ITEM
1 BUSINESS
OVERVIEW
Western
Capital Resources, Inc. (“WCR” or “Western Capital”), a Delaware corporation originally incorporated in
Minnesota in 2001 and reincorporated in Delaware in 2016, is a holding company having a controlling interest in subsidiaries operating
in the following industries and operating segments:
Our
Cellular Retail segment is comprised of an authorized Cricket Wireless dealer and involves the retail sale of cellular phones
and accessories to consumers through our wholly-owned subsidiary PQH Wireless, Inc. and its controlled but less than 100% owned
subsidiaries. Our Direct to Consumer segment consists of a wholly-owned branded 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 manufacturing segment consists of a wholly-owned manufacturer of lawn and garden power equipment
and emergency safety shelters selling products primarily under the Swisher brand name and also providing turn-key manufacturing
services to third parties. 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.”
We
expect segment operating results and earnings per share to change throughout 2022 and beyond due, at least in part, to the seasonality
of the various segments, recently completed and potential merger and acquisition activity, the unknown impact of COVID-19, the
effects of inflationary pressures, as well as supply and labor shortages
RECENT
EVENTS
Acquisitions
On
March 11, 2022, our Cellular Retail segment entered into a series of definitive agreements to purchase 80% of Gateway Wireless,
LLC – an operator of 56 Cricket Wireless locations in Missouri and several other states.
On
January 14, 2022, the Company’s Direct to Consumer segment acquired From Seed to Spoon, a garden planning App that makes
growing food easier. From Seed to Spoon is yet another tool in Park Seed’s tool shed designed to inspire, teach, and reach
customers where they get information today – on their phones. From Seed to Spoon calculates planting dates based on GPS
location taking the guesswork out of when to plant seeds. In addition to providing personalized planting dates, the App also includes
companion planting guides, recipes, organic pest treatments, and beneficial insect guides. It even enables users to filter plants
by health benefit. The App also provides an easy and direct path to purchasing seeds from our Park Seed business.
Our
Cellular Retail segment completed a $4.7 million acquisition of 25 Cricket Wireless retail stores on September 9, 2021, which
are wholly owned. All but four of these stores are located in markets that we currently operate in, allowing existing management
to efficiently integrate the acquired locations into their portfolios. Three of the outlier stores will be added to an expanded
existing market, while one will be our first presence in Alaska.
On
January 8, 2021, our newly-formed Manufacturing segment completed a merger with Swisher Acquisition, Inc. (“Swisher”),
which was an entity under common control of a related party. Pursuant to the merger, the Company issued 408,000 shares
of our common stock as consideration for the merger and Swisher became a wholly-owned subsidiary of the Company as the survivor
of the merger.
We
are actively searching for additional acquisition opportunities. We are industry agnostic and target leaders in niche industries
or geographies as well as opportunistic purchases of businesses that we believe we can improve operationally. We have a particular
interest in companies facing succession dilemmas, corporate divestitures, and businesses in out-of-favor industries. In addition,
we seek to grow our subsidiaries through add-on acquisitions in the e-commerce, cellular retail and manufacturing segments. Our
overall strategy continues to focus on building a diversified portfolio of strong cash flow generating businesses. Our financial
strength, long-term view and operating expertise allow subsidiary companies to focus on growing and maximizing return on investment.
We expect to be patient and move upon what we believe to be the right investment opportunities.
CELLULAR
RETAIL SEGMENT
General
Description
We
operate cellular retail stores as an authorized Cricket Wireless retailer, selling cellular phones and accessories, activating
Cricket Wireless customers on the Cricket network, providing ancillary services and accepting service payments from Cricket customers.
As an authorized Cricket Wireless dealer, we are only permitted to sell the Cricket line of no-contract cellular phones and service
at our Cricket retail stores.
We
generate revenue in this business through retail sales of cellular phones, receipt of back-end compensation from Cricket, sales
of phone accessories (e.g., cases, chargers and bluetooth devices), fees charged when a customer changes services (service activations
and reactivations, adding lines, phone number changes, etc.), or whenever a customer whom we activated on the Cricket network
pays his or her no-contract cellular bill.
A
summary table of the number of cellular retail stores we operated during the periods ended December 31, 2021 and 2020 follows:
| | |
2021 | | |
2020 | |
| Beginning | |
| 205 | | |
| 222 | |
| Acquired / Launched | |
| 34 | | |
| 20 | |
| Closed / Divested | |
| (10 | ) | |
| (37 | ) |
| Ending | |
| 229 | | |
| 205 | |
Market
Information and Marketing
Cricket
Wireless provides nationwide 5G coverage and offers customers simple, no annual contract, no overages, predictable and affordable
nationwide flat rate wireless plans. Cricket Wireless customers have the added advantage of unlimited talk, text and picture messages
in the U.S. and high-speed data access which varies by plan (speeds are reduced after reaching high-speed data allowances on some
plans) on the AT&T network.
No-contract
cellular products and services were historically targeted primarily only to market segments that were underserved by traditional
communications companies requiring credit approval, a contractual commitment from the subscriber for a period of at least one
year, and often included overage charges for minute and data usage in excess of a specified limit. We believe that a large portion
of the U.S. cellular market consists of customers who are price-sensitive and prefer not to enter into these fixed-term contracts.
However, postpaid carriers are making changes to plans and contract requirements, diminishing the difference between pre- and
postpaid plans. We believe that the Cricket Wireless cellular retail product and service offerings we offer appeal strongly to
both the underserved markets and the greater U.S. cellular market and believe we are positioned to benefit as a Cricket Wireless
dealer.
Market
Strategy
We
believe that our business model is scalable and we can apply our operational protocols and administrative office functions to
continue expanding our cellular retail business. We will continue to evaluate strategic and opportunistic acquisitions of existing
Cricket dealerships and will actively close, dispose or consolidate locations that do not meet our operating criteria in order
to streamline operations.
Products
and Services
Our
authorized Cricket retail stores offer the following products and services:
| ● | Cricket
Wireless service plans, each designed to attract customers by offering simple, no annual
contract, no overages, predictable and affordable talk, text, picture messaging and high-speed
data services that are a competitive alternative to traditional wireless and wireline
services (e.g., flat-rate and unlimited talk/text/picture messages plans, without fixed-term
contracts, early termination fees or credit checks); |
| ● | Cricket
Wireless plan upgrades, such as Cricket International, individual country add-ons, Cricket
Protect and mobile hotspots; |
| ● | A
wide range of cellular accessories. |
When
purchasing a phone, our customers have options among the latest in Apple, Samsung and other Android-based and Windows OS-based
smartphones. Because there is no contract for the monthly service, customer phone purchases are paid in full at the time of purchase.
Seasonality
Our
Cellular Retail segment operations are influenced by seasonal effects related to traditional retail selling periods and other
factors affecting our customer base. In particular, we generally expect sales activity to be highest in the first and fourth quarters.
Nevertheless, our revenues can be strongly affected by the launch of new markets, new or improved products such as the release
of the latest smartphone edition, promotional activity, the timing of federal tax-refunds and stimulus programs and the actions
of our competitors, any of which have the ability to offset or exacerbate the seasonality we normally experience.
Competition
There
is substantial and ever-increasing competition in the wireless phone industry where customers can choose between many other postpaid
and no-contract resellers, including AT&T, Verizon, T-Mobile/Metro, Boost Mobile and a larger number of regional providers.
We compete for customers based principally on Cricket’s service/device offerings, price, call quality and coverage area.
Competition
for the no-contract customers historically was primarily among Metro, Virgin Mobile and Boost Mobile, but now also includes the
traditional postpaid carriers that have introduced no-contract products. There is also competition with other no-contract phone
service providers such as Straight Talk by Wal-Mart or Wal-Mart’s Family Mobile powered by T-Mobile, an increase of national
retailers offering similar or identical products and services that we provide, such as Cricket phones sold at Game Stop, Best
Buy, Wal-Mart and others, and an increase in mobile virtual network operator (“MVNO”) offerings.
Our
Cricket store business also competes with other current or potential authorized Cricket Wireless dealers and direct-to-consumer
sales through the Cricket Wireless website. The authorization to sell Cricket products and services is granted by Cricket Wireless,
LLC, a wholly-owned subsidiary of AT&T. Our ability to compete with other sellers of Cricket products and services will depend
on the success with which we operate our stores and the attractiveness of their locations.
