WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
1.
|
Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies –
|
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities
and Exchange Commission (“SEC”) and, therefore, certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
have been omitted.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017.
For further information, refer to the Condensed Consolidated
Financial Statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2016. The condensed consolidated
balance sheet at December 31, 2016, has been derived from the audited consolidated financial statements at that date, but does
not include all of the information and footnotes required by GAAP.
Nature of Business
Western Capital Resources, Inc. (WCR) is a parent company owning
operating subsidiaries, with percentage owned shown parenthetically, as summarized below.
|
○
|
AlphaGraphics, Inc. (AGI) (99.2% - disposed of October 3, 2017 – see notes 12, and 15) – franchisor of domestic
and international AlphaGraphics Business Centers which specialize in the planning, production, and management of visual communications
for businesses and individuals throughout the world.
|
|
○
|
PQH Wireless, Inc. (PQH) (100%) – operates cellular retail stores (280 as of September 30, 2017), as an exclusive dealer
of the Cricket brand.
|
|
○
|
J & P Park Acquisitions, Inc. (JPPA) (100%) – an online and direct marketing distribution retailer of live plants,
seeds, holiday gifts and garden accessories selling its products under Park Seed, Jackson & Perkins, and Wayside Gardens brand
names as well as a wholesaler under the Park Wholesale brand.
|
|
○
|
Restorers Acquisition, Inc. (RAI) (100%) – an online and direct marketing distribution retailer of home improvement and
restoration products operating under Van Dyke’s Restorers.
|
|
○
|
J & P Real Estate, LLC (JPRE) (100%) – owns real estate utilized as JPPA’s distribution and warehouse facility
and the corporate offices of JPPA and RAI.
|
|
○
|
Wyoming Financial Lenders, Inc. (WFL) (100%) – owns and operates “payday” stores (40 as of September 30,
2017) in seven states (Colorado, Iowa, Kansas, Nebraska, North Dakota, Wisconsin and Wyoming) providing sub-prime short-term uncollateralized
non-recourse “cash advance” or “payday” loans typically ranging from $100 to $500 with a maturity of generally
two to four weeks, sub-prime short-term uncollateralized non-recourse installment loans typically ranging from $300 to $800 with
a maturity of six months, check cashing and other money services to individuals.
|
|
○
|
Express Pawn, Inc. (EPI) (100%) – owns and operates retail pawn stores (three as of September 30, 2017) in Nebraska and
Iowa providing collateralized non-recourse pawn loans and retail sales of primarily used merchandise.
|
References in these financial statement notes to “Company”
or “we” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies within our
enterprise, such “AGI,” “PQH,” “JPPA,” “RAI,” “JPRE,” “WFL”
or “EPI” are references only to those companies.
Basis of Consolidation
The consolidated financial statements include the accounts
of WCR, its wholly owned subsidiaries and other entities in which the Company owns a controlling financial interest. For financial
interests in which the Company owns a controlling financial interest, the Company applies the provisions of ASC 810 applicable
to reporting the equity and net income or loss attributable to noncontrolling interests. All significant intercompany balances
and transactions of the Company have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that may affect certain reported amounts and disclosures in the consolidated financial statements and accompanying notes. Management
bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.
Actual results could differ from those estimates. Significant management estimates relate to the notes and loans receivable allowance,
carrying value and impairment of long-lived goodwill and intangible assets, inventory valuation and obsolescence, estimated useful
lives of property and equipment, gift certificate and merchandise credits liability and deferred taxes and tax uncertainties.
Reclassifications
Certain Statements of Operations reclassifications have been made
in the presentation of our prior financial statements and accompanying notes to conform to the presentation as of and for the three
and nine month periods ended September 30, 2017.
In accordance with appropriate accounting rules, the Company
has reclassified its previously reported financial results to exclude the results of the discontinued operations of the Franchise
segment and these results are presented on a historical basis as a separate line in the Company’s condensed consolidated
statements of operations and condensed consolidated balance sheets entitled “held for sale.” Also in accordance
with appropriate accounting rules, continuing corporate overhead costs previously allocated to discontinued operations has been
reallocated to continuing operations. The notes to the condensed consolidated financial statements have been revised to reflect
only the results of continuing operations, except where noted.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”)
and the International Accounting Standards Board (“IASB”) jointly issued a comprehensive new revenue recognition standard
that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. This converged standard is effective
for annual and interim periods beginning after December 15, 2017. The Company is currently assessing the potential effects on our
financial condition, results of operations and consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic
842), related to recognition of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. This ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods
within that annual period, with early adoption permitted and to be applied using a modified retrospective approach. The Company
is currently evaluating the impact the ASU will have on our financial condition, results of operations and consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments
- Credit Losses (Topic 326), related to the measurement of credit losses on financial instruments. The standard requires a financial
asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.
