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 note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.
In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three
and nine month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2020.
Management has analyzed the impact of the Coronavirus
pandemic (“COVID-19”) on its financial statements as of September 30, 2020 and has determined that the changes to its
significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.
For further information, refer to the Consolidated
Financial Statements and notes thereto included in our Form 10-K for the year ended December 31, 2019. The condensed consolidated
balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements at that date, but does
not include all of the information and notes required by GAAP.
Nature of Business
Western Capital Resources, Inc. (“WCR”)
is a parent company owning operating subsidiaries, with percentage owned shown parenthetically, as summarized below.
|
○
|
PQH Wireless, Inc. (“PQH”) (100%) –
operates 206 cellular retail stores as of September 30, 2020 (102 100% owned plus 104 held through its controlled but less than
100% owned subsidiaries), exclusively as an authorized retailer of the Cricket brand.
|
|
○
|
J&P Park Acquisitions, Inc. (“JPPA”)
(100%) – an online and direct marketing distribution retailer of 1) live plants, seeds, holiday gifts and garden accessories
selling its products under Park Seed, Jackson & Perkins, and Wayside Gardens brand names and 2) home improvement and restoration
products operating under the Van Dyke’s Restorers brand, as well as a seed wholesaler under the Park Wholesale brand.
|
|
○
|
J&P Real Estate, LLC (“JPRE”) (100%) – owns real estate utilized as JPPA’s distribution and warehouse
facility and the corporate offices of JPPA.
|
|
○
|
Wyoming Financial Lenders, Inc. (“WFL”)
(100%) – owns and operates “payday” stores (37 as of September 30, 2020, two of which are located within the
Company’s retail pawn stores) in six states (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, 2020) in Nebraska and Iowa providing collateralized non-recourse
pawn loans and retail sales of merchandise obtained from forfeited pawn loans or purchased from customers.
|
References in these financial statement notes to “Company”
or “we” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies within our
enterprise, such as” “PQH,” “JPPA,” “JPRE,” “WFL,” or “EPI” are
references only to those companies.
Basis of Consolidation
The consolidated financial statements include the accounts
of WCR, its wholly owned subsidiaries and other entities in which the Company owns a controlling financial interest. For financial
interests in which the Company owns a controlling financial interest, the Company applies the provisions of Financial Accounting
Standards Board Accounting Standards Codification (“ASC”) 810, “Consolidation” applicable to reporting
the equity and net income or loss attributable to noncontrolling interests. All significant intercompany balances and transactions
of the Company have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that may affect certain reported amounts and disclosures in the consolidated financial statements and accompanying
notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from those estimates. Significant management estimates relate to the notes
and loans receivable allowance, carrying value and impairment of long-lived goodwill, intangible assets, and right-of-use assets,
inventory valuation and obsolescence, estimated useful lives of property and equipment, gift certificate and merchandise credits
liability and deferred taxes and tax uncertainties.
Reclassifications
Certain Statement of Income reclassifications have
been made in the presentation of our prior financial statements to conform to the presentation as of and for the three and nine
months ended September 30, 2020.
Recent Accounting Pronouncements
In April, 2020 the staff of the Financial Accounting
Standards Board (FASB) issued a question-and-answer document that states entities may elect not to evaluate whether a concession
provided by a lessor to a lessee in response to the effects of the coronavirus pandemic is a lease modification. Retailers may
make the elections for any lessor-provided concessions related to the effects of the coronavirus pandemic as long as the concession
does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has made such
election. The Company has received minimal rent concessions and has not entered into any related lease modifications to date. As
such, the Company does not believe this election will have a material impact on its financial condition, results of operations
or consolidated financial statements.
