SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

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

 

Commission File Number:   000-52015

 

Western Capital Resources, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware		47-0848102
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

 

11550 “I” Street, Suite 150, Omaha, Nebraska 68137

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (402) 551-8888

 

N/A

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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 such 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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐	Accelerated filer  ☐	Emerging growth company  ☐
Non-accelerated filer  ☑	Smaller reporting company  ☑

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Yes ☐ No ☑

 

As of May 15, 2020, the registrant had outstanding 9,265,778 shares of common stock, $0.0001 par value per share.

 

 

 

Western Capital Resources, Inc.

 

Index

 

		Page
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 4. Controls and Procedures		19
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 6. Exhibits		21
SIGNATURES		22

  

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

CONTENTS

 

	Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Income	5
Condensed Consolidated Statements of Shareholders’ Equity	6
Condensed Consolidated Statements of Cash Flows	7
Notes to Condensed Consolidated Financial Statements	8

  

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2020				December 31, 2019
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	21,352,241			$	27,132,540
Short-term investments			22,511,712				14,756,665
Loans receivable (net of allowance for losses of $662,000 and $673,000, respectively)			2,738,020				3,860,411
Accounts receivable (net of allowance for losses of $90,000 and $13,000, respectively)			2,271,517				517,476
Inventories (net of allowance of $864,000 and $1,065,000, respectively)			8,817,697				8,330,691
Prepaid expenses and other			2,936,085				2,679,859
TOTAL CURRENT ASSETS			60,627,272				57,277,642
INVESTMENTS			1,000,000				1,500,000
PROPERTY AND EQUIPMENT, net			9,457,967				9,725,043
OPERATING LEASE RIGHT-OF-USE ASSETS			12,187,708				12,344,894
INTANGIBLE ASSETS, net			3,961,873				4,041,650
LOAN RECEIVABLE			703,745				694,987
OTHER			571,131				525,884
GOODWILL			5,796,528				5,796,528
TOTAL ASSETS		$	94,306,224			$	91,906,628
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable		$	8,744,760			$	7,710,222
Accrued payroll			1,942,602				2,572,331
Current portion operating lease liabilities			5,049,025				5,079,745
Other current liabilities			1,169,524				1,276,613
Income taxes payables			844,774				243,149
Current portion notes payable			66,362				65,414
Current portion finance lease obligations			—				1,161
Contract liabilities			627,149				794,830
TOTAL CURRENT LIABILITIES			18,444,196				17,743,465
LONG-TERM LIABILITIES
Notes payable, net of current portion			1,002,856				1,019,837
Operating lease liabilities, net of current portion			7,308,021				7,444,789
Deferred income taxes			379,000				385,000
TOTAL LONG-TERM LIABILITIES			8,689,877				8,849,626
TOTAL LIABILITIES			27,134,073				26,593,091
COMMITMENTS AND CONTINGENCIES (Note 14)			—				—
EQUITY
WESTERN SHAREHOLDERS’ EQUITY
Common stock, $0.0001 par value, 12,500,000 shares authorized, 9,265,778 shares issued and outstanding as of March 31, 2020 and December 31, 2019			927				927
Additional paid-in capital			29,031,741				29,031,741
Retained earnings			35,147,081				33,706,035
TOTAL WESTERN SHAREHOLDERS’ EQUITY			64,179,749				62,738,703
NONCONTROLLING INTERESTS			2,992,402				2,574,834
TOTAL EQUITY			67,172,151				65,313,537
TOTAL LIABILITIES AND EQUITY		$	94,306,224			$	91,906,628

 

