10-Q 1 v351287_10q.htm FORM 10-Q

 

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

x   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2013 or

 

¨   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number:   000-52015

 

Western Capital Resources, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Minnesota   47-0848102
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification Number)

 

11550 “I” Street, Suite 150, Omaha, Nebraska 68137

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (402) 551-8888

 

N/A

 

(Former name, former address and former fiscal year, if changed since last report)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer  ¨ Accelerated filer  ¨
   
Non-accelerated filer  ¨ Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 12, 2013, the registrant had outstanding 60,220,165 shares of common stock, no par value per share.

 

 

 

 
 

 

Western Capital Resources, Inc.

 

Index

 

    Page
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements   2
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   12
     
Item 4. Controls and Procedures   20
     
PART II. OTHER INFORMATION    
Item 6. Exhibits   20
     
SIGNATURES   21

 

1
 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

CONTENTS

 

  Page
   
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
   
Condensed Consolidated Balance Sheets 3
   
Condensed Consolidated Statements of Income 4
   
Condensed Consolidated Statements of Cash Flows 5
   
Notes to Condensed Consolidated Financial Statements 6

 

2
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2013
(Unaudited)		   December 31, 2012 
ASSETS          
           
CURRENT ASSETS          
Cash  $2,173,313   $2,246,619 
Loans receivable (less allowance for losses of $956,000 and $1,191,000)   4,809,188    5,084,510 
Inventory   1,315,012    1,084,510 
Prepaid expenses and other   470,420    486,239 
Deferred income taxes   398,000    484,000 
TOTAL CURRENT ASSETS   9,165,933    9,385,878 
           
PROPERTY AND EQUIPMENT   817,862    855,719 
           
GOODWILL   12,774,069    12,774,069 
           
INTANGIBLE ASSETS   183,850    230,891 
           
OTHER   126,324    126,991 
           
TOTAL ASSETS  $23,068,038   $23,373,548 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
Accounts payable and accrued liabilities  $2,535,374   $3,119,786 
Note payable – short-term   -    405,163 
Current portion long-term debt   2,750,000    210,065 
Deferred revenue   261,733    293,294 
TOTAL CURRENT LIABILITIES   5,547,107    4,028,308 
           
LONG-TERM LIABILITIES          
Note payable – long-term   -    2,750,000 
Deferred income taxes   987,000    871,000 
TOTAL LONG-TERM LIABILITIES   987,000    3,621,000 
           
TOTAL LIABILITIES   6,534,107    7,649,308 
           
SHAREHOLDERS’ EQUITY          
Common stock, no par value, 240,000,000 shares authorized, 60,220,165 and 60,397,780 shares issued and outstanding.   -    - 
Additional paid-in capital   22,353,600    22,371,362 
Accumulated deficit   (5,819,669)   (6,647,122)
TOTAL SHAREHOLDERS’ EQUITY   16,533,931    15,724,240 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $23,068,038   $23,373,548 

 

See notes to condensed consolidated financial statements.

 

3
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

   Three months ended   Six months ended 
   June 30, 2013   June 30, 2012   June 30, 2013   June 30, 2012 
REVENUES                    
Payday loan fees  $2,344,585   $2,351,757   $4,740,578   $4,659,658 
Phones and accessories   2,306,915    1,628,329    5,628,835    4,370,025 
Cellular sales and service fees   1,879,595    1,483,342    3,606,168    3,478,367 
Installment interest income   232,476    248,156    490,118    444,665 
Check cashing fees   128,840    146,595    281,478    342,407 
Other income and fees   205,696    69,790    440,016    149,617 
    7,098,107    5,927,969    15,187,193    13,444,739 
                     
STORE EXPENSES                    
Phone and accessories cost of sales   1,865,136    1,095,938    4,426,978    2,931,013 
Salaries and benefits   1,753,463    1,605,796    3,509,989    3,293,188 
Occupancy   625,579    559,443    1,276,816    1,111,751 
Provisions for loan losses   423,845    356,118    745,192    632,508 
Advertising   83,831    80,259    172,718    157,380 
Depreciation   84,428    70,680    166,081    139,925 
Amortization of intangible assets   37,314    56,846    76,541    116,247 
Other   851,366    771,458    1,762,117    1,523,736 
    5,724,962    4,596,538    12,136,432    9,905,748 
                     
INCOME FROM STORES   1,373,145    1,331,431    3,050,761    3,538,991 
                     
GENERAL & ADMINISTRATIVE EXPENSES                    
Salaries and benefits   484,228    429,354    998,242    957,086 
Depreciation   6,636    5,614    12,828    11,106 
Interest expense   82,274    51,267    165,891    129,388 
Other   257,830    274,445    540,347    578,618 
    830,968    760,680    1,717,308    1,676,198 
                     
INCOME BEFORE INCOME TAXES   542,177    570,751    1,333,453    1,862,793 
                     
INCOME TAX EXPENSE   206,000    217,000    506,000    720,000 
                     
NET INCOME   336,177    353,751    827,453    1,142,793 
                     
SERIES A CONVERTIBLE PREFERRED STOCK DIVIDENDS (assumes all paid)   -    (525,000)   -    (1,050,000)
                     
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS  $336,177   $(171,249)  $827,453   $92,793 
                     
NET INCOME (LOSS) PER COMMON SHARE                    
Basic and diluted  $0.01   $(0.03)  $0.01   $0.02 
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -                    
Basic and diluted   60,220,165    5,397,780    60,270,211    5,955,027 

 

See notes to condensed consolidated financial statements.