No other new accounting pronouncements issued or effective
during the period have had or are expected to have a material impact on the consolidated financial statements.
|
2.
|
Risks Inherent in the Operating Environment –
|
Regulatory
The Company’s Consumer Finance segment activities
are highly regulated under numerous federal, state, and local laws, regulations and rules, which are subject to change. New laws,
regulations or rules could be enacted or issued, interpretations of existing laws, regulations or rules may change and enforcement
action by regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have
advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities of the kind conducted
by the Company. After several years of research, debate, and public hearings, in October 2017 the U.S. Consumer Financial Protection
Bureau (“CFPB”) adopted a new rule for payday lending. The rule, originally scheduled to go into effect in August 2019,
would have imposed significant restrictions on the industry, and it was expected that a large number of lenders would be forced
to close their stores as a result of the rule. The CFPB’s studies projected a reduction in the number of lenders by 50%,
while industry studies forecast a much higher attrition rate if the rule was implemented as originally adopted.
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 rescinds the mandatory
underwriting provisions of the 2017 rule but does 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 entities to come into compliance. The implementation of the
final rule is likely to result in a reduction of in-house bad debt collections, higher collection costs and thus a negative impact
on business conducted within our Consumer Finance segment.
Consumer advocacy groups in many states are actively
seeking state law changes which would effectively end the viability of a payday loan business, including Nebraska where in 2019
we generate approximately 30% of our payday lending revenue, or approximately 2% of our consolidated revenue. If these groups are
successful in Nebraska, we will likely cease payday lending activities in Nebraska. In June 2020, a Nebraska group submitted signatures
for a ballot initiative that would limit all fees charged by payday lenders in Nebraska to an annual interest rate of 36%. As a
result, the initiative is expected to be on the Nebraska statewide ballot for the November 3, 2020 election.
The implementation of the CFPB rule, the passage of
the Nebraska ballot initiative or any other adverse change in present federal, state, or local laws or regulations that govern
or otherwise affect lending could result in the Consumer Finance segment’s curtailment or cessation of operations in certain
or all jurisdictions or locations. Furthermore, any failure to comply with any applicable local, state or federal laws or regulations
could result in fines, litigation, closure of one or more store locations or negative publicity. Any such change or failure would
have a corresponding impact on the Company’s and segment’s results of operations and financial condition, primarily
through a decrease in revenues resulting from the cessation or curtailment of operations, or a decrease in operating income through
increased legal expenditures or fines, and could also negatively affect the Company’s general business prospects due to lost
or decreased operating income or if negative publicity effects its ability to obtain additional financing as needed.
In addition, the passage of federal, state or local
laws and regulations or changes in interpretations of them could, at any point, essentially prohibit the Consumer Finance segment
from conducting its lending business in its current form. Any such legal or regulatory change would certainly have a material and
adverse effect on the Company, its operating results, financial condition and prospects, and perhaps even the viability of the
Consumer Finance segment.
Concentrations
The Company has demand deposits at financial institutions,
often times in excess of the limit for insurance by the Federal Deposit Insurance Corporation. As of September 30, 2020, the Company
had demand deposits in excess of insurance amounts of approximately $7.39 million.
COVID-19
In December 2019 COVID-19 emerged in Wuhan, China.
While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread
to almost all other countries, including the United States, and infections have been reported globally, with much of the United
States experiencing a “third peak” in infections during the fall months.
Because COVID-19 infections have been reported throughout
the United States, certain federal, state and local governmental authorities have issued stay-at-home orders and others proclamations
and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may
be issued in the future. Since the start of the pandemic, the Company’s Cellular Retail segment had temporarily closed approximately
75 locations, all but 22 of which subsequently re-opened by the end of April 2020. In June 2020, those 22 closed locations plus
five others were permanently closed.
The ultimate impact of the COVID-19 pandemic on the
Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted
with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the
COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may
result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial
impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results
of operations. The significance of the impact of the COVID-19 outbreak on the Company’s businesses and the duration for which
it may have an impact cannot be determined at this time.
|
3.