DIRECT
TO CONSUMER SEGMENT
General
Description
Our
Direct to Consumer segment is a direct marketer of roses, plants, seeds, holiday gifts and home restoration products. The business
is composed of: 1) a multi-channel retailer of seeds, garden and living gift products; 2) a wholesale seed business; and 3) a
multi-channel retailer of home hardware and restoration products. Our garden products brands are highly recognizable in the rose
and garden space as both the Jackson & Perkins and Park Seed brands were founded roughly 150 years ago.
Since
fiscal 2020, our Direct to Consumer segment benefitted from the industry-wide changes in consumer purchasing methods and increase
in demand for products ordered online, and from increased consumer interest in gardening and seed-related products.
Products
and Services
Our
Direct to Consumer segment sells product through catalogs and online under the following brands:
●
Jackson & Perkins, founded in 1872, has approximately 150 years of history and is the most recognized brand of premium
garden roses. Jackson and Perkins is one of the largest direct-to-consumer retailers of bare root roses in the United States,
selling over 130 active varieties of bare root roses, of which 23 varieties are patented by Jackson and Perkins. In addition to
bare root roses, we sell perennials, flower bulbs, outdoor living products as well as living holiday gifts plants. Holiday gifts
include fresh evergreen wreaths, live decorative Christmas trees and holiday amaryllis.
●
Park Seed, founded in 1868, has over 150 years in the business and one of America’s oldest and largest direct-to-consumer
seed retailers. As a leader within the Direct to Consumer seed business, Park Seed sells over 2,500 premium vegetable and flower
seed options, as well as various gardening supplies. The wholesale seed business sells seeds, plants and other horticultural products
in larger quantities to small-medium sized growers, nurseries and garden centers. Plants and seeds sales are concentrated during
the spring months.
●
Wayside Gardens, founded approximately 100 years ago, sells unique, hard to find high-end flowers, plants and gardening
supplies to the master gardener. The Wayside Gardens customer is extremely selective, very knowledgeable, and seeks high quality
plants. Approximately 70% of sales occur in the three months from March to May, during the spring planting season.
●
Van Dyke’s, an online and catalog retailer with a vast assortment of vintage home restoration wood products, hardware
and antique furniture, many of which are hard to find. Van Dyke’s focus is on hardware, decorative wood, home accents, knobs
and pulls and kitchen, bath and other décor.
Seasonality
Demand
for live goods and holiday products is cyclical in nature, sensitive to seasonal growing patterns, general weather conditions,
holiday sales patterns and competitive influences. As such, the Direct to Consumer segment’s results of operations, financial
condition and cash flows could fluctuate significantly from period to period. The majority of segment revenue is derived in three
selling periods, spring, fall, and the December holiday season, while the summer season accounts for a small portion of sales.
Market
Strategy
As
a direct-to-consumer retailer, we focus our marketing spending on internet advertising, mail order catalogs and traditional advertising
mediums (i.e., public relations, magazines, social media, etc.). We are focused on niche markets and direct our advertising to
repeat and new customers through internet marketing strategies, including through our From Seed to Spoon garden planning App.
Competition
In
the retail garden business, within the bare root rose category, we compete against brick and mortar garden centers and nurseries
(approximately 10,000 across the United States), as well as other online and mail-order retailers, including David Austin Roses
and Regan Nursery. Across other plant categories, we compete against brick and mortar garden centers and big-box retailers, Gardens
Alive and their portfolio of brands, as well as other direct-to-consumer competitors. Competitors for our seed and growing accessory
category include brick and mortar retailers and other direct-to-consumers retailers like Burpee. Within the seed business, Burpee,
in addition to having an online presence, supplies lower-end seed products to mass-market retailers, including Wal-Mart. Our biggest
competitive advantages are our recognizable brand names and their affiliated product lines: Jackson & Perkins brand name and
unique rose varieties and our Park Seed brand name and its exclusive garden seeds and growing products. In addition, Jackson &
Perkins’ successful online platform provides a competitive advantage over brick and mortar garden centers and nurseries
with many consumers, particularly since the COVID-19 pandemic started. The most direct competitor for Wayside Gardens is White
Flower Farms, which also focuses on high-end, premium plants.
Within
the holiday gifting portion of this segment, we compete against larger competitors including Harry and David and 1-800 Flowers,
among others.
Our
Van Dyke’s Restorers brand competes primarily with other online retailers because brick and mortar stores cannot afford
to carry Van Dyke’s breadth of SKUs. Our competitors are Signature Hardware, House of Antique Hardware, and Rejuvenation
Hardware (part of Williams Sonoma). These competitors compete primarily in the hardware, lighting and kitchen and bath categories.
The decorative wood portion of the Van Dyke’s business is in a very fragmented industry niche and there are no big decorative
wood competitors. Van Dyke’s competes primarily through the breadth of its product variety as well as through its established
brand name and customer list.
MANUFACTURING
SEGMENT
General
Description
Our
Manufacturing segment is a 2021 addition resulting from a merger with Swisher, a manufacturer of lawn and garden power equipment
and emergency safety shelters, and provider of turn-key manufacturing services to third parties.
Products
and Services
Swisher
is a manufacturing of mowers (finish cut, rough cut, walk behind and zero turn), safety shelters, agricultural accessories, timber
management equipment and string trimmers and sells product primarily under the Swisher brand name. Product is sold through e-commerce
and brick & mortar retailers, factory/consumer direct and at its factory direct and at its factory outlet store in Warrensburg,
Missouri.
In
addition to manufacturing products, Swisher also provides a host of manufacturing services, including:
| ● | Assembly
and Distribution |
Swisher
was founded in 1945 by Company entrepreneur Max Swisher who pioneered the zero-turn mower concept and used this new technology
to launch a new manufacturing company based in Warrensburg, MO. Swisher remains based in Warrensburg, MO continuing to manufacture
top quality, Made in America, outdoor power equipment. The Company recently expanded into the above ground home security/tornado
shelter market with “ESP” branded products, which feature multiple unique consumer benefits, outstanding safety and
ease of installation. Swisher management has also leveraged the Company’s manufacturing competencies and facility through
establishing a “Turn-Key” contract manufacturing business that has gained significant sales momentum over the last
year. The new product offerings and manufacturing initiatives along with recently opening a factory retail outlet and service
center have reduced the Company’s historical reliance on outdoor power equipment sales.
Seasonality
Outdoor
power equipment sales are concentrated in the months from March through late September early October. Weather can be a significant
factor impacting the selling season and order volumes. Droughts, late or cold spring weather, and even too much rain could all
influence sales. For example, a late spring could push March/April sales to May/June, thus potentially shifting seasonality between
quarters from year to year. The Company’s entry into ESP safety shelters, contract manufacturing and the retail business
with the Swisher factory outlet has significantly reduced the seasonality and reliance on favorable weather to stimulate outdoor
power equipment sales.
Market
Strategy
Swisher
historically shipped product primarily to distribution centers that were supporting brick & mortar retailers. In recent years,
however, the Company has re-focused efforts to marketing, selling and shipping directly to end-use consumers. This has reduced
reliance on third party retailers, increased margins, and enabled the Company to establish its own relationship with the end customers.
Swisher management has become proficient at all aspects of social media marketing, search engine optimization and managing consumer
reviews. Swisher has a dedicated consumer solutions team which handles all customer questions and problems related to the Company’s
products.
Competition
In
the outdoor power equipment space, Swisher's largest competitor are Deere & Company, Husqvarna and Toro. In addition, in recent
years there has been increasing competition from China in the lower-end spectrum of the market. As a niche manufacturer, Swisher
has focused on product categories such as rough cut and finish cut tow behinds, where industry volumes are lower and thus don’t
attract as much attention from the large competitors in the space. In the safety shelter space, the market is fragmented with
a myriad of small regional competitors, including Survive A Storm, Ground Zero Shelters, Valley Storm Shelters, and Storm Safe
Shelters among others.
CONSUMER
FINANCE SEGMENT
General
Description
The
majority of short-term consumer loans we provide are commonly referred to as “payday loans” or “cash advance”
loans. Such loans are referred to as “payday loans” because they are typically made to borrowers who have no available
cash and promise to repay the loan out of their next paycheck. We also provide pawn loans. In the fourth quarter of 2020, we discontinued
offering short-term installment loans.
We
provide short-term consumer loans in amounts that typically range from $100 to $500, with the average loan amount, including fee,
being approximately $474. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of
generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advance, plus
a fee. The fee varies from state to state based on applicable regulations and generally ranges from $15 to $22 for each whole
or partial increment of $100 borrowed. To repay the cash advance loan, a customer may pay with cash, in which case their personal
check is returned to them, or allow the check to be presented to the bank for collection.