This ASU is effective for annual reporting periods beginning after December 15, 2018 and interim periods within that annual period,
with early adoption permitted and the standard to be applied using a modified retrospective approach. The Company is currently
evaluating the impact the ASU will have on our financial condition, results of operations and consolidated financial statements.
No other new accounting pronouncements issued or effective
during the fiscal year have had or are expected to have a material impact on the consolidated financial statements.
|
2.
|
Risks Inherent in the Operating Environment –
|
Regulatory
The Company’s Consumer Finance segment activities are
highly regulated under numerous local, state, and federal laws, regulations and rules, which are subject to change. New laws, regulations
or rules could be enacted or issued, interpretations of existing laws, regulations or rules may change and enforcement action by
regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have advocated
governmental action to prohibit or severely restrict sub-prime lending activities of the kind conducted by the Company. The federal
Consumer Financial Protection Bureau has indicated that it will use its authority to further regulate the payday industry and has
been actively involved in the enforcement of existing consumer-protection laws applicable to the payday industry.
Any adverse change in present local, state, and federal laws
or regulations that govern or otherwise affect lending could result in the Consumer Finance segment’s curtailment or cessation
of operations in certain or all jurisdictions or locations. Furthermore, any failure to comply with any applicable local, state
or federal laws or regulations could result in fines, litigation, store location closure or negative publicity. Any such change
or failure would have a corresponding impact on the Company’s and segment’s results of operations and financial condition,
primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in operating income
through increased legal expenditures or fines, and could also negatively affect the Company’s general business prospects
due to lost or decreased operating income or if negative publicity effects its ability to obtain additional financing as needed.
In addition, the passage of federal or state laws and regulations
or changes in interpretations of them could, at any point, essentially prohibit the business we conduct in the Consumer Finance
segment from conducting its lending business in its current form. Any such legal or regulatory change would certainly have a material
and adverse effect on the Company, its operating results, financial condition and prospects, and perhaps even the viability of
the business we conduct in the Consumer Finance segment.
3. Loans Receivable
–
The Consumer Finance segment’s outstanding loans receivable
aging was as follows:
September 30, 2017
|
|
|
Payday
|
|
|
Installment
|
|
|
Pawn & Title
|
|
|
Total
|
|
Current
|
|
$
|
3,348,335
|
|
|
$
|
258,785
|
|
|
$
|
317,367
|
|
|
$
|
3,924,487
|
|
1-30
|
|
|
227,700
|
|
|
|
51,146
|
|
|
|
—
|
|
|
|
278,846
|
|
31-60
|
|
|
188,750
|
|
|
|
25,247
|
|
|
|
—
|
|
|
|
213,997
|
|
61-90
|
|
|
120,350
|
|
|
|
12,936
|
|
|
|
—
|
|
|
|
133,286
|
|
91-120
|
|
|
127,408
|
|
|
|
5,623
|
|
|
|
—
|
|
|
|
133,031
|
|
121-150
|
|
|
97,366
|
|
|
|
1,659
|
|
|
|
—
|
|
|
|
99,025
|
|
151-180
|
|
|
81,905
|
|
|
|
1,080
|
|
|
|
—
|
|
|
|
82,985
|
|
|
|
|
4,191,814
|
|
|
|
356,476
|
|
|
|
317,367
|
|
|
|
4,865,657
|
|
Less Allowance
|
|
|
(695,000
|
)
|
|
|
(89,000
|
)
|
|
|
—
|
|
|
|
(784,000
|
)
|
|
|
$
|
3,496,814
|
|
|
$
|
267,476
|
|
|
$
|
317,367
|
|
|
$
|
4,081,657
|
|
December 31, 2016
|
|
|
Payday
|
|
|
Installment
|
|
|
Pawn & Title
|
|
|
Total
|
|
Current
|
|
$
|
3,683,603
|
|
|
$
|
