SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

x

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

 

For the quarterly period ended June 30, 2012 or

 

o

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

 

Commission File Number:   000-52015

 

Western Capital Resources, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Minnesota		47-0848102
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

 

11550 “I” Street, Suite 150, Omaha, Nebraska 68137

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (402) 551-8888

 

N/A

---

 

(Former name, former address and former fiscal year, if changed since last report)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer  o	Accelerated filer  o
Non-accelerated filer  o	Smaller reporting company  þ

 

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

 

Yes o No þ

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 14, 2012, the registrant had outstanding 5,397,780 shares of common stock, no par value per share.

 

 

Western Capital Resources, Inc.

 

Index

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 4. Controls and Procedures		21
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities		21
Item 5. Other Information		21
Item 6. Exhibits		21
SIGNATURES		22

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

CONTENTS

 

	Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Income	4
Condensed Consolidated Statements of Cash Flows	5
Notes to Condensed Consolidated Financial Statements	6

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2012 (Unaudited)				December 31, 2011
ASSETS
CURRENT ASSETS
Cash		$	1,762,704			$	1,909,442
Loans receivable (less allowance for losses of $905,000 and $1,001,000)			4,562,096				4,887,813
Inventory			705,517				756,528
Prepaid expenses and other			435,704				451,751
Deferred income taxes			379,000				413,000
TOTAL CURRENT ASSETS			7,845,021				8,418,534
PROPERTY AND EQUIPMENT			798,919				757,747
GOODWILL			12,672,569				12,393,869
INTANGIBLE ASSETS			293,805				309,552
OTHER			162,782				142,074
TOTAL ASSETS		$	21,773,096			$	22,021,776
LIABILITIES AND  SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities		$	2,301,110			$	2,323,730
Note payable – short-term			-				1,000,000
Current portion long-term debt			558,412				695,123
Preferred dividend payable			4,600,000				3,550,000
Deferred revenue			287,718				314,561
TOTAL CURRENT LIABILITIES			7,747,240				7,883,414
LONG-TERM LIABILITIES
Notes payable – long-term			1,200,000				1,210,065
Deferred income taxes			642,000				530,000
TOTAL LONG-TERM LIABILITIES			1,842,000				1,740,065
TOTAL LIABILITES			9,589,240				9,623,479
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, 5,397,780 and 7,446,007 shares issued and outstanding			-				-
Additional paid-in capital			17,914,543				18,221,777
Accumulated deficit			(5,830,687	)			(5,923,480	)
TOTAL SHAREHOLDERS’ EQUITY			12,183,856				12,398,297
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	21,773,096			$	22,021,776

 

See notes to condensed consolidated financial statements.

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

		Three months ended								Six months ended
		June 30, 2012				June 30, 2011				June 30, 2012				June 30, 2011
REVENUES
Payday loan fees		$	2,351,757			$	2,169,854			$	4,659,658			$	4,495,601
Phones and accessories			1,628,329				808,948				4,370,025				2,395,863
Cricket service fees			1,483,342				440,224				3,478,367				994,920
Installment interest income			248,156				126,168				444,665				126,168
Check cashing fees			146,595				154,603				342,407				387,145
Other income and fees			69,790				340,285				149,617				679,016
			5,927,969				4,040,082				13,444,739				9,078,713
STORE EXPENSES
Salaries and benefits			1,605,796				1,033,563				3,293,188				2,145,608
Phone and accessories cost of sales			1,095,938				433,344				2,931,013				1,391,241
Occupancy			559,443				395,934				1,111,751				813,997
Provisions for loan losses			356,118				275,216				632,508				454,089
Advertising			80,259				83,287				157,380				164,887
Depreciation			70,680				62,931				139,925				127,024
Amortization of intangible assets			56,846				113,043				116,247				228,648
Other			771,458				512,041				1,523,736				1,122,018
			4,596,538				2,909,359				9,905,748				6,447,512
INCOME FROM STORES			1,331,431				1,130,723				3,538,991				2,631,201
GENERAL & ADMINISTRATIVE EXPENSES
Salaries and benefits			429,354				405,888				957,086				851,815
Depreciation			5,614				5,688				11,106				9,708
Interest expense			51,267				63,573				129,388				156,765
Other			274,445				224,859				578,618				514,829
			760,680				700,008				1,676,198				1,533,117
INCOME BEFORE INCOME TAXES			570,751				430,715				1,862,793				1,098,084
INCOME TAX EXPENSE			217,000				161,000				720,000				416,000
NET INCOME			353,751				269,715				1,142,793				682,084
SERIES A CONVERTIBLE PREFERRED STOCK DIVIDENDS (assumes all paid)			(525,000	)			(525,000	)			(1,050,000	)			(1,050,000	)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS		$	(171,249	)		$	(255,285	)		$	92,793			$	(367,916	)
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted		$	(0.03	)		$	(0.03	)		$	0.02			$	(0.05	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
Basic and diluted			5,397,780				7,446,007				5,955,027				7,446,007

 

See notes to condensed consolidated financial statements.

