Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
Some of the statements made in this report are “forward-looking
statements,” as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are based upon our current expectations and projections about future events. Whenever
used in this report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect”
and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although
not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily
located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” (Part I, Item 2), but may be found in other parts of this report as well. These forward-looking statements
generally relate to our plans, objectives and expectations for future operations and are based upon management’s current
estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested
by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this report completely
and with the understanding that actual future results may be materially different from what we expect. We will not necessarily
update forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to
differ from our expectations embodied in our forward-looking statements, or that might affect the value of the common stock, include
but are not limited to:
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·
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the seasonal nature of the products sold in our Direct to Consumer segment - a significant portion of pre-tax net income contributed
by the segment is earned during the months of March through May and December, consequently the third quarter of each year typically
results in a net loss;
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·
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the success of new stores related to our expansion plans in the Cellular Retail segment;
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·
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changes in local, state or federal laws and regulations governing lending practices, or changes in the interpretation of such
laws and regulations;
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·
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litigation and regulatory actions directed toward us or the industries in which we operate, particularly in certain key states
or nationally;
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·
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our need for additional financing;
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·
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unpredictability or uncertainty in financing markets which could impair our ability to grow our business through acquisitions;
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·
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changes in Cricket dealer compensation;
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·
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failure of or disruption caused by a significant vendor;
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·
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outside factors that affect our ability to obtain product and fulfill orders; and
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·
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our ability to successfully operate or integrate recent or future business acquisitions.
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Other factors that could cause actual results to differ
from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors”
section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
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”
or “Western Capital”) is a holding company with a controlling interest in subsidiaries operating in the following industries
and operating segments:
Our “Franchise” segment is comprised of
AlphaGraphics, Inc. (99.2% owned), the franchisor of AlphaGraphics® customized print and marketing solutions. 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 subsidiaries. Our “Direct to Consumer”
segment consists of (1) 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 as well as a wholesaler
under the Park Wholesale brand, and (2) a wholly owned online and direct marketing distribution retailer of home improvement and
restoration products operating as Van Dyke’s Restorers. 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.”
Following is key financial data for the three month
period ended March 31, 2017 and 2016:
Discussion of Critical Accounting
Policies
Our condensed consolidated financial statements and
accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America
applied on a consistent basis. The preparation of these financial statements requires us to make a number of estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We
evaluate these estimates and assumptions on an ongoing basis. We base these estimates on the information currently available
to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could
vary materially from these estimates under different assumptions or conditions.
Our significant accounting policies are discussed in
Note 1, “Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies,” of the notes to
our condensed consolidated financial statements included in this report. We believe that the following critical accounting
policies affect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial
statements.
Loan Loss Allowance
Included in loans receivable are unpaid principal,
interest and fee balances of payday, installment, pawn and title loans that have not reached their maturity date, and “late”
payday loans that have reached maturity within the last 180 days and have remaining outstanding balances. Late payday
loans generally are unpaid loans where a customer’s personal check has been deposited and the check has been returned due
to non-sufficient funds in the customer’s account, a closed account, or other reasons. All returned items are charged-off
after 180 days, as collections after that date have not been significant. Loans are carried at cost plus accrued interest or fees
through maturity date, less payments made and a loans receivable allowance.
The Company does not specifically reserve for any individual
payday, installment or title loan. The Company aggregates loan types for purposes of estimating the loss allowance using
a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the
portfolio. This methodology takes into account several factors, including (1) the amount of loan principal, interest and fee outstanding,
(2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and
(4) current economic trends. The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.
A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages
by loan type of net charge offs, applied against the applicable balance of loan principal, interest and fees outstanding. The Company
also periodically performs a look-back analysis on its loan loss allowance to verify the historical allowance established tracks
with the actual subsequent loan write-offs and recoveries. The Company is aware that as conditions change, it may also need to
make additional allowances in future periods. Loan losses or charge-offs of pawn or title loans are not recorded because the value
of the collateral exceeds the loan amount. See Note 4 to our condensed consolidated financial statements included in this report
for a rollforward of our loans receivable allowance.
Valuation of Long-lived and
Intangible Assets
We assess the possibility of impairment of long-lived
and intangible assets 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. In addition, we conduct an annual goodwill impairment test as of October 1 each year. We assess
our goodwill for impairment at the reporting unit level by applying 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.
Results of Operations – Three Months Ended
March 31, 2017 Compared to Three Months Ended March 31, 2016
Net income attributable to our common shareholders
was $2.26 million, or $0.24 per share (basic and diluted), for the quarter ended March 31, 2017, compared to $1.97 million, or
$0.21 per share (basic and diluted), for the quarter ended March 31, 2016.