 

4
 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   Six Months Ended 
   June 30, 2013   June 30, 2012 
         
OPERATING ACTIVITIES          
Net Income  $827,453   $1,142,793 
Adjustments to reconcile net income to net cash provided (used) by operating activities:          
Depreciation   178,909    151,031 
Amortization   76,541    116,247 
Deferred income taxes   202,000    146,000 
Changes in operating assets and liabilities          
Loans receivable   275,322    325,717 
Inventory   (230,502)   51,011 
Prepaid expenses and other assets   16,486    (261)
Accounts payable and accrued liabilities   (584,412)   (22,620)
Deferred revenue   (31,561)   (26,843)
Net cash provided by operating activities   730,236    1,883,075 
           
INVESTING ACTIVITIES          
Purchase of property and equipment   (141,052)   (122,203)
Purchase of intangible assets   (29,500)   - 
Acquisition of stores, net of cash acquired   -    (453,600)
Net cash used by investing activities   (170,552)   (575,803)
           
FINANCING ACTIVITIES          
Payments on notes payable – short-term   (405,163)   (1,000,000)
Payments on notes payable – long-term   (210,065)   (346,776)
Advances from notes payable – long-term   -    200,000 
Common stock redemption   (17,762)   (307,234)
Net cash used by financing activities   (632,990)   (1,454,010)
           
NET DECREASE IN CASH   (73,306)   (146,738)
           
CASH          
Beginning of period   2,246,619    1,909,442 
End of period  $2,173,313   $1,762,704 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Income taxes paid  $245,650   $368,969 
Interest paid  $164,830   $140,404 

 

See notes to condensed consolidated financial statements.

 

5
 

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies –

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted.

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended December 31, 2012. The condensed consolidated balance sheet at December 31, 2012, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

 

Nature of Business

 

Western Capital Resources, Inc. (WCR), through its wholly owned operating subsidiaries, Wyoming Financial Lenders, Inc. (WFL), Express Pawn, Inc. (EP), and PQH Wireless, Inc. (PQH), collectively referred to as the “Company,” provides retail financial services to individuals and operates retail cellular and retail pawn stores primarily in the Midwestern United States.  The Company operated 51 “Payday” stores, one payday/pawn store, and one pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) as of June 30, 2013. The Company operated 52 cellular retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas, and Washington) as of June 30, 2013.  The consolidated financial statements include the accounts of WCR, WFL, PQH, and EP. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Through our “Consumer Finance” division, we provide non-recourse cash advance and installment loans, collateralized non-recourse pawn loans, check cashing and other money services, and operate retail pawn stores.  The short-term uncollateralized non-recourse consumer loans, known as “cash advance” or “payday” loans, are in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations, and generally ranges from $15 to $22 per each $100 borrowed. To repay a cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. Installment loans provide customers with cash in exchange for a promissory note with a maturity of generally three to six months and are unsecured. The fee and interest rate on installment loans vary based on applicable regulations.

 

In August 2012, we opened our first pawn store by converting an existing payday location into a joint payday/pawn store. We opened our second pawn store in May 2013. We provide collateralized non-recourse loans, commonly known as “pawn loans”, with a maturities of one to four months, depending on the state. Allowable service charges will vary by state and loan size. Our pawn loans earn 15% to 20% per month. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale value depending on an evaluation of several factors. Customers then have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or forfeiting the merchandise to us on expiration. At our pawn stores we sell merchandise that was acquired through either customer forfeiture of pawn collateral or second-hand merchandise purchased from customers or consigned to us.

 

We also provide title loans and other ancillary consumer financial products and services that are complementary to our cash advance-lending business, such as check-cashing services, money transfers and money orders.  In our check cashing business, we primarily cash payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts. Our fees for cashing payroll checks average approximately 2.5% of the face amount of the check, subject to local market conditions, and this fee is deducted from the cash given to the customer for the check. We display our check cashing fees in full view of our customers on a menu board in each store and provide a detailed receipt for each transaction. Although we have established guidelines for approving check-cashing transactions, we have no preset limit on the size of the checks we will cash.

 

Our loans and other related services are subject to state regulations (which vary from state to state), federal regulations and local regulations, where applicable.

 

6
 

 

We also operate a “Cellular Retail” division that is an authorized Cricket premier dealer, selling cellular phones and accessories, providing ancillary services and accepting service payments from customers.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the condensed 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 loans receivable allowance, percentage of existing pawn loans that will be forfeited, allocation of and carrying value of goodwill and intangible assets, inventory valuation and obsolescence and deferred taxes and tax uncertainties.

 

Revenue Recognition

 

The Company recognizes fees on cash advance loans on a constant-yield basis ratably over the loans’ terms. Title and 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 redeemed pawn loans on a constant-yield basis ratably over the loans’ terms. No fees are recognized on forfeited pawn loans. The Company records revenue from check cashing fees, sales of phones, accessories, and pawn inventory, and fees from all other services in the period in which the sale or service is completed.

 

Loans Receivable Allowance

 

The Company maintains a loan loss allowance for anticipated losses for our payday and installment loans. We do not record loan losses or charge-offs of pawn or title loans because the value of the collateral exceeds the loan amount. 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 historical 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. The Company also periodically performs a look-back analysis on its loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. The Company is aware that as conditions change, it 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 or fees less payments made and the loans receivable allowance.  The Company does not specifically reserve for any individual loan.  The Company aggregates 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.  The Company utilizes 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 loans receivable 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.

 

Net Income Per Common Share

 

Basic net income per common share is computed by dividing the income available to common shareholders by the weighted average number of common shares outstanding for the year. There were no dilutive securities at June 30, 2013. Diluted net income per common share, applicable to the three and six months ended June 30, 2013, is computed by dividing the net income available to common shareholders by the sum of the weighted average number of common shares outstanding plus potentially dilutive common share equivalents (convertible preferred shares) when dilutive. There were no outstanding shares of potentially dilutive Series A Convertible Preferred Stock at June 30, 2013. All shares of potentially dilutive Series A Convertible Preferred Stock outstanding at June 30, 2012 were anti-dilutive and therefore excluded from the dilutive net income per share computation for that period.