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Six Months Ended
		June 30, 2012				June 30, 2011
OPERATING ACTIVITIES
Net Income		$	1,142,793			$	682,084
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			151,031				136,732
Amortization			116,247				228,648
Deferred income taxes			146,000				159,000
Loss on disposal of property and equipment			-				27,342
Changes in operating assets and liabilities
Loans receivable			325,717				285,141
Inventory			51,011				33,026
Prepaid expenses and other assets			(261	)			(150,151	)
Accounts payable and accrued liabilities			(22,620	)			(656,504	)
Deferred revenue			(26,843	)			(64,579	)
Net cash provided by operating activities			1,883,075				680,739
INVESTING ACTIVITIES
Purchase of property and equipment			(122,203	)			(84,123	)
Acquisitions, net of cash acquired			(453,600	)			-
Net cash used by investing activities			(575,803	)			(84,123	)
FINANCING ACTIVITIES
Payments on notes payable – short-term			(1,000,000	)			(1,000,000	)
Payments on notes payable – long-term			(346,776	)			(363,759	)
Advances from notes payable – long-term			200,000				-
Common stock redemption			(307,234	)			-
Net cash used by financing activities			(1,454,010	)			(1,363,759	)
NET DECREASE IN CASH			(146,738	)			(767,143	)
CASH
Beginning of period			1,909,442				2,092,386
End of period		$	1,762,704			$	1,325,243
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid		$	368,969			$	732,984
Interest paid		$	140,404			$	163,652

 

See notes to condensed consolidated financial statements.

 

 

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Basis of Presentation, Nature of Business and Summary of Significant Accounting Policies –

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted.

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended December 31, 2011. The condensed consolidated balance sheet at December 31, 2011, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

 

Nature of Business

 

Western Capital Resources, Inc. (WCR), through its wholly owned operating subsidiaries, Wyoming Financial Lenders, Inc. (WFL) and PQH Wireless, Inc. (PQH), collectively referred to as the “Company,” provides retail financial services and retail cellular phone sales to individuals primarily in the Midwestern and Southwestern United States.  As of June 30, 2012, the Company operated 52 “payday” stores in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) and operated 50 Cricket wireless retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington).  The condensed consolidated financial statements include the accounts of WCR, WFL, and PQH. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Company, through its “payday” division, provides non-recourse cash advance loans, small unsecured 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 post-dated personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. To repay the 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. The fee and interest rate on installment loans vary based on applicable regulations. Like cash advance or “payday” loans, installment loans are unsecured.

 

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 Communications, Inc., reselling cellular phones and accessories and accepting service payments from Cricket customers.

 

Use of Estimates

 

The preparation of condensed 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 condensed 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.  

 

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 payday 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. Our current installment loan loss allowance also factors in the delinquency status of loans within the installment portfolio. The Company also periodically performs a look-back analysis on its loan loss allowance to verify that 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, charge-off and recovery rates and delinquency status of installment loans.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics All returned payday 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.

 

Net Income (Loss) Per Common Share

 

Basic net income (loss) per common share is computed by dividing the income (loss) available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted net income (loss) per common share is computed by dividing the net income (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. All shares of potentially dilutive Series A Convertible Preferred Stock outstanding at June 30, 2012 and 2011 were anti-dilutive and therefore excluded from the dilutive net income (loss) per share computation.  

 

Segment Reporting

 

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 Communications, Inc., reselling cellular phones and accessories and serving as a payment center for Cricket customers.

 

Recent Accounting Pronouncements

 

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

 

No other new accounting pronouncement issued or effective during the fiscal quarter has had or is expected to have a material impact on the condensed consolidated financial statements.

 

2.

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. At present, the Company continues to operate its sole store in Colorado while the impact to profitability of this new law is being assessed.

 

In 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 allowed to renew a payday loan once, and then lenders are required to offer a 60-day, interest free, payment plan to consumers. As a result of these changes, we introduced an installment loan product in Wisconsin in 2011.

 

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 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 six months ended June 30, 2012 and 2011, the Company had significant revenues by state (shown as a percentage of applicable division’s revenue) as follows:

 

Payday Division										Cricket Wireless Division
		2012 % of Revenues				2011 % of Revenues						2012 % of Revenues				2011 % of Revenues
Nebraska			26	%			28	%		Missouri			16	%			28	%
Wyoming			15	%			15	%		Nebraska			13	%			20	%
North Dakota			18	%			18	%		Texas			12	%			14	%
Iowa			12	%			13	%		Indiana			11	%			26	%
										Oklahoma			10	%			0	%

 

3.

Loans Receivable –

 

At June 30, 2012 and December 31, 2011 our outstanding loans receivable aging was as follows:

 

		June 30, 2012				December 31, 2011
Current		$	4,244,920			$	4,625,852
1-30			365,295				296,983
31 – 60			231,199				219,830
61 – 90			202,658				222,929
91 – 120			126,675				170,622
121 – 150			136,948				188,983
151 – 180			159,401				163,614
			5,467,096				5,888,813
Allowance for losses			(905,000	)			(1,001,000	)
		$	4,562,096			$	4,887,813

 

4.

Loans Receivable Allowance –

 

As a result of the Company’s collection efforts, it historically writes off approximately 42% of the returned payday items.  Based on days past the check return date, write-offs of payday returned items historically have tracked at the following approximate percentages: 1 to 30 days – 42%; 31 to 60 days – 66%; 61 to 90 days – 83%; 91 to 120 days – 87%; and 121 to 180 days – 90%.  A rollforward of the Company’s loans receivable allowance for the six months ended June 30, 2012 and 2011 is as follows:

 

		Six Months Ended June 30,
		2012				2011
Loans receivable allowance, beginning of period		$	1,001,000			$	1,165,000
Provision for loan losses charged to expense			632,508				454,089
Charge-offs, net			(728,508	)			(778,089	)
Loans receivable allowance, end of period		$	905,000			$	841,000

 

5.