Approximately
91% and 92% of our Consumer Finance segment lending revenue (comprised of payday loan fees, installment loan interest through
the first quarter of 2021 and pawn loan interest) was derived from payday lending in 2021 and 2020, respectively. Payday lending
revenue made up approximately 64% and 71% of our total Consumer Finance segment revenue (comprised of lending revenue, check cashing
fees, pawn store sales of merchandise and miscellaneous other revenue) in 2021 and 2020, respectively.
We
operate three pawn stores in our Consumer Finance segment. Our pawn stores provide collateralized non-recourse loans, commonly
known as “pawn loans” with maturities of one to four months. Allowable service charges vary by state and loan size.
The loan amount varies depending on our valuation of each item pawned. We generally lend from 30% to 55% of our estimate of the
collateral’s resale value. Customers have the option to redeem the pawned merchandise during the term or at maturity, or
else forfeit the merchandise to us on maturity. At our pawn stores, we sell merchandise acquired through either customer forfeiture
of pawn collateral, second-hand merchandise purchased from customers or consigned to us, or new merchandise purchased from vendors.
Pawn store revenues made up approximately 31% and 23% of our total Consumer Finance segment revenue in 2021 and 2020, respectively.
All
of our Consumer Finance lending activities and other services are subject to state regulations (which vary from state to state),
federal regulations and local regulations, where applicable.
As
part of each payday loan transaction, we enter into a standardized written promissory note with the borrowing customer and obtain
proof of income and identity, a personal post-dated check for the principal loan amount plus a specified fee, and other documentation.
Our standardized contracts vary based on state laws, but all of our contracts plainly state in simple terms the annual percentage
rate (assuming the fees we charge are computed as interest) in compliance with Regulation Z, the borrower’s right to rescind
the transaction, a dispute-resolution clause, a notice of financial privacy rights, an affirmative representation about whether
the borrower is a member of the U.S. military, and the consequences of defaulting on the loan. We retain copies of our written
contracts and provide a signed copy to our customers.
In
general, our lending process and standards are extraordinarily different from those used by banks. To our knowledge, banks typically
order and carefully review credit reports on all loans, engage in extensive underwriting analysis, and will typically make independent
verification of earnings history through phone calls, reviews of tax returns and other processes. As a result, we generally experience
a higher default rate on our personal loans than banks do on their personal loans (see caption below, “Risks Associated
with Our Loans—Default and Collection”). As of December 31, 2021, we had an aggregate (of all loan types) of approximately:
| ● | $1.92
million in current outstanding loan principal, fees and interest due to us; and |
| ● | $0.44
million of late loans (customers’ repayment checks deposited and returned as NSF
within the last 180 days). |
A
summary table of the number of Consumer Finance locations operated during the periods ended December 31, 2021 and 2020 follows:
| | |
2021 | | |
2020 | |
| Beginning | |
| 22 | | |
| 39 | |
| Acquired / Launched | |
| — | | |
| — | |
| Closed / Divested | |
| — | | |
| (17 | ) |
| Ending | |
| 22 | | |
| 22 | |
The
Fees We Charge
The
fee we charge for a payday loan varies from state to state, based on applicable regulations, and generally ranges from $15 to
$22 for each whole or partial increment of $100 borrowed. We do not charge interest in connection with our payday loans. If, however,
we calculate the loan fees we charge as an annual percentage rate of interest (“APR”), such rate would range from
177% for a 31-day loan transacted in Kansas (on the low end) to approximately 536% for a 14-day loan in Wyoming (on the high end),
with the actual average loan amount and average actual loan fees we charge involving an imputed annual percentage rate of approximately
439% and 198% for a 14-day and 31-day loan, respectively. The term of a loan significantly affects the imputed APR of the fees
we charge for our loans. For instance, when a $15 fee is charged for a two-week loan of $100, the resulting APR is 391%. When
the same fee on $100 is charged for a four-week loan, the resulting APR is 195%. Currently, we do not charge the maximum fee permitted
in all of the states where we operate. We do, however, charge a uniform fee for all transactions processed in any particular state
that involve the same range of payday loan amounts and the same term.
Of
the four states in which we presently operate payday loan stores, each limits the loan fees we may charge and the term (i.e.,
the length) of the loan we may offer our customers.
We
also offer pawn loans in Nebraska and Iowa. Allowable service charges for pawn loans vary by state and loan size. Our pawn loans
earn 20% per month for loans under $1,000 and our average pawn loan amount typically ranges between $10 and $250, although it
may range as high as $5,000. The loan amount varies depending on our estimated value of each item pawned.
Many
states have laws limiting the amount of fees that may be charged in connection with any lending transaction (including payday
and pawn lending transactions) when calculated as an APR, and some states expressly prohibit payday lending. These limitations,
combined with other limitations and restrictions, effectively prohibit us from utilizing our present business model for cash advance
or “payday” lending in those jurisdictions. In addition, the federal “2007 Military Authorization Act”
prohibits lenders from offering or making payday loans (or similar lending transactions) to members of the U.S. military when
the interest or fees exceed a 36% APR. Like the state limitations discussed above, this limitation effectively prohibits us from
providing our cash advance or “payday” lending to members of the U.S. military. As a result of these restrictions,
we do not conduct business with U.S. military personnel.
The
above-described payday fees are the only fees we assess and collect from our customers for payday loans. Nevertheless, we also
charge a flat fee that ranges from $15 to $40 (depending on the state) for returned checks in the event that a post-dated check
we attempt to cash as repayment for our loan is returned.
Extensions
or “Rollovers” of Payday Loans
Most
states prohibit payday lenders from extending or refinancing a payday loan. Nevertheless, one state in which we presently provide
payday loans (North Dakota) permits a loan to be extended or “rolled over” once.
When
a customer “rolls over” or extends the term of an outstanding loan, when permitted by state law, we treat that rollover
or extension as a brand new loan and we again charge the above-described loan fee for that transaction. This rollover has no effect
on the imputed APR of the loan in those cases where the extended term is equal to the initial term of the loan. For example, a
$100 four-week loan that costs $20 to obtain is the APR equivalent of 261%. If a customer extends the term of that loan for an
additional four-week period, the customer will have paid $40 total in fees to obtain the $100 eight-week loan—which is again
the APR equivalent of 261%. In cases where a customer (1) extends or rolls over a loan for a length of time that is less than
the original loan or (2) repays the extended loan prior to the expiration of the fully extended term, the imputed APR will
increase. For example, if a customer who obtained an initial $100 four-week loan for $20 in loan fees (the APR equivalent of 261%)
later extends the term of that loan for only two additional weeks and pays the additional $20 loan fee, that customer will have
borrowed $100 for a six-week period at a total cost of $40—which is the APR equivalent of 347%. We do not charge any interest
on the unpaid fee from the initial term of the loan because, as a condition to agreeing to a loan extension, we will only accept
cash payment of the fee for extending the loan.
Risks
Associated With Our Loans—Default and Collection
Ordinarily,
our customers approach us for a loan because they currently have insufficient funds to meet their present obligations, and so
rarely, if ever, do our customers have sufficient funds in their checking accounts to cover the personal post-dated checks they
provide us at the time of the loan transaction. The nature of our payday loan transactions presents a number of risks, including
the ultimate risk that the loan will not be paid back.
In
addition, we do not obtain security for our payday loans principally because, even assuming our customers would have potential
collateral to offer as security for a payday loan, the small size of each particular lending transaction does not justify the
time, effort and expense of identifying the collateral and properly obtaining a security interest in such collateral. As a consequence,
all of our payday loans are unsecured. This means that, absent court or other legal action compelling a customer to repay our
loans, we rely principally on the willingness and ability of our customers to repay amounts they owe us. In this regard, in many
cases the costs of merely attempting to collect the amounts owed to us exceed the amounts we would seek to collect—making
it impractical to take formal legal action against a defaulted borrower.
When
a customer defaults on a loan, we engage in collection practices that include contacting the customer for repayment and the customer’s
bank to determine whether funds are available to satisfy their personal post-dated check. If funds are available, we present the
check to the bank for repayment and an official check from the bank is obtained to pay off the item. The costs involved in these
initial collection efforts are minimal and involve some employee time and possibly a flat $15-30 bank fee to cover the cost of
the cashier’s check. If funds are not available, we generally attempt to collect returned checks for up to 90 days (or up
to 180 days in cases where a bank account is still active and the customer has not initiated a stop payment on the postdated check
provided), principally through continued attempts to contact the customer. If our attempts remain unsuccessful after 90 (or 180)
days, we generally assign the item to a collection agency. Assignment to a collection agency may cost us 30-40% of the amount
eventually collected (if any) from the customer. Ordinarily, we do not recoup any costs of collection from our customers.