See notes to condensed consolidated financial statements 

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

		Three Months Ended
		March 31, 2020				March 31, 2019
REVENUES
Sales and associated fees		$	26,808,486			$	23,820,838
Financing fees and interest			2,044,697				2,114,871
Other revenues			4,744,598				4,022,511
Total Revenues			33,597,781				29,958,220
COST OF REVENUES
Cost of sales			13,931,349				12,736,421
Provisions for loans receivable losses			291,428				218,277
Total Cost of Revenues			14,222,777				12,954,698
GROSS PROFIT			19,375,004				17,003,522
OPERATING EXPENSES
Salaries, wages and benefits			8,914,954				8,095,947
Occupancy			2,827,239				2,764,283
Advertising, marketing and development			1,827,955				1,775,842
Depreciation			498,658				429,500
Amortization			184,778				184,536
Other			2,284,318				2,264,592
Total Operating Expenses			16,537,902				15,514,700
OPERATING INCOME			2,837,102				1,488,822
OTHER INCOME (EXPENSES):
Dividend and interest income			138,727				181,543
Interest expense			(15,816	)			(26,255	)
Total Other Income (Expenses)			122,911				155,288
INCOME BEFORE INCOME TAXES			2,960,013				1,644,110
PROVISION FOR INCOME TAX EXPENSE			593,110				344,000
NET INCOME			2,366,903				1,300,110
LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			(462,568	)			(249,697	)
NET INCOME ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS		$	1,904,335			$	1,050,413
EARNINGS PER SHARE ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS
Basic and diluted		$	0.21			$	0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted			9,265,778				9,388,677

 

See notes to condensed consolidated financial statements 

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

		Western Capital Resources, Inc. Shareholders
		Common Stock
			Shares				Amount				Additional Paid-In Capital				Retained Earnings				Noncontrolling Interests				Total
BALANCE – December 31, 2019			9,265,778			$	927			$	29,031,741			$	33,706,035			$	2,574,834			$	65,313,537
Net income			—				—				—				1,904,335				462,568				2,366,903
Distributions to Noncontrolling Interests			—				—				—				—				(45,000	)			(45,000	)
Dividends			—				—				—				(463,289	)			—				(463,289	)
BALANCE – March 31, 2020			9,265,778			$	927			$	29,031,741			$	35,147,081			$	2,992,402			$	67,172,151

 

		Western Capital Resources, Inc. Shareholders
		Common Stock
			Shares				Amount				Additional Paid-In Capital				Retained Earnings				Noncontrolling Interests				Total
BALANCE – December 31, 2018			9,388,677			$	939			$	29,031,741			$	33,774,293			$	1,876,908			$	64,683,881
Net income			—				—				—				1,050,413				249,697				1,300,110
Noncontrolling Interest equity contribution			—				—				—				—				17,446				17,446
Distributions to Noncontrolling Interests			—				—				—				—				(266,600	)			(266,600	)
Dividends			—				—				—				(469,434	)			—				(469,434	)
BALANCE – March 31, 2019			9,388,677			$	939			$	29,031,741			$	34,355,272			$	1,877,451			$	65,265,403

 

See notes to condensed consolidated financial statements. 

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Three Months Ended
		March 31, 2020				March 31, 2019
OPERATING ACTIVITIES
Net income		$	2,366,903			$	1,300,110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			498,658				429,500
Amortization			184,778				184,536
Amortization of operating lease right-of-use assets			1,475,354				1,411,389
Deferred income taxes			(6,000	)			291,000
Gain on disposals			(7,737	)			(147,977	)
Accrued interest from investing activities			(6,002	)			(73,862	)
Changes in operating assets and liabilities:
Loans receivable			1,122,391				980,252
Accounts receivable			(1,754,041	)			(1,510,812	)
Inventory			(421,296	)			(1,232,366	)
Prepaid expenses and other assets			(296,199	)			(386,216	)
Operating lease liabilities			(1,658,358	)			(1,594,341	)
Accounts payable and accrued expenses			1,123,592				508,655
Deferred revenue and other current liabilities			(274,770	)			146,689
Net cash and cash equivalents provided by operating activities			2,347,273				306,557
INVESTING ACTIVITIES
Purchases of investments			(16,161,391	)			(17,940,344	)
Proceeds from held-to-maturity investments			8,903,588				13,680,000
Purchases of property and equipment			(133,410	)			(84,839	)
Acquisition of stores, net of cash acquired			(260,876	)			(164,400	)
Proceeds from the disposal of operating assets			50,000				1,120,000
Net cash and cash equivalents used by investing activities			(7,602,089	)			(3,389,583	)
FINANCING ACTIVITIES
Payments on notes payable – long-term			(16,033	)			(5,204	)
Payments on finance leases			(1,161	)			(12,278	)
Distributions to noncontrolling interests			(45,000	)			(266,600	)
Payments of dividends			(463,289	)			(469,434	)
Net cash and cash equivalents used in financing activities			(525,483	)			(753,516	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(5,780,299	)			(3,836,542	)
CASH AND CASH EQUIVALENTS
Beginning of period			27,132,540				16,724,983
End of period		$	21,352,241			$	12,888,441
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid		$	—			$	16,475
Interest paid		$	15,882			$	20,353
Noncash investing and financing activities:
Assets received in acquisition		$	580,972			$	1,694,546
Liabilities assumed in acquisition		$	580,972			$	1,325,024
Note payable assumed in acquisition		$	—			$	347,918
Noncontrolling interest contribution to subsidiary		$	—			$	17,446
Right-of-use assets obtained and operating lease obligations incurred		$	923,097			$	963,486
Right-of-use asset and operating lease obligation disposals		$	130,357			$	—

