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, 2011

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). x 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, 2011 was approximately $241,300 based on the closing sales price of $0.045 per share as reported on the OTCBB. As of March 30, 2012, there were 5,397,780 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   22
Item 4. Mine Safety Disclosures   22
       
PART II      
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters   23
Item 6. Selected Financial Data   25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
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. 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   40
Item 13. Certain Relationships and Related Transactions and Director Independence   41
Item 14. Principal Accountant Fees and Services   42
       
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 payday 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. In Wisconsin and Colorado, the Payday division provides short-term installment loans. The installment loan product has a rate of interest significantly higher than traditional financial institutions. At December 31, 2011, we operated 52 payday lending stores in nine states, including Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming. Our provision of payday and installment loans is typically heavily regulated by the various states in which we operate, and our payday lending and installment loan 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 and installment 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 for a flat fee, without usage limitations and without any long-term contract or commitment required from the consumer. At December 31, 2011 we owned and operated 45 Cricket wireless retail stores in 13 states, including Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon 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, 2011, each of our major lines of business (i.e., payday and installment lending, sale of Cricket phone and accessory products and Cricket sales and service fees) generated associated revenues. In 2011, we generated approximately:

 

· $10.20 million in payday lending revenues representing approximately 52.3% of our total revenues,
· $4.59 million in phone and accessory sales representing approximately 23.6% of our total revenues, and
· $3.74 million in Cricket related sales and service fees representing approximately 19.2% of our total revenues.

 

The table below summarizes our financial results and condition as of December 31, 2011 and 2010 (audited):

 

    December 31, 2011     December 31, 2010  
Revenues   $ 19,487,920     $ 17,978,447  
Net loss to common shareholders   $ 664,769     $ 751,059  
Current assets   $ 8,418,534     $ 7,958,443  
Current liabilities   $ 7,883,414     $ 6,452,628  
Total assets   $ 22,021,776     $ 20,770,882  
Total liabilities   $ 9,623,479     $ 7,707,816  
Shareholder equity   $ 12,398,297     $ 13,063,066  

 

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 2011 and 2010.

 

1
 

 

Payday lending BUSINESS

 

General Description

 

The short-term consumer loans we provide are commonly referred to as “payday loans” or “cash advance” 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 2011, we offered payday loans typically ranging from $10 to $500, with the average loan amount being approximately $327. Approximately 75.0% of our loan transactions are made for a period of up to four weeks and approximately 25.0% of our loan transactions involve loans whose initial maturity extends beyond four weeks. To repay the payday 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.

 

As part of our payday lending business, we offer short-term installment loans in Colorado and Wisconsin. In 2011 approximately 5.3% of loan revenue was derived from installment lending.

 

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 payday loan application with customers provides that we will not cash their check until the due date of the associated loan. 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 loans are subject to state, federal, and where applicable, local regulations. State and local regulations are not uniform. 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 payday loan 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 payday 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. For installment customers, we will loan up to 35% of their monthly income.

 

2
 

 

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.

 

As part of each payday loan 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 2011 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 payday loans to no more than 25% of a borrower’s monthly income, and 35% of an installment loan customer’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, 2011, we had an aggregate of all loan types of approximately:

 

· $4.63 million in current outstanding loan principal, fees and interest due to us
· $1.26 million of late loans (customers’ repayment checks presented as NSF within the last 180 days or installment loan balances not past the final installment due date with 1 or more payments delinquent)

 

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 do not charge interest in connection with our payday loans but do charge interest on our short-term installment loans made in Colorado and Wisconsin. 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 payday loan fees is applied to our average 2011 loan amount of $327, the fee ranges from $46.99 to $68.92 and the APR ranges from 391% to 574% for a two-week loan and from 195% to 287% for a four-week loan. 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 2011:

 

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
 
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 %
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 %

   

Of the nine states in which we presently operate, three states (South Dakota, Utah and Wisconsin) do not limit the payday loan fees we may charge or the term (i.e., the length) of the loans we may offer our customers. In addition, Utah does not limit the amount we may loan to customers in a payday lending transaction.

 

In Colorado, 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. In 2011, we introduced a short-term installment product in Wisconsin. Wisconsin installment loans are payable over four to six months at an annual percentage rate of approximately 390%.

 

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 conduct business with U.S. military personnel.

 

The above-described payday fees are the only fees we assess and collect from our customers for payday 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 2011, we had approximately 7,200 checks returned that were assessed a fee, compared to approximately 8,300 such checks during 2010. In 2011, we collected fees on returned checks on approximately 26% of the returned checks, for a total of approximately $46,000. In 2010, we collected on approximately 34% of these returned checks, for a total of approximately $55,000.

 

4
 

 

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 2011, 10.2% of our total loan fee revenues were derived from loan fees charged and collected upon the extension or rollover of payday loans. Approximately 10% of payday loans are rolled over or renewed.

 

Most states prohibit payday lenders from extending or refinancing a payday loan. Nevertheless, four states in which we presently operate—South Dakota, North Dakota, Utah and Wisconsin—do permit a loan to be extended or “rolled over” for a specified period. Specifically, Wisconsin 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.

 

Summary of Loan Terms

 

The table below sets forth the minimum and maximum loans we approve, the maximum fee we charge, the maximum term of the 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 - Installment   No minimum   $ 500   20% origination on first $300; 7.5% thereafter; 45% interest and a monthly maintenance fee  

Minimum

6 months

  Yes
Iowa   No minimum   $ 500  

$5+10% of first $100

10% thereafter 1

  31 days   No
Kansas   No minimum   $ 500   $15 per $100   30 days   No
Nebraska   No minimum   $ 500   15% 1 per $100   31 days   No
North Dakota   No minimum   $ 600   20%   60 days   Yes (one)
South Dakota   No minimum   $ 500   No limit   No limit   Yes (four)
Utah   No minimum   No limit   No limit   84 days   Yes
Wisconsin –Installment   No minimum   $ 750   390%   7 months   Yes
Wisconsin - Payday   No minimum   $ 1,500   No limit   No limit   Yes (one)
Wyoming   No minimum   No limit   20%   30 days   No
                         

1 Denotes that the applicable percentage is calculated on the loan amount plus any finance charges.

 

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 payday loans as of December 31, 2011, approximately 7.3% of our customers had more than one loan outstanding. In these cases, the average number of separate loans outstanding was 2.03 and the average aggregate principal amount loaned was approximately $508.

 

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 58% of the amount of all returned checks, which results in approximately 2.42% of our total payday loans being uncollectible. In 2011, we made approximately 178,000 payday loan transactions, of which approximately:

 

· 83% were paid in full at or prior to the expiration of the original loan term, accounting for approximately 84% of our loan fee revenues
· 11% were refinanced, extended, renewed or otherwise paid after the expiration of their original loan term, accounting for approximately 11% of our payday loan fee revenues, and
· 6% 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 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 20,600 cash advance loan stores in the United States, which in the aggregate provide approximately $38.5 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 and compliance with federal rules and regulations. 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. In 2010, we began offering an installment loan product at our store in Colorado and in 2011 at our four stores in Wisconsin.

 

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 were only allowed to renew a payday loan once, and then lenders are required to offer a 60-day, interest free, payment plan to consumers.

 

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In response to these changes, the Company began offering unsecured installment loans in Wisconsin in lieu of payday loans beginning in May 2011. By the fourth fiscal quarter, the Company had phased out payday loans in Wisconsin altogether. 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.

 

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 2011 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 $1.40 million for 2011, an increase of $.12 million from our provision of $1.28 million for 2010. Our provision for loan losses as a percentage of loan fee revenue was 14.5% for 2011 and 12.1% during 2010. The less favorable loss ratio in 2011 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 new installment loan offering has also contributed to the increased loan loss percentage for 2011. 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, foreclosure or liquidity issues. Nevertheless, we are not certain how improving economic conditions or an increase in our consumer base will affect our loan losses for 2012.

 

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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 Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon and Texas. 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, 2011, Cricket cellular phone service was offered in 35 states and had approximately 5.9 million customers. Leap Wireless Communications, Inc. is a Delaware public reporting corporation and the owner of Cricket Wireless. Cricket Wireless service offers customers unlimited wireless voice, data, text, Muve Music TM and broadband data services for a flat monthly rate. In addition, our retail stores in select markets offer Cricket PAYGo™ services, which is an unlimited prepaid wireless service. 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.

 

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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 current 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, Muve Music TM , text 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 service payment options for Cricket customers include:

 

· 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 $59 to high-end cellular phones at $329 before promotional rebate offers.

 

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.

 

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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 and compliance with federal rules and regulations. 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.

 

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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 on 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, prepaid credit and debit 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.

 

Competition within the cellular phone industry in general is significant. We not only compete with other suppliers of Cricket or other prepaid service providers but also with the other national cellular phone providers such as Verizon, AT&T and Sprint. It is estimated that there are in excess of 32 million wireless subscriber connections in the U.S.

 

With the introduction of additional prepaid phone providers such as Straight Talk service rolled out by Wal-Mart in October 2009, Wal-Mart’s Family Mobile TM powered by T-Mobile, which began in September 2010, that provides unlimited talk and text for 3 family members, and the increase of national retailers offering numerous prepaid phone options, such as Cricket PAYGo™ services sold at Target stores or Cricket phones sold at Best Buy or Dollar General, 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.

 

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Technology and Information

 

We maintain an integrated system of point of sale and management 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. Both of our point-of-sale systems used at our payday and Cricket store locations integrate transaction data with our management information systems on a real-time basis. These systems are designed to provide summary, detailed and exception information to regional, area and store managers as well as corporate staff and are designed to collect customer information for demographic analysis.

 

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. Payday segment 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 payday 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, 2011, we had approximately 260 employees, consisting of 242 store personnel (121 of whom were employed at payday loan stores and 121 of which were employed at Cricket retail stores), 12 corporate office employees and six 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

 

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. Neither the Company nor any of its predecessors have been in bankruptcy, receivership or any similar proceeding.

 

RECENT DEVELOPMENTS

 

Credit Facilities

 

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. On March 14, 2012, the Company paid the remaining principal balance and all accrued and unpaid interest.

 

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On October 18, 2011, the Company entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of River City Equity. The borrowing arrangement allows the Company to borrow up to $2,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note matures on September 30, 2013, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of the Company’s assets. As of December 31, 2011, $1,000,000 has been advanced under this arrangement.

 

Acquisitions

 

In September through December 2011, the Company acquired 17 retail storefronts: Arizona (2), Colorado (2), Idaho, (1), Illinois (4), Missouri (1), Nebraska (1), Ohio (1), Oklahoma (3), and Oregon (2), for $1,373,000. Of these storefronts, 14 were previously Cricket corporate-owned stores and three were acquired from another Cricket dealer.

 

In October 2011, the Company acquired one Payday store in Iowa for $48,000.

 

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 38 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. This law changed 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 restructured its lending in Colorado to replace its payday advances with a short-term installment loan. Our 2011 gross profit from Colorado operations was negatively affected by these developments, decreasing 22% from 2010 gross profit.

 

· In Wisconsin, new legislation effective January 1, 2011 limited payday loans to the lesser of $1,500 or 35% of the applicant’s monthly income, permits borrowers to cancel loans within 24 hours and roll their loans over only one time. In addition, payday lenders are required to offer a 60-day, interest free, payment plan to consumers upon maturity of their payday loans. Our 2011 gross profit from Wisconsin operations was negatively affected by these developments, decreasing 41% from 2010 gross profit.

 

· Finally, 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%. The Company discontinued its operations and closed all four stores in Montana due to this law change. In 2010, approximately 3.87% of the Company’s Payday division revenues were generated in Montana.

 

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In addition, legislation banning payday loans was introduced in Nebraska in 2008 but eventually was dropped. Nevertheless, since we derive approximately 28% 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 and compliance with federal rules and regulations. 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. 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 and above-market interest rates.

 

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, 2011, 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 13 states. For the year ended December 31, 2011, revenues from our Missouri and Indiana stores represented approximately 25% and 22% 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 could require us to seek financing on a short-term basis that may be disadvantageous to the Company.

 

On October 18, 2011, we entered in a borrowing arrangement with River City Equity, Inc. Under this arrangement, we may borrow up to $2,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note we delivered to River City Equity matures on September 30, 2013, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of our assets. As of December 31, 2011, $1,000,000 has been advanced under this arrangement.

 

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If we are unable to comply with the terms of our promissory note with River City Equity, we may need to seek additional financing. We may not be able to obtain financing on a short-term basis. Furthermore, even if we are able to obtain needed short-term financing, we may be unable to do so on terms that are favorable.

 

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 inability 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.

 

The reliance on information management and transaction systems to operate our business exposes us to cyber incidents and hacking of our sensitive information if our outsourced service provider experiences a security breach.

 

Effective information security internal controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure in addition to denial of service attacks and corruption of our data. In addition, we rely on the information security internal controls maintained by our outsourced service provider. Despite utilization of a service provider that maintains the highest level of security around our information systems, the sophistication of hackers continues to increase. Our most recent evaluation of ours and our service providers’ internal controls resulted in our conclusion that our disclosure controls and procedures were effective. Our inability to maintain effective controls or utilization of an information technology provider that also maintains effective controls, however, may increase our vulnerability to cyber attacks. Breaches of our information management system could adversely affect our business reputation. We could also be subject to third-party lawsuits relating to the unauthorized disclosure of personal information. Finally, significant information system disruptions could adversely affect our ability to effectively manage operations or reliably report results.

 

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

 

As of December 31, 2011, 58% 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. T he 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.

 

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.

 

17
 

 

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.

 

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. 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 58% of our total revenues in 2011. Our Cricket retail segment accounted for approximately 42% of our total revenues in 2011. 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 Straight Talk and Family Mobile plans. 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, operating solely as a Cricket reseller, we are dependent upon pricing, channel strategies, product supply, credit terms, dealer compensation structure, and up-to-date wireless technologies and infrastructure of Cricket Wireless.

 

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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.

 

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, 2011, with payday loan losses comprising most of the 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 $1.0 million on December 31, 2011. 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 has beneficial ownership of approximately 71.5% of our common stock. as of the date of this report. 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.

 

19
 

 

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, provided it is consistent with Minnesota law. 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.

 

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 Bulletin Board (OTCBB: 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 2011, the average daily trading volume (as reported by Google Finance) was approximately 5,000 shares with the 52-week trading prices ranging from $0.01 to $0.06 per share. The trade volume was as low as 2,000 shares for all of March and April 2011. 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.

 

When permitted by Minnesota law, we are required to 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.

 

20
 

 

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.

 

ITEM 1B    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2    PROPERTIES

 

Our headquarters is in Omaha, Nebraska. There, we have a 5,775-square-foot space, with additional space available, which is sufficient for our projected near-term future growth. The monthly lease amount is currently $3,900 and escalates to $5,500 by the end of the lease term on December 31, 2014. The corporate phone number is (402) 551-8888.

 

As of December 31, 2011, we had 52 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   · Aberdeen, South Dakota
  · Council Bluffs, Iowa (two locations)   · Rapid City, South Dakota
  · Des Moines, Iowa (four locations)   · Sioux Falls, South Dakota
  · Sioux City, Iowa   · Watertown, South Dakota
  · Dodge City, Kansas   · Salt Lake City, Utah
  · Garden City, Kansas   · Sandy, Utah
  · Columbus, Nebraska   · Taylorsville, Utah
  · Grand Island, Nebraska   · West Jordan, Utah
  · Hastings, Nebraska   · Kenosha, Wisconsin
  · Lincoln, Nebraska (three locations)   · Pleasant Prairie, Wisconsin
  · North Platte, Nebraska   · Racine, Wisconsin (two locations)
  · Omaha, Nebraska (seven locations)   · Casper, Wyoming (two locations)
  · Bismarck, North Dakota (two locations)   · Gillette, Wyoming
  · Grand Forks, North Dakota (three locations)   · Laramie, Wyoming
  · Fargo, North Dakota (four locations)   · Sheridan, Wyoming
  · Minot, North Dakota   · Rock Springs, Wyoming

 

As of December 31, 2011, we had 45 Cricket store locations. Our Cricket store locations typically range in size from 1,000 square feet to 2,500 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:

 

  · Nogales, Arizona   · Griffith, Indiana
  · Phoenix, Arizona   · Council Bluffs, Iowa
  · Fort Collins, Colorado   · Kansas City, Kansas
  · Greeley, Colorado   · Kansas City, Missouri (four locations)
  · Coeur d’Alene, Idaho   · St. Louis, Missouri (four locations)
  · Cahokia, Illinois   · Wellston, Missouri
  · Fairview Heights, Illinois   · Lincoln, Nebraska
  · Mundelein, Illinois   · Omaha, Nebraska (seven locations)
  · Arlington Heights, Illinois   · Cincinnati, Ohio
  · Round Lake Beach, Illinois   · Oklahoma City, Oklahoma (two locations)
  · Elkhart, Indiana   · Tulsa, Oklahoma
  · Gary, Indiana (two locations)   · Hillsboro, Oregon
  · Merrillville, Indiana   · Portland, Oregon
  · Mishawaka, Indiana   · San Antonio, Texas (three locations)
  · South Bend, Indiana      

 

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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.

 

ITEM 4   MINE SAFETY DISCLOSURES

 

Not applicable.

 

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 Bulletin Board, the “OTCBB,” 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 2011 and 2010. 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 also began tradingon 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   2011     2010  
First Quarter   $ 0.04 – 0.02     $ 0.30 – 0.08  
Second Quarter   $ 0.06 – 0.02     $ 0.18 – 0.02  
Third Quarter   $ 0.03 – 0.01     $ 0.08 – 0.02  
Fourth Quarter   $ 0.04 – 0.01     $ 0.19 – 0.02  

 

HOLDERS

 

As of the date of this report, we had 5,397,780 shares of common stock outstanding held by approximately 539 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 $3,550,000.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The table below sets forth certain information, as of the close of business on December 31, 2011, 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 February 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

 

We repurchased shares of common stock, effective as at the end of 2011, as follows:

 

Period   Total Number of
Shares Purchased
    Average Price Paid
Per Share
    Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
    Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
 
December 2011     1,678,963 (1)   $ 0.15       0       0  

 

 

(1) These shares were repurchased as a result of private negotiation with three shareholders who approached the Company regarding the potential repurchase of their shares by the Company. The Company obtained full and complete releases of all potential claims in the agreements governing these repurchase transactions.

 

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.

 

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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.

 

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 and installment loans, check cashing and other money services, including title loans. At the close of business on December 31, 2011 and as of the date of this report, we owned and operated 52 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.

