Attached files

file filename
EX-32 - WESTERN CAPITAL RESOURCES, INC.v216042_ex32.htm
EX-21.1 - WESTERN CAPITAL RESOURCES, INC.v216042_ex21-1.htm
EX-31.1 - WESTERN CAPITAL RESOURCES, INC.v216042_ex31-1.htm
EX-31.2 - WESTERN CAPITAL RESOURCES, INC.v216042_ex31-2.htm
EX-10.16 - WESTERN CAPITAL RESOURCES, INC.v216042_ex10-16.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ___________________

Commission File Number 000-52015
 


WESTERN CAPITAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)

Minnesota
 
47-0848102
(State of incorporation)
 
(I.R.S. Employer Identification No.)
     
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

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on which Registered
None
 
N/A

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, no par value per share
 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ¨ Yes   x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   ¨ Yes   x No

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 the filing requirements for the past 90 days x Yes   ¨ 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   ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

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 definition of “accelerated filer,” large 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 Act). ¨ Yes   x No

The aggregate market value of the voting stock held by persons other than officers, directors and more than 5% shareholders of the registrant as of June 30, 2010 was approximately $63,000 based on the closing sales price of $0.02 per share as reported on the OTCBB.  As of March 1, 2011, there were 7,446,007 shares of our common stock, no par value per share, outstanding.

DOCUMENTS INCORPORATED IN PART BY REFERENCE

None.



 
 

 

Western Capital Resources, Inc.
Form 10-K

Table of Contents

   
Page
     
PART I
   
Item 1.
Business
1
Item 1A.
Risk Factors
14
Item 1B.
Unresolved Staff Comments
21
Item 2.
Properties
21
Item 3.
Legal Proceedings
21
Item 4.
Reserved
22
     
PART II
   
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters
23
Item 6.
Selected Financial Data
24
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
32
Item 8.
Financial Statements and Supplementary Data
32
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
33
Item 9A(T).
Controls and Procedures
33
Item 9B.
Other Information
34
     
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance
35
Item 11.
Executive Compensation
38
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
39
Item 13.
Certain Relationships and Related Transactions and Director Independence
41
Item 14.
Principal Accountant Fees and Services
41
     
PART IV
   
Item 15.
Exhibits and Financial Statement Schedules
43
 
Signatures
45

 
 

 
 
PART I
 
ITEM 1
BUSINESS

OVERVIEW

Western Capital Resources, Inc. (“Western Capital Resources,” “the Company,” “we” or “us”) is a Minnesota corporation that maintains two operating segments: one provides short-term consumer loans, commonly referred to as cash advance or “payday” loans, and the other operates Cricket retail cellular wireless stores.

Payday operations are conducted under our wholly owned subsidiary Wyoming Financial Lenders, Inc.  The Federal Trade Commission describes these loans as “small, short term high rate loans.”  Our loans generally are offered and made in exchange for fees that, if treated as interest, are at a rate extraordinarily higher than prime and are made to individuals who do not typically qualify for prime rate loans.  As a consequence, our loans may be considered a type of subprime loan.  At December 31, 2010, we operated 51 payday lending stores in nine states, including Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming.   Our provision of payday loans is typically heavily regulated by the various states in which we operate, and our payday lending business is extremely susceptible to the adverse effects of any changes in federal or state laws and regulations that may further restrict or flatly prohibit payday lending.

Through our payday segment, we also provide title and ancillary consumer financial products and services that are complementary to our payday lending business, such as check-cashing services, money transfers and money orders.  Our check-cashing services involve the cashing of checks for a fee; money-transfer services involve the transfer of money by wire for a fee; and our money-orders services involve the issuing of money orders for a fee.  We believe these services are complementary since customers typically come to our stores for financial reasons and to procure financial services (i.e., obtain a loan).  Once the loan has been obtained, a customer may, for instance, decide to wire a payment of money or obtain a money order to satisfy a debt or other obligation.  Our loans and other services are subject to state regulations (which vary from state to state), and federal and local regulations, where applicable.

Our second segment operates retail stores selling Cricket cellular phones and accessories.  We are a premier Cricket dealer.  Cricket phones are prepaid cellular phones that function for a period of time, without usage limitations and without any long-term contract or commitment required from the consumer, for a flat fee.  At December 31, 2010 we owned and operated 31 Cricket wireless retail stores in eight states, including Illinois, Indiana, Iowa, Kansas, Maryland, Missouri, Nebraska and Texas.    While there are state regulations that affect our provision of Cricket phone products and services, our Cricket phone business is not highly susceptible to the adverse effects of changes in federal or state laws and regulations.

For the fiscal year ended December 31, 2010, each of our major lines of business (i.e., payday lending, check-cashing services, sale of Cricket phone products, Cricket payment processing and other phone-related services) generated associated fees.  In 2010, we generated approximately:

 
·
$10.61 million in payday lending fees representing approximately 59.0% of our total revenues,
 
·
$4.09 million in phone and accessory sales representing approximately 22.8% of our total revenues,
 
·
$1.42 million in payment processing fees representing approximately 7.9% of our total revenues,
 
·
$.74 million in check-cashing fees representing approximately 4.1% of our total revenues, and
 
·
$1.12 million in other income and fees representing approximately 6.2% of our total revenues.

The table below summarizes our financial results and condition as of December 31, 2010 and 2009 (audited):

   
December 31, 2010
   
December 31, 2009
 
Revenues
  $ 17,978,447     $ 18,309,601  
Net loss to common shareholders
  $ 751,059     $ 1,328,318  
Current assets
  $ 7,958,443     $ 7,550,435  
Current liabilities
  $ 6,452,628     $ 4,804,391  
Total assets
  $ 20,770,882     $ 21,094,678  
Total liabilities
  $ 7,707,816     $ 7,192,553  
Shareholder equity
  $ 13,063,066     $ 13,902,125  

The above figures include an assumed preferred stock dividend relating to our Series A Convertible Preferred Stock in the amount of $2.1 million in 2010 and 2009.
 
 
1

 
 
PAYDAY LENDING BUSINESS

General Description

The short-term consumer loans we provide are commonly referred to as “cash advance loans” or “payday loans”.  Such loans are referred to as “payday loans” because they are typically made to borrowers who have no available cash and promise to repay the loan out of their next paycheck.  In some cases, these same types of loans are referred to as “deferred deposit advances” because the borrowers, instead of funding repayment of the loan out of a paycheck, promise to repay the loan with their next regular fixed-income payment, such as a social security check.

When we make cash advance or “payday” loans, we provide our customers with cash in exchange for a promissory note with a maturity of generally up to four weeks that is supported by that customer’s post-dated personal check for the aggregate amount of the loan, plus a fee.  During 2010, we offered payday loans typically ranging from $10 to $500, with the average loan amount being approximately $313.  Approximately 72.8% of our loan transactions are made for a period of up to four weeks and approximately 27.2% of our loan transactions involve loans whose initial maturity extends beyond four weeks.  To repay the loans, customers may pay with cash, in which case their personal check is returned to them, or allow their personal check to be presented to their bank for collection.

The Payday Loan Process

Customers seeking to obtain a payday loan must:

 
·
complete a loan application
 
·
maintain a personal checking account
 
·
have a suitable source of income
 
·
have a valid driver’s license or other form of picture ID
 
·
not otherwise be in default on a loan from us where available
 
·
enter into a standard loan agreement and promissory note with us, and
 
·
deliver their personal post-dated check.

Our standard loan application with customers provides that we will not cash their check until the due date of the associated loan.  A customer’s debt to us is satisfied by:  (i) payment of the full amount owed in cash (at which point we return the customer’s personal check); or (ii) deposit of the customer’s check with the bank.  Where permitted by state regulation, a customer may renew a loan after full payment in cash of the fee associated with the original loan.  When applicable, a customer renewing a loan signs a new promissory note and provides us with a new check.

We require that a customer have and maintain a personal checking account for a number of reasons.  First, we need to ascertain that the personal post-dated check we receive from that customer is written against a valid and existing checking account.  Second, we review recent bank statements from the checking account for proof that the customer’s statements to us, and the representations made to us in the related loan agreement, relating to their employment and level of income are accurate.  Third, we also review the recent bank statements for evidence of any returned checks.  If an applicant had multiple returned checks on their recent bank statements, we are unlikely to extend a loan to that person.

Ordinarily, we deem items such as a recent pay stub, or a bank statement evidencing periodic deposits, as sufficient proof of current employment.  We do not, however, independently verify that a borrowing customer is employed at the time of a loan.  Furthermore, we do not require or request any information relating to whether a borrowing customer’s employment is on a full-time or part-time, or hourly or salaried, basis; nor do we otherwise make any independent verification regarding these kinds of employment-related facts.  We make loans without proof of employment and without a recent bank statement only to repeat customers, who have not previously defaulted on loans we have made to them, in states that do not require those items as prerequisites for a loan.  An employment income source is determined to be “suitable” if it appears to be valid from our review of the bank statements a borrower provides us, and any pay stubs they may also offer as evidentiary support for their employment.  Generally, we do not advance a customer more than 25% of the monthly income that they appear to earn, based on our review of applicable documentation the customer provides to us.  We apply this limitation to all of our customers and in all circumstances, including attempts to roll over loans, except for repeat customers who have had repaid all of their prior loans on time.

We do not undertake any formal or informal credit check of borrowers, or any review of their credit history in connection with a proposed loan transaction.  When making a loan to a first-time customer, we obtain reports from a third-party vendor that summarizes recent credit requests, existing bad debt, and existing delinquencies.  These reports are provided by Teletrack.  If an applicant has a poor Teletrack report showing multiple recent credit requests or existing delinquencies, or more than one returned check on their recent bank statements, we are unlikely to extend a loan to that person.  We do not order Teletrack reports for repeat customers.
 
 
2

 

As part of each lending transaction, we enter into a standardized written contract with the borrowing customer.  The standardized contracts vary slightly based on differing state laws, but all of our standard contracts plainly state in simple terms the annual percentage rate (assuming the fees we charge are computed as interest) in compliance with Regulation Z, and the consequences of defaulting on the loan.  We retain copies of our written contracts at the stores where the transactions are processed and also provide copies to our customers.  Our standard documentation includes:

 
·
a promise to repay the loan and associated loan fee
 
·
an express right to prepay without penalty (but without return of any portion of the associated loan fee unless required by state law)
 
·
a statement that the borrower will pay an additional fee in the event that the post-dated check is returned for insufficient funds
 
·
the borrower’s right to rescind the transaction, without cost, at any time prior to the close of business on the business day immediately following the date of the loan, by returning the borrowed amount and acknowledgment that the loan was rescinded
 
·
customary representations and warranties
 
·
a dispute-resolution clause under which the parties agree to submit any claims or controversies to binding arbitration
 
·
a notice of financial privacy rights
 
·
an affirmative check-the-box representation about whether the borrower is a member of the U.S. military, and
 
·
an acknowledgment that the borrower has read and understands the borrowing agreement.

Upon completion of a loan application, the provision of proof of an existing bank account, current income, a valid driver’s license or other acceptable photo identification, and signed loan agreement and our acceptance of such agreement, the loan approval process is complete.  At that point, the customer signs a promissory note and provides us with a personal post-dated check for the principal loan amount plus a specified fee.  All documentation is reviewed and payday loans are approved at the store level only, barring extraordinary circumstances.  Nearly all of the loans we make are “payday loans” where the borrower provides us with a personal post-dated check.  All checks are drawn upon the borrower’s bank.  We do not accept third-party checks in connection with a payday lending transaction.  We make very few “deferred deposit advance” loans, and we estimate that fewer than one percent of our total loans during 2010 were loans of this type.  In part, this is because we require reasonable proof of current employment as a condition to obtaining a loan from us.

Beyond the steps described above, we do not make any independent determination of the ability of a potential borrower to repay the loans we make to them.  Instead, we rely on a borrower’s representations to us and proof regarding their employment and ownership of an active bank account, our review of their recent bank statement, and our general policy that limits loans to no more than 25% of a borrower’s monthly income.

In general, our lending process and standards are extraordinarily different from those used by banks.  To our knowledge, banks typically order and carefully review credit reports, engage in some level of analysis relating to the ability of a potential borrower to repay the loan, and will typically make independent verification of employment and earnings history through payroll deposits, phone calls, reviews of tax returns and other processes—all in an effort to minimize the risk of a loan default.  As a result, we generally experience a higher default rate on our personal loans than banks do on their personal loans.  At December 31, 2010, we had an aggregate of approximately:

 
·
$3.88 million in outstanding loan principal due to us
 
·
$.66 million in fees due to us
 
·
$1.37 million of late loans (customers’ repayment checks presented as NSF within the last 180 days
 
 
3

 

The Fees We Charge

The fee we charge for a payday loan 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.  We generally do not charge interest in connection with our payday loans, with short-term installment loans made in Colorado being the exception.  If, however, we calculate the loan fees we charge as an annual percentage rate of interest, such rate would range from 177% for a 31-day loan transacted in Kansas (on the low end) to approximately 574% for a 14-day loan in Wisconsin (on the high end), with the actual average loan amount and average actual loan fees we charge involving an imputed annual percentage rate of approximately 450% and 203% for a 14-day and 31-day loan, respectively.  The term of a loan significantly affects the imputed APR of the fees we charge for our loans.  For instance, when a $15 fee is charged for a two-week loan of $100, the resulting APR is 391%.  When the same fee on $100 is charged for a four-week loan, the resulting APR is 195%.  When our general range of loan fees is applied to our average 2010 loan amount of $313, the APR ranges from 391% to 574% for a two-week loan involving a $46.95 and $68.86 fee, respectively; and from 196% to 287% for a four-week loan involving a $46.95 and $68.86 fee, respectively.  Currently, we do not charge the maximum fee permitted in all of the states where we operate.  We do, however, charge a uniform fee for all transactions processed in any particular state that involve the same range of payday loan amounts and the same term.

The table below sets forth the uniform fees we charge and imputed APRs on non-interest payday loans in the states where we operated during 2010:

State
 
Fees
 
APR
(%) on a
14-day
$100
Loan
   
APR
(%) on a
28-day
$100
Loan
   
APR
(%) on a
14-day
$300
Loan
   
APR
(%) on a
28-day
$300
Loan
 
Colorado *
 
20% on first $300 advanced; $7.50 per $100 advanced (up to $500)
    521 %     261 %     521 %     261 %
Iowa
 
$15 on first $85 advanced; 11.1% on additional amounts (up to $445)
    435 %     217 %     338 %     169 %
Kansas
 
$15 per $100 advanced
    391 %     196 %     391 %     196 %
Montana **
 
 23% per $100 advanced if greater than 16 days or 13% per $100 advanced if 16 days or less (max. fee of $61.62)
    339 %     300 %     338 %     268 %
Nebraska
 
$17.50 per $100 advanced
    456 %     228 %     456 %     228 %
North Dakota
 
$20 per $100 advanced
    521 %     261 %     521 %     261 %
South Dakota
 
$20 per $100 advanced
    521 %     261 %     521 %     261 %
Utah
 
$20 per $100 advanced
    521 %     261 %     521 %     261 %
Wisconsin
 
$22 per $100 advanced
    574 %     287 %     574 %     287 %
Wyoming
 
30% per $100 advanced if loan is less than $150 or 20% per $100 advanced if loan is equal to or greater than $150 (subject to numerous maximums)
    782 %     391 %     521 %     261 %

*
Applied through August 11, 2010. See paragraph below for additional information relating to changes in Colorado law that require us to collect charges for payday lending transactions in the form of interest, effective as of August 12, 2010.
**
Applied through December 31, 2010.  We discontinued Montana payday services as of that date.

Of the nine states in which we presently operate, three states (South Dakota, Utah and Wisconsin) do not limit the fees we may charge, or the term (i.e., the length) of the loans we may offer, our customers.  In addition, two of these states (Utah and Wisconsin) do not limit the amount we may loan to customers in a payday lending transaction.  In South Dakota, we offer loans from $20 to $500, charge $20 for each whole or partial increment of $100 that we loan, and offer loan terms from one to 31 days.  Our 2010 revenue derived from South Dakota amounted to 6.23% of our total 2010 Payday division revenue.  In Utah, we offer loans from $10 to $1,200, charge $20 for each whole or partial increment of $100 that we loan, and offer loan terms from one to 31 days.  Our 2010 revenue derived from Utah amounted to 7.10% of our total 2010 Payday division revenue.  In Wisconsin, we offer loans from $20 to $500, charge $22 for each whole or partial increment of $100 that we loan, and offer loan terms from one to 36 days.  Our 2010 revenue derived from Wisconsin amounted to 6.17% of our total 2010 Payday division revenue.  In Colorado, effective August 12, 2010 we offer short-term installment loans from $100 to $500 payable in six equal monthly payments. Loan terms include a 45% annual interest rate, an origination fee of 20% on loan amounts up to $300 and 7.5% on loan amounts thereafter and a monthly maintenance fee.  Our 2010 revenue derived from Colorado amounted to 1.42% of our total 2010 Payday division revenue.

Many states have laws limiting the amount of fees that may be charged in connection with any lending transaction (including payday lending transactions) when calculated as an annual percentage rate or the payday lending is expressly prohibited.  These limitations, combined with other limitations and restrictions, effectively prohibit us from utilizing our present business model for cash advance or “payday” lending in those jurisdictions. In addition, the federal government passed the “2007 Military Authorization Act” which prohibits lenders from offering or making payday loans (or similar lending transactions) to members of the U.S. military when the interest or fees calculated as an annual percentage rate, exceed 36%.  Like the state limitations discussed above, 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.  As a result of these restrictions, we do not and do not plan to conduct business in these state jurisdictions or with U.S. military personnel.
 
 
4

 

The above-described fees are the only fees we assess and collect from our customers for our loans.  Nevertheless, we also charge a flat fee that ranges from $15 to $30 (depending on the state) for returned checks in the event that a post-dated check we attempt to cash as repayment for our loan is returned.  In 2010, we had approximately 8,343 checks returned that were assessed a fee, compared to approximately 8,425 such checks during 2009.  In 2010, we collected approximately 34.15% of the returned check fees for these bad checks, for a total of approximately $55,000.  In 2009, we collected approximately 32.97% of these returned check fees, for a total of approximately $54,800.

Extensions or “Rollovers” of Payday Loans

When a customer “rolls over” or extends the term of an outstanding loan, we treat that rollover or extension as a brand new loan and we again charge the above-described loan fee for that transaction.  This rollover has no effect on the imputed annual percentage rate of the loan in those cases where the extended term is equal to the initial term of the loan.  For example, a $100 four-week loan that costs $20 to obtain is the APR equivalent of 261%.  If a customer extends the term of that loan for an additional four-week period, the customer will have paid $40 total in fees to obtain the $100 eight-week loan—which is again the APR equivalent of 261%.  In cases where a customer (1) extends or rolls over a loan for a length of time that is less than the original loan or (2) repays the extended loan prior to the expiration of the fully extended term, the imputed APR will increase.  For example, if a customer who obtained an initial $100 four-week loan for $20 in loan fees (the APR equivalent of 261%) later extends the term of that loan for only two additional weeks and pays the additional $20 loan fee, that customer will have borrowed $100 for a six-week period at a total cost of $40—which is the APR equivalent of 347%.  We do not charge any interest on the unpaid fee from the initial term of the loan because, as a condition to agreeing to a loan extension, we will only accept cash payment of the fee for extending the loan.  In 2010, 13.27% of our total loan fee revenues were derived from loan fees charged and collected upon the extension or rollover of payday loans.

Most states prohibit payday lenders from extending or refinancing a payday loan.  Nevertheless, five states in which we presently operate—Colorado, South Dakota, North Dakota, Utah and Wisconsin—do permit a loan to be extended or “rolled over” for a specified period.  Specifically, Wisconsin (effective January 2, 2011) and North Dakota permit only one loan extension; South Dakota permits up to four loan extensions; and Utah has no limit on the number of loan extensions but does limit the time period of extensions to 10 weeks from the origination date of the original loan.  In the aggregate, we extended approximately 13.9% of all our payday loans made during 2010.

The table below sets forth the minimum and maximum payday loans we approve, the maximum fee we charge, the maximum term of the payday loan and whether an extension/rollover is permitted in the state were we operate.

