 

 

 

8,922,780

 

Other revenue

 

 

16,632,383

 

 

 

16,447,075

 

Total Revenues

 

 

116,914,541

 

 

 

114,264,960

 

 

 

 

 

 

 

 

 

 

COST OF REVENUES

 

 

 

 

 

 

 

 

Cost of sales

 

 

49,518,838

 

 

 

47,620,763

 

Provisions for loans receivable losses

 

 

975,938

 

 

 

1,241,638

 

Total Cost of Revenues

 

 

50,494,776

 

 

 

48,862,401

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

66,419,765

 

 

 

65,402,559

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

33,813,783

 

 

 

34,242,187

 

Occupancy

 

 

11,038,556

 

 

 

12,406,166

 

Advertising, marketing and development

 

 

6,857,809

 

 

 

7,824,393

 

Depreciation

 

 

1,811,918

 

 

 

1,899,114

 

Amortization

 

 

699,636

 

 

 

794,688

 

Other

 

 

8,448,241

 

 

 

10,818,109

 

 Total Operating Expenses

 

 

62,669,943

 

 

 

67,984,657

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

3,749,822

 

 

 

(2,582,098

)

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSES):

 

 

 

 

 

 

 

 

Dividend and interest income

 

 

729,166

 

 

 

631,670

 

Interest expense

 

 

(115,438

)

 

 

(189,281

)

 Total Other Income (Expenses)

 

 

613,728

 

 

 

442,389

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

4,363,550

 

 

 

(2,139,709

)

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAX EXPENSE (BENEFIT)

 

 

908,000

 

 

 

(619,000

)

 

 

 

3,455,550

 

 

 

(1,520,709

)

 

 

 

 

 

 

 

 

 

LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

 

(1,135,174

)

 

 

(720,422

)

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS

 

$

2,320,376

 

 

$

(2,241,131

)

 

 

 

 

 

 

 

 

 

EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.25

 

 

$

(0.24

)

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

Basic and diluted

 

 

9,369,891

 

 

 

9,390,355

 

 

See notes to consolidated financial statements.

 

F-3

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

   Western Capital Resources, Inc. Shareholders         
   Common Stock    Additional
Paid-In
    Retained      Noncontrolling       
    Shares    Amount    Capital    Earnings    Interests    Total 
BALANCE – December 31, 2017   9,390,997   $939   $29,031,741   $37,903,204   $1,757,686   $68,693,570 
Net Income (Loss)               (2,241,131)   720,422    (1,520,709)
Stock redemption   (2,320)           (9,697)       (9,697)
Dividends               (1,878,083)   (601,200)   (2,479,283)
BALANCE – December 31, 2018   9,388,677    939    29,031,741    33,774,293    1,876,908    64,683,881 
Net Income               2,320,376    1,135,174    3,455,550 
Noncontrolling interest equity contribution                   499,352    499,352 
Stock redemption   (122,899)   (12)       (513,419)       (513,431)
Dividends               (1,875,215)   (936,600)   (2,811,815)
BALANCE – December 31, 2019   9,265,778   $927   $29,031,741   $33,706,035   $2,574,834   $65,313,537 

  

See notes to consolidated financial statements.

 

F-4

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

3,455,550

 

 

$

(1,520,709

)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,811,918

 

 

 

1,899,114

 

Amortization

 

 

699,636

 

 

 

794,688

 

Amortization of operating lease right-of-use assets

 

 

5,710,933

 

 

 

 

Deferred income taxes

 

 

(410,000

)

 

 

(661,000

)

Loss (gain) on disposals

 

 

(86,467

)

 

 

941,367

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Loans receivable

 

 

251,431

 

 

 

198,161

 

Accounts receivable

 

 

(780

)

 

 

270,863

 

Inventory

 

 

366,704

 

 

 

582,282

 

Prepaid expenses and other assets

 

 

1,259,354

 

 

 

242,628

 

Operating lease liabilities

 

 

(6,352,423

)

 

 

 

Accounts payable and accrued expenses

 

 

(1,648,156

)

 

 

(18,812,565

)

Deferred revenue and other current liabilities

 

 

(233,042

)

 

 

(221,932

)

Net cash and cash equivalents provided by (used in) operating activities

 

 

4,824,658

 

 

 

(16,287,103

)

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(20,907,047

)

 

 

(29,817,011

)

Proceeds from held-to-maturity investments

 

