WESTERN CAPITAL RESOURCES, INC. - Annual Report: 2012 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

or

Commission File Number 000-52015

_____________________

WESTERN CAPITAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

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

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

_____________________

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

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

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

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

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

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

Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes   x No

The aggregate market value of the voting stock held by persons other than officers, directors and more than 5% shareholders of the registrant as of June 30, 2012 was approximately $1,241,800 based on the closing sales price of $0.37 per share as reported on the OTCBB. As of March 28, 2013, there were 60,220,165 shares of our common stock, no par value per share, outstanding.

DOCUMENTS INCORPORATED IN PART BY REFERENCE

None.

Western Capital Resources, Inc.
Form 10-K

Table of Contents

PART I

ITEM 1    BUSINESS

OVERVIEW

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 consumer financial services and retail cellular phone sales and services to individuals primarily in the Midwestern United States.  

Consumer finance operations are conducted under our wholly owned subsidiary Wyoming Financial Lenders, Inc. The Federal Trade Commission describes some of the loans we offer as “small, short term high rate loans.” Our loans generally are offered and made in exchange for fees that, if treated as interest, are at a rate extraordinarily higher than prime and are made to individuals who do not typically qualify for prime rate loans. As a consequence, our loans may be considered a type of subprime loan. Our Consumer Finance division provides non-recourse cash advance loans, small unsecured installment loans, collateralized non-recourse pawn, and title loans, check cashing and other money services. At December 31, 2012, we operated 51 payday lending and one payday/pawn store in nine states, including Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming. Our provision of payday and installment loans is typically heavily regulated by the various states in which we operate, and our payday lending and installment loan business is extremely susceptible to the adverse effects of any changes in federal or state laws and regulations that may further restrict or flatly prohibit such lending.

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

Our Cellular Retail division operates retail stores selling cellular phones and accessories. We are an authorized Cricket and Revol dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers. Our cellular phone offerings include prepaid cellular phone service that functions for a period of time for a flat fee, without usage limitations and without any long-term contract or commitment required from the consumer. At December 31, 2012 we owned and operated 57 cellular retail stores in 14 states, including Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas, and Washington. While there are state regulations that affect cellular phone products and services, our cellular retail business is not highly susceptible to the adverse effects of changes in federal or state laws and regulations.

For the fiscal year ended December 31, 2012, each of our major lines of business (i.e., payday and installment lending, sale of cellular phone and accessory products, and cellular sales and service fees) generated associated revenues. In 2012, we generated approximately:

The table below summarizes our financial results and condition as of December 31, 2012 and 2011 (audited):

The above figures include an assumed preferred stock dividend relating to our Series A Convertible Preferred Stock in the amount of $2.5 million and $2.1 million in 2012 and 2011, respectively.

CONSUMER FINANCE DIVISION

General Description

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

We provide short-term consumer loans - known as “payday” or “cash advance” loans - in amounts that typically range from $100 to $500 with the average loan amount being approximately $332. Approximately 75% of our payday loan transactions are made for a period of up to four weeks and approximately 25% of our payday loan transactions involve loans whose initial maturity extends beyond four weeks. 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.

We offer short-term installment loans in Colorado and Wisconsin. Approximately 10% and 5.3% of loan revenue was derived from installment lending in 2012 and 2011, respectively. We provide customers with cash in exchange for a promissory note with a maturity of generally 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.

The Loan Process

Customers seeking to obtain a payday loan must:

Our standard payday loan application with customers provides that we will not cash their check until the due date of the associated loan. To repay a payday loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. All of our loans are subject to state, federal, and where applicable, local regulations. State and local regulations are not uniform. Where permitted by state regulation, a customer may renew a loan after full payment in cash of the fee associated with the original loan. When applicable, a customer renewing a loan signs a new promissory note and provides us with a new check.

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

Ordinarily, we deem items such as a recent pay stub, or a bank statement evidencing periodic deposits, as sufficient proof of current employment. We do not, however, independently verify that a borrowing customer is employed at the time of a loan. Furthermore, we do not require or request any information relating to whether a borrowing customer’s employment is on a full-time or part-time, or hourly or salaried, basis; nor do we otherwise make any independent verification regarding these kinds of employment-related facts. We make loans without proof of employment and without a recent bank statement only to repeat customers, who have not previously defaulted on loans we have made to them, in states that do not require those items as prerequisites for a loan. An employment income source is determined to be “suitable” if it appears to be valid from our review of the bank statements a borrower provides us, and any pay stubs they may also offer as evidentiary support for their employment. Generally, we do not advance a payday customer more than 25% of the monthly income that they appear to earn, based on our review of applicable documentation the customer provides to us. We apply this limitation to all of our customers and in all circumstances, including attempts to roll over loans, except for repeat customers who have had repaid all of their prior loans on time. For installment customers, we will loan up to 35% of their monthly income.