 

See notes to condensed consolidated financial statements. 

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

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

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

Management has analyzed the impact of the Coronavirus pandemic (“COVID-19”) on its financial statements as of March 31, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.

 

For further information, refer to the Consolidated Financial Statements and notes thereto included in our Form 10-K for the year ended December 31, 2019. The condensed consolidated balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP.

 

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

o

PQH Wireless, Inc. (“PQH”) (100%) – operates 221 cellular retail stores as of March 31, 2020 (108 100% owned plus 113 held through its controlled but less than 100% owned subsidiaries), exclusively as an authorized retailer of the Cricket brand.

 

●

Direct to Consumer

o

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.

 

o

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

o

Wyoming Financial Lenders, Inc. (“WFL”) (100%) – owns and operates “payday” stores  (38 as of March 31, 2020, 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.

 

o

Express Pawn, Inc. (“EPI”) (100%) – owns and operates retail pawn stores (three as of March 31, 2020) 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.

 

 

 

Reclassifications

 

Certain Statement of Income reclassifications have been made in the presentation of our prior financial statements to conform to the presentation as of and for the three months ended March 31, 2020.

 

Recent Accounting Pronouncements

 

In April, 2020 the staff of the Financial Accounting Standards Board (FASB) issued a question-and-answer document that says entities can elect not to evaluate whether a concession provided by a lessor to a lessee in response to the effects of the coronavirus pandemic is a lease modification.  Retailers may make the elections for any lessor-provided concessions related to the effects of the coronavirus pandemic as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has made such election.  The Company has received minimal rent concessions and has not entered into any lease modifications to date.  As such, the Company does not believe this election will have a material impact on our financial condition, results of operations or consolidated financial statements.

 

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 28% of our payday lending revenue, or approximately 1.6% 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 March 31, 2020, the Company had demand deposits in excess of insurance amounts of approximately $6.73 million.

 

COVID-19

 

In December 2019 COVID-19 emerged in Wuhan, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to almost all other countries, including the United States, and infections have been reported globally.

 

Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future.  As of March 31, 2020, the Company’s Cellular Retail segment had temporarily closed approximately 75 locations.

 

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations.  The significance of the impact of the COVID-19 outbreak on the Company’s businesses and the duration for which it may have an impact cannot be determined at this time.