 
State
 
 
Minimum Loan
 
Maximum
Loan
 
 
Maximum Fee
 
Maximum
Term
 
Extension/Rollover
Permitted
Colorado
 
No minimum
 
$500
 
20% origination on first
$300; 7.5% thereafter;
 
40 days
 
Yes
           
45% interest and a
monthly maintenance
fee 1
 
Minimum
of 6
months
 
Yes
Iowa
 
No minimum
 
$500
 
$5+10% of first $100
10% thereafter 2
 
31 days
 
No
Kansas
 
No minimum
 
$500
 
$15 per $100
 
30 days
 
Not prohibited
Montana3
 
$50
 
$300
 
25%
 
31 days
 
No
Nebraska
 
No minimum
 
$500
 
15% 2 per $100
 
31 days
 
No
North Dakota
 
No minimum
 
$600
 
20%
 
60 days
 
Yes
South Dakota
 
No minimum
 
$500
 
No limit
 
No limit
 
Yes
Utah
 
No minimum
 
No limit
 
No limit
 
84 days
 
Yes
Wisconsin
 
No minimum
 
No limit
 
No limit
 
No limit
 
Yes
Wyoming
 
No minimum
 
No limit
 
20%
 
30 days
 
No
 
1
Prior to August 10, 2010, the maximum fee was 20% of first $300, and 7.5% for all amounts thereafter.
2
Denotes that the applicable percentage is calculated on the loan amount plus any finance charges.
3
Applied thru December 31, 2010.  We discontinued Montana payday services as of that date.
 
 
5

 
 
Multiple Loans to Single Customers

We occasionally make multiple loans to a single customer if permitted by applicable law and regulations.  Based on our outstanding loans as of December 31, 2010, approximately 6.5% of our customers had more than one loan outstanding.  In these cases, the average number of separate loans outstanding was 2.02 and the average aggregate principal amount loaned was approximately $434.

Risks Associated With Our Loans—Default and Collection

Ordinarily, our customers approach us for a loan because they currently have insufficient funds to meet their present obligations, and so rarely if ever do our customers have sufficient funds in their checking accounts to cover the personal post-dated checks they provide us at the time of the loan transaction.  The nature of our payday loan transactions present a number of risks, including the ultimate risk that the loan will not be paid back.  In addition, we do not obtain security for our payday loans principally because, even assuming our customers would have potential collateral to offer as security for a payday loan, the small size of each particular lending transaction does not justify the time, effort and expense of identifying the collateral and properly obtaining a security interest in such collateral.  As a consequence, all of our payday loans are unsecured.  This means that, absent court or other legal action compelling a customer to repay our loans, we rely principally on the willingness and ability of our customers to repay amounts they owe us.  In this regard, in many cases the costs of merely attempting to collect the amounts owed to us exceed the amounts we would seek to collect—making it impractical to take formal legal action against a defaulted borrower.

When a customer defaults on a loan, we engage in store-level collection practices that include attempts to contact the customer and obtain payment, and attempts to contact the customer’s bank in order to determine whether funds are available to satisfy their personal post-dated check.  If funds are available, we present the check to the bank for repayment and an official check from the bank is obtained to pay off the item.  The costs involved in these initial collection efforts are minimal as they involve some employee time and possibly a flat $15-30 bank fee to cover the cost of the cashier’s check.  If funds are not available, we generally attempt to collect returned checks for up to 90 days (or up to 180 days in cases where a bank account is still active and the customer has not initiated a stop payment on the postdated check provided), principally through continued attempts to contact the customer.  If our attempts remain unsuccessful after 90 (or 180) days, we assign the item to a collection agency.  Assignment to a collection agency may cost us 30-40% of the amount eventually collected (if any) from the customer.  Ordinarily, we do not recoup any costs of collection from our customers.

Historically, we collect approximately 55% of all returned checks, which results in approximately 2.65% of our total payday loans being uncollectible.  In 2010, we made approximately 196,000 loan transactions, of which approximately:

 
·
81.1% were paid in full at or prior to the expiration of the original loan term, accounting for approximately 81.42% of our loan fee revenues
 
·
13.2% were refinanced, extended, renewed or otherwise paid after the expiration of their original loan term, accounting for approximately 12.45% of our loan fee revenues, and
 
·
5.7% involved a personal post-dated check that was returned for insufficient funds.

Marketing Strategy

Our advertising and marketing efforts are designed to introduce customers to our services, build customer loyalty and generate repeat visits and transactions.  Our principal means of advertising our payday lending services consists of promotional materials and Yellow Page directories used in our active markets as well as building signage visible from local arterial roadways on which we are located.  For our Cricket business, we rely primarily on Cricket advertising and promotional items as well as building signage visible from local arterial roadways on which we are located.  Our Cricket locations are also listed on the Cricket Wireless website and are searchable by address, city or zip code.

Industry Information

There are an estimated 22,000 cash advance loan stores in the United States, which in the aggregate provide approximately $40 billion in short-term credit to households experiencing cash-flow shortfalls.  Industry trends indicate that there is likely to be a net decrease in total payday lending stores over the next few years due to store closings resulting from a combination of regulatory or legal changes, a slowdown in new store growth and general economic conditions.
 
 
6

 
 
According to the Community Financial Services Association of America (CFSA), payday loan customers typically are middle-income or lower-middle-income, middle-educated individuals who are a part of a young family (See Community Financial Services Association of America, citing to The Credit Research Center, McDonough School of Business, Georgetown University, Gregory Elliehausen and Edward C. Lawrence, “Payday Advance Credit in America: An Analysis of Customer Demand”).  The CFSA is a lobbying organization for the payday loan industry.  The Credit Research Center study cited by the CFSA was based upon telephone interviews of 427 borrowers of payday loans in 2000 and 2001, and the answers provided in those interviews by the borrowers were not independently verified by the study’s authors.  Moreover, the authors of that study note that, of the 5,364 payday loan consumers whom they attempted to contact and interview for the study, 1,113 were not able to be reached because their phones had been disconnected and another 1,043 refused to be interviewed or else quit the interview prior to completion.  We do not possess independent information that corroborates the findings of The Credit Research Center, and we do not collect demographic data about our customers.

The Consumer Federation of America (CFA), a nonprofit consumer advocacy organization, has submitted written comments to the Federal Trade Commission that make assertions very different from those proponed by the CFSA.  For example, the CFA asserts that “payday loan borrowers are typically female, make around $25,000 a year, are renters, and more likely to be minorities than the general population.  Payday lenders have clustered around military bases, in low to moderate income neighborhoods, and in predominantly minority areas.”  (See Comments To the Federal Trade Commission Regarding the Fair Debt Collection Practices Act Collecting Consumer Debts: The Challenges of Change By the Consumer Federation of America, June 20, 2007).  The CFA presently does not make available to the public the research data to support its claims, and as a consequence we are unable to evaluate their accuracy.  However, other statistics concerning payday lending (such as default rates) that are contained in CFA website material conflict with our statistics borne out by years of involvement in the business.

Predatory Lending and Regulatory Concerns

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 payday loans 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.

In general, the payday lending suffers from the perception and widespread belief that payday lenders are in the nature of predatory lenders, offering loans to low income and poorly educated consumers at costs that are too high to be good for consumers.  This perception and belief results in frequent efforts in the U.S. Congress and various state legislatures, often proponed by consumer advocacy groups and lobbyists for traditional financial institutions such as banks, to further regulate and restrict or prohibit payday lending outright.  For example, the federal government passed the 2007 Military Authorization Act which prohibits any persons from offering or making loans to members of the military when the interest and loan fees, calculated as an annual percentage rate, exceed 36%.  This limitation effectively prohibits payday lenders from making payday loans to members of the U.S. military.

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 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 Bureau.  While the Bureau does not appear to have authority to make rules limiting interest rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that the Bureau will address issues such as rollovers or extensions of payday loans.  Future restrictions on the payday lending industry could have serious consequences for the Company.

During the 2010 legislative session in Colorado, House Bill 10-1351 was passed into law.  This bill amended the Colorado Deferred Deposit Loan Act, the existing payday lending law.  The law became effective August 11, 2010 and modified traditional payday lending by changing the single payment advance (with no minimum term) into a single or multiple payment loan with a minimum six month term. It also limited the amount and type of fees that can be charged on these loans, effectively reducing by one-half the fees that can be charged and when the fees may be realized.  The Company continues to operate its sole store in Colorado while the impact to profitability of this new law is being assessed.  In 2010, 1.42% of our Payday division revenues were generated in Colorado.
 
 
7

 

In May 2010, new laws were enacted in Wisconsin that restrict the number of times a consumer may renew (or rollover) a payday loan. Previously, there were no limits to the number of rollovers permitted.  Effective January 1, 2011, consumers in Wisconsin will only be allowed to renew a payday loan once, and then lenders will be required to offer a 60-day, interest free, payment plan to consumers.  The Company is still assessing the impact of these new Wisconsin laws. Our preliminary projections indicate the changes could reduce revenue in the state by 30% - 40%.  In 2010, 6.17% of our Payday division revenues were generated in Wisconsin.

On November 2, 2010, voters in Montana passed Petition Initiative I-164.  Effective January 1, 2011, Petition Initiative I-164 capped fees on payday loans at an imputed interest rate of 36%.  Due to the passage of I-164, the Company closed its four stores in Montana on or prior to December 31, 2010.  In 2010, 3.87% of our Payday division revenues were generated in Montana.

Any adverse change in present federal or state laws or regulations that govern or otherwise affect payday lending could, at any point, result in our curtailment or cessation of 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 our results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines, and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing a needed.

We do not believe the payday lending is predatory, nor do we believe that our loans are too costly for consumers if they are judiciously obtained.  In fact, we believe that bank overdraft fees by themselves are typically far more costly for consumers, and bouncing a check can often involve other negative consequences such as independent fees levied by the parties to whom a bad check is written, negative publicity, etc.  In this regard, the FDIC released a November 2008 report called “Study of Bank Overdraft Programs.”  The report indicates that the average amount obtained when bank customers overdraw their accounts is $60, and the average overdraft fee charged by the bank is $27.  This equates to an APR of 1,173% and 587% for a two-week and four-week $60 bank “loan,” respectively.  In sum, we believe that many of the bad perceptions about our industry are fueled primarily by:

 
·
the effects of our loans on consumers who do not judiciously obtain payday loans
 
·
a lack of genuine understanding about the choices faced by low and middle-income people facing a critical cash shortage, and
 
·
anti-payday lending lobbying campaigns often funded by traditional financial institutions, such as banks and credit unions, that would economically benefit from the elimination of payday lending.

Finally, we have become aware of continued aggressive enforcement and prosecution by the Federal Trade Commission against payday lenders using unfair and abusive lending practices in violation of the Truth in Lending Act and Regulation Z, including failures to properly disclose loan terms and imputed APRs.  In particular, we believe that FTC regulators are expanding theories relating to “fair and adequate” disclosure loan terms.  This focus includes marketing and advertising materials (specifically, the layout and presentation of such materials), and specific practices, that may detract attention from or diminish the prominence of disclosures relating to loan terms, and the costs and risks involved with payday loans.  Moreover, it has come to our attention that FTC regulators are more keenly scrutinizing whether payday lending business practices match advertised claims.  While we do not presently anticipate any adverse regulatory issues or outcomes relating to our business, it is possible that one or more of our store locations could come under FTC scrutiny and that any such scrutiny could negatively affect store performance and consume considerable time and attention of our management.

Seasonality

We have experienced seasonality in our payday lending 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.
 
 
8

 

Effect of General Economic Conditions on our Payday Lending Business

We believe that consumer demand for our payday lending services is increasing as a result of the recent economic recovery and slowly improving employment numbers; however, we expect improving economic conditions to be partially negated by unemployment levels that remain high in the context of recent history.  High unemployment levels generally reduce the pool of payday loan consumers that can meet all of our loan qualifications, particularly the employment requirement.  In addition, it seems likely that the continued economic situation and higher unemployment rates could result in greater loan losses than we experienced in 2010 with unemployment rates expected to remain high for the foreseeable future.  Our business experienced fluctuating changes in our provision for loan losses in recent years.  For instance, our provision for loan losses totaled $1.28 million for 2010, a decrease of $.27 million from our provision of $1.55 million for 2009, a decrease of $.33 million from our provision of $1.88 million for 2008.   Our provision for loan losses as a percentage of loan fee revenue was 12.1% for 2010, 14.5% during 2009 and 18.5% during 2008.  The less favorable loss ratios in 2009 and 2008 reflected in part a more challenging collections environment as a result of an increase in bankruptcy filings, higher energy prices and increased competition in the lending industry.  We believe that our increased collection efforts and tightening of loan approvals have also contributed to the reduced loan loss percentage for 2010.  We also believe that as the country moves out of recession and into recovery, our consumer base will increase as individuals are denied credit by traditional lenders because of recent unemployment or liquidity issues.  Nevertheless, due to our inability to foretell the depth and duration of the present economic downturn, we believe there are uncertainties in how significant any increased loan losses for 2011 may be.

Credit and financing available to us and our industry has been negatively impacted by the recent economic situation, recent federal and state legislation, and the overall negative perception associated with payday lending.

Future growth in our payday lending business beyond reinvestment of our current profits may be limited due to the tighter credit markets.  Furthermore, we anticipate that the present condition of the financial markets and increased regulation related to payday lending currently under consideration at the federal level will make it more difficult for us to borrow money to fund the expansion of our operations through acquisitions.

CRICKET PHONE BUSINESS

General Description

We are an authorized dealer of Cricket Wireless products and services and operate Cricket retail stores in Nebraska, Missouri, Texas, Kansas, Illinois, Indiana, Iowa and Maryland.  Although Cricket Wireless owns a number of corporate stores, Cricket Wireless is partnering with dealers in order to reach their market-penetration goals.  Authorized dealers are permitted to sell the Cricket line and generally locate their store operations in areas with a strong potential customer base where Cricket 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.  In addition, each store we operate must resemble a Cricket corporate store.  Once we identify an area to locate a new store, we contact Cricket Wireless to obtain approval.   Once Cricket Wireless approves our recommended location, we establish the storefront.

We profit in this business through retail sales of cellular phones used with Cricket services, sales of phone accessories (e.g., face plates and phone chargers), fees charged when a customer changes services (service reactivations, adding lines, plan changes, etc), or whenever a customer pays his or her Cricket invoice at one of our store locations.

We bear no risk of non-payment because of the prepaid nature of the service and because Leap Wireless Communications provides the cell phone services.  Service automatically terminates upon nonpayment, which is midnight of the date on which the payment is due if the account remains unpaid.  If a customer pays their service charge within 60 days of termination, the service is reinitiated and the phone number remains unchanged.  After 60 days, a customer is deemed to be a new customer and a new phone number is assigned.

Market Information and Marketing

At December 31, 2010, Cricket cellular phone service was offered in 35 states and had approximately 5.5 million customers.  Leap Wireless Communications, Inc., a Delaware public reporting corporation and the owner of Cricket Wireless, continues to expand its network footprint by launching Cricket service in new markets and increasing and enhancing coverage in our existing markets.  Cricket Wireless service offers customers unlimited wireless voice and broadband data services for a flat monthly rate.  In addition, our retail stores offer Cricket PAYGo™ services, which is an unlimited prepaid wireless service, in select markets.  Cricket PAYGo is a daily pay-as-you-go wireless and text messaging service designed for customers who prefer the flexibility and control offered by traditional prepaid services but who are seeking greater value for their dollar.

Cricket products and services are primarily targeted to market segments that are underserved by traditional communications companies.  Based on disclosures made by Leap Wireless Communications, Cricket customers tend to be younger, have lower incomes and include a greater percentage of ethnic minorities.  Cricket services are designed to appeal to customers who value unlimited wireless services with predictable billing and who use the majority of those wireless services from within Cricket service areas.  In contrast, the majority of wireless customers in the U.S. subscribe to post-pay services that may require credit approval and a contractual commitment from the subscriber for a period of at least one year and may include overage charges for call volumes in excess of a specified maximum.  Like Leap Wireless Communications, we believe that a significant portion of the remaining growth potential in the U.S. wireless market consists of customers who are price-sensitive, who have lower credit scores or who prefer not to enter into fixed-term contracts.  We believe that our authorized Cricket store business directly caters and appeals strongly to these customer segments.
 
 
9

 

We expect that consumers may wish to prepay their phone service or purchase prepaid cellular/Cricket phones:

 
·
to avoid costly phone purchase and long-term and expensive service contracts with wireless carriers
 
·
because poor credit histories may prevent them from successfully obtaining a service contract with a wireless carrier, or
 
·
due to a short-term need and circumstances in which they expect to engage in heavy usage of phones, and so they wish to pay a flat fee for a period of time instead of risking additional per-minute charges on their phone usage.

Nevertheless, we do not formally query our customers who purchase our phone products or services as to their motivations in purchasing those products or services, and we do not have customer data indicating the extent to which our phone customers cannot obtain a service contract from a long-term contract carrier of phone service or some other phone service provider.

Market Strategy

We believe that our business model is scalable and can be expanded successfully into adjacent and new markets as we continue to perfect our operational protocols and our administrative office functions relating to our Cricket business.  We are looking to acquire additional Cricket dealerships in the midwest and launch additional stores in new Cricket markets that are currently underserved by competing service providers.

Products and Services
 
Our authorized Cricket retail stores offer the following products and services:

 
·
Cricket Wireless service plans, each designed to attract customers by offering simple, predictable and affordable wireless voice and data services that are a competitive alternative to traditional wireless and wireline services by offering plans with a flat-rate and unlimited usage within Cricket service areas, and without requiring fixed-term contracts, early termination fees or credit checks
 
·
Cricket Wireless plan upgrades (e.g., international calling minutes to Canada and/or Mexico; roaming service packages, text messages) and applications (including customized ring tones, wallpapers, photos, greeting cards, games and news and entertainment message deliveries) on a prepaid basis
 
·
Cricket handsets
 
·
Cricket broadband service affording customers unlimited wireless access to the Internet through their computers at a flat rate with no long-term commitments or credit checks, and
 
·
Cricket PAYGo service, an unlimited prepaid (daily pay-as-you-go) wireless and text messaging service available in select markets.

The payment options for Cricket customers include:

 
·
point of activation, which can be either through automatic charge against a debit or credit card on bill cycle due date
 
·
check payment by mail
 
·
payment at any corporate Cricket store, dealer location or alternative payment locations (e.g., a local grocery store), and
 
·
payment by telephone using a credit or debit card.

Customers also have an option on the purchase of their cellular phone, including the latest in Android-based and Blackberry OS-based smartphones.  The customer can either purchase a new or refurbished phone from us or purchase a used phone from a previous customer.  All phones must be paid for in full because there is no contract for the monthly prepaid service.  New phone prices range from $29 (with limited features) to high-end cellular phones at $200.

Seasonality

Our customer activity is influenced by seasonal effects related to traditional retail selling periods and other factors that arise from our target customer base.  We generally expect new sales activity to be highest in the first and fourth quarters.  Nevertheless, our revenues can be strongly affected by the launch of new markets, promotional activity and competitive actions, any of which have the ability to reduce or outweigh certain seasonal effects.
 
 
10

 

REGULATION

We are subject to regulation by federal, state and local governments that affect the products and services we provide. Generally, these regulations are designed to protect consumers who deal with us and are not designed to protect our shareholders.

Regulation of Payday Lending

In those states where we currently operate, we are licensed as a payday lender where required and are subject to various state regulations regarding the terms and conditions of our payday loans and our lending policies, procedures and operations.  In some states, payday lending is referred to as “deferred presentment,” “cash advance loans”, “deferred deposit loans” or “consumer installment loans.”  State regulations normally limit the amount that we may lend to any single consumer and may limit the number of loans that we may make to any consumer at one time or in the course of a single year.  State regulations also limit the amount of fees that we may assess in connection with any loan transaction and may limit a customer’s ability to extend or “rollover” a loan with us.  Often, state regulations also specify minimum and maximum maturity dates for payday loans and, in some cases, specify mandatory cooling-off periods between transactions.

Our payday lending practices must also comply with the disclosure requirements of the Federal Truth-In-Lending Act and Regulation Z under that Act.  Our collection activities for delinquent loans are generally subject to consumer protection laws regulating debt-collection practices.  Finally, our payday lending business subjects us to the Equal Credit Opportunity Act and the Gramm-Leach-Bliley Act.
 
During the last few years, legislation has been introduced and passed in the U.S. Congress and in certain state legislatures proposing or effecting various restrictions or an outright prohibition on payday lending.  Currently, state laws in Arizona, Montana, Oregon and Georgia have effectively eliminated the ability to conduct payday lending activities in those states.  In addition, a 2007 federal law prohibits loans of any type to U.S. military personnel and their family members with charges or interest in excess of 36% per annum.  In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which consolidated most federal regulation of financial services offered to consumers, and replaced 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, are now subject to new regulations to be passed by the Bureau.  While the Bureau does not appear to have authority to make rules limiting interest rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that the Bureau will address issues such as rollovers or extensions of payday loans.  Future restrictions on the payday lending industry could have serious consequences for the Company.

For more information, see “PAYDAY LENDING BUSINESS—Predatory Lending and Regulatory Concerns” above.