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

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

Upon completion of a loan application, the provision of proof of an existing bank account, current income, a valid driver’s license or other acceptable photo identification, and signed loan agreement and our acceptance of such agreement, the loan approval process is complete. At that point, the customer signs a promissory note and provides us with a personal post-dated check for the principal loan amount plus a specified fee. All documentation is reviewed and payday and installment loans are approved at the store level only, barring extraordinary circumstances. All checks are drawn upon the borrower’s bank. We do not accept third-party checks in connection with a payday lending transaction. We make very few “deferred deposit advance” loans, and we estimate that fewer than one percent of our total loans during 2012 were loans of this type. In part, this is because we require reasonable proof of current employment as a condition to obtaining a loan from us.

Beyond the steps described above, we do not make any independent determination of the ability of a potential borrower to repay the loans we make to them. Instead, we rely on a borrower’s representations to us and proof regarding their employment and ownership of an active bank account, our review of their recent bank statement, and our general policy that limits payday loans to no more than 25% of a borrower’s monthly income, and 35% of an installment loan customer’s monthly income.

In general, our lending process and standards are extraordinarily different from those used by banks. To our knowledge, banks typically order and carefully review credit reports, engage in some level of analysis relating to the ability of a potential borrower to repay the loan, and will typically make independent verification of employment and earnings history through payroll deposits, phone calls, reviews of tax returns and other processes—all in an effort to minimize the risk of a loan default. As a result, we generally experience a higher default rate on our personal loans than banks do on their personal loans (see caption below, “Risks Associated with Our Loans—Default and Collection”). At December 31, 2012, we had an aggregate of all loan types of approximately:

The Fees We Charge

The fee we charge for a payday loan varies from state to state, based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. We do not charge interest in connection with our payday loans but do charge interest on our short-term installment loans made in Colorado and Wisconsin. If, however, we calculate the loan fees we charge as an annual percentage rate of interest, such rate would range from 177% for a 31-day loan transacted in Kansas (on the low end) to approximately 536% for a 14-day loan in Wyoming (on the high end), with the actual average loan amount and average actual loan fees we charge involving an imputed annual percentage rate of approximately 439% and 198% for a 14-day and 31-day loan, respectively. The term of a loan significantly affects the imputed APR of the fees we charge for our loans. For instance, when a $15 fee is charged for a two-week loan of $100, the resulting APR is 391%. When the same fee on $100 is charged for a four-week loan, the resulting APR is 195%. When our general range of payday loan fees is applied to our average 2012 loan amount of $332, the fee ranges from $49.74 to $72.96 and the APR ranges from 391% to 574% for a two-week loan and from 195% to 287% for a four-week loan. Currently, we do not charge the maximum fee permitted in all of the states where we operate. We do, however, charge a uniform fee for all transactions processed in any particular state that involve the same range of payday loan amounts and the same term.

The table below sets forth the uniform fees we charge and imputed APRs on non-interest payday loans in the states where we operated during 2012:

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

In Wisconsin and Colorado, we offer short-term installment loans from $100 to $500 payable in six equal monthly payments. Colorado loan terms include a 45% annual interest rate, an origination fee of 20% on loan amounts up to $300 and 7.5% on loan amounts thereafter and a monthly maintenance fee. Wisconsin installment loans are payable over four to six months at an annual percentage rate of approximately 480%.

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

The above-described payday fees are the only fees we assess and collect from our customers for payday loans. Nevertheless, we also charge a flat fee that ranges from $15 to $30 (depending on the state) for returned checks in the event that a post-dated check we attempt to cash as repayment for our loan is returned. In 2012, we had approximately 7,800 checks returned that were assessed a fee, compared to approximately 7,200 such checks during 2011. In 2012, we collected fees on returned checks on approximately 45% of the returned checks, for a total of approximately $64,000. In 2011, we collected on approximately 26% of these returned checks, for a total of approximately $46,000.

Extensions or “Rollovers” of Payday Loans

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

Most states prohibit payday lenders from extending or refinancing a payday loan. Nevertheless, four states in which we presently operate—South Dakota, North Dakota, Utah and Wisconsin—do permit a loan to be extended or “rolled over” for a specified period. Specifically, Wisconsin and North Dakota permit only one loan extension; South Dakota permits up to four loan extensions; and Utah has no limit on the number of loan extensions but does limit the time period of extensions to 10 weeks from the origination date of the original loan.