Segment Information –

 

Segment information related to the three months ended June 30, 2012 and 2011 is set forth below:

 

		Three Months Ended June 30, 2012												Three Months Ended June 30, 2011
		Payday				Cricket Wireless				Total				Payday				Cricket Wireless				Total
Revenues from external customers		$	2,839,713			$	3,088,256			$	5,927,969			$	2,603,830			$	1,436,252			$	4,040,082
Net income		$	372,601			$	(18,850	)		$	353,751			$	335,670			$	(65,955	)		$	269,715

 

 

		Six Months Ended June 30, 2012												Six Months Ended June 30, 2011
		Payday				Cricket Wireless				Total				Payday				Cricket Wireless				Total
Revenues from external customers		$	5,628,830			$	7,815,909			$	13,444,739			$	5,244,827			$	3,833,886			$	9,078,713
Net income (loss)		$	741,374			$	401,419			$	1,142,793			$	715,238			$	(33,154	)		$	682,084
Total segment assets		$	14,728,243			$	7,044,853			$	21,773,096			$	14,500,282			$	4,911,842			$	19,412,124

 

6.

Notes Payable –

 

On January 26, 2011, WERCS extended the maturity of the promissory note made by WERCS to WFL, pursuant to the Business Loan Agreement dated April 1, 2010 and an accompanying $2,000,000 promissory note to WFL, to April 1, 2012. In March 2011, as required by the terms of the note extension, the Company paid $1,000,000 toward the principal balance on the WERCS promissory note. On March 14, 2012, the Company repaid the remaining principal balance and all accrued and unpaid interest under the WERCS credit facility.

 

The Company drew an additional $200,000 on the existing note payable with River City Equity, Inc, a related party, during the first quarter 2012. Total advanced on the $2,000,000 credit facility as of June 30, 2012 was $1,200,000. The note is collateralized by substantially all assets of Western Capital Resources, Inc.

 

7.

Preferred Stock Dividend –

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Balance due, beginning of the period		$	4,075,000			$	1,975,000			$	3,550,000			$	1,450,000
Current quarter preferred dividends payable			525,000				525,000				1,050,000				1,050,000
Preferred dividends paid			-				-				-				-
Balance due, end of the period		$	4,600,000			$	2,500,000			$	4,600,000			$	2,500,000

 

In addition, the Company has $525,000 of second quarter unaccrued cumulative preferred dividends from June 30, 2012 and 2011 that became due and payable July 15, 2012 and 2011, respectively.

 

8.

Other Expense –

 

A breakout of other expense is as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Store expenses
Bank fees		$	75,617			$	59,519			$	157,237			$	134,848
Collection costs			106,828				97,976				235,526				205,930
Repairs & maintenance			61,332				26,171				95,523				73,466
Supplies			98,596				42,938				186,521				77,342
Telephone			43,645				32,910				77,479				66,564
Utilities and network lines			159,487				108,017				335,659				235,441
Other			225,953				144,510				435,791				328,427
		$	771,458			$	512,041			$	1,523,736			$	1,122,018
General & administrative expenses
Professional fees		$	61,291			$	41,355			$	147,214			$	164,870
Management and consulting fees			137,692				117,117				271,442				217,117
Other			75,462				66,387				159,962				132,842
		$	274,445			$	224,859			$	578,618			$	514,829

 

 

9.

Acquisitions –

 

In February 2012, the Company acquired three Cricket corporate-owned stores. Two of the stores are located in McAllen, Texas and one in Laredo, Texas.

 

In May 2012, the Company acquired two Cricket dealer-owned stores in separate transactions. One was located in Omaha, Nebraska and the other in Spokane, Washington.

 

		Fair Value
Other current assets		$	1,600
Property and equipment			72,500
Intangible assets			98,000
Goodwill			278,700
Other non-current assets			4,400
		$	455,200

 

The results of the operations for the acquired locations have been included in the condensed consolidated financial statements since the date of the acquisitions. The following table presents the unaudited pro forma results of continuing operations for the three and six months ended June 30, 2012 and 2011, as if the acquisitions had been consummated at the beginning of each period presented. The pro forma results of continuing operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the year presented or the results which may occur in the future.

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Pro forma revenue		$	5,963,000			$	4,370,000			$	13,770,000			$	9,989,000
Pro forma net income		$	358,000			$	306,000			$	1,194,000			$	815,000
Pro forma net income (loss) per common share – basic and diluted		$	(0.03	)		$	(0.03	)		$	0.02			$	(0.03	)

 

In April 2012 the Company executed an Asset Purchase Agreement to acquire one Cricket retail storefront for a purchase price of $160,000. As a condition of the agreement, the Company will also open two and relocate one existing Cricket retail storefronts.

 

10.