|
Cash Equivalents and Marketable Investments –
|
The following table shows the Company’s cash
and cash equivalents and held-to-maturity investments, by significant investment category, recorded as cash and cash equivalents
or short- and long-term investments:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Operating accounts
|
|
$
|
14,070,233
|
|
|
$
|
10,163,845
|
|
Money Market – U.S. Treasury obligations
|
|
|
1,284,804
|
|
|
|
12,518,262
|
|
U.S. Treasury obligations
|
|
|
13,399,668
|
|
|
|
4,450,433
|
|
Subtotal
|
|
|
28,754,705
|
|
|
|
27,132,540
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity Investments
|
|
|
|
|
|
|
|
|
Certificates of deposit (4 – 24 month maturities, FDIC insured)
|
|
$
|
18,079,672
|
|
|
$
|
9,049,787
|
|
U.S. Treasury obligations (less than one year maturities)
|
|
|
—
|
|
|
|
7,206,878
|
|
Subtotal
|
|
|
18,079,672
|
|
|
|
16,256,665
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
46,834,377
|
|
|
$
|
43,389,205
|
|
Held to maturity investments consisted of the following:
September 30, 2020
|
|
|
|
Cost
|
|
|
Accrued
Interest
|
|
|
Amortized
Discount
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain (Loss)
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
18,028,318
|
|
|
$
|
51,354
|
|
|
$
|
—
|
|
|
$
|
18,079,672
|
|
|
$
|
13,040
|
|
|
$
|
18,092,712
|
|
U.S. Treasuries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
18,028,318
|
|
|
$
|
51,354
|
|
|
$
|
—
|
|
|
$
|
18,079,672
|
|
|
$
|
13,040
|
|
|
$
|
18,092,712
|
|
December 31, 2019
|
|
|
|
Cost
|
|
|
Accrued
Interest
|
|
|
Amortized
Discount
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gain (Loss)
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
9,015,618
|
|
|
$
|
34,169
|
|
|
$
|
—
|
|
|
$
|
9,049,787
|
|
|
$
|
(32,429
|
)
|
|
$
|
9,017,358
|
|
U.S. Treasuries
|
|
|
7,153,587
|
|
|
|
—
|
|
|
|
53,291
|
|
|
|
7,206,878
|
|
|
|
2,883
|
|
|
|
7,209,761
|
|
|
|
$
|
16,169,205
|
|
|
$
|
34,169
|
|
|
$
|
53,291
|
|
|
$
|
16,256,665
|
|
|
$
|
(29,546
|
)
|
|
$
|
16,227,119
|
|
Interest income recognized on held-to-maturity investments
and other sources was as follows:
|
|
|
Three Months Ended
September 30, 2020
|
|
|
Three Months Ended
September 30, 2019
|
|
|
Nine Months Ended
September 30, 2020
|
|
|
Nine Months Ended
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
$
|
44,694
|
|
|
$
|
112,158
|
|
|
$
|
210,725
|
|
|
$
|
412,855
|
|
Other
|
|
|
|
9,902
|
|
|
|
86,659
|
|
|
|
54,318
|
|
|
|
161,481
|
|
|
|
|
$
|
54,596
|
|
|
$
|
198,817
|
|
|
$
|
265,043
|
|
|
$
|
574,336
|
|
The Company deposited in aggregate $1.75 million of
cash across seven different accounts at a financial institution as an accommodation to its majority stockholder, who has other
business relationships with the financial institution. The funds in these accounts can be withdrawn at any time, do not serve as
collateral in any way, and are held on market terms.