 

 

 

3.	Cash Equivalents and Marketable Investments –

 

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

 

		March 31, 2020				December 31, 2019
Cash and cash equivalents
Operating accounts		$	12,509,044			$	10,163,845
Money Market – U.S. Treasury obligations			6,258,991				4,450,433
U.S. Treasury obligations			2,584,206				12,518,262
Subtotal			21,352,241				27,132,540
Held to Maturity Investments
Certificates of deposit (4 – 24 month maturities, FDIC insured)		$	11,315,739			$	9,049,787
U.S. Treasury obligations (less than one year maturities)			12,195,973				7,206,878
Subtotal			23,511,712				16,256,665
TOTAL		$	44,863,953			$	43,389,205

 

Held to maturity investments consisted of the following:

 

March 31, 2020
		Cost				Accrued Interest				Amortized Discount				Amortized Cost				Unrealized Gain (Loss)				Estimated Fair Value
Certificates of Deposit		$	11,271,888			$	43,851			$	—			$	11,315,739			$	(25,906	)		$	11,289,833
U.S. Treasuries			12,155,120				—				40,853				12,195,973				2,953				12,198,926
		$	23,427,008			$	43,851			$	40,853			$	23,511,712			$	(22,953	)		$	23,488,759

 

December 31, 2019
		Cost				Accrued Interest				Amortized Discount				Amortized Cost				Unrealized Gain (Loss)				Estimated Fair Value
Certificates of Deposit		$	9,015,618			$	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

 

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

 

			Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
Held-to-maturity			$	116,075			$	142,146
Other				22,652				39,397
			$	138,727			$	181,543

 

4.         Loans Receivable –

 

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

 

March 31, 2020
		Payday				Installment				Pawn				Total
Current		$	2,390,819			$	38,006			$	278,764			$	2,707,589
1-30			168,738				3,337				—				172,075
31-60			127,840				720				—				128,560
61-90			112,411				108				—				112,519
91-120			105,426				—				—				105,426
121-150			86,619				—				—				86,619
151-180			87,232				—				—				87,232
			3,079,085				42,171				278,764				3,400,020
Less Allowance			(662,000	)			—				—				(662,000	)
		$	2,417,085			$	42,171			$	278,764			$	2,738,020

 

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

 

 

 

5.         Loans Receivable Allowance –

 

A rollforward of the Consumer Finance segment’s loans receivable allowance is as follows:

 

		Three Months Ended March 31, 2020				Year Ended December 31, 2019
Loans receivable allowance, beginning of period		$	673,000			$	818,000
Provision for loan losses charged to expense			291,428				975,938
Write-offs, net			(302,428	)			(1,120,938	)
Loans receivable allowance, end of period		$	662,000			$	673,000

 

6.         Accounts Receivable –

 

A breakdown of accounts receivables by segment is as follows:

 

March 31, 2020
		Cellular Retail				Direct to Consumer				Consumer Finance				Total
Accounts receivable		$	134,151			$	2,204,478			$	22,888			$	2,361,517
Less allowance			—				(90,000	)			—				(90,000	)
Net accounts receivable		$	134,151			$	2,114,478			$	22,888			$	2,271,517

 

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 accounts receivable		$	184,519			$	305,235			$	27,722			$	517,476

 

A portion of accounts receivable are unsettled credit card sales from the prior one to five business days.  This makes up 46% and 68% of the net accounts receivable balance at March 31, 2020 and December 31, 2019, respectively.

 

7.         Inventory –

 

Inventories consist of:

 

		March 31, 2020				December 31, 2019
Finished Goods
Cellular Retail		$	5,673,728			$	5,687,771
Direct to Consumer			3,195,325				2,888,483
Consumer Finance			812,644				819,437
Reserve			(864,000	)			(1,065,000	)
TOTAL		$	8,817,697			$	8,330,691

 

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 $864,000 and $1,065,000 at March 31, 2020 and December 31, 2019, respectively. These inventory write-downs have been reflected in adjustments to 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.

 

8.         Leases –

 

The Company lease accounting policy follows the guidance from ASC 842 - Leases, which provides guidance on the recognition, presentation and disclosure of leases in consolidated condensed financial statements.

