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[March 26, 2014]
WESTERN CAPITAL RESOURCES, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the financial statements and related notes that appear elsewhere in this report. This discussion contains forward-looking statements that involve significant uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in "Risk Factors" elsewhere in this report. For further information, see "Forward-Looking Statements" below.
OVERVIEW While revenues from our cellular retail division overtook revenues from the consumer finance division the consumer finance division contributed 55% of the year's net income. Yet the growth in cellular retail division resulted in it contributing 45% of the year's net income compared to only 7% in 2012. In 2013, the Company continued its growth in the cellular retail division by adding or relocating stores into more lucrative locations and closing underperforming store locations. Cellular retail division revenue increased 40.50% from 2012.
Expansion of the consumer finance division into pawn continued with the addition of one pawn store in 2013 and securing a location for a third store to be opened in the first quarter of 2014.
We provide retail financial services, inclusive of non-recourse unsecured cash advance and installment loans, non-recourse secured pawn and title loans, check cashing and other money services to individuals primarily in the midwestern and southwestern United States. At the close of business on December 31, 2013, we owned and operated 50 "Payday" stores, one combined payday/pawn store, and one pawn store in nine states.
We operate cellular retail stores as an "authorized premier with service" dealer for Cricket Wireless. "Authorized premier with service" Cricket dealers are permitted to sell the carrier's line and perform nearly all the services performed by corporate-owned Cricket retail stores. We generally locate store operations in areas with a strong potential customer base where the carrier does not maintain a corporate storefront. These locations are generally within the urban core or surrounding areas of a community. As of December 31, 2013, we operated 57 Cricket cellular retail stores in 14 states.
Our expenses primarily relate to the operations of our retail stores. The most significant expenses include phones and accessories, salaries and benefits for our store employees, occupancy expenses for our leased real estate, and provisions for payday and installment loan losses. Our other significant expenses are general and administrative, which includes compensation of employees, professional fees for accounting, audit and legal services, and management consulting fees.
23 With respect to our cost structure phone and accessory costs of sales are one of our largest costs of sales. Salaries and benefits and our second largest cost and are driven primarily by store sales volume and number of storefronts operated throughout the year. Occupancy costs make up our third largest expense item. Our provision for losses is also a significant expense. We have experienced some seasonality in our operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter.
We evaluate our stores based on revenue growth, gross profit contributions and loss ratio (which, for the consumer finance segment, is losses as a percentage of loan revenues), with consideration given to the length of time the storefront has been open, saturation of the surrounding area and its geographic location.
We evaluate changes in comparable storefront financial and other measures on a routine basis to assess operating efficiency. We define comparable storefronts as those that are open during the full periods for which a comparison is being made. For example, comparable storefronts for the annual analysis we undertook as of December 31, 2013 have been open at least 24 months on that date. We monitor newer storefronts for their progress toward profitability and rate of loan growth or units sold.
Revenues increased to $32.89 million in 2013 from $26.51 million in 2012. Sales revenues from our cellular retail phones and accessories sales increased in 2013 to $12.13 million compared to $8.23 million during 2012. Payday loan revenues totaled $8.91 million in 2013 compared to $9.88 million in 2012. Our 2013 phone and accessories cost of sales was $9.89 million compared to $5.64 million in 2012. Store salaries and benefits expense was $7.52 million in 2013 compared to $6.63 million in 2012. The increase in our cellular retail segment revenues had a corresponding upward impact to our costs of sales. Income from stores increased to $6.14 million in 2013 compared to $6.10 million in 2012. Our general and administrative expenses increased to $3.54 million in 2012 from $3.19 million in 2012. Primarily as a result of these factors, net income decreased to $1.62 million in 2013 from net income of $1.78 million in 2012.
Net income per common share was $0.03 in 2013 compared to a net loss per common share of ($0.06) in 2012. In December 2012, we converted all outstanding shares of our Series A Convertible Preferred Stock to common stock on a one-for-one basis, retiring 100% of our outstanding Series A Convertible Preferred Stock.
Prior to the conversion, we had 10,000,000 shares of Series A Convertible Preferred Stock (10% cumulative dividends, $0.01 par value, $2.10 stated value) authorized, issued and outstanding. The preferred dividend which accrued through the date of conversion was included in the calculation of the net loss available to common shareholders in 2012. As a result, we had a net loss available to common shareholders in 2012. Prior to the date of conversion, our obligation to pay preferred dividends impacted our cash flow and inhibited our ability to grow through stock-funded acquisitions. The preferred dividend obligation also significantly affected our net income available to common shareholders. For example, absent the 2012 preferred dividend of $2.5 million, our net income available to common shareholders would have been approximately $1.8 million.
RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012 For the year ended December 31, 2013, net income was $1.62 million compared to a net income of $1.78 million in 2012. Income before income taxes was $2.60 million in 2013 compared to $2.90 million in 2012. The major components of each of revenues, store expenses, general and administrative expenses, total operating expenses and income tax expense are discussed below.
Revenues Revenues totaled $32.89 million in 2013 compared to $26.51 million in 2012, an increase of $6.38 million or 24%. The increase in total revenues resulted primarily from a significant increase in our cellular retail division sales.
Sales revenues from customers for the sale of cellular phones and accessories totaled $12.13 million in 2013 compared to $8.22 million in 2012. Cricket carrier fee revenue totaled $8.10 million in 2013 compared to $6.24 million in 2012, an increase related to an increase in dealer fees per unit sold and the increase in unit sales due to the operation of more locations in 2013 compared to 2012. We operated 70 cellular retail storefronts during at least some part of 2013 compared to 61 in 2012. Throughout 2013, we added 13 cellular retail storefronts and closed 13 for a net change of zero storefronts. In comparison, throughout 2012, we added 16 cellular retail storefronts and closed four. Our consumer finance division originated approximately $69.35 million in payday loans during 2013 compared to $69.20 million in payday loans during the prior year resulting in payday loan fees of $9.91 million in 2013 compared to $9.88 million in 2012. The average loan (including fee) totaled $396 in 2013 versus $387 in the prior year. Our average fee for 2013 was $57 compared to $56 for 2012. Income from installment loan interest increased to $1.08 million in 2013, compared to $1.06 million in 2012. Other revenues, including check cashing, title loans, service change fees and other sources, totaled $1.67 million and $1.11 million for 2013 and 2012, respectively.
24 The following table summarizes our revenues: Year Ended December 31, Year Ended December 31, 2013 2012 2013 2012 (percentage of revenues) Phones and accessories $ 12,125,009 $ 8,226,050 36.9 % 31.0 % Payday loan fees 9,911,143 9,876,166 30.1 % 37.3 % Cricket service fees 8,102,364 6,241,150 24.6 % 23.5 % Installment interest income 1,078,788 1,061,196 3.3 % 4.0 % Check cashing fees 511,323 642,241 1.6 % 2.4 % Other income and fees 1,160,569 467,271 3.5 % 1.8 % Total $ 32,889,196 $ 26,514,074 100 % 100 % We expect our sources of revenue for 2014 to continue to diversify as we continue to increase sales in our Cricket retail operations and look to open new Cricket retail and pawn storefronts.
Store Expenses Total expenses associated with store operations for 2013 were $26.75 million compared to $20.42 million for 2012, an increase of $6.33 million or 31.0%. The major components of these expenses are costs of sales for phones and accessories, salaries and benefits for our store employees, occupancy costs relating to our store leaseholds, provision for loan losses, advertising expenses, depreciation of store equipment, amortization of intangible assets and other expenses associated with store operations.
Overall, our most significant increases in store expenses from 2013 to 2012 related to phones and accessories, salaries and benefits for our store employees, and occupancy costs. Our most significant decrease in store expenses over that same period relates to amortization of intangible assets. A discussion and analysis of the various components of our store expenses appears below.
Phone and Accessories Cost of Sales. The increase in our cellular phone and accessory revenues resulted in corresponding increase in costs of sales. Also contributing to the increase was a change in the dealer compensation arrangement with Cricket that resulted in lower profit margins on phone unit sales. For the year ended December 31, 2013, our costs of sales were $9.89 million compared to $5.64 million in 2012, an increase of 75.3%.
Salaries and Benefits. Payroll and related costs at the store level was $7.52 million in 2013 compared to $6.63 million in 2012, an increase of $.89 million.
This increase is primarily a result of an increase in the number of cellular retail storefronts operating throughout 2013. As a result of these additional cellular retail storefronts, we expect that salaries and benefits for 2014 will increase because the additional storefronts will be operating the entire year.
Our salaries and benefits expenses will further increase if we add additional storefronts in 2014, whether cellular retail or pawn.
Occupancy Costs. Occupancy expenses, consisting primarily of store leases were $2.63 million during 2013 compared to $2.27 million in 2012, an increase of $.36 million primarily resulting from a higher number of storefront days (number of storefronts times days leased for year) in 2013 compared to 2012. Occupancy expenses as a percentage of revenues decreased from 8.58% in 2012 to 8.01% in 2013.
Provisions for Loan Losses. Our provision for losses for 2013 totaled $1.86 million and $1.74 million for 2012. Our provision for loan losses as a percentage of loan interest and fee revenue was 16.6% during 2013 versus 15.6% during 2012. Due to our inability to foretell the speed and scope of the current economic recovery or the economy in general, we believe there are uncertainties in what loan losses for 2014 may be.