 

28,045,130

 

 

 

41,711,012

 

Purchase of property and equipment

 

 

(712,469

)

 

 

(960,883

)

Acquisition of stores, net of cash acquired

 

 

(602,200

)

 

 

(76,707

)

Advances on note receivable, net

 

 

(694,987

)

 

 

 

Release of escrowed funds

 

 

3,312,984

 

 

 

3,435,963

 

Proceeds from the disposal of property, plant and equipment

 

 

1,307,500

 

 

 

12,000

 

Net cash and cash equivalents provided by investing activities

 

 

9,748,911

 

 

 

14,304,374

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Payments on notes payable – short-term, net

 

 

 

 

 

(51,992

)

Payments on notes payable – long-term

 

 

(1,072,622

)

 

 

 

Common stock redemption

 

 

(513,431

)

 

 

(9,697

)

Payments on finance leases

 

 

(50,050

)

 

 

(47,135

)

Contributions from noncontrolling interests

 

 

281,906

 

 

 

 

Distributions to noncontrolling interests

 

 

(936,600

)

 

 

(601,200

)

Payments of dividends

 

 

(1,875,215

)

 

 

(1,878,083

)

Net cash and cash equivalents used in financing activities

 

 

(4,166,012

)

 

 

(2,588,107

)

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

10,407,557

 

 

 

(4,570,836

)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of year

 

 

16,724,983

 

 

 

21,295,819

 

End of year

 

$

27,132,540

 

 

$

16,724,983

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid

 

$

575,501

 

 

$

19,284,007

 

Interest paid

 

$

94,723

 

 

$

124,817

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Assets received in acquisition (See Note 19)

 

$

6,235,183

 

 

$

 

Liabilities assumed in acquisition (See Note 19)

 

$

4,785,280

 

 

$

 

Note payable assumed in acquisition (See Note 19)

 

$

1,350,499

 

 

$

 

Noncontrolling interest contribution to subsidiary (See Note 19)

 

$

217,446

 

 

$

 

Right-of-use assets obtained, operating lease obligations incurred

 

$

5,786,575

 

 

$

 

Right-of-use assets and operating lease obligation disposals

 

$

2,218,787

 

 

$

 

 

See notes to consolidated financial statements.

 

F-5

 

1.       Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies –

 

Basis of Presentation / Nature of Business

 

Western Capital Resources, Inc. (“WCR”) is a parent company owning operating subsidiaries, with percentage owned shown parenthetically, as summarized below.

 

Cellular Retail

PQH Wireless, Inc. (“PQH”) (100%) – operates 222 cellular retail stores as of December 31, 2019 (108 100% owned plus 114 through its controlled but less than 100% owned subsidiaries), exclusively as an authorized retailer of the Cricket brand.

 

Direct to Consumer

J&P Park Acquisitions, Inc. (“JPPA”) (100%) – an online and direct marketing distribution retailer of 1) live plants, seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins, and Wayside Gardens brand names and 2) home improvement and restoration products operating under the Van Dyke’s Restorers brand, as well as a seed wholesaler under the Park Wholesale brand.

 

J&P Real Estate, LLC (“JPRE”) (100%) – owns real estate utilized as JPPA’s distribution and warehouse facility and the corporate offices of JPPA.

 

Consumer Finance

Wyoming Financial Lenders, Inc. (“WFL”) (100%) – owns and operates “payday” stores  (38 as of December 31, 2019, two of which are located within the Company’s retail pawn stores) in six states (Iowa, Kansas, Nebraska, North Dakota, Wisconsin and Wyoming) providing sub-prime short-term uncollateralized non-recourse “cash advance” or “payday” loans typically ranging from $100 to $500 with a maturity of generally two to four weeks, sub-prime short-term uncollateralized non-recourse installment loans typically ranging from $300 to $800 with a maturity of six months, check cashing and other money services to individuals.

 

Express Pawn, Inc. (“EPI”) (100%) – owns and operates retail pawn stores (three as of December 31, 2019) in Nebraska and Iowa providing collateralized non-recourse pawn loans and retail sales of merchandise obtained from forfeited pawn loans or purchased from customers. 

 

References in these financial statement notes to “Company” or “we” refer to Western Capital Resources, Inc. and its subsidiaries.  References to specific companies within our enterprise, such as” “PQH,” “JPPA,” “JPRE,” “WFL,” or “EPI” are references only to those companies. 