 

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

 

		Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
Operating lease expense		$	1,652			$	1,401
Variable lease expense			539				694
Total lease expense		$	2,191			$	2,095

 

Other information related to operating leases was as follows:

 

		Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
Weighted average remaining lease term, in years			2.97				2.60
Weighted Average Discount Rate			5.8	%			5.9	%

 

 

 

Future minimum lease payments under operating leases as of March 31, 2020 (in thousands) were as follows:

 

			Operating Leases
Remainder of 2020			$	4,381
2021				4,338
2022				2,781
2023				1,307
2024				645
2025				94
Thereafter				28
Total future minimum lease payments				13,574
Less: imputed interest				(1,217	)
Total			$	12,357
Current portion operating lease liabilities			$	5,049
Non-Current operating lease liabilities				7,308
Total			$	12,357

 

9.         Notes Payable – Long Term –

 

		March 31, 2020				December 31, 2019
Subsidiary subordinated note payable to seller with monthly interest only payments at 6%, guaranteed by PQH, maturing August 5, 2022 when the principal balance is due.		$	789,216			$	789,216
Subsidiary note payable to a financial institution, with monthly principal and interest payments of $6,692, bearing interest at 5.5%, secured by substantially all assets of the subsidiary, and maturing January 4, 2024.			280,002				296,035
Total			1,069,218				1,085,251
Less current maturities			(66,362	)			(65,414	)
		$	1,002,856			$	1,019,837

 

10.     Cash Dividends –

 

Date Declared	Record Date	Dividend Per Share	Payment Date	Dividend Paid
February 13, 2020	February 28, 2020	$0.05	March 9, 2020	$463,289

 

11.       Revenue –

 

Revenue generated from contracts with customers and recognized per ASC 606 primarily consists of sales of merchandise and services at the point of sale and compensation from Cricket Wireless.  As a Cricket Wireless authorized retailer, we earn compensation from Cricket Wireless for activating a new customer on the Cricket Wireless network, activating new devices for existing Cricket Wireless customers (“back-end compensation”) and upon an existing Cricket Wireless customer whom we originally activated on the Cricket Wireless GSM network making a continuing service payment (“CSP”). 

 

Due to COVID-19 and at the request of Cricket Wireless, the Cellular Retail segment temporarily closed approximately 75 retail locations in March 2020.  In conjunction with the request, Cricket Wireless notified the Company that it would be providing supplemental commissions for the store closures.  Supplemental commissions related to the closed locations of approximately $285,000, as reported to us by Cricket, was included in revenue in the three-month period ended March 31, 2020.

 

Revenue generated from short-term lending agreements in the Consumer Finance segment and from Company investments are recognized in accordance with ASC 825.

 

Total net sales of merchandise, which exclude sales taxes, are generally recorded as follows: 

●

Cellular Retail – net sales reflects the transaction price at point of sale when payment is received or receivable, the customer takes control of the merchandise and, applicable to devices, the device has been activated on the Cricket Wireless network.   The sale and activation of a wireless device also correlates to the recording of back-end compensation from Cricket Wireless.  Sales returns are generally not material to our financial statements.

●

Direct to Consumer – net sales reflect the transaction price when product is shipped to customers, FOB shipping point, reduced by variable consideration.  Shipping and handling fees are also included in total net sales. Variable consideration is comprised of estimated future returns and merchandise credits which are estimated based primarily on historical rates and sales levels.

●

Consumer Finance - net sales reflects the transaction price at point of sale when payment in full is received and the customer takes control of the merchandise.  Sales returns are generally not material to our financial statements.

 

Services revenue from customer paid fees is generally recorded at point of sale when payment is received and the customer receives the benefit of the service.  CSP compensation from Cricket Wireless is recorded as of the time certain Cricket Wireless customers make a service payment, as reported to us by Cricket Wireless.

 

Recognized as revenue per ASC 825, Consumer Finance loan fees and interest on cash advance loans are recognized on a constant-yield basis ratably over a loan’s term. Installment loan fees and interest are recognized using the interest method, except that installment loan origination fees are recognized as they become non-refundable and installment loan maintenance fees are recognized when earned.  The Company recognizes fees on pawn loans on a constant-yield basis ratably over the loans’ terms, less an estimated amount for expected forfeited pawn loans which is based on historical forfeiture rates.

 

See Note 15, “Segment Information,” for disaggregation of revenue by segment.