Advertising. Advertising and marketing related expense was $.35 million in 2013 compared to $.32 million in 2012. We believe that our advertising expenses in 2014 may increase slightly over those in 2013, mainly as a result of the need to update advertising in our consumer finance division in 2014.
Depreciation. Depreciation increased by $.02 million in 2013. Depreciation was $.35 million for 2013 and $.33 million for 2012.
25 Amortization of Intangible Assets. Amortization of the customer relationship and other intangible assets was $.14 million for 2013 and $.22 million for 2012.
This has been decreasing as intangible assets become fully amortized.
Other Store Expenses. Other store expenses increased from $3.26 million in 2012 to $4.01 million in 2013. Other store expenses include bank fees, collection costs, repair and maintenance, supplies, telephone, utilities and network lines, and others. The increase in these expenses during 2013 was primarily due to increased supplies related to our cellular retail stores and the expansion of our payday location to incorporate pawn operations.
General and Administrative Expenses Total general and administrative costs for 2013 were $3.54 million compared to $3.19 million for 2012. The major components of these costs are salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses.
Salaries and Benefits. Salaries and benefits expenses for 2013 were $2.01 million compared to $1.83 million for 2012. The Company expects that during 2014 salaries and benefits expenses associated with executive management and corporate headquarters will increase from 2013 levels as we continue to grow and seek out acquisition and expansion opportunities.
Interest Expense. The Company had $.33 million of interest expense in 2013 compared to $.24 million in 2012, an increase due to an increase in the note payable balance in December 2012.
Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities were $1.16 million in 2013 compared to $1.10 million during 2012.
Total Operating Expenses Total operating expenses for 2013 and 2012 were $30.28 million and $23.61 million, respectively. We anticipate our total operating expenses in 2014 to increase compared to 2013 due to the addition of cellular retail storefronts, and expansion of current payday location to incorporate pawn operations.
Income Tax Expense Income tax expense on continuing operations decreased to $.99 million in 2013 compared to $1.12 million in 2012 for an effective rate of 37.8% and 38.6%, respectively.
LIQUIDITY AND CAPITAL RESOURCES Summary cash flow data is as follows: Year Ended December 31, 2013 2012 Cash flows provided (used) by : Operating activities $ 967,846 $ 2,864,783 Investing activities (597,640) (982,068) Financing activities (632,990) (1,545,538) Net increase (decrease) in cash (262,784) 337,177 Cash, beginning of period 2,246,619 1,909,442 Cash, end of period $ 1,983,835 $ 2,246,619 At December 31, 2013, we had cash of $1.98 million compared to cash of $2.25 million on December 31, 2012. For 2014, we believe that our available cash, combined with expected cash flows from operations, will be sufficient to fund our liquidity and capital expenditure requirements through March of 2015. Our expected short-term uses of cash include the reduction in accruals related to operations, scheduled interest payments on debt obligations, and capital expenditures.
Our overall cash and liquidity position is significantly enhanced by the equity raised in 2012 and the 2012 conversion of our Series A Convertible Preferred Stock to common stock and the payment of the accrued dividends on the preferred stock.
26 Credit Facilities On October 18, 2011 and amended on December 7, 2012, we entered in a borrowing arrangement with River City Equity, Inc. Under this arrangement, we may borrow up to $3,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note we delivered to River City Equity originally matured on March 31, 2014 and was amended on March 21, 2014 with a new maturity date of June 30, 2015, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of our assets. As of December 31, 2013, $2,750,000 had been advanced under this arrangement.
CRITICAL ACCOUNTING POLICIES Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary materially from these estimates under different assumptions or conditions.
Our significant accounting policies are discussed in Note 1, "Nature of Business and Summary of Significant Accounting Policies," of the notes to our consolidated financial statements included in this report. We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our consolidated financial statements: Loans Receivable Allowance We maintain a loan loss allowance for anticipated losses for our payday and installment loans. We do not record loan losses or charge-offs on pawn or title loans because the value of the collateral exceeds the loan amounts. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loan principal, interest and fees, historical charge offs, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our historic net write off percentage, net charge offs to loan principal, interest and fee amounts that originated during the last 24 months, applied against the balance of loan principal, interest and fees outstanding. We also periodically perform a look-back analysis on our loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. We are aware that as conditions change, we may also need to make additional allowances in future periods.
Included in loans receivable are unpaid principal, interest and fee balances of payday, installment, pawn and title loans that have not reached their maturity date and "late" payday loans that have reached maturity within the last 180 days and have remaining outstanding balances. Late payday loans generally are unpaid loans where a customer's personal check has been deposited and the check has been returned due to non-sufficient funds in the customer's account, a closed account, or other reasons. Loans are carried at cost plus accrued interest and fees less payments made and the loans receivable allowance. We do not specifically reserve for any individual loan. We aggregate loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management's judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates. We utilize a software program to assist with the tracking of its historical portfolio statistics. All returned items are charged-off after 180 days, as collections after that date have not been significant. The loan loss allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.
