WESTERN CAPITAL RESOURCES, INC. - Quarter Report: 2018 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2018

☐    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)

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☑   No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, 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 ☑   No  ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐  No ☑

APPLICABLE ONLY TO CORPORATE ISSUERS

As of November 14, 2018, the registrant had outstanding 9,388,677 shares of common stock, $0.0001 par value per share.

Western Capital Resources, Inc.

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONTENTS

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 nine month periods ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

For further information, refer to the Condensed Consolidated Financial Statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2017. The condensed consolidated balance sheet at December 31, 2017, 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) is a parent company owning operating subsidiaries, with percentage owned shown parenthetically, as summarized below.

References in these financial statement notes to “Company” or “we” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies within our enterprise, such as” “PQH,” “JPPA,” “JPRE,” “WFL,” “EPI” or “AGI” are references only to those companies.

Basis of Consolidation

The consolidated financial statements include the accounts of the WCR, its wholly owned subsidiaries and other entities in which the Company owns a controlling financial interest. For financial interests in which the Company owns a controlling financial interest, the Company applies the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) 810, “Consolidation” applicable to reporting the equity and net income or loss attributable to noncontrolling interests. All significant intercompany balances and transactions of the Company have been eliminated in consolidation, with the exception of the presentation of dividends received from discontinued subsidiary operations in the Condensed Consolidated Statement of Cash Flows.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience 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 and accounts receivable allowance, carrying value and impairment of long-lived goodwill and intangible assets, inventory valuation and obsolescence, estimated useful lives of property and equipment, gift certificate and merchandise credits liability and deferred taxes and tax uncertainties.

Reclassifications

Certain Statements of Operations and Statements of Cash Flows reclassifications have been made in the presentation of our prior financial statements and accompanying notes to conform to the presentation as of and for the three and nine months ended September 30, 2018.

In accordance with ASC 205-20-45-6, interest on debt required to be paid as a result of our Franchise segment disposal transaction has been allocated to discontinued operations and, in accordance with ASC 205-20-45-9, general corporate overhead has not been allocated to discontinued operations. These re-allocations and related income tax have been made in the presentation of our prior financial statements and accompanying notes.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that supersedes nearly all existing revenue recognition guidance under US GAAP. This standard is effective for annual and interim periods beginning after December 15, 2017. The Company has adopted this standard as of January 1, 2018 applying it on a retrospective basis as of the date adopted and determined it had no impact on our financial condition, results of operations and consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), related to recognition of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that annual period, with early adoption permitted and to be applied using a modified retrospective approach. The Company is currently evaluating the impact the ASU will have on our financial condition, results of operations and consolidated financial statements and expects its adoption to have a material impact on our financial condition due to a material addition of operating lease assets and liabilities in accordance with the ASU.

No other new accounting pronouncements issued or effective during the fiscal year have had or are expected to have a material impact on the consolidated financial statements.

2.     Risks Inherent in the Operating Environment –

Regulatory

The Company’s Consumer Finance segment activities are highly regulated under numerous federal, state, and local laws, regulations and rules, which are subject to change. New laws, regulations or rules could be enacted or issued, interpretations of existing laws, regulations or rules may change and enforcement action by regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities of the kind conducted by the Company. After several years of research, debate, and public hearings, in October 2017 the U.S. Consumer Financial Protection Bureau (CFPB) issued new rules for payday lending. The proposed rules, scheduled to go into effect in August 2019, would impose significant restrictions on the industry, and it is expected that a large number of lenders would be forced to close their stores. The CFPB’s studies projected a reduction in the number of lenders by 50%, while industry studies forecast a much higher attrition rate. At this time it is uncertain whether the rule will be implemented as announced, rewritten with more favorable terms for the industry, or thrown out altogether. If the rule is implemented as written, it could have a significant and negative impact on business conducted within our Consumer Finance segment.

The above rule or any other adverse change in present federal, state, or local laws or regulations that govern or otherwise affect lending could result in the Consumer Finance segment’s curtailment or cessation of operations in certain or all jurisdictions or locations. Furthermore, any failure to comply with any applicable federal, state or local laws or regulations could result in fines, litigation, closure of one or more store locations or negative publicity. Any such change or failure would have a corresponding impact on the Company’s and segment’s results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in operating income through increased legal expenditures or fines, and could also negatively affect the Company’s general business prospects due to lost or decreased operating income or if negative publicity affects its ability to obtain additional financing as needed.

In addition, the passage of federal, state or local laws and regulations or changes in interpretations of them could, at any point, essentially prohibit the Consumer Finance segment from conducting its lending business in its current form. Any such legal or regulatory change would have a material and adverse effect on the Company, its operating results, financial condition and prospects, and perhaps even the viability of the Consumer Finance segment.