Financial Reporting Regulation

Regulations promulgated by the United States Department of the Treasury under the Bank Secrecy Act require us to report all transactions involving currency in an amount greater than $10,000.  Generally, every financial institution must report each deposit, withdrawal, exchange of currency or other payment or transfer that involves an amount greater than $10,000.  In addition, multiple currency transactions must be treated as a single transaction if we have knowledge that the transactions are by or on behalf of any one person and result, in a single business day, in the transfer of cash in or out totaling more than $10,000.  In addition, the regulations require us to maintain information concerning sales of monetary instruments for cash in amounts from $3,000 to $10,000.  The Bank Secrecy Act requires us, under certain circumstances, to file a suspicious activity report.
 
The Money Laundering Act of 1994 requires us, as a money service business, to register with the United States Department of the Treasury.  Money services businesses include check cashers and sellers of money orders.  Money services businesses must renew their registrations every two years, maintain a list of their agents, update the agent list annually, and make the agent list available for examination.

Finally, we have established various procedures designed to comply, and we continue to monitor and evaluate our business methods and procedures to ensure compliance, with the USA PATRIOT Act.
 
 
11

 
 
Privacy Regulation

We are subject to a variety of federal and state laws and regulations restricting the use and seeking to protect the confidentiality of customer identity and other personal nonpublic customer information.  We have identified our systems that capture and maintain nonpublic personal information, as that term is understood under the Gramm-Leach-Bliley Act and associated regulations.  We disclose our public information policies to our customers as required by that law.  We also have systems in place intended to safeguard this information as required by the Gramm-Leach-Bliley Act, which specifically governs certain aspects of our payday lending business.

COMPETITION

Like most other payday lenders, we believe that the primary competitive factors in our business are location and customer service.  We face intense competition in an industry with relatively low barriers to entry, and we believe that the payday lending markets are becoming more competitive as the industry matures and consolidates.  We compete with other payday lending and check cashing stores, and with financial service entities and retail businesses that offer payday loans or similar financial services.  For example, we consider credit card companies that offer payday features, credit unions, banks that offer small loans, and creditors and loan services that can extend payment terms an outstanding loans, to be our competitors.  In addition, we compete in part with services offered by traditional financial institutions, most particularly with respect to the “overdraft protection” services those institutions may offer and the charges they levy for checks written with insufficient funds.

Additional areas of competition have recently arisen.  Businesses now offer loans over the Internet as well as “loans by phone,” and these services compete with the services we offer.  There also has been increasing penetration of electronic banking and related services into the check cashing and money transfer industry, including direct deposit of payroll checks, payroll or debit cards, stored-value cards and electronic transfer of government benefits.

We also believe that customer service is critical to developing loyalty.  In our industry, we believe that quality customer service means:

 
·
assisting with the loan application process and understanding the loan terms,
 
·
treating customers respectfully, and
 
·
processing transactions with accuracy, efficiency and speed.

Our Cricket store business competes primarily with other actual or potential authorized sellers and distributors of Cricket products and services.  The authorization to sell Cricket products and services is granted by Cricket Communications, a Delaware corporation (sometimes referred to as “Cricket Wireless, Inc.”) and wholly owned subsidiary of Leap Wireless International, Inc.  Presently, we believe that our ability to compete with other sellers of Cricket products and services will materially depend on the success with which we operate those store locations for which we presently have authorization to operate.  If we successfully manage those stores and are able to develop and maintain a strong working relationship with Cricket Communications, we expect that we may be able to effectively compete for additional store locations when and as they come available.

With the introduction of additional prepaid phone providers such as Straight Talk service rolled out by Walmart in October 2009 and the increase of national retailers offering numerous prepaid phone options, such as Cricket PAYGo™ services sold at Target stores, it is possible that current and potential new customers will purchase these or other future competing services from these national resellers because of brand recognition, location or convenience, any of which would negatively impact our sales and our ability to win authorizations for new locations to grow our Cricket business.  In addition, it is possible that Cricket Communications may itself, at some point in the future, determine to become more involved in the direct operation of its retail stores and move away from an authorized distributor business model or modify its existing model by changing the compensation structure to dealers or by increasing the number of dealer locations and thus reduce traffic to existing locations.  In any such event, our ability to maintain and grow our Cricket business will be negatively impacted.

TECHNOLOGY AND INFORMATION

We maintain an integrated system of software applications and platforms for processing the various types of financial transactions we offer.  These systems provide us with customer service, internal control mechanisms, record-keeping and reporting information.  We have one point-of-sale system used by all of our payday store locations.  On a daily basis, transaction data is collected and integrated into our management information systems.  These systems are designed to provide summary, detailed and exception information to regional, area and store managers as well as corporate staff.  We utilize a point-of-sale system designed to collect customer information that can be utilized for demographic analysis, as well as the financial tracking of purchases, returns and Cricket service payments.
 
 
12

 
 
SECURITY

We believe the principal security risks to our operations are robbery and employee theft.  We have established extensive security systems, dedicated security personnel and management information systems to address both areas of potential loss.  To protect against robbery, most payday lending store employees work behind bullet-resistant glass and steel partitions, and the back office, safe and computer areas are locked and closed to customers.  Our security measures in most payday lending and Cricket stores include safes, electronic alarm systems monitored by third parties, control over entry to customer service representative and inventory areas, detection of entry through perimeter openings, walls and ceilings and the tracking of all employee movement in and out of secured areas.  Employees use cellular phones to ensure safety and security whenever they are outside secured areas.  Additional security measures used in many stores include some combination of alarm systems, remote control over alarm systems, the arming, disarming and changing of user codes, and mechanically and electronically controlled time-delay safes.

Since we have high volumes of cash and negotiable instruments at our stores and inventory volumes at our Cricket stores, we believe that daily monitoring, unannounced audits and immediate responses to irregularities are critical to security and play an important role in our internal controls.  Our regional managers and corporate staff perform unannounced store audits and cash counts at our stores as well as random inventory counts of cellular phones and accessories.  We self-insure for employee theft and dishonesty at the store level.

EMPLOYEES

At December 31, 2010, we had approximately 205 employees, consisting of 190 store personnel (112 of whom were employed at payday loan stores and 78 of which were employed at Cricket retail stores),   11 corporate office employees and four corporate office managers.  We believe our relationship with our employees is good, and we have not suffered any work stoppages or labor disputes.  We do not have any employees that operate under collective-bargaining agreements.

CORPORATE INFORMATION

General

Our principal offices are located at 11550 “I” Street, Suite 150, Omaha, Nebraska 68137, and our telephone number at that office is (402) 551-8888.

Western Capital Resources, Inc. was originally incorporated and organized as a Minnesota corporation under the name URON Inc. in November 2001.  From its incorporation until August 2006, URON was wholly owned by Multiband Corporation, a Minnesota corporation.  Multiband spun off URON to Multiband’s shareholders in August 2006 and caused URON to become a public reporting corporation as part of the spinoff process.  URON’s principal business was the provision of dial-up internet service to residential and commercial customers, principally in the midwestern United States, Texas, South Carolina and Florida.  In December 2007, URON and Wyoming Financial Lenders, Inc., a Wyoming corporation, engaged in a merger transaction which caused URON to acquire the payday lending business we currently operate through Wyoming Financial Lenders.  In July 2008, and in connection with the December 2007 merger,  we changed our corporate name from URON Inc. to “Western Capital Resources, Inc.”

The Company’s year ends December 31, 2010.  Neither the Company nor any of its predecessors have been in bankruptcy, receivership or any similar proceeding.

RECENT DEVELOPMENTS

Credit Facilities

On January 4, 2010, Wyoming Financial Lenders, Inc., executed an amended Business Loan Agreement and associated Promissory Note with Banco Popular North America (with an effective date of October 30, 2009) refinancing a then-existing line of credit with Banco Popular.  At that time, Western Capital Resources and Banco Popular also entered into a new Commercial Pledge Agreement pursuant to which Western Capital Resources pledged its share ownership in Wyoming Financial Lenders and substantially all of its other assets to Banco Popular as collateral security for the obligations of Wyoming Financial Lenders under the amended Business Loan Agreement and Promissory Note.
 
 
13

 
 
On April 2, 2010, Wyoming Financial Lenders refinanced its credit facility with Banco Popular.  On that date, WERCS, the former holder of the Company’s Series A Convertible Preferred Stock, satisfied all of Wyoming Financial Lenders’ obligations to Banco Popular and entered into a Business Loan Agreement and associated $2,000,000 promissory note with Wyoming Financial Lenders.  The loan from WERCS extinguished the $1,637,341 that Wyoming Financial Lenders then owed to Banco Popular and the remaining $362,659 of loan proceeds were used for general working capital.  The Business Loan Agreement and associated promissory note contained terms that were substantially similar to those contained in the loan documents with Banco Popular.  To secure the obligations of Wyoming Financial Lenders under the new Business Loan Agreement and promissory note, the Company entered into (i) a Commercial Pledge Agreement with WERCS pursuant to which the Company pledged its share ownership in Wyoming Financial Lenders, and (ii) a Commercial Security Agreement pursuant to which the Company granted WERCS a security interest in substantially all of the Company’s assets.  The Company also entered into a Commercial Guaranty relating to the repayment of Wyoming Financial Lenders’ obligations under the Business Loan Agreement and promissory note.  The payment terms under the promissory note required Wyoming Financial Lenders to make monthly payments of accrued interest only for 11 months, followed by an April 1, 2011 balloon payment of any remaining accrued but unpaid interest and all $2,000,000 of principal under the promissory note.  Interest accrues on the unpaid principal balance of the promissory note at the rate of 12.0% per annum.

On January 26, 2011, the Company and Wyoming Financial Lenders, Inc. entered into a Loan Extension Agreement with WERCS. The Loan Extension Agreement extends the maturity date for the payment of all obligations under the Business Loan Agreement to April 1, 2012.  In connection with the extension agreement, the Company made a principal payment of $1,000,000.
 
ITEM 1A
RISK FACTORS

You should consider the following risk factors, in addition to the other information presented or incorporated by reference into this Annual Report on Form 10-K, in evaluating our business and your investment in us.

The payday loan industry is highly regulated under state laws. Changes in state laws and regulations governing lending practices, or changes in the interpretation of such laws and regulations, could negatively affect our business.

Our business is regulated under numerous state laws and regulations, which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business.  As of the date of this report, approximately 34 states and the District of Columbia had legislation permitting or not prohibiting payday loans.  During the last few years, legislation has been adopted in some states that prohibits or severely restricts payday loans.

There are nearly always bills pending in various states to alter the current laws governing payday lending.  Any of these bills, or future proposed legislation or regulations prohibiting payday loans or making them less profitable, could be passed in any state at any time, or existing laws permitting payday lending could expire.

For example, recent legislation has been passed in Colorado, Wisconsin and Montana that restricts certain payday lending practices.  In particular,

 
·
During 2010, Colorado House Bill 10-1351 was passed into law   effective August 11, 2010,  by changing the single payment advance (with no minimum term) into a single or multiple payment loan with a minimum six-month term.  It also limited the amount and type of fees that can be charged on these loans, effectively reducing by one-half the fees that can be charged, and when the fees may be realized.  At present, the Company continues to operate its sole store in Colorado while the impact to profitability of this new law is being assessed.  In 2010, 1.42% of our Payday division revenues were generated in Colorado.

 
·
In Wisconsin, new legislation effective January 1, 2011 will limit payday loans to the lesser of $1,500 or 35% of the applicant’s monthly income, and permit borrowers to cancel loans within 24 hours and roll their loans over only one time.  In addition, payday lenders will be required to offer a 60-day, interest free, payment plan to consumers upon maturity of their payday loans.  The Company is still assessing the impact of these new Wisconsin laws. Our preliminary projections indicate the changes could reduce revenue in the state by 30% - 40%.  In 2010, 6.17% of our Payday division revenues were generated in Wisconsin.

 
·
Finally, on November 2, 2010, voters in Montana passed Petition Initiative I-164.  Effective January 1, 2011, Petition Initiative I-164 will cap fees on payday loans at an imputed interest rate of 36%.  The Company discontinued its operations and closed all four stores in Montana due to this law change.  In 2010,  3.87% of the Company’s Payday division revenues were generated in Montana.
 
 
14

 
 
In addition, legislation banning payday loans was introduced in Nebraska in 2008 but eventually was dropped.  Nevertheless, since we derive approximately 27.55% of our payday revenues in Nebraska, the passage of any such legislation in Nebraska would have a highly material and negative effect on our business.

Statutes authorizing payday loans typically provide state agencies that regulate banks and financial institutions with significant regulatory powers to administer and enforce the laws relating to payday lending.  Under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that affect the way we do business and may force us to terminate or modify our operations in those jurisdictions.  They may also impose rules that are generally adverse to our industry.  Finally, in many states, the attorney general has scrutinized or continues to scrutinize the payday loan statutes and the interpretations of those statutes.

Any adverse change in present laws or regulations, or their interpretation, in one or more such states (or an aggregation of states in which we conduct a significant amount of business) could result in our curtailment or cessation of operations in such jurisdictions.  Any such action could have a corresponding highly material and negative impact on our results of operations and financial condition, primarily through a material decrease in revenues, and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner.

Our business is subject to complex federal laws and regulations governing lending practices, and changes in such laws and regulations could negatively affect our business.
 
Although states provide the primary regulatory framework under which we offer payday loans, certain federal laws also affect our business.  For example, because payday loans are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and Regulation Z under that Act.  Additionally, we are subject to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act and certain other federal laws.  Additionally, anti-payday loan legislation has occasionally been introduced in the U.S. Congress.  For example:

 
·
2006 legislation limits the interest rate and fees that may be charged on any loans, including payday loans, to any person in the military to the equivalent of 36% per annum.  The military lending prohibition became effective on October 1, 2007.

 
·
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 federal agency, the Consumer Financial Protection Bureau, will consolidate most federal regulation of financial services offered to consumers and replaces 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.  While the Bureau does not appear to have authority to make rules limiting interest rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that the Bureau will address issues such as rollovers or extensions of payday loans.  Future restrictions on the payday lending industry 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 our curtailment or cessation of 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 our results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines, and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing a needed.

Changes in local regulations could have a material adverse effect on our business, results of operations and financial condition.

In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning regulations and permit licensing.  We are aware of increasing efforts by local jurisdictions to restrict payday lending through the use of local zoning and permitting laws.  Any actions taken in the future by local zoning boards or other governing bodies to require special use permits for, or impose other restrictions on, payday lenders could have a material adverse effect on the growth of our business and business prospects primarily by restricting any efforts to grow our business “organically” by opening more lending store locations.
 
 
15

 
 
Litigation and regulatory actions directed toward our industry or us could adversely affect our operating results, particularly in certain key states.

During the last few years, our industry has been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of payday loans, and we could suffer losses resulting from interpretations of state laws in those lawsuits or regulatory proceedings, even if we are not a party to those proceedings.  For example, the North Carolina Commissioner of Banks recently issued a ruling in which it determined that Advance America, which marketed, originated, serviced and collected payday loans on behalf of a state-chartered bank located in Kentucky, violated various North Carolina consumer-protection statutes.  Thus, the losses we could suffer could be directly incurred through our involvement in litigation or regulatory proceedings, or could be indirectly incurred through negative publicity regarding the industry in general that is generated by litigation on regulatory proceedings involving third parties.

In addition, regulatory actions taken with respect to a particular non-payday lending financial service that we offer could negatively affect our ability to offer such other financial services.  For example, if we were the subject of regulatory action related to our check-cashing business, that regulatory action could adversely affect our ability to maintain our payday lending licenses.  Moreover, the suspension or revocation of our license or other authorization in one state could adversely affect our ability to maintain licenses in other states.  Accordingly, a violation of a law or regulation with respect to otherwise unrelated products or in other jurisdictions could affect other parts of our business and adversely affect our business and operations as a whole.

We may need additional financing in the future and any such financing may dilute our existing shareholders.

We anticipate that we will continue to experience growth in our income and expenses for the foreseeable future and that our operating expenses will be a material use of cash resources.  Presently, we believe we have cash sufficient to maintain operations through April 1, 2012 when a balloon payment for any remaining accrued but unpaid interest and all $1,000,000 of principal under our promissory note to WERCS is due.  In the event that our income does not meet our expectations, we may sooner require additional financing for working capital.  In addition, if we determine to grow our business through acquisitions, any acquisitions we consummate will likely involve outside financing.  Any additional financing, for whatever purpose and for whatever reason, may dilute our existing shareholders.

Additional financing could be sought from a number of sources, including but not limited to additional sales of equity or debt securities (including equity-linked or convertible debt securities), loans from banks, loans from our affiliates or other financial institutions.  We may not, however, be able to sell any securities or obtain any such additional financing when needed, or do so on terms and conditions acceptable or favorable to us, if at all.  If financing is not available, we may be forced to consider strategic alternatives, such as (but not limited to) curtailing certain aspects of our operations or closing certain operating locations.  If we successfully enter into a financing transaction, any additional equity or equity-linked financing would be dilutive to shareholders, and additional debt financing, if available, may involve restrictive covenants.

Failure to achieve and maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely affect our business and stock price.

Effective internal controls are necessary for us to provide reliable financial reports.  Nevertheless, all internal control systems, no matter how well designed, have inherent limitations.  Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Our most recent evaluation of our internal controls resulted in our conclusion that our disclosure controls and procedures were effective.  Our ability to maintain an effective control environment may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our stock price.

A significant portion of our assets consists of goodwill and other intangible assets.

As of December 31, 2010, 57% of our assets consisted of goodwill and other intangible assets. Under generally accepted accounting principles, the carrying value of goodwill is subject to periodic review and testing to determine if it is impaired.  The value of our assets will depend on market conditions, regulatory environment, the availability of buyers and similar factors. While the value of these assets is based on management projections and assumptions and is determined by using the discounted cash flow method for purposes of our impairment testing, those values may differ from what could ultimately be realized by us in a sales transaction or otherwise and that difference, while not affecting cash flow, could have a material adverse impact on our operating results and financial position.
 
 
16

 
 
The concentration of our revenues in certain states could adversely affect us.

We currently provide payday lending services in nine states.  For the year ended December 31, 2010, revenues from our locations in Nebraska represented approximately 28% of our total payday revenues.  For the foreseeable future, we expect that a material and significant portion of our revenues will continue to be generated in Nebraska.  We operate Cricket stores in eight states.  For the year ended December 31, 2010, revenues from our Missouri and Indiana stores represented approximately 31% and 28% of our total Cricket revenues, respectively.  As a result, changes to prevailing economic, demographic, competitive, regulatory or any other conditions, including the legislative, regulatory or litigation risks mentioned above, in the markets in which we operate, and in Nebraska and Missouri in particular, could lead to a reduction in demand for our services and result in a decline in our revenues or an increase in our provision for doubtful accounts, or even an outright legal prohibition on the conduct of our business.  Any of these outcomes could in turn result in a material and swift deterioration of our financial condition principally by impairing our revenues and affecting our ability to obtain financing and operating liquidity, our operating results and our business prospects (again, principally by reducing our revenues and impairing our ability to grow our business).
 
A default under our borrowing arrangement   with WERCS could require us to seek financing on a short-term basis that may be disadvantageous to the Company.

On April 2, 2010, we refinanced our outstanding credit facility.    The Business Loan Agreement and associated promissory note contains   certain loan covenants.  Failure to comply with the covenants may result in the creditor’s calling of the note.  The Company entered into (i) a Commercial Pledge Agreement with WERCS pursuant to which the Company pledged its share ownership in Wyoming Financial Lenders, and (ii) a Commercial Security Agreement pursuant to which the Company granted WERCS a security interest in substantially all of the Company’s assets.  The Company also entered into a Commercial Guaranty relating to the repayment of Wyoming Financial Lenders’ obligations under the Business Loan Agreement and promissory note.  If we are unable to comply with the required interest-only payments or covenants, we may need to seek additional financing with unfavorable terms.

Unpredictability in financing markets could impair our ability to grow our business through acquisitions.

We anticipate that opportunities to acquire similar businesses will materially depend on the availability of financing alternatives with acceptable terms.  As a result, poor credit and other market conditions or uncertainty in the financing markets or the payday lending business in particular could materially limit our ability to grow through acquisitions since such conditions and uncertainty make obtaining financing more difficult.
 
Public perception of payday lending as being predatory or abusive could adversely affect our business.

Recently, consumer advocacy groups and media reports have advocated governmental action to prohibit or severely restrict payday loans.  The consumer groups and media reports typically focus on the cost to a consumer for this type of loan, which is higher than the interest typically charged by credit card issuers.  The consumer groups and media reports typically characterize these transactions as predatory or abusive toward consumers.  If this negative characterization of our business becomes widely accepted by consumers, demand for our payday loans could significantly decrease, which could adversely affect our results of operations primarily by decreasing our revenues.  Negative perception of our business activities could also result in our industry being subject to more restrictive laws and regulations and greater exposure to litigation.
 
