See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
Western Capital Resources, Inc. (“WCR”)
is a parent company owning operating subsidiaries, with percentage owned shown parenthetically, as summarized below.
Cellular Retail
PQH Wireless, Inc. (“PQH”) (100%) –
operates 229 cellular retail stores as of March 31, 2022 (130 100% owned plus 99 held through its controlled but less than 100%
owned subsidiaries), exclusively as an authorized retailer of the Cricket brand.
Direct to Consumer
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.
Manufacturing
Swisher Acquisition, Inc. (“SAI”) (100%)
- a manufacturer of lawn and garden power equipment and emergency safety shelters under the Swisher brand name, and a provider
of turn-key manufacturing services to third parties.
Consumer Finance
Wyoming Financial Lenders, Inc. (“WFL”)
(100%) – owns and operates “payday” stores (19 as of March 31, 2022) in four states (Iowa, Kansas, North Dakota
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 March 31, 2022) 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,”
“we” or “us” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies
within our enterprise, such as” “PQH,” “JPPA,” “JPRE,” “SAI,” “WFL,”
or “EPI” are references only to those companies.
| 2. | 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
month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December
31, 2022.
Management has analyzed the impact of the Coronavirus
pandemic (“COVID-19”) on its financial statements as of March 31, 2022 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, 2021.
Notes to Condensed Consolidated Financial
Statements (continued)
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, “Consolidation”
applicable to reporting the equity and net income or loss attributable to noncontrolling interests. 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, estimated expected lifetime credits losses, economic conditions
or future economic trends and various other assumptions believed to be reasonable under the circumstances. Actual results could
differ from those estimates. Significant management estimates relate to the loans receivable allowance for credit losses, carrying
value and impairment of goodwill, other long-lived assets, right-of-use assets and related liabilities (including the applicable
discount rate), inventory valuation and obsolescence, estimated useful lives of intangible assets and property and equipment, gift
certificate and merchandise credits liability and deferred taxes and tax uncertainties.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be
cash equivalents.
Fair Value Measurements
The fair value of a financial instrument is the amount
that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value
measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the
information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input
that is significant to the fair value measurement. The three-level hierarchy is as follows:
Level 1 – Quoted market prices in active markets
for identical assets or liabilities.
Level 2 – Observable market-based inputs or inputs
that are corroborated by market data.
Level 3 - Unobservable inputs that are not corroborated
by market date.
The Company’s held to maturity securities are
comprised of U.S Treasury zero coupon T-Bills.
Earnings Per Common Share
The Company computes basic earnings per common share
(“EPS”) in accordance with ASC 260, “Earnings Per Share,” which is computed by dividing the income available
to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS gives effect to
all potentially dilutive common shares outstanding during the period, as calculated using the treasury stock method. In computing
diluted EPS, the weighted average market price for the period is used in determining the number of common shares assumed to be
purchased from the exercise of stock options.
Recent Accounting Pronouncements
No 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.
| 3. | 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 2017 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. 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 is implemented as originally adopted.
However, in January 2018, the CFPB issued a statement
that it intended to “reconsider” the regulation. 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 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 and further contraction of our Consumer Finance segment.
Notes to Condensed Consolidated
Financial Statements (continued)
The above rule 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, additional 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.