3.     Cash Equivalents and Investments –

The following table shows the Company’s cash equivalents and held-to-maturity investments, by significant investment category, recorded as cash equivalents or short- and long-term investments:

As of September 30, 2018, held to maturity securities consisted of the following:

4.     Loans Receivable –

The Consumer Finance segment’s outstanding loans receivable aging is as follows:

5.     Loans Receivable Allowance –

A rollforward of the Consumer Finance segment’s loans receivable allowance is as follows:

6.     Accounts Receivable –

A breakdown of accounts receivables by segment is as follows:

7.     Inventory –

Finished goods inventory, net of allowance, by segment consists of the following:

8.     Notes Payable – Long Term –

The Company is party to a Credit Agreement with a financial institution entered into on April 22, 2016 and last amended on April 26, 2018. The Credit Agreement provides the Company with a revolving line of credit facility in an aggregate amount up to $3,000,000, having a maturity date of April 21, 2020 and an acquisition loan facility in an aggregate amount of up to $9,000,000, having a maturity date of April 21, 2020. The revolver and the acquisition loan facility bear interest at a floating per annum rate equal to one-month LIBOR plus 3.50%, adjusted on a monthly basis. Funds advanced under the acquisition loan facility mature five years from the date of advance. At September 30, 2018, the entire $12,000,000 of credit was available under the credit facilities. See Note 14 for additional terms, conditions and amendments related to the Credit Agreement.

9.     Income Taxes –

The provision for income taxes for continuing operations is 30.8% and 34.3% of income (loss) before the provision for income taxes for the nine month period ended September 30, 2018 and 2017, respectively. The significant difference in rate is the result of the 2018 net income attributable to noncontrolling interests not being subjected to income tax at the corporate level. Rather the “passthrough” taxable income is taxed to the noncontrolling interests at an individual level.

10.   Cash Dividends –

Our Board of Directors declared the following dividends payable in 2018:

11.   Other Operating Expense –

A breakout of other expense is as follows:

12.   Discontinued Operations –

As more fully disclosed in Note 19 of the Notes to Consolidated Financial Statements for the year ended December 31, 2017, on October 3, 2017 the Company closed on the sale of its franchise segment.

In accordance with the provisions of ASC 205-20, the Company has not included the results of operations of the Franchise segment in the results from continuing operations. The results of operations for this business have been reflected as discontinued operations in the unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2017, and consist of the following:

In accordance with the provisions of ASC 205-20, the Company has separately reported the cash flow activity of the discontinued operations of the Franchise segment in the Consolidated Statements of Cash Flows. The cash flow activities from discontinued operations have been reflected as discontinued operations in the Consolidated Statements of Cash Flows for the nine month period ended September 30, 2017, and consisted of the following:

13.   Segment Information –

Segment information related to the three and nine month periods ended September 30, 2018 and 2017 for continuing operations is presented below:

14.   Commitments and Contingencies –

Employment Agreements

Pursuant to the Company’s numerous employment agreements, bonuses for continuing operation of approximately $79,000 and $292,000 were accrued for the three and nine month periods ended September 30, 2018, respectively.

Credit Facility

The Company is party to a Credit Agreement with a financial institution. Certain Company subsidiaries are guarantors of the borrowings and obligations under the Credit Agreement. All borrowings under the Credit Agreement are secured by substantially all assets of WCR and the guarantor subsidiaries.

The Credit Agreement requires WCR to meet certain financial tests. On April 26, 2018 the Company entered into a Fourth Loan Modification Agreement related to the Credit Agreement with a financial institution, pursuant to which, among other things, the maturity date of the Credit Agreement was extended to April 21, 2020 and the financial covenants were modified by (1) removing the consolidated leverage ratio and consolidated fixed charge coverage ratio covenants and (2) adding a minimum liquidity covenant. Subject to certain exceptions, the Credit Agreement contains covenants limiting the Company’s ability to (or to permit the guarantor subsidiaries to) merge or consolidate with, or engage in a sale of substantially all assets to, any party, but WCR or any guarantor subsidiary generally may nonetheless merge with another party if (i) WCR or guarantor subsidiary is the entity surviving such merger, and (ii) immediately after giving effect to such merger, no default shall have occurred and be continuing under the Credit Agreement. Subject to certain exceptions, the Credit Agreement also contains covenants limiting WCR’s ability to (or to permit the guarantor subsidiaries to) create liens on assets, incur additional indebtedness, make certain types of investments, and pay dividends or make certain other types of restricted payments, but WCR may nonetheless pay dividends to its shareholders if (a) there are no outstanding loans or unpaid interest under the revolving credit facility, and (b) no default shall have occurred and be continuing under the Credit Agreement. Some covenant waivers were granted by the financial institution during the nine month period ended September 30, 2018.