 

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. 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. At the close of business on December 31, 2011, we owned and operated 45 Cricket wireless retail stores in 13 states, including Arizona, Colorado, Illinois, Idaho, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon 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. Phone and accessory cost of sales and occupancy costs make up our second and third largest expense items, respectively. Our provision for losses is also a significant expense. We have experienced some 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, 2011 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.

 

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Revenues increased to $19.49 million in 2011 from $17.98 million in 2010. Payday loan revenues totaled $9.66 million in 2011 compared to $10.61 million in 2010. Revenues from our Cricket phone sales increased in 2011 to $4.59 million compared to $4.10 million during 2010. Store salaries and benefits expense was $4.70 million in 2011 compared to $4.57 million in 2010, an increase that resulted mainly from the acquisition of additional Cricket cellular retail storefronts in 2011. Our 2011 phone and accessories cost of sales was $2.86 million compared to $1.71 million in 2010. The increase in our Cricket Wireless segment revenues had a corresponding upward impact to our costs of sales. Income from stores increased to $5.38 million in 2011 compared to $5.08 million in 2010. Primarily as a result of these factors, net income increased to $1.44 million in 2011 from net income of $1.35 million in 2010.

 

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 2011 and 2010.

 

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 available to businesses in our industry 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 2011 preferred dividend of $2.1 million, our net income available to common shareholders would have been approximately $1.44 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. During 2011, we had engaged in discussions with WCR, LLC regarding the conversion of preferred stock on terms more favorable than those contained in the Certificate of Designation for the preferred stock, but we were unable to reach a definitive agreement in this regard. 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 28% of our 2011 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 evaluate 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 will also explore growth opportunity through the conversion (or partial conversion) of payday stores into pawn 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, 2011 COMPARED TO YEAR ENDED DECEMBER 31, 2010

 

For the year ended December 31, 2011, net income was $1.44 million compared to a net income of $1.35 million in 2010. Income from continuing operations before income taxes was $2.32 million in 2011 compared to $2.10 million in 2010. The major components of each of revenues, store expenses, general and administrative expenses, total operating expenses and income tax expense are discussed below.

 

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Revenues

 

Revenues totaled $19.49 million in 2011 compared to $17.98 million in 2010, an increase of $1.51 million or 8.40%. The increase in total revenues resulted primarily from the following factors impacting the Cricket Wireless division: an increase in the number of Cricket storefronts in the last four months of 2011 compared to 2010 and a higher per unit selling price of phones. We originated approximately $67.5 million in payday loans during 2011 compared to $71.88 million in payday loans during the prior year. The average loan (including fee) totaled $382 in 2011 versus $367 in the prior year. Our average fee for 2011 was $55 compared to $54 for 2010. 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 $4.59 million in 2011 compared to $4.09 million in 2010. Cricket service fee revenue totaled $3.74 million in 2011 compared to $1.42 million in 2010, an increase related primarily to a change in dealer compensation arrangement in 2011. We had 49 Cricket retail storefronts open and operating during at least some part of fiscal 2011 compared to 37 storefronts during fiscal 2010. During 2011, we added 18 Cricket storefronts and closed four. In comparison, during 2010, we added four Cricket storefronts and closed six. Other revenues, including installment interest income, check cashing, title loans, service change fees and other sources, totaled $1.50 million and $1.86 million for 2011 and 2010, respectively.

 

The following table summarizes our revenues:

 

    Year Ended December 31,     Year Ended December 31,  
    2011     2010     2011     2010  
                (percentage of revenues)  
Payday loan fees   $ 9,663,130     $ 10,607,136       49.6 %     59.0 %
Phones and accessories     4,585,584       4,094,049       23.5 %     22.8 %
Cricket service fees     3,741,495       1,419,446       19.2 %     7.9 %
Installment interest income     538,273       -       2.8 %     - %
Check cashing fees     682,094       739,733       3.5 %     4.1 %
Other income and fees     277,344       1,118,083       1.4 %     6.2 %
Total   $ 19,487,920     $ 17,978,447       100 %     100 %

 

We expect that our sources of revenue for 2012 may continue to diversify as we continue to improve and increase sales in our Cricket retail operations and look to open new Cricket retail and pawn storefronts.

 

Store Expenses

 

Total expenses associated with store operations for 2011 were $14.10 million compared to $12.90 million for 2010, an increase of $1.20 million or 9.30%. 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 increases in store expenses from 2011 to 2010 related to salaries and benefits for our store employees, the provision for loan losses, and phones and accessories. Our most significant decrease 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 $4.70 million in 2011 compared to $4.58 million in 2010, an increase of $.13 million. This increase is a result of an increase in the number of storefronts operating throughout 2011. As a result of additional Cricket retail storefronts in 2011, we expect that salaries and benefits for 2012 will increase because the additional storefronts will be operating the entire year. Our salaries and benefits expenses will further increase if we add additional storefronts in 2012.

 

Provisions for Loan Losses . Our provision for losses for 2011 totaled $1.40 million and $1.28 million for 2010. Our provision for loan losses as a percentage of loan fee revenue was 14.5% during 2011 versus 12.1% during 2010. The less favorable loss ratio is due primarily to higher loss percentages with installment lending. Due to our inability to foretell the speed and scope of the current economic recovery or the economy in general, we believe there are currently uncertainties in what loan losses for 2012 may be.

 

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Phone and Accessories Cost of Sales.   The increase in our Cricket Wireless phone and accessory revenues resulted in corresponding increase in costs of sales.  For the year ended December 31, 2011, our costs of sales were $2.86 million compared to $1.71 million in 2010.  Also contributing to the increase was a 2011 change in the dealer compensation arrangement with Cricket that resulted in lower margins, partially offset by increased fees income.

 

Occupancy Costs . Occupancy expenses, consisting primarily of store leases were $1.69 million during 2011 compared to $1.85 million in 2010, a decrease of $.16 million primarily resulting from a higher number of storefront days (number of storefronts times days leased for year) in 2010 compared to 2011. Occupancy expenses as a percentage of revenues decreased from 10.3% in 2010 to 8.65% in 2010.

 

Advertising .  Advertising and marketing related expense was $.33 million in 2011 compared to $.36 million in 2010. We believe that our advertising expenses in 2012 may increase slightly over those in 2011, mainly as a result of the need to increase advertisement of our Cricket wireless cellular segment and for pawn stores we open in 2012.

 

Depreciation . Depreciation decreased by $.01 million in 2011. Depreciation was $.27 million for 2011 and $.28 million for 2010.

 

Amortization of Intangible Assets . Amortization of the customer relationship and other intangible assets was $.44 million for 2011 and $.52 million for 2010. This has been decreasing as intangibles become fully amortized.

 

Other Store Expenses . Other store expenses increased from $2.33 million in 2010 to $2.42 million in 2011. Other store expenses include bank fees, collection costs, repair and maintenance, supplies, telephone, utilities and network lines, and others. The increase in these expenses during 2011 was primarily due to increased supplies related to our Cricket store acquisitions.

 

General and Administrative Expenses

 

Total general and administrative costs for 2011 were $3.07 million compared to $2.98 million for 2010. The major components of these costs for 2011 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 2011 were $1.74 million compared to $1.53 million for 2010, with the increase being mainly attributable to an increase in the management bonus pool established pursuant to the employment agreement with the Company’s CEO. The Company expects that during 2012 salaries and benefits expenses associated with executive management and corporate headquarters will remain consistent with their 2011 levels.

 

Interest Expense . The Company had $.29 million of interest expense in 2011 compared to $.41 million in 2010, a 29.3% decrease due to a reduction in notes payable balances.

 

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 $1.01 million in 2011 compared to $1.03 million during 2010. The decrease in these expenses is mainly attributable to a decrease in nonrecurring professional fees, partially offset by management / consulting fees.

 

Total Operating Expenses

 

Total operating expenses for 2011 and 2010 were $17.17 million and $15.88 million, respectively. We anticipate our total operating expenses in 2012 to increase compared to 2011 due to the increase in number of storefronts during 2011 and 2012.

 

Income Tax Expense

 

Income tax expense on continuing operations increased to $.88 million in 2011 compared to $.75 million in 2010 for an effective rate of 38% and 36%, respectively.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Summary cash flow data is as follows:

 

    Year Ended December 31,  
    2011     2010  
             
Cash flows provided (used) by :                
Operating activities   $ 2,149,115     $ 2,743,235  
Investing activities     (1,562,729 )     (103,964 )
Financing activities     (769,330 )     (2,073,447 )
Net increase (decrease) in cash     (182,944 )     565,824  
Cash, beginning of period     2,092,386       1,526,562  
Cash, end of period   $ 1,909,442     $ 2,092,386  

 

At December 31, 2011, we had cash of $1.91 million compared to cash of $2.09 million on December 31, 2010. For 2012, we believe that our available cash, combined with expected cash flows from operations, will be sufficient to fund our liquidity and capital expenditure requirements through March of 2013. 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 short-term debt, and capital expenditures.

 

Our overall cash and liquidity position has been significantly enhanced by the past and current willingness of the holders of our Series A Convertible Preferred Stock to not insist that the Company pay dividends to those stockholders to the greatest extent permitted by Minnesota state law.  Minnesota state law indicates that a corporation can only pay a dividend in circumstances where the corporation will be able to pay its debts in the ordinary course of business after making the dividend. In the case where those stockholders were to insist that the Company pay dividends to the greatest extent permitted by state law (as required by the terms of the preferred stock), our liquidity position would likely be negatively affected, perhaps materially, such that we would be required to arrange for or engage in additional borrowing to ensure that we would have capital available to fund cash advance loans and otherwise.

 

Credit Facilities

 

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. On March 14, 2012, the Company paid the remaining principal balance and all accrued and unpaid interest.

 

On October 18, 2011, the Company entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of River City Equity. The borrowing arrangement allows the Company to borrow up to $2,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note matures on September 30, 2013, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in all of the Company’s assets. As of December 31, 2011, $1,000,000 has been advanced under this arrangement.

 

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.

 

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:

 

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Loans Receivable Allowance

 

We maintain a loan loss allowance for anticipated losses for our payday, 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. 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. Also included in loans receivable are current and delinquent installment and title loans. Loans are carried at cost less the loans receivable allowance. We do not specifically reserve for any individual loan. We aggregate loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates. 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 42% 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 – 42%; 31 to 60 days – 66%; 61 to 90 days – 82%; 91 to 120 days – 88%; 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 loans receivable allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

 

At December 31, 2011 and 2010 our outstanding loans receivable aging was as follows:

 

    December 31,  
    2011     2010  
Current   $ 4,626,000     $ 4,542,000  
1-30     297,000       276,000  
31 – 60     220,000       234,000  
61 – 90     223,000       209,000  
91 - 120     171,000       220,000  
121 – 150     189,000       227,000  
151 – 180     163,000       201,000  
      5,889,000       5,909,000  
Allowance for losses     (1,001,000 )     (1,165,000 )
    $ 4,888,000     $ 4,744,000  

 

A rollforward of our loans receivable allowance for the years ended December 31, 2011 and 2010 is as follows:

 

    Year Ended December 31  
    2011     2010  
Loans receivable allowance, beginning of year   $ 1,165,000     $ 1,237,000  
Provision for loan losses charged to expense:     1,397,000       1,280,000  
Charge-offs, net     (1,561,000 )     (1,352,000 )
                 
Loans receivable allowance, end of year   $ 1,001,000     $ 1,165,000  

 

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 . W e 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.

 

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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 the effect of 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, 2011 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, 2011, 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. This analysis resulted in a determination that no triggering events or changes in circumstances had occurred.

 

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.

 

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.

 

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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

 

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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, 2011 and 2010, 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, 2011 and 2010 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 30, 2012

 

F- 1
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    December 31,  
    2011     2010  
             
ASSETS                
                 
CURRENT ASSETS                
Cash   $ 1,909,442     $ 2,092,386  
Loans receivable (less allowance for losses of $1,001,000 and $1,165,000)     4,887,813       4,743,906  
Inventory     756,528       502,415  
Prepaid expenses and other     451,751       152,736  
Deferred income taxes     413,000       467,000  
TOTAL CURRENT ASSETS     8,418,534       7,958,443  
                 
PROPERTY AND EQUIPMENT     757,747       824,102  
                 
GOODWILL     12,393,869       11,458,744  
                 
INTANGIBLE ASSETS     309,552       434,413  
                 
OTHER     142,074       95,180  
                 
TOTAL ASSETS   $ 22,021,776     $ 20,770,882  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Accounts payable and accrued liabilities   $ 2,323,730     $ 1,477,607  
Income tax payable     -       435,670  
Note payable – short-term     1,000,000       2,000,000  
Current portion long-term debt     695,123       769,330  
Preferred dividend payable     3,550,000       1,450,000  
Deferred revenue     314,561       320,021  
TOTAL CURRENT LIABILITIES     7,883,414       6,452,628  
                 
LONG-TERM LIABILITIES                
Note payable – long-term     1,210,065       905,188  
Deferred income taxes     530,000       350,000  
TOTAL LONG-TERM LIABILITIES     1,740,065       1,255,188  
                 
TOTAL LIABILITIES     9,623,479       7,707,816  
                 
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 7,446,007 shares issued and outstanding.     -       -  
Additional paid-in capital     18,221,777       18,221,777  
Accumulated deficit     (5,923,480 )     (5,258,711 )
TOTAL SHAREHOLDERS’ EQUITY     12,398,297       13,063,066  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 22,021,776     $ 20,770,882  

 

See notes to consolidated financial statements.

 

F- 2
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

    Year ended December 31,  
    2011     2010  
REVENUES                
Payday loan fees   $ 9,663,130     $ 10,607,136  
Phones and accessories     4,585,584       4,094,049  
Cricket service fees     3,741,495       1,419,446  
Installment interest income     538,273       -  
Check cashing fees     682,094       739,733  
Other income and fees     277,344       1,118,083  
      19,487,920       17,978,447  
                 
STORE EXPENSES                
Salaries and benefits     4,702,051       4,573,346  
Provisions for loan losses     1,396,724       1,279,547  
Phone and accessories cost of sales     2,857,294       1,706,160  
Occupancy     1,686,373       1,852,279  
Advertising     333,453       363,171  
Depreciation     275,389       280,250  
Amortization of intangible assets     435,861       517,656  
Other     2,417,441       2,327,611  
      14,104,586       12,900,020  
                 
INCOME FROM STORES     5,383,334       5,078,427  
                 
GENERAL & ADMINISTRATIVE EXPENSES                
Salaries and benefits     1,735,686       1,527,797  
Depreciation     23,741       17,677  
Interest expense     290,913       405,249  
Other     1,014,763       1,026,763  
      3,065,103       2,977,486  
                 
INCOME BEFORE INCOME TAXES     2,318,231       2,100,941  
                 
INCOME TAX EXPENSE     883,000       752,000  
                 
NET INCOME     1,435,231       1,348,941  
                 
SERIES A CONVERTIBLE PREFERRED STOCK DIVIDENDS (assumes all paid)     (2,100,000 )     (2,100,000 )
                 
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS   $ (664,769 )   $ (751,059 )
                 
NET LOSS PER COMMON SHARE -                
Basic and diluted   $ (0.09 )   $ (0.10 )
                 
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING -                
Basic and diluted     7,446,007       7,584,637  

 

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, 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  
                                                         
Dividends     -       -       -       -       -       (2,100,000 )     (2,100,000 )
Net income     -       -       -       -       -       1,435,231       1,435,231  
BALANCE - December 31, 2011     10,000,000     $ 100,000       7,446,007     $ -     $ 18,221,777     $ (5,923,480 )   $ 12,398,297  

 

See notes to consolidated financial statements.

 

F- 4
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year Ended December 31,  
    2011     2010  
OPERATING ACTIVITIES                
Net Income   $ 1,435,231     $ 1,348,941  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation     299,130       297,927  
Amortization     435,861       517,656  
Shares received for reimbursement of expenses     -       (88,000 )
Deferred income taxes     234,000       119,000  
Loss on disposal of property and equipment     28,172       57,650  
Changes in operating assets and liabilities:                
Loans receivable     (100,876 )     131,964  
Inventory     (254,113 )     (128,557 )
Prepaid expenses and other assets     (334,283 )     97,944  
Accounts payable and accrued liabilities     411,453       414,515  
Deferred revenue     (5,460 )     (25,805 )
Net cash provided by operating activities     2,149,115       2,743,235  
                 
INVESTING ACTIVITIES                
Purchases of property and equipment     (145,947 )     (103,964 )
Acquisition of stores, net of cash acquired     (1,416,782 )     -  
Net cash used by investing activities     (1,562,729 )     (103,964 )
                 
FINANCING ACTIVITIES                
Net advances  on notes payable     -       205,628  
Payments on notes payable – long-term     (769,330 )     (629,075 )
Dividends     -       (1,650,000 )
Net cash used by financing activities     (769,330 )     (2,073,447 )
                 
NET INCREASE (DECREASE) IN CASH     (182,944 )     565,824  
                 
CASH                
Beginning of year     2,092,386       1,526,562  
End of year   $ 1,909,442     $ 2,092,386  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
                 
Income taxes paid   $ 1,094,468     $ 343,103  
Interest paid   $ 290,954     $ 401,594  
                 
Noncash investing and financing activities:                
Refinancing of note payable – short-term   $ -     $ 1,636,044  

 

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 52 “Payday” stores in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) as of December 31, 2011 and 51 “Payday” stores in 2010. The Company operated 45 Cricket wireless retail stores in 13 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon and Texas) as of December 31, 2011 and 31 Cricket wireless retail stores in eight states (Illinois, Indiana, Iowa, Kansas, Maryland, Missouri, Nebraska and Texas) as of December 31, 2010.  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 and installment 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 a cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. Installment loans provide customers with cash in exchange for a promissory note with a maturity of generally three to six months and are unsecured. The fee and interest rate on installment loans vary based on applicable regulations.

 

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 loans receivable allowance, allocation of and carrying value of goodwill and intangible assets, inventory valuation and obsolescence and deferred taxes and tax uncertainties.