The Consumer Finance segment’s outstanding loans
receivable aging is as follows:
September 30, 2020
|
|
|
|
Payday
|
|
|
Installment
|
|
|
Pawn
|
|
|
Total
|
|
Current
|
|
$
|
2,197,694
|
|
|
$
|
42,495
|
|
|
$
|
261,599
|
|
|
$
|
2,501,788
|
|
1-30
|
|
|
130,093
|
|
|
|
4,793
|
|
|
|
—
|
|
|
|
134,886
|
|
31-60
|
|
|
84,270
|
|
|
|
546
|
|
|
|
—
|
|
|
|
84,816
|
|
61-90
|
|
|
81,382
|
|
|
|
—
|
|
|
|
—
|
|
|
|
81,382
|
|
91-120
|
|
|
44,418
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,418
|
|
121-150
|
|
|
17,964
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,964
|
|
151-180
|
|
|
44,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,851
|
|
|
|
|
2,600,672
|
|
|
|
47,834
|
|
|
|
261,599
|
|
|
|
2,910,105
|
|
Less Allowance
|
|
|
(312,700
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(312,700
|
)
|
|
|
$
|
2,287,972
|
|
|
$
|
47,834
|
|
|
$
|
261,599
|
|
|
$
|
2,597,405
|
|
December 31, 2019
|
|
|
|
Payday
|
|
|
Installment
|
|
|
Pawn
|
|
|
Total
|
|
Current
|
|
$
|
3,322,131
|
|
|
$
|
67,891
|
|
|
$
|
309,934
|
|
|
$
|
3,699,956
|
|
1-30
|
|
|
216,753
|
|
|
|
10,590
|
|
|
|
—
|
|
|
|
227,343
|
|
31-60
|
|
|
140,872
|
|
|
|
6,234
|
|
|
|
—
|
|
|
|
147,106
|
|
61-90
|
|
|
117,544
|
|
|
|
2,649
|
|
|
|
—
|
|
|
|
120,193
|
|
91-120
|
|
|
118,626
|
|
|
|
840
|
|
|
|
—
|
|
|
|
119,466
|
|
121-150
|
|
|
110,278
|
|
|
|
395
|
|
|
|
—
|
|
|
|
110,673
|
|
151-180
|
|
|
108,674
|
|
|
|
—
|
|
|
|
—
|
|
|
|
108,674
|
|
|
|
|
4,134,878
|
|
|
|
88,599
|
|
|
|
309,934
|
|
|
|
4,533,411
|
|
Less Allowance
|
|
|
(673,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(673,000
|
)
|
|
|
$
|
3,461,878
|
|
|
$
|
88,599
|
|
|
$
|
309,934
|
|
|
$
|
3,860,411
|
|
|
5.
|
Loans Receivable Allowance –
|
A rollforward of the Consumer Finance segment’s
loans receivable allowance is as follows:
|
|
Nine Months Ended
September 30, 2020
|
|
|
Year Ended
December 31, 2019
|
|
Loans receivable allowance, beginning of period
|
|
$
|
673,000
|
|
|
$
|
818,000
|
|
Provision for loan losses charged to expense
|
|
|
110,165
|
|
|
|
975,938
|
|
Write-offs, net
|
|
|
(470,465
|
)
|
|
|
(1,120,938
|
)
|
Loans receivable allowance, end of period
|
|
$
|
312,700
|
|
|
$
|
673,000
|
|
A breakdown of accounts receivables by segment is as
follows:
September 30, 2020
|
|
|
|
Cellular
Retail
|
|
|
Direct to
Consumer
|
|
|
Consumer
Finance
|
|
|
Total
|
|
Accounts receivable
|
|
$
|
225,696
|
|
|
$
|
590,533
|
|
|
$
|
23,138
|
|
|
$
|
839,367
|
|
Less allowance
|
|
|
—
|
|
|
|
(9,000
|
)
|
|
|
—
|
|
|
|
(9,000
|
)
|
Net accounts receivable
|
|
$
|
225,696
|
|
|
$
|
581,533
|
|
|
$
|
23,138
|
|
|
$
|
830,367
|
|
December 31, 2019
|
|
|
|
Cellular
Retail
|
|
|
Direct to
Consumer
|
|
|
Consumer
Finance
|
|
|
Total
|
|
Accounts receivable
|
|
$
|
184,519
|
|
|
$
|
318,235
|
|
|
$
|
27,722
|
|
|
$
|
530,476
|
|
Less allowance
|
|
|
—
|
|
|
|
(13,000
|
)
|
|
|
—
|
|
|
|
(13,000
|
)
|
Net accounts receivable
|
|
$
|
184,519
|
|
|
$
|
305,235
|
|
|
$
|
27,722
|
|
|
$
|
517,476
|
|
A portion of accounts receivable are unsettled credit
card sales from the prior one to five business days. This makes up 74% and 68% of the net accounts receivable balance at September
30, 2020 and December 31, 2019, respectively.