| 4. | Cash and Cash Equivalents and Investments – |
The following table shows the Company’s cash
and cash equivalents, held-to-maturity investments, and other investments by significant investment category, recorded as cash
and cash equivalents or short- and long-term investments:
Schedule of Cash and Cash Equivalents and Investments
| |
March 31, 2022 | | |
December 31, 2021 | |
Cash and cash equivalents | |
| | | |
| | |
Operating accounts | |
$ | 20,777,394 | | |
$ | 20,549,383 | |
Money Market – U.S. Treasury obligations | |
| 1,547,425 | | |
| 1,013,134 | |
U.S. Treasury obligations | |
| 8,593,656 | | |
| 21,452,578 | |
Subtotal | |
| 30,918,475 | | |
| 43,015,095 | |
| |
| | | |
| | |
Investments | |
| | | |
| | |
Certificates of deposit (9 - 18 month maturities at time of purchase, FDIC insured) | |
| 1,535,292 | | |
| 2,035,301 | |
U.S. Treasury obligations (less than one year maturities) | |
| 25,180,386 | | |
| 12,340,973 | |
Subtotal | |
| 26,715,678 | | |
| 14,376,274 | |
| |
| | | |
| | |
TOTAL | |
$ | 57,634,153 | | |
$ | 57,391,369 | |
Investments consisted of the following:
March 31, 2022 |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Amortized Cost | | |
Unrealized Loss | | |
Estimated Fair Value | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Certificates of deposit | |
$ | - | | |
$ | 1,535,292 | | |
$ | - | | |
$ | 1,535,292 | | |
$ | - | | |
$ | 1,535,292 | |
U.S. Treasury obligations | |
| 25,168,378 | | |
| - | | |
| - | | |
| 25,180,386 | | |
| (22,435 | ) | |
| 25,157,951 | |
| |
$ | 25,168,378 | | |
$ | 1,535,292 | | |
$ | - | | |
$ | 26,715,678 | | |
$ | (22,435 | ) | |
$ | 26,693,243 | |
December 31, 2021 |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Amortized Cost | | |
Unrealized Gain (Loss) | | |
Estimated Fair Value | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Certificates of deposit | |
$ | - | | |
$ | 2,035,301 | | |
$ | - | | |
$ | 2,035,301 | | |
$ | (402 | ) | |
$ | 2,034,899 | |
U.S. Treasury obligations | |
| 12,340,973 | | |
| - | | |
| - | | |
| 12,340,973 | | |
| (1,566 | ) | |
| 12,339,407 | |
| |
$ | 12,340,973 | | |
$ | 2,035,301 | | |
$ | - | | |
$ | 14,376,274 | | |
$ | (1,968 | ) | |
$ | 14,374,306 | |
Interest income recognized on held-to-maturity investments
and other sources was as follows:
| | |
Three Months Ended
March 31, 2022 | | |
Three Months Ended
March 31, 2021 | |
| | |
| | |
| |
Held-to-maturity | | |
$ | 11,869 | | |
$ | 92 | |
Other | | |
| 6,490 | | |
| 30,562 | |
Total | | |
$ | 18,359 | | |
$ | 30,654 | |
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 March 31, 2022, the Company
had demand deposits in excess of insurance amounts of approximately $14.6 million.
The Company has deposited in aggregate $2.79 million
of cash across several different accounts at financial institutions as an accommodation to its majority stockholder, which 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.
Notes to Condensed Consolidated Financial
Statements (continued)
The Consumer Finance segment’s outstanding loans
receivable aging was as follows:
March 31, 2022 |
| |
Payday | | |
Pawn | | |
Total | |
Current | |
$ | 1,518,580 | | |
$ | 267,364 | | |
$ | 1,785,944 | |
1-30 | |
| 122,804 | | |
| - | | |
| 122,804 | |
31-60 | |
| 76,524 | | |
| - | | |
| 76,524 | |
61-90 | |
| 70,071 | | |
| - | | |
| 70,071 | |
91-120 | |
| 62,551 | | |
| - | | |
| 62,551 | |
121-150 | |
| 63,244 | | |
| - | | |
| 63,244 | |
151-180 | |
| 67,170 | | |
| - | | |
| 67,170 | |
| |
| 1,980,944 | | |
| 267,364 | | |
| 2,248,308 | |
Less allowance for credit losses | |
| (399,000 | ) | |
| - | | |
| (399,000 | ) |
| |
$ | 1,581,944 | | |
$ | 267,364 | | |
$ | 1,849,308 | |
December 31, 2021 |
| |
Payday | | |
Pawn | | |
Total | |
Current | |
$ | 1,652,791 | | |
$ | 271,009 | | |
$ | 1,923,800 | |
1-30 | |