 

Segment Reporting

 

The Company has grouped its operations into two segments – Consumer Finance division and Cellular Retail division. The Consumer Finance division provides financial and ancillary services. The Cellular Retail division is an authorized Cricket premier dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers.

 

7
 

 

Recent Accounting Pronouncements

 

No new accounting pronouncement issued or effective during the fiscal quarter has had or is expected to have a material impact on the condensed consolidated financial statements.

 

2.Risks Inherent in the Operating Environment –

 

The Company’s Consumer Finance division activities are highly regulated under numerous local, state, and federal laws and regulations, which are subject to change. New laws or regulations could be enacted that could have a negative impact on the Company’s lending activities. Over the past few years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict deferred presentment cash advances.

 

The Federal Trade Commission has issued an FTC Consumer Alert (Federal Trade Commission, March 2008, Consumer Alert entitled “Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives”) that discourages consumers from obtaining payday loans such as the loans we offer, primarily on the basis that the types of loans we offer are very costly and consumers should consider alternatives to accepting a payday loan. For further information, you may obtain a copy of the alert at www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm.  The federal government also passed legislation, the 2007 Military Authorization Act, prohibiting us from offering or making our loans to members of the military when the interest and fees calculated as an annual percentage rate exceeds 36%. This limitation effectively prohibits us from utilizing our present business model for cash advance or “payday” lending when dealing with members of the U.S. military, and as a result we do not and do not plan to conduct payday lending business with U.S. military personnel. These facts evidence the widespread belief that our charges relating to our loans are too expensive to be good for consumers. Some consumer advocates and others have characterized payday lending as “predatory.” As a result, there are frequently attempts in the various state legislatures, and occasionally in the U.S. Congress, to limit, restrict or prohibit payday lending.

 

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the U.S. Congress and signed into law. Under the Act, a new Consumer Financial Protection Bureau (“CFPB”) will consolidate most federal regulation of financial services offered to consumers, and replace the Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers, including mortgage lenders, providers of payday loans, other nonbank financial companies, and banks and credit unions with assets over $10 billion, will be subject to new regulations to be passed by the CFPB. While the CFPB does not appear to have authority to make rules limiting interest rates or fees charged, the scope and extent of the CFPB’s authority will nonetheless be broad, and it is expected that the CFPB will address issues such as rollovers or extensions of payday loans and compliance with federal rules and regulations. Future restrictions on the payday lending industry by the CFPB could have serious consequences for the Company.

 

Any adverse change in present federal laws or regulations that govern or otherwise affect payday lending could result in curtailment or cessation of the Company’s operations in certain jurisdictions or locations. Furthermore, any failure to comply with any applicable federal laws or regulations could result in fines, litigation, the closure of one or more store locations or negative publicity. Any such change or failure would have a corresponding impact on the Company’s results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in operating income through increased legal expenditures or fines, and could also negatively affect the Company’s general business prospects if the Company is unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects its ability to obtain additional financing as needed.

 

The passage of federal or state laws and regulations could, at any point, essentially prohibit the Company from conducting its payday 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 its viability.

 

For the six months ended June 30, 2013 and 2012, the Company had significant revenues by state (shown as a percentage of applicable division’s revenue when over 10%) as follows:

 

Consumer Finance Division  Cellular Retail Division
   2013
% of Revenues		   2012
% of Revenues		      2013
% of Revenues		   2012
% of Revenues		 
Nebraska   29%   26%  Missouri   *%   16%
Wyoming   15%   15%  Nebraska   26%   13%
North Dakota   19%   18%  Texas   13%   12%
Iowa   11%   12%  Indiana   *%   11%
             Oklahoma   *%   10%

 

* Less than 10%

 

8
 

 

 

3.Loans Receivable –

 

At June 30, 2013 and December 31, 2012 our outstanding loans receivable aging was as follows:

 

June 30, 2013
   Payday   Installment   Pawn &
Title		   Total 
Current  $3,981,470   $344,586   $238,561   $4,564,617 
1-30   294,731    51,914    -    346,645 
31-60   227,798    19,560    -    247,358 
61-90   146,324    10,371    -    156,695 
91-120    138,619    4,199    -    142,818 
121-150   131,820    2,196    -    134,016 
151-180   170,808    2,231    -    173,039 
    5,091,570    435,057    238,561    5,765,188 
Allowance for losses   (896,000)   (60,000)   -    (956,000)
   $4,195,570   $375,057   $238,561   $4,809,188 

 

December 31, 2012
   Payday   Installment   Pawn &
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 

 

4.Loans Receivable Allowance –

 

As a result of the Company’s collection efforts, it historically writes off approximately 41% of the returned payday items.  Based on days past the check return date, write-offs of payday returned items historically have tracked at the following approximate percentages: 1 to 30 days – 41%; 31 to 60 days – 66%; 61 to 90 days – 83%; 91 to 120 days – 86%; and 121 to 180 days – 91%.  A rollforward of the Company’s loans receivable allowance for the six months ended June 30, 2013 and 2012 is as follows:

 

   Six Months Ended
June 30,		 
   2013   2012 
         
Loans receivable allowance, beginning of period  $1,191,000   $1,001,000 
Provision for loan losses charged to expense   745,191    632,508 
Charge-offs, net   (980,191)   (728,508)
Loans receivable allowance, end of period  $956,000   $905,000 

 

5.Note Payable – Short Term –

 

The Company’s short-term debt is as follows:

 

   June 30, 2013   December 31, 2012 
Note payable to shareholders related to preferred stock conversion to common, due and payable, if no earlier payment demand is made, on April 30, 2013. The note accrues no interest.  $-   $405,163 

 

9
 

 

6.Notes Payable – Long Term –

 

The Company’s long-term debt is as follows:

 