Material Definitive Agreement –

 

On June 22, 2012, Western Capital Resources, Inc. (through its wholly owned subsidiary PC Doctors Acquisition, Inc., a Delaware corporation) entered into an Asset Purchase Agreement with PC Doctors, LLC, a Wisconsin limited liability company, Tecguard, LLC, a Wisconsin limited liability company, and Robert Posteluk. PC Doctors is engaged in the business of selling cellular phones, internet service, tablets, computers, accessories and computer services, and Tecguard is engaged in the business of selling protection plans for cellular phones and computers. The businesses are conducted primarily in the State of Wisconsin.

 

Under the Asset Purchase Agreement, Western Capital would acquire substantially all of the assets of PC Doctors and Tecguard for a purchase price of $3.20 million (subject to a working capital adjustment), plus potential additional payments aggregating $1.55 million contingent upon the earnings of the buyer subsidiary for the years ended December 31, 2012 and 2013. The Asset Purchase Agreement contains customary representations and warranties respecting the business and assets of PC Doctors and Tecguard, as well as customary indemnification covenants. The closing of the transactions contemplated by the Asset Purchase Agreement is subject to customary conditions, including the completion of a due diligence investigation by Western Capital to its reasonable satisfaction. The Asset Purchase Agreement may be terminated if, among other customary reasons, the closing has not occurred on or prior to July 22, 2013 (or such later date as the parties may agree upon).

 

 

Also on June 22, 2012, the Company entered into a non-binding term sheet with WCR, LLC, a Delaware limited liability company and the controlling shareholder of the company, for the provision of a short-term loan the proceeds of which would be used to satisfy the Company’s financial obligations at the closing of the transaction with PC Doctors, LLC, Tecguard, LLC and Robert Posteluk. The Company’s ability to fulfill its obligations at the closing of such transaction depends upon its ability to secure this or other available financing through the completion of definitive documentation. The non-binding term sheet outlines the material terms of the lending arrangement proposed by the parties, including a loan of up to $3.5 million in principal amount, accruing interest at the rate of 11% per annum, payable on the six-month anniversary of the loan, with a $25,000 commitment fee payable upon execution of definitive documentation. The loan would be secured by a security interest in all of the assets of the Company (subordinate to the rights of River City Equity, Inc.), and involve no financial covenants or prepayment penalties.

 

11.

Consulting Agreement –

 

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

 

12.

Management and Advisory Agreement –

 

Effective June 21, 2012, the Company entered into an Amended and Restated Management and Advisory Agreement with Blackstreet Capital Management, LLC, a Delaware limited liability company. The amended and restated agreement increases the management fee payable to Blackstreet to the greater of (i) $330,750 per year (subject to annual increases of five percent) or (ii) five percent of Western Capital’s EBITDA. The amended and restated agreement also requires the Company to pay Blackstreet a fee in an amount equal to two percent of the gross proceeds of any debt or equity financing, and a fee in an amount equal to $400,000 (plus a $60,000 increase in the management fee payable under the agreement) upon the closing of an acquisition in consideration for Blackstreet’s referral to the Company of such acquisition opportunity and assistance in the performance of due diligence services relating thereto. The Company will not, however, be obligated to accept and pursue any acquisition referrals made by Blackstreet. Finally, the amended and restated agreement provides that a termination fee will be paid to Blackstreet in the event that the Company terminates the agreement in connection with a sale of all or substantially all of the assets of the Company to, or any merger or other transaction with, an unaffiliated entity, which transaction results in the holders of a majority of the stock of the Company immediately prior to such transaction owning less than 50% of the stock of the Company (or any successor entity) after giving effect to the transaction.

 

13.

Rights Offering –

 

On June 18, 2012 the Company filed a registration statement with the SEC on Form S-1 relating to the proposed distribution of subscription rights (for no consideration) to the existing shareholders of the Company and the related public offer and sale of common stock to such shareholders .

 

Gross proceeds from the sale of shares of common stock, assuming the exercise of all subscription rights to be distributed up to the maximum amount contemplated in the registration statement, would be $4.5 million.

 

14.

Common Stock Repurchases –

 

In February and 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.

 

15.

Subsequent Events –

 

Form S-1/A Registration Statement Under the Securities Act of 1933.

 

On July 26, 2012, the Company filed Form S-1/A, Registration Statement Under the Securities Act of 1933. This amended the filing made on June 18, 2012.

 

Material Definitive Agreement

 

On August 10, 2012, the Company terminated the Asset Purchase Agreement with PC Doctors, LLC, a Wisconsin limited liability company, Tecguard, LLC, a Wisconsin limited liability company, and Robert Posteluk, dated as of June 22, 2012, by exercising its termination rights under that agreement following the completion of the Company’s initial due-diligence investigation.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Some of the statements made in this report are “forward-looking statements,” as that term is defined under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon our current expectations and projections about future events. Whenever used in this report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this report are primarily located in the material set forth under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part I, Item 2), but may be found in other parts of this report as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. We will not necessarily update forward-looking statements even though our situation may change in the future.

 

Specific factors that might cause actual results to differ from our expectations 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 and/or nationally;

 

·

Our need for additional financing, and

 

·

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

 

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

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.

 

General 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, small unsecured installment loans, check cashing and other money services. As of June 30, 2012, we operated 52 “payday” stores in nine states (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. 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 post-dated personal check for the aggregate amount of the cash advance, plus a fee. The fee varies from state to state based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. To repay the 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. The fee and interest rate on installment loans vary based on applicable regulations. Like cash advance or payday loans, installment loans are unsecured. All of our payday loans, installment loans and other services are subject to state regulations (which vary from state to state), federal regulations and local regulation, where applicable.