Any disruption in the availability of our information systems could adversely affect our operations.

We rely upon our information systems to manage and operate our business.  Each location is part of an information network that permits us to maintain adequate cash inventory, reconcile cash balances daily, and report revenues and loan losses in a timely manner.  Our security measures could fail to prevent a disruption in the availability of our information systems or our back-up systems could fail to operate properly.  Any disruption in the availability of our information systems could adversely affect our results of operations by impairing our ability to efficiently effect transactions.
 
 
17

 
 
If we lose key managers or are unable to attract and retain the talent required for our business, our operating results could suffer.

Our future success depends to a significant degree upon the members of our executive management, particularly John Quandahl, who is our Chief Executive Officer and interim Chief Financial Officer.  Accordingly, the loss of these services would likely materially and adversely affect our business.  The Company has an employment agreement with Mr. Quandahl effective through March 31, 2013.  Nevertheless, we cannot be certain that Mr. Quandahl will continue providing services to us for any particular period of time.  Our continued growth will also depend upon our ability to attract and retain additional skilled management personnel.  Competition for highly skilled and experienced management is intense and likely to continue and increase.  To the extent that we are unable to attract and retain the talent required for our business, our operating results could suffer.

We lack product and business diversification with a customer base primarily in urban areas, which creates a risk that our future revenues and earnings will be susceptible to fluctuations.

Our primary payday business activity is offering and servicing payday loans.  We also provide certain related and other services, such as check cashing, money transfers and money orders. The payday segment accounted for approximately 65% of our total revenues in 2010.  Our Cricket retail segment accounted for approximately 35% of our total revenues in 2010.  If we are unable to further diversify our business products and services and expand our customer-base outside of the urban areas, we may experience fluctuations in our revenues and earnings, which may be significant, relating to our payday lending business and wireless cellular sales.  Such fluctuations could result from legal or regulatory changes in one or more jurisdictions, changes in economic conditions in the jurisdictions where we provide services, or result from other risks or adverse events befalling us.  Our susceptibility to fluctuations or the actual happening of significant fluctuations in our revenues or earnings could cause our Company to be perceived as a less stable and therefore less attractive investment in general, which would likely negatively affect the market price of our common stock and our ability to obtain additional financing an acceptable terms.

Competition in the retail financial services industry is intense and could cause us to lose market share and revenues.

We believe that the primary competitive factors in the payday loan industry are store location and customer service.  We face intense competition in the payday loan industry, and we believe that the payday lending market is becoming more competitive as this industry matures and begins to consolidate.  The payday loan industry has low barriers to entry, and new competitors, such as Wal-Mart, may enter the market easily.  We currently compete with services, such as overdraft protection offered by traditional financial institutions, and with other payday loan and check cashing stores and other financial service entities and retail businesses that offer payday loans or other similar financial services, as well as a rapidly growing internet-based payday loan market.  Some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have.  As a result, we could lose market share and our revenues could decline, thereby affecting our earnings and potential for growth.

We face significant wireless cellular competition that may reduce our market share and lower our profits.

We face significant competition in our industry. We currently compete with resellers of our size including US Cellular and Metro PCS. We also compete with the four national wireless service providers: AT&T, Sprint Nextel, T-Mobile and Verizon Wireless and with Walmart’s recent rollout of their Straight Talk plan. Our ability to compete effectively will depend on, among other things, the pricing of Cricket services and equipment, the quality of our customer service, the reach and quality of our sales and distribution channels and our capital resources. It will also depend on how successfully we anticipate and respond to various factors affecting our industry, including new technologies and business models, changes in consumer preferences, demographic trends and economic conditions. Finally, as a Cricket reseller, we are dependent upon pricing and channel strategies established by Leap Wireless.
 
The wireless industry also faces competition from other communications and technology companies seeking to capture customer revenue and brand dominance with respect to the provision of wireless products and services. For example, Apple Inc. is packaging software applications and content with its handsets, and Google Inc. has developed and deployed an operating system and related applications for mobile devices.
 
 
18

 
 
General economic conditions affect our loan losses, and accordingly, our results of operations could be adversely affected by a general economic slowdown or other negative economic conditions such as high unemployment.

Provision for loan losses, net of recoveries, is one of our largest operating expenses, constituting approximately 7% of total revenues for the fiscal year ended December 31, 2010, with payday loan losses comprising most of the losses.  At the end of each month, management considers recent collection history to develop expected loss rates, which are used to establish the allowance for loan losses.  Any changes in economic factors that adversely affect our customers, such as an economic downturn or high unemployment, could result in higher loan loss experiences than anticipated, which could in turn adversely affect our loan charge-offs and operating results.

If estimates of our loan losses are not adequate to absorb actual losses, our financial condition and results of operations may be adversely affected.

We maintain an allowance for loan losses at levels to cover the estimated incurred losses in the collection of our loan portfolio outstanding at the end of each applicable period.  At the end of each period, management considers recent collection history to develop expected loss rates, which are used to establish the allowance for loan losses.  Our allowance for loan losses was $1.16 million on December 31, 2010.  Our allowance for loan losses is an estimate, and if actual loan losses are materially greater than our allowance for losses, our financial condition and results of operations could be adversely affected.

Because we maintain a significant supply of cash in our locations, we may experience losses due to employee error and theft.

Because our business requires us to maintain a significant supply of cash in our stores, we are subject to the risk of cash shortages resulting from employee error and theft.  We periodically experience employee error and theft in stores, which can significantly increase the operating losses of those stores for the period in which the employee error or theft is discovered.  We self-insure for employee error and theft at the store level.  If our controls to limit our exposure to employee error and theft at the store level and at our corporate headquarters do not operate effectively or are structured ineffectively, our operating margins could be adversely affected by costs associated with increased security and preventative measures.

Regular turnover among our location managers and employees makes it more difficult for us to operate our locations and increases our costs of operation.

We experience a relatively stable workforce among our location managers and employees.  Turnover interferes with implementation of operating strategies.  Increases in our workforce turnover in the future would likely increase our operating pressures and operating costs and could restrict our ability to grow.  Additionally, high turnover would create challenges for us in maintaining high levels of employee awareness of and compliance with our internal procedures and external regulatory compliance requirements.  In sum, high turnover would increase our training and supervisory costs, and result in decreased earnings with corresponding greater risks of regulatory non-compliance.

Our controlling shareholder possesses controlling voting power with respect to our common stock and voting preferred stock, which will limit  your influence on corporate matters.

Our controlling shareholder, WCR, LLC, has beneficial ownership of 10,791,250 shares (9,700,000 of which are issuable upon conversion of Series A Convertible Preferred Stock).  WCR’s beneficial ownership amounts to 61.9% of our common stock.  As a result, WCR has the ability to outrightly control our management and affairs through the election and removal of our entire Board of Directors and all other matters requiring shareholder approval, including the future merger, consolidation or sale of all or substantially all of our assets.  This concentrated control could discourage others from initiating any potential merger, takeover or other change-of-control transaction that may otherwise be beneficial to our shareholders.  Furthermore, this concentrated control will limit the practical effect of your participation in Company matters, through shareholder votes and otherwise.

Our articles of incorporation grant our Board of Directors the power to issue additional shares of common and preferred stock and to designate other classes of preferred stock, all without shareholder approval.

Our authorized capital consists of 250 million shares of capital stock.  Pursuant to authority granted by our articles of incorporation, our Board of Directors, without any action by our shareholders, may designate and issue shares in such classes or series (including other classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights.  The rights of holders of other classes or series of stock that may be issued could be superior to the rights of holders of our common shares.  The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore, any issuances of additional stock (common or preferred) will dilute the percentage of ownership interest of then-current holders of our capital stock and may dilute our book value per share.
 
 
19

 
 
Because we became public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.

Additional risks to our investors may exist since we became public through a “reverse merger.”  Security analysts of major brokerage firms may not provide coverage of the Company since, because we became public through a reverse merger, there is no incentive to brokerage firms to recommend the purchase of our common stock.  In addition, because of past abuses and fraud concerns stemming primarily from a lack of public information about newly public businesses, there are many people in the securities industry and business in general who view reverse merger/public shell transactions with suspicion.  Without brokerage firm and analyst coverage, there may be fewer people aware of us and our business, resulting in fewer potential buyers of our securities, less liquidity, and depressed stock prices for our investors.
 
Our common stock trades only in an illiquid trading market.

Trading of our common stock is conducted on the OTC Markets (OTCQB: WCRS).  This has an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us and our common stock.  This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.

In addition, there has typically been very little trading activity in our common stock.  During 2010, the average daily trading volume (as reported by Yahoo Finance) was approximately 12,000 shares with the 52-week trading prices ranging from $0.02 to $0.30 per share.  The trade volume was as low as 3,000 shares for the entire month of September 2010.  The small trading volume will likely make it difficult for our shareholders to sell their shares as and when they choose.  Furthermore, small trading volumes generally depress market prices.  As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.
 
There is not now and there may not ever be an active market for shares of our common stock.

In general, there has been minimal trading volume in our common stock.  The small trading volume will likely make it difficult for our shareholders to sell their shares as and when they choose.  Furthermore, small trading volumes are generally understood to depress market prices.  As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.
 
We do not intend to pay dividends on our common stock for the foreseeable future. We will, however, pay dividends on our convertible preferred stock.

We pay dividends to the holders of our Series A Convertible Preferred Stock, each share of which carries a $2.10 stated value.  There are 10 million shares of Series A Convertible Preferred Stock outstanding.  Our Series A Convertible Preferred Stock entitles its holders to (i) a cumulative 10% dividend, compounded and payable on a quarterly basis; (ii) in the event of a liquidation or dissolution of the Company, a preference in the amount of all accrued but unpaid dividends plus the stated value of such shares, before any payment shall be made or any assets distributed to the holders of any junior securities; (iii) convert their preferred shares into our common stock on a share-for-share basis, subject to adjustment; and (iv) vote their preferred shares on an as-if-converted basis.
 
We have the right to redeem some or all such preferred shares, at any time upon 60 days’ advance notice, at a per-share price of $3.50 plus accrued but unpaid dividends.  Holders of Series A Convertible Preferred Stock have no preemptive or cumulative-voting rights.
 
We do not anticipate that we will pay any dividends for the foreseeable future on our common stock.  Accordingly, any return on an investment in us will be realized only when you sell shares of our common stock.  When legally permitted, we expect to pay dividends to our preferred stockholders.
 
 
20

 
 
ITEM 1B
UNRESOLVED STAFF COMMENTS

Not applicable.
 
ITEM 2
PROPERTIES

Our headquarters is in Omaha, Nebraska.  There, we have a 2,440-square-foot space, with additional space available, which is sufficient for our projected near-term future growth.  The monthly lease amount is currently $2,751 under a month-to-month lease.  The corporate phone number is (402) 551-8888.
 
As of the date of this report, we have 51 payday store locations.  Our payday store locations typically range in size from 1,000 square feet to 2,000 square feet, and have varying lease terms (none of which, however, have remaining terms of more than five years).  As of the date of this report, we have payday lending stores in the following cities:

·     Sterling, Colorado
·     Council Bluffs, Iowa
·     Des Moines, Iowa (four locations)
·     Sioux City, Iowa
·     Dodge City, Kansas
·     Garden City, Kansas
·     Columbus, Nebraska
·     Grand Island, Nebraska
·     Hastings, Nebraska
·     Lincoln, Nebraska (three locations)
·     North Platte, Nebraska
·     Omaha, Nebraska (seven locations)
·     Bismarck, North Dakota (two locations)
·     Grand Forks, North Dakota (three locations)
·     Fargo, North Dakota (four locations)
·     Minot, North Dakota
·     Aberdeen, South Dakota
·     Rapid City, South Dakota
·     Sioux Falls, South Dakota
·     Watertown, South Dakota
·     Salt Lake City, Utah
·     Sandy, Utah
·     Taylorsville, Utah
·     West Jordan, Utah
·     Kenosha, Wisconsin
·     Pleasant Prairie, Wisconsin
·     Racine, Wisconsin (two locations)
·     Casper, Wyoming (two locations)
·     Gillette, Wyoming
·     Laramie, Wyoming
·     Sheridan, Wyoming
·     Rock Springs, Wyoming

As of the date of this report, we have 31 Cricket store locations.  Our Cricket store locations typically range in size from 1,000 square feet to 2,000 square feet, and have varying lease terms (none of which, however, have remaining terms of more than five years).  As of the date of this report, we have Cricket retail stores in the following cities:

·     Cahokia, Illinois
·     Elkhart, Indiana
·     Gary, Indiana (two locations)
·     Merrillville, Indiana
·     Mishawaka, Indiana
·     South Bend, Indiana (two locations)
·     Griffith, Indiana
·     Council Bluffs, Iowa
·     Kansas City, Kansas (two locations)
·     Baltimore, Maryland
·     Ballwin, Missouri
·     Kansas City, Missouri (four locations)
·     St. Louis, Missouri (three locations)
·     Wellston, Missouri
·     Lincoln, Nebraska
·     Omaha, Nebraska (five locations)
·     San Antonio, Texas (three locations)
 
ITEM 3
LEGAL PROCEEDINGS

We are involved in a variety of legal claims and proceedings incidental to our business, including customer bankruptcy and employment-related matters from time to time, and other legal matters that arise in the normal course of business.  We believe these claims and proceedings are not out of the ordinary course for a business of the type and size in which we are engaged.  While we are unable to predict the ultimate outcome of these claims and proceedings, management believes there is not a reasonable possibility that the costs and liabilities of such matters, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
 
 
21

 
 
On March 26, 2010, the Company and all of the then-current members of its Board of Directors, among others, were sued by our former Chief Financial Officer and another former member of management, Messrs. Steven Staehr and David Stueve, respectively.  In that lawsuit, the plaintiffs have alleged, among other things, that our Board of Directors breached certain of their fiduciary duties primarily in connection with the sale by WERCS of its capital stock in the Company to WCR, LLC.  The complaint seeks injunctive and declaratory relief and unspecified money damages.  The Company believes the claims are without merit.  While we are unable to predict the ultimate outcome of these claims and proceedings, management currently believes there is not a reasonable possibility that the costs and liabilities of such matters, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.  After the filing of the lawsuit, the Company removed the lawsuit to federal court and the plaintiffs sought to remand the case back to state court.  On October 26, 2010, the plaintiffs’ motion to remand the case to state court was denied by the federal court.  The Company has filed a motion to dismiss the lawsuit, and was required to resubmit such motion based on certain amendments the plaintiffs made to their complaint.  The Company’s motion to dismiss is currently being considered by the federal court.
 
ITEM 4
RESERVED
 
 
22

 

PART II
 
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS

MARKET INFORMATION

Our common stock is listed for trading on the OTC Markets’ middle tier for over-the-counter stock quotation, the “OTCQB,” under the symbol “WCRS.”  The transfer agent and registrar for our common stock is Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.  The following table sets forth the high and low bid prices for our common stock as reported by the OTC Bulletin Board in 2010 and 2009.  The Company’s common shares did not begin trading on the OTC Bulletin Board until February 2007.  These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions.  Trading in the Company’s common stock during the period represented was sporadic, exemplified by low trading volume and many days during which no trades occurred.   On or about March 1, 2010, our common stock ceased being quoted on the OTCBB (a quotation service administered by FINRA) and began being quoted on the OTCQB, which is the OTC Markets’ middle-tier over-the-counter quotation platform.  OTC Markets is the entity formerly known as “The Pink Sheets.”

   
Market Price (high/low)
 
For the Fiscal Year
 
2010
   
2009
 
First Quarter
 
$
0.30 – 0.08
   
$
2.20 – 0.25
 
Second Quarter
 
$
0.18 – 0.02
   
$
2.00 – 0.30
 
Third Quarter
 
$
0.08 – 0.02
   
$
2.00 – 0.22
 
Fourth Quarter
 
$
0.19 – 0.02
   
$
0.80 – 0.08
 

HOLDERS

As of the date of this report, we had 7,446,007 shares of common stock outstanding held by approximately 520 holders of record.

DIVIDENDS

Holders of our common stock are entitled to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by our Board of Directors out of funds legally available therefore.  We have not paid any dividends on our common stock and intend to retain earnings, if any, to finance the development and expansion of our business.  In addition, we must first pay preferred dividends on its Series A Convertible Preferred Stock as described under the caption “Description of Equity Securities” below.  The current dividend payable to the holders of Series A Convertible Preferred Stock aggregates to $525,000 on a quarterly basis.  Other than with respect to shares of Series A Convertible Preferred Stock, future dividend policy is subject to the sole discretion of our Board of Directors and will depend upon a number of factors, including future earnings, capital requirements and our financial condition.  As of the date of this report, the Company had an outstanding accrued but unpaid and cumulated dividends on its Series A Convertible Preferred Stock aggregating to $1,975,000.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The table below sets forth certain information, as of the close of business on December 31, 2010, regarding equity compensation plans (including individual compensation arrangements) under which securities of Western Capital were then authorized for issuance.
 
 
23

 

   
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available
for Issuance Under
Equity Compensation
Plans (excluding
securities reflected in
column a)
 
   
(a)
 
(b)
 
(c)
 
Equity compensation plans approved by securityholders
 
None
 
n/a
 
None
 
Equity compensation plans not approved by securityholders
 
None
 
n/a
 
2,000,000
(1)
 

(1)
In January 2008, our Board of Directors adopted the 2008 Stock Incentive Plan which permits the issuance of various incentives, including options or similar rights to purchase or acquire up to 2,000,000 shares of common stock.  As of the date of this report, no incentives have been issued under such plan. We are not required by applicable state law or the listing standards of any self-regulatory organization or quotation service (e.g., the OTC Markets, NASD, AMEX or NYSE) to obtain the approval of its security holders prior to issuing any such compensatory options, warrants or other rights to purchase securities of the Company.

SALES OF UNREGISTERED SECURITIES AND REPURCHASES OF EQUITY SECURITIES BY THE ISSUER

None.

DESCRIPTION OF EQUITY SECURITIES

Our authorized capital stock consists of 250 million shares of capital stock, no par value per share (unless otherwise determined by the Board of Directors).  All shares of common stock have equal voting rights and are entitled to one vote per share on all matters to be voted upon by our shareholders.  Shares of our common stock have no preemptive, subscription, conversion or redemption rights and may be issued only as fully-paid and non-assessable shares.  Cumulative voting in the election of directors is not permitted.  In the event of our liquidation, each holder of our common stock is entitled to receive a proportionate share of our assets available for distribution to stockholders after the payment of liabilities.  All shares of our common stock issued and outstanding are fully-paid and non-assessable.

Of our 250 million shares of authorized capital, we have designated 10,000,000 for issuance as “Series A Convertible Preferred Stock.”  Each share of Series A Convertible Preferred Stock carries a $2.10 stated value and entitles its holders to (i) a cumulative 10% dividend, compounded and payable on a quarterly basis; (ii) in the event of a liquidation or dissolution of the Company, a preference in the amount of all accrued but unpaid dividends plus the stated value of such shares, before any payment shall be made or any assets distributed to the holders of any junior securities; (iii) convert their preferred shares into common shares of the Company on a share-for-share basis (subject to adjustment); and (iv) vote their preferred shares on an as-if-converted basis.  The Company has the right to redeem some or all of such preferred shares, at any time upon 60 days’ advance notice, at a price of $3.50 per share plus accrued but unpaid dividends.  Holders of Series A Convertible Preferred Stock have no preemptive or cumulative-voting rights.
 
ITEM 6
SELECTED FINANCIAL DATA

Not applicable.
 
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and related notes that appear elsewhere in this report.  This discussion contains forward-looking statements that involve significant uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Risk Factors” elsewhere in this report.  For further information, see “Forward-Looking Statements” below.
 
 
24

 

OVERVIEW

We provide (through Wyoming Financial Lenders, Inc.) retail financial services to individuals primarily in the midwestern and southwestern United States.  These services include non-recourse cash advance loans, check cashing and other money services, including title loans.  At the close of business on December 31, 2010 and as of the date of this report, we owned and operated 51 stores in nine states, including Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming.

We provide short-term consumer loans—known as “payday” or “cash advance” loans—in amounts that typically range from $100 to $500.  Payday 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 advanced, 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 a payday 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.  All of our payday loans and other services are subject to state regulations (which vary from state to state), federal regulations and local regulation, where applicable.