Summary of Loan Terms

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

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

Multiple Loans to Single Customers

We occasionally make multiple loans to a single customer if permitted by applicable law and regulations. Based on our outstanding payday loans as of December 31, 2012, approximately 7.6% of our customers had more than one loan outstanding. In these cases, the average number of separate loans outstanding was 2.03 and the average aggregate principal amount loaned was approximately $425.

Risks Associated With Our Loans—Default and Collection

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

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

Historically, we collect approximately 58% of the amount of all returned checks, which results in approximately 2.60% of our total payday loans being uncollectible. In 2012, we made approximately 179,000 payday loan transactions.

Marketing Strategy

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

Industry Information

There are an estimated 20,600 cash advance loan stores in the United States, which in the aggregate provide approximately $38.5 billion in short-term credit to households experiencing cash-flow shortfalls. Industry trends indicate that there is likely to be a net decrease in total payday lending stores over the next few years due to store closings resulting from a combination of regulatory or legal changes, a slowdown in new store growth and general economic conditions.

Predatory Lending and Regulatory Concerns

The Federal Trade Commission has issued an FTC Consumer Alert (Federal Trade Commission, March 2008, Consumer Alert entitled “Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives”) that discourages consumers from obtaining payday loans such as the loans we offer, primarily on the basis that payday loans are very costly and consumers should consider alternatives to accepting a payday loan. For further information, you may obtain a copy of the alert at www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm.

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

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

During the 2010 legislative session, the Colorado Deferred Deposit Loan Act, the existing payday lending law, was amended. Because of the change, we phased out our payday loan product and began offering our installment loan product. We also began offering our installment loan product at our four stores in Wisconsin in 2011.

Effective January 1, 2011, consumers in Wisconsin were only allowed to renew a payday loan once, and then lenders are required to offer a 60-day interest-free, payment plan to consumers. In response to these changes, beginning in May 2011, the Company began offering unsecured installment loans in Wisconsin in lieu of payday loans. By the fourth fiscal quarter of 2011, the Company had phased out payday loans in Wisconsin altogether.

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

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

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

Seasonality

We have experienced seasonality in our payday lending operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter.

Effect of General Economic Conditions on our Payday Lending Business

We believe that consumer demand for our payday lending services is increasing as a result of the continued sluggishness of the economy and sustained levels of high unemployment even though high unemployment levels generally reduce the pool of payday loan consumers that can meet all of our loan qualifications, particularly the employment requirement. In addition, it seems likely that the continued economic situation and higher unemployment rates could result in greater loan losses than we experienced in 2012 with unemployment rates expected to remain high and increase for the foreseeable future. Our business experienced fluctuating changes in our provision for loan losses in recent years. For instance, our provision for loan losses totaled $1.74 million for 2012, an increase of $.34 million from our provision of $1.40 million for 2011. Our provision for loan losses as a percentage of loan fee revenue was 17.6% for 2012 and 14.5% during 2011. The less favorable loss ratio in 2012 reflected in part a more challenging collections environment as a result of an increase in bankruptcy filings, higher energy prices and increased competition in the lending industry. We believe that our new installment loan offering has also contributed to the increased loan loss percentage for 2012. In summary, we are uncertain how the current economic conditions will affect demand for our services or our loan losses for 2013.

Credit and financing available to us and our industry has been negatively impacted by the recent economic situation, recent federal and state legislation, and the overall negative perception associated with payday lending. As a result of future growth in our payday lending business beyond reinvestment of our current profits may be limited due to the tighter credit markets. Furthermore, we anticipate that uncertainty about increased regulation of payday lending will make it more difficult for us to borrow money to fund the expansion of our operations through acquisitions.

Introduction of Pawn Services

In August 2012 we opened our first pawn store by converting an existing payday location into a joint payday/pawn store. At this store, we provide collateralized non-recourse loans, commonly known as “pawn loans,” with a maturity of four months. Allowable service charges will vary by state and loan size. Our pawn loans earn 15% per month and our average pawn loan amount typically ranges between $35 and $100 and has been as high as $1,150. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale value depending on an evaluation of several factors. Customers then have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or forfeiting the merchandise to us on expiration. At our pawn stores we sell merchandise that was acquired through either customer forfeiture of pawn collateral, second-hand merchandise purchased from customers or consigned to us.

CELLULAR RETAIL DIVISION

General Description

We also operate cellular retail stores as an authorized Cricket and Revol dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers. We opened our first wireless location for Revol products and services on October 1, 2012. Authorized dealers are permitted to sell the carrier’s line and generally locate their store operations in areas with a strong potential customer base where the carrier 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 December 31, 2012, we operated 52 Cricket cellular retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington) and five Revol stores in Ohio.