272,703
|
|
|
$
|
284,460
|
|
|
$
|
4,240,766
|
|
1-30
|
|
|
253,297
|
|
|
|
44,433
|
|
|
|
—
|
|
|
|
297,730
|
|
31-60
|
|
|
201,375
|
|
|
|
27,905
|
|
|
|
—
|
|
|
|
229,280
|
|
61-90
|
|
|
185,072
|
|
|
|
18,747
|
|
|
|
—
|
|
|
|
203,819
|
|
91-120
|
|
|
159,435
|
|
|
|
15,737
|
|
|
|
—
|
|
|
|
175,172
|
|
121-150
|
|
|
176,625
|
|
|
|
8,889
|
|
|
|
—
|
|
|
|
185,514
|
|
151-180
|
|
|
134,171
|
|
|
|
7,824
|
|
|
|
—
|
|
|
|
141,995
|
|
|
|
|
4,793,578
|
|
|
|
396,238
|
|
|
|
284,460
|
|
|
|
5,474,276
|
|
Less Allowance
|
|
|
(953,000
|
)
|
|
|
(83,000
|
)
|
|
|
—
|
|
|
|
(1,036,000
|
)
|
|
|
$
|
3,840,578
|
|
|
$
|
313,238
|
|
|
$
|
284,460
|
|
|
$
|
4,438,276
|
|
4. Loans Receivable Allowance
–
A rollforward of the Consumer Finance segment’s loans
receivable allowance is as follows:
|
|
Nine Months Ended
September 30, 2017
|
|
|
Year Ended
December 31, 2016
|
|
Loans receivable allowance, beginning of period
|
|
$
|
1,036,000
|
|
|
$
|
1,177,000
|
|
Provision for loan losses charged to expense
|
|
|
815,313
|
|
|
|
1,605,867
|
|
Charge-offs, net
|
|
|
(1,067,313
|
)
|
|
|
(1,746,867
|
)
|
Loans receivable allowance, end of period
|
|
$
|
784,000
|
|
|
$
|
1,036,000
|
|
5. Accounts Receivable
–
A breakdown of accounts receivables for continuing operations
by segment are as follows:
September 30, 2017
|
|
|
Cellular Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Total
|
|
Accounts receivable
|
|
$
|
342,876
|
|
|
$
|
657,868
|
|
|
$
|
13,222
|
|
|
$
|
1,013,966
|
|
Less allowance
|
|
|
—
|
|
|
|
(19,000
|
)
|
|
|
—
|
|
|
|
(19,000
|
)
|
Net account receivable
|
|
$
|
342,876
|
|
|
$
|
638,868
|
|
|
$
|
13,222
|
|
|
$
|
994,966
|
|
December 31, 2016
|
|
|
Cellular Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Total
|
|
Accounts receivable
|
|
$
|
333,800
|
|
|
$
|
363,426
|
|
|
$
|
12,431
|
|
|
$
|
709,657
|
|
Less allowance
|
|
|
—
|
|
|
|
(13,000
|
)
|
|
|
—
|
|
|
|
(13,000
|
)
|
Net account receivable
|
|
$
|
333,800
|
|
|
$
|
350,426
|
|
|
$
|
12,431
|
|
|
$
|
696,657
|
|
6. Notes Payable
– Long Term –
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Revolving credit facility (with a credit limit of $3,000,000) to a financial institution with monthly payments of interest only at LIBOR plus 3.5% (4.75% at September 30, 2017), secured by substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing April 21, 2018
|
|
$
|
—
|
|
|
$
|
998,426
|
|
Note pa
yab
le to a financial institution with monthly principal payment of $58,333 plus interest at LIBOR plus 3.5% (4.75% at September 30, 2017), secured
by substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing April 21, 2021
|
|
|
1,502,959
|
|
|
|
3,091,667
|
|
Note pa
yab
le to a financial institution with monthly principal payment of $56,667 plus interest at LIBOR plus 3.5% (4.75% at September 30, 2017), secured
by substantially all assets of the Company with stated guarantee amounts by subsidiaries, maturing December 1, 2021
|
|
|
2,831,264
|
|
|
|
3,400,000
|
|
Subsidiary note pa
yab
le to a financial institution with monthly principal payment of $33,334 plus annual paydowns equal to JPRE’s net cash flow from operations due within 120 days of the calendar year end plus interest at LIBOR plus 3.5% (4.75% at September 30, 2017), secured
by JPRE assets, maturing June 5, 2019 when remaining principal balance is due
|
|
|
2,671,446
|
|
|
|
2,971,452
|
|
Subsidiary note payable to seller with monthly interest payments only at 6%, maturing June 30, 2022
|
|
|
789,216
|
|
|
|
—
|
|
Total
|
|
|
7,794,885
|
|
|
|
10,461,545
|
|
Less current maturities
|
|
|
(1,780,000
|
)
|
|
|
(1,780,000
|
)
|
|
|
$
|
6,014,885
|
|
|
$
|
8,681,545
|
|
At September 30, 2017 and December 31, 2016, approximately
$7,666,000 and $4,510,000 of credit was available under the credit facilities, respectively.