 

We also operate (through PQH Wireless, Inc.) 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. 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. As of June 30, 2012, we operated 50 Cricket wireless retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington).  

 

 

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 compliance, external reporting, audit and legal services, and management / consulting fees.

 

With respect to our cost structure, phone and accessory cost of sales and salaries and benefits are two of our largest costs and are driven primarily by the number of storefronts operated throughout the period and seasonal fluctuation in sales volumes.   Occupancy costs make up our third largest expense item.  Our provision for losses is also a significant expense.  We have experienced seasonality in our Cricket 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 is losses as a percentage of payday loan fees), with consideration given to the length of time the branch has been open and its geographic location.  We evaluate changes in comparable branch financial and other measures on a routine basis to assess operating efficiency.  We define comparable branches as those branches that are open during the full periods for which a comparison is being made.  For example, comparable branches for the annual analysis we undertook as of December 31, 2011 have been open at least 24 months on that date.  We monitor newer branches for their progress toward profitability and rate of loan growth, units sold, or payment volume.

 

The contraction 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 and 26% of our year-to-date 2012 total payday 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.

 

In an effort to expand our geographic reach, our strategic expansion plans involve the expansion and diversification of our product and service offerings.  For this reason, we have focused, and expect to continue to focus, a significant amount of time and resources on the development of our Cricket Wireless retail stores.  In an effort to expand our product and service offerings within the Payday division we intend to introduce pawn stores into a limited number of existing payday locations. 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 is concentrated geographically.

 

Discussion of Critical Accounting Policies

 

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

 

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

 

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 payday 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 balance of outstanding loans that we write off. Our current installment loan loss allowance also factors in the delinquency status of loans within the installment loan portfolio. We also periodically perform a look-back analysis on its loan loss allowance to verify that 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 cash advance loans that are currently due or past due and cash advance loans that have not been repaid.  This generally is evidenced where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons.  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 loans for purposes of estimating the 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, charge-off and recovery rates, and delinquency status of installment loans.  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 approximate percentages: 1 to 30 days – 42%; 31 to 60 days – 66%; 61 to 90 days – 83%; 91 to 120 days – 87%; and 121 to 180 days – 90%.  All returned payday items are charged off after 180 days, as collections after that date have not been significant.  The loan loss allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

 

A rollforward of the Company’s loans receivable allowance for the six months ended June 30, 2012 and 2011 is as follows:

 

		Six Months Ended June 30,
		2012				2011
Loans receivable allowance, beginning of period		$	1,001,000			$	1,165,000
Provision for loan losses charged to expense			632,508				454,089
Charge-offs, net			(728,508	)			(778,089	)
Loans receivable allowance, end of period		$	905,000			$	841,000

 

Valuation of Long-lived and Intangible Assets

 

The Company assesses the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable; goodwill is analyzed on an annual basis. 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 trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets’ carrying value over the estimated fair value.

 

Results of Operations – Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

 

For the three-month period ended June 30, 2012, net income was $.35 million compared to net income of $.27 million for the three months ended June 30, 2011. During the three months ended June 30, 2012, income from operations before income taxes was $.57 million compared to $.43 million for the three months ended June 30, 2011. Year over year, we operated one additional payday store and 21 additional Cricket storefronts. The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.

 

Revenues

 

The following table summarizes our revenues for the three months ended June 30, 2012 and 2011, respectively:

 

		Three Months Ended June 30,												Three Months Ended June 30,
		2012				2011				% Change Year Over Year				2012				2011
														(percentage of revenues)
Payday loan fees		$	2,351,757			$	2,169,854				8.4	%			39.7	%			53.8	%
Phones and accessories			1,628,329				808,948				101.3	%			27.5	%			20.0	%
Cricket service fees			1,483,342				440,224				237.0	%			25.0	%			10.9	%
Installment interest income			248,156				126,168				96.7	%			4.2	%			3.1	%
Check cashing fees			146,595				154,603				(5.2	)%			2.4	%			3.8	%
Other income and fees			69,790				340,285				(79.5	)%			1.2	%			8.4	%
Total		$	5,927,969			$	4,040,082				46.7	%			100.0	%			100.0	%

 

 

Revenues totaled $5.93 million for the three months ended June 30, 2012, compared to $4.04 million for the three months ended June 30, 2011. The increase in total revenues resulted primarily from higher Cricket division revenue which can be attributed to our recent acquisitions. During the three-month periods ended June 30, 2012 and 2011, we originated approximately $16.60 million and $16.23 million in cash advance loans, respectively. Our average cash advance loan (including fees) totaled approximately $381 and $378 during the three-month periods ended June 30, 2012 and 2011, respectively. Our average fee for the three-month periods ended June 30, 2012 and 2011 was $55.