We profit in this business through retail sales of Cricket and Revol cellular phones, sales of phone accessories (e.g., face plates and phone chargers), fees charged when a customer changes services (service reactivations, adding lines, plan changes, etc), or whenever a customer pays his or her prepaid cellular invoice at one of our store locations. We bear no risk of non-payment because of the prepaid nature of the service and because the cellular communications companies provide the cell phone services.

Market Information and Marketing

At December 31, 2012, Cricket cellular phone service was offered in 48 states and had approximately 5.3 million customers. Leap Wireless Communications, Inc. is a Delaware public reporting corporation and the owner of Cricket Wireless. Cricket Wireless service offers customers a simple, predictable and affordable nationwide unlimited wireless voice, data, text, Muve Music ^TM and broadband data services for a flat monthly rate. In addition, our retail stores in select markets offer Cricket PAYGo™ services, which is an unlimited prepaid wireless service. Cricket PAYGo is a daily pay-as-you-go wireless and text messaging service designed for customers who prefer the flexibility and control offered by traditional prepaid services but who are seeking greater value for their dollar.

Prepaid cellular products and services are primarily targeted to market segments that are underserved by traditional communications companies. In contrast, the majority of cellular customers in the U.S. subscribe to post-pay services that may require credit approval and a contractual commitment from the subscriber for a period of at least one year and may include overage charges for call volumes in excess of a specified maximum. We believe that a significant portion of the remaining growth potential in the U.S. cellular market consists of customers who are price-sensitive, who have lower credit scores or who prefer not to enter into fixed-term contracts. We believe that our authorized cellular retail product and service offerings appeal strongly to these target-market segments.

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

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

Market Strategy

We believe that our business model is scalable and can be expanded successfully into current adjacent and new markets as we continue to perfect our operational protocols and our administrative office functions relating to our cellular retail business. We opened our first wireless location for Revol products and services on October 1, 2012. We are looking to acquire additional Cricket dealerships in the midwest and launch additional stores in new markets that are currently underserved by competing service providers.

Products and Services

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

The service payment options for Cricket and Revol customers include:

Customers also have an option on the purchase of their cellular phone, including the latest in Apple, Android-based and Blackberry OS-based smartphones. The customer can either purchase a new or refurbished phone from us or purchase a used phone from a previous customer. All phones must be paid for in full because there is no contract for the monthly prepaid service. New phone prices range from $39.99 to high-end cellular phones, such as the iPhone ®, at $499.99 before promotional rebate offers.

Seasonality

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

REGULATION

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

Regulation of Consumer Financing Activities

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

Our payday lending practices must also comply with the disclosure requirements of the Federal Truth-In-Lending Act and Regulation Z under that Act. Our collection activities for delinquent loans are generally subject to consumer protection laws regulating debt-collection practices. Finally, our payday lending business subjects us to the Equal Credit Opportunity Act and the Gramm-Leach-Bliley Act.

During the last few years, legislation has been introduced and passed in the U.S. Congress and in certain state legislatures proposing or effecting various restrictions or an outright prohibition on payday lending. Currently, state laws in Arizona, Montana, Oregon and Georgia have effectively eliminated the ability to conduct payday lending activities in those states. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which consolidated most federal regulation of financial services offered to consumers, and replaced the Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers, including mortgage lenders, providers of payday loans, other nonbank financial companies, and banks and credit unions with assets over $10 billion, are now subject to new regulations to be passed by the Bureau. While the Bureau does not appear to have authority to make rules limiting interest rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that the Bureau will address issues such as rollovers or extensions of payday loans and compliance with federal rules and regulations. Future restrictions on the payday lending industry could have serious consequences for the Company.

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

Financial Reporting Regulation

Regulations promulgated by the United States Department of the Treasury under the Bank Secrecy Act require us to report all transactions involving currency in an amount greater than $10,000. Generally, every financial institution must report each deposit, withdrawal, exchange of currency or other payment or transfer that involves an amount greater than $10,000. In addition, multiple currency transactions must be treated as a single transaction if we have knowledge that the transactions are by or on behalf of any one person and result, in a single business day, in the transfer of cash in or out totaling more than $10,000. In addition, the regulations require us to maintain information concerning sales of monetary instruments for cash in amounts from $3,000 to $10,000. The Bank Secrecy Act requires us, under certain circumstances, to file a suspicious activity report.

The Money Laundering Act of 1994 requires us, as a money service business, to register with the United States Department of the Treasury. Money services businesses include check cashers and sellers of money orders. Money services businesses must renew their registrations every two years, maintain a list of their agents, update the agent list annually, and make the agent list available for examination.