| 112,716 | | |
| - | | |
| 112,716 | |
31-60 | |
| 78,762 | | |
| - | | |
| 78,762 | |
61-90 | |
| 76,198 | | |
| - | | |
| 76,198 | |
91-120 | |
| 61,310 | | |
| - | | |
| 61,310 | |
121-150 | |
| 63,321 | | |
| - | | |
| 63,321 | |
151-180 | |
| 48,215 | | |
| - | | |
| 48,215 | |
| |
| 2,093,313 | | |
| 271,009 | | |
| 2,364,322 | |
Less allowance for credit losses | |
| (384,000 | ) | |
| - | | |
| (384,000 | ) |
| |
$ | 1,709,313 | | |
$ | 271,009 | | |
$ | 1,980,322 | |
A breakdown of accounts receivables by segment was
as follows:
March 31, 2022 |
| |
Cellular Retail | | |
Direct to Consumer | | |
Manufacturing | | |
Consumer Finance | | |
Total | |
Accounts receivable | |
$ | 282,221 | | |
$ | 2,125,381 | | |
$ | 1,036,542 | | |
$ | 37,595 | | |
$ | 3,481,739 | |
Less allowance for credit losses | |
| - | | |
| (40,000 | ) | |
| (17,500 | ) | |
| - | | |
| (57,500 | ) |
Net accounts receivable | |
$ | 282,221 | | |
$ | 2,085,381 | | |
$ | 1,019,042 | | |
$ | 37,595 | | |
$ | 3,424,239 | |
December 31, 2021 |
| |
Cellular Retail | | |
Direct to Consumer | | |
Manufacturing | | |
Consumer Finance | | |
Total | |
Accounts receivable | |
$ | 270,686 | | |
$ | 225,213 | | |
$ | 839,626 | | |
$ | 32,252 | | |
$ | 1,367,777 | |
Less allowance for credit losses | |
| - | | |
| (17,000 | ) | |
| (17,500 | ) | |
| - | | |
| (34,500 | ) |
Net accounts receivable | |
$ | 270,686 | | |
$ | 208,213 | | |
$ | 822,126 | | |
$ | 32,252 | | |
$ | 1,333,277 | |
A portion of accounts receivable are unsettled credit
card sales from the prior one to five business days. This makes up 28% and 25% of the net accounts receivable balance as of March
31, 2022 and December 31, 2021, respectively
Inventories consisted of:
March 31, 2022 |
| |
Cellular
Retail | | |
Direct to Consumer | | |
Manufacturing | | |
Consumer Finance | | |
Reserve | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Raw materials | |
$ | - | | |
$ | - | | |
$ | 2,112,559 | | |
$ | - | | |
$ | (266,000 | ) | |
$ | 1,846,559 | |
Work in process | |
| - | | |
| - | | |
| 421,970 | | |
| - | | |
| (29,000 | ) | |
| 392,970 | |
Finished goods | |
| 6,491,970 | | |
| 5,899,338 | | |
| 2,232,595 | | |
| 850,582 | | |
| (1,183,000 | ) | |
| 14,291,485 | |
Total | |
$ | 6,491,970 | | |
$ | 5,899,338 | | |
$ | 4,767,124 | | |
$ | 850,582 | | |
$ | (1,478,000 | ) | |
$ | 16,531,014 | |
Notes to Condensed Consolidated Financial
Statements (continued)
December 31, 2021 |
| |
Cellular
Retail | | |
Direct to Consumer | | |
Manufacturing | | |
Consumer Finance | | |
Reserve | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Raw materials | |
$ | - | | |
$ | - | | |
$ | 1,940,096 | | |
$ | - | | |
$ | (256,000 | ) | |
$ | 1,684,096 | |
Work in process | |
| - | | |
| - | | |
| 461,831 | | |
| - | | |
| (33,000 | ) | |
| 428,831 | |
Finished goods | |
| 4,834,929 | | |
| 5,253,771 | | |
| 2,008,970 | | |
| 840,260 | | |
| (1,135,000 | ) | |
| 11,802,930 | |
Total | |
$ | 4,834,929 | | |
$ | 5,253,771 | | |
$ | 4,410,897 | | |
$ | 840,260 | | |
$ | (1,424,000 | ) | |
$ | 13,915,857 | |
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 $1,478,000
and $1,424,000 during the three months ended March 31, 2022 and year ended December 31, 2021, respectively. These inventory write-downs
have been reflected in cost of goods sold in the statement of operations. Management believes that these reductions properly reflect
inventory values, and no additional losses will be incurred upon disposition.
| 8. | Advertising, Marketing and Development – |
The Company had no prepaid direct-response advertising
costs as of March 31, 2022 and December 31, 2021. Included in Advertising, Marketing and Development for the three month periods
ended March 31, 2022 and 2021 were advertising expenses of $2.04 million and $1.96 million, respectively.