 

Store Expenses

 

The following table summarizes our store expenses for the three months ended June 30, 2012 and 2011, respectively:

 

		Three Months Ended June 30,												Three Months Ended June 30,
		2012				2011				% Change Year Over Year				2012				2011
														(percentage of revenues)
Store Expenses:
Salaries and benefits		$	1,605,796			$	1,033,563				55.4	%			27.0	%			25.5	%
Phone and accessories cost of sales			1,095,938				433,344				152.9	%			18.5	%			10.7	%
Occupancy			559,443				395,934				41.3	%			9.4	%			9.8	%
Provisions for loan losses			356,118				275,216				29.4	%			6.0	%			6.8	%
Advertising			80,259				83,287				(3.6	)%			1.4	%			2.1	%
Depreciation			70,680				62,931				12.3	%			1.2	%			1.6	%
Amortization of intangible assets			56,846				113,043				(49.7	)%			1.0	%			2.8	%
Other			771,458				512,041				50.7	%			13.0	%			12.7	%
		$	4,596,538			$	2,909,359				58.0	%			77.5	%			72.0	%

 

As the table above demonstrates, total expenses associated with store operations for the three months ended June 30, 2012 were $4.60 million, compared to $2.91 million for the three months ended June 30, 2011, or a 58.0% increase for the interim periods. 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 relating to our store leaseholds, advertising expenses, depreciation of store equipment and leasehold improvements, amortization of intangible assets and other expenses associated with store operations.

 

Overall, our most significant store expenses for the three months ended June 30, 2012 and 2011 related to phone and accessory costs, salaries and benefits for our store employees, occupancy costs and provision for loan losses. 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 $1.61 million compared to $1.03 million for the three-month periods ended June 30, 2012 and 2011, respectively.

 

Phone and Accessories Cost of Sales. For the three months ended June 30, 2012, our costs of sales were $1.10 million compared to $.43 million for the same period in 2011. The increase in our Cricket Wireless segment phone and accessory costs resulted from operating additional storefronts in 2012 and from a change in the structure of dealer compensation from Cricket, which change decreased our margins while increasing fees to dealers.

 

 

Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $.56 million for the three months ended June 30, 2012 versus $.40 million for the three months ended June 30, 2011.

 

Provisions for Loan Losses. For the three months ended June 30, 2012, our provisions for loan losses were $.36 million compared to $.28 million for the three months ended June 30, 2011. Our provisions for loan losses represented approximately 13.8% and 12.2% of our loan fee revenue for the three months ended June 30, 2012 and 2011, respectively. The increase can be attributed to our introduction of an installment loan product which has higher loss rates than payday loans. Due to the inability to foretell the scope and duration of the current economic recovery, there exists uncertainty in how significant our total 2012 loan losses may or may not be and how they may differ from 2011.

 

Advertising. Advertising and marketing expenses remained consistent at $.08 million for the three months ended June 30, 2012 and 2011. In general, we expect that our marketing and advertising expenses for 2012 to remain consistent.

 

Depreciation. Depreciation, relating to store equipment and leasehold improvements, increased to $.07 million for the three months ended June 30, 2012 compared to $.06 million for the three months ended June 30, 2011.

 

Amortization of Intangible Assets. Amortization of intangible assets decreased to $.06 million for the three months ended June 30, 2012 from $.11 million for the three month ended June 30, 2011.

 

Other Store Expenses. Other expenses increased to $.77 million for the three months ended June 30, 2012 from $.51 million for the three months ended June 30, 2011.

 

General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the three months ended June 30, 2012 and 2011, respectively:

 

		Three Months Ended June 30,												Three Months Ended June 30,
		2012				2011				% Change Year Over Year				2012				2011
														(percentage of revenues)
General & Administrative Expenses:
Salaries and benefits		$	429,354			$	405,888				5.8	%			7.2	%			10.0	%
Depreciation			5,614				5,688				(1.3	)%			0.1	%			0.1	%
Interest expense			51,267				63,573				(19.4	)%			0.9	%			1.6	%
Other expense			274,445				224,859				22.1	%			4.6	%			5.6	%
		$	760,680			$	700,008				8.7	%			12.8	%			17.3	%

 

Total general and administrative costs for the three months ended June 30, 2012 were $.76 million compared to $.70 million for the period ended June 30, 2011. For the three months ended June 30, 2012, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:

 

Salaries and Benefits. Salaries and benefits expenses for the three months ended June 30, 2012 were $.43 million, a $.02 million increase from the $.41 million in such expenses during period ended June 30, 2011

 

Interest. Interest expense for the three months ended June 30, 2012 was $.05 million compared to $.06 million for the three months ended June 30, 2011.

 

Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, increased $.05 million to $.27 million for the three months ended June 30, 2012 compared to $.22 million from the three months ended June 30, 2011.

 

 

Income Tax Expense

 

Income tax expense for the three months ended June 30, 2012 was $.22 million compared to income tax expense of $.16 million for the three months ended June 30, 2011, an effective rate of 38% and 37%, respectively.

 

Results of Operations – Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

 

For the six-month period ended June 30, 2012, net income was $1.14 million compared to net income of $.68 million for the six months ended June 30, 2011. During the six months ended June 30, 2012, income from operations before income taxes was $1.86 million compared to $1.10 million for the six months ended June 30, 2011. The major components of revenues, store expenses, general and administrative expenses, and income tax expense are discussed below.