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

Privacy Regulation

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

COMPETITION

Payday and Installment Lending

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

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

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

Pawn

Our competitors for merchandise sales include numerous retail and wholesale stores, including jewelry stores, discount retail stores, consumer electronics stores, other pawn stores, other resale stores, electronic commerce retailers and auction sites. The pawn industry in the United States is large and highly fragmented. The industry consists of approximately 13,000 pawn stores owned primarily by independent operators who own one to three locations, and we consider the industry relatively mature. The three largest pawn store operators account for approximately ten percent of the total estimated pawn stores in the United States.

Cellular Retail

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

Competition for the “prepaid” or no-contract customers continues to grow. In addition to Cricket, other prepaid carriers include MetroPCS, Virgin Mobile and Boost Mobile. There is also competition with other prepaid phone service providers such as Straight Talk by Wal-Mart or Wal-Mart’s Family Mobile ^TM powered by T-Mobile, an increase of national retailers offering products and services that we provide, such as Cricket phones sold at Best Buy or Dollar General, and an increase in MVNO offerings. It is possible that Cricket Communications may itself, at some point in the future, determine to become more involved in the direct operation of its retail stores and move away from an authorized distributor business model or modify its existing model by changing the compensation structure to dealers or by increasing the number of dealer locations and thus reduce traffic to existing locations. In any such event, our ability to maintain and grow our Cricket business will be negatively impacted.

The significant increase in individuals receiving public assistance through “lifeline assistance programs,” in which low-income participants may receive free or reduced-cost cellular service, furthers the competition for our cellular services because those programs are directly funded by the U.S. government whereas we must depend upon end-users to prepay for our services.

Technology and Information

We maintain an integrated system of retail points of sale and management software applications and platforms for processing the various types of financial transactions we offer. These systems provide us with customer service, internal control mechanisms, record-keeping and reporting information. Both of our point-of-sale systems used at our payday and Cricket store locations integrate transaction data with our management information systems on a real-time basis, whereas our pawn point of sale system is fully contained. These systems are designed to provide summary, detailed and exception information to regional, area and store managers as well as corporate staff and are designed to collect customer information for demographic analysis.

Security

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

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

EMPLOYEES

At December 31, 2012, we had approximately 300 employees, consisting of 280 store personnel (107 of whom were employed at payday loan stores, 10 of which were employed at the pawn store, and 163 of which were employed at Cricket retail stores), 14 corporate office employees and six corporate office managers. We believe our relationship with our employees is good, and we have not suffered any work stoppages or labor disputes. We do not have any employees that operate under collective-bargaining agreements.

CORPORATE INFORMATION

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

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

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

RECENT DEVELOPMENTS

Credit Facilities

On January 26, 2011, the Company and Wyoming Financial Lenders, Inc. entered into a Loan Extension Agreement with WERCS. The Loan Extension Agreement extends the maturity date for the payment of all obligations under the Business Loan Agreement to April 1, 2012. In connection with the extension agreement, the Company made a principal payment of $1,000,000. On March 14, 2012, the Company paid the remaining principal balance and all accrued and unpaid interest.

On October 18, 2011, the Company entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of River City Equity. The borrowing arrangement allows the Company to borrow up to $2,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note was amended December 7, 2012 increasing the borrowing limit to $3,000,000 and extending the maturity date. The note’s new maturity date is March 31, 2014, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of the Company’s assets. As of December 31, 2012, $2,750,000 has been advanced under this arrangement.

Acquisitions

In an effort to mitigate our limited 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 conversion of select payday locations to joint pawn/payday locations and 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.

A summary table of the number of stores operated during the periods ended December 31, 2012 and 2011 follows:

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

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

Our business is regulated under numerous state laws and regulations, which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. As of the date of this report, approximately 38 states and the District of Columbia had legislation permitting or not prohibiting payday loans. During the last few years, legislation has been adopted in some states that prohibits or severely restricts payday loans.

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

From time to time legislation banning payday loans has been introduced in Nebraska but has not been passed into law. Since we derive approximately 27% of our payday revenues in Nebraska, the passage of any such legislation in Nebraska would have a highly material and negative effect on our business.

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

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

Adverse changes in laws or regulations relating to pawn lending services could negatively impact our financial results and/or limit our ability to expand into new markets.

Our products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations. We face the risk that restrictions or limitations on pawn loan amounts, pawn loan yields and customer acceptance of pawn loan products resulting from the enactment, change or interpretation of laws and regulations could have a negative effect on our business activities. In particular, short-term consumer loans have come under increased scrutiny and increasingly restrictive regulation in recent years. Adoption of such federal, state or local regulation or legislation could restrict, or even eliminate, our ability to conduct our pawn lending operations at a profit level we consider reasonable at some or all of our stores, and could prevent us from expanding into new markets.

