SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549





Form 10-Q





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





For the quarterly period ended March 31, 2011 or





oTransition 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 o 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  oNon-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 May 11, 2011, the registrant had outstanding 7,446,007 shares of common stock, no par value per share.










Western Capital Resources, Inc.





Index





PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements

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

11Item 4. Controls and Procedures

16PART II. OTHER INFORMATIONItem 1. Legal Proceedings

16Item 3. Defaults Upon Senior Securities

16Item 5. Other Information

16Item 6. Exhibits

17SIGNATURES

18




1


PART I. FINANCIAL INFORMATION





Item 1. Financial Statements





WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES





CONTENTS





PageCONDENSED CONSOLIDATED FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets
3Condensed Consolidated Statements of Income
4Condensed Consolidated Statements of Cash Flows
5Notes to Condensed Consolidated Financial Statements
6




2





WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS





March 31, 2011

(Unaudited)


December 31, 2010ASSETSCURRENT ASSETSCash

$
1,972,070


$
2,092,386Loans receivable (less allowance for losses of $921,000 and $1,165,000)


3,715,544



4,743,906Inventory


402,982



502,415Prepaid expenses and other


141,609



152,736Deferred income taxes


375,000



467,000TOTAL CURRENT ASSETS


6,607,205



7,958,443PROPERTY AND EQUIPMENT


742,221



824,102GOODWILL


11,458,744



11,458,744INTANGIBLE ASSETS


318,808



434,413OTHER


93,656



95,180TOTAL ASSETS

$
19,220,634


$
20,770,882LIABILITIES AND  SHAREHOLDERS’ EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities

$
1,077,464


$
1,477,607Income taxes payable


137,586



435,670Note payable – short-term


1,000,000



2,000,000Current portion long-term debt


776,168



769,330Preferred dividend payable


1,975,000



1,450,000Deferred revenue


213,793



320,021TOTAL CURRENT LIABILITIES


5,180,011



6,452,628LONG-TERM LIABILITIESNotes payable – long-term


726,188



905,188Deferred income taxes


364,000



350,000TOTAL LONG-TERM LIABILITIES


1,090,188



1,255,188TOTAL LIABILITES


6,270,199



7,707,816SHAREHOLDERS' EQUITYSeries 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



100,000Common stock, no par value, 240,000,000 shares authorized, 7,446,007 shares issued and outstanding


-



-Additional paid-in capital


18,221,777



18,221,777Accumulated deficit


(5,371,342
)


(5,258,711
)TOTAL SHAREHOLDERS’ EQUITY


12,950,435



13,063,066TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
19,220,634


$
20,770,882





See notes to condensed consolidated financial statements.


3


WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)





Three months endedMarch 31, 2011


March 31, 2010REVENUESPayday loan fees

$
2,325,747


$
2,490,225Phones and accessories


1,586,915



1,478,548Payment processing fees


554,696



173,780Check cashing fees


232,542



232,595Other income and fees


338,731



280,8545,038,631



4,656,002STORE EXPENSESSalaries and benefits


1,112,045



1,230,618Provisions for loan losses


178,873



160,744Phones and accessories cost of sales


957,897



428,123Occupancy


418,063



500,956Advertising


81,600



81,315Depreciation


64,093



68,872Amortization of intangible assets


115,605



134,151Other


609,977



616,3113,538,153



3,221,090INCOME FROM STORES


1,500,478



1,434,912GENERAL & ADMINISTRATIVE EXPENSESSalaries and benefits


445,927



323,521Depreciation


4,020



4,256Interest expense


93,192



83,654Other


289,970



241,229833,109



652,660INCOME BEFORE INCOME TAXES


667,369



782,252INCOME TAX EXPENSE


255,000



298,000NET INCOME


412,369



484,252SERIES A CONVERTIBLE PREFERRED STOCK DIVIDENDS

(assumes all paid)


(525,000
)


(525,000
)NET LOSS AVAILABLE TO COMMON SHAREHOLDERS

$
(112,631
)

$
(40,748
)NET LOSS PER COMMON SHAREBasic and diluted

$
(0.02
)

$
(0.01
)WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -Basic and diluted


7,446,007



7,996,007





See notes to condensed consolidated financial statements.