27 At December 31, 2013 and 2012 our outstanding loans receivable aging was as follows: December 31, 2013 Pawn & Payday Installment Title Total Current $ 4,519,839 $ 408,782 $ 288,788 $ 5,217,409 1-30 271,967 56,807 - 328,774 31-60 202,097 31,212 - 233,309 61-90 217,154 17,285 - 234,439 91-120 206,885 8,660 - 215,545 121-150 199,253 2,846 - 202,099 151-180 218,802 2,825 - 221,627 5,835,997 528,417 288,788 6,653,202 Allowance for losses (1,120,000) (95,000) - (1,215,000) $ 4,715,997 $ 433,417 $ 288,788 $ 5,438,202 December 31, 2012 Pawn & Payday Installment Title Total Current $ 4,318,517 $ 391,137 $ 171,344 $ 4,880,998 1-30 269,091 47,538 - 316,629 31-60 234,514 16,285 - 250,799 61-90 216,717 3,201 - 219,918 91-120 202,642 1,051 - 203,693 121-150 215,562 388 - 215,950 151-180 187,523 - - 187,523 5,644,566 459,600 171,344 6,275,510 Allowance for losses (1,119,000) (72,000) - (1,191,000) $ 4,525,566 $ 387,600 $ 171,344 $ 5,084,510 As a result of the Company's collection efforts, it historically writes off approximately 42% of the returned items. Based on days past the check return date, write-offs of returned items historically have tracked at the following approximate percentages: 1 to 30 days - 42%; 31 to 60 days - 67%; 61 to 90 days - 84%; 91 to 120 days - 89%; and 121 to 180 days - 92%. A rollforward of our loans receivable allowance for the years ended December 31, 2013 and 2012 is as follows: Year Ended December 31 2013 2012 Loans receivable allowance, beginning of year $ 1,191,000 $ 1,001,000 Provision for loan losses charged to expense 1,859,461 1,738,000 Charge-offs, net (1,835,461) (1,548,000) Loans receivable allowance, end of year $ 1,215,000 $ 1,191,000 Valuation of Long-lived and Intangible Assets The Company assesses the possibility of impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry events or trends. In addition, we conduct an annual goodwill impairment test as of October 1 each year. We assess our goodwill for impairment at the reporting unit level by applying a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any.
A reporting unit is an operating segment, or under certain circumstances, a component of an operating segment that constitutes a business. Our reporting units consist of multiple state and multi-state based operations and therefore the cessation of operations in any particular state does not imply that goodwill for the relevant reporting unit will be impaired.
28 Due to the minimal amount of float for our common stock, the market capitalization approach of valuing the reporting unit as a whole is not practical. The discounted future cash flows method is utilized in estimating value. When estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any.
In determining the estimated future discounted cash flows, we consider current and projected future levels of income, as well as strategic plans, business trends, prospects, and market and economic conditions. Impairment tests involve the use of judgments and estimates related to the fair market value of the business operations with which goodwill is associated, taking into consideration both historical operating performance and anticipated financial position and future earnings. We believe that the estimates of future cash flows and fair value determined as of October 1, 2013 are reasonable. Changes in estimates of those cash flows and fair value, however, could affect the evaluation. Based upon this evaluation, we concluded that the fair value exceeded the carrying value of net assets and there was no impairment.
As of December 31, 2013, we evaluated whether any triggering events or changes in circumstances had occurred subsequent to our annual impairment test. As part of this evaluation, we considered additional qualitative factors, including whether there had been any significant adverse changes in legal factors or in our business climate, adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or likely sale or disposal of all or a significant portion of our reporting unit. This analysis resulted in a determination that no triggering events or changes in circumstances had occurred.
OFF BALANCE SHEET ARRANGEMENTS We have no off balance sheet arrangements.
FORWARD-LOOKING STATEMENTS Some of the statements made in this report are "forward-looking statements," as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon our current expectations and projections about future events. Whenever used in this report, the words "believe," "anticipate," "intend," "estimate," "expect" and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily located in the material set forth under the headings "Description of Business," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," but are found in other parts of this report as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management's current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our expectations or may affect the value of the common stock, include, but are not limited to: · Changes in local, state or federal laws and regulations governing lending practices, or changes in the interpretation of such laws and regulations · Litigation and regulatory actions directed toward our industry or us, particularly in certain key states · Our need for additional financing · Change in our authorization to be a dealer for Cricket Wireless, and · Unpredictability or uncertainty in financing markets which could impair our ability to grow our business through acquisitions.
Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the "Risk Factors" section and of this report.
Industry data and other statistical information used in this report are based on independent publications, government publications, reports by market research firms or other published independent sources. Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above. Although we believe these sources are reliable, we have not independently verified the information.
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