We expect segment operating results and earnings per
share to change throughout 2017 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments,
growth in the Cellular Retail segment, and potential mergers and acquisitions activity.
Following is a discussion of operating results by segment.
The following table provides quarter-over-quarter revenues
and net income attributable to WCR common shareholders by operating segment (in thousands):
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Franchise
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Cellular
Retail
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Direct to
Consumer
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Consumer
Finance
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Corporate
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Total
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Three Months Ended March 31, 2017
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Revenues
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$
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3,943
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$
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17,045
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$
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11,904
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$
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2,743
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$
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-
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$
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35,635
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% of total revenue
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11.1
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%
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47.8
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%
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33.4
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%
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7.7
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%
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|
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-
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%
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|
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100.0
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%
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Net income (loss)
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$
|
635
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|
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$
|
620
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|
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$
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866
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$
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254
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|
|
$
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(108
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)
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$
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2,267
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Net income (loss) attributable to WCR common shareholders
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$
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630
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$
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620
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|
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$
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866
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|
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$
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254
|
|
|
$
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(108
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)
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$
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2,262
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|
|
|
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|
|
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Three Months Ended March 31, 2016
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Revenues
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$
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3,612
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|
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$
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9,775
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|
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$
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12,064
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$
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2,984
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$
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-
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$
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28,435
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% of total revenue
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12.7
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%
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|
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34.4
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%
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42.4
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%
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10.5
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%
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|
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-
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%
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|
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100.0
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%
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Net income (loss)
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$
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523
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$
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371
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$
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904
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$
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312
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$
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(135
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)
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$
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1,975
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Net income (loss) attributable to WCR common shareholders
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|
$
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519
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$
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371
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$
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904
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$
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312
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$
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(135
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)
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$
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1,971
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Franchise
The table below summarizes the number of AlphaGraphics
business centers owned and operated by franchisees during the quarter ended March 31, 2017 and 2016:
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Beginning
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New
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Closed
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Ending
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2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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US Centers
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256
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|
|
|
-
|
|
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(3
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)
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253
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|
International Centers
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25
|
|
|
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-
|
|
|
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-
|
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25
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Total
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|
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281
|
|
|
|
-
|
|
|
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(3
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)
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|
|
278
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Centers
|
|
|
254
|
|
|
|
4
|
|
|
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(1
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)
|
|
|
257
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|
International Centers
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|
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25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
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Total
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|
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279
|
|
|
|
4
|
|
|
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(1
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)
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282
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|
Our U.S. franchisees reported approximate center sales
for the quarter ended March 31, 2017 and 2016 as follows:
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2017
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2016
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Total gross U.S. network-wide center sales
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$
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69,084,000
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$
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67,786,000
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Our revenues in the Franchise segment for the quarter
ended March 31, 2017 and 2016 were $3.94 million versus $3.61 million, an increase of 9.1%. Segment net income period over period
increased 23% to $0.64 million from $0.52 million in the prior year period.
Cellular Retail
A summary table of the number of Cricket cellular retail
stores we operated during the quarter ended March 31, 2017 and 2016 follows:
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2017
|
|
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2016
|
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Beginning
|
|
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198
|
|
|
|
99
|
|
Acquired/ Launched
|
|
|
46
|
|
|
|
14
|
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Closed
|
|
|
-
|
|
|
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(2
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)
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Ending
|
|
|
244
|
|
|
|
111
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|
The Cellular Retail segment revenues and contribution
to net income each increased period over period. Both increases are primarily attributable to the 53 additional mature stores we
operated under a store operating agreement beginning in November 2016. In addition to operating these additional mature locations,
we also operated another 80 locations, most of which had been launched within the fourth quarter of 2016 and first quarter of 2017.
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 $0.87
million compared to net income of $0.90 million for the comparable prior year period. Revenues for the three month period ended
March 31, 2017 were $11.90 million compared to the comparable period in 2016 of $12.06 million.
Consumer Finance
A summary table of the number of consumer finance locations
we operated during the quarters ended March 31, 2017 and 2016 follows:
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2017
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2016
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Beginning
|
|
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41
|
|
|
|
47
|
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Acquired/ Launched
|
|
|
-
|
|
|
|
-
|
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Closed
|
|
|
-
|
|
|
|
-
|
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Ending
|
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41
|
|
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47
|
|
Our Consumer Finance segment revenues decreased for
the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016. We closed two underperforming store locations and
another 4 locations due to state legislative changes between the comparable periods. Revenue decreased 8.1% period over period
while net income decreased 18.6%.
Corporate
Costs related to our Corporate segment were $0.11 million
for the quarter ended March 31, 2017 compared to $0.14 million for the quarter ended March 31, 2016.
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, 2017, 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, 2017
.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over
financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.