4


WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)





Three Months EndedMarch 31, 2011


March 31, 2010OPERATING ACTIVITIESNet Income

$
412,369


$
484,252Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


68,113



73,128Amortization


115,605



134,151Deferred income taxes


106,000



116,000Loss on disposal of property and equipment


27,342



618Changes in operating assets and liabilitiesLoans receivable


1,028,362



1,042,391Inventory


99,433



186,080Prepaid expenses and other assets


12,651



61,895Accounts payable and accrued liabilities


(698,227
)


(546,131
)Deferred revenue


(106,228
)


(106,283
)Other liabilities – long-term


-



37,429Net cash provided by operating activities


1,065,420



1,483,530INVESTING ACTIVITIESPurchase of property and equipment


(13,574
)


(13,108
)Net cash used by investing activities


(13,574
)


(13,108
)FINANCING ACTIVITIESPayments on note payable – short-term


(1,000,000
)


(158,328
)Payments on notes payable – long-term


(172,162
)


(39,299
)Dividends


-



(1,250,000
)Net cash used by financing activities


(1,172,162
)


(1,447,627
)NET (DECREASE) INCREASE IN CASH


(120,316
)


22,795CASHBeginning of period


2,092,386



1,526,562End of period

$
1,972,070


$
1,549,357SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONIncome taxes paid

$
447,084


$
239,000Interest paid


94,361



89,545





See notes to condensed consolidated financial statements.




5


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 month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010. The condensed consolidated balance sheet at December 31, 2010, 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 United States.  As of March 31, 2011, the Company operated 51 “payday” stores in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) and operated 29 Cricket wireless retail stores in seven states (Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska and Texas).  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, check cashing and other money services.  The short-term consumer loans, known as cash advance loans or “payday” loans, are in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state based on applicable regulations, and generally ranges from $15 to $22 per each $100 borrowed. To repay the cash advance loans, customers may pay with cash, in which their personal check is returned to them, or by allowing their check to be presented to the bank for collection.





The Company also provides title 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 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 allowance for loans receivable, allocation of and carrying value of goodwill and intangible assets, and deferred taxes and tax uncertainties.




6


Revenue Recognition





The Company recognizes fees on cash advance loans on a constant-yield basis ratably over the loans’ terms. Title and installment loan fees and interest are recognized using the interest method.  Installment loan origination fees are recognized as they become non-refundable and installment loan maintenance fees are recognized when earned.  The Company records revenue from check cashing fees, sales of phones, and accessories and fees from all other services in the period in which the sale or service is completed.





Loans Receivable / Loan Loss Allowance





We maintain a loan loss allowance for anticipated losses for our cash advance, installment and title loans. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off. The Company also periodically performs a look-back analysis on its loan loss allowance to verify 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 cash advance loans that are currently due or past due and cash advance loans that have not been repaid.  This generally is evidenced where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons.  Cash advance loans are carried at cost less the allowance for doubtful accounts.  The Company does not specifically reserve for any individual cash advance loan.  The Company aggregates cash advance loans for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio.  This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.  As a result of the Company’s collection efforts, it historically writes off approximately 45% of the returned items.  Based on days past the check return date, write-offs of returned items historically have tracked at the following approximate percentages: 1 to 30 days – 43%; 31 to 60 days – 66%; 61 to 90 days – 81%; 91 to 120 days – 87%; and 121 to 180 days – 89%.  All returned items are charged off after 180 days, as collections after that date have not been significant.  The loan loss allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.





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








Three Months Ended

March 31,2011


2010Loans receivable allowance, beginning of period

$
1,165,000


$
1,237,000Provision for loan losses charged to expense


179,000



161,000Charge-offs, net


(423,000
)


(407,000
)Loans receivable allowance, end of period

$
921,000


$
991,000





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 March 31, 2011 and 2010 were anti-dilutive and therefore excluded from the dilutive net loss per share computation.