7.
Equity
–
In March 2017, the Company redeemed 106,874 shares of common
stock for $480,928 in a private and unsolicited transaction.
8.
Cash
Dividends –
Date declared
|
|
February 24, 2017
|
|
Record date
|
|
March 17, 2017
|
|
Date paid
|
|
March 24, 2017
|
|
Dividend per share of common stock
|
|
$
|
0.025
|
|
Date declared
|
|
May 12, 2017
|
|
Record date
|
|
July 14, 2017
|
|
Date paid
|
|
July 24, 2017
|
|
Dividend per share of common stock
|
|
$
|
0.025
|
|
Date declared
|
|
August 28, 2017
|
|
Record date
|
|
September 18, 2017
|
|
Date paid
|
|
September 29, 2017
|
|
Dividend per share of common stock
|
|
$
|
0.025
|
|
9.
Other
Operating Expense –
A breakout of other expense is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Bank fees
|
|
$
|
379,245
|
|
|
$
|
320,156
|
|
|
$
|
1,484,460
|
|
|
$
|
1,216,555
|
|
Collection costs
|
|
|
94,197
|
|
|
|
85,306
|
|
|
|
275,619
|
|
|
|
311,457
|
|
Insurance
|
|
|
260,419
|
|
|
|
174,699
|
|
|
|
757,690
|
|
|
|
502,025
|
|
Management and advisory fees
|
|
|
193,710
|
|
|
|
195,425
|
|
|
|
537,853
|
|
|
|
577,954
|
|
Professional and consulting fees
|
|
|
555,977
|
|
|
|
368,527
|
|
|
|
1,704,803
|
|
|
|
1,174,323
|
|
Supplies
|
|
|
341,808
|
|
|
|
222,745
|
|
|
|
1,080,325
|
|
|
|
555,099
|
|
Other
|
|
|
644,370
|
|
|
|
587,462
|
|
|
|
2,037,646
|
|
|
|
1,641,446
|
|
|
|
$
|
2,469,726
|
|
|
$
|
1,954,320
|
|
|
$
|
7,878,396
|
|
|
$
|
5,978,859
|
|
10.