   June 30, 2013   December 31, 2012 
Note payable (with a credit limit of $3,000,000) to River City Equity, Inc., a related party, with interest payable monthly at 12% due March 31, 2014 and upon certain events can be collateralized by substantially all assets of WCR.  $2,750,000   $2,750,000 
Note payable to a related party with interest payable monthly at 10%, due March 1, 2013 and collateralized by substantially all assets of select locations of PQH.   -    94,397 
Note payable to a related party with interest payable monthly at 10%, due April 1, 2013 and collateralized by substantially all assets of select locations of PQH.   -    115,668 
Total   2,750,000    2,960,065 
Less current maturities   2,750,000    210,065
   $-   $2,750,000 

 

7.Other Expense –

 

A breakout of other expense is as follows:

 

   Three Months Ended
June 30,		   Six Months Ended
June 30,		 
   2013   2012   2013   2012 
                 
Store expenses                    
Bank fees  $99,373   $75,617   $206,316   $157,237 
Collection costs   126,182    106,828    237,915    235,526 
Repairs & maintenance   48,160    61,332    113,414    95,523 
Supplies   88,281    98,596    162,761    186,521 
Telephone   39,534    43,645    79,115    77,479 
Utilities and network lines   177,205    159,487    378,050    335,659 
Other   272,631    225,953    584,546    435,791 
   $851,366   $771,458   $1,762,117   $1,523,736 
                     
General & administrative expenses                    
Professional fees  $76,258   $61,291   $191,361   $147,214 
Management and consulting fees   111,822    137,692    219,509    271,442 
Other   69,750    75,462    129,477    159,962 
   $257,830   $274,445   $540,347   $578,618 

 

8.Segment Information –

 

The Company has grouped its operations into two segments – Consumer Finance and Cellular Retail.  The Consumer Finance segment provides financial and ancillary services.  The Cellular Retail segment is a dealer for Cricket and Revol cellular carriers selling cellular phones and accessories, ancillary services and serving as a payment center for customers.

 

10
 

 

Segment information related to the three and six months ended June 30, 2013 and 2012 is set forth below:

 

   Three Months Ended
June 30, 2013		   Three Months Ended
June 30, 2012		 
   Consumer
Finance		   Cellular
Retail		   Total   Consumer
Finance		   Cellular
Retail		   Total 
                         
Revenues from external customers  $2,924,470   $4,173,637   $7,098,107   $2,839,713   $3,088,256   $5,927,969 
Net income  $277,740   $58,437   $336,177   $372,601   $(18,850)  $353,751 
                               
   Six Months Ended
June 30, 2013		   Six Months Ended
June 30, 2012		 
   Consumer
Finance		   Cellular
Retail		   Total   Consumer
Finance		   Cellular
Retail		   Total 
                         
Revenues from external customers  $5,981,758   $9,205,435   $15,187,193   $5,628,830   $7,815,909   $13,444,739 
Net income (loss)  $688,080   $139,373   $827,453   $741,374   $401,419   $1,142,793 
Total segment assets  $15,634,372   $7,433,666   $23,068,038   $14,728,243   $7,044,853   $21,773,096 

 

9.Employment Agreement –

 

On April 11, 2013, the Company entered into an Amended and Restated Employment Agreement with its Chief Executive Officer, Mr. John Quandahl, to be effective as of April 1, 2013, due to the fact that the Company’s earlier Employment Agreement with Mr. Quandahl expired as of March 31, 2013. The amended and restated agreement has a term of three years and contains other terms and conditions that are identical to those of the original agreement. Specifically, the amended and restated agreement provides an annual base salary and eligibility for an annual performance-based cash bonus pool for management.

 

The performance-based bonus provisions of the amended and restated agreement permit members of the Company’s management to receive annual bonus payments based on adjusted EBITDA targets annually established by the Board of Directors. If the Company’s actual adjusted EBITDA performance for a particular annual period ranges from 85-100% of the established adjusted EBITDA target, management will be entitled to receive a cash bonus consisting of 7.5% of the actual adjusted EBITDA. Mr. Quandahl’s share of the bonus pool for any particular year is expected to be 10-50% (but may be more), and the bonus pool will be payable to other management-level participants in the bonus pool, if any, selected from time to time by the Board of Directors in its discretion. If the Company’s actual adjusted EBITDA performance for a particular annual period is less than 85% of the established adjusted EBITDA target, no bonus will be payable, and if such performance exceeds 100% of the established adjusted EBITDA target, the bonus pool will include 15% of the amount by which such performance exceeds the target. In addition to the adjusted EBITDA threshold, the amended and restated agreement also contains capital expenditure and working capital thresholds.

 

The amended and restated agreement also contains customary non-solicitation and non-competition provisions as well as provisions for severance payments upon termination by the Company without cause or upon termination by Mr. Quandahl with good reason.

 

10.Subsequent Events –

 

AT&T Acquisition of Leap Wireless

 

On July 12, 2013, AT&T announced an agreement between AT&T and Leap Wireless to acquire Leap Wireless. Leap Wireless owns the Cricket Wireless business that is a critical component and focus of the Company’s Cellular Retail division. AT&T’s acquisition of Leap Wireless is subject to a number of conditions, including approval from the Federal Trade Commission for purposes of federal anti-trust laws.

 

11
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part I, Item 2), but may be 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 necessarily 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 and/or nationally;

 

·Our need for additional financing, 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 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

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.

 

General Overview

 

Consumer finance operations are conducted under our wholly owned subsidiaries, Wyoming Financial Lenders, Inc. and Express Pawn, Inc., primarily in the Midwestern and Southwestern United States. Services provided include short-term loans (non-recourse “cash advance” or “payday” loans, small unsecured installment loans, collateralized non-recourse pawn loans and title loans), check cashing and other money services. As of June 30, 2013, we operated 51 “payday” stores, one payday/pawn store, and one pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming).  

