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 and nine month periods ended September 30, 2019 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2019.
For
further information, refer to the Consolidated Financial Statements and notes thereto included in our Form 10-K for the year ended
December 31, 2018. The condensed consolidated balance sheet at December 31, 2018, 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.
|
o
|
PQH
Wireless, Inc. (PQH) (100%) – operates 194 cellular retail stores as of September
30, 2019 (110 100% owned plus 84 through majority owned subsidiaries), as an exclusive
dealer of the Cricket Wireless brand.
|
|
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.
|
|
o
|
Wyoming
Financial Lenders, Inc. (WFL) (100%) – owns and operates 38 “payday”
stores in six states (Iowa, Kansas, Nebraska, North Dakota, Wisconsin and Wyoming) as
of September 30, 2019 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 September
30, 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.
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 nine months ended September 30, 2019.
|
1.
|
Basis
of Presentation, Nature of Business and Summary of Significant Accounting Policies –
continued
|
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 will be 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 will classify leases to determine how to recognize lease-related
revenue and expense. Quantitative and qualitative disclosures will be 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 8 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 and consolidated financial statements.
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 8 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.
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.
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 September 30, 2019, the Company had demand deposits in excess of insurance amounts of approximately
$3.93 million.
|
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:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Operating accounts
|
|
$
|
7,733,121
|
|
|
$
|
10,901,929
|
|
U.S. treasuries
|
|
|
13,344,202
|
|
|
|
3,014,478
|
|
Money markets
|
|
|
927,011
|
|
|
|
2,808,576
|
|
Subtotal
|
|
|
22,004,334
|
|
|
|
16,724,983
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity investments
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
12,007,686
|
|
|
|
12,711,069
|
|
U.S. treasuries
|
|
|
4,150,737
|
|
|
|
10,683,679
|
|
Subtotal
|
|
|
16,158,423
|
|
|
|
23,394,748
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
38,162,757
|
|
|
$
|
40,119,731
|
|
As
of September 30, 2019 and December 31, 2018, held to maturity investments consisted of the following:
September 30, 2019
|
|
|
Cost
|
|
|
Accrued Interest
|
|
|
Amortized
Discount
|
|
|
Amortized
Cost
|
|
|
Unrealized Gain (Loss)
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
11,929,316
|
|
|
$
|
78,370
|
|
|
$
|
—
|
|
|
$
|
12,007,686
|
|
|
$
|
(76,713
|
)
|
|
$
|
11,930,973
|
|
U.S. Treasuries
|
|
|
4,121,672
|
|
|
|
—
|
|
|
|
29,065
|
|
|
|
4,150,737
|
|
|
|
3,736
|
|
|
|
4,154,473
|
|
|
|
$
|
16,050,988
|
|
|
$
|
78,370
|
|
|
$
|
29,065
|
|
|
$
|
16,158,423
|
|
|
$
|
(72,977
|
)
|
|
$
|
16,085,446
|
|
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:
|
|
|
Three Months Ended
September 30, 2019
|
|
|
Three Months Ended
September 30, 2018
|
|
|
Nine
Months Ended
September
30, 2019
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
$
|
112,158
|
|
|
$
|
121,906
|
|
|
$
|
412,855
|
|
|
$
|
364,454
|
|
Other
|
|
|
|
86,659
|
|
|
|
31,833
|
|
|
|
161,481
|
|
|
|
100,971
|
|
|
|
|
$
|
198,817
|
|
|
$
|
153,739
|
|
|
$
|
574,336
|
|
|
$
|
465,425
|
|
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.
The
Consumer Finance segment’s outstanding loans receivable aging is as follows:
September 30, 2019
|
|
|
Payday
|
|
|
Installment
|
|
|
Pawn
|
|
|
Total
|
|
Current
|
|
$
|
3,119,450
|
|
|
$
|
73,391
|
|
|
$
|
308,201
|
|
|
$
|
3,501,042
|
|
1-30
|
|
|
241,197
|
|
|
|
15,192
|
|
|
|
—
|
|
|
|
256,389
|
|
31-60
|
|
|
155,545
|
|
|
|
7,091
|
|
|
|
—
|
|
|
|
162,636
|
|
61-90
|
|
|
129,094
|
|
|
|
2,638
|
|
|
|
—
|
|
|
|
131,732
|
|
91-120
|
|
|
92,491
|
|
|
|
1,085
|
|
|
|
—
|
|
|
|
93,576
|
|
121-150
|
|
|
73,018
|
|
|
|
294
|
|
|
|
—
|
|
|
|
73,312
|
|
151-180
|
|
|
68,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,559
|
|
|
|
|
3,879,354
|
|
|
|
99,691
|
|
|
|
308,201
|
|
|
|
4,287,246
|
|
Less Allowance
|
|
|
(602,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(602,000
|
)
|
|
|
$
|
3,277,354
|
|
|
$
|
99,691
|
|
|
$
|
308,201
|
|
|
$
|
3,685,246
|
|
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
|
|
|
5.