Segment
Information –
Segment information related to the three and nine month periods
ended September 30, 2017 and 2016 for continuing operations is presented below:
Three Months Ended September 30, 2017
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
18,301
|
|
|
$
|
4,983
|
|
|
$
|
2,849
|
|
|
$
|
—
|
|
|
$
|
26,133
|
|
Net income (loss)
|
|
$
|
(223
|
)
|
|
$
|
(462
|
)
|
|
$
|
326
|
|
|
$
|
(251
|
)
|
|
$
|
(610
|
)
|
Expenditures for segmented assets
|
|
$
|
6,408
|
|
|
$
|
139
|
|
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
6,555
|
|
Three Months Ended September 30, 2016
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
9,294
|
|
|
$
|
5,945
|
|
|
$
|
3,009
|
|
|
$
|
—
|
|
|
$
|
18,248
|
|
Net income (loss)
|
|
$
|
72
|
|
|
$
|
(325
|
)
|
|
$
|
391
|
|
|
$
|
(218
|
)
|
|
$
|
(80
|
)
|
Expenditures for segmented assets
|
|
$
|
241
|
|
|
$
|
50
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
312
|
|
Nine Months Ended September 30, 2017
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to
Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
52,432
|
|
|
$
|
29,014
|
|
|
$
|
8,136
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89,582
|
|
Net income (loss)
|
|
$
|
65
|
|
|
$
|
1,507
|
|
|
$
|
781
|
|
|
$
|
(690
|
)
|
|
$
|
—
|
|
|
$
|
1,663
|
|
Total segmented assets
|
|
$
|
28,375
|
|
|
$
|
13,462
|
|
|
$
|
8,080
|
|
|
$
|
2,162
|
|
|
$
|
8,683
|
|
|
$
|
60,762
|
|
Expenditures for segment assets
|
|
$
|
7,612
|
|
|
$
|
341
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
7,962
|
|
Nine Months Ended September 30, 2016
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to
Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
27,152
|
|
|
$
|
30,699
|
|
|
$
|
8,830
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66,681
|
|
Net income (loss)
|
|
$
|
526
|
|
|
$
|
1,682
|
|
|
$
|
964
|
|
|
$
|
(636
|
)
|
|
$
|
—
|
|
|
$
|
2,536
|
|
Total segmented assets
|
|
$
|
16,472
|
|
|
$
|
14,723
|
|
|
$
|
15,735
|
|
|
$
|
413
|
|
|
$
|
10,111
|
|
|
$
|
57,454
|
|
Expenditures for segment assets
|
|
$
|
1,688
|
|
|
$
|
88
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,815
|
|
11. Acquisition
–
In 2016, PQH entered into an agreement to acquire 20
Cricket Wireless retail locations, with an option to purchase an additional 33 locations. The aggregate purchase price for all
53 locations was approximately $6,000,000, subject to reduction in the event that the seller exercised an option to retain a 30%
ownership in the acquired business. From November 22, 2016 through June 30, 2017, PQH operated the store locations under a management
agreement. Effective July 1, 2017, we consummated the acquisition transaction by acquiring a 70% interest in all 53 locations through
a subsidiary of PQH, and the seller, upon exercising its option to retain a 30% ownership interest in the acquired business, contributed
its interest to the subsidiary. As a result, PQH owns 70% of the newly formed subsidiary and the seller owns the remaining 30%
of that subsidiary.
The provisional fair value of the purchase consideration
together with the corresponding fair value of the contribution by noncontrolling interests was allocated to the net tangible assets
acquired. We accounted for the acquisition of stores as the purchase of a business under GAAP under the acquisition method of accounting.
The assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated
with those of our company. The fair value of the net assets acquired was approximately $6,000,000. The excess of the aggregate
fair value over the net tangible assets has been treated as a gain on bargain purchase in accordance with ASC 805. The purchase
price allocation was based, in part, on management’s knowledge of wireless retail business and is preliminary. Once we complete
our analysis to finalize the purchase price allocation, which includes finalizing the valuation report, it is reasonably possible
that, there could be significant changes to the preliminary values below. Under the purchase method of accounting, the assets acquired
and liabilities assumed were recorded at their provisional fair values as of the purchase date as follows:
|
|
July 1, 2017
|
|
Inventory
|
|
$
|
217,000
|
|
Property and equipment
|
|
|
1,332,000
|
|
Intangible assets
|
|
|
4,306,000
|
|
Other assets
|
|
|
103,000
|
|
Net assets acquired
|
|
$
|
5,958,000
|
|
12. Discontinued
Operations –
On September 29, 2017, the Board of Directors of the Company
authorized the Company to enter into a sale agreement (see Note 15) for 100% of its stock holdings of AGI, the sole business comprising
the Company’s Franchise segment.