Inventories consist of:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Finished Goods
|
|
|
|
|
|
|
|
|
Cellular Retail
|
|
$
|
5,466,853
|
|
|
$
|
5,687,771
|
|
Direct to Consumer
|
|
|
3,682,418
|
|
|
|
2,888,483
|
|
Consumer Finance
|
|
|
726,397
|
|
|
|
819,437
|
|
Reserve
|
|
|
(814,000
|
)
|
|
|
(1,065,000
|
)
|
TOTAL
|
|
$
|
9,061,668
|
|
|
$
|
8,330,691
|
|
As a result of changes in the market for certain Company
products and the resulting deteriorating value, carrying amounts for those inventories were reduced by approximately $814,000 and
$1,065,000 at September 30, 2020 and December 31, 2019, respectively. These inventory write-downs have been reflected in adjustments
to cost of goods sold in the statement of operations. Management believes that these reductions properly reflect inventory at lower
of cost or market, and no additional losses will be incurred upon disposition.
The Company lease accounting policy follows the guidance
from ASC 842 - Leases, which provides guidance on the recognition, presentation and disclosure of leases in consolidated condensed
financial statements.
Total components of operating lease expense for the
real property asset class (in thousands) were as follows:
|
|
Three Months Ended
September 30, 2020
|
|
|
Nine Months Ended
September 30, 2020
|
|
Operating lease expense
|
|
$
|
1,520
|
|
|
$
|
4,760
|
|
Variable lease expense
|
|
|
506
|
|
|
|
1,663
|
|
Total lease expense
|
|
$
|
2,026
|
|
|
$
|
6,423
|
|
|
|
Three Months Ended
September 30, 2019
|
|
|
Nine Months Ended
September 30, 2019
|
|
Operating lease expense
|
|
$
|
1,421
|
|
|
$
|
4,190
|
|
Variable lease expense
|
|
|
633
|
|
|
|
2,008
|
|
Total lease expense
|
|
$
|
2,054
|
|
|
$
|
6,198
|
|
Other information related to operating leases was as
follows:
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Weighted average remaining lease term, in years
|
|
|
2.83
|
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
5.5
|
%
|
|
|
5.9
|
%
|
Future minimum lease payments under operating leases
as of September 30, 2020 (in thousands) were as follows:
|
|
|
Operating Leases
|
|
Remainder of 2020
|
|
|
$
|
1,440
|
|
2021
|
|
|
|
4,800
|
|
2022
|
|
|
|
3,273
|
|
2023
|
|
|
|
1,690
|
|
2024
|
|
|
|
779
|
|
2025
|
|
|
|
138
|
|
Thereafter
|
|
|
|
28
|
|
Total future minimum lease payments
|
|
|
|
12,148
|
|
Less: imputed interest
|
|
|
|
(1,004
|
)
|
Total
|
|
|
$
|
11,144
|
|
|
|
|
|
|
|
Current portion operating lease liabilities
|
|
|
$
|
4,701
|
|
Non-current operating lease liabilities
|
|
|
|
6,443
|
|
Total
|
|
|
$
|
11,144
|
|
|
9.
|
Notes Payable – Long Term –
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Subsidiary subordinated note payable to seller with monthly interest only payments at 6%, guaranteed by PQH, with a maturity date of August 5, 2022. The note was paid off in August 2020.
|
|
$
|
—
|
|
|
$
|
789,216
|
|
Subsidiary note payable to a financial institution, with monthly principal and interest payments of $6,692, bearing interest at 5.5%, secured by substantially all assets of the subsidiary, and maturing January 4, 2024. The note was paid off in September 2020 and refinanced internally.
