WESTERN CAPITAL RESOURCES, INC. Management report and analysis of the financial position and operating results (Form 10-Q)

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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 "Risk Factors" and "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 could affect the value of common shares, include, but are not limited to:

? Supply chain disruptions and delays and revenue loss or increase

costs;

? Potential risks of product liability related to design, manufacture, sale

and the use of our Swisher products;

? Changes in local, state or federal laws and regulations governing loans

practices or changes in the interpretation of these laws and regulations;

? Litigation and regulatory actions directed to the consumer credit sector

or us, particularly in certain key states;

? Our need for additional financing;

? Changes to our authorization to be a reseller for Wireless cricket;

? Changes to the remuneration of authorized cricket dealers;

? Lack of advertising support and sales promotions of Wireless cricket in the

the markets we operate;

? 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 affect our ability to grow our business by

   acquisitions.



Other factors that could cause actual results to differ from those implied by
the forward-looking statements in this report are more fully described in the
"Risk Factors" section and of this report.



Industry data and other statistical information used in this report are based on
independent publications, government publications, reports by market research
firms or other published independent sources. Some data are also based on our
good faith estimates, derived from our review of internal surveys and the
independent sources listed above. Although we believe these sources are
reliable, we have not independently verified the information.



OVERVIEW


Western Capital Resources, Inc. ("WCR"), a Delaware corporation originally
incorporated in Minnesota in 2001 and reincorporated in Delaware in 2016, is a
holding company having a controlling interest in subsidiaries operating in the
following industries and operating segments:



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Our Cellular Retail segment is comprised of an authorized Cricket Wireless
dealer and involves the retail sale of cellular phones and accessories to
consumers through our wholly-owned subsidiary PQH Wireless, Inc. and its
controlled but less than 100% owned subsidiaries. Our Cellular Retail segment
completed a $4.7 million acquisition of 25 Cricket Wireless retail stores on
September 9, 2021, which are wholly owned. Our Direct to Consumer segment
consists of a wholly-owned branded online and direct marketing distribution
retailer of live plants, seeds, holiday gifts and garden accessories selling its
products under Park Seed, Jackson & Perkins and Wayside Gardens brand names and
home improvement and restoration products operating as Van Dyke's Restorers as
well as a wholesaler under the Park Wholesale brand. Our manufacturing segment
consists of a wholly-owned manufacturer of lawn and garden power equipment and
emergency safety shelters selling products primarily under the Swisher brand
name and provides turn-key manufacturing services to third parties. Our Consumer
Finance segment consists of retail financial services conducted through our
wholly-owned subsidiaries Wyoming Financial Lenders, Inc. and Express Pawn, Inc.
Throughout this report, we collectively refer to WCR and its consolidated
subsidiaries as "we," the "Company," and "us."



We expect segment operating results and earnings per share to change throughout
2021 and beyond due, at least in part, to the seasonality of the various
segments, recently completed and potential merger and acquisition activity, the
unknown impact of COVID-19, the effects of inflationary pressures, as well as
supply and labor shortages. We expect supply and labor shortages to be further
aggravated, possibly significantly, due to the COVID-19 Vaccination and Testing:
Emergency Temporary Standard (ETS) issued by the Occupational Safety and Health
Administration (OSHA) which was published on November 4, 2021. The rule was
effective November 5, 2021 and contains various compliance dates for specific
provisions.



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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
condensed 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 condensed 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 2, "Summary of
Significant Accounting Policies," of the notes to our condensed consolidated
financial statements included in this report together with our significant
accounting policies discussed in Note 1, "Basis of Presentation, Nature of
Business and Summary of Significant Accounting Policies," of the notes to our
December 31, 2020 consolidated financial statements included in our Form 10-K
for the year ended December 31, 2020. 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.



Receivables and allowance for credit losses


Consumer Finance -



Included in loans receivable are unpaid principal, interest and fee balances of
payday and pawn 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. Management estimates the reserve for credit losses
which is highly subjective due to many economic variables.