Assigned Leases

The Company’s Cellular Retail segment has transferred to other dealers the operations of 35 locations where we are a party to non-cancelable operating leases and where a release has not been obtained from the lessor. Minimum lease payments under these leases are approximately $2,328,000 as of September 30, 2018.  

15.   Subsequent Events –

Release of Escrow Funds

In October 2018, we received $3,295,414, the scheduled release of 50% of the funds held in escrow relating to the 2017 sale of our Franchise segment, together with interest earned.

Dividend Declared

Our Board of Directors declared the following dividend:

We evaluated all events or transactions that occurred after September 30, 2018 up through the date we issued these financial statements. During this period we did not have any material subsequent events that impacted our financial statements.

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 embodied in our forward-looking statements, or that might affect the value of the common stock, include but are not limited to:

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, 2017.

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 is 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 or Western Capital), 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:

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 subsidiaries, one of which is 70% owned. Our “Direct to Consumer” segment consists of a wholly owned 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 “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.”

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.

Loan Loss Allowance

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. All returned items are charged-off after 180 days, as collections after that date have not been significant. Loans are carried at cost plus accrued interest or fees through maturity date, less payments made and a loans receivable allowance.

The Company does not specifically reserve for any individual payday, installment or title 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 (1) the amount of loan principal, interest and fee outstanding, (2) historical charge offs from loans that originated during the last 24 months, (3) current and expected collection patterns and (4) current economic trends. The Company utilizes a software program to assist with the tracking of its historical portfolio statistics. A loan loss allowance is maintained for anticipated losses for payday and installment loans based primarily on our historical percentages by loan type of net charge offs, applied against the applicable 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. Loan losses or charge-offs of pawn or title loans are not recorded because the value of the collateral exceeds the loan amount. See Note 5 to our condensed consolidated financial statements included in this report for a rollforward of our loans receivable allowance.

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.

Goodwill

Goodwill represents the excess of acquisition cost over the fair value of identifiable finite lived net assets acquired and is not amortized. Goodwill is tested for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate potential impairment. We test for goodwill impairment at the reporting unit level, which aligns with the Company’s segments. We perform a qualitative assessment to determine if a quantitative impairment test is necessary. If quantitative testing is necessary based on a qualitative assessment, we apply a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any.

Results of Operations – Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Net loss from continuing operations attributable to our common shareholders was ($1.17) million, or ($0.12) per share (basic and diluted), for the three months ended September 30, 2018, compared to ($0.73) million, or ($0.08) per share (basic and diluted), for the three months ended September 30, 2017.

We expect segment operating results and earnings per share to change throughout 2018 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, retraction in the Cellular Retail segment, and potential mergers and acquisitions activity.

Following is a discussion of operating results by segment.

The following table provides revenues and net income attributable to WCR common shareholders by continuing operating segment for the three months ended September 30, 2018 and September 30, 2017 (in thousands):

Cellular Retail

A summary table of the number of Cricket cellular retail stores we operated during the three months ended September 30, 2018 and 2017 follows:

The Cellular Retail segment achieved substantial growth in location count in 2016 and 2017 as a result of our expansion initiative. While some newly launched locations are performing well, others have been slow to ramp up. Due to the underperformance of some expansion stores as well as some mature stores, we have accelerated store closures and disposals, reducing the number of retail stores operated from 225 at the beginning of the quarter to 206 at quarter end. Because the growth initiative included leased properties with three to five year terms, there are additional costs incurred to terminate leases or sublet leased properties of closed locations. The nonrecurring expense of store closings, which includes costs for lease termination agreements executed within the quarter, but not store operating losses, amounted to approximately $742,000 for the quarter.

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 three months ended September 30, 2018, the Direct to Consumer segment had net loss of ($0.98) million compared to net loss of ($0.46) million for the comparable period in 2017, while revenues for the three month period ended September 30, 2018 were $4.92 million compared to $4.98 million for the comparable period in 2017. A 1.26% decrease in revenues, increases in product costs, shipping costs, advertising and payroll and a reduced tax benefit from the lower federal corporate income tax rate contributed to the increase in loss period over period.

Consumer Finance

A summary table of the number of consumer finance locations we operated during the three month periods ended September 30, 2018 and 2017 follows:

Our Consumer Finance segment revenues decreased $0.11 million, or 4.0%, primarily from a decrease in pawn sales, for the three month period ended September 30, 2018 compared to the three month period ended September 30, 2017. Our net income for the three month period ended September 30, 2018 decreased 13.8% over the three month period ended September 30, 2017 largely due to the lower pawn sales and an increase in net bad debt, offset by a reduced federal corporate income tax expense.

Corporate

Net expenses related to our Corporate segment were $0.15 million for the three month period ended September 30, 2018 compared to $0.30 million for the three month period ended September 30, 2017. The period over period decrease is primarily due to investment income of $0.15 million in the current period only.

