WESTERN CAPITAL RESOURCES, INC. MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
The following discussion should be read in conjunction with the consolidated 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 Fiscal year 2021 net income attributable to WCR common shareholders increased 23.2% year over year, with our Cellular Retail, Manufacturing and Consumer Finance segments each outperforming 2020 results. Our Manufacturing segment is new this year, as described in Part I, Item 1, "Business-Recent Events-Acquisitions," and prior year information is presented on a restated basis in accordance with the required presentation of pre-transaction information for entities under common control.
RESULTS OF OPERATIONS:
Net income attributable to our common shareholders was
$10.31 million, or $1.12per share in 2021 compared to $8.37 million, or $0.88per share in 2020. Revenues increased from $150 millionin 2020 to $164 millionin 2021, with the Cellular Retail and Direct to Consumer segments being the largest contributors to the increase, with 19.6% and 2.9% year-over-year growth, respectively. 20
The following table presents certain financial information attributable to common shareholders of BFR by operating segment (in thousands):
Cellular Direct to Consumer Retail Consumer Manufacturing Finance Corporate Total Year Ended December 31, 2021 Revenue from external customers
$ 101,887 $ 43,335 $ 12,963 $ 1,793$ - $ 159,978Fee and interest income $ - $ - $ - $ 4,167$ - $ 4,167Total revenue $ 101,887 $ 43,335 $ 12,963 $ 5,960$ - $ 164,145% of total revenue 62.1 % 26.4 % 7.9 % 3.6 % 0.0 % 100.0 % Net income (loss) $ 9,117 $ 4,648$ 319 $ 665 $ (1,511 ) $ 13,238Net income attributable to noncontrolling interests $ 2,931$ - $ - $ - $ - $ 2,931Net income (loss) attributable to WCR common shareholders $ 6,186 $ 4,648$ 319 $ 665 $ (1,511 ) $ 10,307Year Ended December 31, 2020 Revenue from external customers $ 85,209 $ 42,114 $ 14,890 $ 1,784$ - $ 143,997Fee and interest income $ - $ - $ - $ 5,959$ - $ 5,959Total revenue $ 85,209 $ 42,114 $ 14,890 $ 7,743$ - $ 149,956% of total revenue 56.8 % 28.1 % 9.9 % 5.2 % 0.0 % 100.0 % Net income (loss) $ 5,934 $ 4,947$ 154 $ 440 $ (1,073 ) $ 10,402Net income attributable to noncontrolling interests $ 2,035$ - $ - $ - $ - $ 2,035Net income (loss) attributable to WCR common shareholders $ 3,899 $ 4,947$ 154 $
$ (1,073 ) $ 8,367Cellular Retail
The following table provides selected financial information for the operating activity of our Cellular Retail segment:
Year Ended December 31, (in thousands) 2021 % of 2020 % of 2021 2020 Revenues Revenues Revenues:
Retail sales and associated fees
$ 79,220 $ 65,145
77.8 % 76.5 % Other revenue 22,667 20,064 22.2 % 23.5 % 101,887 85,209 100.0 % 100.0 % Cost of revenues 50,049 39,008 49.1 % 45.8 % Gross profit 51,838 46,201 50.9 % 54.2 %
Salaries, wages and benefits expense 24,372 22,072 23.9 % 25.9 % Occupancy expense 8,695 8,771 8.5 % 10.3 % Depreciation and amortization expense 1,981 2,014 2.0 % 2.4 % Other expense 5,539 5,936 5.5 % 7.0 % Provision for income taxes 2,134 1,474
2.1 % 1.6 % 42,721 40,267 42.0 % 47.2 % Net income
$ 9,117 $ 5,9348.9 % 7.0 % Segment contribution to net income before noncontrolling interests was $9.12 millionin 2021 compared to $5.93 millionin 2020. Year-over-year, revenues increased 19.6% (4.8% from stores added in 2021). We experienced a significant uptick in upgrade activity in 2021 (existing customers buying a new device), some of which is attributable to customers upgrading from devices still on the 3G network in anticipation of it being shut off by AT&T on February 22, 2022and some attributable to customers moving to the new 5G network. We were affected, primarily toward the latter part of 2021, by inflationary pressures and inventory shortages due to the global shortages of chips. The inflationary pressures have increased cost in most all expense categories. It is unknown if and to what extent inventory shortages will have on 2022. At the end of 2021, we were operating 229 locations. We intend to continue looking for acquisitions in 2022 and expect our store count to increase throughout the
year. 21 Direct to Consumer
The following table provides selected financial information for our Direct to Consumer operating business:
Year Ended December 31, (in thousands) 2021 % of 2020 % of 2021 2020 Revenues Revenues Revenues
$ 43,335 $ 42,114100.0 % 100.0 % Cost of revenues 19,616 19,442 45.3 % 46.2 % Gross profit 23,719 22,672 54.7 % 53.8 %