 

Revenue Recognition

 

The Company recognizes fees on cash advance loans on a constant-yield basis ratably over the loans’ terms. Title and installment loan fees and interest are recognized using the interest method, except that installment loan origination fees are recognized as they become non-refundable and installment loan maintenance fees are recognized when earned. The Company 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 Allowance

 

We maintain a loan loss allowance for anticipated losses for our payday, 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 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.  Also included in loans receivable are current and delinquent installment and title loans. Loans are carried at cost less the loans receivable allowance.  The Company does not specifically reserve for any individual loan.  The Company aggregates loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio.  This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.  As a result of the Company’s collection efforts, it historically writes off approximately 42% 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 – 42%; 31 to 60 days – 66%; 61 to 90 days – 82%; 91 to 120 days – 88%; 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 loans receivable allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

 

At December 31, 2011 and 2010 our outstanding loans receivable aging was as follows:

 

    December 31,  
    2011     2010  
Current   $ 4,626,000     $ 4,542,000  
1-30     297,000       276,000  
31 – 60     220,000       234,000  
61 – 90     223,000       209,000  
91 - 120     171,000       220,000  
121 – 150     189,000       227,000  
151 – 180     163,000       201,000  
      5,889,000       5,909,000  
Allowance for losses     (1,001,000 )     (1,165,000 )
    $ 4,888,000     $ 4,744,000  

 

A rollforward of the Company’s loans receivable allowance for the years ended December 31, 2011 and 2010 is as follows:

 

    Year Ended December 31,  
    2011     2010  
Loans receivable allowance, beginning of year   $ 1,165,000     $ 1,237,000  
Provision for loan losses charged to expense     1,397,000       1,280,000  
Charge-offs, net     (1,561,000 )     (1,352,000 )
Loans receivable allowance, end of year   $ 1,001,000     $ 1,165,000  

 

Inventory

 

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

 

F- 7
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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 . W e 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 the effect of 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 2011 or 2010.

 

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, 2011 and 2010 were anti-dilutive and therefore excluded from the dilutive net loss per share computation:

 

F- 8
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

    Year Ended December 31,  
    2011     2010  
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, and accounts payable are short-term in nature and their carrying values approximate fair values. The amounts reported in the balance sheets for notes payable are both long-term and short-term and their carrying value approximates fair value.

 

Recent Accounting Pronouncements

 

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. The Company adopted this standard with no material impact on its consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04 “ Fair Value Measurement (Topic820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS .” ASU 2011-04 results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. For public entities, ASU 2011-04 is effective for interim or annual reporting periods ending on or after December 15, 2011. We are assessing the impact of ASU 2011-04 on our consolidated financial statements.

 

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08 “ Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should perform additional steps to determine if there is goodwill impairment. The amendments are effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011, early adoption being permitted. The adoption of ASU 2011-08 is not expected to have an impact on our consolidated financial statements.

 

2. Acquisitions/Dispositions –

 

In 2011 the Company purchased the assets of various stores in separate transactions. The aggregate purchase price totaled $1,421,000.

 

In September through December 2011, the Company acquired 17 retail storefronts (Arizona (2), Colorado (2), Idaho, (1), Illinois (4), Missouri (1), Nebraska (1), Ohio (1), Oklahoma (3) and Oregon (2)) for $1,373,000. Fourteen of the storefronts were previously Cricket corporate owned stores and 3 were acquired from another Cricket dealer.

 

In October 2011, the Company acquired one Payday store in Iowa for $48,000.

 

The Company made no material acquisitions in 2010.

 

F- 9
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2011
 
Cash   $ 4,000  
Loans receivable     43,000  
Property and equipment     115,000  
Intangible assets     311,000  
Goodwill     935,000  
Other non-current assets     12,000  
Other     1,000  
    $ 1,421,000  

 

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, 2011 and 2010, as if the acquisitions had been consummated at the beginning of 2010. 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 2010 or the results which may occur in the future.

 

    For the Year Ended December 31,  
    2011     2010  
Pro forma revenue   $ 25,996,000     $ 25,788,000  
Pro forma net loss   $ (148,100 )   $ (232,400 )
Pro forma net loss per common share – basic and diluted   $ (0.02 )   $ (0.03 )

 

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, 2011 and 2010:

 

    For the Year Ended December 31, 2011     For the Year Ended December 31, 2010  
    Payday     Cricket
Wireless
    Total     Payday     Cricket
Wireless
    Total  
                                                 
Revenues   $ 11,211,739     $ 8,276,181     $ 19,487,920     $ 11,753,254     $ 6,225,193     $ 17,978,447  
Depreciation and amortization   $ 151,249     $ 583,742     $ 734,991     $ 183,186     $ 632,397     $ 815,583  
Interest expense   $ -     $ 290,913     $ 290,913     $ 144     $ 405,105     $ 405,249  
Income tax expense (benefit)   $ 963,000     $ (80,000 )   $ 883,000     $ 1,009,000     $ (257,000 )   $ 752,000  
Net income (loss)   $ 1,575,757     $ (140,526 )   $ 1,435,231     $ 1,745,791     $ (396,850 )   $ 1,348,941  
Total segment assets   $ 15,037,112     $ 6,984,665     $ 22,021,776     $ 15,481,283     $ 5,289,599     $ 20,770,882  
Expenditures for segmented assets   $ 55,216     $ 1,451,856     $ 1,507,072     $ 101,991     $ 51,973     $ 153,964  

 

F- 10
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. Property and Equipment –

 

Property and equipment consisted of the following:

 

    For the Year Ended December 31,  
    2011     2010  
Furniture and equipment   $ 1,076,225     $ 938,535  
Leasehold improvements     727,570       705,909  
Other     71,766       71,983  
      1,875,561       1,716,427  
Less accumulated depreciation     1,117,814       892,325  
                 
    $ 757,747     $ 824,102  

 

Depreciation expense on all operations for the year ended December 31, 2011 and 2010 was $299,130 and $297,927, respectively.

 

5. Intangible Assets –

 

Intangible assets consisted of the follows:

 

    For the Year Ended December 31,  
    2011     2010  
Customer relationships   $ 4,453,912     $ 4,142,912  
Less accumulated amortization     4,144,360       3,708,499  
                 
    $ 309,552     $ 434,413  

 

As of December 31, 2011, estimated future amortization expense for the customer relationships is as follows:

 

2012   $ 175,000  
2013     88,000  
2014     47,000  
    $ 310,000  

 

6. Note Payable – Short Term –

 

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

 

    December 31,  
    2011     2010  
Note payable to WERCS with interest payable monthly at the fixed rate of 12%.  The note was extended to April 1, 2012, is collateralized by substantially all assets of WFL and shares of stock of WFL, and contains certain financial and compliance covenants, as defined.   $ 1,000,000     $ 2,000,000  
    $ 1,000,000     $ 2,000,000  

 

F- 11
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

7. Notes Payable – Long Term –

 

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

 

    December 31,  
    2011     2010  
Note payable (with a credit limit of $2,000,000) to River City Equity, Inc., a related party, with interest payable monthly at 12% due September 30, 2013 and upon certain events  can be collateralized by substantially all assets of WCR.   $ 1,000,000     $ -  
Note payable to a related party with interest payable monthly at 10%, due March 1, 2013 and collateralized by substantially all assets of select locations of PQH.     449,340       770,638  
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.     440,499       711,140  
Note payable with interest payable monthly at 7%, amortized through January 1, 2012 and collateralized by substantially all assets of select locations of PQH.     15,349       192,740  
Total     1,905,188       1,674,518  
Less current maturities     (695,123 )     (769,330 )
    $ 1,210,065     $ 905,188  

 

Estimated repayments are as follows:

 

2012   $ 695,123  
2013     1,210,065  
    $ 1,905,188  

 

8. Income Taxes –

 

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

 

    For the Year Ended December 31,  
    2011     2010  
Current:                
Federal   $ 549,000     $ 525,000  
State     100,000       108,000  
      649,000       633,000  
                 
Deferred:                
Federal     197,000       100,000  
State     37,000       19,000  
      234,000       119,000  
                 
    $ 883,000     $ 752,000  

 

F- 12
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

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

 

    For the Year Ended December 31,  
    2011     2010  
    Current     Non-Current     Current     Non-Current  
Deferred income tax assets:                                
Allowance for loan receivable   $ 380,000     $ -     $ 442,000     $ -  
Other     33,000       -       25,000       -  
      413,000       -       467,000       -  
Deferred income tax liabilities:                                
Property and equipment     -       (163,000 )     -       (194,000 )
Goodwill and intangible assets     -       (367,000 )     -       (156,000 )
      -       (530,000 )     -       (350,000 )
                                 
Net   $ 413,000     $ (530,000 )   $ 467,000     $ (350,000 )

 

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

 

    For the Year Ended December 31,  
    2011     2010  
Income tax expense using the statutory federal rate   $ 788,000     $ 714,000  
State income taxes, net of federal benefit     92,000       83,000  
Shares received for reimbursement of expenses     -       (33,000 )
Other     3,000       (12,000 )
                 
Income tax expense   $ 883,000     $ 752,000  

 

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, 2011 and 2010, 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. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company and has concluded that as of December 31, 2011, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes it is no longer subject to income tax examinations for years prior to 2008.

 

9. Shareholders’ Equity –

 

Capitalization

 

At December 31, 2011, 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.

 

F- 13
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

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, 2011.

 

The Company had no stock options or stock warrants outstanding at December 31, 2011.  

 

10. Preferred Stock Dividend –

 

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

 

    For the Year Ended December 31,  
    2011     2010  
Balance due, beginning of year   $ 1,450,000     $ 1,000,000  
Current year preferred dividends payable     2,100,000       2,100,000  
Preferred dividends paid     -       (1,650,000 )
                 
Balance due, end of year   $ 3,550,000     $ 1,450,000  

 

In addition, the Company has $525,000 of fourth quarter unaccrued cumulative preferred dividends at December 31, 2011 and 2010 that became due and payable January 15, 2012 and 2011, respectively.

 

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 $1,704,000 and $1,863,000 in 2011 and 2010, respectively.  Future minimum lease payments are approximately as follows:  

 

Year Ending December 31,   Amount  
2012   $ 1,411,000  
2013     899,000  
2014     548,000  
2015     234,000  
2016 and thereafter     70,000  
    $ 3,162,000  

 

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, 2016 requiring monthly lease payments of $1,680 and one that extends through June, 2015 requiring monthly lease payments of $1,200.

 

On August 31, 2011, the Company entered into two operating leases for property owned by Ladary, Inc.  Ladary, which acquired the two properties in foreclosure sales, is a corporation partially owned by the Chief Executive Officer of the Company, two directors and two employees of the management company that manages the Company’s largest shareholder.  The new leases, one of which replaced an earlier lease that the Company had entered into with the prior landlord, have four-year terms, require aggregate monthly rental payments of $6,000, and are on terms and conditions substantially similar to those contained in the replaced leases.

 

F- 14
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

On October 18, 2011 the Company entered into a long-term Promissory Note with River City Equity, Inc. River City Equity, Inc. is a related party due to the relationship of one of its minority shareholders to the Company’s CEO. Terms of the note are for up to $2,000,000 of principal to be loaned at a rate of 12% with interest payable on a monthly basis. The note matures and all accrued and unpaid interest and the unpaid principal is due and payable on September 30, 2013. The note includes a prepayment penalty and terms providing a security interest, under certain circumstances, in substantially all assets of the Company.

 

Mr. Richard Miller is the Company’s Board Chairman. 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. He was paid $100,000 and $75,000 in 2011 and 2010, respectively, under this consulting agreement.

 

Rent expense to related parties for 2011 and 2010 was approximately $57,000 and $33,000, respectively.

 

Interest expense for 2011 and 2010 on the related party notes payable was approximately $139,000 and $176,000, respectively.

 

At the time of executing the credit facility with WERCS, the CEO was a non-controlling and non-affiliate (under 10%) shareholder of WERCS. As of December 31, 2010, the CEO 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 adjusted EBITDA and other targets established by the Board of Directors annually. The Employment Agreement sets the 2011 and 2010 adjusted EBITDA target at $4 million. If the Company’s actual adjusted EBITDA performance for a particular annual period ranges from 85-100% of the established adjusted EBITDA target, the cash bonus pool will be 7.5% of adjusted EBITDA. If the Company’s actual EBITDA performance for a particular annual period exceeds 100% of the established adjusted EBITDA target, 15% of adjusted 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. The Board approved modifications to the threshold calculations for 2011 by modifying them to exclude from the capital expenditures and working capital requirement calculations the Cricket store acquisition transactions and related long-term debt. The bonus pool for 2011 is approximately $334,000. Certain targets were not achieved for 2010 due to transactions approved by the Board. The Board did, however, approve a bonus pool for management of approximately $215,000 for 2010, the amount that would have been earned under this plan had all the targets been achieved.

 

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 (increased by 5% annually effective April 1, 2011). Management and advisory fees for 2011 and 2010 were $311,250 and $225,000, respectively.

 

F- 15
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 and compliance with federal rules and regulations. 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 offering short-term installment loans.

 

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 are 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. In 2011 we introduced an installment loan product in Wisconsin.

 

F- 16
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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%. The Company discontinued its payday loan operations in that state on December 31, 2010.

 

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, 2011 and 2010, 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
   

2011

% of

Revenues

   

2010

% of

Revenues

       

2011

% of

Revenues

 

2010

% of

Revenues

 
Nebraska   28 %   28 %   Missouri   25 % 31 %
Wyoming   15 %   14 %   Nebraska   18 % 16 %
North Dakota   18 %   16 %   Texas   11 % 12 %
Iowa   12 %   12 %   Indiana   22 % 28 %

 

17. Other Expenses –

 

A breakout of other expense is as follows:

 

    For the Year Ended December 31,  
    2011     2010  
Store expenses                
Bank fees   $ 273,868     $ 223,757  
Collection costs     386,230       408,180  
Repair and Maintenance     155,579       178,825  
Supplies     248,011       167,624  
Telephone     133,945       142,592  
Utilities and network lines     486,355       503,703  
Other     733,453       702,930  
    $ 2,417,441     $ 2,327,611  
                 
General & administrative expenses                
Professional fees   $ 235,380     $ 452,244  
Management and consulting fees     411,250       300,000  
Other     368,133       274,519  
    $ 1,014,763     $ 1,026,763  

 

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 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. 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. On July 6, 2011, the U.S. District Court for the District of Minnesota granted the Company’s motion to dismiss the action brought by Messrs. Steven Staehr and David Stueve. The lawsuit was dismissed without prejudice. The Company obtained a full and complete release from Steven Staehr pursuant to a Stock Redemption Agreement entered into on March 1, 2012, effective as of February 28, 2012. The redemption transaction contemplated by the agreement was consummated on March 12, 2012.

 

F- 17
 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

19. Special Committee of the Board of Directors

 

In June 2011, the Board of Directors appointed Mr. Ellery Roberts to a special committee of the board.  The appointment was made for a period of six months.  In November 2011 this appointment was extended through August 2012. In consideration for his additional service on the committee, the Company will pay Mr. Roberts $13,000 per month from June 2011 through November 2011 and $10,000 per month from December 2011 through November 2012.

 

20. Subsequent Events –

 

TX store acquisition

 

In February, 2012, the Company acquired three additional Cricket corporate owned stores for approximately $350,000. Two of the stores are located in McAllen, Texas and one in Laredo, Texas.

 

Common Stock Repurchase

 

Also in February-March, 2012, the Company repurchased an aggregate of 2,048,227 shares of its common stock from four shareholders at $0.15 per share for a total repurchase cost of $307,234.

 

Credit Facility

 

On March 14, 2012, the Company paid the remaining principal balance and all accrued and unpaid interest owing under the WERCS credit facility.

 

Related-Party Consulting Agreement

 

On March 7, 2012, a consulting agreement with Mr. Richard Miller was approved by the Company’s Board of Directors. The agreement provides for consulting fees in the amount of $100,000 and the same terms and conditions as the agreement that expires March 31, 2012.

  

F- 18
 

 

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

 

None.

 

ITEM 9A.      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, 2011, 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, 2011.

 

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, 2011 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, 2011. 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, 2011.

 

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

 

On March 1, 2012, we entered into Stock Redemption Agreement with Mr. Steven Staehr for the repurchase by us of 369,264 common shares. On March 12, 2012, we completed the transactions contemplated by the Stock Redemption Agreement by accepting the shares transferred to us and paying the redeemed stockholder. We agreed to pay a per-share price of $0.15, resulting in an aggregate purchase price of approximately $55,390. The Stock Redemption Agreement contained standard representations and warranties, mutual releases of any and all potential claims, and a covenant from the selling shareholder not to reacquire any shares of Western Capital capital stock, and was in substantially identical form to that entered into with three other shareholders whose common shares were earlier redeemed by the Company and reported on a Form 8-K filed on February 21, 2012. Redemption proceeds were paid in cash. The Stock Redemption Agreements entered into with each of the four shareholders are filed as exhibits to this report.

 

On March 7, 2012, the Board of Directors approved an amendment and restatement of the Company’s Code of Ethics effective March 30, 2012. The amended and restated Code of Ethics is filed as an exhibit to this report.

 

34
 

 

PART III

 

ITEM 10    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

MANAGEMENT

 

Our Board of Directors consists of Richard E. Miller, Angel Donchev, Thomas H. Ripley, Ellery Roberts and John Quandahl. During fiscal 2011, the board seat occupied by Mr. Ripley was occupied by Mr. Aldus Chapin, II The following table sets forth the name and position of each of our current directors and executive officers.

 

Name   Age   Positions
John Quandahl   45   Chief Executive Officer, Chief Operating Officer and Director
Steve Irlbeck   47   Chief Financial Officer
Rich Horner   48   Vice President, Wyoming Financial Lenders
Richard Miller   64   Director (Chairman)
Angel Donchev   30   Director
Thomas H. Ripley   43   Director
Ellery Roberts   41   Director

 

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

 

John Quandahl , the Company’s Chief Executive and Operating Officer, currently also serves as the President of Wyoming Financial Lenders, Inc., a position he has held since 2007. Mr. Quandahl served as the Company’s Interim Chief Financial Officer from January 1, 2008 to May 10, 2011. 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, 2009, Mr. Quandahl was appointed as our Chief Executive Officer and until May 2011, our interim Chief Financial Officer. Mr. Quandahl was appointed to the Board of Directors on March 9, 2009.

 

Steve Irlbeck was appointed the Company’s Chief Financial Officer in May 2011. Mr. Irlbeck joined the Company in January 2009 as the Company’s Senior Director of Accounting. From 1995 until 2008, Mr. Irlbeck was employed at Lutz & Company, PC, a public accounting and consulting firm in Omaha, Nebraska where he was a tax partner. Mr. Irlbeck is a certified public accountant (inactive) and earned a degree in accounting from Creighton University.

 

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.

 

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
 

 

Thomas H . Ripley, was appointed as a director of the Company on February 17, 2012 to fill the vacancy created by Aldus Chapin, II. Mr. Ripley is an independent operating partner that has worked with Blackstreet Capital Management, LLC. since April 2008 and currently serves as the Chairman of the Board of American Combustion Industries, and is also the President and a director of ThinkDirect Marketing Group.  Mr. Ripley has been an operating partner and member of the executive team of several companies since 2001.  Prior to his private equity experience, Mr. Ripley worked on Wall Street for Bear Stearns, and Goldman Sachs.  Mr. Ripley was a Captain in the U.S. Marine Corps and holds a Masters in Business from the University of Chicago, and completed his undergraduate studies at the Virginia Military Institute. 