 

 

 

12.     Other Operating Expense –

 

A breakout of other expense is as follows:

 

		For The Three Months Ended
		March 31, 2020				March 31, 2019
Bank fees		$	560,978			$	504,981
Collection costs			78,069				77,715
Insurance			196,381				188,296
Management and advisory fees			211,003				202,146
Professional and consulting fees			380,496				553,622
Supplies			217,579				138,592
Gain on disposal			(7,737	)			(1,415	)
Other			647,549				600,655
		$	2,284,318			$	2,264,592

 

13.       Segment Information –

 

Segment information related to the three-month period ended March 31, 2020 and 2019 (in thousands) is as follows:

 

Thee Months Ended March 31, 2020 (in thousands)
		Cellular Retail				Direct to Consumer				Consumer Finance				Corporate				Total
Revenue from external customers		$	19,533			$	11,599			$	421			$	—			$	31,553
Fees and interest income		$	—			$	—			$	2,045			$	—			$	2,045
Total Revenue		$	19,533			$	11,599			$	2,466			$	—			$	33,598
Net income (loss)		$	1,184			$	1,176			$	225			$	(218	)		$	2,367
Total segment assets		$	35,495			$	15,307			$	8,347			$	35,157			$	94,306
Expenditures for segmented assets		$	336			$	118			$	—			$	—			$	454

 

Three Months Ended March 31, 2019 (in thousands)
		Cellular Retail				Direct to Consumer				Consumer Finance				Corporate				Total
Revenue from external customers		$	16,501			$	10,941			$	401			$	—			$	27,843
Fees and interest income		$	—			$	—			$	2,115			$	—			$	2,115
Total Revenue		$	16,501			$	10,941			$	2,516			$	—			$	29,958
Net income (loss)		$	571			$	650			$	233			$	(154	)		$	1,300
Total segment assets		$	34,253			$	13,968			$	8,429			$	36,039			$	92,689
Expenditures for segmented assets		$	229			$	34			$	—			$	—			$	263

 

14.       Commitments and Contingencies –

 

Employment Agreements

 

Pursuant to the numerous employment agreements, bonuses of approximately $203,000 and $158,000 were accrued for the three months ended March 31, 2020 and 2019, respectively.

 

Assigned Leases

 

The Company’s Cellular Retail segment has transferred operations of many locations to other dealers and remains contingently liable under many lease agreements. Minimum lease payments of assigned or assumed non-cancelable operating leases related to transferred locations in which a release has not been obtained from the lessor are approximately $1,876,000 as of March 31, 2020.

 

Legal Proceedings

 

The Company is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company does not believe that such normal and routine litigation will have a material impact on its consolidated financial results.

 

15.       Subsequent Events –

 

Dividend Declared

 

Our Board of Directors declared the following dividend:

 

Date Declared	Record Date	Dividend Per Share	Payment Date
May 5, 2020	May 22, 2020	$0.025	June 2, 2020

 

 

 

COVID-19

 

As of the date of this report, the Company’s Cellular Retail segment has reopened approximately 45 of the locations temporarily closed in March 2020.  Cricket Wireless continued to provide supplemental commissions related to the store closures.

 

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations.

 

The significance of the impact of the COVID-19 outbreak on the Company’s businesses and the duration for which it may have an impact cannot be determined at this time.

 

We evaluated all events or transactions that occurred after March 31, 2020 through the date we issued these financial statements. During this period we did not have any other material subsequent events that impacted our financial statements.

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Some of the statements made in this report are “forward-looking statements,” as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements are based upon our current expectations and projections about future events.  Whenever used in this report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect,” “will” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions.  The forward-looking statements in this report are primarily located in the material set forth under the headings “Description of Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are found in other parts of this report as well.  These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends.  Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives.  You should read this report completely and with the understanding that actual future results may be materially different from what we expect.  We are not undertaking any obligation to update any forward-looking statements even though our situation may change in the future.

 

Specific factors that might cause actual results to differ from our expectations or may affect the value of the common stock, include, but are not limited to:

 

●

Changes in local, state or federal laws and regulations governing lending practices, or changes in the interpretation of such laws and regulations;

●

Litigation and regulatory actions directed toward the consumer finance industry or us, particularly in certain key states;

●

Our need for additional financing;

●

Changes in our authorization to be a dealer for Cricket Wireless;

●

Changes in authorized Cricket dealer compensation;

●

Lack of 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.