|
Loans
Receivable Allowance –
|
A
rollforward of the Consumer Finance segment’s loans receivable allowance is as follows:
|
|
Nine Months Ended
September 30, 2019
|
|
|
Year Ended
December 31, 2018
|
|
Loans receivable allowance, beginning of period
|
|
$
|
818,000
|
|
|
$
|
833,000
|
|
Provision for loan losses charged to expense
|
|
|
705,604
|
|
|
|
1,241,638
|
|
Write-offs, net
|
|
|
(921,604
|
)
|
|
|
(1,256,638
|
)
|
Loans receivable allowance, end of period
|
|
$
|
602,000
|
|
|
$
|
818,000
|
|
6. Accounts
Receivable –
A
breakdown of accounts receivables by segment is as follows:
September 30, 2019
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Total
|
|
Accounts receivable
|
|
$
|
146,374
|
|
|
$
|
622,321
|
|
|
$
|
15,147
|
|
|
$
|
783,842
|
|
Less allowance
|
|
|
—
|
|
|
|
(8,000
|
)
|
|
|
—
|
|
|
|
(8,000
|
)
|
Net accounts receivable
|
|
$
|
146,374
|
|
|
$
|
614,321
|
|
|
$
|
15,147
|
|
|
$
|
775,842
|
|
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 accounts 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 76% and
57% of the net accounts receivable balance at September 30, 2019 and December 31, 2018, respectively.
Inventories
consist of:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Finished Goods
|
|
|
|
|
|
|
|
|
Cellular Retail
|
|
$
|
5,000,129
|
|
|
$
|
5,456,898
|
|
Direct to Consumer
|
|
|
3,451,829
|
|
|
|
2,848,484
|
|
Consumer Finance
|
|
|
863,921
|
|
|
|
832,130
|
|
Reserve
|
|
|
(605,000
|
)
|
|
|
(670,000
|
)
|
TOTAL
|
|
$
|
8,710,879
|
|
|
$
|
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 $605,000 and $670,000 at September 30, 2019 and December 31, 2018, 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.
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.
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:
|
|
Three Months Ended
September 30, 2019
|
|
|
Nine Months Ended
September 30, 2019
|
|
Operating lease expense
|
|
$
|
1,421
|
|
|
$
|
4,190
|
|
Variable lease expense
|
|
|
633
|
|
|
|
2,008
|
|
Total lease expense
|
|
$
|
2,054
|
|
|
$
|
6,198
|
|
Other
information related to operating leases as of September 30, 2019 was as follows:
Weighted average remaining lease term, in years
|
|
|
2.79
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
5.9
|
%
|
Future
minimum lease payments under operating leases as of September 30, 2019 (in thousands) were as follows:
|
|
|
Operating Leases
|
|
|
Remainder of 2019
|
|
|
$
|
1,504
|
|
|
2020
|
|
|
|
4,577
|
|
|
2021
|
|
|
|
2,876
|
|
|
2022
|
|
|
|
1,565
|
|
|
2023
|
|
|
|
681
|
|
|
Thereafter
|
|
|
|
315
|
|
|
Total future minimum lease payments
|
|
|
|
11,518
|
|
|
Less: imputed interest
|
|
|
|
(1,026
|
)
|
|
Total
|
|
|
$
|
10,492
|
|
Current portion operating lease liabilities
|
|
$
|
4,620
|
|
Non-Current operating lease liabilities
|
|
|
5,872
|
|
Total
|
|
$
|
10,492
|
|
As
previously disclosed in our 2018 Form 10-K under the prior guidance of ASC 840, future minimum payments under operating lease
agreements as of December 31, 2018 (in thousands) were as follows:
Year Ending December 31,
|
|
|
Operating Leases
|
|
|
2019
|
|
|
$
|
5,896
|
|
|
2020
|
|
|
|
3,878
|
|
|
2021
|
|
|
|
2,259
|
|
|
2022
|
|
|
|
917
|
|
|
2023
|
|
|
|
290
|
|
|
Thereafter
|
|
|
|
33
|
|
|
Total minimum lease payments
|
|
|
$
|
13,273
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
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.
|
|
|
311,850
|
|
|
|
—
|
|
Total
|
|
|
1,101,066
|
|
|
|
789,216
|
|
Less current maturities
|
|
|
(64,531
|
)
|
|
|
—
|
|
|
|
$
|
1,036,535
|
|
|
$
|
789,216
|
|
The
Company is party to a Credit Agreement with a financial institution entered into on April 22, 2016 and subject to subsequent amendments.