 

Ellery Roberts was 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. Ripley, the Board of Directors considered his experience in business acquisitions and post-acquisition operational improvements with emphasis upon cost reduction and revenue growth. 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.

 

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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 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 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.

 

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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. Our Code of Ethics was amended and restated effective as of March 30, 2012, and a copy of that amended and restated Code of Ethics is filed as an exhibit to this report. 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 officers and directors and by WCR, LLC, the Company believes that all such filings were filed on a timely basis for fiscal year 2011. The Company does not have any information relative to Mr. Steven Staehr and when any filings reporting his disposition of shares during 2011 may have been due.

 

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, 2011; 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, 2011 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)     2011     $ 246,000     $ 80,114     $ 0     $ 326,114  
Pres. and Chief Operating Officer     2010     $ 246,000     $ 70,313     $ 0     $ 316,313  
Steve Irlbeck (2)     2011     $ 140,000     $ 70,000     $ 0     $ 210,000  
Chief Financial Officer     2010     $ 120,000     $ 55,000     $ 0     $ 175,000  
Rich Horner (3)     2011     $ 148,000     $ 64,000     $ 0     $ 212,000  
Treasurer of WFL     2010     $ 145,500     $ 50,000     $ 0     $ 195,500  

 

 

(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. From January 1, 2009 through May 10, 2011, Mr. Quandahl also served as interim Chief Financial Officer.

 

(2) Mr. Irlbeck is the Chief Financial Officer of Western Capital Resources. Mr. Irlbeck began serving as our Chief Financial Officer on May 10, 2011. Prior to May 10, 2011, Mr. Irlbeck was the Company’s Senior Director of Accounting.

 

(3) Mr. Horner is the Company’s Controller became the Treasurer 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, 2011 for any named executives.

 

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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 Agreement 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 and is eligible for an annual performance-based cash bonus.

 

The performance-based bonus provisions of the Employment Agreement permit Mr. Quandahl and other members of management to receive annual bonus payments based on adjusted EBITDA targets annually established by the Board of Directors. The 2011 and 2010 adjusted EBITDA target was $4 million. If the Company’s actual adjusted EBITDA performance for a particular annual period ranges from 85-100% of the established adjusted EBITDA target, management will be entitled to receive a cash bonus consisting of 7.5% of the actual adjusted EBITDA. Mr. Quandahl’s share of the bonus pool for any particular year is expected to be 10-50% and the 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 adjusted EBITDA performance for a particular annual period is less than 85% of the established adjusted EBITDA target, no bonus will be payable, and if such performance exceeds 100% of the established adjusted EBITDA target, the bonus pool will include15% of the amount by which such performance exceeds the target. In addition to the adjusted EBITDA threshold, the agreement also contains capital expenditure and working capital thresholds.

 

During 2011 and 2010, the Board of Directors authorized certain transactions that resulted in the capital expenditure limitation and working capital threshold eligibility requirements not being satisfied. The board waived compliance with these two eligibility requirements in 2010 and approved the exclusion of such transactions when testing these two eligibility requirements in 2011. The board also authorized the adjusted EBITDA calculation to exclude certain expenditures. The effect of those actions permitted eligible participants to benefit under the management bonus pool arrangement in both 2010 and 2011.

 

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)     2011     $ 0     $ 100,000     $ 0     $ 100,000  
Chairman     2010     $ 0     $ 75,000     $ 0     $ 75,000  
Ellery Roberts (2)     2011     $ 102,583     $ 0     $ 0     $ 102,583  
Director     2010     $ 11,666     $ 0     $ 0     $ 11,666  
Angel Donchev     2011     $ 0     $ 0     $ 0     $ 0  
Director     2010     $ 0     $ 0     $ 0     $ 0  
Aldus Chapin II (3)     2011     $ 0     $ 0     $ 0     $ 0  
Director     2010     $ 0     $ 0     $ 0     $ 0  

 

 

(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. All compensation reflected in the table for Mr. Miller was paid pursuant to his consulting agreement with the Company.

(2) Mr. Roberts serves on a special committee of the Board of Directors. In connection with this service, the Board of Directors approved the payment of compensation to Mr. Roberts in the amount of $13,000 per month from June 2011 to November 2011, and $10,000 per month from December 2011 through November 2012.
(3) Mr. Chapin resigned from the Board of Directors effective February 17, 2012.

 

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ITEM 12        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

As of the close of business on March 26, 2012, we had outstanding two classes of voting securities—common stock, of which there were 5,397,780 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 26, 2012, 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.

 

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       5.9 %
Ellery Roberts (3)     -       -  
Angel Donchev (3)     -       -  
Thomas H. Ripley (3)     -       -  
Rich Horner (4)     100,000       1.9 %
Steve Irlbeck (5)     400,000       7.4 %
John Quandahl (6)     -       -  
All current executive officers and directors as a group (7)     833,750       14.6 %
WCR, LLC (8)     10,791,250       71.5 %
c/o Blackstreet Capital Advisors II                
5425 Wisconsin Avenue                
Suite #701                
Chevy Chase, MD  20815                
Alpha Capital Anstalt     416,667       7.72 %

 

 

* 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%.

 

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(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) Messrs. Roberts, Donchev, and Riley are directors of the Company.

 

(4) Mr. Horner became the Treasurer of Wyoming Financial Lenders, Inc. in January 2009.

 

(5) Mr. Irlbeck became the Company’s Chief Financial Officer on May 10, 2011 and was the Company’s Senior Director of Accounting from January 1, 2009 to May 10, 2011.

 

(6) Mr. Quandahl is the Company’s Chief Executive Officer and a director of the Company.

 

(7) Consists of Messrs. Miller, Roberts, Donchev, Riley, Irlbeck, Horner and Quandahl.

 

(8) 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.

 

ITEM 13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

CERTAIN RELATIONSHIPS AND TRANSACTIONS

 

On October 18, 2011 the Company entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of River City Equity. The borrowing arrangement allows the Company to borrow up to $2,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note matures on September 30, 2013, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of the Company’s assets. As of December 31, 2011, $1,000,000 has been advanced under this arrangement. After the initial advancement from River City Equity under the borrowing arrangement, the brother of the Company’s Chief Executive Officer obtained an ownership interest in River City Equity. Since such time, there have been additional advancements. The Board of Directors has been apprized of the fact that, subsequent to the transactions creating the arrangement with River City Equity, that entity has become a “related party” under applicable SEC disclosure rules. The Company may in the future seek advancements from the $1,000,000 remaining available under the borrowing arrangement. In any such case, advancements will be approved in the manner required under the board’s related-party transaction policy discussed below.

 

RELATED PARTY TRANSACTION POLICY

 

The Board of Directors has adopted a written Conflict of Interest and Related Party Transaction Policy. That policy governs the approval of all related-party transactions, subject only to certain customary exceptions (e.g., compensation, certain charitable donations, transactions made available to all employees generally, etc.). The policy contains a minimum dollar threshold of $5,000.

 

The entire Board of Directors administers the policy and approves any related-party transactions. At each calendar year’s first regularly scheduled meeting,, management discloses any related-party transactions to be entered into by the Company for that calendar year, including the proposed aggregate value of such transactions if applicable. After full disclosure of all material facts, review and discussion, the board approves or disapproves such transactions. If a related-party transaction will be ongoing, the board may establish guidelines for management to follow in its ongoing dealings with the related party. However, management is generally required to update the board as to any material change to the related-party transactions approved at the first calendar year meeting.

 

In the event management recommends any related-party transactions after the first calendar year meeting, such transactions are generally presented to the board for approval in advance, or preliminarily entered into by management subject to ratification by the board. If ratification is not obtained, management must make all reasonable efforts to cancel or annul such transaction.

 

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Procedurally, no director is allowed vote in any approval of a related-party transaction for which he or she is the related party, except that such a director may otherwise participate in a related discussion and shall provide to the board all material information concerning the related-party transaction and the director’s interest therein.

 

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 Mr. Roberts. 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 OTCBB, 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:

 

    2011     2010  
Audit Fees   $ 63,353     $ 106,462  

 

Lurie Besikof Lapidus & Company, LLP did not perform any other audit-related, tax-related or other services for fees during either of fiscal 2010 or 2011.

 

Audit Fees . The fees identified under this caption were for professional services rendered by Lurie Besikof Lapidus & Company, LLP for years ended 2011 and 2010 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.

 

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 2011 and 2010 were pre-approved by the Audit Committee and Board of Directors, respectively.

 

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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, 2011 and December 31, 2010   F-2
Consolidated Statements of Income – Years ended December 31, 2011 and December 31, 2010   F-3
Consolidated Statement of Shareholders’ Equity – Years ended December 31, 2011 and December 31, 2010   F-4
Consolidated Statements of Cash Flows – Years ended December 31, 2011 and December 31, 2010   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).
     
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 $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).
     
10.3   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).
     
10.4   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).

 

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10.5   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).
     
10.6   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).
     
10.7   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).
     
10.8   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).
     
10.9   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).
     
10.10   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).
     
10.11   Promissory Note delivered in favor of River City Equity, Inc. dated as of October 18, 2011 ( filed herewith ).
     
10.12   Security Agreement delivered in favor of River City Equity, Inc. dated as of October 18, 2011 ( filed herewith ).
     
10.13   Stock Redemption Agreement with Mill City Ventures II, LP, dated effective as of December 31, 2011 ( filed herewith ).
     
10.14   Stock Redemption Agreement with Lantern Advisers, dated effective as of December 31, 2011 ( filed herewith ).
     
10.15   Stock Redemption Agreement with Boosalis Childrens’ Irrevocable Trust, dated effective as of December 31, 2011 ( filed herewith ).
     
10.16   Stock Redemption Agreement with Steven Staehr, dated as of February 28, 2012 ( filed herewith ).
     
10.17   Consulting Agreement with Ric Miller Consulting, Inc. dated as of April 1, 2012 ( filed herewith ).
     
14   Code of Ethics (amended and restated as of March 30, 2012) (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 3/30/12
  John Quandahl
   
  Chief Executive Officer
   
  /s/ Steve Irlbeck 3/30/12
  Steve Irlbeck
   
  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 3/30/12   /s/ Richard Miller 3/30/12
John Quandahl, Director,     Richard Miller, Director  
Chief Executive Officer, Chief Operating Officer     (Chairman)  
(principal executive officer)        
         
      /s/ Angel Donchev 3/30/12
      Angel Donchev, Director  
         
/s/ Steve Irlbeck 3/30/12   /s/ Thomas H. Ripley 3/30/12
Steve Irlbeck, Chief Financial Officer     Thomas Ripley, Director  
(principal financial officer and principal accounting        
officer)        
         
      /s/ Ellery Roberts 3/30/12
      Ellery Roberts, Director  

  

45

 

 

Exhibit 10.11

PROMISSORY NOTE

 

  Omaha, Nebraska
$2,000,000.00 October 18, 2011

 

For Value Received , Western Capital Resources, Inc. , a Minnesota corporation (the “ Company ”), promises to pay to the order of River City Equity, Inc. , a Nebraska corporation (“ Holder ”), pursuant to the terms herein, in lawful money of the United States of America, the principal sum of Two Million and 00/100 Dollars ($2,000,000.00), together with interest in arrears on the unpaid principal balance remaining unpaid from time to time (computed on the basis of actual days elapsed in a 365-day year) at a rate equal to Twelve Percent (12%) per annum, in the manner provided below, as evidenced by this Promissory Note (the “ Note ”). This Note may be secured by the assets of the Company as provided in that certain Security Agreement of even date herewith.

 

1. PAYMENTS.

 

1.1 Principal and Interest. Interest shall accrue on a monthly basis on the principal amount of the Note outstanding from time to time until the Maturity Date. Each interest payment for a calendar month shall be due on the 15th day of the next following calendar month. The principal amount of this Note shall be due and payable, together with any accrued and unpaid interest hereunder, on the earlier of (i) September 30, 2013 (the “ Maturity Date ”), or (ii) the date the amounts owing under this Note shall become due and payable, following an Event of Default, pursuant to Section 2.1 below. Any payments received shall be applied first to any other charges due under this Note, second to the payment of accrued interest, and third to the payment of the unpaid principal balance due under this Note.

 

1.2 Manner of Payment. All payments of principal and interest on this Note shall be made by electronic ACH payment at such place (or to such account) in the United States of America as Holder shall designate to the Company in writing. If any payment of principal or interest on this Note is due on a day which is not a Business Day, such payment shall be due on the next succeeding Business Day, and such extension of time shall not be taken into account in calculating the amount of interest payable under this Note. “ Business Day ” means any day other than a Saturday, Sunday or legal holiday in the State of Nebraska.

 

1.3 Prepayment. At any time after the date hereof, the Company may, at any time and from time to time, prepay all or any portion of the outstanding principal balance due under this Note, provided that each such prepayment is accompanied by the accrued interest on the amount of principal prepaid calculated to the date of such prepayment, as well as a prepayment premium equal to (i) 2% of the principal amount of the Note outstanding at the time of such prepayment (on or prior to September 30, 2012) or (ii) 1% of the principal amount of the Note outstanding at the time of such prepayment (after September 30, 2012 and on or prior to September 30, 2013). The Company shall provide Holder with not less than 15 days written notice prior to such prepayment.

 

 
 

 

2. DEFAULT.

 

2.1 Events of Default. The failure of the Company to pay, when due, any amounts owed hereunder shall, after the lapse of a five-day cure period following written notice to the Company, constitute an event of default hereunder (“ Event of Default ”).

 

2.2 Remedies. Upon the occurrence of an Event of Default hereunder (unless such Event of Default has been cured or waived by Holder), Holder may, at its option, (i) by written notice to the Company, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, (ii) exercise all rights under the Security Agreement, and/or (iii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from the Company all sums due under this Note. The Company shall pay all reasonable costs and expenses incurred by or on behalf of Holder in connection with Holder’s exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys’ fees.

 

3. MISCELLANEOUS.

 

3.1 Waiver. The rights and remedies of Holder under this Note shall be cumulative and not alternative. No waiver by Holder of any right or remedy under this Note shall be effective unless in writing signed by Holder. Neither the failure nor any delay in exercising any right, power or privilege under this Note will operate as a waiver of such right, power or privilege and no single or partial exercise of any such right, power or privilege by Holder will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right of Holder arising out of this Note can be discharged by Holder, in whole or in part by a waiver or renunciation of the claim or right unless in a writing, signed by Holder; (b) no waiver that may be given by Holder will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on the Company will be deemed to be a waiver of any obligation of the Company or of the right of Holder to take further action without notice or demand as provided in this Note. The Company hereby waives presentment, demand, protest and notice of dishonor and protest.

 

3.2 Notices. Any notice required or permitted to be given hereunder shall be given by the Company to Holder or Holder to the Company in writing and shall be (a) personally delivered, (b) sent by overnight courier of national reputation, or (c) transmitted by facsimile or electronic mailing, in each case, to the applicable party as follows:

 

If to the Holder : River City Equity, Inc.
  10631 Ridgemont Circle
  Omaha NE 68136  
  Facsimile: ______________
   
With a copy to : ______________
  ______________
  ______________
   

 

2
 

 

   
If to the Company : Western Capital Resources, Inc.
  11550 “I” Street, Suite 150
  Omaha, NE  68137
  Attention: John Quandahl
  Facsimile: (402) 555-8888
   
With a copy to : Maslon Edelman Borman & Brand, LLP
  90 South Seventh Street
  3300 Wells Fargo Center
  Minneapolis, MN  55402
  Attention: Paul Chestovich
  Facsimile: (612) 642-8305
   

 

3.3 Severability. If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

 

3.4 Governing Law. This Note will be governed by the laws of the State of Nebraska without regard to conflicts-of-law principles.

 

3.5 Parties in Interest. This Note shall bind the Company and its successors and assigns. This Note shall not be assigned by Holder without the express prior written consent the Company, which consent may be granted or withheld in the Company’s reasonable discretion.

 

3.6 Construction. The headings of Sections in this Note are provided for convenience only and will not affect its construction or interpretation. All references to “section” or “Sections” refer to the corresponding Section or Sections of this Note unless otherwise specified. All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words “hereof” and “hereunder” and similar references refer to this Note in its entirety and not to any specific section or subsection hereof.

 

In Witness Whereof , the Company has executed and delivered this Note as of the date first stated above.

 

  WESTERN CAPITAL RESOURCES, INC.
   
   
  /s/ John Quandahl
  John Quandahl
  Chief Executive Officer

 

3
 

 

 

Exhibit 10.12

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (“Security Agreement”) dated effective October 18, 2011, is made and given by Western Capital Resources, Inc., a Minnesota corporation (the “Debtor”), to River City Equity, Inc., a Nebraska corporation (the “Secured Party”).

 

RECITALS:

 

A. The Debtor has executed and delivered to the Secured Party a Promissory Note of the same date herewith in the original principal amount of $2,000,000.00 (the “Note”).

 

B. As a condition to and in consideration of the advance by the Secured Party of funds pursuant to the Note, the Secured Party has required that the Debtor agree to grant to the Secured Party a security interest in certain of the Debtor’s property, as further described below.

 

NOW, THEREFORE, in consideration of the terms and conditions contained herein and

in order to induce the Secured Party to advance funds pursuant to the Note, the Debtor hereby agrees with the Secured Party as follows:

 

1. Grant of Security Interest . As security for the payment and performance of the Note and this Security Agreement, the Debtor hereby agrees to grant to the Secured Party a security interest (the “Security Interest”) in all of the Debtor’s property described in Exhibit A attached hereto (the “Collateral”) upon the occurrence of any of the following events (i) the consent of WERCS (as defined in Section 5 below), (ii) the satisfaction of all secured obligations owing to WERCS, or (iii) the written request of the Secured Party (subject, however, to the consent of WERCS). Upon the earliest of the foregoing events, the Debtor will take such steps as are necessary to memorialize the Security Interest granted pursuant to this Section 1, and the remainder of this Security Agreement shall thereupon become effective.

 

2. Continuing Debtor Responsibility . Notwithstanding anything herein to the contrary, (a) the exercise by the Secured Party of any of its rights hereunder shall not release the Debtor from any of its duties or obligations under the terms of items included in the Collateral; and (b) the Secured Party shall have no obligation or liability as to the Collateral by reason of this Security Agreement nor shall the Secured Party be obligated to take any action to collect or enforce any claim for payment assigned hereunder.

 

3. Title to Collateral . The Debtor has and will maintain, so long as the Security Interest remains outstanding, title to each item of the Collateral, free and clear of all liens or other security interests, except as described in Section 5 below. The Debtor will defend the Collateral against all claims or demands of any persons contesting the Secured Party’s lien. As of the date of execution of this Security Agreement, the Debtor represents that there are no financing statements or other similar documents covering all or any part of the Collateral on file in any recording office, except such as may have been filed in connection with the Senior Indebtedness (as defined in Section 5).