Total components of operating lease expense (in thousands)
were as follows for the three months ended:
| |
March 31, 2022 | | |
March 31, 2021 | |
Operating lease expense | |
$ | 1,803 | | |
$ | 1,534 | |
Variable lease expense | |
| 526 | | |
| 531 | |
Total lease expense | |
$ | 2,329 | | |
$ | 2,065 | |
Other information related to operating leases was as
follows:
| |
March 31, 2022 | | |
December 31, 2021 | |
Weighted average remaining lease term, in years | |
| 5.87 | | |
| 5.81 | |
| |
| | | |
| | |
Weighted average discount rate | |
| 4.2 | % | |
| 4.4 | % |
Future minimum lease payments under operating leases
as of March 31, 2022 (in thousands) are as follows:
Remainder of 2022 | | |
$ | 4,791 | |
2023 | | |
| 4,776 | |
2024 | | |
| 2,871 | |
2025 | | |
| 1,511 | |
2026 | | |
| 929 | |
Thereafter | | |
| 3,949 | |
Total future minimum lease payments | | |
| 18,827 | |
Less: imputed interest | | |
| (2,173 | ) |
Total | | |
$ | 16,654 | |
| | |
| | |
Current portion operating lease liabilities | | |
$ | 5,590 | |
Non-current operating lease liabilities | | |
| 11,064 | |
Total | | |
$ | 16,654 | |
A rollforward of the Company’s intangible assets
is as follows:
| |
December 31, 2021 | | |
Acquisitions | | |
Additions | | |
Deletions | | |
March 31, 2022 | |
Customer relationships | |
$ | 12,136,254 | | |
$ | 1,172,626 | | |
$ | - | | |
$ | - | | |
$ | 13,308,880 | |
Other | |
| 242,660 | | |
| - | | |
| - | | |
| - | | |
| 242,660 | |
Amortizable intangible assets | |
| 12,378,914 | | |
| 1,172,626 | | |
| - | | |
| - | | |
| 13,551,540 | |
Less accumulated amortization | |
| (5,222,513 | ) | |
| - | | |
| (386,809 | ) | |
| - | | |
| (5,609,322 | ) |
Net amortizable intangible assets | |
$ | 7,156,401 | | |
$ | 1,172,626 | | |
$ | (386,809 | ) | |
$ | - | | |
$ | 7,942,218 | |
Notes to Condensed Consolidated
Financial Statements (continued)
| |
December 31, 2020 | | |
Acquisitions | | |
Additions | | |
Deletions | | |
December 31, 2021 | |
Customer relationships | |
$ | 7,727,054 | | |
$ | 4,411,700 | | |
$ | - | | |
$ | (2,500 | ) | |
$ | 12,136,254 | |
Other | |
| 242,660 | | |
| - | | |
| - | | |
| - | | |
| 242,660 | |
Amortizable intangible assets | |
| 7,969,714 | | |
| 4,411,700 | | |
| - | | |
| (2,500 | ) | |
| 12,378,914 | |
Less accumulated amortization | |
| (4,383,795 | ) | |
| - | | |
| (838,718 | ) | |
| - | | |
| (5,222,513 | ) |
Net amortizable intangible assets | |
$ | 3,585,919 | | |
$ | 4,411,700 | | |
$ | (838,718 | ) | |
$ | (2,500 | ) | |
$ | 7,156,401 | |
As of March 31, 2022, estimated future amortization
expense for the amortizable intangible assets (in thousands) was as follows:
Remainder of 2022 | | |
$ | 1,129 | |
2023 | | |
| 1,430 | |
2024 | | |
| 1,339 | |
2025 | | |
| 1,242 | |
2026 | | |
| 889 | |
Thereafter | | |
| 1,913 | |
| | |
$ | 7,942 | |
A breakdown of notes payable was as follows:
| |
March 31, 2022 | | |
December 31, 2021 | |
Bank revolving loan | |
$ | 1,900,196 | | |
$ | 1,173,098 | |
Note payable – bank | |
| 85,263 | | |
| - | |
Note payable – related party | |
| 2,000,000 | | |
| 2,250,000 | |
Total | |
| 3,985,459 | | |
| 3,423,098 | |
Less current maturities | |
| (2,150,196 | ) | |
| (1,423,098 | ) |
| |
$ | 1,835,263 | | |
$ | 2,000,000 | |
Future minimum long-term principal payments are as
follows:
| | |
| | |
Year 1 | | |
$ | 2,150,196 | |
Year 2 | | |
| 335,263 | |
Year 3 | | |
| 250,000 | |
Year 4 | | |
| 250,000 | |
Year 5 | | |
| 250,000 | |
Thereafter | | |
| 750,000 | |
Total | | |
$ | 3,985,459 | |
On October 22, 2010 SAI obtained a senior credit facility
(“Revolving Loan”) with a bank. The Revolving Loan, as previously amended, had a credit limit of up to $4,500,000 based
on percentages of eligible inventory, an interest rate of LIBOR plus 4.5% (4.875% at March 31, 2022), and a maturity date of October
21, 2021, and contained certain restrictive financial covenants. SAI entered into an Amended and Restated Credit Agreement (the
“Credit Agreement”) with its senior lender on April 8, 2021. The Credit Agreement modified the revolving line of credit
limit to $2.5 million based on an inventory and receivables availability, and subjects SAI to various covenants, including a minimum
Fixed Charge Coverage ratio and maximum Senior Funded Debt to EBITDA ratio. SAI did not fulfill the Senior Funded Debt to EBITDA ratio as required in the Credit Agreement. The bank had not requested
early repayment of the loan and, as discussed more fully in Note 20, “Subsequent Events,” extended the maturity
date of the Credit Agreement. The Commercial Promissory Note associated with the
Credit Agreement had a maturity date of April 30, 2022. The Revolving Loan, as amended, continues to be secured by substantially
all assets of SAI.
On January 7, 2022 SAI executed an equipment financing
loan agreement with a bank. As of March 31, 2022, $85,263 of $430,000 committed was advanced on the note. Upon completion of the
equipment purchase and bank financing, payment of $9,680.20 will be due monthly for a term of 48 months. The agreement has a stated
interest rate of 3.85% per annum.
SAI was party to a Management and Advisory Agreement
dated August 6, 2010, as amended April 1, 2012, with Blackstreet Capital Management, LLC (“Blackstreet”) under which
Blackstreet provides certain financial, managerial, strategic and operating advice and assistance. The agreement required SAI to
pay Blackstreet a fee in an amount equal to the greater of (i) $250,000 (subject to annual increases of five percent) or (ii) five
percent of SAI’s “EBITDA” as defined under the agreement. As of December 31, 2020, SAI owed Blackstreet $2,513,546
of accrued fees under the agreement. On January 8, 2021, pursuant to the Merger Transaction, the agreement was terminated, $13,546
of the accrued fees were paid to Blackstreet, and the remaining $2,500,000 was converted into a note payable to Blackstreet. The
note is payable in ten consecutive annual lump sum installments of $250,000, without interest thereon, commencing on January 31,
2021, is unsecured and is guaranteed by the Company. The accrued liability converted to a note is presented herein retrospectively
to furnish comparative information.
Notes to Condensed Consolidated
Financial Statements (continued)
| 12. | Commitments and Contingencies – |
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.
Cellular Retail
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 and 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”). Compensation from Cricket Wireless for the three month periods ended March 31, 2022 and 2021 was $9.74 million
and $8.71, respectively.