 

In our consumer finance operations, we provide short-term unsecured consumer cash advance loans in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advance, plus a fee. The fee varies from state to state based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. To repay the cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection.

 

We provide unsecured installment loans in exchange for a promissory note with a maturity of generally three to six months. The fee and interest rate on installment loans vary based on applicable regulations. We also provide collateralized non-recourse loans, commonly known as “pawn loans,” with a maturity of one to four months. Allowable service charges will vary by state and loan size. Our pawn loans earn 15% to 20% per month. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale value depending on an evaluation of several factors. Customers then have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or forfeit the merchandise to us on expiration. At our pawn stores we sell merchandise that was acquired through either customer forfeiture of pawn collateral or second-hand merchandise purchased from customers or consigned to us.

 

Also as part of our consumer finance operations, we provide title loans and other ancillary consumer financial products and services that are complementary to its cash advance-lending business, such as check-cashing services, money transfers and money orders.  In our check cashing business, we primarily cash payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts.

 

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All of our loan and other services are subject to state regulations (which vary from state to state), federal regulations and local regulation, where applicable.

 

Our Cellular retail operations are conducted under our wholly owned subsidiary, PQH Wireless, Inc. This division operates retail stores selling cellular phones and accessories. We are an authorized Cricket dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers. Our cellular phone offerings include prepaid cellular phone service that functions for a period of time for a flat fee, without usage limitations and without any long-term contract or commitment required from the consumer. Authorized dealers are permitted to sell the carrier’s line and generally locate their 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. We are an authorized premier Cricket dealer, and as such, we are only permitted to sell the Cricket line of prepaid cellular phones at our Cricket retail stores. As of June 30, 2013, we operated 52 Cricket wireless retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington).

 

Our expenses primarily relate to the operations of our various stores.  The most significant expenses include salaries and benefits for our store employees, phones and accessories, provisions for payday loan losses and occupancy expenses for our leased real estate.  Our other significant expenses are general and administrative, which includes compensation of employees, professional fees for compliance, external reporting, audit and legal services, and management/consulting fees.

 

With respect to our cost structure, phone and accessory cost of sales and salaries and benefits are two of our largest costs and are driven primarily by the size and number of storefronts operated throughout the period and seasonal fluctuation in sales volumes.   Occupancy costs make up our third largest expense item.  Our provision for losses is also a significant expense.  We have experienced seasonality in our Cricket 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 net store profits, revenue growth, gross profit contributions and, for payday stores, loss ratio (which is losses as a percentage of payday loan fees), with consideration given to the length of time the store has been open and its geographic location.  We evaluate changes in comparable store financial and other measures on a routine basis to assess operating efficiency.  We define comparable stores as those that are open during the full periods for which a comparison is being made.  For example, comparable stores for the annual analysis we undertook as of December 31, 2012 have been open at least 24 months on that date.  We monitor newer stores for their progress toward profitability and rate of loan growth, units sold, or payment volume.

 

The contraction of the payday loan industry has followed, and continues to be significantly affected by, payday lending legislation and regulation in the various states and nationally.  We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally, and are involved with the efforts of the various industry lobbying efforts.  To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business could be adversely affected.  In Nebraska, legislation was introduced in 2008 (but did not advance) to ban all cash advance or payday loans in Nebraska.  Despite the defeat of this legislation, since we derived approximately 27% of our 2012 and 29% of our year-to-date 2013 total payday revenues in Nebraska, any subsequent attempts to pass similar legislation in Nebraska, or other legislation that would restrict our ability to make cash advance loans in Nebraska, would pose significant risks to our business.

 

To further diversify our geographic reach, our strategic expansion plans involve the expansion and diversification of our product and service offerings.  For this reason, we have focused, and expect to continue to focus, a significant amount of time and resources on the conversion of select payday locations to joint pawn/payday locations and development of our cellular retail stores.  In an effort to expand our product and service offerings within the Payday division, we intend to either introduce pawn stores into a limited number of existing payday locations and launch or buy additional pawn store locations. We believe that successful expansion, both geographically and product- and service-wise, will help to mitigate the regulatory and economic risk inherent in our business by making us less reliant on (i) cash advance and installment lending alone and (ii) any particular aspect of our business that is concentrated geographically.

 

A summary table of the number of stores operated during the six-month periods ended June 30, 2013 and 2012 follows:

 

   6 Months Ended June 30, 2013   6 Months Ended June 30, 2012 
   Consumer
Finance		   Payday /
Pawn		   Pawn   Cellular
Retail		   Consumer
Finance		   Payday /
Pawn		   Pawn   Cellular
Retail		 
Beginning   51    1    -    57    52    -    -    45 
Acquired  /  Launched   -    -    1    3    -    -    -    5 
Converted   -    -    -    -    -    -    -    - 
Closed   -    -    -    8    -    -    -    - 
Ending   51    1    1    52    52    -    -    50 

 

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Discussion of Critical Accounting Policies

 

Our condensed 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, “Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies,” of the notes to our condensed 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 condensed 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 of pawn or title loans because the value of the collateral exceeds the loan amount. 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 historical 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 fees 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 or fees less payments made and the loans receivable allowance.  We do not specifically reserve for any individual loan.  We aggregate loans for purposes of estimating the 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. 

 

As a result of our collection efforts, we historically write off approximately 41% 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 – 41%; 31 to 60 days – 66%; 61 to 90 days – 83%; 91 to 120 days – 86%; and 121 to 180 days – 91%.  All returned payday 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.

 

A rollforward of our loans receivable allowance for the six months ended June 30, 2013 and 2012 is as follows:

 

   Six Months Ended
June 30,		 
   2013   2012 
         
Loans receivable allowance, beginning of period  $1,191,000   $1,001,000 
Provision for loan losses charged to expense   745,191    632,508 
Charge-offs, net   (980,191)   (728,508)
Loans receivable allowance, end of period  $956,000   $905,000 

 

Valuation of Long-lived and Intangible Assets

 

We assess the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is analyzed on an annual basis. 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 trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets’ carrying value over the estimated fair value.