 

Revenues

 

The following table summarizes our revenues for the six months ended June 30, 2012 and 2011, respectively:

 

 

		Three Months Ended June 30,												Three Months Ended June 30,
		2012				2011				% Change Year Over Year				2012				2011
														(percentage of revenues)
Payday loan fees		$	4,659,658			$	4,495,601				3.6	%			34.7	%			49.5	%
Phones and accessories			4,370,025				2,395,863				82.4	%			32.5	%			26.4	%
Cricket service fees			3,478,367				994,920				249.6	%			25.9	%			10.9	%
Installment interest income			444,665				126,168				252.4	%			3.3	%			1.4	%
Check cashing fees			342,407				387,145				(11.6	)%			2.5	%			4.3	%
Other income and fees			149,617				679,016				(78.0	)%			1.1	%			7.5	%
Total		$	13,444,739			$	9,078,713				48.1	%			100.0	%			100.0	%

 

 

Revenues totaled $13.4 million for the six months ended June 30, 2012, compared to $9.08 million for the six months ended June 30, 2011. The increase in total revenues resulted primarily from higher Cricket division revenue which can be attributed to our recent acquisitions. During the six-month periods ended June 30, 2012 and 2011, we originated approximately $32.37 million and $31.45 million in cash advance loans, respectively. Our average loan (including fees) totaled approximately $382 and $378 during the six-month periods ended June 30, 2012 and 2011, respectively. Our average fee for each of the six-month periods ended June 30, 2012 and 2011 was $55.

 

Store Expenses

 

The following table summarizes our store expenses for the six months ended June 30, 2012 and 2011, respectively:

 

		Six Months Ended June 30,												Six Months Ended June 30,
		2012				2011				% Change Year Over Year				2012				2011
														(percentage of revenues)
Store Expenses:
Salaries and benefits		$	3,293,188			$	2,145,608				53.5	%			24.5	%			23.6	%
Phone and accessories cost of sales			2,931,013				1,391,241				110.7	%			21.8	%			15.3	%
Occupancy			1,111,751				813,997				36.6	%			8.3	%			9.0	%
Provisions for loan losses			632,508				454,089				39.3	%			4.7	%			5.0	%
Advertising			157,380				164,887				(4.6	)%			1.2	%			1.8	%
Depreciation			139,925				127,024				10.2	%			1.0	%			1.4	%
Amortization of intangible assets			116,247				228,648				(49.2	)%			0.9	%			2.5	%
Other			1,523,736				1,122,018				35.8	%			11.3	%			12.4	%
		$	9,905,748			$	6,447,512				53.6	%			73.7	%			71.0	%

 

 

As the table above demonstrates, total expenses associated with store operations for the six months ended June 30, 2012 were $9.91 million, compared to $6.45 million for the six months ended June 30, 2011, or a 53.6% increase for the interim periods. 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 relating to our store leaseholds, advertising expenses, depreciation of store equipment and leasehold improvements, amortization of intangible assets and other expenses associated with store operations.

 

Overall, our most significant store expenses for the six months ended June 30, 2012 and 2011 related to phone and accessory costs, salaries and benefits for our store employees, occupancy costs and provision for loan losses. 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 $3.29 million compared to $2.15 million for the six-month periods ended June 30, 2012 and 2011, respectively

 

Phone and Accessories Cost of Sales. For the six months ended June 30, 2012, our costs of sales were $2.93 million compared to $1.39 million for the same period in 2011. The increase in our Cricket Wireless segment phone and accessory costs resulted from operating additional storefronts in 2012 and from a change in the structure of dealer compensation from Cricket, which change decreased our margins while increasing fees to dealers.

 

Occupancy Costs. Occupancy expenses, consisting mainly of store leases, were $1.11 million for the six months ended June 30, 2012 versus $.81 million for the six months ended June 30, 2011.

 

Provisions for Loan Losses. For the six months ended June 30, 2012, our provisions for loan losses were $.63 million compared to $.45 million for the six months ended June 30, 2011. Our provisions for loan losses represented approximately 12.4% and 9.8% of our loan fee revenue for the six months ended June 30, 2012 and 2011, respectively. The increase can be attributed to our introduction of an installment loan product which has higher default rates than payday loans. Due to the inability to foretell the scope and duration of the current economic recovery, there exists uncertainty in how significant our total 2012 loan losses may or may not be and how they may differ from 2011.

 

Advertising. Advertising and marketing expenses remained consistent at $.16 million for each of the six months ended June 30, 2012 and 2011. In general, we expect that our marketing and advertising expenses for 2012 will remain consistent.

 

Depreciation. Depreciation, relating to store equipment and leasehold improvements, increased to $.14 million for the six months ended June 30, 2012 compared to $.13 million for the six months ended June 30, 2011.

 

Amortization of Intangible Assets. Amortization of intangible assets decreased from $.23 million for the six months ended June 30, 2011 to $.17 million for the six month ended June 30, 2012.

 

Other Store Expenses. Other expenses increased to $1.52 million for the six months ended June 30, 2012 from $1.12 million for the six months ended June 30, 2011.