 
 

 

4. Disposition of Collateral . The Debtor will not sell, lease, or otherwise dispose of, or discount or factor, with or without recourse, any Collateral, except sales or licenses of inventory and disposition of worn-out or obsolete property in the ordinary course of business.

 

5. Subordination . Notwithstanding anything to the contrary stated herein, the Security Interest shall be subordinated to any security interests granted to secure that certain indebtedness (the “Senior Indebtedness”) of Wyoming Financial Lenders, Inc. (a wholly owned subsidiary of the Debtor) in favor of WERCS (“WERCS”), including any amendments or supplements to, or replacements or extensions of, the Senior Indebtedness and its governing documents. The Secured Party hereby agrees, at its expense, to execute such additional agreements and other instruments evidencing the subordination of such security interests as may be reasonably required from time to time by WERCS.

 

6. Business Location . The Debtor’s place of business is accurately reflected opposite Debtor’s signature. The Debtor does business solely under its own name. The Debtor will from time to time, at the request of the Secured Party, provide the Secured Party with current lists as to the locations of the Collateral and will not permit any Collateral, or any records pertaining to the Collateral, to be located in any state or area in which a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest.

 

7. Authority . There is vested in the Debtor full power and authority to execute this Security Agreement and, upon satisfaction of the terms and conditions of Section 1, to subject the Collateral to the Security Interest.

 

9. Further Assurances . The Debtor will, at any time after satisfaction of the terms and conditions of Section 1, execute such financing statements or other instruments and perform such acts as the Secured Party may reasonably request in writing to establish and maintain an attached and perfected Security Interest in the Collateral. The Debtor hereby authorizes the Secured Party, at any time after satisfaction of the terms and conditions of Section 1, to file one or more financing statements or continuation statements in respect of the Collateral and the Debtor shall promptly execute such documents as are required by the Secured Party for that purposes. The Debtor further agrees that it will take all further action that may be necessary or that the Secured Party may reasonably request in writing, in order to perfect and protect the Security Interest or to enable the Secured. Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral.

 

10. Action by the Secured Party . If the Debtor at any time fails to perform or observe any of the foregoing agreements, upon ten (10) days prior written notice to the Debtor, the Secured Party shall have the right, power, and authority (but not the duty) to perform or observe such agreement on behalf of and in the name of the Debtor and to take any and all other actions which the Secured Party may reasonably deem necessary to cure and correct such failure (including, without limitation, the satisfaction of liens, the execution of security agreements, and the endorsement of instruments); and the Debtor shall thereupon pay to the Secured Party on demand the amount expended by the Secured Party in connection therewith (including reasonable attorneys’ fees and costs).

2
 

 

11. Notice of Loss . The Debtor will promptly notify the Secured Party of any material loss of or material damage to any item of Collateral or of any material adverse change, known to the Debtor, in any material item of the Collateral or the prospect of payment or performance thereof.

 

12. Lawful Use . The Debtor will use and keep the Collateral, and will require that others use and keep the Collateral, only for lawful purposes without material violation of any federal, state, or local law, statute, or ordinance.

 

13. Default . The Debtor shall be deemed in default under this Security Agreement upon the happening of any of the following events (each event, a “Default,” and collectively, “Defaults”):

 

(a) The declaration of a default by the Secured Party of indebtedness owing pursuant to the Note; or

 

(b) The sale or transfer by the Debtor, or any successor to the Debtor, of all or substantially all of the assets used by the Debtor in its business operations (including a transfer of such assets to a corporate or other successor to such operations, absent the Secured Party's consent); any dissolution of, or merger or consolidation involving, the Debtor or any corporate successor to the Debtor.

 

In the event of a Default, the Secured Party shall have the right, at its option and without demand or notice, to exercise all of the rights and remedies of a secured party under the Uniform Commercial Code or any other applicable law. The Debtor agrees in the event of any Default to pay all costs and expenses of the Secured Party, including reasonable attorneys’ fees, in the collection of the Note or the enforcement of any of the Secured Party’s rights, including the reasonable costs of sale of the Collateral. If any notice of sale, disposition or other intended action by the Secured Party is required by law to be given to the Debtor, such notice shall be deemed reasonably and properly given if mailed to the Debtor at the address specified below, or at such other address of the Debtor as may be shown on the Security Party’s records, at least ten (10) days before such sale, disposition or other intended action. Waiver of any default hereunder by the Secured Party shall not be a waiver of any other default or of the same default on a later occasion. No delay or failure by the Secured Party to exercise any right or remedy shall be a waiver of such right or remedy or shall preclude the exercise of any other right or remedy at any other time.

 

14. Rights and Remedies on Default . Upon acceleration of the obligation for repayment of the indebtedness represented by the Note or any other Default, the Debtor hereby appoints the Secured Party, or the Secured Party’s designee, as attorney-in-fact for the Debtor with power to endorse checks or other forms of payment or security, to receive and open mail addressed to the Debtor, to advise the post office to change the address for delivery of the Debtor’s mail to an address designated by the Secured Party, to correspond with account debtors and direct them to remit payment directly to the Secured Party and otherwise to correspond with third persons with respect to the Collateral, and otherwise to do all things necessary to carry out this Security Agreement and to enable the Secured Party to realize on its security interest in the Collateral from and after acceleration of the obligation for repayment of the indebtedness represented by the Note. The Secured Party will not be liable for any acts or commission or omission nor for any error in judgment or mistake of fact or law with respect to its exercise of its rights under the foregoing appointment as attorney-in-fact. The Secured Party’s power as attorney-in-fact, being coupled with an interest, is irrevocable so long as any obligation of the Debtor to the Secured Party remains unpaid.

3
 

 

In the event of a Default which is not timely cured, upon request by the Secured Party, the Debtor shall make available all of its books and records with respect to the Collateral or any part thereof, including but not limited to names and addresses of account debtors or other parties to any contract or course of dealing which does or may constitute Collateral, and shall further make available for review the Debtor’s other books and records with respect to the Collateral. The Secured Party shall be under no obligation whatsoever to proceed first against certain of the Collateral before proceeding against any other of the Collateral or proceeding against the Debtor.

 

15. Costs and Expenses . The Debtor shall not be obligated to pay or reimburse the Secured Party in connection with this Security Agreement or the Note, except that the Debtor will pay or reimburse the Secured Party on demand for all out-of-pocket expenses reasonably incurred by the Secured Party in connection with (i) review of this Security Agreement, the Note and related loan documentation, in an amount not to exceed $5,000, (ii) organizational expenses, in an amount not to exceed $1,000, and (iii) the foreclosure, or enforcement of the Security Interest and the enforcement of this Security Agreement, including the reasonable costs of sale of the Collateral, and all such costs and expenses shall be part of the obligations secured by the Security Interest.

 

16. Indemnity . The Debtor shall indemnify, defend, and hold the Secured Party harmless from and against any and all claims, losses, and liabilities growing out of or resulting from this Security Agreement and the Security Interest created hereby or the Secured Party’s actions pursuant hereto, except claims, losses, or liabilities resulting from the Secured Party’s gross negligence or willful misconduct. Any liability of the Debtor to indemnify and hold the Secured Party harmless pursuant to the preceding sentence shall be part of the obligations secured by the Security Interest. All obligations of the Debtor under this Section 16 shall survive any termination of this Security Agreement.

 

17. Waivers . This Security Agreement may be waived, modified, amended, terminated, or discharged, and the Security Interest may be released, only explicitly in a writing signed by the Secured Party. A waiver so signed shall be effective only in the specific instance and only for the specific purpose given. Delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Secured Party. All rights and remedies of the Secured Party shall be cumulative and may be exercised singly or in any order or sequence, or concurrently, at the Secured Party’s option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. The Debtor hereby waives all requirements of law, if any, relating to the marshaling of assets which would be applicable in connection with the enforcement by the Secured Party of its remedies hereunder, absent this waiver.

4
 

 

18. Secured Party’s Address . The Secured Party’s address for notices is 10631 Ridgemont Circle, Omaha NE 68136, or such other address as the Secured Party may from time to time specify.

 

19. Governing Law . THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS SECURITY AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEBRASKA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEBRASKA. THIS SECURITY AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR STATE COURT SITTING IN OMAHA, NEBRASKA AND THE DEBTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT.

 

20. Waiver of Notice and Hearing . TO THE GREATEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEBTOR HEREBY WAIVES ALL RIGHTS TO A JUDICIAL HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE SECURED PARTY OF: (I) ITS RIGHTS TO POSSESSION OF THE COLLATERAL WITHOUT JUDICIAL PROCESS OR (II) ITS RIGHTS TO REPLEVY, ATTACH, OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. THE DEBTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS PROVISION AND THIS SECURITY AGREEMENT.

 

21. Waiver of Jury Trial . THE DEBTOR AND THE SECURED PARTY, BY THEIR EXECUTION OF THIS SECURITY AGREEMENT, IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT FOR THE TRANSACTIONS CONTEMPLATED HEREBY.

 

22. Amendment or Modification . This Security Agreement may not be modified or amended except by a written instrument duly executed by each of the parties hereto.

 

23. Continuing Security Interests . This Security Agreement shall (a) upon satisfaction of the terms and conditions of Section 1, create a continuing security interest in the Collateral and shall remain in full force and effect until payment in full of the Note and any other amounts payable by the Debtor to the Secured Party hereunder and the performance by the Debtor of all of its obligations thereunder; (b) be binding upon the Debtor, its successors, and assigns; and (c) inure to the benefit of and be enforceable by the Secured Party and its successors, transferees, and assigns.

 

24. Termination of Security Interest . Upon payment in full of the Note and satisfaction of the other obligations of the Debtor to the Secured Party, the Security Interest, if granted pursuant to Section 1, shall terminate. Upon any such termination, the Secured Party will return to the Debtor such of the Collateral then in the possession of the Secured Party that shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Debtor such documents as the Debtor shall reasonably request to evidence such termination. Any reversion or return of Collateral upon termination of this Security Agreement and any instruments of transfer or termination shall be at the expense of the Debtor and shall be without warranty by, or recourse on, the Secured Party.

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25. Entire Agreement . This Security Agreement and the Note set forth the entire agreement and understanding of the parties hereto in respect of the Loan and supersede all prior agreements, arrangements and understandings relating to the subject matter hereof.

 

26. Construction . Whenever possible, each provision of this Security Agreement shall be interpreted so that it is valid under applicable law. If any provision of this Security Agreement is to any extent deemed invalid under applicable law in any jurisdiction, this Security Agreement shall remain binding upon the parties and the particular provision shall still be effective to the extent it remains valid and the entire Security Agreement shall also continue to be valid in other jurisdictions.

 

27. Counterparts . This Security Agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which shall constitute one agreement.

 

28. General . All representations and warranties contained in this Security Agreement and in any other agreement between the Debtor and the Secured Party concerning the Note and the other obligations related thereto, shall survive the execution, delivery, and performance of this Security Agreement and the creation and payment of the obligations of the Debtor to the Secured Party. The Debtor waives notice of the acceptance of this Security Agreement by the Secured Party.

 

 

 

 

* * * * *

 

6
 

 

IN WITNESS WHEREOF , the Debtor has caused this Security Agreement to be duly executed and delivered by a duly authorized officer as of the date first above written.

 

      DEBTOR:
         
      WESTERN CAPITAL RESOURCES, INC.,
      a Minnesota corporation
         
         
Address:   By: /s/ John Quandahl
        Its: President and CEO
11550 “I” Street, Suite 150      
Omaha, NE  68137      
         
         
         
SECURED PARTY:      
         
         
RIVER CITY EQUITY, Inc,      
a Nebraska corporation      
         
         
By:        /s/ Mark Houlton      
  Its: President      

 

 

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EXHIBIT A

 

Collateral

 

 

The word “Collateral” as used in this Security Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Debtor is giving to the Secured Party a security interest for the payment of principal and interest on the Note and performance of all other obligations under the Note and this Security Agreement:

 

All property, assets, rights and interest in property of the Debtor, of any kind or description, tangible or intangible, whether now owned or existing or hereafter acquired or arising and wheresoever located including, but not being limited to, the following: All deposit accounts, accounts and accounts receivable of the Debtor, whether now in existence or hereafter coming into existence; all letter of credit rights; all chattel paper (whether tangible or electronic), contract rights, instruments (including promissory notes), documents, general intangibles (including, without limitation, payment intangibles, trademarks, service marks, trade names, patents, copyrights and licenses), inventory (including raw materials inventory, finished goods inventory, parts, supplies) and goods in process of the Debtor, whether now in existence or owned or hereafter coming into existence or acquired, wherever located, and all returned goods, and repossessions and replacements thereof; all vehicles, furniture, machinery and equipment now owned and hereafter acquired by the Debtor (including all embedded software); all investment property; all supporting obligations, software and commercial tort claims; all accessions, additions, replacements, and substitutions relating to any of the foregoing; all records of any kind relating to any of the foregoing; all proceeds relating to any of the foregoing (including insurance, general intangibles and accounts proceeds); all insurance policies insuring the foregoing property or any part thereof including unearned premiums and all refunds.

 

In addition, the word “Collateral” also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located:

 

(A) all accessions, attachments, accessories, replacements of and additions to any of the collateral described herein, whether added now or later;

 

(B) all products and produce of any of the property described in this Exhibit A ;

 

(C) all accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Exhibit A ;

 

(D) all proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Exhibit A , and sums due from a third party who has damaged or destroyed the collateral or from that party’s insurer, whether due to judgment, settlement or other process; and

 

8
 

 

 

(E) all records and data relating to any of the property described in this Exhibit A , whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of the Debtor’s right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media.

 

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Exhibit 10.13

STOCK REDEMPTION AGREEMENT

 

THIS STOCK REDEMPTION AGREEMENT (the “ Agreement ”) is effective as of December 31, 2011 by and between Western Capital Resources, Inc., a Minnesota corporation (the “ Corporation ”), and Mill City Ventures II, LP (the “ Shareholder ”).

 

W I T N E S S E T H:

 

WHEREAS , the Shareholder is the record owner of an aggregate of 798,000 shares of common stock of the Corporation (the “ Shares ”);

 

WHEREAS , the parties hereto desire to have the Corporation redeem the Shares as provided herein (the “ Redemption ”); and

 

WHEREAS , the parties desire to enter into this Agreement to define their respective rights, obligations, duties and remedies pertaining to the Redemption.

 

NOW, THEREFORE , in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is mutually agreed as follows:

 

A G R E E M E N T:

 

1. Redemption of Shares . The Shareholder agrees to sell and transfer to the Corporation, and the Corporation hereby agrees to redeem, the Shares and all of the Shareholder’s respective right, title thereto and interest therein free and clear of any and all liens, pledges security interests, restrictions of transfer or encumbrances of any kind or nature (“ Encumbrances ”). As soon as is practicable after the date of this Agreement, but in no event later than five (5) business days thereafter, Shareholder shall deliver to the Corporation a stock certificate or certificates representing its Shares and execute and deliver a stock power with respect to the Shares substantially in the form attached hereto as Exhibit A (the “ Stock Power ”) assigning the Shares to the Corporation; provided, however, that if Shareholder is transferring Shares electronically through DWAC or a DTC participating broker, then no Stock Power will be required with respect to such Shares. After receipt of the stock certificates and a Stock Power executed by Shareholder (or electronic transfer of Shares, as applicable), the Corporation shall cancel the Shareholder’s stock certificate(s).

 

2. Redemption Consideration . Promptly following the cancellation of Shareholder’s stock certificate or receipt of electronically transferred Shares, as applicable, the Corporation will pay the Shareholder for its Shares in an amount per share equal to $0.15 (the “ Consideration ”) . The Consideration will be paid in cash by disbursement to the Shareholder from the Corporation’s legal counsel, Maslon Edelman Borman & Brand, LLP.

 

3. Representations, Warranties and Covenants of the Shareholders . Shareholder hereby represents, warrants and covenants to the Corporation as follows:

 

 
 

 

(A) Shareholder is the record and beneficial owner of the Shares free and clear of any and all Encumbrances, and upon delivery of the Shares as contemplated by this Agreement, the Corporation will receive good and marketable title to the Shares free and clear of all Encumbrances. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which Shareholder is bound. Shareholder has full legal capacity, power and authority to transfer the Shares without obtaining the consent or approval of any other person or governmental authority.

 

(B) Shareholder: (i) has had the opportunity to review all relevant information about the Corporation, including without limitation all filings which the Corporation has heretofore made with the United States Securities and Exchange Commission (the “ Commission ”), shareholder records, minute books, financial statements, and any other information which it desired to review in conjunction with this Agreement; (ii) is experienced and knowledgeable in financial and business matters, and (iii) is capable of evaluating the merits and risks of transferring the Shares as contemplated hereunder, including without limitation any and all business, securities, tax and other risks .

 

(C) Shareholder covenants and agrees that after the date of this Agreement, Shareholder will not acquire, either in the public markets, through private purchase , or via any other means, any equity securities of the Corporation.

 

4. Representations and Warranties of the Corporation . The Corporation hereby represents and warrants to Shareholder that (i) neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which the Corporation is bound; and (ii) this Agreement has been duly executed by an authorized representative of the Corporation and, assuming the valid execution and delivery of the same by the other parties thereto, the same are valid and binding agreements of the Corporation, enforceable against the Corporation in accordance with their respective terms, except as may be limited by customary enforceability exceptions . Furthermore, the Corporation is current with its reporting obligations under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). The Corporation’s filings made pursuant to the Exchange Act (collectively, the “ SEC Documents ”) contain all disclosures required by the Exchange Act and do not contain any misstatements of material fact or omit to state a material fact necessary to make the statements made therein not misleading. The SEC Documents, as of their respective dates, are available on the Commission’s EDGAR system.

 

5. Mutual Release . The Corporation and the Shareholder (for purposes of this Section, each a “ Releasing Party ”), for themselves and on behalf of its agents, representatives, successors and assigns, and companies that the Releasing Party directly or indirectly controls (collectively, the “ Related Parties ”), do hereby release, acquit and forever discharge the other party to this Agreement and each of their past and present associates, owners, stockholders, members, affiliates, subsidiaries, parents, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, insurers, representatives, accountants, counsel and all persons acting by, through, under or in concert with them, or any of them, of and from any and all past, present or future claims, demands, actions, causes of action, losses, damages, costs, expenses (including reasonable attorneys’ fees and costs) and liabilities of whatever nature, whether known or unknown, anticipated or unanticipated, suspected or unsuspected, accrued or to accrue in the future, at law or in equity, which arose or occurred at any time through and including the effective date of this Agreement. It is the intention of the parties that this release is, and may be pled as a full and complete defense to any and all actions, causes of action, suits, proceedings, and claims whether asserted or unasserted, known or unknown, which the Corporation or the Shareholder or their respective Related Parties had, have or may have against each other, from the beginning of time to the date hereof; provided , however , that nothing contained herein shall operate to release any liabilities or obligations of the parties arising under this Agreement.