In October 2008, we began operating Cricket Wireless retail stores as an authorized dealer of Cricket Wireless products and services.  Authorized dealers are permitted to sell the Cricket line and generally locate their store operations in areas with a strong potential customer base where Cricket does not maintain a corporate storefront.  Our storefronts 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.  In addition, each store we operate must resemble a Cricket corporate store.  Once we identify an area to locate a new store, we contact Cricket Wireless to obtain approval.   Once Cricket Wireless approves our recommended location, we establish the storefront.  Cricket Wireless provides assistance with exterior signage cost, marketing funds for the launch and premier kits for display.  At the close of business on December 31, 2010, we owned and operated 31 Cricket wireless retail stores in eight states, including Illinois, Indiana, Iowa, Kansas, Maryland, Missouri, Nebraska and Texas.

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 accounting, audit and legal services, and management / consulting fees.

With respect to our cost structure, salaries and benefits are one of our largest costs and are driven primarily by the number of storefronts operated throughout the year and seasonal fluctuation in sales volumes.  Occupancy costs and phone and accessory cost of sales make up our second and third largest expense items, respectively.  Our provision for losses is also a significant expense.  We have experienced seasonality in our operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter.

We evaluate our stores based on revenue growth, gross profit contributions and loss ratio (which, for the payday segment, is losses as a percentage of revenues), with consideration given to the length of time the storefront has been open and its geographic location.  We evaluate changes in comparable storefront financial and other measures on a routine basis to assess operating efficiency.  We define comparable storefronts as those that are open during the full periods for which a comparison is being made.  For example, comparable storefronts for the annual analysis we undertook as of December 31, 2010 have been open at least 24 months on that date.  We monitor newer storefronts for their progress toward profitability and rate of loan growth or units sold.
 
Revenues decreased to $17.98 million in 2010 from $18.31 million in 2009.  Payday loan revenues totaled $10.61 million in 2010 compared to $10.70 million in 2009.  Revenues from our Cricket phone sales decreased in 2010 to $4.10 million compared to $5.29 million during 2009.  Store salaries and benefits expense was $4.57 million in 2010 compared to $5.58 million in 2009, a decrease that resulted mainly from the closing payday loan and Cricket cellular retail storefronts in 2010 and realignment of some store management to corporate management.  Our 2010 phone and accessories cost of sales was $1.71 million compared to $2.16 million in 2009.  The decrease in our Cricket Wireless segment revenues had a corresponding downward impact to our costs of sales.   Income from stores increased to $5.08 million in 2010 compared to $3.54 million in 2009.  Primarily as a result of these factors, net income increased to $1.35 million in 2010 from net income of $.77 million in 2009.
 
 
25

 

We have 10,000,000 shares of Series A Convertible Preferred Stock (10% cumulative dividends, $0.01 par value, $2.10 stated value) authorized, issued and outstanding.  One-fourth of the $2.1 million annual preferred dividend accrues each quarter, whether paid or not.  Our Board of Directors votes to approve payment of dividends when appropriate and as permitted by Minnesota law.  The dividend can be paid either in cash or in shares of our common stock at the discretion of the preferred shareholder.  This preferred dividend is included in the net income or loss available to common shareholders.  As a result, we had a net loss available to common shareholders in 2010 and 2009.

Our obligation to pay preferred dividends significantly impacts our cash flow and our ability to grow through acquisitions, which is the most significant way in which we expect to grow.  For instance, our use of cash in satisfaction of the dividend-payment obligations prevents us from using that cash as part of acquisition transactions.  The present condition of the credit markets also makes it difficult for us to surmount this obstacle through borrowing.  In addition, our use of cash in satisfaction of the dividend-payment obligations requires us to manage our cash in ways that we will ensure the availability of cash for lending to our payday loan customers during the fall and winter months, which is typically the busiest time of year for payday lending.

The preferred dividend obligation also significantly affects our net income available to common shareholders.  For example, absent the 2010 preferred dividend of $2.1 million, our net income available to common shareholders  would have been approximately $1.35 million.  For this reason, we are continuing to explore ways in which we may be able to retire or redeem the Series A Convertible Preferred Stock.  It is difficult for us to forecast what success, if any, we may have in this endeavor since the preferred stockholders are not obligated to surrender their shares, exchange them, or engage in any sort of recapitalization transaction.

The growth 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 27.55% of our 2010 total payday segment 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.

With payday loan industry growth and fragmentation, we believe there are opportunities to grow our business, primarily through acquisitions as opposed to organic growth.  We continually evaluate opportunities in numerous states in which we currently operate and evaluating the regulatory environment and market potential in the various states in which we currently do not have stores.  In addition to expanding our geographic reach, our strategic expansion plans also involve the expansion and diversification of our product and service offerings.  For this reason, we have focused, and will continue to focus, a significant amount of time and resources on the development of our Cricket Wireless retail stores.  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 lending alone and (ii) any particular aspect of our business that concentrated geographically.

RESULTS OF OPERATIONS:
YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009

For the year ended December 31, 2010, net income was $1.35 million compared to a net income of $.77 million in 2009.  Income from continuing operations before income taxes was $2.10 million in 2010 compared to $1.24 million in 2009.  The major components of each of revenues, store expenses, general and administrative expenses, total operating expenses and income tax expense are discussed below.

Revenues

Revenues totaled $17.98 million in 2010 compared to $18.31 million in 2009, a decrease of $.33 million or 1.80%. The decrease in total revenues resulted primarily from the following factors impacting the Cricket Wireless division: a reduction in the number of phone and modem units sold, which can be attributed to elevated sales in 2009 as Cricket rolled out new markets, a lower average selling price per unit under Cricket’s new pricing structure which took effect in all markets on August 3, 2010; and the closing of some Cricket storefronts.  These factors have the effect of decreasing the average per-unit selling price and gross revenues.  This was partially offset by an increase in fees generated from accepting Cricket service payments.  This trend is expected to partially reverse due to another recent change to Cricket’s compensation structure for dealers.   We originated approximately $71.88 million in payday loans during 2010 compared to $73.16 million in payday loans during the prior year. The average loan (including fee) totaled $367 in 2010 versus $368 in the prior year. Our average fee for 2010 was $54 compared to $52 for 2009. We closed four payday storefronts in Montana late in the fourth quarter of 2010 because of recent state legislation. Revenues from Cricket phone sales totaled $4.09 million in 2010 compared to $5.29 million in 2009.  Cricket payment fee revenue totaled $1.42 million in 2010 compared to $.49 million in 2009.  We had 37 Cricket retail storefronts open and operating during at least some part of fiscal 2010 compared to 43 storefronts during fiscal 2009.  During 2010, we added four Cricket storefronts and closed six.  Other revenues, including check cashing, title loans, service change fees and other sources, totaled $1.12 million and $1.01 million for 2010 and 2009, respectively.
 
 
26

 
 
The following table summarizes revenues:

   
Year Ended December 31,
   
Year Ended December 31,
 
   
2010
   
2009
   
2010
    2009  
                     
(percentage of revenues)
 
Payday loan fees
  $ 10,607,136     $ 10,700,842       59.0 %     58.5 %
Phones and accessories
    4,094,049       5,289,537       22.8 %     28.9 %
Payment processing fees
    1,418,377       494,074       7.9 %     2.7 %
Check cashing fees
    739,733       813,174       4.1 %     4.4 %
Other income and fees
    1,119,152       1,011,974       6.2 %     5.5 %
Total
  $ 17,978,447     $ 18,309,601       100 %     100 %

We expect that our sources of revenue for 2011 may continue to diversify as we continue to improve and increase sales in our Cricket retail operations and look to open new Cricket retail storefronts.

Store Expenses

Total expenses associated with store operations for 2010 were $12.90 million compared to $14.77 million for 2009, a decrease of $1.87 million or 12.7%. The major components of these expenses are salaries and benefits for our store employees, provision for loan losses, costs of sales for phones and accessories, occupancy costs primarily relating to our store leaseholds, advertising expenses, depreciation of store equipment, amortization of intangible assets and other expenses associated with store operations.

Overall, our most significant decreases in store expenses from 2010 to 2009 related to salaries and benefits for our store employees, the provision for loan losses, and phones and accessories. Our most significant increase in store expenses over that same period relates to our costs of occupancy. A discussion and analysis of the various components of our store expenses appears below.

Salaries and Benefits. Payroll and related costs at the store level were $4.57 million in 2010 compared to $5.58 million in 2009, a decrease of $1.01.  This decrease is a result of a decrease in the number of storefronts operating throughout the year and from our realignment of employee duties from store to general and administrative. We believe this realignment will provide better oversight and management of storefronts from one centralized point while also reducing costs.  As a result of this realignment and fewer Cricket and payday retail storefronts in 2010 compared to 2009, we expect that salaries and benefits for 2011 will decrease baring significant expansion into new markets or additional new storefronts.

Provisions for Loan Losses. Our provision for losses for 2010 totaled $1.28 million and $1.55 million for 2009. Our provision for loan losses as a percentage of loan fee revenue was 12.1% during 2010 versus 14.5% during 2009. The more favorable loss ratio year-to-year reflects our focused collection efforts in 2010. Due to our inability to foretell the speed and scope of the current economic recovery, we believe there are currently uncertainties in what loan losses for 2011 may be.

Phone and Accessories Cost of Sales.  The decrease in our Cricket Wireless phone and accessory revenues resulted in corresponding decrease in costs of sales.  For the year ended December 31, 2010, our costs of sales were $1.71 million compared to $2.16 million in 2009.  

Occupancy Costs. Occupancy expenses, consisting primarily of store leases were $1.85 million during 2010 compared to $1.68 million in 2009, an increase of $.17 million primarily resulting from a higher number of storefront days (number of storefronts times days leased for year) in 2010 compared to 2009 when many Cricket storefronts were open only part of the year.  Occupancy expenses as a percentage of revenues increased from 9.2% in 2009 to 10.3% in 2010, primarily due to the higher occupancy expense to revenue percentage in our Cricket stores.
 
 
27

 

Advertising.  Advertising and marketing related expense was $.36 million in 2010 compared to $.45 million in 2009. We believe that our advertising expenses in 2011 may increase slightly over those in 2010, mainly as a result of the need to increase advertisement of our Cricket wireless cellular segment.

Depreciation. Depreciation increased by $.01 million in 2010 due to depreciation associated with capital expenditures for stores. Depreciation was $.28 million for 2010 and $.27 million for 2009.

Amortization of Intangible Assets. Amortization of the customer relationship and other intangible assets was $.52 million for 2010 and $.69 million for 2009.
 
Other Store Expenses. Other store expenses decreased from $2.38 million in 2009 to $2.33 million in 2010. Other store expenses include bank fees, collection costs, repair and maintenance, supplies, telephone, utilities and network lines, and others.  The decrease in these expenses during 2010 was due to reduced supplies and telephone expense that was partially offset by an increase in utility costs.

General and Administrative Expenses

Total general and administrative costs for 2010 were $2.98 million compared to $2.30 million for 2009. The major components of these costs for 2010 are salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses.

Salaries and Benefits. Salaries and benefits expenses for 2010 were $1.53 million compared to $.84 million for 2009, with the increase being mainly attributed to realignment of management from storefronts to the corporate infrastructure. The Company expects that during 2011 salaries and benefits expenses associated with executive management and corporate headquarters will increase from their 2010 levels due to the realignment being in effect for the entire 2011 year.
 
Interest Expense. The Company had $.41 million of interest expense in 2010 compared to $.35 million in 2009.
 
Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management / consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities were $1.03 million in 2010 compared to $1.09 million during 2009.   The decrease in these expenses is mainly attributable to a decrease in nonrecurring professional fees which is partially offset by management / consulting fees we began incurring during 2010.  Management expects management / consulting fees to increase since these services will be provided for all 12 months in 2011.

Total Operating Expenses

Total operating expenses for 2010 and 2009 were $15.88 million and$17.07 million, respectively.  We anticipate our total operating expenses in 2011 to slightly decrease compared to 2010 with the closing of four payday storefronts and two Cricket Wireless retail storefronts.

Income Tax Expense

Income tax expense on continuing operations increased to $.75 million in 2010 compared to $.47 million in 2009 for an effective rate of 35.8% and 37.9%, respectively.
 
 
28

 
 
LIQUIDITY AND CAPITAL RESOURCES

Summary cash flow data is as follows:
 
   
Year Ended December 31,
 
   
2010
   
2009
 
             
Cash flows provided (used) by :
           
Operating activities
  $ 2,743,235     $ 2,386,400  
Investing activities
    (103,964 )     (2,670,928 )
Financing activities
    (2,073,447 )     (1,547,457 )
Net increase (decrease) in cash
    565,824       (1,831,985 )
Cash, beginning of period
    1,526,562       3,358,547  
Cash, end of period
  $ 2,092,386     $ 1,526,562  

At December 31, 2010, we had cash of $2.09 million compared to cash of $1.53 million on December 31, 2009.  The increase results mainly from an increase in cash provided by operating additional storefronts throughout fiscal 2010 compared to fiscal 2009, offset by the purchase of related property and equipment, interest and principal payments on our notes payable, and payment of our preferred stock dividend.  For 2011, we believe that our available cash, combined with expected cash flows from operations, will be sufficient to fund our liquidity and capital expenditure requirements through March of 2012.  Our expected short-term uses of cash include the reduction in accruals related to operations, scheduled principal and interest payments on long-term debts, repayment of $1,000,000 of short-term debt, and capital expenditures.

Credit Facilities

On January 4, 2010, Wyoming Financial Lenders, Inc., executed an amended Business Loan Agreement and associated Promissory Note with Banco Popular North America (with an effective date of October 30, 2009) refinancing a then-existing line of credit with Banco Popular.  At that time, Western Capital Resources and Banco Popular also entered into a (new) Commercial Pledge Agreement pursuant to which Western Capital Resources pledged its share ownership in Wyoming Financial Lenders and substantially all of its other assets to Banco Popular as collateral security for the obligations of Wyoming Financial Lenders under the amended Business Loan Agreement and Promissory Note.

On April 2, 2010, Wyoming Financial Lenders refinanced its credit facility with Banco Popular.  On that date, WERCS, the former holder of the Company’s Series A Convertible Preferred Stock, satisfied all of Wyoming Financial Lender’s financial obligations to Banco Popular and entered into a Business Loan Agreement and associated $2,000,000 promissory note with Wyoming Financial Lenders.  The loan from WERCS extinguished the $1,637,341 that Wyoming Financial Lenders then owed to Banco Popular and the remaining $362,659 of loan proceeds were used for general working capital.  The Business Loan Agreement and associated promissory note contained terms that were substantially similar to those contained in the loan documents with Banco Popular.  To secure the obligations of Wyoming Financial Lenders under the new Business Loan Agreement and promissory note, the Company entered into (i) a Commercial Pledge Agreement with WERCS pursuant to which the Company pledged its share ownership in Wyoming Financial Lenders, and (ii) a Commercial Security Agreement pursuant to which the Company granted WERCS a security interest in substantially all of the Company’s assets.  The Company also entered into a Commercial Guaranty relating to the repayment of Wyoming Financial Lenders’ obligations under the Business Loan Agreement and promissory note.  The payment terms under the promissory note required Wyoming Financial Lenders to make monthly payments of accrued interest only for 11 months, followed by an April 1, 2011 balloon payment of any remaining accrued but unpaid interest and all $2,000,000 of principal under the promissory note.  Interest accrues on the unpaid principal balance of the promissory note at the rate of 12.0% per annum.  On January 26, 2011, the Company and Wyoming Financial Lenders entered into a Loan Extension Agreement with WERCS.  The Loan Extension Agreement extends the maturity date for the payment of all obligations under the Business Loan Agreement to April 1, 2012.  In connection with the extension agreement, the Company made a principal payment of $1,000,000.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis.  The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  We evaluate these estimates and assumptions on an ongoing basis.  We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances.  Actual results could vary materially from these estimates under different assumptions or conditions.
 
 
29

 
 
Our significant accounting policies are discussed in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the notes to our consolidated financial statements included in this report.  We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our consolidated financial statements:

Loan Loss Allowance

We maintain a loan loss allowance for anticipated losses for our payday loans. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off. 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 payday loans that are currently due or past due and payday loans that have not been repaid. This generally is evidenced 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. Payday loans are carried at cost less the allowance for doubtful accounts. We do not specifically reserve for any individual payday loan. We aggregate payday loans for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates. We utilize a software program to assist with the tracking of its historical portfolio statistics. As a result of the Company’s collection efforts, it historically writes off approximately 45% 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 – 45%; 31 to 60 days – 67%; 61 to 90 days – 83%; 91 to 120 days – 87%; and 121 to 180 days – 90%. All returned items are charged-off after 180 days, as collections after that date have not been significant. The loan loss allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

At December 31, 2010 and 2009 our outstanding loans receivable aging was as follows:

   
December 31,
 
   
2010
   
2009
 
Current
  $ 4,542,000     $ 4,700,000  
1-30
    276,000       265,000  
31 – 60
    234,000       216,000  
61 – 90
    209,000       238,000  
91 - 120
    220,000       226,000  
121 – 150
    227,000       232,000  
151 – 180
    201,000       236,000  
      5,909,000       6,113,000  
Allowance for losses
    (1,165,000 )     (1,237,000 )
    $ 4,744,000     $ 4,876,000  

A rollforward of our loans receivable allowance for the years ended December 31, 2010 and 2009 is as follows:

   
Year Ended December 31
 
   
2010
   
2009
 
Loans receivable allowance, beginning of year
  $ 1,237,000     $ 1,413,000  
Provision for loan losses charged to expense:
    1,280,000       1,552,000  
Charge-offs, net
    (1,352,000 )     (1,728,000 )
                 
Loans receivable allowance, end of year
  $ 1,165,000     $ 1,237,000  

 
30

 
 
Valuation of Long-lived and Intangible Assets

The Company assesses the possibility of impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry events or trends. In addition, we conduct an annual goodwill impairment test as of  October 1 each year.  We assess our goodwill for impairment at the reporting unit level by applying a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any.

A reporting unit is an operating segment, or under certain circumstances, a component of an operating segment that constitutes a business. Our reporting units consist of multiple state and multi-state based operations and therefore the cessation of operations in any particular state does not imply that goodwill for the relevant reporting unit will be impaired.

Due to our capital structure involving preferred stock and related cumulative preferred dividends, the market capitalization approach of valuing the reporting unit as a whole is not practical. The discounted future cash flows method is utilized in estimating value.  When estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any. Impairment losses, which are limited to the carrying value of goodwill, represent the excess of the carrying amount of a reporting unit's goodwill over the implied fair value of that goodwill.

In determining the estimated future discounted cash flows, we consider current and projected future levels of income, as well as strategic plans, business trends, prospects, and market and economic conditions. Impairment tests involve the use of judgments and estimates related to the fair market value of the business operations with which goodwill is associated, taking into consideration both historical operating performance and anticipated financial position and future earnings. We believe that the estimates of future cash flows and fair value determined as of October 1, 2010 are reasonable.   Changes in estimates of those cash flows and fair value, however, could affect the evaluation.  Based upon this evaluation, we concluded that the fair value exceeded the carrying value of net assets and there was no impairment.

As of December 31, 2010, we evaluated whether any triggering events or changes in circumstances had occurred subsequent to our annual impairment test. As part of this evaluation, we considered additional qualitative factors, including whether there had been any significant adverse changes in legal factors or in our business climate, adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or likely sale or disposal of all or a significant portion of our reporting unit. Due to various state regulatory changes, we determined that there may have been events or changes in circumstances in our Payday business that could indicate an impairment condition may have exited as of December 31, 2010. This analysis resulted in a determination that the fair value of the Payday operating unit exceeded the carrying value of its net assets, and thus would not have required any further impairment evaluation.
 
OFF BALANCE SHEET ARRANGEMENTS

We have no off balance sheet arrangements.

FORWARD-LOOKING STATEMENTS

Some of the statements made in this report are “forward-looking statements,” as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements are based upon our current expectations and projections about future events.  Whenever used in this report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions.  The forward-looking statements in this report are primarily located in the material set forth under the headings “Description of Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are found in other parts of this report as well.  These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends.  Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives.  You should read this report completely and with the understanding that actual future results may be materially different from what we expect.  We will not update forward-looking statements even though our situation may change in the future.
 
 
31

 
 
Specific factors that might cause actual results to differ from our expectations or may affect the value of the common stock, include, but are not limited to:

 
·
Changes in local, state or federal laws and regulations governing lending practices, or changes in the interpretation of such laws and regulations
 
·
Litigation and regulatory actions directed toward our industry or us, particularly in certain key states
 
·
Our need for additional financing, and
 
·
Unpredictability or uncertainty in financing markets which could impair our ability to grow our business through acquisitions.

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

Industry data and other statistical information used in this report are based on independent publications, government publications, reports by market research firms or other published independent sources.  Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above.  Although we believe these sources are reliable, we have not independently verified the information.
 