|
|
|
—
|
|
|
|
296,035
|
|
Total
|
|
|
—
|
|
|
|
1,085,251
|
|
Less current maturities
|
|
|
—
|
|
|
|
(65,414
|
)
|
|
|
$
|
—
|
|
|
$
|
1,019,837
|
|
Date Declared
|
Record Date
|
Dividend Per Share
|
Payment Date
|
Dividend Paid
|
February 13, 2020
|
February 28, 2020
|
$0.050
|
March 9, 2020
|
$463,289
|
May 5, 2020
|
May 22, 2020
|
$0.025
|
June 2, 2020
|
$230,865
|
August 10, 2020
|
August 25, 2020
|
$0.025
|
September 4, 2020
|
$228,373
|
Revenue generated from contracts with customers
and recognized per ASC 606 primarily consists of sales of merchandise and services at the point of sale and compensation from Cricket
Wireless. As a Cricket Wireless authorized retailer, we earn compensation from Cricket Wireless for activating a new customer on
the Cricket Wireless network, activating new devices for existing Cricket Wireless customers (“back-end compensation”)
and upon an existing Cricket Wireless customer whom we originally activated on the Cricket Wireless GSM network making a continuing
service payment (“CSP”).
Due to COVID-19 and at the request of Cricket Wireless,
the Cellular Retail segment temporarily closed approximately 75 retail locations in March 2020. In conjunction with the request,
Cricket Wireless notified the Company that it would be providing temporary supplemental commissions for the store closures. In
addition, Cricket Wireless temporarily increased other supplemental commissions for qualifying activations. COVID-19 related supplemental
commissions of approximately $0 and $1,530,000, as reported to us by Cricket, was included in revenue in the three and nine month
periods ended September 30, 2020. The closure related supplemental compensation assistance from Cricket ended by June 30, 2020.
Revenue generated from short-term lending agreements
in the Consumer Finance segment and from Company investments are recognized in accordance with ASC 825.
Total net sales of merchandise, which exclude sales
taxes, are generally recorded as follows:
|
●
|
Cellular Retail – net sales reflects the transaction price at point of sale when payment
is received or receivable, the customer takes control of the merchandise and, applicable to devices, the device has been activated
on the Cricket Wireless network. The sale and activation of a wireless device also correlates to the recording of back-end compensation
from Cricket Wireless. Sales returns are generally not material to our financial statements.
|
|
●
|
Direct to Consumer – net sales reflect the transaction price when product is shipped to
customers, FOB shipping point, reduced by variable consideration. Shipping and handling fees are also included in total net sales.
Variable consideration is comprised of estimated future returns and merchandise credits which are estimated based primarily on
historical rates and sales levels.
|
|
●
|
Consumer Finance - net sales reflects the transaction price at point of sale when payment in full
is received and the customer takes control of the merchandise. Sales returns are generally not material to our financial statements.
|
Services revenue from customer paid fees is generally
recorded at point of sale when payment is received and the customer receives the benefit of the service. CSP compensation from
Cricket Wireless is recorded as of the time certain Cricket Wireless customers make a service payment, as reported to us by Cricket
Wireless.
Recognized as revenue per ASC 825, Consumer Finance
loan fees and interest on cash advance loans are recognized on a constant-yield basis ratably over a loan’s term. Installment
loan fees and interest are recognized using the interest method, except that installment loan origination fees are recognized as
they become non-refundable and installment loan maintenance fees are recognized when earned. The Company recognizes fees on pawn
loans on a constant-yield basis ratably over the loans’ terms, less an estimated amount for expected forfeited pawn loans
which is based on historical forfeiture rates.
See Note 14, “Segment Information,” for
disaggregation of revenue by segment.
|
12.