 

OVERVIEW

 

Western Capital Resources, Inc. (“WCR”), 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.  Throughout this report, we collectively refer to WCR and its consolidated subsidiaries as “we,” the “Company,” and “us.”

 

Discussion of Critical Accounting Policies

 

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis.  The preparation of these condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  We evaluate these estimates and assumptions on an ongoing basis.  We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances.  Actual results could vary materially from these estimates under different assumptions or conditions.

 

Our significant accounting policies are discussed in Note 1, “Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies,” of the notes to our condensed consolidated financial statements included in this report together with our significant accounting policies discussed in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the notes to our December 31, 2019 consolidated financial statements included in our Form 10-K for the year ended December 31, 2019.  We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.

 

 

 

Receivables and 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 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.

 

We do not specifically reserve for any individual payday or installment 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 three month ended March 31, 2020 and the year ended December 31, 2019.

 

Valuation of Long-lived and Intangible Assets

 

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

 

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. 

 

Management has analyzed the impact of the Coronavirus pandemic (“COVID-19”) on its financial statements as of March 31, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets. However, the Company's future assessment of the magnitude and duration of COVID-19/coronavirus, as well as other factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods.

 

Operating Leases

 

We have 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.  We determine if an arrangement is or contains a lease at inception. 

 

Under ASC 842, we recognize right-of-use (“ROU”) assets and lease liabilities for operating leases.  ROU assets and lease liabilities are recognized at commencement date based on the present value of future minimum lease payments over the lease term.  For our leased real property asset class, we do not separate lease and non-lease components when determining the amounts of a lease payment.  As most of our leases do not provide an implicit rate, we use WCR’s collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

 

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 our 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, whether and at what point the period covered by an option to extend a lease is reasonable certain to be exercised, 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.

 

 

 

Results of Operations – Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

 

Net income attributable to our common shareholders was $1.90 million, or $0.21 per share (basic and diluted), for the quarter ended March 31, 2020, compared to net income of $1.05 million, or $0.11 per share (basic and diluted), for the quarter ended March 31, 2019. 

 

We expect segment operating results and earnings per share to change throughout 2020 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, potential mergers and acquisitions activity and unknown impact of COVID-19.

 

Following is a discussion of operating results by segment.

 

The following table provides revenues and net income attributable to WCR common shareholders for the quarters ended March 31, 2020 and March 31, 2019 (in thousands).

 

 

 

Cellular Retail

 

A summary table of the number of Cricket Wireless retail stores we operated during the three months ended March 31, 2020 and March 31, 2019 follows:

 

		2020				2019
Beginning			222				205
Acquired/ Launched			7				31
Closed/Transferred			(8	)			(35	)
Ending			221				201

 

Period over period, net income attributable to shareholders increased from $0.32 million in the comparable prior year quarter to $0.72 million in the current quarter.  Our strategic location disposals and additions from the first quarter of 2019 through the current quarter has resulted in a better mix of stores and the increased operating results attributable to shareholders period over period.

 

Due to the impact of COVID-19 and even though our stores were generally deemed to be “essential businesses”, on March 19, 2020 we began the process of temporarily closing approximately 75 of our retail stores.  Cricket Wireless provided supplemental commissions to alleviate the financial strain caused by the closures.  Our stores that remained open reduced hours of operations and experienced various levels of decreased activity.  As of the date of the filing of this report, approximately 45 of the locations that temporarily closed have re-opened, but with reduced hours of operations.

 

Direct to Consumer

 

The Direct to Consumer segment has seasonal sources of revenue and historically experiences a greater proportion of annual revenue and net income in the months of March through May and December due to the seasonal products it sells.  For the current quarter, the Direct to Consumer segment had net income of $1.18 million compared to net income of $0.65 million for the comparable prior year period.  Revenues for the three month period ended March 31, 2020 were $11.60 million compared to $10.94 million for the comparable period in 2019.  Similar to other online retailers, the Direct to Consumer segment has experienced an increase in demand and sales activity due to COVID-19.