The Credit Agreement provides the Company with a revolving line of credit facility in an aggregate amount up to $3,000,000, with
a maturity date of April 21, 2020 and an acquisition loan facility in an aggregate amount of up to $9,000,000, with a maturity
date of April 21, 2020. The revolver and the acquisition loan facility bear interest rate at a floating per annum rate equal to
one-month LIBOR plus 3.50%, adjusted on a monthly basis. Funds advanced under the acquisition loan facility mature five years
from the date of advance. At September 30, 2019, the entire $12,000,000 of credit was available under the credit facilities. See
Note 16 for additional terms and conditions related to the Credit Agreement and Note 17 regarding the termination of the Credit Agreement.
The
provision for income taxes is 18.70% and 30.80% of income (loss) before the provision for income taxes for the nine month period
ended September 30, 2019 and 2018, respectively. The significant difference in rate is the result of the impact of net income
attributable to noncontrolling interests not being subjected to income tax at the corporate level. Rather the “passthrough”
taxable income is taxed to the noncontrolling interests at an individual level.
Date
Declared
|
Record
Date
|
Dividend
Per Share
|
Payment
Date
|
Dividend
Paid
|
February
12, 2019
|
March
1, 2019
|
$0.05
|
March
11, 2019
|
$469,434
|
May
2, 2019
|
May
23, 2019
|
$0.05
|
June
3, 2019
|
$469,434
|
August
1, 2019
|
August
23, 2019
|
$0.05
|
September
3, 2019
|
$468,912
|
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 back-end compensation from Cricket Wireless. As an authorized dealer, we earn compensation from Cricket
Wireless for activating new customers on the Cricket Wireless network, activating new devices for existing Cricket Wireless customers
and upon an existing Cricket Wireless customer whom we originally activated on the Cricket Wireless GSM network making a continuing
service payment (“CSP”). Revenue generated from short-term lending agreements and 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 and the customer takes control of the merchandise. 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 when charged to customers 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 is generally recorded at point of sale when payment is received and the customer receives the benefit of the service.
Other compensation from Cricket Wireless is recorded at the time certain Cricket Wireless customers make a service payment, as
reported to us by Cricket Wireless.
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 primarily on historical forfeiture rates.
See
Note 15, “Segment Information,” for disaggregation of revenue by segment.
On
February 21, 2019, PQH entered into a joint venture agreement with another Cricket Wireless dealer (“dealer”). Pursuant
to the agreement, PQH contributed a note payable in exchange for a 51% ownership interest in a newly formed subsidiary and dealer
contributed substantially all its assets, including 28 Cricket Wireless retail locations, and specified liabilities in exchange
for a 49% ownership interest in the newly formed subsidiary and receipt of the note payable contributed by PQH. Effective March
1, 2019, we consummated the transaction. Under the purchase method of accounting, the assets acquired and liabilities assumed
were recorded at their estimated fair values as of the purchase date as follows:
|
|
March
1, 2019
(in
thousands)
|
|
Cash
|
|
$
|
14
|
|
Receivables
|
|
|
272
|
|
Inventory
|
|
|
50
|
|
Property and equipment
|
|
|
596
|
|
Operating lease right-of-use asset
|
|
|
772
|
|
Other assets
|
|
|
48
|
|
Liabilities
|
|
|
(597
|
)
|
Term note payable
|
|
|
(348
|
)
|
Operating lease liabilities
|
|
|
(772
|
)
|
Net equity
|
|
$
|
35
|
|
|
14.