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of WCR, its wholly owned subsidiaries and other entities in which the Company owns a controlling financial interest. For financial interests in which the Company owns a controlling financial interest, the Company applies the provisions of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 810, “Consolidation” applicable to reporting the equity and net income or loss attributable to noncontrolling interests.  All significant intercompany balances and transactions of the Company have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of 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 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 notes and loans receivable allowance, carrying value and impairment of long-lived goodwill and intangible assets, inventory valuation and obsolescence, estimated useful lives of property and equipment, gift certificate and merchandise credits liability and deferred taxes and tax uncertainties.

 

F-6

 

Revenue Recognition

 

On January 1, 2018, we adopted Topic 606, as further disclosed later in this Note 1.  Also refer to Notes 17, “Revenue,” and 20, “Segment Information,” for additional information, including the disaggregation of revenue by segment.

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.

 

Fair Value of Financial Measurement

 

In determining fair value measurements, the Company follows the provisions of ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value focusing on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. The three level hierarchy is as follows:

 

Level 1 - Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.

 

Level 2 - Pricing inputs are quoted prices for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.

 

Level 3 - Pricing inputs are unobservable for the assets and liabilities, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

The Company’s held to maturity securities are comprised of a U.S Treasury zero coupon T-Bill and certificates of deposit. The Company’s available for sale securities consist of mutual funds held in money market mutual funds in a brokerage account, which are classified as cash equivalents.

 

The fair value of these investments is based on quoted prices from recognized pricing services, or in the case of mutual funds, at their closing published net asset value.

 

The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy.  During the years 2019 and 2018, there were no transfers between levels.

 

Receivables and Loss Allowance

 

Cellular Retail

 

Receivables for noncash sales are recorded when possession of products is taken by the customer or services are completed,  represent claims against third parties that will be settled in cash, include unsettled credit card charges, and are included in accounts receivable. The carrying value of accounts receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.

F-7

 

Direct to Consumer

 

Receivables for noncash sales are recorded when orders are shipped,  represent claims against third parties that will be settled in cash, include unsettled credit card charges and wholesales sales on terms, and are included in accounts receivable. The carrying value of accounts receivable, net of the allowance for doubtful accounts, represents their estimated net realizable value. The allowance for doubtful accounts is estimated based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. 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 collections after that date have not been significant.  Loans are carried at cost plus accrued interest or fees less payments made and a loans receivable allowance.

 

The Company does not specifically reserve for any individual payday or installment 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 (1) the amount of loan principal, interest and fee outstanding, (2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trends.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.  A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages by loan type of net charge offs, applied against the applicable 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. Loan losses or charge-offs of pawn loans are not recorded because the value of the collateral exceeds the loan amount. 

 

Inventory

 

Cellular Retail

 

Inventory, consisting of phones and accessories, is stated at cost, determined on the specific identification and weighted-average cost basis, respectively.

 

Direct to Consumer

 

Inventory is valued at the lower of cost or market using the weighted-average method of determining cost.

 

Consumer Finance

 

Merchandise inventory is stated at the lower of cost or market. The principal amount of an unpaid loan becomes the inventory cost for forfeited collateral.

 

Long-Lived Assets

 

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets as follows:

 

Computer equipment and software

3 – 10 years

Improvements and equipment

3 – 15 years

Building

39 years

 

The cost of maintenance and repairs is charged to operations as incurred while renewals and betterments are capitalized.

 

F-8

 

The Company capitalizes certain internal costs, including payroll costs, incurred in connection with the development of software for internal use. These costs are capitalized beginning when the Company has entered the application development stage.  The capitalization of these costs ceases when the software is substantially complete and ready for its intended use. Only costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over the estimated useful life of the enhancements.

 

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.

 

The Company assesses the possibility of impairment of long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry events or trends. 

 

Goodwill

 

Goodwill represents the excess of acquisition cost over the fair value of identifiable finite lived net assets acquired and is not amortized.  Goodwill is tested for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate potential impairment.  The Company tests for goodwill impairment at the reporting unit level, which aligns with the Company’s segments. The Company performs a qualitative assessment to determine if a quantitative impairment test is necessary.  If quantitative testing is necessary based on a qualitative assessment, we apply a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any. 