 

14
 

 

Results of Operations – Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

 

For the three-month period ended June 30, 2013, net income was $.34 million compared to net income of $.35 million for the three months ended June 30, 2012. During the three months ended June 30, 2013, income from operations before income taxes was $.54 million compared to $.57 million for the three months ended June 30, 2012. Compared to the prior three-month period, throughout some point of the quarters, we operated three additional cellular retail storefronts and two pawn stores. The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.

 

Revenues

 

The following table summarizes our revenues for the three months ended June 30, 2013 and 2012, respectively: 

 

   Three Months Ended
June 30,		       Three Months Ended 
June 30,		 
   2013   2012   % Change Year
Over Year  		   2013   2012 
               (percentage of revenues) 
                     
Payday loan fees  $2,344,585   $2,351,757    (0.3)%   33.0%   39.7%
Phones and accessories   2,306,915    1,628,329    41.7%   32.5%   27.5%
Cellular sales & service fees   1,879,595    1,483,342    26.7%   26.5%   25.0%
Installment interest income   232,476    248,156    (6.3)%   3.3%   4.2%
Check cashing fees   128,840    146,595    (12.1)%   1.8%   2.4%
Other income and fees   205,696    69,790    194.7%   2.9%   1.2%
Total  $7,098,107   $5,927,969    19.7%   100.0%   100.0%

 

Revenues totaled $7.10 million for the three months ended June 30, 2013, compared to $5.93 million for the three months ended June 30, 2012. The increase in total revenues resulted primarily from higher Cellular retail division revenue, which can be attributed to a higher per unit selling price of phones. A breakdown of phone units sold shows in increase of higher priced “smart” phones and a decrease for lower priced “feature” phones. For the Consumer Finance division, during the three-month periods ended June 30, 2013 and 2012, we originated approximately $16.72 million and $16.60 million in cash advance loans, respectively. Our average cash advance loan (including fees) totaled approximately $392 and $384 during the three-month periods ended June 30, 2013 and 2012, respectively. Our average fee for the three-month periods ended June 30, 2013 and 2012 was $57 and $55, respectively.

 

Store Expenses

 

The following table summarizes our store expenses for the three months ended June 30, 2013 and 2012, respectively:

 

   Three Months Ended
June 30,		       Three Months Ended
June 30,		 
   2013   2012   % Change Year
Over Year		   2013   2012 
               (percentage of revenues) 
Store Expenses:                         
Phone and accessories cost of sales  $1,865,136   $1,095,938    70.2%   26.3%   18.5%
Salaries and benefits   1,753,463    1,605,796    9.2%   24.7%   27.1%
Occupancy   625,579    559,443    11.8%   8.8%   9.4%
Provisions for loan losses   423,845    356,118    19.0%   6.0%   6.0%
Advertising   83,831    80,259    4.5%   1.2%   1.4%
Depreciation   84,428    70,680    19.5%   1.2%   1.2%
Amortization of intangible assets   37,314    56,846    (34.4)%   0.5%   1.0%
Other   851,366    771,458    10.4%   12.0%   13.0%
   $5,724,962   $4,596,538    24.5%   80.7%   77.5%

 

As the table above demonstrates, total expenses associated with store operations for the three months ended June 30, 2013 were $5.72 million, compared to $4.60 million for the three months ended June 30, 2012, or a 24.5% increase for the interim periods. The major components of these expenses are phone and accessories costs of sales, salaries and benefits for our store employees, occupancy costs relating to our store leaseholds, provisions for loan losses, advertising expenses, depreciation of store equipment and leasehold improvements, amortization of intangible assets and other expenses associated with store operations.

 

15
 

 

Overall, our most significant store expenses for the three months ended June 30, 2013 and 2012 related to phone and accessory costs, salaries and benefits for our store employees, occupancy costs and provision for loan losses. A discussion and analysis of the various components of our store expenses appears below.

 

Phone and Accessories Cost of Sales. For the three months ended June 30, 2013, our costs of sales were $1.87 million compared to $1.10 million for the same period in 2012. The increase in our Cellular Retail segment phone and accessory costs resulted from a higher per unit cost per phone year over year, which is in line with the increased sales of smart phones discussed in the previous section. Our gross profit per phone unit varies little between a smart or feature phone, resulting in a decreasing gross profit from phone sales.

 

Salaries and Benefits. Payroll and related costs at the store level were $1.75 million compared to $1.61 million for the three-month periods ended June 30, 2013 and 2012, respectively. The increase is attributed to operating the additional cellular and pawn stores.

 

Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $.63 million for the three months ended June 30, 2013 versus $.56 million for the three months ended June 30, 2012. The increase is attributed to operating the additional cellular and pawn stores.

 

Provisions for Loan Losses. For the three months ended June 30, 2013, our provisions for loan losses were $.42 million compared to $.36 million for the three months ended June 30, 2012. Our provisions for loan losses represented approximately 16.4% and 13.7% of our payday and installment loan revenue for the three months ended June 30, 2013 and 2012, respectively. The increase can be attributed to the higher default rate associated with installment lending. Due to our inability to foretell the scope and duration of the current economic recovery, we are uncertain how significant our total 2013 loan losses may be and how they may differ from 2012.

 

Advertising. Advertising and marketing expenses were $.08 million for each of the three months ended June 30, 2013 and 2012. In general, we expect that our marketing and advertising expenses for 2013 will remain materially consistent with 2012 expenses.

 

Depreciation. Depreciation, relating to store equipment and leasehold improvements, increased to $.08 million for the three months ended June 30, 2013 compared to $.07 million for the three months ended June 30, 2012.

 

Amortization of Intangible Assets. Amortization of intangible assets decreased to $.04 million for the three months ended June 30, 2013 from $.06 million for the three month period ended June 30, 2012.