Our business is subject to complex federal laws and regulations governing lending practices, and changes in such laws and regulations could negatively affect our business.

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

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 affects our ability to obtain additional financing as needed.

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

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

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

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

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

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

We anticipate that we will continue to experience growth in our income and expenses for the foreseeable future and that our operating expenses will be a material use of cash resources. Presently, we believe we have cash sufficient to maintain operations. In the event that our income does not meet our expectations, we may sooner require additional financing for working capital. In addition, if we determine to grow our business through acquisitions, any acquisitions we consummate will likely involve outside financing. Any additional financing, for whatever purpose and for whatever reason, may dilute our existing shareholders.

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

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

We currently provide payday lending services in nine states. For the year ended December 31, 2012, revenues from our locations in Nebraska represented approximately 27% of our total payday revenues. For the foreseeable future, we expect that a material and significant portion of our revenues will continue to be generated in Nebraska. We operate cellular retail stores in 14 states. For the year ended December 31, 2012, revenues from our Missouri, Nebraska and Texas stores represented approximately 14%, 13% and 13% of our total cellular revenues, respectively. As a result, changes to prevailing economic, demographic, competitive, regulatory or any other conditions, including the legislative, regulatory or litigation risks mentioned above, in the markets in which we operate, and in Nebraska and Missouri in particular, could lead to a reduction in demand for our services and result in a decline in our revenues or an increase in our provision for doubtful accounts, or even an outright legal prohibition on the conduct of our business. Any of these outcomes could in turn result in a material and swift deterioration of our financial condition principally by impairing our revenues and affecting our ability to obtain financing and operating liquidity, our operating results and our business prospects (again, principally by reducing our revenues and impairing our ability to grow our business).

A default under our borrowing arrangement could require us to seek financing on a short-term basis that may be disadvantageous to the Company.

On October 18, 2011 and amended on December 7, 2012, we entered in a borrowing arrangement with River City Equity, Inc. Under this arrangement, we may borrow up to $3,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note we delivered to River City Equity matures on March 31, 2014, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of our assets. As of December 31, 2012, $2,750,000 has been advanced under this arrangement.

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

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

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

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

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

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

As of December 31, 2012, 56% of our assets consisted of goodwill and other intangible assets. Under generally accepted accounting principles, the carrying value of goodwill is subject to periodic review and testing to determine if it is impaired. The value of our assets will depend on market conditions, regulatory environment, the availability of buyers and similar factors. While the value of these assets is based on management projections and assumptions and is determined by using the discounted cash flow method for purposes of our impairment testing, those values may differ from what could ultimately be realized by us in a sales transaction or otherwise and that difference, while not affecting cash flow, could have a material adverse impact on our operating results and financial position.

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

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

Public perception of payday lending as being predatory or abusive could adversely affect our business.

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

Any disruption in the availability of our information systems could adversely affect our operations.

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

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

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

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

Although we have one payday/pawn location our primary payday business activity is offering and servicing payday loans. We also provide certain related and other services, such as check cashing, money transfers and money orders. The payday segment accounted for approximately 46% of our total revenues in 2012. Our cellular retail segment accounted for approximately 54% of our total revenues in 2012. If we are unable to further diversify our business products and services and expand our customer-base outside of the urban areas, we may experience fluctuations in our revenues and earnings, which may be significant, relating to our payday and pawn lending business and cellular retail sales. Such fluctuations could result from legal or regulatory changes in one or more jurisdictions, changes in economic conditions in the jurisdictions where we provide services, or result from other risks or adverse events befalling us. Our susceptibility to fluctuations or the actual happening of significant fluctuations in our revenues or earnings could cause our Company to be perceived as a less stable and therefore less attractive investment in general, which would likely negatively affect the market price of our common stock and our ability to obtain additional financing an acceptable terms.

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

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

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

We face significant competition in our industry. We currently compete with resellers of our size including US Cellular and Metro PCS. We also compete with the four national wireless service providers (AT&T, Sprint Nextel, T-Mobile and Verizon Wireless) and with Walmart’s Straight Talk and Family Mobile plans. We also compete with government-financed “lifeline assurance” programs that offer free or reduced-cost cellular services to individuals and families receiving many types of public assistance. Our ability to compete effectively will depend on, among other things, the pricing of cellular services and equipment, the quality of our customer service, the reach and quality of our sales and distribution channels and our capital resources. It will also depend on how successfully we anticipate and respond to various factors affecting our industry, including new technologies and business models, changes in consumer preferences, demographic trends and economic conditions. Finally, operating primarily as an authorized Cricket dealer, we are dependent upon continued operations as a Cricket dealer, their pricing, channel strategies, product supply, credit terms, dealer compensation structure, and up-to-date wireless technologies and infrastructure of Cricket Wireless.