 

Merchandise Credits and Gift Card Liabilities

 

Direct to Consumer

 

The Company maintains a liability for unredeemed gift cards, gift certificates and merchandise credits until the earlier of redemption, escheatment or a maximum of two years. The Company has concluded based on historical redemption trends that the likelihood of these liabilities being redeemed beyond two years from the date of issuance is remote. The liability is also reserved for estimated redemption rates which management bases on historical trends. 

 

Advertising, Marketing and Development Costs

 

Direct to Consumer

 

The Company expenses advertising costs as they are incurred, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits, not to exceed six months. Direct-response advertising consists primarily of catalog book production, printing, and postage costs. Prepaid advertising costs at December 31, 2019 and 2018 were $0.67 million and $0.88 million, respectively.

 

Consumer Finance

 

The costs of advertising and marketing are expensed as incurred.

 

Stock-based Compensation

 

The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of the Company’s stock option awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.

 

F-9

 

Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimate.

 

Income Taxes

 

Deferred income taxes reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts, based on enacted tax laws and statutory tax rates applicable in the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The provision for income taxes represents taxes paid or payable for the current year and changes during the year in deferred tax assets and liabilities.

 

Net Income (Loss) Per Common Share

 

Basic net income (loss) 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.  Diluted earnings per share gives effect to all potentially dilutive common shares outstanding during the period, including stock options, using the treasury stock method. Options to purchase 65,000 shares granted under the 2015 Stock Incentive Plan effective February 6, 2015 (see Note 15) were outstanding at December 31, 2019.  These options have a strike price in excess of the market price as of December 31, 2019 and 2018, were antidilutive and therefore not included in the computation of diluted earnings per share.  Thus, there were no dilutive common shares as of December 31, 2019 and 2018.

 

Fair Value of Financial Instruments

 

The amounts reported in the balance sheets for cash, short-term investments, accounts and loans receivable, inventory, and accounts payable are short-term in nature and their carrying values approximate fair values.  The amounts reported in the balance sheets for notes payable are both long-term and short-term and for investments are long-term and their carrying value approximates fair value.

 

Reclassifications

 

Certain Statement of Cash Flows reclassifications have been made in the presentation of our prior financial statements to conform to the presentation as of and for the year ended December 31, 2019.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), related to recognition of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize the following for all leases: (1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  All entities must classify leases to determine how to recognize lease-related revenue and expense.  Quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.  The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities.  All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.  The Company adopted ASU 2016-02 and ASC 842 using the modified retrospective method on January 1, 2019. See Note 9 for further disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), related to the measurement of credit losses on financial instruments.  The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  The ASU is effective for annual reporting periods beginning after December 15, 2019 and interim periods within that annual period, with early adoption permitted and the standard to be applied using a modified retrospective approach.  The Company does not believe adoption of ASU 2016-13 will have a material impact on our financial condition, results of operations or consolidated financial statements.

 

F-10

 

In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements (Topic 842) to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02.  Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect to not separate non-lease components from leases when certain conditions are met.  The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted certain options available under ASU 2018-11on January 1, 2019. See Note 9 for further disclosures. 

 

No other new accounting pronouncements issued or effective during the fiscal year have had or are expected to have a material impact on the consolidated financial statements.

 

2.         Risks Inherent in the Operating Environment –

 

Regulatory

 

The Company’s Consumer Finance segment activities are highly regulated under numerous federal, state, and local laws, regulations and rules, which are subject to change. New laws, regulations or rules could be enacted or issued, interpretations of existing laws, regulations or rules may change and enforcement action by regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities of the kind conducted by the Company. After several years of research, debate, and public hearings, in October 2017 the U.S. Consumer Financial Protection Bureau (“CFPB”) adopted a new rule for payday lending.  The rule, originally scheduled to go into effect in August 2019, would impose significant restrictions on the industry, and it is expected that a large number of lenders would be forced to close their stores.  The CFPB’s studies projected a reduction in the number of lenders by 50%, while industry studies forecast a much higher attrition rate if the rule is implemented as originally adopted.

 

However, in January 2018, the CFPB issued a statement that it intends to “reconsider” the regulation.  The most current information from the CFPB website states the proposals it is considering includes rescinding the mandatory underwriting provisions contained in the rule and to delay the August 19, 2019 compliance date for the other provisions to November 19, 2020.  At this time it is uncertain whether the rule will be implemented as announced, rewritten with more favorable terms for the industry, or thrown out altogether.  If the rule is implemented as written, it could have a significant and negative impact on business conducted within our Consumer Finance segment.