Over
the past 12 months, using a 24 month lookback period for a given month, we collect anywhere from 64% - 68% of the amount of all
returned checks, which results in approximately 2.02% of our total payday loan principal and fee volume being uncollectible. In
2021 and 2020, we generated approximately 56,000 and 84,000 payday loan transactions, respectively.
Industry
Information
The
total size of the check cashing & payday loan industry is estimated to be a $19.1 billion in 2022 according to industry statistics
reported by IBISWorld (4/30/21). In a December 2017 study by the Center for Financial Services Innovation (“2017 Financially
Underserved Market Size Study”), it was reported that consumers spent approximately $3.2 billion on fees for single payment
loan products from storefront payday lenders in 2016, compared to $3.6 billion in 2015. This year-over-year decline continues
a trend that is expected to continue going forward. According to the Community Financial Services Association of America (“CFSA”)
website, industry analysts estimate that 12 million U.S. households use short-term payday advances each year in 35 states, and
estimate that there are 20,600 payday advance locations across the United States, which extend approximately $38.5 billion in
short-term credit to households experiencing cash-flow shortfalls. In addition to being a valuable source of credit for many consumers,
the payday loan industry makes significant contributions to the U.S. and state economies, employing more than 50,000 Americans
who earn $2 billion in wages and generating more than $2.6 billion in federal, state, and local taxes. Industry trends indicate
that there will likely be a net decrease in total payday lending stores over the next few years due to store closings resulting
from a combination of regulatory or legal changes, regulatory pressures, a slowdown in new store growth, and general economic
conditions.
Predatory
Lending and Regulatory Concerns
In
general, the payday lending industry suffers from the perception and widespread belief that payday lenders are, by their nature,
predatory lenders, offering loans to low-income and poorly educated consumers at costs that are too high to be good for consumers.
This perception and belief results in frequent efforts in the U.S. Congress and various state legislatures, often proposed by
consumer advocacy groups and lobbyists for traditional financial institutions such as banks, to further regulate and restrict
or prohibit payday lending outright. See “Item 1A – Risk Factors” for further information regarding regulatory
risks.
We
do not believe payday lending is predatory, nor do we believe that our loans are too costly for consumers if they are judiciously
obtained. In fact, we believe that bank overdraft fees by themselves are typically far more costly for consumers, and bouncing
a check can often involve other negative consequences such as independent fees levied by the parties to whom a bad check is written,
negative publicity, etc. In a January 13, 2022 article published by “moneyunder30.com”, it was reported that the median
overdraft fee among retail banks is $34, and the majority of overdraft fees are incurred on transactions of $24 or less. Also,
consumers repaid most overdrafts within three days. In other words, a $24 loan, repaid in three days, with a $34 overdraft fee
would represent an APR of 17,000%. In sum, we believe that many of the bad perceptions about our industry are fueled primarily
by:
| ● | the
effects of our loans on consumers who do not judiciously obtain payday loans; |
| ● | a
lack of genuine understanding about the choices faced by low and middle-income people
facing a critical cash shortage; and |
| ● | anti-payday
lending lobbying campaigns, often funded by traditional financial institutions such as
banks and credit unions that would economically benefit from the elimination of payday
lending. |
Seasonality
Our
Consumer Finance segment results are subject to seasonality, with the first and fourth quarters typically being our strongest
periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds
during the first quarter.
Competition
Like
most other payday lenders, we believe that the primary competitive factors in our business are location and customer service.
We face intense competition in an industry with relatively low barriers to entry, and we believe that the payday lending markets
are becoming more competitive as the industry matures and consolidates. We compete with other payday lending and check cashing
stores, and with financial service entities and retail businesses that offer payday loans or similar financial services. For example,
we consider credit card companies that offer payday features, credit unions, banks that offer small loans, and creditors and loan
services that can extend payment terms on outstanding loans to be our competitors. In addition, we compete in part with services
offered by traditional financial institutions, most notably with respect to the “overdraft protection” services those
institutions may offer and the charges they levy for checks written with insufficient funds.
Additional
areas of competition have arisen. Businesses offer loans over the Internet as well as “loans by phone,” and these
services compete with the services we offer. There also has been increasing penetration of electronic banking and related services
into the check cashing and money transfer industry, including direct deposit of payroll checks, payroll or debit cards, stored-value
cards, prepaid credit and debit cards, and electronic transfer of government benefits.
We
also believe that customer service is critical to developing loyalty. In our industry, we believe that quality customer service
means:
| ● | assisting
with the loan application process and helping our customers understand the loan terms; |
| ● | treating
customers respectfully; and |
| ● | processing
transactions with accuracy, efficiency and speed. |
Our
competitors for pawn store merchandise sales include numerous retail and wholesale stores, including jewelry stores, discount
retail stores, consumer electronics stores, other pawn stores, other resale stores, electronic commerce retailers and auction
sites.
The
pawn industry in the United States is large and highly fragmented. The industry consists of approximately 13,000 pawn stores owned
primarily by independent operators who own one to three locations. We consider the industry relatively mature. The three largest
pawn store operators account for approximately 10% of the total estimated pawn stores in the United States.
Effect
of General Economic Conditions on our Consumer Finance Segment
Our
business has experienced fluctuating changes in our provision for loan losses in recent years, significantly impacted by the amount
loaned by loan types where installment lending carried a higher forfeiture rate. We are uncertain how the current economic conditions
will affect demand for our services or our loan losses after 2022.
Credit
and financing available to us and our industry have been negatively impacted by recent federal and state legislation and regulation,
including the overall negative perception associated with payday lending. For example, we are aware of federal and state regulatory
pressures being exerted on our banking relationships due to the negative perception about payday lending. For more information,
see “Regulation - Regulation of Consumer Financing Activities” below.
REGULATION
We
are subject to regulations by federal, state and local governments that affect the products and services we provide. Generally,
these regulations are designed to protect consumers who use our services and are not designed to protect our shareholders.
Regulation
of Consumer Financing Activities
In
those states where we currently operate consumer finance activities, we are licensed as a payday lender or pawn broker where required
and are subject to various state regulations regarding the terms and conditions of our payday and pawn loans and our lending policies,
procedures and operations. In some states, payday lending is referred to as “deferred presentment,” “cash advance
loans,” “deferred deposit loans,” or “consumer installment loans.” State regulations normally limit
the amount that we may lend to any single consumer and may limit the number of loans that we may make to any consumer at one time
or in the course of a single year. State regulations also limit the amount of fees that we may assess in connection with any loan
transaction and may limit a customer’s ability to extend or “rollover” a loan with us. State regulations often
specify minimum and maximum maturity dates for payday loans and, in some cases, specify mandatory cooling-off periods between
transactions.
Our
payday lending practices must also comply with the disclosure requirements of the Federal Truth-In-Lending Act and Regulation
Z under that Act. Our collection activities for delinquent loans are generally subject to consumer protection laws regulating
debt-collection practices. Finally, our payday lending business subjects us to the Equal Credit Opportunity Act and the Gramm-Leach-Bliley
Act.
During
the last several years, legislation has been introduced and passed in the U.S. Congress and in certain state legislatures proposing
or effecting various restrictions or an outright prohibition on payday or certain installment lending and consumer advocacy groups
in many states are actively seeking state law changes which would effectively end the viability of a payday loan business. Currently,
state laws in Arizona, Colorado, Georgia, Montana, Nebraska, Oregon, and South Dakota have effectively eliminated the ability
to conduct payday and certain installment lending in those states. In 2010, Congress passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act, which consolidated most federal regulation of financial services offered to consumers, and replaced
the Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers, including mortgage lenders, providers
of payday loans, other nonbank financial companies, and banks and credit unions with assets over $10 billion, are subject to regulations
and oversight by the Consumer Financial Protection Bureau (“CFPB”). While the CFPB does not have authority to make
rules limiting interest rates or fees charged, the scope and extent of its authority are broad enough to impose limits on rollovers
and extensions of payday loans, as well as compliance with federal rules and regulations.
After
several years of research, debate, and public hearings, in October 2017, the CFPB adopted a new rule for payday lending. The 2017
rule, originally scheduled to go into effect in August 2019, would have imposed significant restrictions on the industry, and
at the time it was 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 forecasted a much higher attrition rate if the rule were to
be implemented as originally adopted. Included in the new rule were requirements for vetting borrowers (i.e., obtaining a credit
report and performing basic underwriting procedures), limits on the number of loans a consumer could obtain in a 12-month period,
limiting to two the number of times a consumer’s check may be presented to the consumer’s bank for payment, and provisions
requiring paydowns by the consumer on successive loans. However, in January 2018, the CFPB issued a statement that it intended
to “reconsider” the regulation and delayed the August 19, 2019 compliance date for the other provisions to November
19, 2020. In July 2020, the CFPB issued a final rule applicable to the 2017 rule. The final rule rescinded the mandatory underwriting
provisions of the 2017 rule but did not rescind or alter the payments provisions of the 2017 rule. The CFPB will seek to have
these rules go into effect with a reasonable period for lenders to come into compliance.
