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:
|
●
|
a
significant portion of pre-tax net income contributed by the Direct to Consumer segment
is seasonal in nature and is earned during the months of March through May and December,
and consequently the third quarter of each year typically results in a net loss;
|
|
●
|
the
success of new stores related to our expansion plans in the Cellular Retail segment;
|
|
●
|
changes
in local, state or federal laws and regulations governing lending practices, or changes
in the interpretation of such laws and regulations, affecting our Consumer Finance segment;
|
|
●
|
litigation
and regulatory actions directed toward us or the industries in which we operate, particularly
in certain key states or nationally;
|
|
●
|
our
need for additional financing;
|
|
●
|
unpredictability
or uncertainty in financing markets, which could impair our ability to grow our business
through acquisitions;
|
|
●
|
changes
in Cricket dealer compensation;
|
|
●
|
failure
of or disruption caused by a significant vendor;
|
|
●
|
outside
factors that affect our ability to obtain product and fulfill orders; and
|
|
●
|
our
ability to successfully operate or integrate recent or future business 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 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 and six month periods ended June 30, 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.
We
do not specifically reserve for any individual payday, installment or title loan. 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 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. We also periodically perform a look-back analysis on its loan loss allowance to verify the historical
allowance established tracks with the actual subsequent loan write-offs and recoveries. We are aware that as conditions change,
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 June 30, 2017 Compared to Three Months Ended June 30, 2016
Net
income attributable to our common shareholders was $1.74 million, or $0.19 per share (basic and diluted), for the quarter ended
June 30, 2017, compared to $1.78 million, or $0.19 per share (basic and diluted), for the quarter ended June 30, 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):
|
|
Franchise
|
|
|
Cellular
Retail
|
|
|
Direct to
Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Total
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,033
|
|
|
$
|
17,087
|
|
|
$
|
12,127
|
|
|
$
|
2,543
|
|
|
$
|
—
|
|
|
$
|
35,790
|
|
% of total revenue
|
|
|
11.3
|
%
|
|
|
47.7
|
%
|
|
|
33.9
|
%
|
|
|
7.1
|
%
|
|
|
—
|
%
|
|
|
100.0
|
%
|
Net income (loss)
|
|
$
|
930
|
|
|
$
|
(331
|
)
|
|
$
|
1,103
|
|
|
$
|
201
|
|
|
$
|
(151
|
)
|
|
$
|
1,752
|
|
Net income (loss) attributable to WCR common shareholders
|
|
$
|
922
|
|
|
$
|
(331
|
)
|
|
$
|
1,103
|
|
|
$
|
201
|
|
|
$
|
(151
|
)
|
|
$
|
1,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,562
|
|
|
$
|
8,083
|
|
|
$
|
12,689
|
|
|
$
|
2,838
|
|
|
$
|
—
|
|
|
$
|
27,172
|
|
% of total revenue
|
|
|
13.1
|
%
|
|
|
29.8
|
%
|
|
|
46.7
|
%
|
|
|
10.4
|
%
|
|
|
—
|
%
|
|
|
100.0
|
%
|
Net income (loss)
|
|
$
|
568
|
|
|
$
|
74
|
|
|
$
|
1,103
|
|
|
$
|
262
|
|
|
$
|
(218
|
)
|
|
$
|
1,789
|
|
Net income (loss) attributable to WCR common shareholders
|
|
$
|
564
|
|
|
$
|
74
|
|
|
$
|
1,103
|
|
|
$
|
262
|
|
|
$
|
(218
|
)
|
|
$
|
1,785
|
|
Franchise
The
table below summarizes the number of AlphaGraphics business centers owned and operated by franchisees during the quarter ended
June 30, 2017 and 2016:
|
|
Beginning
|
|
|
New
|
|
|
Closed
|
|
|
Ending
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Centers
|
|
|
253
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
253
|
|
International
Centers
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Total
|
|
|
278
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Centers
|
|
|
257
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
258
|
|
International
Centers
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Total
|
|
|
282
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
283
|
|
Our
U.S. franchisees reported approximate center sales for the quarters ended June 30, 2017 and 2016 as follows:
|
|
2017
|
|
|
2016
|
|
Total
gross U.S. network-wide center sales
|
|
$
|
68,421,000
|
|
|
$
|
70,875,000
|
|
Our
revenues in the Franchise segment for the quarter ended June 30, 2017 and 2016 were $4.03 million versus $3.56 million, an increase
of 13.2%. The fiscal period on which franchisees pay royalties was changed to a calendar year effective January 1, 2017. Because
most franchisees pay royalties on a decreasing scale, revenue is higher at the beginning of the calculation period, decreasing
throughout the year. In the current quarter, franchisees are in the second quarter of the calculation period compared to the fourth
quarter of the calculation period in the quarter ended June 30, 2016, thus accounting for the period over period increase. Segment
net income period over period increased 63.2% to $0.93 million from $0.57 million in the prior year period, an increase of 63.7%.