Results of Operations – Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Net income (loss) for continuing operations attributable to our common shareholders was $(1.43) million, or ($0.15) per share (basic and diluted), for the nine months ended September 30, 2018, compared to $1.63 million, or $0.17 per share (basic and diluted), for the nine months ended September 30, 2017.

We expect segment operating results and earnings per share to change throughout 2018 due, at least in part, to the seasonality of the Direct to Consumer and Cellular Retail segments, retraction in the Cellular Retail segment, and potential mergers and acquisitions activity.

Following is a discussion of operating results by segment.

The following table provides revenues and net income attributable to WCR common shareholders by continuing operating segment for the nine month period ended September 30, 2018 and September 30, 2017 (in thousands):

Cellular Retail

A summary table of the number of Cricket cellular retail stores we operated during the nine months ended September 30, 2018 and 2017 follows:

As previously noted, the Cellular Retail segment achieved substantial growth in location count in 2016 and 2017. Also as noted in the quarterly discussion, due to the underperformance of some of the expansion locations as well as some mature stores, we have accelerated store closures and disposals. Year to date, we have reduced the number of retail stores operated from 278 at the beginning of the year to 206 at the end of September 2018. These closures have temporarily increased costs, but once the process is completed over the next three to six months, we expect to realize the benefits of the closings. The nonrecurring expense of store closings, which includes costs for lease termination agreements executed within the quarter, but not including store operating losses, amounted to approximately $1.51 million year to date through September 30, 2018.

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 months ended September 30, 2018, the Direct to Consumer segment had net loss of ($0.13) million compared to net income of $1.51 million for the comparable period in 2017. Revenues for the nine month period ended September 30, 2018 were $27.31 million compared to $29.01 million for the comparable period in 2017. In 2018, we experienced delays in sales due to weather conditions and shipping zones not opening up as early as 2017 and sales volume never fully recovered from the delays. The segment is experiencing a decline in shipping fees passed on to customers, consistent with industry trends where there is pressure to offer no or reduced shipping charges to customers, and an increase is shipping costs. Also, over the same period of the prior year, advertising and marketing costs have increased $0.7 million. By the end of March 2018 we had substantially completed the relocation of the Van Dyke’s Restorers brand distribution from the outsourced 3PL to in-house, which added approximately $225,000 of nonrecurring expense in 2018.

Consumer Finance

A summary table of the number of consumer finance locations we operated during the nine month periods ended September 30, 2018 and 2017 follows:

Our Consumer Finance segment revenues decreased $0.26 million, or 3.2%, for the nine month period ended September 30, 2018 compared to the nine month period ended September 30, 2017. Our net income for the nine month period ended September 30, 2018 increased 6.5% over the nine month period ended September 30, 2017 largely due to reduction of ongoing operating expenses and income tax expense, which was partially offset by reduced gross profit on lower sales.

Corporate

Net costs related to our Corporate segment were $0.58 million for the nine month period ended September 30, 2018 compared to $0.74 million for the nine month period ended September 30, 2017. Period over period, there was an increase in interest expense allocated to the Corporate segment, a reduction in the provision for income tax benefit due to the change in the federal corporate income tax rate and $0.35 million interest and dividends income, net of income taxes, in the current period only. Because we have no outstanding balances on the parent level credit facility and no operating segment is receiving direct benefit from it, current period unused line fees and amortization of loan costs have been treated as a corporate overhead expense.

Consolidated Income Tax Expense

Provision for income tax benefit for continuing operations for the nine month period ended September 30, 2018 was ($0.39) million compared to income tax expense of $0.91 million for the nine month period ended September 30, 2017 for an effective rate of 30.8% and 34.3%, respectively. The difference in rate is the result of the 2018 net income attributable to noncontrolling interests not being subjected to income tax at the corporate level, rather the “passthrough” taxable income is taxed to the noncontrolling interests at an individual level, combined with the impact of the lower federal corporate income tax rate.

Liquidity and Capital Resources

Summary cash flow data is as follows:

Included in the cash flows used by operating activities for the nine month period ended September 30, 2018 are income tax payments of $19.15 million. The liability associated with these payments relate primarily to our 2017 sale of our Franchise segment.

At September 30, 2018, we had cash and cash equivalents of $9.54 million and highly liquid investments of $25.96 million compared to cash and cash equivalents of $8.63 million on September 30, 2017. We believe that our available cash and cash equivalents, 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 September of 2019. We also have a $3,000,000 revolving credit facility and a $9,000,000 acquisition credit facility available to us. Our expected short-term uses of available cash include the funding of operating activities and the payment of dividends.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2018.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 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.

We utilize the Committee of Sponsoring Organization’s Internal Control – Integrated Framework, 2013 version, for the design, implementation and assessment of the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

As of September 30, 2018, our Chief Executive Officer and Chief Financial Officer carried out an assessment 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 this assessment, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.