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
 
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX OF FINANCIAL INFORMATION

CONTENTS

  
  
Page(s)
     
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
F-1
     
CONSOLIDATED FINANCIAL STATEMENTS
   
     
Consolidated Balance Sheets
 
F-2
     
Consolidated Statements of Income
 
F-3
     
Consolidated Statements of Shareholders’ Equity
 
F-4
     
Consolidated Statements of Cash Flows
 
F-5
     
Notes to Consolidated Financial Statements
 
F-6

 
32

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS

Board of Directors
Western Capital Resources, Inc.
Omaha, Nebraska

We have audited the accompanying consolidated balance sheets of Western Capital Resources, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Capital Resources, Inc. and Subsidiaries as of December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Minneapolis, Minnesota

/s/ Lurie Besikof Lapidus & Company, LLP

March 25, 2011
 
 
F-1

 
 
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
December 31,
 
   
2010
   
2009
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash
  $ 2,092,386     $ 1,526,562  
Loans receivable (less allowance for losses of $1,165,000 and $1,237,000)
    4,743,906       4,875,870  
Inventory
    502,415       373,858  
Prepaid expenses and other
    152,736       288,145  
Deferred income taxes
    467,000       486,000  
TOTAL CURRENT ASSETS
    7,958,443       7,550,435  
                 
PROPERTY AND EQUIPMENT
    824,102       1,075,715  
                 
GOODWILL
    11,458,744       11,458,744  
                 
INTANGIBLE ASSETS
    434,413       902,069  
                 
OTHER
    95,180       107,715  
                 
TOTAL ASSETS
  $ 20,770,882     $ 21,094,678  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued liabilities
  $ 1,477,607     $ 1,352,989  
Income tax payable
    435,670       145,773  
Note payable – short-term
    2,000,000       1,794,372  
Current portion long-term debt
    769,330       165,431  
Preferred dividend payable
    1,450,000       1,000,000  
Deferred revenue
    320,021       345,826  
TOTAL CURRENT LIABILITIES
    6,452,628       4,804,391  
                 
LONG-TERM LIABILITIES
               
Note payable – long-term
    905,188       2,138,162  
Deferred income taxes
    350,000       250,000  
TOTAL LONG-TERM LIABILITIES
    1,255,188       2,388,162  
                 
TOTAL LIABILITIES
    7,707,816       7,192,553  
                 
SHAREHOLDERS’ EQUITY
               
Series A convertible preferred stock 10% cumulative dividends, $0.01 par value, $2.10 stated value.  10,000,000 shares authorized, issued and outstanding
    100,000       100,000  
Common stock, no par value, 240,000,000 shares authorized, 7,446,007 and 7,996,007 shares issued and outstanding.
    -       -  
Additional paid-in capital
    18,221,777       18,478,337  
Accumulated deficit
    (5,258,711 )     (4,676,212 )
TOTAL SHAREHOLDERS’ EQUITY
    13,063,066       13,902,125  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 20,770,882     $ 21,094,678  

See notes to consolidated financial statements.
 
 
F-2

 
 
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

   
Year ended December 31,
 
   
2010
   
2009
 
REVENUES
           
Payday loan fees
  $ 10,607,136     $ 10,700,842  
Phones and accessories
    4,094,049       5,289,537  
Payment processing fees
    1,418,377       494,074  
Check cashing fees
    739,733       813,174  
Other income and fees
    1,119,152       1,011,974  
      17,978,447       18,309,601  
                 
STORE EXPENSES
               
Salaries and benefits
    4,573,346       5,584,568  
Provisions for loan losses
    1,279,547       1,552,031  
Phone and accessories cost of sales
    1,706,160       2,159,661  
Occupancy
    1,852,279       1,675,951  
Advertising
    363,171       451,838  
Depreciation
    280,250       270,338  
Amortization of intangible assets
    517,656       687,780  
Other
    2,327,611       2,383,329  
      12,900,020       14,765,496  
                 
INCOME FROM STORES
    5,078,427       3,544,105  
                 
GENERAL & ADMINISTRATIVE EXPENSES
               
Salaries and benefits
    1,527,797       842,149  
Depreciation
    17,677       17,338  
Interest expense
    405,249       348,388  
Other
    1,026,763       1,094,548  
      2,977,486       2,302,423  
                 
INCOME BEFORE INCOME TAXES
    2,100,941       1,241,682  
                 
INCOME TAX EXPENSE
    752,000       470,000  
                 
NET INCOME
    1,348,941       771,682  
                 
SERIES A CONVERTIBLE PREFERRED STOCK DIVIDENDS (assumes all paid)
    (2,100,000 )     (2,100,000 )
                 
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
  $ (751,059 )   $ (1,328,318 )
                 
NET LOSS PER COMMON SHARE -
               
Basic and diluted
  $ (0.10 )   $ (0.17 )
                 
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING -
               
Basic and diluted
    7,584,637       7,942,623  

See notes to consolidated financial statements.
 
 
F-3

 
 
WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

   
Series A Convertible
Preferred Stock
   
Common Stock
   
Additional
Paid-In
   
Retained
   
Shareholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Equity
 
BALANCE - December 31, 2008
    10,000,000     $ 100,000       7,598,354     $ -     $ 18,478,337     $ (3,347,894 )   $ 15,230,443  
                                                         
Warrant exercise February 2009 at a per share exercise price of $0.01
    -       -       397,653       -       -       -       -  
Dividends
    -       -       -       -       -       (2,100,000 )     (2,100,000 )
Net income
    -       -       -       -       -       771,682       771,682  
BALANCE - December 31, 2009
    10,000,000       100,000       7,996,007       -       18,478,337       (4,676,212 )     13,902,125  
                                                         
Shares retired
                    (550,000 )     -       (256,560 )     168,560       (88,000 )
Dividends
    -       -       -       -       -       (2,100,000 )     (2,100,000 )
Net income
    -       -       -       -       -       1,348,941       1,348,941  
BALANCE - December 31, 2010
    10,000,000     $ 100,000       7,446,007     $ -     $ 18,221,777     $ (5,258,711 )   $ 13,063,066  

See notes to consolidated financial statements.
 
 
F-4

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Year Ended December 31,
 
   
2010
   
2009
 
OPERATING ACTIVITIES
           
Net Income
  $ 1,348,941     $ 771,682  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    297,927       287,676  
Amortization
    517,656       687,780  
Shares received for reimbursement of expenses
    (88,000 )     -  
Deferred income taxes
    119,000       258,000  
Loss on disposal of property and equipment
    57,650       85,517  
Changes in operating assets and liabilities:
               
Loans receivable
    131,964       28,140  
Inventory
    (128,557 )     (189,498 )
Prepaid expenses and other assets
    97,944       (69,289 )
Accounts payable and accrued liabilities
    414,515       500,109  
Deferred revenue
    (25,805 )     26,283  
Net cash provided by operating activities
    2,743,235       2,386,400  
                 
INVESTING ACTIVITIES
               
Purchases of property and equipment
    (103,964 )     (492,928 )
Acquisition of stores
    -       (2,178,000 )
Net cash used by investing activities
    (103,964 )     (2,670,928 )
                 
FINANCING ACTIVITIES
               
Advances / (payments) on notes payable – short-term
    205,628       (305,628 )
Payments on notes payable – long-term
    (629,075 )     (141,829 )
Dividends
    (1,650,000 )     (1,100,000 )
Net cash used by financing activities
    (2,073,447 )     (1,547,457 )
                 
NET INCREASE (DECREASE) IN CASH
    565,824       (1,831,985 )
                 
CASH
               
Beginning of year
    1,526,562       3,358,547  
End of year
  $ 2,092,386     $ 1,526,562  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
                 
Income taxes paid
  $ 343,103     $ 151,090  
Interest paid
    401,594       348,388  
                 
Noncash investing and financing activities:
               
Refinancing of note payable – short-term
  $ 1,636,044     $ -  
Note payable offset with other receivable
    -       54,578  
 
See notes to consolidated financial statements.

 
F-5

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.         Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies –

Nature of Business/ Basis of Presentation

Western Capital Resources, Inc. (WCR) through its wholly owned operating subsidiaries, Wyoming Financial Lenders, Inc. (WFL) and PQH, Inc. (PQH), collectively referred to as the Company, provides retail financial services and retail cellular phone sales to individuals primarily in the Midwestern United States. The Company operated 51 “Payday” stores in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) as of December 31, 2010 and 55 “Payday” stores in 2009. We closed our 4 “Payday” stores in Montana. The Company operated 31 Cricket wireless retail stores in eight states (Illinois, Indiana, Iowa, Kansas, Maryland, Missouri, Nebraska and Texas) as of December 31, 2010 and 33 Cricket wireless retail stores in seven states (Illinois, Indiana, Kansas, Maryland, Missouri, Nebraska and Texas) as of December 31, 2009. The consolidated financial statements include the accounts of WCR, WFL, and PQH. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company, through its “payday” division, provides non-recourse cash advance loans, check cashing and other money services. The short-term consumer loans, known as cash advance loans 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 the cash advance loans, customers may pay with cash, in which their personal check is returned to them, or allowing their check to be presented to the bank for collection.

The Company also provides 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. 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.

The Company also operates a Cricket Wireless Retail division that is a premier dealer for Cricket Wireless, Inc. reselling cellular phones and accessories and accepting service payments from Cricket customers.

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 allowance for loans receivable, allocation of and carrying value of goodwill and intangible assets, 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. Installment loan origination fees are recognized as they become non-refundable and installment loan maintenance fees are recognized when earned. The Company records revenue from check cashing fees, sales of phones, and accessories and fees from all other services in the period in which the sale or service is completed.

 
F-6

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Loans Receivable / Loan Loss Allowance

We maintain a loan loss allowance for anticipated losses for our cash advance, installment and title loans. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off. 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 cash advance loans that are currently due or past due and cash advance loans that have not been repaid. This generally is evidenced 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. Cash advance loans are carried at cost less the allowance for doubtful accounts. The Company does not specifically reserve for any individual cash advance loan. The Company aggregates cash advance loans 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. As a result of the Company’s collection efforts, it historically writes off approximately 45% of the returned items. Based on days past the check return date, write-offs of returned items historically have tracked at the following approximately percentages: 1 to 30 days – 45%; 31 to 60 days – 67%; 61 to 90 days – 83%; 91 to 120 days – 87%; and 121 to 180 days – 90%. All returned items are charged-off after 180 days, as collections after that date have not been significant. The loan loss allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

A rollforward of the Company’s loans receivable allowance for the years ended December 31, 2010 and 2009 is as follows:

   
Year Ended December 31,
 
   
2010
   
2009
 
Loans receivable allowance, beginning of year
  $ 1,237,000     $ 1,413,000  
Provision for loan losses charged to expense
    1,280,000       1,552,000  
Charge-offs, net
    (1,352,000 )     (1,728,000 )
Loans receivable allowance, end of year
  $ 1,165,000     $ 1,237,000  

Inventory

Inventory, consisting of phones and accessories, is stated at cost, determined on the specific identification and a first-in, first-out basis, respectively.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets. Useful lives generally range from five to seven years for furniture, equipment, and vehicles. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the related assets or the leases term, and this amortization is included with depreciation.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets acquired using purchase accounting and is not amortized.

Intangible Assets

Customer relationships represent the fair values management assigned to relationships with customers acquired through business acquisitions and is amortized over three years on an accelerated basis based on management’s estimates of attrition of the acquired customers.

 
F-7

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Long- Lived Assets

The Company assesses the possibility of impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry events or trends. In addition, we conduct an annual goodwill impairment test as of October 1 each year. We assess our goodwill for impairment at the reporting unit level by applying a fair value test. This fair value test involves a two-step process. The first step is to compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of the impairment, if any.

Due to our capital structure involving preferred stock and related cumulative preferred dividends, the market capitalization approach of valuing the reporting unit as a whole is not practical. The discounted future cash flows method is utilized in estimating value. When estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any. There were no impairment charges recorded in 2010 or 2009.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and loans receivable. The Company’s cash is placed with high quality financial institutions. From time to time, cash balances exceed federally insured limits. The Company has not experienced any significant losses with respect to its cash. Loans receivable, while concentrated in geographical areas, are dispersed among numerous customers.

Income Taxes

Deferred income taxes reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts, based on enacted tax laws and statutory tax rates applicable in the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The provision for income taxes represents taxes paid or payable for the current year and changes during the year in deferred tax assets and liabilities.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing the loss available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted net loss per common share is computed by dividing the net loss 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. The 10 million shares of potentially dilutive Series A Convertible Preferred Stock outstanding at December 31, 2010 and 2009 were anti-dilutive and therefore excluded from the dilutive net loss per share computation:

   
Year Ended December 31,
 
   
2010
   
2009
 
Series A Convertible Preferred Stock
    10,000,000       10,000,000  

Fair Value of Financial Instruments

The amounts reported in the balance sheets for cash, loans receivable, inventory, notes payable, and accounts payable are short-term in nature and their carrying values approximate fair values.

 
F-8

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Recent Accounting Pronouncements

In January 2010, the FASB issued amendments to guidance on fair value measurements and disclosures that will require inclusion of the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. An amendment related to the level of disaggregation in determining classes of assets and liabilities and disclosures about inputs and valuation techniques was also issued. The amendments were effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the reconciliation for level 3 activity on a gross basis, which became effective for fiscal years beginning after December 15, 2010. The Company adopted this amendment guidance with no material impact on its consolidated financial statements.

In April 2010, the FASB issued guidance on accounting for certain tax effects related to the accounting for postretirement health care plans effective on the enactment date of March 23, 2010. The Company adopted this amendment guidance with no material impact on its consolidated financial statements.

In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-20 “ Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires extensive new disclosures about financing receivables, including credit risk exposures and the allowance for credit losses. For public entities, ASU 2010-20 disclosures of period-end balances are effective for interim or annual reporting periods ending on or after June 15, 2011, as updated by ASU 2011-01. Disclosures related to activity that occurs during the reporting period are required for interim and annual reporting periods beginning on or after December 15, 2010. We are assessing the impact of ASU 2010-20 on our disclosures.

In September 2006, the FASB issued new standards on fair value measurements. This standard establishes a framework for measuring fair value in generally accepted accounting principles clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurement. This standard emphasizes that fair value is a market-based measurement, as opposed to a transaction-specific measurement. We adopted this standard at the beginning of 2009 for financial assets and liabilities and the adoption did not have a material impact on our consolidated financial statements. We adopted this standard at the beginning of 2010 for non-financial assets and liabilities and the adoption did not have a material effect on our consolidated financial statements.

2.      Acquisitions/Dispositions –

In 2009 the Company purchased the assets of various stores in separate transactions. The aggregate purchase price totaled $2,178,000.

Acquisition of Cricket Wireless Stores in Missouri and Indiana

On January 14, 2009 PQH acquired for $1,828,000 in cash 12 existing Cricket Wireless Stores in an asset purchase from VZ Wireless, LLC. The stores are located in Kansas City, Missouri (four stores), St. Louis, Missouri (seven stores) and Cahokia, Illinois (one store).

In February 2009 PQH acquired the authorization for seven locations in Northern Indiana for $300,000 in cash plus sellers’ expenses, not to exceed $50,000, and in March 2009, PQH launched eight new Cricket Wireless stores in Indiana.

Under the purchase method of accounting the assets and liabilities of the aforementioned acquisitions were recorded at their respective fair values as of the purchase date as follows:

   
Year Ended
December 31, 2009
 
Property and equipment
  $ 140,000  
Intangible assets
    833,000  
Goodwill
    1,205,000  
    $ 2,178,000  
 
The results of the operations for the acquired locations have been included in the consolidated financial statements since the date of the acquisitions. The following table presents the unaudited pro forma results of operations for the year ended December 31, 2009, as if the acquisitions had been consummated at the beginning of 2009. The pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the 2009 or the results which may occur in the future.

 
F-9

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Year Ended 
December 31, 2009
 
Pro forma revenue
  $ 18,530,000  
Pro forma net income
  $ 785,000  
Pro forma net loss per common share – basic and diluted
  $ (0.17 )

3.         Segment Information –

The Company has grouped its operations into two segments – Payday Operations and Cricket Wireless Retail Operations. The Payday Operations segment provides financial and ancillary services. The Cricket Wireless Retail Operations segment is a dealer for Cricket Wireless, Inc., reselling cellular phones and accessories and serving as a payment center for Cricket customers.

Segment information related to the years ended December 31, 2010 and 2009 follows:

   
For the Year Ended December 31, 2010
   
For the Year Ended December 31, 2009
 
   
Payday
   
Cricket
Wireless
   
Total
   
Payday
   
Cricket
Wireless
   
Total
 
                                     
Revenues
  $ 11,753,254     $ 6,225,193     $ 17,978,447     $ 11,756,714     $ 6,552,887     $ 18,309,601  
Depreciation and amortization
  $ 183,186     $ 632,397     $ 815,583     $ 285,364     $ 690,092     $ 975,456  
Interest expense
  $ 144     $ 405,105     $ 405,249     $ -     $ 348,388     $ 348,388  
Income tax expense (benefit)
  $ 1,009,000     $ (257,000 )   $ 752,000     $ 882,000     $ (412,000 )   $ 470,000  
Net Income
  $ 1,745,791     $ (396,850 )   $ 1,348,941     $ 1,443,094     $ (671,412 )   $ 771,682  
Total segment assets
  $ 15,481,283     $ 5,289,599     $ 20,770,882     $ 15,263,935     $ 5,830,743     $ 21,094,678  
Expenditures for segmented assets
  $ 101,991     $ 51,973     $ 153,964     $ 88,650     $ 2,582,178     $ 2,670,828  

4.         Property and Equipment –

Property and equipment consisted of the following:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
Furniture and equipment
  $ 938,535     $ 927,728  
Leasehold improvements
    705,909       735,234  
Other
    71,983       69,702  
      1,716,427       1,732,664  
Less accumulated depreciation
    892,325       656,949  
                 
    $ 824,102     $ 1,075,715  
 
Depreciation expense on all operations for the year ended December 31, 2010 and 2009 was $297,927 and $287,676, respectively.

 
F-10

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5.         Intangible Assets –
 
Intangible assets consisted of the follows:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
Customer relationships
  $ 4,142,912     $ 4,092,912  
Less accumulated amortization
    3,708,499       3,190,843  
                 
    $ 434,413     $ 902,069  

As of December 31, 2010, estimated future amortization expense for the customer relationships is as follows:

2011
  $ 404,000  
2012
    30,000  
    $ 434,000  

6.         Note Payable – Short Term –

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

   
December 31,
 
   
2010
   
2009
 
Note payable to bank with interest at a variable rate adjusted from time to time based on changes in the 1 month Libor. The rate was based on the 1 month Libor (0.24% at December 31, 2009) plus 7.25%. The note was paid in full on April 2, 2010.
  $ -     $ 1,794,372  
Note payable to WERCS with interest payable monthly at the fixed rate of 12%. The note is due April 2, 2011, is collateralized by substantially all assets of WFL and shares of stock of WFL, and contains certain financial and compliance covenants, as defined.
    2,000,000       -  
    $ 2,000,000     $ 1,794,372  

7.         Notes Payable – Long Term –

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

   
December 31,
 
   
2010
   
2009
 
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.
  $ 770,638     $ 1,000,000  
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.
    711,140       945,422  
Note payable with interest payable monthly at 7%, amortized through January 1, 2012 and collateralized by substantially all assets of select locations of PQH.
    192,740       358,171  
Total
    1,674,518       2,303,593  
Less current maturities
    (769,330 )     (165,431 )
    $ 905,188     $ 2,138,162  
 
 
F-11

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Estimated repayments are as follows:

2011
  $ 769,330  
2012
    695,123  
2013
    210,065  
    $ 1,674,518  

8.         Income Taxes –

The Company’s provision for income taxes is as follows:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
Current:
           
Federal
  $ 525,000     $ 178,000  
State
    108,000       34,000  
      633,000       212,000  
                 
Deferred:
               
Federal
    100,000       217,000  
State
    19,000       41,000  
      119,000       258,000  
                 
    $ 752,000     $ 470,000  

Deferred income tax assets (liabilities) are summarized as follows:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
   
Current
   
Non-Current
   
Current
   
Non-Current
 
Deferred income tax assets:
                       
Allowance for loan receivable
  $ 442,000     $ -     $ 470,000     $ -  
Other
    25,000       -       16,000       -  
      467,000       -       486,000       -  
Deferred income tax liabilities:
                               
Property and equipment
    -       (194,000 )     -       (194,000 )
Goodwill and intangible assets
    -       (156,000 )     -       (56,000 )
      -       (350,000 )     -       (250,000 )
                                 
Net
  $ 467,000     $ (350,000 )   $ 486,000     $ (250,000 )

Reconciliations from the statutory federal income tax rate to the effective income tax rate are as follows:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
Income tax expense using the statutory federal rate
  $ 714,000     $ 422,000  
State income taxes, net of federal benefit
    83,000       46,000  
Shares received for reimbursement of expenses
    (33,000 )     -  
Other
    (12,000 )     2,000  
                 
Income tax expense
  $ 752,000     $ 470,000  
 
 
F-12

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
It is the Company’s practice to recognize penalties and/or interest related to income tax matters in interest and penalties expense. As of December 31, 2010 and 2009, the Company had an immaterial amount of accrued interest and penalties.