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 condensed consolidated financial statements.




7


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.         Loans Receivable –





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




March 31, 2011


December 31, 2010Current

$
3,579,000


$
4,542,0001-30


183,000



276,00031 – 60


148,000



234,00061 – 90


174,000



209,00091 - 120


188,000



220,000121 – 150


186,000



227,000151 – 180


179,000



201,0004,637,000



5,909,000Allowance for losses


(921,000
)


(1,165,000
)$
3,716,000


$
4,744,000


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 three months ended March 31, 2011 and  2010 is set forth below:








Three Months Ended

March 31, 2011


Three Months Ended

March 31, 2010Payday


Cricket

Wireless


Total


Payday


Cricket Wireless


TotalRevenues from external customers

$
2,640,997


$
2,397,634


$
5,038,631


$
2,782,907


$
1,873,095


$
4,656,002Net income (loss)

$
379,568


$
32,801


$
412,369


$
437,341


$
46,911


$
484,252Total segment assets

$
14,283,393


$
4,937,241


$
19,220,634


$
14,356,963


$
5,183,355


$
19,540,318








4.         Note Payable – Long-Term





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.





5.         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.




8


In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the U.S. Congress and signed into law.  Under the Act, a new Consumer Financial Protection Bureau will consolidate most federal regulation of financial services offered to consumers, and replace the Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers, including mortgage lenders, providers of payday loans, other nonbank financial companies, and banks and credit unions with assets over $10 billion, will be subject to new regulations to be passed by the Bureau.  While the Bureau does not appear to have authority to make rules limiting interest rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that the Bureau will address issues such as rollovers or extensions of payday loans.  Future restrictions on the payday lending industry could have serious consequences for the Company.





Any adverse change in present federal laws or regulations that govern or otherwise affect payday lending could result in our curtailment or cessation of operations in certain jurisdictions or locations.  Furthermore, any failure to comply with any applicable federal laws or regulations could result in fines, litigation, the closure of one or more store locations or negative publicity.  Any such change or failure would have a corresponding impact on our results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines, and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing a needed.





During the 2010 legislative session in Colorado, House Bill 10-1351 was passed into law.  This bill amended the Colorado Deferred Deposit Loan Act, the existing payday lending law.  The law became effective August 11, 2010 and modified traditional payday lending by changing the single payment advance (with no minimum term) into a single or multiple payment loan with a minimum six month term. It also limited the amount and type of fees that can be charged on these loans, effectively reducing by one-half the fees that can be charged and when the fees may be realized.  At present, the Company continues to operate its sole store in Colorado while the impact to profitability of this new law is being assessed.  Currently, we derive 1.34% of our Payday division revenues from fees in Colorado.





In May 2010, new laws were enacted in Wisconsin that restrict the number of times a consumer may renew (or rollover) a payday loan. Previously, there were no limits to the number of rollovers permitted.  Effective January 1, 2011, consumers in Wisconsin will only be allowed to renew a payday loan once, and then lenders will be required to offer a 60-day, interest free, payment plan to consumers.  The Company is still assessing the impact of these new Wisconsin laws. Our preliminary projections indicate the changes could reduce revenue in the state by 30% - 40%.  Currently, we derive 4.06% of our Payday division revenues from fees in Wisconsin.





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





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 three months ended March 31, 2011 and 2010, the Company had significant revenues by state (shown as a percentage of applicable division’s revenue) as follows:





Payday Division


Cricket Wireless Division2011

% of Revenues


2010

% of Revenues




2011

% of Revenues


2010

% of RevenuesNebraska


28
%


27
%

Missouri


29
%


32
%Wyoming


15
%


13
%

Nebraska


18
%


15
%North Dakota


17
%


15
%

Texas


14
%


11
%Iowa


12
%


12
%

Indiana


27
%


25
%





9


6.         Preferred Stock Dividend –





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





Three Months Ended

March 31,2011


2010Balance due, beginning of year

$
1,450,000


$
1,000,000Current quarter preferred dividends payable


525,000



525,000Preferred dividends paid


-



(1,250,000
)Balance due, end of quarter

$
1,975,000


$
275,000





In addition, the Company has $525,000 of first quarter unaccrued cumulative preferred dividends March  31, 2011 and 2010 that became due and payable April 15, 2011 and 2010, respectively.