 

Consumer advocacy groups in many states are actively seeking state law changes which would effectively end the viability of a payday loan business, including Nebraska where we generate approximately 30% of our payday lending revenue or approximately 2% of our consolidated revenue.  If these groups are successful in Nebraska, we will likely cease payday lending activities in Nebraska.

 

The above rule or any other adverse change in present federal, state, or local laws or regulations that govern or otherwise affect lending could result in the Consumer Finance segment’s curtailment or cessation of operations in certain or all jurisdictions or locations.  Furthermore, any failure to comply with any applicable local, state or federal 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 the Company’s and segment’s results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, or a decrease in operating income through increased legal expenditures or fines, and could also negatively affect the Company’s general business prospects due to lost or decreased operating income or if negative publicity effects its ability to obtain additional financing as needed.

 

In addition, the passage of federal, state or local laws and regulations or changes in interpretations of them could, at any point, essentially prohibit the Consumer Finance segment 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 the viability of the Consumer Finance segment.

 

Concentrations

 

The Company has demand deposits at financial institutions, often times in excess of the limit for insurance by the Federal Deposit Insurance Corporation.  As of December 31, 2019, the Company had demand deposits in excess of insurance amounts of approximately $6.77 million.

 

F-11

 

 

Loans receivable in the Consumer Finance segment are concentrated in the sub-prime market and geographically, primarily in the Midwest. For the years ended December 31, 2019 and 2018, the Consumer Finance segment had geographic economic and regulatory risk concentrations (shown as a percentage of the Consumer Finance segment’s revenue by state when 10% or more) as follows:

 

Consumer Finance Segment

 

 

2019 % of Revenues

 

 

2018 % of Revenues

 

Nebraska

 

 

35

%

 

 

36

%

North Dakota

 

 

25

%

 

 

23

%

Iowa

 

 

16

%

 

 

17

%

Wyoming

 

 

14

%

 

 

14

%

 

The Company’s Cellular Retail segment is an authorized retailer for Cricket Wireless.  As an authorized retailer operating exclusively for a single carrier, the Company is subject to a number of concentrations, including revenues from a single brand, a single supplier for phones, a single operating system provider and select third party processors.

 

Our Direct to Consumer subsidiary JPPA has an agreement with a third-party wholesale grower that is in effect until 2022. The grower has agreed to perform research for JPPA and maintain JPPA’s research crop for product to be sold through 2022.  In exchange, this grower/researcher (also a direct-to-consumer competitor) is allowed to sell certain Jackson & Perkins branded roses in their wholesale division.

 

3.         Cash Equivalents and Investments –

 

The following table shows the Company’s cash equivalents and held-to-maturity investments, by significant investment category, recorded as cash equivalents or short- and long-term investments:

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Operating accounts

 

$

10,163,845

 

 

$

10,901,929

 

Money Market – U.S. Treasury obligations

 

 

4,450,433

 

 

 

2,808,576

 

U.S. Treasury obligations

 

 

12,518,262

 

 

 

3,014,478

 

Subtotal

 

 

27,132,540

 

 

 

16,724,983

 

 

 

 

 

 

 

 

 

 

Held to Maturity Investments

 

 

 

 

 

 

 

 

Certificates of deposit (4 – 24 month maturities, FDIC insured)

 

$

9,049,787

 

 

$

12,711,069

 

U.S. Treasury obligations (less than one year maturities)

 

 

7,206,878

 

 

 

10,683,679

 

Subtotal

 

 

16,256,665

 

 

 

23,394,748

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

43,389,205

 

 

$

40,119,731

 

 

Held to maturity investments consisted of the following:

 

December 31, 2019

 

 

Cost

 

 

Accrued Interest

 

 

Amortized Discount

 

 

Amortized Cost

 

 

Unrealized
Gain
(Loss)

 

 

Estimated Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

$

9,051,618

 

 

$

34,169

 

 

$

 

 

$

9,049,787

 

 

$

(32,429

)

 

$

9,017,358

 

U.S. Treasuries

 

 

7,153,587

 

 

 

 

 

 

53,291

 

 

 

7,206,878

 

 

 

2,883

 

 

 

7,209,761

 

 

 

$

16,169,205

 

 

$

34,169

 

 

$

53,291

 

 

$

16,256,665

 

 