Cellular Retail revenues are recognized per ASC
606, “Revenue Recognition” and consist of the following:
| ● | Merchandise – merchandise sales, which exclude sales taxes, reflect 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 not material to our financial statements. Merchandise
sales revenue, which included back-end compensation from Cricket Wireless, is recorded in Sales and associated fees in the income
statement. |
| ● | Other revenue – services revenue from customer paid fees is 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. |
Direct to Consumer
Direct to Consumer revenue is recognized per ASC
606 and consists of the following:
| ● | Merchandise – merchandise sales, which exclude sales taxes, reflect the transaction price
when product is shipped to customers, FOB shipping point, reduced by variable consideration. Shipping and handling fees are 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. |
Manufacturing
Manufacturing revenue is recognized per ASC 606
and consists of the following:
| ● | Merchandise – merchandise sales, which exclude sales taxes, reflect the transaction price
when product is shipped to customers, FOB shipping point, or at point of sale and are reduced by variable consideration. Shipping
and handling fees are not included in total net sales and are an offset to freight-out expense. Variable consideration is comprised
of estimated future returns and warranty liability which are estimated based primarily on historical rates and sales levels. |
Consumer Finance
Consumer Finance revenue from merchandise sales
is recognized per ASC 606 and consists of the following:
| ● | Merchandise – merchandise sales, which exclude sales taxes, reflects the transaction price
at point of sale in our pawn stores when payment in full is received and the customer takes control of the merchandise. Sales returns
are not material to our financial statements. |
| ● | Other revenue – services revenue from customer paid fees for ancillary services is recorded
at point of sale when payment is received and the customer receives the benefit of the service. |
Consumer finance revenue from loan fees and interest
is recognized per ASC 825 and consist of the following:
| ● | Loan fees and interest – 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 17, “Segment Information,” for
disaggregation of revenue by segment.
Notes to Condensed Consolidated
Financial Statements (continued)
|
14. | Other Operating Expense
– |
A breakout of other operating expense is as follows:
| |
|
|
|
|
|
| |
Total | |
Three Months Ended | |
| |
March 31, 2022 | | |
March 31, 2021 | |
Bank fees | |
$ | 707,317 | | |
$ | 724,645 | |
Collection costs | |
| 56,307 | | |
| 72,283 | |
Insurance | |
| 233,198 | | |
| 164,521 | |
Management and advisory fees | |
| 242,068 | | |
| 224,771 | |
Professional and consulting fees | |
| 603,922 | | |
| 431,678 | |
Supplies | |
| 244,843 | | |
| 166,872 | |
Loss (Gain) on disposal | |
| (8,021 | ) | |
| 13,056 | |
Other | |
| 620,822 | | |
| 654,643 | |
. | |
$ | 2,700,456 | | |
$ | 2,452,469 | |
| 15. | Provision for Income Tax Expense – |
Provision for income tax expense
for the three months ended March 31, 2022 and 2021 was $1.34 million and $1.30 million for an effective rate of 21.4% and 21.7%,
respectively. The effective tax rate is lower than the federal plus
state statutory rates due to: (1) noncontrolling interests’ share of net income is not subject to income tax at the consolidated
group level; (2) year-over-year changes in the number and mix of states in which our subsidiaries are subject to state income taxes
due to various nexus factors such as changes in multi-state activities by members of the consolidated group and its impact on the
application of respective state income tax rules and regulations; and (3) changes in state income tax related statutes and regulations.
Excluding the noncontrolling interests’ share of net income, the effective tax rate for the comparable periods was 24.3%
and 24.9%, respectively. This decrease period over period is due to changing state income tax exposure resulting from a change
in the number and mix of states in which subsidiaries are subject to state income taxes due to various factors such as changes
in multistate activities by members of the consolidated group and its impact on state taxation rules and regulations applicable
to the Company.
Direct to Consumer Acquisition
On January 14, 2022, the Company’s Direct to
Consumer segment completed an acquisition of assets accounted for under ASC 805-10, acquiring the “Seed to Spoon” App.
This is a garden planning App that makes growing food easier and provides an easy and direct path to purchasing seeds from our
Park Seed business.