 

Other Store Expenses. Other expenses increased to $.85 million for the three months ended June 30, 2013 from $.77 million for the three months ended June 30, 2012.

 

General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the three months ended June 30, 2013 and 2012, respectively:

 

   Three Months Ended
June 30,		       Three Months Ended 
June 30,		 
   2013   2012   %Change Year
Over Year		   2013   2012 
               (percentage of revenues) 
General & Administrative Expenses:                         
Salaries and benefits  $484,228   $429,354    12.8%   6.8%   7.2%
Depreciation   6,636    5,614    18.2%   0.1%   0.1%
Interest expense   82,274    51,267    60.5%   1.2%   0.9%
Other expense   257,830    274,445    (6.1)%   3.6%   4.6%
   $830,968   $760,680    9.2%   11.7%   12.8%

 

Total general and administrative costs for the three months ended June 30, 2013 were $.83 million compared to $.76 million for the period ended June 30, 2012. For the three months ended June 30, 2013 and 2012, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:

 

Salaries and Benefits. Salaries and benefits expenses for the three months ended June 30, 2013 were $.48 million, a $.05 million increase from the $.43 million in such expenses during the period ended June 30, 2012.

 

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Interest. Interest expense for the three months ended June 30, 2013 and 2012 was $.08 million and $.05 million, respectively.

 

Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, decreased $.01 million to $.26 million for the three months ended June 30, 2013 compared to $.27 million from the three months ended June 30, 2012.

 

Income Tax Expense

 

Income tax expense for the three months ended June 30, 2013 was $.21 million compared to income tax expense of $.22 million for the three months ended June 30, 2012, an effective rate of 38% for each period.

 

Results of Operations – Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

 

For the six-month period ended June 30, 2013, net income was $.83 million compared to net income of $1.14 million for the six months ended June 30, 2012. During the six months ended June 30, 2013, income from operations before income taxes was $1.33 million compared to $1.86 million for the six months ended June 30, 2012. Compared to the prior six-month period, throughout some point of the quarters, we operated ten additional cellular retail storefronts and two pawn stores. The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.

 

Revenues

 

The following table summarizes our revenues for the three months ended June 30, 2013 and 2012, respectively: 

 

   Six Months Ended
June 30,		       Six Months Ended June
30,		 
   2013   2012   % Change Year
Over Year		   2013   2012 
               (percentage of revenues) 
                     
Payday loan fees  $4,740,578   $4,659,658    1.7%   31.2%   34.7%
Phones and accessories   5,628,835    4,370,025    28.8%   37.1%   32.5%
Cellular sales & service fees   3,606,168    3,478,367    3.7%   23.7%   25.9%
Installment interest income   490,118    444,665    10.2%   3.2%   3.3%
Check cashing fees   281,478    342,407    (17.8)%   1.9%   2.5%
Other income and fees   440,016    149,617    194.1%   2.9%   1.1%
Total  $15,187,193   $13,444,739    13.0%   100.0%   100.0%

 

Revenues totaled $15.2 million for the six months ended June 30, 2013, compared to $13.44 million for the six months ended June 30, 2012. The increase in total revenues resulted primarily from higher Cellular retail division revenue, which can be attributed to a higher per unit selling price of phones. A breakdown of phone units sold shows in increase of higher priced “smart” phones and a decrease for lower priced “feature” phones. For the Consumer Finance division, during the six-month periods ended June 30, 2013 and 2012, we originated approximately $32.95 million and $32.37 million in cash advance loans, respectively. Our average cash advance loan (including fees) totaled approximately $395 and $382 during the six-month periods ended June 30, 2013 and 2012, respectively. Our average fee for the six-month periods ended June 30, 2013 and 2012 was $57 and $55, respectively.

 

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Store Expenses

 

The following table summarizes our store expenses for the six months ended June 30, 2013 and 2012, respectively:

 

   Six Months Ended
June 30,		       Six Months Ended 
June 30,		 
   2013   2012   % Change Year
Over Year		   2013   2012 
               (percentage of revenues) 
Store Expenses:                         
Phone and accessories cost of sales  $4,426,978   $2,931,013    51.0%   29.1%   21.8%
Salaries and benefits   3,509,989    3,293,188    6.6%   23.2%   24.5%
Occupancy   1,276,816    1,111,751    14.8%   8.4%   8.3%
Provisions for loan losses   745,192    632,508    17.8%   4.9%   4.7%
Advertising   172,718    157,380    9.7%   1.1%   1.2%
Depreciation   166,081    139,925    18.7%   1.1%   1.0%
Amortization of intangible assets   76,541    116,247    (34.2)%   0.5%   0.9%
Other   1,762,117    1,523,736    15.6%   11.6%   11.3%
   $12,136,432   $9,905,748    22.5%   79.9%   73.7%

 

As the table above demonstrates, total expenses associated with store operations for the six months ended June 30, 2013 were $12.14 million, compared to $9.91 million for the six months ended June 30, 2012, or a 22.5% increase for the interim periods. The major components of these expenses are phone and accessories costs of sales, salaries and benefits for our store employees, occupancy costs relating to our store leaseholds, provisions for loan losses, advertising expenses, depreciation of store equipment and leasehold improvements, amortization of intangible assets and other expenses associated with store operations.

 

Overall, our most significant store expenses for the six months ended June 30, 2013 and 2012 related to phone and accessory costs, salaries and benefits for our store employees, occupancy costs and provision for loan losses. A discussion and analysis of the various components of our store expenses appears below.

 

Phone and Accessories Cost of Sales. For the six months ended June 30, 2013, our costs of sales were $4.43 million compared to $2.93 million for the same period in 2012. The increase in our Cellular Retail segment phone and accessory costs resulted from a higher per unit cost per phone year over year which is in line with the increased sales of smart phones discussed in the previous section. Our gross profit per phone unit varies little between a smart or feature phone, resulting in a decreasing gross profit from phone sales.