$

(29,546

)

 

$

16,227,119

 

 

F-12

 

December 31, 2018

 

 

Cost

 

 

Accrued Interest

 

 

Amortized Discount

 

 

Amortized Cost

 

 

Unrealized
Gain
(Loss)

 

 

Estimated Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

$

12,670,000

 

 

$

41,069

 

 

$

 

 

$

12,711,069

 

 

$

(68,087

)

 

$

12,642,982

 

U.S. Treasuries

 

 

10,564,160

 

 

 

25,707

 

 

 

93,812

 

 

 

10,683,679

 

 

 

(30,229

)

 

 

10,653,450

 

 

 

$

23,234,160

 

 

$

66,776

 

 

$

93,812

 

 

$

23,394,748

 

 

$

(98,316

)

 

$

23,296,432

 

 

Interest income recognized on held-to-maturity investments and other sources was as follows:

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

$

488,824

 

 

$

503,502

 

Other

 

 

240,342

 

 

 

128,168

 

 

 

$

729,166

 

 

$

631,670

 

 

The Company deposited in aggregate $1.75 million of cash across seven different accounts at a financial institution as an accommodation to its majority stockholder, who has other business relationships with the financial institution. The funds in these accounts can be withdrawn at any time, do not serve as collateral in any way, and are held on market terms.

 

4.         Loans Receivable –

 

The Consumer Finance segment’s outstanding loans receivable aging was as follows:

 

December 31, 2019
 

 

 

Payday

 

 

Installment

 

 

Pawn

 

 

Total

 

Current

 

$

3,322,131

 

 

$

67,891

 

 

$

309,934

 

 

$

3,699,956

 

1-30

 

 

216,753

 

 

 

10,590

 

 

 

 

 

 

227,343

 

31-60

 

 

140,872

 

 

 

6,234

 

 

 

 

 

 

147,106

 

61-90

 

 

117,544

 

 

 

2,649

 

 

 

 

 

 

120,193

 

91-120

 

 

118,626

 

 

 

840

 

 

 

 

 

 

119,466

 

121-150

 

 

110,278

 

 

 

395

 

 

 

 

 

 

110,673

 

151-180

 

 

108,674

 

 

 

 

 

 

 

 

 

108,674

 

 

 

 

4,134,878

 

 

 

88,599

 

 

 

309,934

 

 

 

4,533,411

 

Less Allowance

 

 

(673,000

)

 

 

 

 

 

 

 

 

(673,000

)

 

 

$

3,461,878

 

 

$

88,599

 

 

$

309,934

 

 

$

3,860,411

 

 

December 31, 2018
 

 

 

Payday

 

 

Installment

 

 

Pawn

 

 

Total

 

Current

 

$

3,314,182

 

 

$

254,255

 

 

$

321,447

 

 

$

3,889,884

 

1-30

 

 

224,091

 

 

 

41,596

 

 

 

 

 

 

265,687

 

31-60

 

 

199,259

 

 

 

30,285

 

 

 

 

 

 

229,544

 

61-90

 

 

153,449

 

 

 

15,189

 

 

 

 

 

 

168,638

 

91-120

 

 

131,480

 

 

 

9,001

 

 

 

 

 

 

140,481

 

121-150

 

 

125,074

 

 

 

4,311

 

 

 

 

 

 

129,385

 

151-180

 

 

101,619

 

 

 

4,604

 

 

 

 

 

 

106,223

 

 

 

 

4,249,154

 

 

 

359,241

 

 

 

321,447

 

 

 

4,929,842

 

Less Allowance

 

 

(770,000

)

 

 

(48,000

)

 

 

 

 

 

(818,000

)

 

 

$

3,479,154

 

 

$

311,241

 

 

$

321,447

 

 

$

4,111,842

 

 

F-13

 

5.         Loans Receivable Allowance –

 

As a result of the Consumer Finance segment’s collection efforts, it historically writes off approximately 40% of returned payday items, the most significant element making up loans receivable.  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 – 40%; 31 to 60 days – 66%; 61 to 90 days – 85%; 91 to 120 days – 89%; and 121 to 150 – 92% and 151+ days – 93%.  