Cellular
Retail
A
summary table of the number of Cricket cellular retail stores we operated during the quarter ended June 30, 2017 and 2016 follows:
|
|
2017
|
|
|
2016
|
|
Beginning
|
|
|
244
|
|
|
|
111
|
|
Acquired/
Launched
|
|
|
32
|
|
|
|
9
|
|
Closed
|
|
|
(8
|
)
|
|
|
(4
|
)
|
Ending
|
|
|
268
|
|
|
|
116
|
|
The Cellular Retail segment revenues increase period
over period is a result of operating significantly more stores in the current quarter. Included in the growth in the number of
locations are 53 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 were launched within the fourth quarter
of 2016 and first quarter of 2017. While the launching of the new locations contributed to revenue growth, it also contributed
to the decline in segment net income period over period.
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
and comparable prior year period, the Direct to Consumer segment had net income of $1.10 million. Revenues for the three month
period ended June 30, 2017 were $12.13 million compared to the comparable period in 2016 of $12.69 million.
Consumer
Finance
A
summary table of the number of consumer finance locations we operated during the quarters ended June 30, 2017 and 2016 follows:
|
|
2017
|
|
|
2016
|
|
Beginning
|
|
|
41
|
|
|
|
47
|
|
Acquired/
Launched
|
|
|
—
|
|
|
|
—
|
|
Closed
|
|
|
—
|
|
|
|
(1
|
)
|
Ending
|
|
|
41
|
|
|
|
46
|
|
Our
Consumer Finance segment revenues decreased for the quarter ended June 30, 2017 compared to the quarter ended June 30, 2016 due
to the closing of five locations in South Dakota at the end of 2016. Revenue decreased 10.4% period over period while net income
decreased 23.3%.
Corporate
Costs
related to our Corporate segment were $0.15 million for the quarter ended June 30, 2017 compared to $0.22 million for the quarter
ended June 30, 2016.