Our loans receivable balances as of September 30, 2021, December 31, 2020 and
September 30, 2020 were $2.26 million, $2.26 million and $2.91 million,
respectively, while the allowance for credit losses for the corresponding dates
was $0.28 million, $0.32, and $0.31 million, respectively. In the first nine
months of 2021 we experienced negative credit losses on loans receivable, where
recoveries exceeded new reserves in large part due to a reduction in new loans
as a result of the closing of all our locations in Nebraska due to a change in
law and divesting of locations in Iowa in the fourth quarter of 2020. Management
does not expect this event to continue as contributing positive influences
dissipate.



Valuation of long-lived and intangible assets



We assess the possibility of impairment of long-lived assets, other than
goodwill, whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors that could trigger an impairment review
include significant underperformance relative to expected historical or
projected future cash flows, significant changes in the manner of use of
acquired assets or the strategy for the overall business, and significant
negative industry events or trends. Management has not identified events or
trends indicating that the carrying value may not be recoverable.



However, the Company has many operating lease agreements across our operating
segments which are accounted for as operating leases and included in noncurrent
assets as operating lease right-of-use ("ROU") assets. Due to the significant
assumptions and judgements required in accounting for leases and impairment of
ROU assets, the judgment and estimates made could have a significant effect on
the amount of assets and results of operations.



Operating Results – Three Months Ended September 30, 2021 Compared to the three months ended September 30, 2020

Net income attributable to our common shareholders for the current quarter was
$0.99 million, or $0.11 per share (basic and diluted) for the quarter ended
September 30, 2021, compared to $1.16 million, or $0.12 per share (basic and
diluted) for the quarter ended September 30, 2020.



Here is a discussion of operating results by segment.



The following table provides revenues and net income attributable to WCR common
shareholders for the quarters ended September 30, 2021 and September 30, 2020
(in thousands).



                           Cellular        Direct to                           Consumer
                            Retail         Consumer        Manufacturing        Finance        Corporate        Total
Three Months Ended
September 30, 2021
Revenue                   $    25,282     $     5,951     $         3,638     $     1,535     $         -     $  36,406
% of total revenue               69.5 %          16.3 %              10.0 %           4.2 %             - %         100 %
Net income (loss)         $     2,331     $      (477 )   $            69     $       205     $      (385 )   $   1,743
Net income attributable
to noncontrolling
interests                 $       750     $         -     $             -     $         -     $         -     $     750
Net income (loss)
attributable to WCR
common shareholders       $     1,581     $      (477 )   $            69     $       205     $      (385 )   $     993

Three Months Ended
September 30, 2020
Revenue                   $    22,589     $     5,901     $         4,433     $     1,798     $         -     $  34,721
% of total revenue               65.0 %          17.0 %              12.8 %           5.2 %             - %         100 %
Net income (loss)         $     1,717     $       (60 )   $           161     $       112     $      (192 )   $   1,738
Net income attributable
to noncontrolling
interests                 $       576     $         -     $             -     $         -     $         -     $     576
Net income (loss)
attributable to WCR
common shareholders       $     1,141     $       (60 )   $           161     $       112     $      (192 )   $   1,162




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Cellular Retail


A summary table of the number of Wireless cricket retail stores we operated during the three months ended September 30, 2021 and September 30, 2020 follows:



                     2021      2020
Beginning              205       205
Acquired/ Launched      29         1
Closed/Divested         (3 )       -
Ending                 231       206




As previously noted in this report, on September 9, 2021 we completed a $4.7
million acquisition of 25 Cricket Wireless retail stores. All but four of these
stores are located in markets that we currently operate in, allowing existing
management to efficiently integrate the acquired locations into their
portfolios. Three of the outlier stores were added to an expanded existing
market, while one, in Juneau, Alaska is our first presence in Alaska.



Period over period, net income attributable to shareholders increased from $1.14
million in the comparable prior year quarter to $1.58 million in the current
quarter. Many factors have contributed to this period over period increase. Most
notably is the 11.9% increase in sales period over period, with only 1.9%
attributable to the recently acquired stores. Inflationary pressures have
negatively impacted many expenses, most notably payroll and related payroll
expenses which have increased 12.7% year over year.