 

Consumer Finance

 

A summary table of the number of consumer finance locations we operated during the quarters ended March 31, 2020 and March 31, 2019 follows:

 

		2020				2019
Beginning			39				41
Acquired/ Launched			—				—
Closed			—				(2	)
Ending			39				39

 

Our Consumer Finance segment revenues decreased $0.05 million, or 2.0%, for the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019.  This segment and the industry continues to experience declines in loan and check cashing activity.  In addition, in the later part of March 2020 the segment began to experience a larger than normal decline in lending activity due to COVID-19.

 

Corporate

 

Net costs related to our Corporate segment were $0.22 million for the quarter ended March 31, 2020 compared to $0.15 million for the quarter ended March 31, 2019.  The period over period increase in net costs is primarily due to a decrease in investment income and an increase in compensation costs.

 

Consolidated Income Tax Expense

 

Provision for income tax expense for the quarter ended March 31, 2020 was $0.59 million compared to $0.34 million for the quarter ended March 31, 2019 for an effective rate of 20.0% and 20.9%, respectively.  The effective tax rate, while consistent, is lower than the federal plus state effective rates due to impact of noncontrolling interest share of positive net income not subject to income tax at the consolidated group level.

 

 

 

Liquidity and Capital Resources

 

Summary cash flow data is as follows:

 

		Three Months Ended March 31,
		2020				2019
Cash flows provided (used) by:
Operating activities		$	2,347,273			$	306,557
Investing activities			(7,602,089	)			(3,389,583	)
Financing activities			(525,483	)			(753,516	)
Net decrease in cash and cash equivalents			(5,780,299	)			(3,836,542	)
Cash and cash equivalents, beginning of period			27,132,540				16,724,983
Cash and cash equivalents, end of period		$	21,352,241			$	12,888,441

 

At March 31, 2020, we had cash and cash equivalents of $21.35 million compared to cash and cash equivalents of $12.89 million on March 31, 2019, the increase coming primarily from converting investments to cash and cash equivalents as noted above.  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 March 31, 2020, we had $11.32 million invested in certificates of deposit (limited to $250,000 per financial institution per entity) and $12.20 million in short-term T-Bills or Notes.

 

At March 31, 2020, our outstanding debt and capital lease obligations were $1.07 million compared to $1.09 million at December 31, 2019. 

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of March 31, 2020.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

 

We utilize the Committee of Sponsoring Organization’s Internal Control – Integrated Framework, 2013 version, for the design, implementation and assessment of the effectiveness of our disclosure controls and procedures and internal control over financial reporting. 

 

As of March 31, 2020, our Chief Executive Officer and Chief Financial Officer carried out an assessment of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on this assessment, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of March 31, 2020.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the fiscal year covered by this report that materially affected, or were reasonably likely to materially affect such controls.

 

 

 

PART II. OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

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 March 31, 2020.

 

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)
January 1, 2020		January 31, 2020				—			$	—				—			$	476,900
February 1, 2020		February 29, 2020				—			$	—				—			$	476,900
March 1, 2020		March 31, 2020				—			$	—				—			$	1,476,900
						—								—

 

	(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.

  

 

 

Item 6. Exhibits

 

Exhibit		Description
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS		XBRL Instance Document (filed herewith).
101.SCH		XBRL Schema Document (filed herewith).
101.CAL		XBRL Calculation Linkbase Document (filed herewith).
101.DEF		XBRL Definition Linkbase Document (filed herewith).
101.LAB		XBRL Label Linkbase Document (filed herewith).
101.PRE		XBRL Presentation Linkbase Document (filed herewith).

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: May 15, 2020	Western Capital Resources, Inc.
	(Registrant)
	By:	/s/ John Quandahl
		John Quandahl
		Chief Executive Officer and Chief Operating Officer
	By:	/s/ Angel Donchev
		Angel Donchev
		Chief Financial Officer