In accordance with the provisions of ASC 205-20, the Company
has separately reported the assets and liabilities of the discontinued operations of the Franchise segment in the Condensed Consolidated
Balance Sheets. The assets and liabilities have been reflected as held for sale in the unaudited Condensed Consolidated Balance
Sheets as of September 30, 2017 and December 31, 2016, and consist of the following:
|
|
September 30, 2017
(unaudited)
|
|
|
December 31, 2016
(unaudited)
|
|
OTHER CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Accounts receivable (less allowance for losses of $145,000 and $83,000, respectively)
|
|
$
|
1,306,762
|
|
|
$
|
1,020,210
|
|
Prepaid expenses and other
|
|
|
203,152
|
|
|
|
327,851
|
|
TOTAL OTHER CURRENT ASSETS
|
|
$
|
1,509,914
|
|
|
$
|
1,348,061
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
243,147
|
|
|
$
|
287,386
|
|
Intangible assets, net
|
|
|
5,983,031
|
|
|
|
6,241,386
|
|
Other
|
|
|
215,063
|
|
|
|
121,119
|
|
TOTAL NONCURRENT ASSETS
|
|
$
|
6,441,241
|
|
|
$
|
6,649,891
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
841,097
|
|
|
$
|
1,375,754
|
|
Other liabilities
|
|
|
1,142,999
|
|
|
|
1,044,061
|
|
Income taxes payable
|
|
|
—
|
|
|
|
170,262
|
|
Current portion capital lease obligations
|
|
|
—
|
|
|
|
7,620
|
|
Deferred revenue and other
|
|
|
286,832
|
|
|
|
253,698
|
|
TOTAL CURRENT LIABILITIES
|
|
$
|
2,270,928
|
|
|
$
|
2,851,395
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
2,155,000
|
|
|
$
|
2,293,000
|
|
Other
|
|
|
208,924
|
|
|
|
143,080
|
|
TOTAL LONG-TERM LIABILITIES
|
|
$
|
2,363,924
|
|
|
$
|
2,436,080
|
|
In accordance with the provisions of ASC 205-20, the Company
has not included the results of operations of the Franchise segment in the results from continuing operations. The results of operations
for this business have been reflected as discontinued operations in the unaudited Condensed Consolidated Statements of Operations for
the nine month periods ended September 30, 2017 and 2016, and consist of the following:
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
(unaudited)
|
|
|
September 30, 2016
(unaudited)
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
12,298,655
|
|
|
$
|
11,451,699
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
2,098,486
|
|
|
|
1,819,491
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
10,200,169
|
|
|
|
9,632,208
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
3,194,025
|
|
|
|
3,426,127
|
|
Occupancy
|
|
|
140,428
|
|
|
|
179,518
|
|
Advertising, marketing and development
|
|
|
436,566
|
|
|
|
271,649
|
|
Depreciation
|
|
|
74,263
|
|
|
|
84,141
|
|
Amortization
|
|
|
258,356
|
|
|
|
258,356
|
|
Other
|
|
|
2,108,299
|
|
|
|
2,037,001
|
|
|
|
|
6,211,937
|
|
|
|
6,256,792
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
3,988,232
|
|
|
|
3,375,416
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
—
|
|
|
|
(93,373
|
)
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
3,988,232
|
|
|
|
3,282,043
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
1,511,000
|
|
|
|
1,267,000
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
2,477,232
|
|
|
|
2,015,043
|
|
|
|
|
|
|
|
|
|
|
Less net income attributable to noncontrolling interests
|
|
|
(17,446
|
)
|
|
|
(14,742
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO WESTERN COMMON SHAREHOLDERS
|
|
$
|
2,459,786
|
|
|
$
|
2,000,301
|
|
13. Pro Forma –
As more fully disclosed in Notes
12 and 15 herein, the Company sold 100% of its stock holdings of AGI on October 3, 2017.
The following table presents the
unaudited results of continuing operations for the three and nine month periods ended September 30, 2017 and September 30, 2016
(in thousands, except for per share data) as if the disposition of the discontinued operations had been consummated at the beginning
of 2016. The pro forma net income below excludes interest expense on debt required to be paid off at closing of the disposition
transaction and related tax effect. The pro forma results of continuing operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had the disposition occurred at the beginning of the
2016 or the results which may occur in the future.