The cellular retail industry also faces competition from other communications and technology companies seeking to capture customer revenue and brand dominance with respect to the provision of cellular accessories and services. For example, Apple Inc. is packaging software applications and content with its handsets, and Google Inc. has developed and deployed an operating system and related applications for mobile devices.

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

Provision for loan losses, net of recoveries, is one of our largest operating expenses, constituting approximately 15.9% of our loan revenues for the year ended December 31, 2012, with payday loan losses comprising most of the losses. Any changes in economic factors that adversely affect our customers, such as an economic downturn or high unemployment, could result in higher loan loss experiences than anticipated, which could in turn adversely affect our loan charge-offs and operating results.

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

We maintain an allowance for loan losses at levels to cover the estimated incurred losses in the collection of our payday and installment loan portfolios outstanding at the end of each applicable period. At the end of each period, management considers recent collection history to develop expected loss rates, which are used to establish the allowance for loan losses. Our allowance for loan losses was $1.2 million on December 31, 2012. Our allowance for loan losses is an estimate, and if actual loan losses are materially greater than our allowance for losses, our financial condition and results of operations could be adversely affected.

A sustained deterioration in the economy could reduce demand for our products and services and result in reduced earnings.

A sustained deterioration in the economy could cause a deterioration in the performance of our pawn loans and in consumer demand for and resale value of pre-owned merchandise that we sell in our stores. This, in turn, could reduce the amount that we could effectively lend on an item of collateral. Such reductions could adversely affect pawn loan balances, pawn loan redemption rates, inventory balances, revenues and gross profit margins.

If we do not appropriately value the collateral underlying our pawn loans, we may experience losses.

Our sole recourse in the event that a customer fails to repay a pawn loan is to retain possession of the pledged collateral underlying the loan. Accordingly, the recovery of the amount advanced and any accrued pawn service charges, and the realization of a profit on the sale of merchandise, depends on our initial assessment of the estimated sale value of pledged collateral when the pawn loan is made. If we do not appropriately value the collateral and the estimated sale value of property that is pledged to us, we may experience losses if the pawn loan is not redeemed and we are unable to sell the collateral at a price consistent with our expectations.

If our customers redeem their outstanding pawn loans at a rate that is lower than we anticipate, our revenues may be reduced.

We accrue pawn service charges revenues based on anticipated redemption activity for pawn loans during each reporting period. If the redemption rate of our outstanding pawn loans is lower than what we estimate, the actual pawn service charges that we collect could be less than our estimates, resulting in reduced revenues.

Our earnings and financial position are subject to changes in gold values and the resulting impact on pawn lending and jewelry sales, and a significant or sudden change in gold values may have a material impact on our earnings.

A significant portion of our pawn loans are secured by gold jewelry. Our pawn service charges, sales proceeds and ability to liquidate excess jewelry inventory at an acceptable margin are dependent upon gold values. A significant decline in gold prices could result in decreases in merchandise sales margins, inventory valuations and the value of collateral securing outstanding pawn loans. In addition, a decline in gold prices could result in a lower balance of pawn loans outstanding, as our customers would receive lower loan amounts for individual pieces of jewelry. Any of these risks could adversely affect our financial condition and results of operations.

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

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

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

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

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

Our controlling shareholder, WCR, LLC, has beneficial ownership of 54,427,922 shares. WCR has beneficial ownership of approximately 90% of our common stock. as of the date of this report. As a result, WCR has the ability to outrightly control our management and affairs through the election and removal of our entire Board of Directors and all other matters requiring shareholder approval, including the future merger, consolidation or sale of all or substantially all of our assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change-of-control transaction that may otherwise be beneficial to our shareholders. Furthermore, this concentrated control will limit the practical effect of your participation in Company matters, through shareholder votes and otherwise.

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

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

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

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

Our common stock trades only in an illiquid trading market.

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

In addition, there has typically been very little trading activity in our common stock. During 2012, the average daily trading volume (as reported by Google Finance) was approximately 8,000 shares with the 52-week trading prices ranging from $0.01 to $0.37 per share. The small trading volume will likely make it difficult for our shareholders to sell their shares as and when they choose. Furthermore, small trading volumes generally depress market prices. As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.

There is not now and there may not ever be an active market for shares of our common stock.

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

ITEM 1B    UNRESOLVED STAFF COMMENTS

None.

ITEM 2    PROPERTIES

Our headquarters is in Omaha, Nebraska. There, we have a 5,775-square-foot space, with additional space available, which is sufficient for our projected near-term future growth. The monthly lease amount is currently $5,000 and escalates to $5,500 by the end of the lease term on December 31, 2014. The corporate phone number is (402) 551-8888.