The Company is subject to income taxes in the U.S. federal jurisdiction and various states and local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for the years before 2007. The Company is not currently under examination by any taxing jurisdiction.

9.         Shareholders’ Equity –

Capitalization

At December 31, 2010, the Company’s authorized capital stock consists of 250,000,000 shares of no par value capital stock. All shares have equal voting rights and are entitled to one vote per share.

Of the 250,000,000 shares of authorized capital, 240,000,000 have been designated as common stock and 10,000,000 as Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock has a 10% cumulative dividend and can be converted on a share-for-share basis into common stock. The Company has the right to redeem some or all of the Series A Convertible Preferred Stock at any time, upon 60 days notice, at $3.50 per share, plus any cumulative unpaid dividends.

Stock Options and Warrants

Prior to 2007, the Company granted no stock options or stock warrants. In 2007, stock option (2007 stock options) and stock warrants were granted in connection with the merger between URON and Wyoming Financial Lenders, became immediately vested and exercisable, and had a grant date fair value of $0.54. The Company issued 400,000 new shares upon the exercise of stock warrants in 2009.

2008 Stock Incentive Plan

On February 2, 2008, the Board of Directors of the Company approved and adopted the Company’s 2008 Stock Incentive Plan, pursuant to which an aggregated of 2,000,000 shares of common stock have been reserved for issuance. No options under this plan have been granted as of December 31, 2010.

The Company had no stock options or stock warrants outstanding at December 31, 2010.

10.       Preferred Stock Dividend –

Reconciliations of the cumulative preferred stock dividend payable are as follows:

   
For the Year Ended December 31,
 
   
2010
   
2009
 
Balance due, beginning of year
  $ 1,000,000     $ -  
Current year preferred dividends payable
    2,100,000       2,100,000  
Preferred dividends paid
    (1,650,000 )     (1,100,000 )
                 
Balance due, end of year
  $ 1,450,000     $ 1,000,000  

In addition, the Company has $525,000 of fourth quarter unaccrued cumulative preferred dividends at December 31, 2010 and 2009 that became due and payable January 15, 2011 and 2010, respectively.

 
F-13

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
11.       Operating Lease Commitments –

The Company leases its facilities under operating leases with terms ranging from month to month to six years, with rights to extend for additional periods. Rent expense on all operations was approximately $1,863,000 and $1,721,000 in 2010 and 2009, respectively. Future minimum lease payments are approximately as follows:

Year Ending December 31,
 
Amount
 
2011
  $ 1,117,000  
2012
    718,000  
2013
    410,000  
2014
    171,000  
2015 and thereafter
    59,000  
 
  $ 2,475,000  

12.       Related Party Transactions –

The Company leases two properties from an officer of the Company and another related party under operating leases, one that extends through October, 2011 requiring monthly lease payments of $1,400 and one that extend through June, 2015 requiring monthly lease payments of $1,200.

Interest expense for 2010 and 2009 on two related party notes payable was approximately $176,000 and $199,000, respectively.

At the time of executing the credit facility with WERCS, the CEO / CFO was a non-controlling and non-affiliate (under 10%) shareholder of WERCS. As of December 31, 2010, the CEO / CFO was no longer a shareholder of WERCS.

13.       Stock Purchase and Sale –

On February 23, 2010, WERCS, a Wyoming corporation (“WERCS”), entered into a definitive Stock Purchase and Sale Agreement by and between WERCS, and WCR Acquisition, Inc., a Delaware corporation, pursuant to which WERCS agreed to sell to WCR Acquisition, Inc. all shares of common stock and Series A Convertible Preferred Stock of the Company owned by WERCS. The parties later amended the Stock Purchase and Sale Agreement to substitute WCR, LLC, a Delaware limited liability company, as the buyer of Company stock from WERCS. The sale of the shares of common stock and Series A Convertible Preferred Stock was consummated on March 31, 2010. WCR, LLC purchased the common stock and the Series A Convertible Preferred Stock for aggregate consideration of approximately $4,770,000.

Since the 10,000,000 shares of Series A Convertible Preferred Stock vote on an as-converted basis (presently one-for-one) with shares of the Company’s common stock, the purchase and sale transaction effects a change in the voting control of the Company, with WCR, LLC possessing approximately 61.8% of the voting power of the Company’s shares.

14.       Employment Agreement /Management Bonus Pool –

On March 31, 2010, the Company entered into an Employment Agreement with John Quandahl, its Chief Executive Officer, Chief Operating Officer, and interim Chief Financial Officer. The Employment Agreement provides Mr. Quandahl with an annual base salary and eligibility for an annual performance-based cash bonus pool for management.

The performance-based bonus provisions permit management to receive annual bonus payments in cash based on EBITDA and other targets established by the Board of Directors annually. The Employment Agreement sets the 2010 EBITDA target at $4 million. If the Company’s actual EBITDA performance for a particular annual period ranges from 85-100% of the established EBITDA target, the cash bonus pool will be 7.5% of EBITDA. If the Company’s actual EBITDA performance for a particular annual period exceeds 100% of the established EBITDA target, 15% of EBITDA over the established target will be added to the cash bonus pool. The cash bonus pool for 2010 is limited to 75% of the calculated annual amount due to the mid-year implementation of the agreement. Certain targets were not achieved for 2010 due to certain transactions approved by the Board. The Board did, however, approve a bonus pool for management of approximately $215,000, the amount that would have been earned under this plan had all the targets been achieved.

 
F-14

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
15.       Management and Advisory Agreement –

Effective April 1, 2010, the Company entered into a Management and Advisory Agreement with Blackstreet Capital Management, LLC (“Blackstreet”), to provide certain financial, managerial, strategic and operating advice and assistance. Blackstreet employs two of the Company’s directors and is affiliated with another entity to which a third director provides consulting services. The annual fees for this contract will be the greater of 5% of EBITDA or $300,000. Management and advisory fees for 2010 were $225,000.

16.       Risks Inherent in the Operating Environment –

The Company’s payday or short-term consumer loan 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 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 Bureau. While the Bureau does not appear to have authority to make rules limiting interest rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that the Bureau will address issues such as rollovers or extensions of payday loans. Future restrictions on the payday lending industry 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 our curtailment or cessation of 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 our results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines, and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing a needed.

During the 2010 legislative session in Colorado, House Bill 10-1351 was passed into law. This bill amended the Colorado Deferred Deposit Loan Act, the existing payday lending law. The law became effective August 11, 2010 and modified traditional payday lending by changing the single payment advance (with no minimum term) into a single or multiple payment loan with a minimum six month term. It also limited the amount and type of fees that can be charged on these loans, effectively reducing by one-half the fees that can be charged and when the fees may be realized. The Company continues to operate its sole store in Colorado while the impact to profitability of this new law is being assessed. In 2010, 1.42% of our Payday division revenue was generated in Colorado.

 
F-15

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
In May 2010, new laws were enacted in Wisconsin that restrict the number of times a consumer may renew (or rollover) a payday loan. Previously, there were no limits to the number of rollovers permitted. Effective January 1, 2011, consumers in Wisconsin will only be allowed to renew a payday loan once, and then lenders will be required to offer a 60-day, interest free, payment plan to consumers. The Company is still assessing the impact of these new Wisconsin laws. Our preliminary projections indicate the changes could reduce revenue in the state by 30% - 40%. In 2010, 6.17% of our Payday division revenue was generated in Wisconsin.

On November 2, 2010, voters in Montana passed Petition Initiative I-164. Effective January 1, 2011, Petition Initiative I-164 will cap fees on payday loans at an imputed interest rate of 36%. The Company discontinued its payday loan operations in that state. In 2010, 3.87% of our Payday division revenue was generated in Montana.

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 years ended December 31, 2010 and 2009, the Company had significant revenues by state (shown as a percentage of applicable division’s revenue when 10% or more) as follows:

Payday Division
 
Cricket Wireless Division
 
   
2010
of
Revenues
   
2009
% of
Revenues
     
2010
% of
Revenues
   
2009
% of
Revenues
 
Nebraska
    28 %     27 %
Missouri
    31 %     39 %
Wyoming
    14 %     14 %
Nebraska
    16 %     15 %
North Dakota
    16 %     15 %
Texas
    12 %     11 %
Iowa
    12 %     12 %
Indiana
    28 %     22 %

17.       Other Expenses –

A breakout of other expense is as follows:

   
For the Year Ended December 31,
 
 
 
2010
   
2009
 
Store expenses
           
Bank fees
  $ 223,757     $ 228,009  
Collection costs
    408,180       376,016  
Repair and Maintenance
    178,825       201,298  
Supplies
    167,624       304,092  
Telephone
    142,592       188,477  
Utilities and network lines
    503,703       374,739  
Other
    702,930       710,698  
    $ 2,327,611     $ 2,383,329  
                 
General & administrative expenses
               
Professional fees
  $ 452,244     $ 702,291  
Management and consulting fees
    300,000       -  
Other
    274,519       392,257  
    $ 1,026,763     $ 1,094,548  
 
 
F-16

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
18.      Litigation Matter –

On March 26, 2010, the Company and all of the then-current members of its Board of Directors, among others, were sued by former members of our management Messrs. Steven Staehr and David Stueve, respectively. In that lawsuit, the plaintiffs have alleged, among other things, that our Board of Directors breached certain of their fiduciary duties primarily in connection with the sale by WERCS of its capital stock in the Company to WCR, LLC. The complaint seeks injunctive and declaratory relief and unspecified money damages. The Company believes the claims are without merit. While we are unable to predict the ultimate outcome of these claims and proceedings, management currently believes there is not a reasonable possibility that the costs and liabilities of such matters, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations. Subsequent to the filing of the lawsuit, the Company removed the lawsuit to federal court and the plaintiffs sought to have the case remanded back to state court. On October 26, 2010, the plaintiffs’ motion to remand the case to state court was denied by the federal court. The Company filed a motion to dismiss the lawsuit and was required to resubmit such motion based on certain amendments the plaintiffs made to their complaint. The Company’s motion to discuss is currently being considered by the federal court.

19.      Subsequent Events –

On January 26, 2011, WERCS extended the maturity of the promissory note made by WERCS to WFL, pursuant to the Business Loan Agreement dated April 1, 2010 and an accompanying $2,000,000 promissory note to WFL, to April 1, 2012. In March, 2011, as required by the terms of the note extension, the Company paid $1,000,000 toward the principal balance on the WERCS promissory note.
 
 
F-17

 

ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T).  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 December 31, 2010, our Chief Executive Officer and Interim 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 December 31, 2010.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
 
 
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets
 
 
 
·
provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
 
 
 
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.
 
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, the Company’s management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 2010 based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010. Lurie, Besikof, Lapidus & Company, LLP, an independent registered public accounting firm, is not required to issue, and thus has not issued, an attestation report on the Company’s internal control over financial reporting as of December 31, 2010.

 
33

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect such controls.
 
ITEM 9B   OTHER INFORMATION
 
None.

 
34

 

PART III
 
ITEM 10   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
MANAGEMENT

Our Board of Directors consists of Richard E. Miller, Angel Donchev, Aldus Chapin II, Ellery Roberts and John Quandahl. The following table sets forth the name and position of each of our current directors and executive officers.

Name
 
Age
 
Positions
John Quandahl
 
44
 
Chief Executive Officer, Chief Operating Officer, Interim Chief Financial Officer and Director
Rich Horner
 
47
 
Vice President, Wyoming Financial Lenders
Richard Miller
 
63
 
Director (Chairman)
Angel Donchev
 
29
 
Director
Aldus Chapin II
 
47
 
Director
Ellery Roberts
 
40
 
Director

The biographies of the above-identified individuals are set forth below:

John Quandahl, the Company’s Chief Executive and Operating Officer and interim Chief Financial Officer, currently also serves as the President of Wyoming Financial Lenders, Inc., a position he has held since 2007. From 2005 until joining Wyoming Financial Lenders, Mr. Quandahl was the President of Houlton Enterprises, Inc., and prior to that served as that corporation’s Chief Operating Officer from 1999 until 2004. During his tenure at Wyoming Financial Lenders and Houlton Enterprises, Mr. Quandahl and the respective employers were based in Omaha, Nebraska. Mr. Quandahl was the controller as Silverstone Group, Inc., from 1993 until 1998, and before that began his career at the Nebraska Department of Revenue as a tax auditor in 1989. Mr. Quandahl is a certified public accountant (inactive) and earned a degree in accounting from the University of Nebraska - Lincoln. Mr. Quandahl served as Chief Operating Officer of Wyoming Financial Lenders prior to its merger with the Company has continued to serve as our Chief Operating Officer since that time. Effective January 1, 2008, Mr. Quandahl was appointed as our Chief Executive Officer and interim Chief Financial Officer. Mr. Quandahl was appointed to the Board of Directors on March 9, 2009.

Rich Horner, the Company’s Vice President of Wyoming Financial Lenders, joined Wyoming Financials Lenders in 2000 as its general manager. Since that time, he has served as the Wyoming Financial Lenders controller from 2007 to present. Mr. Horner was promoted to Vice President of Wyoming Financial Lenders in January 2009. Prior to joining Wyoming Financial Lenders, Mr. Horner served in a finance and budgetary capacity for InfoUSA. Mr. Horner has an MBA in finance and management from the University of Nebraska-Omaha. Mr. Horner is not a member of the Board of Directors.

Richard Miller is an independent business consultant. Previously, Mr. Miller was Chief Executive Officer of Pirelli Tire North America, a $120 million tire manufacturer, and Chief Executive Officer of Dunn Tire Corporation, a $25 million regional tire retailer. Prior experience also includes senior operating positions with Dunlop Tire and Michelin Tire. Mr. Miller has served as Executive Chairman of True Home Value, Inc., and currently serves as Chairman of Flow Dry Industries and Swift Spinning, Inc. two private companies to which Blackstreet Capital Management, LLC provides management and advisory services. Mr. Miller is a highly decorated former Marine Captain and holds a BA from Chapman College in California. Mr. Miller serves as Chairman of the Board.

Angel Donchev was appointed as a director of the Company on March 31, 2010 in connection with the acquisition of voting control of the Company by WCR, LLC. Mr. Donchev is employed by Blackstreet Capital Management, LLC, a Delaware limited liability company principally engaged in the management of private investments. Mr. Donchev joined Blackstreet Capital Management in 2005 and currently serves as a director of American Combustion Industries, Flow Dry Technology, Inc., and Swift Spinning, Inc. (all of which are private companies). Mr. Donchev has been involved in control buyouts of companies with combined revenues in excess of $300 million over the past five years. Previously, Mr. Donchev worked as a generalist in the Corporate Finance division of Stephens Inc., a middle market investment bank, where he gained experience in a variety of M&A and public offering transactions. Prior to that, Mr. Donchev worked for Teton Capital, an Austin, Texas based hedge fund, where he provided research and analysis on potential investments. Mr. Donchev graduated summa cum laude from the McCombs School of Business at the University of Texas at Austin, where he received a BBA in Business Honors and Finance.

 
35

 

Aldus Chapin, II was appointed as a director of the Company on March 31, 2010 in connection with the acquisition of voting control of the Company by WCR, LLC. Mr. Chapin is a Managing Director at Blackstreet Capital Management, LLC, a Delaware limited liability company principally engaged in the management of private investments, where he leads restructuring for all Blackstreet portfolio companies. Mr. Chapin has worked in private equity for 11 years and has a background in operations and finance. Prior to joining Blackstreet Capital Management in 2004, Mr. Chapin led operations for New York based retailer Dean & DeLuca, as well as the Manhattan restaurants for bakery chain Au Bon Pain. Mr. Chapin was the Managing Director for Lipton Financial Services, a $100 million New York based hedge fund focused on the franchise and specialty retail sectors. In addition, Mr. Chapin was the Managing Director for BV Ventures, UK, LTD, a London based equity fund where he acquired, restructured and divested a number of companies in the food service sector. Mr. Chapin has served as Executive Chairman and Interim-Chief Executive Officer in a number of complex restructuring efforts for Blackstreet Capital Management and currently serves as Chairman of Rauch Industries, Inc., American Combustion Industries, Inc., J&P Acquisitions, Inc. and Pennysaver, Inc. as well as a member of the Board of Directors of Swisher Acquisitions, Inc. and TPP Acquisition, Inc. (all of which are private companies).

Ellery Roberts was unanimously appointed by the Board of Directors to serve as a director on May 10, 2010. Mr. Roberts is the co-founder and co-managing principal of RW Capital Partners LLC, a lower middle-market mezzanine fund. Mr. Roberts brings over 15 years of private equity investing experience having been one of the founding members and Managing Director of Parallel Investment Partners, LP (formerly SKM Growth Investors, LP), a Dallas based private equity fund focused on re-capitalizations, buyouts and growth capital investments in lower middle market companies throughout the United States. Mr. Roberts was responsible for approximately $400 million in invested capital across two funds. Also during his tenure with Parallel, Mr. Roberts sat on the boards of Environmental Lighting Concepts, Hat World Corporation, Senex Financial Corporation, Builders TradeSource Corporation, Action Sports, Weisman Discount Home Centers, Winnercom, Mealey's Furniture, Regional Management Corporation, Marmalade Cafes and Diesel Service and Supply (all of which are private companies). Prior to Parallel, Mr. Roberts was a Vice President with Lazard Freres & Co. While at Lazard, he focused on and also gained experience in the home building, health care, retail, industrial and lodging sectors. Prior to joining Lazard in 1997, Mr. Roberts was with Colony Capital, Inc., where he analyzed and executed transactions for Colony Investors II, L.P., a $625 million private equity fund and prior to that was with the Corporate Finance Division of Smith Barney, Inc. where he participated in a wide variety of investment banking activities. During his career Mr. Roberts has been directly involved with over $3.0 billion in direct private equity investments. Mr. Roberts received his B.A. degree in English from Stanford University.

Under our corporate bylaws, all of our directors serve for indefinite terms expiring upon the next annual meeting of our shareholders.

When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board of Directors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director. With regard to Mr. Quandahl, the Board of Directors considered his significant experience, expertise and background with regard to accounting, financial and tax matters, his particular experience with the payday lending industry as well as retail operations, and his demonstrated experience and skills in managing and evaluating the coordination and integration of the Company’s two principal operating segments. With regard to Mr. Donchev, the Board of Directors considered his background and experience with the public securities markets and his former employment and experience with the investment banking field. With regard to Mr. Chapin, the Board of Directors considered his extensive background in retail, from an operating, restructuring and financial and investment perspective. With regard to Mr. Miller, the Board of Directors considered his leadership experience as well as his background and experience in retail operations. Finally, with regards to Mr. Roberts, the Board of Directors considered his extensive experience in finance and capital structures, his prior board leadership experience as well as his prior experience in retail operations.

FAMILY RELATIONSHIPS

The Board of Directors has affirmatively determined that there are no familial relationships among any of our officers or directors.

 
36

 

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

During the past ten years, no officer, director, control person or promoter of the Company has been:
 
 
·
involved in any petition under the federal bankruptcy laws or any state insolvency law that was filed by or against, or a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years, or any corporation or business association of which he was an executive officer at or within two years within the date of this report;
 
 
 
·
convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
 
 
 
·
the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: (1) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; (2) engaging in any type of business practice; or (3) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
 
 
 
·
the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;
 
 
 
·
found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;
 
 
 
·
found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
 
 
 
·
the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (1) any federal or state securities or commodities law or regulation; or (2) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (3) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
 
 
 
·
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
 
 
AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined that at least one member of the Audit Committee, Mr. Ellery Roberts, is an “audit committee financial expert” as that term is defined in Regulation S-K promulgated under the Exchange Act. Mr. Robert’s relevant experience is detailed in ITEM 10 above. As noted above, Mr. Roberts qualifies as an “independent director,” as such term is defined in Section 4200(a)(15) of National Association of Securities Dealers’ listing standards, and meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act. The Board of Directors has determined that each of the Audit Committee members is able to read and understand fundamental financial statements and that at least one member of the Audit Committee has past employment experience in finance or accounting.