|
Other
Operating Expense –
|
A
breakout of other expense is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Bank fees
|
|
$
|
353,064
|
|
|
$
|
355,333
|
|
|
$
|
1,397,631
|
|
|
$
|
1,391,710
|
|
Collection costs
|
|
|
82,503
|
|
|
|
78,708
|
|
|
|
242,855
|
|
|
|
244,900
|
|
Insurance
|
|
|
178,414
|
|
|
|
187,877
|
|
|
|
545,056
|
|
|
|
591,506
|
|
Management and advisory fees
|
|
|
211,003
|
|
|
|
202,146
|
|
|
|
624,151
|
|
|
|
592,655
|
|
Professional and consulting fees
|
|
|
325,824
|
|
|
|
415,376
|
|
|
|
1,115,629
|
|
|
|
1,320,387
|
|
Supplies
|
|
|
170,387
|
|
|
|
165,978
|
|
|
|
453,198
|
|
|
|
553,468
|
|
Loss on disposal
|
|
|
66,685
|
|
|
|
633,320
|
|
|
|
77,883
|
|
|
|
1,280,085
|
|
Other
|
|
|
526,854
|
|
|
|
552,560
|
|
|
|
1,744,201
|
|
|
|
1,892,472
|
|
|
|
$
|
1,914,734
|
|
|
$
|
2,591,298
|
|
|
$
|
6,200,604
|
|
|
$
|
7,867,183
|
|
|
15.
|
Segment
Information –
|
Segment
information related to the three and nine month periods ended September 30, 2019 and 2018 (in thousands) is as follows:
Three Months Ended September 30, 2019
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
16,969
|
|
|
$
|
4,925
|
|
|
$
|
420
|
|
|
$
|
—
|
|
|
$
|
22,314
|
|
Financing fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,203
|
|
|
$
|
—
|
|
|
$
|
2,203
|
|
Total revenues
|
|
$
|
16,969
|
|
|
$
|
4,925
|
|
|
$
|
2,623
|
|
|
$
|
—
|
|
|
$
|
24,517
|
|
Net income (loss)
|
|
$
|
690
|
|
|
$
|
(610
|
)
|
|
$
|
279
|
|
|
$
|
(69
|
)
|
|
$
|
290
|
|
Expenditures for segmented assets
|
|
$
|
185
|
|
|
$
|
149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
334
|
|
Three Months Ended September 30, 2018
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
16,704
|
|
|
$
|
4,920
|
|
|
$
|
413
|
|
|
$
|
—
|
|
|
$
|
22,037
|
|
Financing fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,323
|
|
|
$
|
—
|
|
|
$
|
2,323
|
|
Total revenues
|
|
$
|
16,704
|
|
|
$
|
4,920
|
|
|
$
|
2,736
|
|
|
$
|
—
|
|
|
$
|
24,360
|
|
Net income (loss)
|
|
$
|
(133
|
)
|
|
$
|
(982
|
)
|
|
$
|
281
|
|
|
$
|
(150
|
)
|
|
$
|
(984
|
)
|
Expenditures for segmented assets
|
|
$
|
148
|
|
|
$
|
15
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
171
|
|
Nine Months Ended September 30, 2019
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
49,753
|
|
|
$
|
27,339
|
|
|
$
|
1,236
|
|
|
$
|
—
|
|
|
$
|
78,328
|
|
Financing fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,304
|
|
|
$
|
—
|
|
|
$
|
6,304
|
|
Total revenues
|
|
$
|
49,753
|
|
|
$
|
27,339
|
|
|
$
|
7,540
|
|
|
$
|
—
|
|
|
$
|
84,632
|
|
Net income (loss)
|
|
$
|
1,702
|
|
|
$
|
733
|
|
|
$
|
741
|
|
|
$
|
(207
|
)
|
|
$
|
2,969
|
|
Total segmented assets
|
|
$
|
30,779
|
|
|
$
|
12,976
|
|
|
$
|
8,817
|
|
|
$
|
35,761
|
|
|
$
|
88,333
|
|
Expenditures for segmented assets
|
|
$
|
507
|
|
|
$
|
216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
723
|
|
Nine Months Ended September 30, 2018
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
49,415
|
|
|
$
|
27,310
|
|
|
$
|
1,304
|
|
|
$
|
—
|
|
|
$
|
78,029
|
|
Financing fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,570
|
|
|
$
|
—
|
|
|
$
|
6,570
|
|
Total revenues
|
|
$
|
49,415
|
|
|
$
|
27,310
|
|
|
$
|
7,874
|
|
|
$
|
—
|
|
|
$
|
84,599
|
|
Net income (loss)
|
|
$
|
(989
|
)
|
|
$
|
(128
|
)
|
|
$
|
832
|
|
|
$
|
(584
|
)
|
|
$
|
(869
|
)
|
Total segmented assets
|
|
$
|
24,031
|
|
|
$
|
13,098
|
|
|
$
|
7,609
|
|
|
$
|
35,624
|
|
|
$
|
80,362
|
|
Expenditures for segmented assets
|
|
$
|
375
|
|
|
$
|
400
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
797
|
|
|
16.
|
Commitments
and Contingencies –
|
Employment
Agreements
Pursuant
to the Company’s numerous employment agreements, bonuses of approximately $180,000 and $497,000 were accrued for the three
and nine month period ended September 30, 2019.