Three
Months Ended September 30, 2017
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cellular
Retail
|
|
|
Direct
to Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,301
|
|
|
$
|
4,983
|
|
|
$
|
2,849
|
|
|
$
|
—
|
|
|
$
|
26,133
|
|
%
of total revenue
|
|
|
70.0
|
%
|
|
|
19.1
|
%
|
|
|
10.9
|
%
|
|
|
—
|
%
|
|
|
100.0
|
%
|
Net
income
|
|
$
|
(190
|
)
|
|
$
|
(462
|
)
|
|
$
|
326
|
|
|
$
|
(251
|
)
|
|
$
|
(577
|
)
|
Net
income attributable to noncontrolling interests
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100
|
|
Net
income attributable to Western common shareholders
|
|
$
|
(290
|
)
|
|
$
|
(462
|
)
|
|
$
|
326
|
|
|
$
|
(251
|
)
|
|
$
|
(677
|
)
|
Earnings
per share attributable to Western common shareholders – basic and diluted
|
|
$
|
(0.031
|
)
|
|
$
|
(0.049
|
)
|
|
$
|
0.035
|
|
|
$
|
(0.027
|
)
|
|
$
|
(0.072
|
)
|
Three
Months Ended September 30, 2016
(in
thousands)
|
|
|
Cellular
Retail
|
|
|
Direct
to Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
9,294
|
|
|
$
|
5,945
|
|
|
$
|
3,099
|
|
|
$
|
—
|
|
|
$
|
18,248
|
|
%
of total revenue
|
|
|
50.9
|
%
|
|
|
32.6
|
%
|
|
|
16.5
|
%
|
|
|
—
|
%
|
|
|
100.0
|
%
|
Net
income
|
|
$
|
95
|
|
|
$
|
(325
|
)
|
|
$
|
391
|
|
|
$
|
(218
|
)
|
|
$
|
(57
|
)
|
Net
income attributable to noncontrolling interests
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net
income attributable to Western common shareholders
|
|
$
|
95
|
|
|
$
|
(325
|
)
|
|
$
|
391
|
|
|
$
|
(218
|
)
|
|
$
|
(57
|
)
|
Earnings
per share attributable to Western common shareholders – basic and diluted
|
|
$
|
0.010
|
|
|
$
|
(0.034
|
)
|
|
$
|
0.041
|
|
|
$
|
(0.023
|
)
|
|
$
|
(0.006
|
)
|
Nine
Months Ended September 30, 2017
(in
thousands)
|
|
|
Cellular
Retail
|
|
|
Direct
to Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
52,432
|
|
|
$
|
29,014
|
|
|
$
|
8,136
|
|
|
$
|
—
|
|
|
$
|
89,582
|
|
%
of total revenue
|
|
|
58.5
|
%
|
|
|
32.4
|
%
|
|
|
9.1
|
%
|
|
|
—
|
%
|
|
|
100.0
|
%
|
Net
income
|
|
$
|
183
|
|
|
$
|
1,507
|
|
|
$
|
781
|
|
|
$
|
(690
|
)
|
|
$
|
1,781
|
|
Net
income attributable to noncontrolling interests
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100
|
|
Net
income attributable to Western common shareholders
|
|
$
|
83
|
|
|
$
|
1,507
|
|
|
$
|
781
|
|
|
$
|
(690
|
)
|
|
$
|
1,681
|
|
Earnings
per share attributable to Western common shareholders – basic and diluted
|
|
$
|
0.009
|
|
|
$
|
0.160
|
|
|
$
|
0.083
|
|
|
$
|
(0.073
|
)
|
|
$
|
0.179
|
|
Nine
Months Ended September 30, 2016
(in
thousands)
|
|
|
Cellular
Retail
|
|
|
Direct
to Consumer
|
|
|
Consumer
Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
27,152
|
|
|
$
|
30,699
|
|
|
$
|
8,830
|
|
|
$
|
—
|
|
|
$
|
66,681
|
|
%
of total revenue
|
|
|
40.7
|
%
|
|
|
46.0
|
%
|
|
|
13.3
|
%
|
|
|
—
|
%
|
|
|
100.0
|
%
|
Net
income
|
|
$
|
565
|
|
|
$
|
1,682
|
|
|
$
|
964
|
|
|
$
|
(636
|
)
|
|
$
|
2,575
|
|
Net
income attributable to noncontrolling interests
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net
income attributable to Western common shareholders
|
|
$
|
565
|
|
|
$
|
1,682
|
|
|
$
|
964
|
|
|
$
|
(636
|
)
|
|
$
|
2,575
|
|
Earnings
per share attributable to Western common shareholders – basic and diluted
|
|
$
|
0.059
|
|
|
$
|
0.177
|
|
|
$
|
0.102
|
|
|
$
|
(0.067
|
)
|
|
$
|
0.271
|
|
14. Commitments
and Contingencies –
Pursuant
to the Company’s numerous employment agreements, bonuses of approximately $92,000 and $411,000 were accrued for the three
and nine month periods ended September 30, 2017, respectively.