In
addition, our Consumer Finance segment activities are subject to the following federal consumer laws, regulations and CFPB guidance:
| ● | Unfair,
Deceptive or Abusive Acts or Practices (“UDAAP”) |
| ● | Fair
Debt Collections Practice Act (“FDCPA”) |
| ● | Consumer
Complaint Management |
| ● | Electronic
Fund Transfer Act (“EFTA”) (Reg. E) |
| ● | Fair
Credit Reporting Act (“FCRA”) |
| ● | Service
Members Civil Relief Act |
For
more information, see “CONSUMER FINANCE SEGMENT—Predatory Lending and Regulatory Concerns” above.
Financial
Reporting Regulation
Regulations
promulgated by the United States Department of the Treasury under the Bank Secrecy Act require us to report all transactions involving
currency in an amount greater than $10,000. Generally, every financial institution must report each deposit, withdrawal, exchange
of currency, or other payment or transfer that involves an amount greater than $10,000. In addition, multiple currency transactions
must be treated as a single transaction if we have knowledge that the transactions are by or on behalf of any one person and result,
in a single business day, in the transfer of cash in or out totaling more than $10,000. In addition, the regulations require us
to maintain information concerning sales of monetary instruments for cash in amounts from $3,000 to $10,000. The Bank Secrecy
Act requires us, under certain circumstances, to file a suspicious activity report.
The
Money Laundering Suppression Act of 1994 requires us to register with the United States Department of the Treasury as a money
service business. Money service businesses include check cashers and sellers of money orders. Money service businesses must renew
their registrations every two years, maintain a list of their agents, update the agent list annually, and make the agent list
available for examination.
Finally,
we have established various procedures designed to comply, and we continue to monitor and evaluate our business methods and procedures
to ensure compliance with the USA PATRIOT Act.
Privacy
Regulation
We
are subject to a variety of federal and state laws and regulations restricting the use and seeking to protect the confidentiality
of customer identity and other personal nonpublic customer information. We have identified our systems that capture and maintain
nonpublic personal information, as that term is understood under the Gramm-Leach-Bliley Act and associated regulations. We disclose
our public information policies to our customers as required by that law. We also have systems in place intended to safeguard
this information as required by the Gramm-Leach-Bliley Act, which specifically governs certain aspects of our payday lending business.
Technology
and Information
We
maintain integrated systems of retail points of sale and management software applications and platforms for processing the various
types of financial transactions we offer. These systems provide us with customer service, internal control mechanisms, record-keeping
and reporting information. These systems are designed to provide summary, detailed and exception information to various levels
of management.
Security
We
believe the principal security risks to our Consumer Finance and Cellular Retail segments are robbery and employee theft. We have
established extensive security and management information systems to address both areas of potential loss. To protect against
robbery, most payday lending store employees work behind bullet-resistant glass, and the back office, safe and computer areas
are locked and closed to customers. Security measures utilized in our retail locations include mechanical safes, electronic alarm
systems monitored by third parties or remote-controlled systems, control over entry to customer service representative, motion
detection devices, locked cases, and, at times, the use of professional security services. Consumer Finance segment employees
also use cellular phones to ensure safety and security whenever they are outside secured areas.
We
implemented critical safeguarding controls, including daily cash and deposit monitoring, unannounced audits of cash and inventory
items, and requiring immediate responses from our staff when irregularities in cash balances are discovered. We primarily self-insure
for employee theft and dishonesty at the store level.
We
regularly receive and store information about our customers, vendors and other third parties. We have programs in place to detect,
contain, and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or
degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable
to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we
develop or procure from third parties or through open-source solutions may contain defects in design or manufacture or other problems
that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or
facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our team
members, contractors, and vendors. The Company retains outside cyber-security experts to assist us in preventing security breaches
of our sensitive information from cyber incidents and hacking.
EMPLOYEES
As
of December 31, 2021, we had approximately 950 employees. We believe our relationship with our employees is good, and we have
not suffered any work stoppages or labor disputes. We do not have any employees that operate under collective-bargaining agreements.
CORPORATE
INFORMATION
Our
principal offices are located at 11550 “I” Street, Suite 150, Omaha, Nebraska 68137, our telephone number at that
office is (402) 551-8888, and our internet website is https://www.westerncapitalresources.com.
Our
fiscal year ends December 31. Neither we nor any of our predecessors have been in bankruptcy, receivership or any similar proceeding.
ITEM
1A RISK FACTORS
You
should consider the following risk factors, in addition to the other information presented or incorporated by reference into this
Annual Report on Form 10-K, in evaluating our business and your investment in us.
Investment
Risks
Acquisitions
and strategic investments may fail to meet our expectations, and any such failure could have a negative impact on our results
of operation or financial condition, and could ultimately result in dilution to our shareholders.
Our
long-term growth strategy includes acquisitions. We may not successfully execute this strategy. An acquisition strategy includes
numerous risks, including, among others, the risk that our financial projections relating to our acquisitions may turn out to
be incorrect and our investment may fail to positively impact our results and growth as anticipated (and may in fact negatively
impact our results), the risk of unexpected or unidentified issues not discovered in the due diligence process which could harm
our financial condition, risks related to our ability to successfully integrate an acquisition target into the Company, and the
need for substantial additional capital which may result in dilution to our shareholders.
Acquisitions
and strategic investments made wholly or partly on the basis of our issuance of securities to the target companies, or acquisitions
made with cash that is obtained from outside investors or lenders, will result in dilution to our shareholders.
The
structuring of future acquisitions, whether through share exchanges, merger acquisitions or otherwise, may result in dilution
to existing shareholders. In addition, cash-based transactions may not be financed from corporate cash flows and reserves, and
may themselves be financed through borrowing arrangements or the sale of equity or equity-linked securities, the latter of which
would be dilutive to our shareholders.
Acquisitions
and strategic investments may be disruptive to our business.
The
time and expense associated with finding suitable acquisitions or with integrating acquired entities and operations with our Company
can be disruptive to our ongoing business and divert our management’s attention. In addition, the financing of acquisitions
may impact our ability to obtain or renew financing for existing operations, or subject us to covenants restricting certain activities.
Any of these outcomes could have a short- or long-term adverse effect on our results of operation and our ability to further execute
our acquisition strategy.
Unpredictability
in financing and other markets could impair our ability to grow our business through acquisitions
We
anticipate that opportunities to acquire businesses will materially depend on the availability of financing alternatives with
acceptable terms as well as acceptable market valuations of prospective acquisitions. As a result, poor credit and other market
conditions, mergers and acquisitions market valuations, any uncertainty in the financing markets, or the adverse regulatory pressures
of being involved in the payday lending business in particular, could materially limit our ability to grow through acquisitions
since such conditions and uncertainty make obtaining financing and finding attractive opportunities more difficult and more expensive.
Our
controlling shareholder possesses controlling voting power with respect to our common stock, which will limit other shareholders’
influence on corporate matters.
Our
controlling shareholders, WCR, LLC, BC Alpha Holdings I, LLC and their affiliates that are under common control (see Item 12),
had beneficial ownership of approximately 75% of our common stock as of March 29, 2022. As a result, the controlling shareholders
have the ability to outright control our affairs through the election and removal of our entire Board of Directors and all other
matters requiring shareholder approval, including a future merger or consolidation of the Company, or a sale of all or substantially
all of our assets. This concentrated control limits the Company’s public float and could discourage others from initiating
any such potential merger, consolidation or sale or other change-of-control transaction that may otherwise be beneficial to our
shareholders. Furthermore, this concentrated control will limit the practical effect of your participation in Company matters,
through shareholder votes and otherwise.
Our
certificate of incorporation grants our Board of Directors the power to issue additional shares of common and preferred stock
and to designate other classes of preferred stock, all without shareholder approval.
Our
authorized capital consists of 12.5 million shares of capital stock. Pursuant to authority granted by our certificate of incorporation,
our Board of Directors, without any action by our shareholders, may designate and issue shares in such classes or series (including
other classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such
shares, including dividends, liquidation and voting rights, provided they are consistent with Delaware law. The rights of holders
of other classes or series of stock that may be issued could be superior to the rights of holders of our common shares. The designation
and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of
our common stock. Furthermore, any issuances of additional stock (common or preferred) will dilute the percentage of ownership
interest of then-current holders of our capital stock and may dilute our book value per share.