The purchase price calculation (in thousands) was as
follows:
| |
| | |
Cash | |
$ | 976 | |
Holdback payable | |
| 200 | |
Total | |
| | |
. | |
$ | 1,176 | |
The assets acquired (in thousands) were recorded at
their estimated fair values as of the purchase date as follows:
| |
| | |
Inventory | |
$ | 3 | |
Intangible assets | |
| 1,173 | |
Total | |
| | |
. | |
$ | 1,176 | |
Segment information related to the three month periods
ended March 31, 2022 and 2021 (in thousands) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2022 (in thousands) |
| |
Cellular Retail | | |
Direct to Consumer | | |
Manufacturing | | |
Consumer Finance | | |
Corporate | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Revenue from external customers | |
$ | 26,259 | | |
$ | 15,979 | | |
$ | 2,620 | | |
$ | 456 | | |
$ | - | | |
$ | 45,314 | |
Fees and interest income | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 1,139 | | |
$ | - | | |
$ | 1,139 | |
Total revenue | |
$ | 26,259 | | |
$ | 15,979 | | |
$ | 2,620 | | |
$ | 1,595 | | |
$ | - | | |
$ | 46,453 | |
Net income (loss) | |
$ | 2,389 | | |
$ | 2,723 | | |
$ | (19 | ) | |
$ | 182 | | |
$ | (334 | ) | |
$ | 4,941 | |
Total segment assets | |
$ | 45,360 | | |
$ | 19,204 | | |
$ | 10,799 | | |
$ | 6,529 | | |
$ | 40,101 | | |
$ | 121,993 | |
Expenditures for segmented assets | |
$ | - | | |
$ | 1,205 | | |
$ | 26 | | |
$ | - | | |
$ | - | | |
$ | 1,231 | |
Notes to Condensed Consolidated Financial
Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021 (in thousands) |
| |
Cellular Retail | | |
Direct to Consumer | | |
Manufacturing | | |
Consumer Finance | | |
Corporate | | |
Total | |
Revenue from external customers | |
$ | 25,511 | | |
$ | 14,678 | | |
$ | 2,523 | | |
$ | 472 | | |
$ | - | | |
$ | 43,184 | |
Fees and interest income | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 1,002 | | |
$ | - | | |
$ | 1,002 | |
Total revenue | |
$ | 25,511 | | |
$ | 14,678 | | |
$ | 2,523 | | |
$ | 1,474 | | |
$ | - | | |
$ | 44,186 | |
Net income (loss) | |
$ | 2,522 | | |
$ | 2,269 | | |
$ | (18 | ) | |
$ | 162 | | |
$ | (256 | ) | |
$ | 4,679 | |
Total segment assets | |
$ | 40,186 | | |
$ | 17,515 | | |
$ | 10,629 | | |
$ | 6,356 | | |
$ | 37,149 | | |
$ | 111,835 | |
Expenditures for segmented assets | |
$ | 191 | | |
$ | 63 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 254 | |
| 18. | Basic and Diluted Weighted Average Shares Outstanding
– |
Following is the calculation of basic and diluted
weighted average shares outstanding for the three month periods ended on March 31, 2022 and 2021:
| |
|
|
|
|
|
| |
| |
Three Months Ended: | |
| |
March 31, 2022 | | |
March 31, 2021 | |
Weighted average shares outstanding - basic | |
| 9,108,053 | | |
| 9,249,900 | |
Stock options (treasury method) | |
| 12,083 | | |
| 8,231 | |
Weighted average shares outstanding - diluted | |
| 9,120,136 | | |
| 9,258,131 | |
Our Board of Directors declared and paid the following
dividends during the first quarter of 2022:
Date Declared | |
Record Date | |
Dividend Per Share | | |
Payment Date | |
Dividend Paid | |
February 15, 2022 | |
March 1, 2022 | |
$ | 0.025 | | |
March 11, 2022 | |
$ | 227,702 | |
Dividends Declared
Our Board of Directors declared the following dividends
after March 31, 2022:
Date Declared | |
Record Date | |
Dividend Per Share | | |
Payment Date |
May 4, 2022 | |
May 20, 2022 | |
$ | 0.025 | | |
June 2, 2022 |
SAI Amended and Restated Credit Agreement
SAI entered into a Second Amended and Restated Credit Agreement (the “Agreement”)
with its senior lender on May 6, 2022. The Agreement provides for a revolving line of credit of up to $2.5 million based on
an inventory and receivables availability, and subjects SAI to various covenants, including a minimum Fixed Charge Coverage
Ratio and Minimum Net Worth requirement. The Commercial Promissory Note associated with the Agreement has a maturity date
of April 30, 2023.
Cellular Retail Acquisition
On May 9, 2022, PQH completed the acquisition of
80% of the membership interests of Gateway Wireless, LLC (“Gateway”), an operator of 56 wireless retail locations in
Missouri and several other states. PQH paid $3.0 million to acquire the membership interests in Gateway and fund the paydown of
certain obligations to the selling shareholders at closing. Simultaneously with closing, WCR funded a $3.1 million loan to Gateway
to refinance the existing senior debt of the Company.
We evaluated all events or transactions that occurred
after March 31, 2022 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.