7.         Other Expense –





A breakout of other expense is as follows:





Three Months Ended

March 31,2011


2010Store expensesBank fees

$
75,329


$
58,890Collection costs


107,954



110,153Repairs & maintenance


47,295



49,106Supplies


34,404



43,676Telephone


33,654



39,229Utilities and network lines


127,424



148,247Other


183,917



167,010$
609,977


$
616,311General & administrative expensesProfessional fees

$
123,515


$
173,025Management and consulting fees


100,000



-Other


66,455



68,204$
289,970


$
241,229




8.         Subsequent Events –




We evaluated all events or transactions that occurred after March 31, 2011 up through May 13, 2011, the date we issued these financial statements. During this period we did not have any material subsequent events that impacted our financial statements.


10





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), Legal Proceedings (Part II, Item 1), and “Risk Factors” (Part II, Item 1A), 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 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, 2010.





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 March 31, 2011, we operated 51 “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”, “installment” 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(s) for the aggregate amount of the cash advanced, plus a fee. The fee varies from state to state based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. To repay a payday or installment loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. All of our payday loans, 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 March 31, 2011, we operated 29 Cricket wireless retail stores in seven states (Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska and Texas).




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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, 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 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, 2010 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 27.55% of our 2010 and 28.03% of our year-to-date 2011 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 will continue to focus, a significant amount of time and resources on the development of our Cricket Wireless retail stores.  We believe that successful expansion, both geographically and product- and service-wise, will help to mitigate the regulatory and economic risk inherent in our business by making us less reliant on (i) cash advance lending alone and (ii) any particular aspect of our business that 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.





Loan Loss Allowance





We maintain a loan loss allowance for anticipated losses for our cash advance, installment and title loans. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off. The Company also periodically performs a look-back analysis on its loan loss allowance to verify 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 cash advance loans that are currently due or past due and cash advance loans that have not been repaid.  This generally is evidenced where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons.  Cash advance loans are carried at cost less the allowance for doubtful accounts.  The Company does not specifically reserve for any individual cash advance loan.  The Company aggregates cash advance loans for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio.  This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.  As a result of the Company’s collection efforts, it historically writes off approximately 45% of the returned items.  Based on days past the check return date, write-offs of returned items historically have tracked at the following approximate percentages: 1 to 30 days – 43%; 31 to 60 days – 66%; 61 to 90 days – 81%; 91 to 120 days – 87%; and 121 to 180 days – 89%.  All returned items are charged off after 180 days, as collections after that date have not been significant.  The loan loss allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.




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








Three Months Ended

March 31,2011


2010Loans receivable allowance, beginning of period

$
1,165,000


$
1,237,000Provision for loan losses charged to expense


179,000



161,000Charge-offs, net


(423,000
)


(407,000
)Loans receivable allowance, end of period

$
921,000


$
991,000





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 tested 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 March 31, 2011 Compared to Three Months Ended March 31, 2010





For the three-month period ended March 31, 2011, net income was $.41 million compared to net income of $.48 million for the three months ended March 31, 2010. During the three months ended March 31, 2011, income from operations before income taxes was $.67 million compared to $.78 million for the three months ended March 31, 2010. The major components of revenues, store expenses, general and administrative expenses, total operating expenses and income tax expense are discussed below.