 

2
 

  

6. General Provisions .

 

(A) Parties and Assignment . This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.

 

(B) Counterparts; Facsimile Signatures . For the convenience of the parties and to facilitate the execution of this Agreement, this Agreement may be executed in counterparts and each such executed counterpart shall be deemed to be an original instrument. This Agreement may be executed by one or more of the parties by electronically-transmitted signature and all parties agree that the reproduction of signatures by way of electronically-transmitted device will be treated as though such reproductions were executed originals.

 

(C) Headings . The headings of sections and subsections hereunder are for convenience and reference only, and shall not be deemed a part of this Agreement.

 

(D) Waiver; Remedies . No delay or failure on the part of any party hereto to exercise any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power, or privilege hereunder operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege hereunder.

 

(E) Integration . This Agreement sets forth the parties' final and entire agreement with respect to the Redemption and supersedes any and all prior understandings and agreements. This Agreement shall not be modified or amended in any fashion except by an instrument in writing signed by the parties hereto.

 

(F) No Third Party Beneficiaries . This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

 

(G) Severability . If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement.

 

3
 

 

 

(H) Survival of Representations and Obligations . All representations, warranties, covenants and agreements of the parties contained in this Agreement, or in any instrument, certificate, exhibit or other writing provided for in it, shall survive the execution of this Agreement and the consummation of the transactions contemplated herein.

 

(I) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota (without regard to principles of conflicts of laws contained therein) applicable to contracts made and to be performed within such State. Each of the parties hereby irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought in the federal or state courts located in Hennepin County in the State of Minnesota.

 

(J) Further Assurances . Each party to this Agreement will, on or any time after the effective date of this Agreement, execute and deliver to any other party such further documents or instruments, and take such further actions, as may reasonably be requested by such other party to effect the purposes hereof and the transactions contemplated hereby.

 

(K) Representation. In connection with this Agreement, the Corporation was represented by the law firm Maslon Edelman Borman & Brand, LLP (“ Maslon ”). In the past, and in presently in unrelated matters, Maslon has served as legal counsel to the Corporation and to certain of the Shareholders. All of the parties to this Agreement agree to waive any actual or potential conflict of interest that has arisen or may arise in connection with Maslon’s preparation of this Agreement and the transactions contemplated hereby. Furthermore, the parties acknowledge and agree that in the event there is a dispute between the parties relating to this Agreement, Maslon will not represent any of the parties in such dispute.

 

[THE FOLLOWING PAGE IS THE SIGNATURE PAGE]

 

4
 

 

 

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be duly executed as of the date and year first above written.

 

WESTERN CAPITAL RESOURCES, INC.:

     
     
     
     

By:

/s/ John Quandahl    
      John Quandahl    
      Chief Executive Officer    
       
       
       

SHAREHOLDER:

   
MILL CITY VENTURES II, LP    
     
     
     
     
     
By: /s/ Joseph A. Geraci, II    
        Joseph A. Geraci, II    
        Manager of Mill City Advisors, LLC    
        (General Partner)    

 

 
 

  

EXHIBIT A

STOCK POWER

 

The Undersigned , __________________, pursuant to that certain Redemption Agreement by and among the undersigned and Western Capital Resources, Inc., a Minnesota corporation (the “Corporation”), does hereby assign, transfer and convey unto the Corporation, effective as of _________________, a total of ___________ shares of common stock of the Corporation (collectively, the “Redeemed Shares”) legally and beneficially owned by the undersigned and standing in the name of the undersigned on the books of said Corporation, represented by Stock Certificate No.(s). _____________________________________ and does hereby irrevocably constitute and appoint ___________________________________________ as his true and lawful attorney-in-fact, with full power of substitution and re-substitution in the premises, to transfer the Redeemed Shares on the books of the Corporation.

 

Dated:    
       
       
     
      Signature
       
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[MEDALLION GUARANTEE REQUIRED]

 
 

 

 

Exhibit 10.14

STOCK REDEMPTION AGREEMENT

 

THIS STOCK REDEMPTION AGREEMENT (the “ Agreement ”) is effective as of December 31, 2011 by and between Western Capital Resources, Inc., a Minnesota corporation (the “ Corporation ”), and Lantern Advisers, LLC (the “ Shareholder ”).

 

W I T N E S S E T H:

 

WHEREAS , the Shareholder is the record owner of an aggregate of 480,963 shares of common stock of the Corporation (the “ Shares ”);

 

WHEREAS , the parties hereto desire to have the Corporation redeem the Shares as provided herein (the “ Redemption ”); and

 

WHEREAS , the parties desire to enter into this Agreement to define their respective rights, obligations, duties and remedies pertaining to the Redemption.

 

NOW, THEREFORE , in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is mutually agreed as follows:

 

A G R E E M E N T:

 

1. Redemption of Shares . The Shareholder agrees to sell and transfer to the Corporation, and the Corporation hereby agrees to redeem, the Shares and all of the Shareholder’s respective right, title thereto and interest therein free and clear of any and all liens, pledges security interests, restrictions of transfer or encumbrances of any kind or nature (“ Encumbrances ”). As soon as is practicable after the date of this Agreement, but in no event later than five (5) business days thereafter, Shareholder shall deliver to the Corporation a stock certificate or certificates representing its Shares and execute and deliver a stock power with respect to the Shares substantially in the form attached hereto as Exhibit A (the “ Stock Power ”) assigning the Shares to the Corporation; provided, however, that if Shareholder is transferring Shares electronically through DWAC or a DTC participating broker, then no Stock Power will be required with respect to such Shares. After receipt of the stock certificates and a Stock Power executed by Shareholder (or electronic transfer of Shares, as applicable), the Corporation shall cancel the Shareholder’s stock certificate(s).

 

2. Redemption Consideration . Promptly following the cancellation of Shareholder’s stock certificate or receipt of electronically transferred Shares, as applicable, the Corporation will pay the Shareholder for its Shares in an amount per share equal to $0.15 (the “ Consideration ”) . The Consideration will be paid in cash by disbursement to the Shareholder from the Corporation’s legal counsel, Maslon Edelman Borman & Brand, LLP.

 

3. Representations, Warranties and Covenants of the Shareholders . Shareholder hereby represents, warrants and covenants to the Corporation as follows:

 

 

 
 

 

(A) Shareholder is the record and beneficial owner of the Shares free and clear of any and all Encumbrances, and upon delivery of the Shares as contemplated by this Agreement, the Corporation will receive good and marketable title to the Shares free and clear of all Encumbrances. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which Shareholder is bound. Shareholder has full legal capacity, power and authority to transfer the Shares without obtaining the consent or approval of any other person or governmental authority.

 

(B) Shareholder: (i) has had the opportunity to review all relevant information about the Corporation, including without limitation all filings which the Corporation has heretofore made with the United States Securities and Exchange Commission (the “ Commission ”), shareholder records, minute books, financial statements, and any other information which it desired to review in conjunction with this Agreement; (ii) is experienced and knowledgeable in financial and business matters, and (iii) is capable of evaluating the merits and risks of transferring the Shares as contemplated hereunder, including without limitation any and all business, securities, tax and other risks .

 

(C) Shareholder covenants and agrees that after the date of this Agreement, Shareholder will not acquire, either in the public markets, through private purchase , or via any other means, any equity securities of the Corporation.

 

4. Representations and Warranties of the Corporation . The Corporation hereby represents and warrants to Shareholder that (i) neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which the Corporation is bound; and (ii) this Agreement has been duly executed by an authorized representative of the Corporation and, assuming the valid execution and delivery of the same by the other parties thereto, the same are valid and binding agreements of the Corporation, enforceable against the Corporation in accordance with their respective terms, except as may be limited by customary enforceability exceptions . Furthermore, the Corporation is current with its reporting obligations under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). The Corporation’s filings made pursuant to the Exchange Act (collectively, the “ SEC Documents ”) contain all disclosures required by the Exchange Act and do not contain any misstatements of material fact or omit to state a material fact necessary to make the statements made therein not misleading. The SEC Documents, as of their respective dates, are available on the Commission’s EDGAR system.

 

5. Mutual Release . The Corporation and the Shareholder (for purposes of this Section, each a “ Releasing Party ”), for themselves and on behalf of its agents, representatives, successors and assigns, and companies that the Releasing Party directly or indirectly controls (collectively, the “ Related Parties ”), do hereby release, acquit and forever discharge the other party to this Agreement and each of their past and present associates, owners, stockholders, members, affiliates, subsidiaries, parents, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, insurers, representatives, accountants, counsel and all persons acting by, through, under or in concert with them, or any of them, of and from any and all past, present or future claims, demands, actions, causes of action, losses, damages, costs, expenses (including reasonable attorneys’ fees and costs) and liabilities of whatever nature, whether known or unknown, anticipated or unanticipated, suspected or unsuspected, accrued or to accrue in the future, at law or in equity, which arose or occurred at any time through and including the effective date of this Agreement. It is the intention of the parties that this release is, and may be pled as a full and complete defense to any and all actions, causes of action, suits, proceedings, and claims whether asserted or unasserted, known or unknown, which the Corporation or the Shareholder or their respective Related Parties had, have or may have against each other, from the beginning of time to the date hereof; provided , however , that nothing contained herein shall operate to release any liabilities or obligations of the parties arising under this Agreement.

  

2
 

 

6. General Provisions .

 

(A) Parties and Assignment . This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.

 

(B) Counterparts; Facsimile Signatures . For the convenience of the parties and to facilitate the execution of this Agreement, this Agreement may be executed in counterparts and each such executed counterpart shall be deemed to be an original instrument. This Agreement may be executed by one or more of the parties by electronically-transmitted signature and all parties agree that the reproduction of signatures by way of electronically-transmitted device will be treated as though such reproductions were executed originals.

 

(C) Headings . The headings of sections and subsections hereunder are for convenience and reference only, and shall not be deemed a part of this Agreement.

 

(D) Waiver; Remedies . No delay or failure on the part of any party hereto to exercise any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power, or privilege hereunder operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege hereunder.

 

(E) Integration . This Agreement sets forth the parties' final and entire agreement with respect to the Redemption and supersedes any and all prior understandings and agreements. This Agreement shall not be modified or amended in any fashion except by an instrument in writing signed by the parties hereto.

 

(F) No Third Party Beneficiaries . This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

 

(G) Severability . If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement.

 

 

3
 

 

(H) Survival of Representations and Obligations . All representations, warranties, covenants and agreements of the parties contained in this Agreement, or in any instrument, certificate, exhibit or other writing provided for in it, shall survive the execution of this Agreement and the consummation of the transactions contemplated herein.

 

(I) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota (without regard to principles of conflicts of laws contained therein) applicable to contracts made and to be performed within such State. Each of the parties hereby irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought in the federal or state courts located in Hennepin County in the State of Minnesota.

 

(J) Further Assurances . Each party to this Agreement will, on or any time after the effective date of this Agreement, execute and deliver to any other party such further documents or instruments, and take such further actions, as may reasonably be requested by such other party to effect the purposes hereof and the transactions contemplated hereby.

 

(K) Representation. In connection with this Agreement, the Corporation was represented by the law firm Maslon Edelman Borman & Brand, LLP (“ Maslon ”). In the past and presently in unrelated matters, Maslon has served as legal counsel to the Corporation and to certain of the Shareholders. All of the parties to this Agreement agree to waive any actual or potential conflict of interest that has arisen or may arise in connection with Maslon’s preparation of this Agreement and the transactions contemplated hereby. Furthermore, the parties acknowledge and agree that in the event there is a dispute between the parties relating to this Agreement, Maslon will not represent any of the parties in such dispute.

 

[THE FOLLOWING PAGE IS THE SIGNATURE PAGE]

 

 

4
 

  

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be duly executed as of the date and year first above written.

 

WESTERN CAPITAL RESOURCES, INC.:    
       
       
       
       
By: /s/ John Quandahl    
        John Quandahl    
        Chief Executive Officer    
       
       
       
       

SHAREHOLDER:

 

LANTERN ADVISERS, LLC

   
       
       
       
       

By:

/s/ Douglas Polinsky    
        Douglas Polinsky    
        Manager    

 

 
 

 

 

EXHIBIT A

STOCK POWER

 

The Undersigned , __________________, pursuant to that certain Redemption Agreement by and among the undersigned and Western Capital Resources, Inc., a Minnesota corporation (the “Corporation”), does hereby assign, transfer and convey unto the Corporation, effective as of _________________, a total of ___________ shares of common stock of the Corporation (collectively, the “Redeemed Shares”) legally and beneficially owned by the undersigned and standing in the name of the undersigned on the books of said Corporation, represented by Stock Certificate No.(s). _____________________________________ and does hereby irrevocably constitute and appoint ___________________________________________ as his true and lawful attorney-in-fact, with full power of substitution and re-substitution in the premises, to transfer the Redeemed Shares on the books of the Corporation.

 

Dated:      
       
       
       
      Signature
       
       

 

 

 

 

 

 

 

 

 

 

 

 

 

[MEDALLION GUARANTEE REQUIRED]

 
 

 

Exhibit 10.15

 

STOCK REDEMPTION AGREEMENT

 

THIS STOCK REDEMPTION AGREEMENT (the “ Agreement ”) is effective as of December 31, 2011 by and between Western Capital Resources, Inc., a Minnesota corporation (the “ Corporation ”), and the Boosalis Children Irrevocable Trust U/A/D 12/27/00 (the “ Shareholder ”).

 

W I T N E S S E T H:

 

WHEREAS , the Shareholder is the record owner of an aggregate of 400,000 shares of common stock of the Corporation (the “ Shares ”);

 

WHEREAS , the parties hereto desire to have the Corporation redeem the Shares as provided herein (the “ Redemption ”); and

 

WHEREAS , the parties desire to enter into this Agreement to define their respective rights, obligations, duties and remedies pertaining to the Redemption.

 

NOW, THEREFORE , in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is mutually agreed as follows:

 

A G R E E M E N T:

 

1. Redemption of Shares . The Shareholder agrees to sell and transfer to the Corporation, and the Corporation hereby agrees to redeem, the Shares and all of the Shareholder’s respective right, title thereto and interest therein free and clear of any and all liens, pledges security interests, restrictions of transfer or encumbrances of any kind or nature (“ Encumbrances ”). As soon as is practicable after the date of this Agreement, but in no event later than five (5) business days thereafter, Shareholder shall deliver to the Corporation a stock certificate or certificates representing its Shares and execute and deliver a stock power with respect to the Shares substantially in the form attached hereto as Exhibit A (the “ Stock Power ”) assigning the Shares to the Corporation; provided, however, that if Shareholder is transferring Shares electronically through DWAC or a DTC participating broker, then no Stock Power will be required with respect to such Shares. After receipt of the stock certificates and a Stock Power executed by Shareholder (or electronic transfer of Shares, as applicable), the Corporation shall cancel the Shareholder’s stock certificate(s).

 

2. Redemption Consideration . Promptly following the cancellation of Shareholder’s stock certificate or receipt of electronically transferred Shares, as applicable, the Corporation will pay the Shareholder for its Shares in an amount per share equal to $0.15 (the “ Consideration ”) . The Consideration will be paid in cash by disbursement to the Shareholder from the Corporation’s legal counsel, Maslon Edelman Borman & Brand, LLP.

 
 

 

3. Representations, Warranties and Covenants of the Shareholders . Shareholder hereby represents, warrants and covenants to the Corporation as follows:

  

(A) Shareholder is the record and beneficial owner of the Shares free and clear of any and all Encumbrances, and upon delivery of the Shares as contemplated by this Agreement, the Corporation will receive good and marketable title to the Shares free and clear of all Encumbrances. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which Shareholder is bound. Shareholder has full legal capacity, power and authority to transfer the Shares without obtaining the consent or approval of any other person or governmental authority.

 

(B) Shareholder: (i) has had the opportunity to review all relevant information about the Corporation, including without limitation all filings which the Corporation has heretofore made with the United States Securities and Exchange Commission (the “ Commission ”), shareholder records, minute books, financial statements, and any other information which it desired to review in conjunction with this Agreement; (ii) is experienced and knowledgeable in financial and business matters, and (iii) is capable of evaluating the merits and risks of transferring the Shares as contemplated hereunder, including without limitation any and all business, securities, tax and other risks .

 

(C) Shareholder covenants and agrees that after the date of this Agreement, Shareholder will not acquire, either in the public markets, through private purchase , or via any other means, any equity securities of the Corporation.

 

4. Representations and Warranties of the Corporation . The Corporation hereby represents and warrants to Shareholder that (i) neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which the Corporation is bound; and (ii) this Agreement has been duly executed by an authorized representative of the Corporation and, assuming the valid execution and delivery of the same by the other parties thereto, the same are valid and binding agreements of the Corporation, enforceable against the Corporation in accordance with their respective terms, except as may be limited by customary enforceability exceptions . Furthermore, the Corporation is current with its reporting obligations under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). The Corporation’s filings made pursuant to the Exchange Act (collectively, the “ SEC Documents ”) contain all disclosures required by the Exchange Act and do not contain any misstatements of material fact or omit to state a material fact necessary to make the statements made therein not misleading. The SEC Documents, as of their respective dates, are available on the Commission’s EDGAR system.

 

2
 

 

5. Mutual Release . The Corporation and the Shareholder (for purposes of this Section, each a “ Releasing Party ”), for themselves and on behalf of its agents, representatives, successors and assigns, and companies that the Releasing Party directly or indirectly controls (collectively, the “ Related Parties ”), do hereby release, acquit and forever discharge the other party to this Agreement and each of their past and present associates, owners, stockholders, members, affiliates, subsidiaries, parents, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, insurers, representatives, accountants, counsel and all persons acting by, through, under or in concert with them, or any of them, of and from any and all past, present or future claims, demands, actions, causes of action, losses, damages, costs, expenses (including reasonable attorneys’ fees and costs) and liabilities of whatever nature, whether known or unknown, anticipated or unanticipated, suspected or unsuspected, accrued or to accrue in the future, at law or in equity, which arose or occurred at any time through and including the effective date of this Agreement. It is the intention of the parties that this release is, and may be pled as a full and complete defense to any and all actions, causes of action, suits, proceedings, and claims whether asserted or unasserted, known or unknown, which the Corporation or the Shareholder or their respective Related Parties had, have or may have against each other, from the beginning of time to the date hereof; provided , however , that nothing contained herein shall operate to release any liabilities or obligations of the parties arising under this Agreement.