15. Subsequent
Events –
Sale
of Franchise Segment
On October 2, 2017, the Company entered into a Purchase and
Sale Agreement (the “Agreement”) with U.S. Business Holdings, Inc. (the “Purchaser”), MBE WorldWide S.p.A.
(as guarantor for the Purchaser), BC Alpha, LLC (“BCA”, a wholly owned subsidiary of BC Alpha Holdings II, LLC), and
BC Alpha Holdings II, LLC (“BCAH”, a wholly owned subsidiary of the Company). Pursuant to the Agreement, BCA sold
all of its shares of capital stock of AGI to the Purchaser. This sale, which closed on October 3, 2017, constitutes the sale of
the Company’s franchise segment. The cash purchase price paid by the Purchaser pursuant to the Agreement was $61,500,000,
subject to post-closing working capital adjustments. BCA, BCAH, the Company and the Purchaser also agreed to make a joint election
under Section 338(h)(10) of the Internal Revenue Code, which treats the transaction as an asset purchase for tax purposes subject
to satisfaction of applicable legal requirements.
Pursuant to the Agreement, the Company, BCA and BCAH made
customary representations and warranties regarding AGI and its business, and agreed to certain covenants, including customary
non-compete and no-solicit covenants related to the AGI business for a period of three years from the closing date. In addition,
the Agreement requires the Company to indemnify the Purchaser for damages resulting from or arising out of any inaccuracy or breach
of any representation, warranty or covenant of the Company, BCA or BCAH in the Agreement and for certain other matters. The Company’s
indemnification obligations generally survive for 24 months following the closing. The Company’s maximum aggregate liability
for indemnification claims for any such inaccuracies or breaches is generally limited to an indemnification escrow of $6,500,000,
50% of which (less any indemnification claims) is to be disbursed 12 months following the closing, with the remaining balance
(less any indemnification claims) to be disbursed 24 months following the closing.
As a result of the transaction, the Company received approximately
$49,000,000 in proceeds from the sale, after taking into account the impact of the estimated working capital and similar purchase
price adjustments, the escrowing of $6,500,000 of sale proceeds, the payoff of the Company’s current balance on its Fifth
Third acquisition credit facility of approximately $4,300,000, and the payoff of an aggregate amount of approximately $1,600,000
in transaction costs and pre-closing AGI liabilities related to the cancellation and redemption of securities at the AGI level
that occurred prior to the transaction.
In connection with the transaction, the Company also entered
into a Consent and Third Loan Modification Agreement (the “Modification Agreement”) with Fifth Third Bank, as lender
(“Fifth Third”), which amended that certain Credit Agreement between the Company and Fifth Third, dated April 22,
2016, as amended (the “Credit Agreement”) to (i) release Fifth Third’s liens on the assets of AGI, BCA and BCAH,
(ii) remove AGI, BCA and BCAH as guarantors of the Company’s obligations under the Credit Agreement, and (iii) release Fifth
Third’s lien on the Company’s equity interests in BCAH.
Real
Estate Debt Payoff
On October 12, 2017 the Company paid off the subsidiary note
payable with Fifth Third which had a maturity date of June 5, 2019 and a balance of $2,638,112.
Risks Inherent in Our Consumer Finance Segment
In October 2017, the Consumer Financial Protection
Bureau issued final rules affecting the payday lending industry and other market participants who make available certain kinds
of high-interest loans. Those rules will generally require lenders to take steps to reasonably determine that borrowers will be
able repay the loans according to their terms without needing to reborrow within the following 30 days. The rules also generally
prohibit lenders from directly withdrawing payment from a borrower’s bank account after two prior consecutive attempted
withdrawals have failed. Finally, the rules prohibit lenders from making loans to customers who have earlier taken out three “covered”
loans (i.e., payday loans and certain other kinds of high-interest loans) within 30 days of each other until at least 30 days
have passed from the date on which the last such covered loan is no longer outstanding. These rules will become effective on or
about July 2019, and are expected to have a material impact on the industry.
We evaluated all events or transactions that occurred after
September 30, 2017 up through the date we issued these financial statements. During this period we did not have any material subsequent
events that impacted our financial statements other than those listed above.