Our
common stock trades only in an illiquid trading market.
Trading
of our common stock is conducted on the OTCQB, a tier of the OTC Markets (symbol: WCRS). This has an adverse effect on the liquidity
of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through
delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us and our common
stock. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger
spread between the bid and asked prices for our common stock.
There
is not now and there may not ever be an active market for shares of our common stock.
In
general, there has been minimal trading volume in our common stock. During 2021, the average daily trading volume was under 1,200
shares. The small trading volume will likely make it difficult for our shareholders to sell their shares as and when they choose.
Furthermore, small trading volumes are generally understood to depress market prices. As a result, you may not always be able
to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.
A
significant portion of our assets consists of goodwill and other intangible assets.
As
of December 31, 2021, 11.2% of our assets consisted of goodwill and other intangible assets, excluding right-of-use assets.
Including right-of-use assets, this is 25.4% of our assets. Under generally accepted accounting principles, the carrying value
of goodwill is subject to periodic review and testing to determine if it is impaired. The value of our assets will depend on market
conditions, regulatory environment, the availability of buyers and similar factors. While the value of these assets is based on
management projections and assumptions and is determined by using the discounted cash flow method for purposes of our impairment
testing, those values may differ from what could ultimately be realized by us in a sales transaction or otherwise and that difference,
while not affecting cash flow, could have a material adverse impact on our operating results and financial position.
Industry
Risks
We
face significant cellular retail competition that may reduce our market share and lower our profits.
We
face significant competition in our Cellular Retail segment. We compete with the three national wireless service providers (AT&T,
T-Mobile and Verizon Wireless) as well as other smaller brands or carriers such as U.S. Cellular, Boost Mobile and Metro by T-Mobile
and with many mobile virtual network operators (“MVNOs”) such as Walmart’s Straight Talk and Family Mobile plans.
We also compete with other providers for customers eligible for government-subsidized services under the Affordable Connectivity
Program (previously the Emergency Broadband Benefit program) that lowers the monthly cost of broadband service to eligible households.
Our ability to compete effectively will depend on, among other things, the pricing of cellular services and equipment, the quality
of our customer service, the reach and quality of our sales and distribution channels and our capital resources. It will also
depend on how successfully we anticipate and respond to various factors affecting our industry, including new technologies and
business models, changes in consumer preferences, demographic trends and economic conditions.
The
cellular retail industry also faces competition from other communications and technology companies seeking to capture customer
revenue and brand dominance with respect to the provision of cellular accessories and services. For example, Apple Inc. packages
software applications and content with its handsets, and Google Inc. has developed and deployed an operating system and related
applications for mobile devices.
We
are subject to federal and state regulations relating to agriculture, plants and seeds which impose costs of compliance and significant
liability for failures to comply.
Our
seed sales are regulated by the Federal Seed Act, or the FSA. The Agricultural Marketing Service, or AMS, enforces interstate
commerce provisions of the FSA and provides seed testing service under the Agricultural Marketing Act. The FSA regulates the interstate
shipment of agricultural and vegetable seeds. The FSA requires that seeds shipped in interstate commerce be labeled with information
that allows seed buyers to make informed choices. Seed labeling information and advertisements pertaining to the seed must be
truthful. All South Carolina nursery growers, including our Direct to Consumer segment operating subsidiary, must be certified
and registered before selling, shipping or distributing plants under the South Carolina Nursery Regulations.
The
Environmental Protection Agency’s, or EPA’s, Agricultural Worker Protection Standard aims to reduce pesticide poisonings
and injuries among agricultural workers and pesticide handlers. It imposes obligations on employers of pesticide handlers and
other agricultural workers to provide their employees with certain training, information, protective equipment, and other rights
and protections. All of these requirements impose additional costs of compliance and risks from noncompliance. In addition, we
use certain fertilizers, pesticides and other products in our business which may be harmful if released into the environment.
We have adequate material safety data sheets to handle these chemicals appropriately.
We
are subject to federal and state regulations relating to privacy, data protection and consumer protection which impose costs of
compliance and potentially significant liability for failures to comply.
The
Direct-to-Consumer segment is almost wholly dependent upon the continued ability to successfully interact with customers using
their personal information and the technology required to interact with them. A variety of laws and regulations govern the collection,
use, retention, sharing, export and security of personal information. Laws and regulations relating to privacy, data protection
and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted
and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices.
As a result, our practices may not comply, or may not comply in the future with all such laws, regulations, requirements and obligations.
Any failure, or perceived failure, by us to comply with our posted privacy policies or with any applicable privacy or consumer
protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory
guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely
affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities
or others or other liabilities or require us to change our operations and/or cease using certain data sets. Any such claim, proceeding
or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings,
distract our management, increase our costs of doing business, result in a loss of customers and suppliers and may result in the
imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the
costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer
protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
Federal,
state and international governmental authorities continue to evaluate the privacy implications inherent in the use of proprietary
or third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. U.S.
and foreign governments have enacted, have considered or are considering legislation or regulations that could significantly restrict
the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and
consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such
tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means
to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could
if widely adopted significantly reduce the effectiveness of such practices and technologies. The regulation of the use of cookies
and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ
such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms
and consequently, materially adversely affect our business, financial condition and operating results.
In
addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current
laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer
protection. Any such changes may force us to incur substantial costs or require us to change our business practices. This could
compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers or
otherwise harm our business, financial condition and operating results.
A
sustained deterioration in the economy could reduce demand for our Direct to Consumer segment products and services and result
in reduced earnings.
A
sudden or sustained deterioration in the economy could result in decreased demand for our seed, live plant, holiday gifts, lawn
and garden power equipment, emergency safety shelters and home restoration products. This could result in decreased revenue and,
because a significant portion of our sales in the Direct to Consumer segment are of live goods, inventory losses on live product
acquired prior to a seasonal selling period could be significant.
Our
Direct to Consumer success depends, in substantial part, on our continued ability to market our products through
search engines and social media platforms.
The
marketing of our products in the Direct to Consumer segment depends on our ability to cultivate and maintain cost-effective and
otherwise satisfactory relationships with search engines and social media platforms, including those operated by Google, Facebook,
Bing and Yahoo! These platforms could decide to change their terms and conditions of use at any time (and without notice) and/or
significantly increase their fees. No assurances can be provided that we will be able to maintain cost-effective and otherwise
satisfactory relationships with these platforms and our inability to do so in the case of one or more of these platforms
could have a material adverse effect on our business, financial condition and results of operations.
We
obtain a significant number of visits via search engines such as Google, Bing and Yahoo! Search engines frequently change the
algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results
are displayed, which can negatively affect the placement of links and, therefore, reduce the number of visits to our website.
The growing use of online ad-blocking software may also impact the success of our marketing efforts because we may reach a smaller
audience and fail to bring more customers to our websites, which could have a material adverse effect on our business,
financial condition and results of operations.
Free
shipping pressure in the e-commerce industry could decrease our Direct to Consumer segment’s revenues and profitability.
The
abundance of free shipping offers from Amazon.com and other online retailers has put pressure on our Direct to Consumer segment
shipping revenues, currently representing 19% of Direct to Consumer revenues. If market forces lead to the elimination of this
revenue stream, it may be difficult for the Direct to Consumer segment to make up that lost revenue.
The
payday loan industry is highly regulated under federal, state and local laws and regulations. Changes in federal, state or local
laws and regulations governing lending practices, or changes in the interpretation of such laws and regulations, could negatively
affect our business.
Our
Consumer Finance segment activities are highly regulated under numerous federal, state and local laws, regulations and rules,
which are subject to change. New laws, regulations or rules could be enacted or issued, interpretations of existing laws, regulations
or rules may change and enforcement action by regulatory agencies may intensify.
Although
states provide the primary regulatory framework under which we offer payday loans, certain federal laws also affect our business.
For example, because payday loans are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and
Regulation Z under that Act. Additionally, we are subject to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act and
certain other federal laws.
From
a federal standpoint, anti-payday loan legislation has occasionally been introduced in the U.S. Congress. Over the past several
years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely
restrict sub-prime lending activities such as those we conduct. As outlined under “BUSINESS – REGULATION – Regulation
of Consumer Financing Activities,” the CFPB released their final rule in October 2017, announced in January 2018 that it
was reconsidering the rule and in July 2020 issued a final rule applicable to the 2017 rule.