|
Other Operating Expense
–
|
A breakout of other expense is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Bank fees
|
|
$
|
411,189
|
|
|
$
|
353,064
|
|
|
$
|
1,705,582
|
|
|
$
|
1,397,631
|
|
Collection costs
|
|
|
93,464
|
|
|
|
82,503
|
|
|
|
250,939
|
|
|
|
242,855
|
|
Insurance
|
|
|
191,108
|
|
|
|
178,414
|
|
|
|
587,440
|
|
|
|
545,056
|
|
Management and advisory fees
|
|
|
220,303
|
|
|
|
211,003
|
|
|
|
651,609
|
|
|
|
624,151
|
|
Professional and consulting fees
|
|
|
354,725
|
|
|
|
325,824
|
|
|
|
1,004,461
|
|
|
|
1,115,629
|
|
Supplies
|
|
|
185,744
|
|
|
|
170,387
|
|
|
|
605,898
|
|
|
|
453,198
|
|
Loss on disposal
|
|
|
—
|
|
|
|
66,685
|
|
|
|
662,522
|
|
|
|
77,883
|
|
Other
|
|
|
478,109
|
|
|
|
526,854
|
|
|
|
1,755,209
|
|
|
|
1,744,201
|
|
|
|
$
|
1,934,642
|
|
|
$
|
1,914,734
|
|
|
$
|
7,223,660
|
|
|
$
|
6,200,604
|
|
Cellular Retail Acquisitions
In 2020, PQH completed Cricket retail location transactions,
acquiring 19 locations.
In 2019, PQH contributed a note payable in exchange
for a 51% ownership interest in a newly formed subsidiary Summit JV, LLC (“Summit”) and another Cricket Wireless dealer
contributed substantially all its assets, including 28 Cricket Wireless retail locations, and specified liabilities in exchange
for a 49% ownership interest in Summit and receipt of the note payable contributed by PQH. Effective March 1, 2019, we consummated
the transaction.
The purchase price calculations (in thousands) are
as follows:
|
|
2020
|
|
|
2019
|
|
Cash
|
|
$
|
568
|
|
|
$
|
—
|
|
Note payable
|
|
|
—
|
|
|
|
18
|
|
Noncontrolling interests/equity
|
|
|
—
|
|
|
|
17
|
|
|
|
$
|
568
|
|
|
$
|
35
|
|
The assets acquired and liabilities assumed (in thousands)
were recorded at their estimated fair values as of the purchase dates as follows:
|
|
2020
|
|
|
2019
|
|
Cash
|
|
$
|
2
|
|
|
$
|
14
|
|
Receivables
|
|
|
—
|
|
|
|
272
|
|
Inventory
|
|
|
82
|
|
|
|
50
|
|
Property and equipment
|
|
|
272
|
|
|
|
596
|
|
Intangible assets
|
|
|
234
|
|
|
|
—
|
|
Operating lease right-of-use assets
|
|
|
1,178
|
|
|
|
772
|
|
Other assets
|
|
|
33
|
|
|
|
48
|
|
Other liabilities
|
|
|
(55
|
)
|
|
|
(597
|
)
|
Operating lease liabilities
|
|
|
(1,178
|
)
|
|
|
(772
|
)
|
Term note payable
|
|
|
—
|
|
|
|
(348
|
)
|
|
|
$
|
568
|
|
|
$
|
35
|
|
|
14.
|
Segment Information –
|
Segment information related to the three and nine month
periods ended September 30, 2020 and 2019 (in thousands) is as follows:
Three Months Ended September 30, 2020
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
22,589
|
|
|
$
|
5,901
|
|
|
$
|
379
|
|
|
$
|
—
|
|
|
$
|
28,869
|
|
Fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,419
|
|
|
$
|
—
|
|
|
$
|
1,419
|
|
Total revenue
|
|
$
|
22,589
|
|
|
$
|
5,901
|
|
|
$
|
1,798
|
|
|
$
|
—
|
|
|
$
|
30,288
|
|
Net income (loss)
|
|
$
|
1,717
|
|
|
$
|
(60
|
)
|
|
$
|
112
|
|
|
$
|
(192
|
)
|
|
$
|
1,577
|
|
Expenditures for segmented assets
|
|
$
|
62
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200
|
|
Three Months Ended September 30, 2019
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
16,969
|
|
|
$
|
4,925
|
|
|
$
|
420
|
|
|
$
|
—
|
|
|
$
|
22,314
|
|
Fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,203
|
|
|
$
|
—
|
|
|
$
|
2,203
|
|
Total revenue
|
|
$
|
16,969
|
|
|
$
|
4,925
|
|
|
$
|
2,623
|
|
|
$
|
—
|
|
|
$
|
24,517
|
|
Net income (loss)
|
|
$
|
690
|
|
|
$
|
(610
|
)
|
|