Direct to Consumer



The Direct to Consumer segment has seasonal sources of revenue and historically
experiences a greater proportion of annual revenue and net income in the months
of March through May and December due to the seasonal products it sells. For the
current quarter, the Direct to Consumer segment had a net loss of ($0.48)
million compared to net loss of ($0.06) million for the comparable prior year
period. While revenues for the quarter ended September 30, 2021 were $5.95
million compared to $5.90 million for the comparable period in 2020, advertising
expense, the most significant factor contributing to the period over period
increase in segment net loss, was $0.38 million higher in the current period.



Manufacturing


Manufacturing segment sales decreased from $4.43 million in the comparable prior
period to $3.64 million in the current period. Management attributes this
decline to lost sales in the current period due to supply shortages as well as
increased pricing of its products due to inflationary pressure on raw material
costs. For the quarter ended September 30, 2021, the Manufacturing segment had
net income of $0.07 million compared to net income of $0.16 million for the
comparable prior year period.



Consumer Finance


A summary table of the number of consumer credit branches that we have operated during the closed quarters September 30, 2021 and September 30, 2020 follows:


                        2021      2020
  Beginning                22        39
  Acquired/Launched         -         -
  Closed/Divested           -        (1 )
  Ending                   22        38




Our Consumer Finance segment continues to decline as a result of state
regulatory changes and negative trends within the industry. Consumer Finance
segment revenues decreased $0.26 million, or 14.6%, for the quarter ended
September 30, 2021 compared to the quarter ended September 30, 2020 primarily
due to the closing of all our locations in Nebraska and divesting of locations
in Iowa in the fourth quarter of 2020. Segment net income did increase slightly
period over period primarily due to recoveries of bad debt from closed
locations.



Results of Operations – Nine Months Ended September 30, 2021 Compared to the nine months ended September 30, 2020



Net income attributable to our common shareholders was $9.30 million, or $1.01
per share (basic and diluted), for the nine month period ended September 30,
2021, compared to net income of $7.93 million, or $0.83 per share (basic and
diluted), for the nine month period ended September 30, 2020.



Here is a discussion of operating results by segment.


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The following table provides revenues and net income attributable to WCR common
shareholders for the nine month period ended September 30, 2021 and September
30, 2020 (in thousands).



                      Cellular        Direct to                           Consumer
                       Retail         Consumer        Manufacturing        Finance        Corporate        Total
Nine Months Ended
September 30, 2021
Revenue              $    76,087     $    33,731     $        10,363     $     4,320     $         -     $ 124,501
% of total revenue          61.1 %          27.1 %               8.3 %           3.5 %             - %         100 %
Net income (loss)    $     7,172     $     4,301     $           463     $ 
     494     $      (898 )   $  11,532
Net income
attributable to
noncontrolling
interests            $     2,235     $         -     $             -     $         -     $         -     $   2,235
Net income (loss)
attributable to
WCR common
shareholders         $     4,937     $     4,301     $           463     $       494     $      (898 )   $   9,297

Nine Months Ended
September 30, 2020
Revenue              $    63,609     $    33,841     $        12,696     $     6,008     $         -     $ 116,154
% of total revenue          54.8 %          29.1 %              10.9 %           5.2 %             - %         100 %
Net income (loss)    $     4,435     $     4,672     $           408     $ 
     478     $      (574 )   $   9,419
Net income
attributable to
noncontrolling
interests            $     1,492     $         -     $             -     $         -     $         -     $   1,492
Net income (loss)
attributable to
WCR common
shareholders         $     2,943     $     4,672     $           408     $ 
     478     $      (574 )   $   7,927




Cellular Retail



A summary table of the number of Cricket Wireless retail stores we operated
during the nine months ended September 30, 2021 and September 30, 2020 follows:



                        2021      2020
  Beginning               205       222
  Acquired/Launched        31        20
  Closed/Divested          (5 )     (36 )
  Ending                  231       206



Period over period, net income attributable to shareholders increased from $2.94
million in the nine month period ended September 30, 2020 to $4.94 million for
the nine month period ended September 30, 2021, while sales increased over the
comparable period from $63.61 million to $76.09 million. The prior year period
was hampered by COVID-19 while the latter benefited from, among other factors,
government stimulus programs which tend to benefit our industry. Also
contributing to the growth in sales and net income is Crickets Wireless' 2020
distribution optimization program which has resulted in fewer and, on average,
better performing stores combined with our strategic location disposals and
additions over the last several years resulting in a better mix of stores. The
nine month period ended September 30, 2020 also included a loss of $0.67 million
related to store closures.



Direct to Consumer



The Direct to Consumer segment has seasonal sources of revenue and historically
experiences a greater proportion of annual revenue and net income in the months
of March through May and December due to the seasonal products it sells. For the
nine month period ended September 30, 2021, the Direct to Consumer segment had
net income of $4.30 million compared to net income of $4.67 million for the
comparable nine month period prior year. Revenues for the nine month period
ended September 30, 2021 were $33.73 million compared to $33.84 million for the
comparable period in 2020. Similar to other online retailers, the Direct to
Consumer segment has experienced an increase in demand and on-line sales
activity due to COVID-19.



Manufacturing


Manufacturing segment sales decreased from $12.70 million in the comparable
prior period to $10.36 million in the current period. Management attributes this
decline to lost sales primarily in the second and third quarters of the current
period due to supply shortages as well as increased pricing of its products due
to inflationary pressure on raw material costs. For the nine month period ended
September 30, 2021, the Manufacturing segment had net income of $0.46 million
compared to net income of $0.41 million for the comparable prior year period.



Consumer Finance



A summary table of the number of consumer finance locations we operated during
the nine month periods ended September 30, 2021 and September 30, 2020 follows:



                     2021      2020
Beginning               22        39
Acquired/ Launched       -         -
Closed                   -        (1 )
Ending                  22        38




Our Consumer Finance segment revenues decreased $1.69 million, or 28.1% period
over period. As noted previously, our Consumer Finance segment continues to
decline as a result of state regulatory changes and negative trends within the
industry, mostly notably the closing of all our locations in Nebraska due to a
2020 law change. This segment and the industry continue to experience declines
in loan activity due to industry regulations and trends as well as COVID-19. In
the later part of March 2020, the segment began to experience a larger than
normal decline in lending activity due to COVID-19, which has carried over into
2021 and is just recently beginning to return back to pre-COVID-19 levels.

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Corporate


Net costs related to our Corporate segment were $0.90 million for the nine month
period ended September 30, 2021 compared to $0.57 million for the nine month
period ended September 30, 2020. The period over period increase in net costs is
primarily due to a decrease in income from investments and expensing of failed
mergers, acquisitions and financing costs of $0.19 million in the current
period.



Consolidated income tax expense



Provision for income tax expense for the nine months ended September 30, 2021
was $3.14 million compared to $2.61 million for the nine months ended September
30, 2020 for an effective rate of 21.4% and 21.7%, respectively. The effective
tax rate is lower than the federal plus state statutory rates due to: (1)
noncontrolling interests' share of net income is not subject to income tax at
the consolidated group level; (2) year-over-year changes in the number and mix
of states in which our subsidiaries are subject to state income taxes due to
various nexus factors such as changes in multi-state activities by members of
the consolidated group and its impact on the application of respective state
income tax rules and regulations; and (3) changes in state income tax related
statutes and regulations. Excluding the noncontrolling interests' share of net
income, the effective tax rate for the comparable periods was 25.2% and 24.8%,
respectively. This increase period over period is due to increased state income
tax exposure resulting from a change in the number and mix of states in which
subsidiaries are subject to state income taxes due to various factors such as
changes in multistate activities by members of the consolidated group and its
impact on state taxation rules and regulations applicable to us.

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