In
the states, there are nearly always bills pending to alter the current laws governing payday lending. There is also a current
trend for consumer activist groups to seek law changes through a ballot initiative. Any of these bills or ballot initiatives,
or future proposed legislation or regulations prohibiting payday loans or making them less profitable, could be passed in any
state at any time, or existing laws permitting payday lending could expire.
Statutes
authorizing payday loans typically provide state agencies that regulate banks and financial institutions with significant regulatory
powers to administer and enforce the laws relating to payday lending. Under statutory authority, state regulators have broad discretionary
power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue
new administrative rules, even if not contained in state statutes, that affect the way we do business and may force us to terminate
or modify our operations in those jurisdictions. They may also impose rules that are generally adverse to our industry. Finally,
in many states, the attorney general has scrutinized or continues to scrutinize the payday loan statutes and the interpretations
of those statutes.
In
sum, the passage of federal or state laws and regulations that govern or otherwise affect lending, or changes in interpretations
of them, could, at any point, result in our curtailment or cessation of operations in certain or all jurisdictions or locations
essentially prohibiting us from conducting our lending business in its current form. Any such legal or regulatory change would
certainly have a material and adverse effect on us, our operating results, financial condition and prospects, and perhaps even
our viability. Furthermore, any failure to comply with any applicable federal, state or local laws or regulations could result
in fines, litigation, closure of one or more store locations and negative publicity.
Litigation
and regulatory actions directed toward the consumer finance industry or our Company could adversely affect our operating results,
particularly in certain key states.
During
the last few years, the consumer finance industry has been subject to regulatory proceedings, class action lawsuits and other
litigation regarding the offering of payday loans, and we could suffer losses resulting from interpretations of state laws in
those lawsuits or regulatory proceedings, even if we are not a party to those proceedings. The losses we could suffer could be
directly incurred through our involvement in litigation or regulatory proceedings, or could be indirectly incurred through negative
publicity regarding the industry in general that is generated by litigation on regulatory proceedings involving third parties.
In
addition, regulatory actions or enforcement efforts taken with respect to money services businesses could negatively affect our
ability to operate our consumer finance segment in our current form. For example, federal bank regulators are imposing significant
costs and regulatory pressure on banks that do business with money services businesses, even though our business is conducted
in a manner compliant with applicable law. As a result, fewer and fewer banks are willing to accept or even retain customers in
the money service business industry. We may be forced to change long-standing banking relationships and change the way we operate
our consumer finance operations, incurring additional capital expenditures and paying higher banking fees.
Public
perception of payday lending as being predatory or abusive could adversely affect our business.
In
recent years, consumer advocacy groups and media reports have advocated governmental action to prohibit or severely restrict payday
loans. The consumer groups and media reports typically focus on the cost to a consumer for this type of loan, which is higher
than the interest typically charged by credit card issuers. The consumer groups and media reports typically characterize these
transactions as predatory or abusive toward consumers. If this negative characterization of payday lending becomes widely accepted
by consumers, demand for our payday loans could significantly decrease, which could adversely affect our results of operations
primarily by decreasing our revenues. Negative perception of payday lending activities could also result in our industry being
subject to more restrictive laws and regulations and greater exposure to litigation.
General
economic conditions affect our Consumer Finance segment, and accordingly, our results of operations could be adversely affected
by a general economic slowdown or other negative economic conditions such as high unemployment.
Provision
for loan losses, net of recoveries, is historically one of our largest Consumer Finance segment operating expenses. Any changes
in economic factors that adversely affect our customers, such as an economic downturn or high unemployment, could result in higher
loan loss experiences than anticipated, which could in turn adversely affect our loan charge-offs and operating results.
In
addition, changes in economic factors could cause worsening performance of our pawn loans and in consumer demand for and resale
value of pre-owned merchandise that we sell in our stores. This, in turn, could reduce the amount that we could effectively lend
on an item of collateral. Such reductions could adversely affect pawn loan balances, pawn loan redemption rates, inventory balances,
revenues and gross profit margins.
Company
Risks
We
are subject to risks associated with public health crises and epidemics/pandemics, such as COVID-19.
We
are exposed to risks associated with public health crises and epidemics/pandemics, such as COVID-19, including its variants. COVID-19
or other epidemics/pandemics may have an adverse impact on our operations, supply chains and distribution systems and increase
our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses
and governments have taken, are taking or that may occur or recur in the future, including travel bans and restrictions, quarantines,
shelter in place orders, and shutdowns.
Due
to these impacts and measures, we may experience significant and unpredictable reductions or increases in demand for certain of
our products and services. In addition, prolonged quarantines or travel restrictions may significantly impact the ability of our
employees to get to their places of work or may significantly hamper our products from moving through the supply and distribution
chains. As a result, COVID-19 or other epidemics/pandemics could negatively affect our sales, and it is uncertain how they will
affect our operations generally if these impacts persist or exacerbate over an extended period of time. In addition, some of our
businesses, particularly our Direct to Consumer segment with its focus on online sales to consumers, enjoyed increased demand
as a result of the COVID-19-related restrictions and resulting changes in consumer behavior, some of which demand may not continue
if consumer behaviors again change after such restrictions lapse. Any of these impacts could have a material adverse effect on
our business, financial condition and results of operations.
We
are subject to supply and labor shortages associated with COVID-19 testing and vaccination requirements.
We
are exposed to additional expense and risk of potentially significant labor shortages associated with governmental pronouncements
to require continual testing for COVID-19 and its variants and mandatory vaccination of our employees, including an increasing
number of additional injections required to obtain and maintain vaccinated status, and required compensation to employees who
have tested positive for the virus and required to remain out of the workforce for a period of time.
We
face substantial risk through reliance on a single wireless retail carrier.
We
operate our Cellular Retail segment exclusively as an authorized dealer for Cricket, which means that this segment of our operations
is entirely dependent upon continued operations as a Cricket dealer under our dealer agreement with Cricket Wireless, the commitment
of Cricket Wireless to advertise and offer competitive product and service offerings in our markets, and the health of our relationship
with Cricket Wireless. If Cricket Wireless were to change certain aspects of its dealer arrangements, including items such as
pricing, product supply, credit terms and dealer compensation structure (all of which are primarily determined by Cricket Wireless)
in a manner that is adverse to us, our margins and results of operations would likely suffer. In addition, if Cricket Wireless
were to begin growing its relationship with other operators, or were to embark upon an effort to significantly grow corporate-owned
locations, our prospects for growth in this segment would suffer.
We
risk inventory shortages within our Cellular Retail segment given the global chip shortages.
The
global chip shortage hit the smartphone industry in 2021, resulting in some inventory shortages. The limited supply of chips is
expected to continue throughout 2022 which will likely have an impact on the smartphone supply. Also, we rely on AT&T as the
sole provider of our Cricket cellular devices. Inventory shortages caused by the global chip shortage could negatively affect
our business, financial condition and results of operations.
We
may be unable to obtain sufficient inventory to meet business needs.
Our
businesses can be impacted by unexpected circumstances that may either make inventory unavailable or only available at increased
costs. These impacts include, but are not limited to:
| ● | Even
if inventory is available at the source, there may be circumstances that make it difficult
or impossible to move the goods to our business locations. Limited availability of trucks,
containers, ships or port congestion can delay our ability to obtain finished goods,
raw materials or other supplies as needed to meet customer demand. |
| ● | Changes
in tariffs, embargos and other items impacting purchases from other countries can limit
our supply of sellable inventory or increase their costs over those anticipated. |
| ● | Much
of our Direct to Consumer segment inventory consists of seeds and living plants sourced
both domestically and internationally. All of these items may be impacted by weather
such as droughts, natural disasters including earthquakes, tornados, floods, crop failure,
high temperatures, unavailable water supply, infestations of insects, molds, fungi, disease
and other items that impact crops both domestically and internationally. |
| ● | In
many cases, there are limited suppliers for the Direct to Consumer segment inventory
we need at the quantities we need. The lead time between ordering and delivery of some
of these goods, such as roses and Christmas trees, can be several years. If we miscalculate
the amounts required, we will be unable to sell the products we purchased, which may
result in a write-off of the excess inventory, or be unable to fulfill some of our customer
orders. |
| ● | Our
Direct to Consumer grower suppliers are highly impacted by unfavorable weather patterns.
For example, the drought in California during the past two years has threatened the operations
of several rose growers. So far, we have not been impacted materially but this could
result in a disruption in the future supply of products or increase our cost of supply. |
Managing
our inventory is complex and may include write-downs of excess or obsolete inventory.