Revenues





Revenues totaled $5.04 million for the three months ended March 31, 2011, compared to $4.66 million for the three months ended March 31, 2010. The increase in total revenues resulted primarily from an increase in fees received for Cricket payment processing due to an increased compensation percentage from Cricket year over year.  Also contributing to the increase is a higher average sales price per phone on a reduced number of units sold,  an increase in accessory unit sales and an increase in services producing other fees and income, offset by a slight decline in loan originations.





Loan originations in the 2011 interim period declined slightly.  During the three-month periods ended March 31, 2011 and March 31, 2010, we originated approximately $15.2 million $16.1 million in cash advance loans, respectively.  Our average loan (including fees) totaled approximately $378 and $368 during the three-month periods ended March 31, 2011 and 2010, respectively. Our average fee for the three-month periods ended March 31, 2011 and 2010 was $55 and $54, respectively.





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The following table summarizes our revenues for the three months ended March 31, 2011 and 2010, respectively:





Three Months Ended

March 31,


Three Months Ended

March 31,2011


2010


2011


2010(percentage of revenues)Payday loan fees

$
2,325,747


$
2,490,225



46.2
%


53.5
%Phones and accessories


1,586,915



1,478,548



31.5
%


31.8
%Payment processing fees


554,696



173,780



11.0
%


3.7
%Check cashing fees


232,542



232,595



4.6
%


5.0
%Other income and fees


338,731



280,854



6.7
%


6.0
%Total

$
5,038,631


$
4,656,002



100.0
%


100.0
%





Store Expenses





Total expenses associated with store operations for the three months ended March 31, 2011 were $3.54 million, compared to $3.22 million for the three months ended March 31, 2010, or a 9.84% 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 decreases in store expenses for the three months ended March 31, 2011 and 2010 related to salaries and benefits for our store employees and occupancy costs. Our most significant increase in store expenses over that same period prior year relates to our phones and accessories cost of sales. 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 $1.11 million compared to $1.23 million for the periods ended March 31, 2011 and 2010, respectively. The decrease in costs is attributed to our operating four fewer payday and two fewer Cricket stores during 2011.





Provisions for Loan Losses. For the three months ended March 31, 2011, our provisions for loan losses were $.18 million compared to $.16 million for the three months ended March 31, 2010. Our provisions for loan losses represented approximately 7.7% and 6.5% of our loan fee revenue for the three months ended March 31, 2011 and 2010, respectively.  Due to our inability to foretell the scope and duration of the current economic recovery, we believe there are currently uncertainties in how significant our total 2011 loan losses may be and how they may differ from 2010.





Phone and Accessories Cost of Sales.  For the three months ended March 31, 2011, our costs of sales were $.96 million compared to $.43 million for the same period in 2010.  The increase in our Cricket Wireless segment phone and accessory revenues together with the change in dealer compensation structure from Cricket had a corresponding upward impact to our costs of sales.





Occupancy Costs. Occupancy expenses, comprised mainly of store leases, were $.42 million for the three months ended March 31, 2011 versus $.50 million for the three months ended March 31, 2010.  The decrease in our occupancy costs is primarily a result of operating six fewer storefronts in 2011.





Advertising. Advertising and marketing expenses remained consistent at $.08 million for both the three months ended March 31, 2010 and 2011.  In general, we expect that our marketing and advertising expenses for 2011 will remain consistent with 2010 levels.





Depreciation. Depreciation, relating to store equipment and leasehold improvements, decreased slightly to $.06 million for the three months ended March 31, 2011 from $.07 million for the three months ended March 31, 2010.





Amortization of Intangible Assets. Amortization of intangible assets decreased from $.13 million for the three months ended March 31, 2010 to $.12 million, or 7.7%, for the three months ended March 31, 2011.





Other Store Expenses. Other expenses decreased to $.61 million for the three months ended March 31, 2011 from $.62 million for the three months ended March 31, 2010.  The decrease was primarily due to operating fewer stores during the three months ended March 31, 2011 compared to the three months ended March 31, 2010.