Salaries, wages and benefits expense 6,656 5,887 15.4 % 14.0 % Occupancy expense 574 565 1.3 % 1.3 % Depreciation and amortization expense 456 531 1.0 % 1.3 % Other expense 9,964 9,286 23.0 % 22.0 % Provision for income taxes 1,421 1,456
3.3 % 3.5 % 19,071 17,725 44.0 % 42.1 % Net income
$ 4,648 $ 4,94710.7 % 11.7 % The Direct to Consumer segment contributed $4.65 millionof net income in 2021 compared to $4.95 millionin 2020. Over the past several years, we have focused on upgrading management and product offerings as well as optimizing marketing spend. During both 2021 and 2020, the segment experienced an increase in product sales, benefitting from the industry-wide changes in consumer purchasing methods and increase in demand for products ordered online, and from increased consumer interest in gardening and seed-related products. Although revenues increased year-over-year, they were hampered in 2021 by supply shortages. This segment, similar to all others, experienced increased labor costs year over year, impacting both cost of revenues and salaries and wages expense. Manufacturing The following table provides select financial information for our Manufacturing segment operating activity: Year Ended December 31, (in thousands) 2021 % of 2020 % of 2021 2020 Revenues Revenues Revenues: Sales $ 12,963 $ 14,890100.0 % 100.0 % Other revenue - - - % - % 12,963 14,890 100.0 % 100.0 % Cost of revenues 9,528 11,235 73.5 % 75.5 % Gross profit 3,435 3,655 26.5 % 24.5 %
Salaries, wages and benefits expense 1,108 1,139 8.5 % 7.6 % Occupancy expense 152 103 1.2 % 0.7 % Depreciation and amortization expense 5 11
- % 0.1 % Interest expense 65 159 0.5 % 1.1 % Other expense 1,666 1,995 12.9 % 13.4 %
Provision for income taxes 120 94
0.9 % 0.6 % 3,116 3,501 24.0 % 23.5 % Net income
$ 319 $ 1542.5 % 1.0 %
Our Manufacturing segment, acquired in
22 Consumer Finance
The following table provides selected financial information for the operating activity of our Consumer Finance segment:
Year Ended December 31, (in thousands) 2021 % of 2020 % of 2021 2020 Revenues Revenues Revenues: Retail sales
$ 1,477 $ 1,43824.8 % 18.6 % Financing fees and interest 4,167 5,959 69.9 % 76.9 % Other revenue 316 347 5.3 % 4.5 % 5,960 7,744 100.0 % 100.0 % Cost of revenues 751 1,114 12.6 % 14.4 % Gross profit 5,209 6,630 87.4 % 85.6 %
Salaries, wages and benefits expense 2,211 3,076 37.1 % 39.7 % Occupancy expense 748 1,148 12.5 % 14.8 % Depreciation and amortization expense 10 20 0.2 % 0.3 % Other expense 1,336 1,784 22.4 % 23.0 % Provision for income taxes 239 162
4.0 % 2.1 % 4,544 6,190 76.2 % 79.9 % Net income
$ 665 $ 44011.2 % 5.7 %
Consumer Finance segment net income increased to
$0.65 millionin 2021 from $0.44 millionin 2020 on declining revenues year-over year. The increase in net income and decrease in cost of revenues both benefited from recoveries of bad debt, or reduction in net bad debt included in cost of revenues. Collections in 2021 of bad debts previously expensed on closed locations exceeded expectations and will not be a recurring item in 2022. The decrease in revenues was due the closure of our payday business in Nebraskain November 2020due to state regulatory changes and from the sale, also in November 2020, of five of our six payday store operations in Iowa. Excluding one payday location that benefited from the Nebraskalaw change, all the other payday stores combined had a 4% reduction in loan originations year-over-year, a continuing trend in the industry. Corporate Net cost of our Corporate segment was ($1.51) millionfor the year ended December 31, 2021compared to ($1.07) millionfor the year ended December 31, 2020, the increased net cost due primarily to the decrease in investment income and one-time transaction expenses of $0.2 millionassociated with the Swisher transaction that closed in January 2021.
Consolidated tax expense
Income tax expense was
$3.47 millionfor 2021 compared to $2.88 millionfor 2020 for an effective rate of 20.8% and 21.7%, respectively. Income attributable to our noncontrolling interest flows through to the noncontrolling interest and is not taxable at the Company level. Excluding the non-taxable flow-through income to the noncontrolling interest, the effective rate for 2021 and 2020 was 25.2% and 25.6%, respectively. The effective rate decrease year-over-year is due to a reduction in nondeductible transaction expense year-over-year.