 

A rollforward of the Company’s loans receivable allowance is as follows:

 

 

 

Year Ended
December 31,

 

 

 

2019

 

 

2018

 

Loans receivable allowance, beginning of year

 

$

818,000

 

 

$

833,000

 

Provision for loan losses charged to expense

 

 

975,938

 

 

 

1,241,638

 

Charge-offs, net

 

 

(1,120,938

)

 

 

(1,256,638

)

Loans receivable allowance, end of year

 

$

673,000

 

 

$

818,000

 

 

6.         Accounts Receivable –

 

A breakdown of accounts receivables by segment are as follows:

 

December 31, 2019

 

 

Cellular Retail

 

 

Direct to Consumer

 

 

Consumer Finance

 

 

Total

 

Accounts receivable

 

$

184,519

 

 

$

318,235

 

 

$

27,722

 

 

$

530,476

 

Less allowance

 

 

 

 

 

(13,000

)

 

 

 

 

 

(13,000

)

Net account receivable

 

$

184,519

 

 

$

305,235

 

 

$

27,722

 

 

$

517,476

 

 

December 31, 2018

 

 

Cellular Retail

 

 

Direct to Consumer

 

 

Consumer Finance

 

 

Total

 

Accounts receivable

 

$

130,251

 

 

$

372,076

 

 

$

15,881

 

 

$

518,208

 

Less allowance

 

 

 

 

 

(25,000

)

 

 

 

 

 

(25,000

)

Net account receivable

 

$

130,251

 

 

$

347,076

 

 

$

15,881

 

 

$

493,208

 

 

A portion of accounts receivable are unsettled credit card sales from the prior one to five business days.  This makes up 68% and 57% of the net accounts receivable balance at December 31, 2019 and December 31, 2018, respectively.

 

7.         Inventory –

 

Inventories consist of:

 

 

 

2019

 

 

2018

 

Finished Goods

 

 

 

 

 

 

 

 

Cellular Retail

 

$

5,687,771

 

 

$

5,456,898

 

Direct to Consumer

 

 

2,888,483

 

 

 

2,848,484

 

Consumer Finance

 

 

819,437

 

 

 

832,130

 

Reserve

 

 

(1,065,000

)

 

 

(670,000

)

TOTAL

 

$

8,330,691

 

 

$

8,467,512

 

 

As a result of changes in the market for certain Company products and the resulting deteriorating value, carrying amounts for those inventories were reduced by approximately $1,065,000 and $670,000 during the year ended December 31, 2019 and 2018, respectively. These inventory write-downs have been reflected in cost of goods sold in the statement of operations. Management believes that these reductions properly reflect inventory at lower of cost or market, and no additional losses will be incurred upon disposition.

 

F-14

 

8.         Property and Equipment –

 

A rollforward of the Company’s property and equipment is as follows:

 

 

 

December 31, 2018

 

 

Acquisitions

 

 

Additions

 

 

Deletions

 

 

December 31, 2019

 

Property, equipment and sales floor

 

$

8,182,321

 

 

$

1,606,331

 

 

$

531,028

 

 

$

(1,840,524

)

 

$

8,479,156

 

Software

 

 

1,736,669

 

 

 

 

 

 

159,137

 

 

 

(11,325

)

 

 

1,884,481

 

Building (owned)

 

 

5,458,008

 

 

 

 

 

 

30,214

 

 

 

 

 

 

5,488,222

 

Land

 

 

1,200,000

 

 

 

 

 

 

 

 

 

 

 

 

1,200,000

 

 

 

 

16,576,998

 

 

 

1,606,331

 

 

 

720,379

 

 

 

(1,851,849

)

 

 

17,051,859

 

Accumulated depreciation

 

 

(6,631,172

)

 

 

 

 

 

(1,811,918

)

 

 

1,116,274

 

 

 

(7,326,816

)

 

 

$

9,945,826

 

 

$

1,606,331

 

 

$

(1,091,539

)

 

$

(735,575

)

 

$

9,725,043

 

 

 

 

December 31, 2017

 

 

Acquisitions

 

 

Additions

 

 

Deletions

 

 

December 31, 2018

 

Property, equipment and sales floor

 

$

8,706,997

 

 

$

30,000

 

 

$

693,448

 

 

$

(1,248,124

)

 

$

8,182,321

 

Software

 

 

1,634,489

 

 

 

 

 

 

102,180

 

 

 

 

 

 

1,736,669

 

Building - owned

 

 

5,292,753

 

 

 

 

 

 

165,255

 

 

 

 

 

 

5,458,008

 

Land

 

 

1,200,000

 

 

 

 