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General and Administrative Expenses





Total general and administrative costs for the three months ended March 31, 2011 were $.83 million compared to $.65 million for the period ended March 31, 2010. For the three months ended March 31, 2011, 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 March 31, 2011 were $.45 million, a $.13 million increase from the $.32 million in such expenses during period ended March 31, 2010. The increase was due to the accrual of expense for the annual management bonus pool and the recharacterization of certain employees and their salaries from “store-related” expense to corporate infrastructure expense.





Interest.  Interest expense for the three months ended March 31, 2011 was $.09 million compared to $.08 million for the three months ended March 31, 2010.  Interest expense related to the WERCS loan and notes payable for store acquisitions made during prior periods.





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 or 21%, to $.29 million for the three months ended March 31, 2011 compared to $.24 million from the three months ended March 31, 2010. The increase in these expenses is mainly attributable to management and consulting fees, which we did not begin incurring during 2010 until April 1.





Income Tax Expense





Income tax expense for the three months ended March 31, 2011 was $.26 million compared to income tax expense of $.30 million for the three months ended March 31, 2010, an effective rate of 38% for both interim periods.




Liquidity and Capital Resources





Summary cash flow data is as follows:





Three Months Ended March 31,2011

2010Cash flows provided (used) by :Operating activities

$
1,065,420


$
1,483,530Investing activities


(13,574
)


(13,108
)Financing activities


(1,172,162
)


(1,447,627
)Net decrease in cash


(120,316
)


22,795Cash, beginning of period


2,092,386



1,526,562Cash, end of period

$
1,972,070


$
1,549,357





At March 31, 2011, we had cash of $1.97 million compared to cash of $2.09 million on December 31, 2010.  The net decrease results mainly from repayment of debt, including the $1 million of short-term debt, offset by cash flows provided by operating activities.  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 31, 2012. Our expected short-term uses of available cash include the funding of operating activities (including anticipated increases in payday loans) and the financing of expansion activities, including new store openings and store acquisitions.





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.





Off-Balance Sheet Arrangements





The Company had no off-balance sheet arrangements as of March 31, 2011.


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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 March 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 March 31, 2011.





Changes in Internal Control over Financial Reporting





There were no changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




PART II. OTHER INFORMATION





Item 1. Legal Proceedings





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





Item 3. Defaults upon Senior Securities





As of March 31, 2011, the Company had an outstanding accrued but unpaid and cumulated dividends on its Series A Convertible Preferred Stock aggregating to $1,975,000.  Our Series A Convertible Preferred Stock ranks senior to our common stock.





Item 5. Other Information





On May 10, 2011, our Board of Directors unanimously approved the appointment of Stephen Irlbeck as the Company's Chief Financial Officer, effective immediately.  Prior to his appointment as Chief Financial Officer, Mr. Irlbeck served as our Senior Director of Accounting. With Mr. Irlbeck's appointment, John Quandahl is no longer our interim Chief Financial Officer.





Mr. Irlbeck joined the Company on January 1, 2009. Prior to joining the Company, Mr. Irlbeck was a tax partner with Lutz and Company, PC, a local CPA firm located in Omaha, Nebraska.  He joined the firm in 1995 and was a tax partner in the firm from 2001 until leaving the firm in 2008.





No change has been made to Mr. Irlbeck's compensation or benefit package in connection with his appointment as Chief Financial Officer. Mr. Irlbeck is paid an annual salary of $140,000.  In addition to his salary, Mr. Irlbeck is eligible to participate in the annual performance-based management bonus pool.




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Item 6. Exhibits





Exhibit

Description10.1

Loan Extension Agreement among Wyoming Financial Lenders, Inc., Western Capital Resources, Inc. and WERCS, dated effective as of January 26, 2011 (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on February 4, 2011).10.2

Announcement of Appointment of Chief Financial Officer, dated effective as of May 10, 2011 (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).




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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: May 13, 2011
Western Capital Resources, Inc.(Registrant)By:
/s/ John QuandahlJohn QuandahlChief Executive Officer and Chief Operating OfficerBy:
/s/ Stephen IrlbeckStephen IrlbeckChief Financial Officer




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