CASH AND CAPITAL RESOURCES
Summary cash flow data is as follows:
Year Ended December 31, 2021 2020 Cash flows provided by (used in): Operating activities
$ 17,380,816 $ 15,493,544Investing activities (2,788,686 ) (1,659,306 ) Financing activities (4,081,838 ) (8,490,426 ) Net increase in cash 10,510,292 5,343,812
Cash and cash equivalents, beginning of year 32,504,803 27,160,991 Cash and cash equivalents, end of year
December 31, 2021and December 31, 2020, we had cash and cash equivalents of $43.0 millionand $32.5 million, respectively. We believe that our available cash, combined with expected cash flows from operations and our held-to-maturity investments, will be sufficient to fund our liquidity and capital expenditure requirements through March of 2023. Our expected short-term uses of available cash include the funding of operating activities, scheduled repayments of debt and the payment of dividends. 23 In addition to cash and cash equivalents, as of December 31, 2021, we had $12.34 millionin US Treasuries and $2.04 millioninvested in certificates of deposit (limited to approximately $250,000per financial institution per entity).
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 Americaapplied on a consistent basis. The preparation of these consolidated 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 consolidated 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 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:
Receivables and provision for loss
Included in loans receivable is
$1.65 millionof unpaid principal, interest and fee balances of payday loans that have not reached their maturity date. Payday loans by their nature are high risk loans and require significant assumptions when determining a reserve for credit losses, including the default rate and the amount of subsequent collections on those defaulted loans. These two factors have remained relatively stable over the past two years and we therefore use historical rates to assist in determining anticipated future credit losses. In addition, we must consider future economic factors. Any significant downturn in the economy which is greater than our assumptions will increase the default rates and reduce subsequent collections on those defaulted loans. As of December 31, 2021, we have estimated credit losses from the $1.65 millionloans receivable balance to be approximately $42,000. Inventory Direct to Consumer Inventory is valued at the lower of cost or market using the weighted-average method of determining cost. The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. Two subcategories of inventory, live plants and restoration products, are most susceptible to write-downs and the application of key assumptions. Live plants have a limited life and any unsold product is disposed of at the end of a selling season. Should the demand for product not meet expectations, larger write-downs may occur during interim periods until written off. Management will assess the need for write-downs based on inventory levels, the length of time remaining in the live-goods season, and current and expected demand which could be impacted by many current market and economic factors as discussed in the
Risk Factors section. We have a significant number of home hardware products in this segment's inventory. Due to the uniqueness of many of these items, the sales volume of an individual SKU may be low. Management evaluates the value of items in inventory to estimate an allowance against carrying costs. This evaluation includes a look-back of sales volume of the respective SKU over the prior twelve month period to estimate the allowance. Manufacturing Inventory is valued at the lower of cost or market using the standard costing method of determining cost. The Company periodically evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. Key assumptions used are the future quantity to be sold, the future selling price of an item, and the cost of raw materials, primarily steel. Unknown economic factors or supply factors could materially affect these assumptions. A sharp downturn in the economy would negatively impact the future quantity sold. Dropping steel or other raw materials costs will negatively impact assumptions used for future sales prices and the underlying cost under the lower of cost or market methodology. Future sales prices and the underlying cost under the lower of cost or market methodology could also be negatively impacted by an unforeseen introduction of comparable products, possibly from foreign sources or otherwise, at a lower price point. 24 Fair Value Measurements The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three-level hierarchy is as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs based on the market or inputs corroborated by market data.
Level 3 – Unobservable inputs that are not supported by market date.
The Company believes its valuation methods are appropriate and consistent with other market participants, however the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
CAUTION REGARDING 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," "will" 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 are not undertaking any obligation to update any forward-looking statements even though our situation may change in the future.
Specific factors that could cause actual results to differ from our expectations or affect the value of the common shares include, but are not limited to:
? Supply chain disruptions and delays and associated loss of revenue;
? Inflationary pressures on cost of sales and fluctuations in commodity prices;
? Potential product liability risks related to design, manufacture, sale
and use of our Swisher products;
? Changes in local, state or federal laws and regulations governing loans
practices or changes in the interpretation of such laws and regulations;
? Litigation and Regulatory Actions Affecting the Consumer Credit Industry
or us, including in certain key states;
? Our need for additional funding;
? Changes to our authorization to be a reseller for
? Changes in the remuneration of authorized cricket dealers;
? Lack of advertising support and sales promotions from
the markets in which we operate;
? Our dependence on information systems;
? Direct and indirect effects of COVID-19 on our employees, our customers, our supply
chain, economy and financial markets; and
? Unpredictability or uncertainty in financing and mergers and acquisitions
markets, which could impair our ability to grow our business through
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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