 
37

 

CODE OF ETHICS

We have adopted a Code of Ethics which governs the conduct of our officers, directors and employees in order to promote honesty, integrity, loyalty and the accuracy of our financial statements. You may obtain a copy of the Code of Ethics without charge by writing us and requesting a copy, attention: John Quandahl, 11550 “I” Street, Omaha, Nebraska 68137. You may also request a copy by calling us at (402) 551-8888.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, directors and persons considered to be beneficial owners of more than ten percent of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission and Nasdaq. Officers, directors and greater-than-ten-percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company by its offers and directors and by WCR, LLC, the Company believes that all such filings were filed on a timely basis for fiscal year 2010. The Company does not, however, have any information with which to assess whether Mr. Steve Staehr, presumed to be a greater-than-ten-percent shareholder, has complied with any Section 16 filing requirements incumbent upon him.
 
ITEM 11   EXECUTIVE COMPENSATION
 
SUMMARY COMPENSATION TABLE

The following table sets forth the cash and non-cash compensation for awarded to or earned by: (i) each individual who served as the principal executive officer and principal financial officer of Western Capital during the year ended December 31, 2010; and (ii) each other individual that served as an executive officer of either Western Capital or Wyoming Financial Lenders, Inc. at the conclusion of the year ended December 31, 2010 and who received more than $100,000 in the form of salary and bonus during such fiscal year. For purposes of this report, these individuals are collectively the “named executives” of the Company.

Name and Principal Position
   
Salary
   
Other Annual
Compensation
   
Stock Option
Awards
   
Total
 
John Quandahl (1)
2010
  $ 246,000     $ 70,313     $ 0     $ 316,313  
Pres. and Chief Operating Officer
2009
  $ 246,000     $ 0     $ 0     $ 246,000  
Rich Horner (2)
2010
  $ 145,500     $ 50,000     $ 0     $ 195,500  
Vice President of WFL
2009
  $ 136,000     $ 35,558     $ 0     $ 171,558  
 
 
(1)
Mr. Quandahl is the President and Chief Operating Officer of Wyoming Financial Lenders, Inc., the wholly owned and principal operating subsidiary of Western Capital that offers payday lending services. Mr. Quandahl also began serving as the Chief Operating Officer of Western Capital effective November 29, 2007, and continues to serve in that capacity. Effective January 1, 2009, Mr. Quandahl was also appointed to serve as the Company’s President and Chief Executive Officer and interim Chief Financial Officer.
 
 
(2)
Mr. Horner became the Vice President of Wyoming Financial Lenders in January 2009. Prior to January 2009, Mr. Horner served as the Company’s Controller.
 
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

We had no outstanding equity awards as of December 31, 2010 for any named executives.

EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS

We do not currently have change-in-control agreements with any named executives or any other current members of our executive management. On March 31, 2010, we entered into an Employment with Mr. Quandahl to serve as our Chief Executive Officer and Chief Operating Officer. Prior to that time, Mr. Quandahl served in such capacities without any written agreement. Mr. Quandahl receives an annual base salary of $246,000 (which is the same salary Mr. Quandahl received the prior two years without any written agreement), and eligibility for an annual performance-based cash bonus.

 
38

 

The performance-based bonus provisions of the Employment Agreement permit Mr. Quandahl to receive annual bonus payments based on EBITDA targets annually established by the Board of Directors. The Employment Agreement sets the 2010 EBITDA target at $4 million. If the Company’s actual EBITDA performance for a particular annual period ranges from 85-100% of the established EBITDA target, Mr. Quandahl will be entitled to receive a cash bonus based on his share of a bonus pool consisting of 7.5% of the actual EBITDA. In this regard, Mr. Quandahl’s share of the bonus pool for any particular year is expected to be 10-50% and the remaining bonus pool will be payable to other management-level participants in the bonus pool selected from time to time by the Board of Directors. If the Company’s actual EBITDA performance for a particular annual period is less than 85% of the established EBITDA target, no bonus will be payable, and if such performance exceeds 100% of the established EBITDA target, the bonus pool participants will receive their proportionate share of 15% of the amount by which such performance exceeds the target.

During 2010, the Board of Directors authorized certain transactions that resulted in nonconformance with the capital expenditure limitation and working capital threshold eligibility requirements. The Board’s waiver of these two eligibility requirements permitted all eligible participants to benefit under the management bonus pool arrangement.

The Employment Agreement also contains customary provisions prohibiting Mr. Quandahl from soliciting customers and employees of the Company for three years after any termination of his employment with the Company, and from competing with the Company for either three years (if Mr. Quandahl is terminated for good cause or if he resigns without good reason) or two years (if the Company terminates Mr. Quandahl’s employment for without good cause or if he resigns with good reason). If Mr. Quandahl’s employment is terminated by the Company without “good cause” or if Mr. Quandahl voluntarily resigns with “good reason,” then Mr. Quandahl will be entitled to (i) severance pay for a period of 12 months and (ii) reimbursement for health insurance premiums for his family if he elects continued coverage under COBRA.

COMPENSATION OF DIRECTORS

Name and Principal Position
   
Compensation
   
Other Annual
Compensation
   
Stock Option
Awards
   
Total
 
Richard Miller (1)
2010
  $ 0     $ 75,000     $ 0     $ 75,000  
Chairman
2009
  $ N/A     $ N/A     $ N/A     $ N/A  
Ellery Roberts
2010
  $ 11,666     $ 0     $ 0     $ 11,666  
Director
2009
  $ N/A     $ N/A     $ N/A     $ N/A  
Angel Donchev
2010
  $ 0     $ 0     $ 0     $ 0  
Director
2009
  $ N/A     $ N/A     $ N/A     $ N/A  
Aldus Chapin II
2010
  $ 0     $ 0     $ 0     $ 0  
Director
2009
  $ N/A     $ N/A     $ N/A     $ N/A  
 

(1)
Mr. Miller provides management consulting services to the Company in addition to his services as Chairman of the Board. In accordance with the consulting agreement, his compensation is $100,000 per year.
 
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
 
As of the close of business on March 30, 2011, we had outstanding two classes of voting securities—common stock, of which there were 7,446,007 shares issued and outstanding; and Series A Convertible Preferred Stock, of which there were 10,000,000 shares issued and outstanding. Each share of capital stock is currently entitled to one vote on all matters put to a vote of our shareholders. The following table sets forth the number of common shares, and percentage of outstanding common shares, beneficially owned as of March 30, 2011, by:
 
 
·
each person known by the Company to be the beneficial owner of more than five percent of the Company’s outstanding common stock
 
·
each current director
 
·
each executive officer of the Company and other persons identified as a named executive in ITEM 11 above, and
 
·
all current executive officers and directors as a group.

 
39

 

Unless otherwise indicated, the address of each of the following persons is 11550 “I” Street, Omaha, Nebraska 68137, and each such person has sole voting and investment power with respect to the shares set forth opposite his, her or its name.

Name and Address
 
Common Shares
Beneficially Owned (1)
   
Percentage of 
Common Shares (1)
 
Richard Miller (2)
    333,750       4.3 %
                 
Rich Horner (3)
    100,000       *  
                 
All current executive officers and directors as a group (4)
    433,750       5.6 %
                 
Steve Irlbeck (5)
    400,000       5.4 %
                 
WRC, LLC (6)
c/o Blackstreet Capital Advisors II
5425 Wisconsin Avenue
Suite #701
Chevy Chase, MD 20815
    10,791,250       61.9 %
Boosalis Childrens Irrevocable Trust
102 Mount Tiburon
Tiburon, CA 94920
    400,000       5.4 %
Lantern Advisers, LLC (7)
80 South Eighth Street, Suite 900
Minneapolis, MN 55402
    520,963       7.0 %
Mill City Ventures II, LP (8)
80 South Eighth Street, Suite 900
Minneapolis, MN 55402
    798,000       10.7 %
Joseph A. Geraci, II (9)
80 South Eighth Street, Suite 900
Minneapolis, MN 55402
    798,000       10.7 %
Steven Staehr (10)
7778 Barbican Ct.
Las Vegas, NV 89147
    966,667       13.0 %
 

*  less than 1%
 
(1)
Beneficial ownership is determined in accordance with the rules of the SEC, and includes general voting power and/or investment power with respect to securities. Shares of common stock issuable upon exercise of options or warrants that are currently exercisable or exercisable within 60 days of the record rate, and shares of common stock issuable upon conversion of other securities currently convertible or convertible within 60 days, are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Under the applicable SEC rules, each person’s beneficial ownership is calculated by dividing the total number of shares with respect to which they possess beneficial ownership by the total number of outstanding shares of the Company. In any case where an individual has beneficial ownership over securities that are not outstanding, but are issuable upon the exercise of options or warrants or similar rights within the next 60 days, that same number of shares is added to the denominator in the calculation described above. Because the calculation of each person’s beneficial ownership set forth in the “Percentage of Common Shares” column of the table may include shares that are not presently outstanding, the sum total of the percentages set forth in such column may exceed 100%.
 
 
(2)
Mr. Miller is a director of the Company. Share figures contained in the table are taken from Mr. Miller’s most recent filing under §13 of the Securities Exchange Act of 1934 on Schedule 13G/A, filed with the SEC on November 3, 2010.
 
 
(3)
Mr. Horner became the Vice President of Wyoming Financial Lenders, Inc. in January 2009.
 
 
(4)
Consists of Messrs. Miller and Horner.
 
 
(5)
Mr. Irlbeck is the Company’s Senior Director of Accounting.

 
40

 

(6)
Consists of 1,091,250 shares of common stock and 9,700,000 shares of Series A Convertible Preferred Stock which are convertible into an equal number of shares of common stock. Share figures contained in the table are taken from WCR LLC’s most recent filing under §13 of the Securities Exchange Act of 1934 on Schedule 13D/A, filed on November 5, 2010.
 
 
 (7)
Lantern Advisers, LLC is a Minnesota limited liability company owned equally by Messrs. Douglas Polinsky and Joseph A. Geraci, II. As to shares of Western Capital, only Mr. Polinsky possesses investment and voting control. As a consequence, Mr. Geraci disclaims beneficial ownership of any shares held by Lantern Advisers. Share figures contained in the table are taken from Lantern Advisers’ most recent filing under §13 of the Securities Exchange Act of 1934 on Schedule 13G/A, filed on February 16, 2010.
 
 
(8)
Mill City Ventures II, LP is a Minnesota limited partnership the securities of which are beneficially held by Mill City Advisers LLC, a Minnesota limited liability company that serves as the general partner to Mill City Ventures II, LP. Mr. Joseph A. Geraci, II, the sole member and manager of Mill City Advisors, holds investment and voting control over the shares beneficially owned by Mill City Ventures II.
 
 
(9)
Joseph A. Geraci, II, possesses beneficial ownership of securities held by Mill City Ventures II, LP. See fn 9 above. Mr. Geraci disclaims beneficial ownership of any beneficial ownership of shares of Western Capital held by Lantern Advisers, LLC. See fn 8 above.
 
 
(10)
Share figures reflected in the table are based on a January 10, 2008 Schedule 13/G filing with the SEC, which is the Company’s most recent and best available information relating to Mr. Staehr’s ownership of Company stock.
 
 
ITEM 13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
CERTAIN RELATIONSHIPS AND TRANSACTIONS

None.

DIRECTOR INDEPENDENCE

The Company does not have a standing nominating committee. Instead, the entire Board of Directors shares the responsibility of identifying potential director-nominees to serve on the Board of Directors.

The Board of Directors does have a standing Compensation Committee and Audit Committee. The Compensation Committee is composed of Messrs. Roberts, Miller and Donchev, with no designated chairperson. The Audit Committee is composed of Messrs. Roberts and Donchev, with Mr. Roberts serving as the chairperson. The Board of Directors has determined that only Mr. Roberts is “independent,” as such term is defined in Section 5605(a)(2) of the Nasdaq Listing Rules, and meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act. The preceding disclosure respecting director independence is required under applicable SEC rules. However, as a corporation whose shares are listed for trading on the OTCQB, the Company is not required to have any independent directors at all on its Board of Directors, or any independent directors serving on any particular committees of the Board of Directors.

ITEM 14    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Aggregate fees billed by our principal independent registered public accounting firm for the fiscal years indicated:

   
2010
   
2009
 
Audit Fees
  $ 106,462     $ 295,466  
Audit-Related Fees
    -       72,260  
Tax Fees
    -       -  
All Other Fees
    -       -  
                 
Total
  $ 106,462     $ 367,726  
 
 
41

 

Audit Fees. The fees identified under this caption were for professional services rendered by Lurie Besikof Lapidus & Company, LLP for years ended 2010 and 2009 in connection with the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q. The amounts also include fees for services that are normally provided by the independent public registered accounting firm in connection with statutory and regulatory filings and engagements for the years identified.

Audit-Related Fees. The fees under this caption relate to assurance and related services related to management’s internal investigation, their amended Form 10-K/A for the year ended December 31 2007, and amended Quarterly Reports on Form 10-Q/A for the first, second and third quarters of fiscal 2008.

Tax Fees. The fees identified under this caption were for tax compliance, tax planning, tax advice and corporate tax services. Corporate tax services encompass a variety of permissible services, including technical tax advice related to tax matters; assistance with withholding-tax matters; assistance with state and local taxes; preparation of reports to comply with local tax authority transfer pricing documentation requirements; and assistance with tax audits.

Approval Policy. Our Audit Committee approves in advance all services provided by our independent registered public accounting firm. All engagements of our independent registered public accounting firm in years ended 2010 and 2009 were pre-approved by the Audit Committee and Board of Directors, respectively.

 
42

 

PART IV
 
ITEM 15   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
FINANCIAL STATEMENTS

Item
 
Page
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
 
F-1
Consolidated Balance Sheets – December 31, 2010 and December 31, 2009
 
F-2
Consolidated Statements of Operations – Years ended December 31, 2010 and December 31, 2009
 
F-3
Consolidated Statement of Shareholders’ Equity – Years ended December 31, 2010 and December 31, 2009
 
F-4
Consolidated Statements of Cash Flows – Years ended December 31, 2010 and December 31, 2009
 
F-5
Notes to Consolidated Financial Statements
 
F-6

EXHIBITS

Exhibit No.
 
Description
2.1
 
Stock Purchase Agreement with PQH Wireless, Inc., John Quandahl, Mark Houlton and Charles Payne, dated October 15, 2008 (incorporated by reference to Exhibit 2.3 to the registrant’s registration statement on Form S-1/A filed with the SEC on November 24, 2008).
     
2.2
 
Asset Purchase Agreement with Dean Salem and VZ Wireless, LLC dated January 14, 2009 (incorporated by reference to Exhibit 2.4 to the registrant’s annual report on Form 10-K filed on May 4, 2009).
     
3.1
 
Amended and Restated Articles of Incorporation, filed with the Minnesota Secretary of State on May 25, 2007 (incorporated by reference to Exhibit 3.1 to the registrant’s annual report on Form 10-K filed on April 7, 2008) (see also Exhibits 3.2 and 3.4 below).
     
3.2
 
Amendment to Amended and Restated Articles of Incorporation, filed with the Minnesota Secretary of State on December 27, 2007 (incorporated by reference to Exhibit 3.2 to the registrant’s annual report on Form 10-K filed on April 7, 2008).
     
3.3
 
Articles of Merger relating to the merger of WFL Acquisition Corp. with and into Wyoming Financial Lenders, Inc. (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed on January 7, 2008) (see also Exhibit 2.1 above).
     
3.4
 
Certificate of Designation for Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the registrant’s current report on Form 8-K filed on January 7, 2008).
     
3.5
 
Amendment to Articles of Incorporation, filed with the Minnesota Secretary of State on March 18, 2008 (incorporated by reference to Exhibit 3.5 to the registrant’s annual report on Form 10-K filed on April 7, 2008).
     
3.6
 
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed on June 23, 2008).
     
3.7
 
Amendment to Articles of Incorporation, filed with the Minnesota Secretary of State on July 29, 2008 (incorporated by reference to the registrant’s current report on Form 8-K filed on July 29, 2008).
     
3.8
 
Amendment to Articles of Incorporation, filed with the Minnesota Secretary of State on March 30, 2010 (incorporated by reference to the registrant’s current report on Form 8-K filed on April 2, 2010).
     
10.1
 
2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the registrant’s annual report on Form 10-K filed on April 7, 2008).
     
10.2
 
Term Promissory Note in principal amount of $500,000 in favor of Charles Payne (incorporated by reference to Exhibit 10.6 to the registrant’s registration statement on Form S-1/A filed with the SEC on November 24, 2008).
     
10.3
 
Term Promissory Note in principal amount of $1,000,000 in favor of John Quandahl (incorporated by reference to Exhibit 10.7 to the registrant’s registration statement on Form S-1/A filed with the SEC on November 24, 2008).
 
 
43

 
 
10.4
 
Term Promissory Note in principal amount of $1,000,000 in favor of Mark Houlton (incorporated by reference to Exhibit 10.8 to the registrant’s registration statement on Form S-1/A filed with the SEC on November 24, 2008).
     
10.5
 
Form of Security Agreement with Charles Payne, John Quandahl and Mark Houlton (incorporated by reference to Exhibit 10.9 to the registrant’s registration statement on Form S-1/A filed with the SEC on November 24, 2008).
     
10.6
 
Settlement Agreement with Christopher D. Larson, National Cash & Credit, LLC, Wyoming Financial Lenders, Inc., WERCS, Inc. and John Quandahl dated as of May 1, 2009 (incorporated by reference to Exhibit 10.10 to the registrant’s annual report on Form 10-K filed on May 4, 2009).
     
10.7
 
Business Loan Agreement between Wyoming Financial Lenders, Inc. and Banco Popular North America, dated effective as of October 30, 2009 (amending and restating the Business Loan Agreement dated October 20, 2008, and included as Exhibit 10.7 above) (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on January 19, 2010).
     
10.8
 
Promissory Note of Wyoming Financial Lenders, Inc. to Banco Popular North America, dated effective as of October 30, 2009 (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed on January 19, 2010).
     
10.9
 
Commercial Pledge Agreement between Western Capital Resources, Inc. and Banco Popular North America, dated effective as of October 30, 2009 (incorporated by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed on January 19, 2010).
     
10.10
 
Business Loan Agreement between Wyoming Financial Lenders, Inc. and WERCS, dated as of April 2, 2010 (incorporated by reference to Exhibit 10.5 to the registrant’s quarterly report on Form 10-Q filed on May 13, 2010).
     
10.11
 
Promissory Note of Wyoming Financial Lenders, Inc. to WERCS, dated as of April 2, 2010 (incorporated by reference to Exhibit 10.6 to the registrant’s quarterly report on Form 10-Q filed on May 13, 2010).
     
10.12
 
Commercial Pledge Agreement between Western Capital Resources, Inc. and WERCS, dated as of April 2, 2010 (incorporated by reference to Exhibit 10.7 to the registrant’s quarterly report on Form 10-Q filed on May 13, 2010).
     
10.13
 
Commercial Security Agreement between Wyoming Financial Lenders, Inc. and WERCS, dated as of April 2, 2010 (incorporated by reference to Exhibit 10.8 to the registrant’s quarterly report on Form 10-Q filed on May 13, 2010).
     
10.14
 
Employment Agreement with John Quandahl dated as of March 31, 2010 (incorporated by reference to Exhibit 10.4 to the registrant’s quarterly report on Form 10-Q filed on May 13, 2010).
     
10.15
 
Management and Advisory Agreement with Blackstreet Capital Management, LLC, dated as of May 10, 2010 (incorporated by reference to Exhibit 10.4 to the registrant’s quarterly report on Form 10-Q filed on August 13, 2010).
     
10.16
 
Consulting Agreement with Ric Miller Consulting, Inc. dated as of April 1, 2010 (filed herewith).
     
21
 
List of Subsidiaries (filed herewith).
     
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 Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 
44

 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
Western Capital Resources, Inc.
 
     
 
/s/ John Quandahl
3/25/11
 
 
John Quandahl
 
     
 
Chief Executive Officer and
 
 
Interim Chief Financial Officer
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ John Quandahl
3/25/11
 
/s/ Richard Miller
3/25/11
John Quandahl, Director,
 
 
Richard Miller, Director
 
Chief Executive Officer, Chief Operating Officer and
   
(Chairman)
 
Interim Chief Financial Officer
       
(principal executive officer and principal financial
       
officer)
   
/s/ Angel Donchev
3/25/11
   
 
Angel Donchev, Director
 
         
/s/ Steve Irlbeck
3/25/11
 
/s/ Aldus Chapin II
3/25/11
Steve Irlbeck, Senior Director of Accounting
 
 
Aldus Chapin II, Director
 
         
     
/s/ Ellery Roberts
3/25/11
     
Ellery Roberts, Director
 
 
 
45