 

General and Administrative Expenses

 

The following table summarizes our general and administrative expenses for the six months ended June 30, 2012 and 2011, respectively:

 

		Six Months Ended June 30,												Six Months Ended June 30,
		2012				2011				% Change Year Over Year				2012				2011
														(percentage of revenues)
General & Administrative Expenses:
Salaries and benefits		$	957,086			$	851,815				12.4	%			7.1	%			9.4	%
Depreciation			11,106				9,708				14.4	%			0.1	%			0.1	%
Interest expense			129,388				156,765				(17.5	)%			1.0	%			1.7	%
Other expense			578,618				514,829				12.4	%			4.3	%			5.7	%
		$	1,676,198			$	1,533,117				9.3	%			12.5	%			16.9	%

 

 

Total general and administrative costs for the six months ended June 30, 2012 were $1.68 million compared to $1.53 million for the period ended June 30, 2011. For the six months ended June 30, 2012, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion and analysis of the various components of our general and administrative costs appears below:

 

Salaries and Benefits. Salaries and benefits expenses for the six months ended June 30, 2012 were $.96 million, a $.11 million increase from the $.85 million in such expenses during period ended June 30, 2011

 

Interest. Interest expense for the six months ended June 30, 2012 was $.13 million compared to $.16 million for the six months ended June 30, 2011.

 

Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management and consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities, increased $.07 million to $.58 million for the six months ended June 30, 2012 compared to $.51 million from the six months ended June 30, 2011.

 

Income Tax Expense

 

Income tax expense for the six months ended June 30, 2012 was $.72 million compared to income tax expense of $.42 million for the six months ended June 30, 2011, an effective rate of 39% and 38%, respectively.

 

Liquidity and Capital Resources

 

Summary cash flow data is as follows:

 

		Six Months Ended June 30,
		2012				2011
Cash flows provided (used) by:
Operating activities		$	1,883,075			$	680,739
Investing activities			(575,803	)			(84,123	)
Financing activities			(1,454,010	)			(1,363,759	)
Net increase (decrease) in cash			(146,738	)			(767,143	)
Cash, beginning of period			1,909,442				2,092,386
Cash, end of period		$	1,762,704			$	1,325,243

 

At June 30, 2012, we had cash of $1.76 million compared to cash of $1.33 million on December 31, 2011. We believe that our available cash, combined with expected cash flows from operations will be sufficient to fund our liquidity and capital expenditure requirements through June 30, 2013. Our expected short-term uses of available cash include the funding of operating activities (including anticipated increases in payday loans), the financing of expansion activities, including new store openings or store acquisitions and the repayment of long-term debt.

 

Because of the constant threat of regulatory changes to the payday lending industry, we believe it will be difficult for us to obtain debt financing from traditional financial institutions. Financing we may obtain from alternate sources is likely to involve higher interest rates.

 

On October 18, 2011, we 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 us 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 June 30, 2012, $1,200,000 had been advanced under this arrangement.

 

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. If our preferred shareholders 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.

 

 

On June 22, 2012, the Company entered into an Asset Purchase Agreement with PC Doctors and Tecguard for a purchase price of $3.2 million. To fund this acquisition, the Company has entered into a non-binding term sheet with WCR, LLC, the controlling shareholder of the Company, for the provision of a short-term loan the proceeds of which would be used to satisfy the Company’s financial obligations at the closing of the transaction with PC Doctors, LLC and Tecguard, LLC. The Company intends to pay off this short-term financing with proceeds from a proposed rights offering in connection with which the Company filed a registration statement on Form S-1 with the SEC on June 18, 2012 and amended the registration statement by filing Form S-1/A on July 26, 2012.

 

Off-Balance Sheet Arrangements  

 

The Company had no off-balance sheet arrangements as of June 30, 2012.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

 

As of June 30, 2012, our Chief Executive Officer and 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 June 30, 2012.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 3. Defaults upon Senior Securities

 

As of June 30, 2012, the Company had outstanding accrued but unpaid cumulated dividends on its Series A Convertible Preferred Stock aggregating to $4,600,000. Our Series A Convertible Preferred Stock ranks senior to our common stock.

 

Item 5. Other Information

 

On August 10, 2012, the Company terminated the Asset Purchase Agreement with PC Doctors, LLC, a Wisconsin limited liability company, Tecguard, LLC, a Wisconsin limited liability company, and Robert Posteluk, dated as of June 22, 2012, by exercising its termination rights under that agreement following the completion of the Company’s initial due-diligence investigation.

 

Item 6. Exhibits  

 

Exhibit		Description
10.1		Consulting Agreement with Ric Miller Consulting, Inc., dated as of April 1, 2012 (incorporated by reference to Exhibit 10.17 to the registrant’s Form 10-K filed on March 30, 2012).
10.2		Asset Purchase Agreement by and among PC Doctors Acquisition, Inc., PC Doctors, LLC, Tecguard, LLC and Robert Posteluk, dated June 22, 2012 (filed herewith).
10.3		Amended and Restated Management and Advisory Agreement with Blackstreet Capital Management, LLC (effective June 21, 2012) (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 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS		XBRL Instance Document (filed herewith).
101.SCH		XBRL Schema Document (filed herewith).
101.CAL		XBRL Calculation Linkbase Document (filed herewith).
101.DEF		XBRL Definition Linkbase Document (filed herewith).
101.LAB		XBRL Label Linkbase Document (filed herewith).
101.PRE		XBRL Presentation Linkbase Document (filed herewith).

 

 

SIGNATURES

 

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

 

Dated: August 14, 2012	Western Capital Resources, Inc.
	(Registrant)
	By:	/s/ John Quandahl
		John Quandahl
		Chief Executive Officer and Chief Operating Officer
	By:	/s/ Stephen Irlbeck
		Stephen Irlbeck
		Chief Financial Officer