Results
of Operations – Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Net
income attributable to our common shareholders was $4.01 million, or $0.42 per share (basic and diluted), for the six month period
ended June 30, 2017, compared to $3.76 million, or $0.40 per share (basic and diluted), for the six month period ended June 30,
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 period over period revenues and net income attributable to WCR common shareholders by operating segment
(in thousands):
|
|
Franchise
|
|
|
Cellular Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,977
|
|
|
$
|
34,131
|
|
|
$
|
24,031
|
|
|
$
|
5,286
|
|
|
$
|
—
|
|
|
$
|
71,425
|
|
% of total revenue
|
|
|
11.2
|
%
|
|
|
47.8
|
%
|
|
|
33.6
|
%
|
|
|
7.4
|
%
|
|
|
—
|
|
|
|
100.0
|
%
|
Net income (loss)
|
|
$
|
1,565
|
|
|
$
|
289
|
|
|
$
|
1,968
|
|
|
$
|
455
|
|
|
$
|
(258
|
)
|
|
$
|
4,019
|
|
Net income (loss) attributable to WCR common shareholders
|
|
$
|
1,552
|
|
|
$
|
289
|
|
|
$
|
1,968
|
|
|
$
|
455
|
|
|
$
|
(258
|
)
|
|
$
|
4,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,174
|
|
|
$
|
17,858
|
|
|
$
|
24,754
|
|
|
$
|
5,822
|
|
|
$
|
—
|
|
|
$
|
55,608
|
|
% of total revenue
|
|
|
12.9
|
%
|
|
|
32.1
|
%
|
|
|
44.5
|
%
|
|
|
10.5
|
%
|
|
|
—
|
%
|
|
|
100.0
|
%
|
Net income (loss)
|
|
$
|
1,083
|
|
|
$
|
454
|
|
|
$
|
2,007
|
|
|
$
|
574
|
|
|
$
|
(353
|
)
|
|
$
|
3,765
|
|
Net income (loss) attributable to WCR common shareholders
|
|
$
|
1,074
|
|
|
$
|
454
|
|
|
$
|
2,007
|
|
|
$
|
574
|
|
|
$
|
(353
|
)
|
|
$
|
3,756
|
|
Franchise
The
table below summarizes the number of AlphaGraphics business centers owned and operated by franchisees during the six month periods
ended June 30, 2017 and 2016:
|
|
Beginning
|
|
|
New
|
|
|
Closed
|
|
|
Ending
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Centers
|
|
|
256
|
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
253
|
|
International Centers
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Total
|
|
|
281
|
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Centers
|
|
|
254
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
258
|
|
International Centers
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Total
|
|
|
279
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
283
|
|
Our
U.S. franchisees reported approximate center sales for the six month periods ended June 30, 2017 and 2016 as follows:
|
|
2017
|
|
|
2016
|
|
Total gross U.S. network-wide center sales
|
|
$
|
137,505,000
|
|
|
$
|
138,661,000
|
|
Our
revenues in the Franchise segment for the six month periods ended June 30, 2017 and 2016 were $7.98 million versus $7.17 million,
an increase of 11.3%. As discussed in the quarter over quarter analysis, the change in the royalty calculation fiscal year is
the primary driver for the period over period increase. Segment net income period over period increased 45.4% to $1.57 million
from $1.08 million in the prior year period.
Cellular
Retail
A
summary table of the number of Cricket cellular retail stores we operated during the six month periods ended June 30, 2017 and
2016 follows:
|
|
2017
|
|
|
2016
|
|
Beginning
|
|
|
198
|
|
|
|
99
|
|
Acquired/ Launched
|
|
|
78
|
|
|
|
23
|
|
Closed
|
|
|
(8
|
)
|
|
|
(6
|
)
|
Ending
|
|
|
268
|
|
|
|
116
|
|
The
increase in Cellular Retail segment revenues in the current six month period compared to the same period in the prior year is
due to the 53 additional mature stores that we are operating under a store operating agreement which began in November 2016 plus
operating approximately 100 additional locations which we have launched or taken over since the end of the prior year period.
Effective July 1, 2017, we acquired a 70% ownership interest in the 53 locations under the management agreement, with seller retaining
the remaining 30% percent interest.
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. Revenues for the six month
period ended June 30, 2017 were $24.03 million compares to $24.8 million for the comparable period in 2016.
Consumer
Finance
A
summary table of the number of consumer finance locations we operated during the six month periods ended June 30, 2017 and 2016
follows:
|
|
2017
|
|
|
2016
|
|
Beginning
|
|
|
41
|
|
|
|
47
|
|
Acquired/ Launched
|
|
|
—
|
|
|
|
—
|
|
Closed
|
|
|
—
|
|
|
|
(1
|
)
|
Ending
|
|
|
41
|
|
|
|
46
|
|
Our
Consumer Finance segment revenues decreased for the six month period ended June 30, 2017 compared to the six month period ended
June 30, 2016 as a result of the store closings in South Dakota at the end of 2016. Revenue decreased 9.21% period over period
while net income decreased 20.7%.
Corporate
Costs
related to our Corporate segment were $0.26 million for the six month period ended June 30, 2017 compared to $0.35 million for
the six month period ended June 30, 2016.