$
|
279
|
|
|
$
|
(69
|
)
|
|
$
|
290
|
|
Expenditures for segmented assets
|
|
$
|
185
|
|
|
$
|
149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
334
|
|
Nine Months Ended September 30, 2020
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
63,609
|
|
|
$
|
33,841
|
|
|
$
|
1,372
|
|
|
$
|
—
|
|
|
$
|
98,822
|
|
Fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,636
|
|
|
$
|
—
|
|
|
$
|
4,636
|
|
Total Revenue
|
|
$
|
63,609
|
|
|
$
|
33,841
|
|
|
$
|
6,008
|
|
|
$
|
—
|
|
|
$
|
103,458
|
|
Net income (loss)
|
|
$
|
4,435
|
|
|
$
|
4,672
|
|
|
$
|
478
|
|
|
$
|
(574
|
)
|
|
$
|
9,011
|
|
Total segment assets
|
|
$
|
34,375
|
|
|
$
|
14,155
|
|
|
$
|
7,792
|
|
|
$
|
35,439
|
|
|
$
|
91,761
|
|
Expenditures for segmented assets
|
|
$
|
696
|
|
|
$
|
337
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,033
|
|
Nine Months Ended September 30, 2019
(in thousands)
|
|
|
|
Cellular
Retail
|
|
|
Direct to Consumer
|
|
|
Consumer Finance
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
49,753
|
|
|
$
|
27,339
|
|
|
$
|
1,236
|
|
|
$
|
—
|
|
|
$
|
78,328
|
|
Fees and interest income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,304
|
|
|
$
|
—
|
|
|
$
|
6,304
|
|
Total Revenue
|
|
$
|
49,753
|
|
|
$
|
27,339
|
|
|
$
|
7,540
|
|
|
$
|
—
|
|
|
$
|
84,632
|
|
Net income (loss)
|
|
$
|
1,702
|
|
|
$
|
733
|
|
|
$
|
741
|
|
|
$
|
(207
|
)
|
|
$
|
2,969
|
|
Total segment assets
|
|
$
|
30,779
|
|
|
$
|
12,976
|
|
|
$
|
8,817
|
|
|
$
|
35,761
|
|
|
$
|
88,333
|
|
Expenditures for segmented assets
|
|
$
|
507
|
|
|
$
|
216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
723
|
|
|
15.
|
Commitments and Contingencies –
|
Employment Agreements
Pursuant to the numerous employment agreements, bonuses
of approximately $347,000 and $932,000 were accrued for the three and nine months ended September 30, 2020, respectively.
Assigned Leases
The Company’s Cellular Retail segment has transferred
operations of many locations to other dealers and remains contingently liable under many lease agreements. Minimum lease payments
of assigned or assumed non-cancelable operating leases related to transferred locations in which a release has not been obtained
from the lessor are approximately $1,312,000 as of September 30, 2020.
Legal Proceedings
The Company is party to a variety of legal actions
arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company does not
believe that such normal and routine litigation will have a material impact on its consolidated financial results.
Consumer Finance – NE Operations
On November 3, 2020, Nebraska voters passed a ballot
initiative that limits all fees charged by payday lenders in Nebraska to an annual interest rate of 36%. This initiative will cause
us to close our Nebraska payday lending operations which we expect to have completed by mid-December 2020. The loss of Nebraska
operations will have a significant impact on this segment’s contributions to shareholder earnings.
Dividend Declared
Our Board of Directors declared the following dividend:
Date Declared
|
Record Date
|
Dividend Per Share
|
Payment Date
|
November 3, 2020
|
November 17, 2020
|
$0.025
|
November 30, 2020
|
We evaluated all events or transactions that occurred
after September 30, 2020 through the date we issued these financial statements. During this period we did not have any other material
subsequent events that impacted our financial statements.