 

6. General Provisions .

 

(A) Parties and Assignment . This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.

 

(B) Counterparts; Facsimile Signatures . For the convenience of the parties and to facilitate the execution of this Agreement, this Agreement may be executed in counterparts and each such executed counterpart shall be deemed to be an original instrument. This Agreement may be executed by one or more of the parties by electronically-transmitted signature and all parties agree that the reproduction of signatures by way of electronically-transmitted device will be treated as though such reproductions were executed originals.

 

(C) Headings . The headings of sections and subsections hereunder are for convenience and reference only, and shall not be deemed a part of this Agreement.

 

(D) Waiver; Remedies . No delay or failure on the part of any party hereto to exercise any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power, or privilege hereunder operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege hereunder.

 

(E) Integration . This Agreement sets forth the parties' final and entire agreement with respect to the Redemption and supersedes any and all prior understandings and agreements. This Agreement shall not be modified or amended in any fashion except by an instrument in writing signed by the parties hereto.

 

(F) No Third Party Beneficiaries . This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

 

(G) Severability . If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement.

  

3
 

 

(H) Survival of Representations and Obligations . All representations, warranties, covenants and agreements of the parties contained in this Agreement, or in any instrument, certificate, exhibit or other writing provided for in it, shall survive the execution of this Agreement and the consummation of the transactions contemplated herein.

 

(I) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota (without regard to principles of conflicts of laws contained therein) applicable to contracts made and to be performed within such State. Each of the parties hereby irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought in the federal or state courts located in Hennepin County in the State of Minnesota.

 

(J) Further Assurances . Each party to this Agreement will, on or any time after the effective date of this Agreement, execute and deliver to any other party such further documents or instruments, and take such further actions, as may reasonably be requested by such other party to effect the purposes hereof and the transactions contemplated hereby.

 

(K) Representation. In connection with this Agreement, the Corporation was represented by the law firm Maslon Edelman Borman & Brand, LLP (“ Maslon ”). In the past and presently in unrelated matters, Maslon has served as legal counsel to the Corporation and to certain of the Shareholders. All of the parties to this Agreement agree to waive any actual or potential conflict of interest that has arisen or may arise in connection with Maslon’s preparation of this Agreement and the transactions contemplated hereby. Furthermore, the parties acknowledge and agree that in the event there is a dispute between the parties relating to this Agreement, Maslon will not represent any of the parties in such dispute.

 

[THE FOLLOWING PAGE IS THE SIGNATURE PAGE]

 

4
 

 

 

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be duly executed as of the date and year first above written.

 

WESTERN CAPITAL RESOURCES, INC.:    
       
       
       
       
By: /s/ John Quandahl    
        John Quandahl    
        Chief Executive Officer    
       
       
       
       

SHAREHOLDER:

 

BOOSALIS CHILDREN IRREVOCABLE
TRUST U/A/D 12/27/00

 
       
       
       
       
By: /s/ Angelos Dassios    
  Angelos Dassios, Trustee    

 

 
 

 

EXHIBIT A

STOCK POWER

 

The Undersigned , __________________, pursuant to that certain Redemption Agreement by and among the undersigned and Western Capital Resources, Inc., a Minnesota corporation (the “Corporation”), does hereby assign, transfer and convey unto the Corporation, effective as of _________________, a total of ___________ shares of common stock of the Corporation (collectively, the “Redeemed Shares”) legally and beneficially owned by the undersigned and standing in the name of the undersigned on the books of said Corporation, represented by Stock Certificate No.(s). _____________________________________ and does hereby irrevocably constitute and appoint ___________________________________________ as his true and lawful attorney-in-fact, with full power of substitution and re-substitution in the premises, to transfer the Redeemed Shares on the books of the Corporation.

 

Dated:      
       
       
       
      Signature
       
       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[MEDALLION GUARANTEE REQUIRED]

 

 

Exhibit 10.16

 

STOCK REDEMPTION AGREEMENT

 

THIS STOCK REDEMPTION AGREEMENT (the “ Agreement ”) is effective as of February 28, 2012 by and between Western Capital Resources, Inc., a Minnesota corporation (the “ Corporation ”), and Steven Staehr (the “ Shareholder ”).

 

W I T N E S S E T H:

 

WHEREAS , the Shareholder is the record owner of an aggregate of 369,264 shares of common stock of the Corporation (the “ Shares ”);

 

WHEREAS , the parties hereto desire to have the Corporation redeem the Shares as provided herein (the “ Redemption ”); and

 

WHEREAS , the parties desire to enter into this Agreement to define their respective rights, obligations, duties and remedies pertaining to the Redemption;

 

NOW, THEREFORE , in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is mutually agreed as follows:

 

A G R E E M E N T:

 

1.                   Redemption of Shares . The Shareholder agrees to sell and transfer to the Corporation, and the Corporation hereby agrees to redeem, the Shares and all of the Shareholder’s respective right, title thereto and interest therein free and clear of any and all liens, pledges security interests, restrictions of transfer or encumbrances of any kind or nature (“ Encumbrances ”). As soon as is practicable after the date of this Agreement, but in no event later than five (5) business days thereafter, Shareholder shall deliver to the Corporation a stock certificate or certificates representing its Shares and execute and deliver a stock power with respect to the Shares substantially in the form attached hereto as Exhibit A (the “ Stock Power ”) assigning the Shares to the Corporation; provided, however, that if Shareholder is transferring Shares electronically through DWAC or a DTC participating broker, then no Stock Power will be required with respect to such Shares. After receipt of the stock certificates and a Stock Power executed by Shareholder (or electronic transfer of Shares, as applicable), the Corporation shall cancel the Shareholder’s stock certificate(s).

 

2.                   Redemption Consideration . Promptly following the cancellation of Shareholder’s stock certificate or receipt of electronically transferred Shares, as applicable, the Corporation will pay the Shareholder for its Shares in an amount per share equal to $0.15 (the “ Consideration ”) . The Consideration will be paid in cash by disbursement to the Shareholder from the Corporation’s legal counsel, Maslon Edelman Borman & Brand, LLP.

 

3.                   Representations, Warranties and Covenants of the Shareholders . Shareholder hereby represents, warrants and covenants to the Corporation as follows:

 

 

 
 

 

(A)              Shareholder is the record and beneficial owner of the Shares free and clear of any and all Encumbrances, and upon delivery of the Shares as contemplated by this Agreement, the Corporation will receive good and marketable title to the Shares free and clear of all Encumbrances. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which Shareholder is bound. Shareholder has full legal capacity, power and authority to transfer the Shares without obtaining the consent or approval of any other person or governmental authority.

 

(B)               Shareholder: (i) has had the opportunity to review all relevant information about the Corporation, including without limitation all filings which the Corporation has heretofore made with the United States Securities and Exchange Commission (the “ Commission ”), shareholder records, minute books, financial statements, and any other information which it desired to review in conjunction with this Agreement; (ii) is experienced and knowledgeable in financial and business matters, and (iii) is capable of evaluating the merits and risks of transferring the Shares as contemplated hereunder, including without limitation any and all business, securities, tax and other risks .

 

(C)               The Shares represent all of the shares of common stock of the Corporation in which Shareholder owns any legal or beneficial interest. Shareholder covenants and agrees that after the date of this Agreement, Shareholder will not acquire, either in the public markets, through private purchase , or via any other means, any equity securities of the Corporation.

 

4.                   Representations and Warranties of the Corporation . The Corporation hereby represents and warrants to Shareholder that (i) neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of any contract, commitment, indenture, or other agreement or restriction of any kind or character to which the Corporation is bound; and (ii) this Agreement has been duly executed by an authorized representative of the Corporation and, assuming the valid execution and delivery of the same by the other parties thereto, the same are valid and binding agreements of the Corporation, enforceable against the Corporation in accordance with their respective terms, except as may be limited by customary enforceability exceptions . Furthermore, the Corporation is current with its reporting obligations under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). The Corporation’s filings made pursuant to the Exchange Act (collectively, the “ SEC Documents ”) contain all disclosures required by the Exchange Act and do not contain any misstatements of material fact or omit to state a material fact necessary to make the statements made therein not misleading. The SEC Documents, as of their respective dates, are available on the Commission’s EDGAR system.

 

2
 

  

5.                   Mutual Release . The Corporation and the Shareholder (for purposes of this Section, each a “ Releasing Party ”), for themselves and on behalf of its agents, representatives, successors and assigns, and companies that the Releasing Party directly or indirectly controls (collectively, the “ Related Parties ”), do hereby release, acquit and forever discharge the other party to this Agreement and each of their past and present associates, owners, stockholders, members, affiliates, subsidiaries, parents, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, insurers, representatives, accountants, counsel and all persons acting by, through, under or in concert with them, or any of them, of and from any and all past, present or future claims, demands, actions, causes of action, losses, damages, costs, expenses (including reasonable attorneys’ fees and costs) and liabilities of whatever nature, whether known or unknown, anticipated or unanticipated, suspected or unsuspected, accrued or to accrue in the future, at law or in equity, which arose or occurred at any time through and including the effective date of this Agreement. It is the intention of the parties that this release is, and may be pled as a full and complete defense to any and all actions, causes of action, suits, proceedings, and claims whether asserted or unasserted, known or unknown, which the Corporation or the Shareholder or their respective Related Parties had, have or may have against each other, from the beginning of time to the date hereof; provided , however , that nothing contained herein shall operate to release any liabilities or obligations of the parties arising under this Agreement.

 

6.                   General Provisions .

 

(A)              Parties and Assignment . This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.

 

(B)               Counterparts; Facsimile Signatures . For the convenience of the parties and to facilitate the execution of this Agreement, this Agreement may be executed in counterparts and each such executed counterpart shall be deemed to be an original instrument. This Agreement may be executed by one or more of the parties by electronically-transmitted signature and all parties agree that the reproduction of signatures by way of electronically-transmitted device will be treated as though such reproductions were executed originals.

 

(C)               Headings . The headings of sections and subsections hereunder are for convenience and reference only, and shall not be deemed a part of this Agreement.

 

(D)              Waiver; Remedies . No delay or failure on the part of any party hereto to exercise any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power, or privilege hereunder operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege hereunder.

 

(E)               Integration . This Agreement sets forth the parties' final and entire agreement with respect to the Redemption and supersedes any and all prior understandings and agreements. This Agreement shall not be modified or amended in any fashion except by an instrument in writing signed by the parties hereto.

 

(F)                No Third Party Beneficiaries . This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

 

(G)              Severability . If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement.

 

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(H)              Survival of Representations and Obligations . All representations, warranties, covenants and agreements of the parties contained in this Agreement, or in any instrument, certificate, exhibit or other writing provided for in it, shall survive the execution of this Agreement and the consummation of the transactions contemplated herein.

(I)                 Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota (without regard to principles of conflicts of laws contained therein) applicable to contracts made and to be performed within such State. Each of the parties hereby irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought in the federal or state courts located in Hennepin County in the State of Minnesota.

(J)                 Further Assurances . Each party to this Agreement will, on or any time after the effective date of this Agreement, execute and deliver to any other party such further documents or instruments, and take such further actions, as may reasonably be requested by such other party to effect the purposes hereof and the transactions contemplated hereby.

(K)              Representation. In connection with this Agreement, the Corporation was represented by the law firm Maslon Edelman Borman & Brand, LLP (“ Maslon ”). Maslon does not represent the Shareholder and has never represented the Shareholder in the past.

 

 

 

[THE FOLLOWING PAGE IS THE SIGNATURE PAGE]

 

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IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be duly executed as of the date and year first above written.

 

WESTERN CAPITAL RESOURCES, INC.:    
       
       
       
       

By:

/s/ John Quandahl    
  John Quandahl    
  Chief Executive Officer    
       
       
       
SHAREHOLDER:    
     
     
     
     
By: /s/ Steven Staehr    
  Steven Staehr    

 

 
 

 

EXHIBIT A

STOCK POWER

 

The Undersigned , __________________, pursuant to that certain Redemption Agreement by and among the undersigned and Western Capital Resources, Inc., a Minnesota corporation (the “Corporation”), does hereby assign, transfer and convey unto the Corporation, effective as of _________________, a total of ___________ shares of common stock of the Corporation (collectively, the “Redeemed Shares”) legally and beneficially owned by the undersigned and standing in the name of the undersigned on the books of said Corporation, represented by Stock Certificate No.(s). _____________________________________ and does hereby irrevocably constitute and appoint ___________________________________________ as his true and lawful attorney-in-fact, with full power of substitution and re-substitution in the premises, to transfer the Redeemed Shares on the books of the Corporation.

 

Dated:      
       
       
       
      Signature
       
       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[MEDALLION GUARANTEE REQUIRED]

 

 
 

 

Exhibit 10.17

 

CONSULTING AGREEMENT

 

 

This Consulting Agreement (the “ Agreement ”) is made and entered into as of April 1, 2012 (the “ Effective Date ”), by and between Ric Miller Consulting, Inc., a Florida Corporation (“ Consultant ”), and Western Capital Resources, Inc., a Minnesota company (“C ompany ”).

 

INTRODUCTION

 

A. Consultant specializes in providing managerial and strategic planning services, in addition to providing certain other services.

 

B. The Company desires to engage Consultant to provide certain services as described herein, and Consultant desires to accept such engagement. The parties are entering into this Agreement to govern the terms and conditions of such engagement.

 

AGREEMENT

 

Now, Therefore , in consideration of the mutual covenants and promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

1. ENGAGEMENT. The Company engages Consultant, and Consultant accepts such engagement, to provide the Services (as defined below) in exchange for the Compensation (as defined below) during the term hereof, pursuant and subject to the terms and conditions contained in this Agreement.

 

2. SERVICES. Consultant will use its commercially reasonable best efforts to render the Services detailed in the in this contract.

 

 

3. COMPENSATION AND TRAVEL EXPENSES.

 

(a) The Company will pay Consultant compensation in the amount agreed to by the Board of Directors, $100,000 per anum. The Compensation set forth herein (as of the Effective Date) applies only to the Company and its existing subsidiaries, locations and business segments as of the Effective Date. Company will pay 1/12 th of the compensation monthly as of the beginning of each month during the terms of this contract.

 

(b) The Company will (i) reimburse Consultant for travel costs and expenses reasonably incurred in connection with the provision of Services.

 

 

4. ACCESS TO INFORMATION AND COOPERATION. The Company will promptly provide Consultant with all information requested by Consultant and which is reasonably necessary for Consultant to effectively and efficiently perform the Services, as determined by Consultant in its discretion. The Company will not prohibit or impede any activities of Consultant undertaken in connection with this Agreement.

CONFIDENTIAL Page 1
 

 

5. INDEPENDENT CONTRACTOR STATUS. Consultant is an independent contractor. Nothing in this Agreement will in any way be construed to cause Consultant to be considered or deemed an agent, employee or representative of the Company. Consultant will have the right to control and direct the means, manner and methods by which the Services will be performed. Except as requested by the Company and required for conducting the Services, Consultant will have the right in its discretion to perform the Services at any place or location, and at such times, as Consultant may determine; provided, however, that if either party determines that any part of the Services must be performed at a work location specified by the Company or at Company property, then the Company shall ensure that such work location or property contains an environment for Consultant and its representatives that is safe and free from discrimination, offensive behavior, and harassment (sexual or otherwise). If Consultant determines that a work location or property of the Company is not safe or free from adverse working conditions as required in the prior sentence, then the Company will at its sole expense provide Consultant with an alternate work environment, reasonably agreeable to Consultant, meeting such requirements. Consultant will have the right to perform any services (including those identical or substantially similar to the Services hereunder) for any other persons, entities and associations during the term of this Agreement. This Agreement does not create a joint venture, partnership or any employment relationship between the parties. Consultant will not have the authority to enter into contracts on the Company’s behalf or otherwise legally bind the Company. Consultant acknowledges that it will be obligated to report as income any compensation it receives from the Company in connection with this Agreement. The Company will not be obligated to pay or maintain workers’ compensation, unemployment compensation, social security or any other insurance or payroll tax for Consultant.

 

6. CONFIDENTIAL INFORMATION.

 

(a) All Confidential Information, as defined below, that either party discloses or furnishes (a “ Disclosing Party ”), either directly or indirectly though its Representatives, as defined below, to the other party (a “ Recipient ”), including without limitation any such information furnished prior to the Effective Date, will be used by Recipient solely for purposes of performing Recipient’s obligations under this Agreement and for no other purpose. Furthermore, Recipient will take all reasonable steps to ensure that Confidential Information of the Disclosing Party is not disclosed to third parties; provided, however, that such information may be disclosed to those directors, governors, officers, managers, employees, subcontractors, legal counsel and accountants of Recipient (collectively, “ Representatives ”) who have a reasonable need to know such information in connection with the performance of Recipient’s obligations under this Agreement. Recipient will inform each such Representative of the confidential nature of such information and of the confidential undertakings of Recipient contained herein, and will be responsible for ensuring that its Representatives comply with the terms and conditions of this Agreement. As used herein, “reasonable steps” means those steps that Recipient takes to protect its own similarly confidential or proprietary information (which shall not be less than a reasonable standard of care).

 

(b) As used herein but subject to paragraph (c) below, “ Confidential Information ” means any of the Disclosing Party’s proprietary or confidential information, technical data, trade secrets or know-how (including but not limited to the Disclosing Party’s research, product plans, products, service plans, services, customer lists and customers, markets, software, developments, inventions, processes, formulae, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures or finances) that is disclosed, directly or indirectly, and regardless of whether or not the material is marked as “confidential,” to Recipient or one of its Representatives by or on behalf of the Disclosing Party, whether in writing or orally or by drawings, inspection of documents or other tangible property. For clarity, the fees and charges of Consultant under this Agreement are Confidential Information.

CONFIDENTIAL Page 2
 

 

(c) For purposes of this Agreement, “Confidential Information” does not include any one or more items described in paragraph (b) above which: (i) is acquired in the public sector; (ii) is known to the public prior to disclosure; (iii) after disclosure to Recipient or its Representatives, becomes known to the public through no act or omission of Recipient or any of its Representatives; (iv) is required to be disclosed pursuant to applicable law, rule, regulation, court or administrative order or subpoena; provided, however, that Recipient shall take reasonable steps to obtain confidential treatment for such items and shall promptly advise the Disclosing Party of its notice of any such requirement; (v) was previously known by or independently developed by or for Recipient; or (vi) is or becomes available to Recipient on a non-confidential basis from another person, entity or association that, to Recipient’s knowledge, is not legally or contractually prohibited from disclosing such information to Recipient.