Credit
Facility
The
Company is party to a Credit Agreement with a financial institution. Certain Company subsidiaries are guarantors of the borrowings
and obligations under the Credit Agreement. All borrowings under the Credit Agreement are secured by substantially all assets
of WCR and the guarantor subsidiaries.
The
Credit Agreement, as amended, requires WCR to meet a minimum liquidity covenant. Subject to certain exceptions, the Credit Agreement
contains covenants limiting the Company’s ability to (or to permit the guarantor subsidiaries to) merge or consolidate with,
or engage in a sale of substantially all assets to, any party, but WCR or any guarantor subsidiary generally may nonetheless merge
with another party if (i) WCR or guarantor subsidiary is the entity surviving such merger, and (ii) immediately after giving effect
to such merger, no default shall have occurred and be continuing under the Credit Agreement. Subject to certain exceptions, the
Credit Agreement also contains covenants limiting WCR’s ability to (or to permit the guarantor subsidiaries to) create liens
on assets, incur additional indebtedness, make certain types of investments, and pay dividends or make certain other types of
restricted payments, but WCR may nonetheless pay dividends to its shareholders if (a) there are no outstanding loans or unpaid
interest under the revolving credit facility, and (b) no default shall have occurred and be continuing under the Credit Agreement.
Some covenant waivers were granted by the financial institution during the period ended September 30, 2018. See Note 17 regarding the termination of the Credit Agreement.
Assigned
Leases
The
Company’s Cellular Retail segment has transferred operations of 44 locations to other dealers. 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 $2,592,000 as of September 30, 2019.
Dividend
Declared
Our
Board of Directors declared the following dividend:
Date
Declared
|
Record
Date
|
Dividend
Per Share
|
Payment
Date
|
October
31, 2019
|
November
15, 2019
|
$0.05
|
November
25, 2019
|
Entry
into Definitive Agreements
On
July 25, 2019, Summit, a 51% owned indirect subsidiary of the Company, entered into a joint venture agreement with another Cricket
Wireless authorized dealer. Pursuant to the agreement, Summit will contribute $500,000 for a 100% ownership interest in the newly
formed subsidiary Smart Acquisition, LLC (“Smart”), followed by dealer contributing substantially all its assets,
including 21 Cricket Wireless retail locations, and specified liabilities in exchange for $500,000 and a 25% ownership interest
in Smart. Upon completion of the transaction Summit will have a 75% ownership interest in Smart. The Company closed on the transaction
on October 3, 2019.
On
August 9, 2019, Summit, a 51% owned indirect subsidiary of the Company, entered into a joint venture agreement with another Cricket
Wireless authorized dealer. Pursuant to the agreement, Summit will contribute $900,000 for a 100% ownership interest in the newly
formed subsidiary Linked Investment, LLC (“Linked”), followed by dealer contributing substantially all its assets,
including 14 Cricket Wireless retail locations, and specified liabilities in exchange for $100,000 and a 25% ownership interest
in Linked. Upon completion of the transaction Summit will have a 75% ownership interest in Linked. The Company closed on the transaction
on October 24, 2019.
As a result of PQH providing more than its pro-rata share of the funding for the Smart and Linked transactions, PQH ownership
in Summit was increased from 51% to 60% after the two transactions closed.
Termination
of Credit Facility
The
Company, as more fully described in Note 9 was party to a Credit Agreement with a financial institution entered into on April
22, 2016 and subject to subsequent amendments. The Credit Agreement provided the Company with a revolving line of credit facility
in an aggregate amount up to $3,000,000, with a maturity date of April 21, 2020 and an acquisition loan facility in an aggregate
amount of up to $9,000,000, with a maturity date of April 21, 2020. The Company terminated the credit agreement on October 8,
2019.
We
evaluated all events or transactions that occurred after September 30, 2019 up 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.