Managing
our inventory, across our segments, is complicated by a number of factors, including the need to maintain a significant inventory
of finished goods to support our cellular retail locations and online orders for our products that we anticipate but may not be
received. These issues may cause us to purchase and maintain significant amounts of inventory. If this inventory is not used as
expected based on anticipated requirements, it may become excess or obsolete. The existence of excess or obsolete inventory can
result in sales price reductions or inventory write-downs, which could adversely affect our business and results of operations.
Outside
factors may affect our ability to obtain product and fulfill orders in our Direct to Consumer segment.
In
our Direct to Consumer segment we have year-to-year agreements with third party wholesale growers that could be impacted by changes
in their business operations, including, but not limited to plant disease, financial difficulties, labor disruptions, land lease
issues and water supplies. Although J&P Park Acquisitions, Inc. (“JPPA”) has taken steps to purchase from multiple
vendors and identify alternate sources of supply, the long lead time involved in growing operations could mean the Company might
not be able to obtain certain crops at certain times. Certain of the Company’s growers also compete with the Company through
their own direct-to-consumer selling operations. Additionally, the recent COVID-19 virus has caused some imported products to
be delayed. There could be further disruptions, whether caused by the third-party wholesaler, pandemic, weather or other environmental
or climate influences that could limit the supply of product we rely upon to fulfill orders.
Large
or rapid increases in the cost of raw materials or components parts or substantial decreases in their availability could materially
and adversely affect the operating results of our Manufacturing segment.
Our
Manufacturing segment uses large amounts of steel, among other items, in the manufacture of its products. Occasionally, market
prices of some of the steel or other key raw materials may increase significantly, including as a result of tariffs or other trade
barriers. If in the future Swisher is not able to reduce product costs in other areas or pass raw material and related component
price increases on to its customers, its margins could be adversely affected. In addition, because Swisher maintains limited raw
material and component inventories, even brief unanticipated delays in delivery by suppliers - including those due to capacity
constraints, labor disputes, impaired financial condition of suppliers, epidemics, pandemics like COVID-19, other infectious diseases,
weather emergencies or other natural disasters - may impair Swisher’s ability to satisfy its customers and could adversely
affect its financial performance.
We
may be subject to product liability and other similar claims if people or property are harmed by the products we sell.
Some
of the products we sell, including those sold in the recently acquired Swisher business, may expose us to product liability and
other claims and litigation (including class actions) or regulatory action relating to safety, personal injury, death or environmental
or property damage. Some of our agreements with members of our supply chain may not indemnify us from product liability for a
particular product, and some members of our supply chain may not have sufficient resources or insurance to satisfy their indemnity
and defense obligations. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for
liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.
A
significant disruption in our information systems and our inability to adequately maintain and update those systems could adversely
affect our operations and our ability to maintain the confidence of our customers and business partners.
We
rely extensively on our information systems to manage and operate our businesses. Our systems are subject to damage or interruption
from power outages, telecommunications failures, computer viruses, malicious attacks, denial of service attacks, security breaches,
and catastrophic events. If our systems are damaged, fail to function properly or reliably, or our security measures fail to prevent
a disruption, we may incur substantial repair or replacement costs, experience data loss or theft and impediments to our ability
to manage inventories or efficiently effect transactions, engage in additional promotional activities to retain our customers,
and encounter lost confidence of our customers and other business partners, which could adversely affect our results of operations.
We
regularly invest to maintain and update our computer systems. Implementing significant system changes increases the risk of computer
system disruption. The potential problems and interruptions associated with implementing technology initiatives, as well as providing
training and support for those initiatives, could disrupt or reduce our operational efficiency, and could negatively impact customer
experience and confidence of our customers and other business partners.
Unexpected
system interruptions caused by system failures may result in reduced revenues and harm to our brands, particularly for our Direct
to Consumer segment.
In
the past, particularly during peak holiday periods, we have experienced significant increases in traffic on our website and in
its toll-free customer service centers for our Direct to Consumer segment. Our operations depend on our ability to maintain our
computer and telecommunications systems in effective working order and to protect its systems against damage from fire,
natural disaster, power loss, telecommunications failure, security breaches (including breaches of our transaction processing
or other systems that could result in the compromise of confidential customer data) or similar events. Our systems have in the
past, and may in the future, experience systems interruptions, long response times or degradation in service. Our Direct to Consumer
business depends on customers making purchases on our systems. Our revenues may decrease and our reputation could be harmed if
we experience frequent or long system delays or interruptions or if a disruption occurs during a peak holiday season.
If
our telecommunications providers do not adequately maintain our service, we may experience system failures and our revenues may
decrease.
We
depend on telecommunication providers to provide telephone services to our customer service centers and connectivity with our
data centers for our Direct to Consumer segment. Although we maintain redundant telecommunications systems, if these
providers experience system failures or fail to adequately maintain our systems, we may experience interruptions and will be unable
to generate revenue. We depend upon these third-party relationships because we do not have the resources to maintain our service
without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms
may disrupt our operations or require us to incur significant unanticipated costs.
If
our efforts to protect the security of information about our customers, vendors and other third parties are unsuccessful, we may
face costly government enforcement actions and private litigation, and our sales and reputation could suffer.
We
regularly receive and store information about our customers, vendors and other third parties. We have programs in place to detect,
contain, and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or
degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable
to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we
develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems
that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or
facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our team
members, contractors, and vendors.
If
we, our vendors, or other third parties with whom we do business experience additional significant data security breaches or fail
to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions
or private litigation. In addition, our customers could lose confidence in our ability to protect their information, which could
cause them to no longer purchase our products or use our services.
Because
we maintain a significant supply of cash in our locations, we may experience losses due to employee error and theft.
Because
some of our business requires us to maintain a significant supply of cash in our stores, we are subject to the risk of cash shortages
resulting from employee error and theft. We periodically experience employee error and theft in stores, which can significantly
increase the operating losses of those stores for the period in which the employee error or theft is discovered. We self-insure
for employee error and theft at the store level. If our controls to limit our exposure to employee error and theft at the store
level and at our corporate headquarters do not operate effectively or are structured ineffectively, our operating margins could
be adversely affected by costs associated with increased security and preventative measures.
Regular
turnover among our location managers and employees makes it more difficult for us to operate our locations and increases our costs
of operation.
We
have historically experienced a relatively stable workforce among our location managers and employees, but turnover has generally
increased for us and the economy generally since the beginning of 2020. Turnover interferes with implementation of operating strategies.
Continued or increased workforce turnover in the future would likely increase our operating pressures and operating costs and
could restrict our ability to grow. Additionally, high turnover would create challenges for us in maintaining high levels of employee
awareness of and compliance with our internal procedures and external regulatory compliance requirements. In sum, continued or
increased high turnover would increase our training and supervisory costs, and result in decreased earnings with corresponding
greater risks of regulatory non-compliance.
The
concentration of our Consumer Finance revenues in certain states could adversely affect us.
We
currently provide payday lending services in four states, down from six states providing payday or installment lending services
at the beginning for 2020. In 2020, Nebraska voters approved a 36% rate cap on payday loans, resulting in us ceasing payday lending
in the state. This was a significant loss to the Consumer Finance segment.
Our
Consumer Finance segment revenues from payday loan fees is now concentrated in the states of North Dakota, Wyoming, Iowa and Kansas.
Changes to prevailing economic, demographic, competitive, regulatory, statutory or any other conditions, including the legislative,
regulatory or litigation risks mentioned above, in the markets in which we operate, could lead to a further deterioration in revenues
in this segment or an increase in our provision for doubtful accounts, or even an outright legal prohibition on the conduct of
our business.
If
estimates of our loan losses are not adequate to absorb actual losses, our financial condition and results of operations may be
adversely affected.
We
maintain an allowance for loan losses at levels to cover the estimated incurred losses in the collection of our payday and installment
loan portfolios outstanding at the end of each applicable period. At the end of each period, management considers recent collection
history to develop expected loss rates, which are used to establish the allowance for loan losses. Our allowance for loan losses
was $0.38 million on December 31, 2021. Our allowance for loan losses is an estimate, and if actual loan losses are materially
greater than our allowance for losses, our financial condition and results of operations could be adversely affected.
Failure
to achieve and maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely
affect our business and stock price.
Effective
internal controls are necessary for us to provide reliable financial reports. Nevertheless, all internal control systems, no matter
how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation. As we continue executing on our acquisition strategy, our fraud
risks will change and likely increase as the acquired entity may be unfamiliar or uncooperative with proper internal controls
and procedures. Our inability to maintain an effective control environment may cause investors to lose confidence in our reported
financial information, which could in turn have a material adverse effect on our stock price.