 

 

 

 

 

 

 

 

1,200,000

 

Other

 

 

39,294

 

 

 

 

 

 

 

 

 

(39,294

)

 

 

 

 

 

 

16,873,533

 

 

 

30,000

 

 

 

960,883

 

 

 

(1,287,418

)

 

 

16,576,998

 

Accumulated depreciation

 

 

(5,526,299

)

 

 

 

 

 

(1,899,114

)

 

 

794,241

 

 

 

(6,631,172

)

 

 

$

11,347,234

 

 

$

30,000

 

 

$

(938,231

)

 

$

(493,177

)

 

$

9,945,826

 

 

As of December 31, 2019, estimated future depreciation expense for property and equipment (in thousands) is as follows:

 

2020

 

$

1,765

 

2021

 

 

1,478

 

2022

 

 

903

 

2023

 

 

495

 

2024

 

 

303

 

Thereafter

 

 

3,581

 

 

 

$

8,525

 

 

9.  Leases –

 

The Company adopted ASC 842 - Leases, using the modified retrospective method on January 1, 2019. The Company elected the package of practical expedients relief option offered in ASU 2016-02 and the accounting policy election for lessees not to separate lease and non-lease components (election applies to leased real property asset class).

 

The most significant impact of the adoption of ASC 842 was the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases of $11.53 million and $11.76 million, respectively, and a reversal of deferred rent of $0.23 million on January 1, 2019. The Company’s accounting for finance leases, which are insignificant, remained unchanged. The adoption of ASC 842 did not have any impact on the Company’s operating results or cash flows.

 

The Company has many retail and office space lease agreements and insignificant equipment lease agreements which are accounted for as operating leases. The real property leases typically are for three- to five-year terms with many containing options for similar renewal periods. The Company determines if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease liabilities (current and noncurrent) in the condensed consolidated balance sheet. Finance leases are included in property and equipment and finance lease obligations in the condensed consolidated balance sheet.

 

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.

 

F-15

 

The lease payment terms may include fixed payment terms and variable payments. Fixed payment terms and variable payments that depend on an index (i.e., Consumer Price Index, or “CPI”) or rate are considered in the determination of the operating lease liabilities. While lease liabilities are not remeasured because of changes to the CPI, changes are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. Variable payments that do not depend on an index or rate are not included in the lease liabilities determination. Rather, these payments are recognized as variable lease expense when incurred. Expenses related to leases with a lease term of one month or less are recognized as variable lease expense when incurred. Variable lease payments are included within operating costs and expenses in the condensed consolidated statement of operations.

 

Due to the significant assumptions and judgements required in accounting for leases (to include whether a contract contains a lease, the allocation of the consideration, and the determination of the discount rate), the judgements and estimates made could have a significant effect on the amount of assets and liabilities recognized.

 

Total components of operating lease expense for the real property asset class (in thousands) were as follows:

 

 

 

2019

 

Operating lease expense

 

$

5,701

 

Variable lease expense

 

 

2,708

 

Total lease expense

 

$

8,409

 

 

Other information related to operating leases as of December 31, 2019 was as follows:

 

Weighted average remaining lease term, in years

 

 

3.00

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

5.8

%

 

Future minimum lease payments under operating leases as of December 31, 2019 (in thousands) were as follows: 

 

2020

 

$

5,660

 

2021

 

 

3,940

 

2022

 

 

2,403

 

2023

 

 

1,144

 

2024

 

 

525

 

Thereafter

 

 

118

 

Total minimum lease payments

 

 

13,790

 

Less:  Imputed interest

 

 

(1,265

)

Total present value of minimum lease payments

 

$

12,525

 

 

Current portion operating lease liabilities

 

$

5,080

 

Non-Current operating lease liabilities

 

 

7,445

 

Total operating lease liabilities

 

$

12,525

 

 

10.      Goodwill and Long-Lived Assets –

 

During the fourth quarter of 2019, the Company completed the annual impairment assessments for goodwill and long-lived assets, determining there was no impairment.

 

F-16

 

A rollforward of the carrying amount of goodwill is as follows:

 

 

 

Cellular Retail Segment

 

 

Direct to Consumer Segment

 

 

Consumer Finance Segment

 

 

Total

 

Balance at December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

5,765,284

 

 

$

31,244

 

 

$

7,559,063

 

 

$

13,355,591

 

Accumulated impairment losses