 

Salaries and Benefits. Payroll and related costs at the store level were $3.51 million compared to $3.29 million for the three-month periods ended June 30, 2013 and 2012, respectively. The increase is attributed to operating the additional cellular and pawn stores.

 

Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $1.28 million for the six months ended June 30, 2013 versus $1.11 million for the six months ended June 30, 2012. The increase is attributed to operating the additional cellular and pawn stores.

 

Provisions for Loan Losses. For the six months ended June 30, 2013, our provisions for loan losses were $.75 million compared to $.63 million for the six months ended June 30, 2012. Our provisions for loan losses represented approximately 14.2% and 12.4% of our payday and installment loan revenue for the six months ended June 30, 2013 and 2012, respectively. The increase can be attributed to the higher default rate associated with installment lending. Due to our inability to foretell the scope and duration of the current economic recovery, we are uncertain how significant our total 2013 loan losses may be and how they may differ from 2012.

 

Advertising. Advertising and marketing expenses were $.17 million and $.16 million for the six months ended June 30, 2013 and 2012, respectively. In general, we expect that our marketing and advertising expenses for 2013 will remain materially consistent with 2012 expenses.

 

Depreciation. Depreciation, relating to store equipment and leasehold improvements, increased to $.17 million for the six months ended June 30, 2013 compared to $.14 million for the six months ended June 30, 2012.

 

Amortization of Intangible Assets. Amortization of intangible assets decreased to $.08 million for the six months ended June 30, 2013 from $.12 million for the six month period ended June 30, 2012.

 

Other Store Expenses. Other expenses increased to $1.76 million for the six months ended June 30, 2013 from $1.52 million for the six months ended June 30, 2012.

 

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General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the six months ended June 30, 2013 and 2012, respectively:

 

   Six Months Ended
June 30,		       Six Months Ended 
June 30,		 
   2013   2012   % Change Year
Over Year		   2013   2012 
               (percentage of revenues) 
General & Administrative Expenses:                         
Salaries and benefits  $998,242   $957,086    4.3%   6.5%   7.1%
Depreciation   12,828    11,106    15.5%   0.1%   0.1%
Interest expense   165,891    129,388    28.2%   1.1%   1.0%
Other expense   540,347    578,618    (6.6)%   3.6%   4.3%
   $1,717,308   $1,676,198    2.5%   11.3%   12.5%

 

Total general and administrative costs for the six months ended June 30, 2013 were $1.72 million compared to $1.68 million for the period ended June 30, 2012. For the six months ended June 30, 2013 and 2012, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:

 

Salaries and Benefits. Salaries and benefits expenses for the six months ended June 30, 2013 were $1.00 million, a $.04 million increase from the $.96 million in such expenses during the period ended June 30, 2012.

 

Interest. Interest expense for the six months ended June 30, 2013 and 2012 was $.17 million and $.13 million, respectively.

 

Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, decreased $.04 million to $.54 million for the six months ended June 30, 2013 compared to $.58 million from the six months ended June 30, 2012.

 

Income Tax Expense

 

Income tax expense for the six months ended June 30, 2013 was $.51 million compared to income tax expense of $.72 million for the six months ended June 30, 2012, an effective rate of 38% and 39%, respectively.

 

Liquidity and Capital Resources

 

Summary cash flow data is as follows:

 

   Six Months Ended June 30, 
   2013   2012 
         
Cash flows provided (used) by:          
Operating activities  $730,236   $1,883,075 
Investing activities   (170,552)   (575,803)
Financing activities   (632,990)   (1,454,010)
Net decrease in cash   (73,306)   (146,738)
Cash, beginning of period   2,246,619    1,909,442 
Cash, end of period  $2,173,313   $1,762,704 

 

At June 30, 2013, we had cash of $2.17 million compared to cash of $1.76 million on June 30, 2012. 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 June 30, 2014. Our expected short-term uses of available cash include the funding of operating activities (including anticipated increases in payday loans), the financing of expansion activities, including new store openings or store acquisitions, and the repayment of debt.

 

Because of the constant threat of regulatory changes to the payday lending industry, we believe it will be difficult for us to obtain debt financing from traditional financial institutions. Financing we may obtain from alternate sources is likely to involve higher interest rates.

 

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Credit Facilities

 

On October 18, 2011, we entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of River City Equity. The promissory note was amended on December 7, 2012. The borrowing arrangement allows us to borrow up to $3,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note matures on March 31, 2014, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. We intend to extend the note for one year upon its expiration. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in all of our assets. As of June 30, 2013, $2,750,000 has been advanced under this arrangement.

 

Off-Balance Sheet Arrangements  

 

The Company had no off-balance sheet arrangements as of June 30, 2013.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

 

As of June 30, 2013, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of June 30, 2013.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 6. Exhibits  

 

Exhibit   Description
     
10.1   Amended and Restated Employment Agreement with John Quandahl, effective April 1, 2013 (incorporated by reference to Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q filed on May 14, 2013).
     
31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
32  

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(filed herewith).

     
101.INS   XBRL Instance Document (filed herewith).
     
101.SCH   XBRL Schema Document (filed herewith).
     
101.CAL   XBRL Calculation Linkbase Document (filed herewith).
     
101.DEF   XBRL Definition Linkbase Document (filed herewith).
     
101.LAB   XBRL Label Linkbase Document (filed herewith).
     
101.PRE   XBRL Presentation Linkbase Document (filed herewith).

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: August 12, 2013 Western Capital Resources, Inc.
  (Registrant)
   
  By: /s/ John Quandahl
    John Quandahl
    Chief Executive Officer and Chief Operating Officer
     
  By: /s/ Stephen Irlbeck
    Stephen Irlbeck
    Chief Financial Officer

 

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