 

7. RULE 10b-5; COMPANY BLACKOUT POLICY. This Section 7 will apply only if the Company is a public reporting company under the Securities Exchange Act of 1934. Consultant understands and acknowledges that United States federal securities laws prohibit any person or firm who has material non-public information about the Company from purchasing or selling securities of the Company in reliance on such information, or from communicating such information to any other person or firm under circumstances in which it is reasonably foreseeable that such person or firm is likely to purchase or sell securities of the Company in reliance on such information. Accordingly, Consultant agrees, for so long as it possesses any material non-public information regarding the Company, not to (a) purchase or sell securities of the Company in the public markets, or (b) furnish or communicate such material non-public information to any person or firm under circumstances in which it is reasonably foreseeable that such person or firm is likely to purchase or sell securities of the Company n in reliance thereon. Furthermore, upon the written request of the Company, Consultant will (i) sign documentation reasonably necessary to evidence Consultant’s agreement to be bound by any insider-trading policy of the Company generally applicable to Company executives, directors and consultants, as the same may be amended from time to time, including all trading prohibitions and limitations (e.g., blackout periods) that comprise a part of such policy, and (ii) abide by the guidelines and procedures contained in such policy.

 

8. SURRENDER OF INFORMATION. Upon the written request of the Company following the expiration or termination of this Agreement, Consultant will return to the Company or destroy all Confidential Information of the Company in its possession or control and certify to the Company such return or destruction.

 

9. TERM AND TERMINATION. This Agreement will begin on the Effective Date and continue until March 31, 2013, however, such agreement will continue to renew for additional twelve (12) months terms unless notice of termination is delivered to the other party within thirty (30) days of the existing term expiration date, unless terminated earlier as follows:

 

(a) by the mutual agreement of the parties;

 

(b) by either Consultant or the Company upon at least 30 days prior written notice;, in the event of a termination of this agreement under this subsection the Company shall pay the agreed amount stated under Section 3(a) above for last month of consulting. No compensation shall be due and payable for the remainder of the period for which services are not performed.

 

(c) by either Consultant or the Company upon at least 15 days prior written notice to the breaching party if: (i) the other party fails to substantially perform any of its material obligations under this Agreement, by a showing of clear and convincing evidence; (ii) the other party declares itself or is adjudicated bankrupt or otherwise proceeds under any applicable bankruptcy or insolvency laws for the reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to such party; (iii) the commencement or appointment of any custodian or the like for the other party under any bankruptcy, insolvency or other proceeding remains undismissed for a period of 60 days; (iv) the other party makes a general assignment for the benefit of its creditors or states in writing that it is unable to pay its debts generally as they become due;

 

CONFIDENTIAL Page 3
 

 

 

(d) immediately by the Company in the event that the Company in good faith determines that Consultant has engaged in any dishonesty, misrepresentation or unprofessional conduct relating to this Agreement; or

 

(e) immediately by Consultant in the event that Consultant in good faith determines that the Company or its Representatives have either engaged in any (i) dishonesty or misrepresentation relating to the Company, its business, its financial statements or this Agreement or (ii) unprofessional conduct relating to this Agreement.

 

In addition, this Agreement will automatically terminate upon the death of Ric Miller (the sole member and President of Consultant) or his disability or illness resulting in the inability of Consultant to render Services in a manner that would not constitute a material breach of the obligations of Consultant hereunder.

 

10. General Representations and Warranties . The parties each hereby represent and warrant to the other that its respective execution, delivery and performance of this Agreement will not (a) result in a breach of any of the terms or conditions of, or constitute a default under, any material agreement or obligation to which it is now a party or by which it or any of its respective properties or assets may be bound or affected, or (b) violate any order, writ, injunction or decree of any court, administrative agency or governmental body, which would (or which violation would) prevent it from consummating the transactions contemplated herein or performing its obligations hereunder. Consultant disclaims any representation or warranty relating to the outcome or results of the Services to be rendered under this Agreement; and the Company understands and acknowledges that Consultant is not guaranteeing any particular outcome or results with respect to such Services.

 

11. MUTUAL INDEMNIFICATION; CERTAIN LEGAL EXPENSES. Company and Consultant each agree to indemnify and hold harmless the other party and its respective officers, managers, directors, governors, employees, subcontractors, agents and representatives from and against any loss, costs, damages, claims, fines, expenses (including reasonable attorneys’ fees) or other liabilities incurred in connection with (a) the breach of any representations, warranties or obligations under this Agreement or (b) the failure to comply with any federal or state statutes, rules or regulations, or other requirements of any governmental authority. Notwithstanding the foregoing, in no event shall either party have any obligation to indemnify the other party for any consequential damages, lost profits, or punitive damages; and the aggregate sum of indemnification obligations of Consultant hereunder will not exceed the aggregate amount paid to Consultant under this Agreement for the prior 24 months. In addition, the Company will reimburse Consultant for any legal fees reasonably incurred by Consultant in connection with legal advice rendered to Consultant and relating to (i) any legal or administrative subpoena, proceeding or investigation (including without limitation formal and informal investigations of the SEC, Department of Treasury/IRS and self-regulatory organizations) involving the Company or (ii) comments received by the Company in connection with any Company SEC filing insofar as such comments relate to the Services hereunder.

 

CONFIDENTIAL Page 4
 

 

 

12. EQUITABLE REMEDIES. Each party agrees that it would be impossible or inadequate to measure and calculate the damages that would result to the other party from any breach of the restrictive covenants set forth in Sections 6 and 7 (if applicable) of this Agreement. Accordingly, the parties agree that if either party breaches or threatens to breach any of such covenants, the non-breaching party will have, in addition to any other rights or remedies, the right to obtain an injunction or other equitable relief (e.g., temporary restraining orders, and preliminary and permanent injunctions) from a court of competent jurisdiction without the need to demonstrate irreparable harm and without posting any bond or other security.

 

13. Dispute Resolution .

 

(a) Except for the right to obtain equitable relief under Section 12 above, any controversy, claim or dispute arising under or relating to this Agreement, including the existence, validity, interpretation, performance, termination or breach hereof, will finally be settled by binding arbitration before a single arbitrator (the “ Arbitration Tribunal ”), which will be jointly appointed by the parties. The Arbitration Tribunal shall self-administer the arbitration proceedings utilizing the Commercial Rules of the American Arbitration Association (“ AAA ”); provided, however, that the AAA shall not be involved in administration of the arbitration. The arbitrator must be a retired judge of a state or federal court of the United States or a licensed lawyer with at least ten years of corporate or commercial law experience and have at least an AV rating by Martindale Hubbell. If the parties cannot agree on an arbitrator, either party may request a court of competent jurisdiction to appoint an arbitrator which appointment will be final.

 

(b) The arbitration will be held in Omaha, Nebraska. Each party will have discovery rights as provided by the Federal Rules of Civil Procedure within the limits imposed by the Arbitration Tribunal; provided, however, that all such discovery will be commenced and concluded within 60 days of the selection of the arbitrator. It is the intent of the parties that any arbitration will be concluded as quickly as reasonably practicable. Once commenced, the hearing on the disputed matters will be held four days a week until concluded, with each hearing date to begin at 9:00 a.m. and to conclude at 5:00 p.m. The Arbitration Tribunal will use all reasonable efforts to issue the final written report containing an award or awards, if any, within a period of five business days after closure of the proceedings. Failure of the Arbitration Tribunal to meet the time limits of this Section will not be a basis for challenging the award. The Arbitration Tribunal will not have the authority to award punitive damages to either party. Each party will bear its own expenses, but the parties will share equally the expenses of the Arbitration Tribunal. The Arbitration Tribunal shall award attorneys’ fees and other related costs payable by the losing party to the successful party as it deems equitable. This Agreement will be enforceable, and any arbitration award will be final and non-appealable, and judgment thereon may be entered in any court of competent jurisdiction.

 

14. Assignment and Delegation . No party may assign its rights or delegate any of its obligations under this Agreement without the prior written consent of the other party, which consent may not be unreasonably withheld. To the extent that either party properly assigns it rights or delegates its obligations hereunder, the rights of each party shall inure to the benefit of each party’s successors and assigns.

 

15. SURVIVAL. Notwithstanding any termination of this Agreement, Section 3(c) and (d), Sections 6, 7 (if applicable), 8, 10 through 13, and Sections 15 and 16 will forever survive such termination.

 

CONFIDENTIAL Page 5
 

  

16. General Provisions.

 

 

(a) This Agreement contains the entire agreement and understanding between the parties pertaining to the subject matter of this Agreement, and supersedes all previous representations, understandings or agreements between the parties. This Agreement may be modified only in a writing executed by both parties. The laws of the State of Nebraska shall govern this Agreement without regard to such state’s conflicts-of-law principles. Exclusive venue for the enforcement of any arbitration awards or decisions made under Section 13, or for equitable relief proceedings under Section 12, will exclusively be in the District Court designated for Omaha, Nebraska. If any provision of this Agreement is deemed invalid, illegal or otherwise unenforceable under any applicable law, such provision shall be deemed omitted and the remaining provisions shall not be affected in any way. The failure of either party to exercise in any respect any right under this Agreement shall not be deemed a waiver of any rights under this Agreement, at law or in equity. To the contrary, a waiver of rights under this Agreement may be effected only pursuant to an express written instrument signed by the waiving party.

 

(b) All notices required under this Agreement will be in writing and will be made either by personal service upon the party receiving the notice, or sent by prepaid United States mail addressed to the party receiving the notice, at the addresses set forth below:

 

If to the Company:

WESTERN CAPITAL RESOURCES, INC.

11550 “I” Street

Omaha, NE 68137

Attn: John Quandahl

Tel.: (402) 551-8888

 

If to Consultant:

Ric Miller Consulting, Inc

P.O. Box 367

Pineland, FL 33945

Tel.: (239) 896-5312


 

or such other address as either party may designate in writing after the Effective Date in accordance with this Section. For purposes of this Agreement, personal service will include service by a recognized overnight delivery service requiring a written receipt of delivery from the addressee. Notices sent as provided above will be deemed delivered on the date personal service is made or three days after mailing, as applicable.

 

(c) This Agreement may be executed by the parties in counterparts, each of which when so executed and delivered will be an original, but all of which together shall constitute one and the same instrument. Signatures delivered by facsimile or other means of electronic communication shall be valid and binding to the same extent as signatures delivered in original.

 

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In Witness Whereof , the undersigned have set their hands to this Consulting Agreement to be effective as of the Effective Date.

 

 

CONSULTANT:   COMPANY:
RIC MILLER CONSULTING, INC.   WESTERN CAPITAL RESOURCES, INC.
         

By:

          /s/ Ric Miller  

By:

          /s/ John Quandahl
            Ric Miller , President    

                 JOHN QUANDAHL, CEO

         
Dated: March 6, 2012   Dated: March 19, 2012

 

 

CONFIDENTIAL Page 7
 

 

Exhibit 14

 

CODE OF BUSINESS CONDUCT AND ETHICS

(AS ADOPTED BY THE BOARD OF DIRECTORS ON MARCH 30, 2012

 

Introduction

 

This Code of Business Conduct and Ethics (this “Code”) covers a wide range of business practices and procedures. It does not cover every issue that may arise, but it sets out basic principles to guide all employees of Western Capital Resources, Inc. and its various subsidiary entities (collectively, the “Company”). All of our employees and all of our officers, specifically including our principal executive officer (CEO), principal financial officer (CFO), and other members of management (collectively referred to as “covered persons”), must conduct themselves accordingly.

 

If a law conflicts with a policy in this Code, you must comply with the law. If you have any questions about these conflicts, you should ask your supervisor or a member of management about how to handle the situation.

 

Those who violate the standards in this Code will be subject to disciplinary action, up to and including termination of employment. If you are in a situation which you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 9 of this Code.

 

1. Compliance with Laws, Rules and Regulations

 

Obeying the law, both in letter and in spirit, is the foundation on which the Company’s ethical standards are built. All covered persons must, in the course of the Company’s business, respect and obey the laws of the cities and states in which we operate. Although not all covered persons are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel.

 

2. Conflicts of Interest

 

A “conflict of interest” exists when a person’s private interest interferes in more than a de minimis way with the interests of the Company. A conflict situation can arise when a covered person takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively. Conflicts of interest may also arise when a covered person (or one or more members of his or her family) receives improper and unauthorized personal benefits as a result of the covered person’s position in the Company. Loans to, or guarantees of obligations of, covered persons and their family members may create conflicts of interest. Furthermore, for so long as the Company remains subject to the provisions of the Securities Exchange Act of 1934, loans and any extensions of credit to executive officers are prohibited by applicable federal law.

   
 

 

It is almost always a conflict of interest for a covered person to work simultaneously for a competitor, customer or supplier. You are not allowed to work for a competitor as a consultant or board member. Transactions or roles involving conflicts of interest are prohibited as a matter of Company policy, except as specifically approved by the Board of Directors or consistent with approved guidance or policy of the board, and in any event compliant with applicable state law and other rules and regulations that may apply to the Company. Conflicts of interest may not always be clear-cut, so if you have a question, you should consult with management or the Company’s legal counsel. Any covered person who becomes aware of a conflict or potential conflict should consult the procedures described in Section 9 of this Code and, if appropriate, bring it to the attention of their supervisor, the CFO or the Chairman of the Board of Directors.

 

3. Corporate Opportunities

 

Covered persons are prohibited from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. Covered persons owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises.

 

4. Competition and Fair Dealing

 

We seek to outperform our competition fairly and honestly. Stealing proprietary information, possessing trade secret information that was obtained without the owner’s consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each covered person should endeavor to respect the rights of and deal fairly with the Company’s customers, suppliers, competitors and employees. No covered person should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.

 

5. Confidentiality

 

Employees must maintain the confidentiality of confidential information entrusted to them by the Company or its customers, except when disclosure is authorized by management, legal counsel to the Company, or required by applicable laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. It also includes information that suppliers and customers have entrusted to us. The obligation to preserve confidential information continues even after employment ends.

 

6. Protection and Proper Use of Company Assets

 

All covered persons should endeavor to protect the Company’s assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company’s profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Company equipment should not be used for non-Company business, though incidental and de minimis personal use may be permitted.

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The obligation of employees to protect the Company’s assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Company policy. Under certain circumstances, such use or distribution could also be illegal and result in civil or even criminal penalties.

 

7. Payments to Government Personnel

 

The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country.

 

In addition, the U.S. government has a number of laws and regulations regarding business gratuities which may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. The Company’s legal counsel can provide guidance to you in this area.

 

8. Accurate Public Disclosures

 

Full, fair, accurate, timely and understandable disclosures in the Company’s periodic reports filed with the SEC and press releases is legally required and is essential to the success of our business. Our management is required to exercise the highest standard of care in preparing such public disclosures. Furthermore, we expect all covered persons to provide members of our management with accurate and clear information whenever they are asked to provide any information in connection with such public disclosures (or whenever they reasonably believe such information will be used in such public disclosures). The following guidelines are intended to be instructive but are not comprehensive:

 

· All Company accounting records, as well as reports produced from those records, must comply with applicable laws, regulations, and industry standards.

 

· All records, including accounting records, must fairly and accurately reflect the transactions or occurrences to which they relate.

 

· All accounting records must fairly and accurately reflect, in reasonable detail, the Company’s assets, liabilities, revenues and expenses.

 

· The Company’s accounting records must not contain any false or intentionally misleading entries.

 

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· All transactions must be supported by accurate documentation in reasonable detail and recorded in the proper account and in the proper accounting period.

 

· No information should be concealed from the independent auditors.

 

9. Reporting Code Violations and General Compliance Procedures

 

Your conduct can reinforce an ethical atmosphere and positively influence the conduct of fellow employees. If you are powerless to stop suspected misconduct or if you discover it after it has occurred, you should consider the following guidelines. In some situations it is difficult to know if a violation has occurred. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. Subject in all events to applicable law, these are the steps to keep in mind:

 

· Try to obtain all the facts. In order to reach the right solutions, we must be as fully informed as possible.

 

· If you are being asked to do something, then ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense.

 

· Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem.

 

· If you are an employee, consider discussing the problem with your immediate supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems.

 

If you speak with your immediate supervisor but remain concerned, or if you feel uncomfortable speaking with your immediate supervisor (for whatever reason), you must (anonymously, if you wish) send a detailed note, with relevant documents, to: Western Capital Resources, Inc., at 11550 “I” Street, Suite 150, Omaha, Nebraska 68137 (attention: Chief Financial Officer).

 

If you have reason to believe that the CFO will not address your concerns, or if you believe your concerns have not been addressed by the CFO, you may address any concerns to the attention of the Chairman of the Audit Committee of the Company, Ellery Roberts, or to anonymousreporting@wcrimail.com.

 

Your calls, detailed notes and/or e-mails will be dealt with confidentially. You have the commitment of the Company and its Board of Directors that you will be protected from retaliation for any report of alleged misconduct submitted in good faith. Retaliation by anyone against any such reporting person will not be tolerated.

4
 

 

You may be asked to provide information relating to possible violations of this Code or other Company policies. In any such event, the Company expects that you will fully cooperate with any internal investigations, including any such investigations relating to accounting, financial and audit matters.

 

10. Waivers of the Code

 

Any waiver of this Code for our management may be made only by the Board of Directors or a board committee and should be promptly disclosed as required by law or applicable stock exchange regulation.

 

11. Violations

 

The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of this Code or any required procedures under this Code. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code and its prescribed procedures, and may include written notices to the individual involved that the board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the board) and termination of the individual’s employment.

 

In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past.

 

 

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Exhibit 21.1

 

Subsidiaries of Western Capital Resources, Inc.

 

The following are subsidiaries of Western Capital Resources, Inc.:

 

    State of Incorporation
Wyoming Financial Lenders, Inc.   Wyoming
PQH Wireless, Inc.   Nebraska

 

 

 

Exhibit 31.1

 

SECTION 302 CERTIFICATION

 

I, John Quandahl, certify that:

 

1. I have reviewed this annual report on Form 10-K of Western Capital Resources, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  March  30, 2012   /s/ John Quandahl
    John Quandahl
    Chief Executive Officer

 

 

 

Exhibit 31.2

 

SECTION 302 CERTIFICATION

 

I, Steve Irlbeck, certify that:

 

1. I have reviewed this annual report on Form 10-K of Western Capital Resources, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  March 30, 2012   /s/ Steve Irlbeck
    Steve Irlbeck
    Chief Financial Officer

 

 

 

Exhibit 32

 

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report of Western Capital Resources, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Quandahl, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

  /s/ John Quandahl
 

John Quandahl

Director, Chief Executive Officer and Chief Operating

Officer

   
  March 30, 2012
   
  /s/ Steve Irlbeck
 

Steve Irlbeck

Chief Financial Officer

   
  March 30, 2012