As of December 31, 2012, we had 51 payday and one payday/pawn store locations. Our payday store locations typically range in size from 1,000 square feet to 2,000 square feet, and have varying lease terms (none of which, however, have remaining terms of more than five years). As of the date of this report, we have payday lending stores in the following cities:

¹ Combined pawn/payday location

As of December 31, 2012, we had 57 cellular retail locations. Our cellular retail locations typically range in size from 1,000 square feet to 2,500 square feet, and have varying lease terms (none of which, however, have remaining terms of more than five years). As of the date of this report, we have cellular retail stores in the following cities:

ITEM 3    LEGAL PROCEEDINGS

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

ITEM 4   MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

MARKET INFORMATION

Our common stock is listed for trading on the OTC Bulletin Board, the “OTCBB,” under the symbol “WCRS.” The transfer agent and registrar for our common stock is Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. The following table sets forth the high and low bid prices for our common stock as reported by the OTC Bulletin Board in 2012 and 2011. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions. Trading in the Company’s common stock during the period represented was sporadic, exemplified by low trading volume and many days during which no trades occurred. On or about March 1, 2010, our common stock also began trading on the “OTCQB,” which is the OTC Markets’ middle-tier over-the-counter quotation platform. OTC Markets is the entity formerly known as “The Pink Sheets.”

HOLDERS

As of the date of this report, we had 60,220,165 shares of common stock outstanding held by approximately 544 holders of record.

DIVIDENDS

Holders of our common stock are entitled to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by our Board of Directors out of funds legally available therefore. We have not paid any dividends on our common stock and intend to retain earnings, if any, to finance the development and expansion of our business. In addition, we must first pay preferred dividends on its Series A Convertible Preferred Stock as described under the caption “Description of Equity Securities” below.

On December 10, 2012, we entered into a Preferred Stock Conversion Agreement with WCR, LLC, a Delaware limited liability company, and Richard E. Miller, a director of the Company. WCR, LLC and Richard E. Miller are the holders of all of the Company’s 10,000,000 shares of issued and outstanding Series A Convertible Preferred Stock. Pursuant to the Preferred Stock Conversion Agreement, the preferred shareholders converted all of their respective preferred shares into 10,000,000 shares of common stock at the conversion rate set forth in the Certificate Designation for the Series A Convertible Preferred Stock (i.e., a one-for-one share basis). In consideration of the preferred shareholders’ conversion of their preferred shares, the Company paid all of the dividends accrued but unpaid on account of the Series A Convertible Preferred Stock through the date of conversion (i.e., December 10, 2012). The total amount of accrued but unpaid dividends on the Series A Convertible Preferred Stock at December 10, 2012 was $6,055,163. In this regard, the Company delivered to the preferred shareholders cash in the amount of $5,650,000 and demand promissory notes in the aggregate principal amount of $405,163. The demand promissory notes accrue no interest and will be due and payable, if no earlier payment demand is made, on April 30, 2013.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The table below sets forth certain information, as of the close of business on December 31, 2012, regarding equity compensation plans (including individual compensation arrangements) under which securities of Western Capital were then authorized for issuance.

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

On December 11, 2012, we issued 10,000,000 shares of common stock in a private placement transaction exempt from the registration requirements of the Securities Act of 1933. These shares were issued to our former preferred shareholders in connection with their conversion of all of their preferred shares in to common shares (on a one-for-one basis) pursuant to a Preferred Stock Conversion Agreement of the same date. The shares were issued to one individual (Mr. Richard E. Miller, a director) and our controlling shareholder (WCR, LLC). The offer and sale of these common shares was exempt under Section 4(2) and Regulation D thereunder on the basis that such shares were offered and sold solely to accredited investors.

DESCRIPTION OF EQUITY SECURITIES

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

ITEM 6    SELECTED FINANCIAL DATA

Not applicable.

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

OVERVIEW

While revenues from our cellular retail division overtook revenues from the consumer finance division the consumer finance division contributed 93% of the year’s net income. In 2012 the Company began its expansion of the consumer finance division into pawn and continued growth in the cellular retail division by adding a net of 12 stores. Cellular retail division revenue increased 74% over 2011 revenues.

We provide retail financial services, inclusive of non-recourse unsecured cash advance and installment loans, non-recourse secured pawn and title loans, check cashing and other money services to individuals primarily in the midwestern and southwestern United States. At the close of business on December 31, 2012 and as of the date of this report, we owned and operated 52 stores, including one payday/pawn location in nine states.

We operate cellular retail stores primarily as an authorized premier with service dealer for Cricket Wireless. Authorized premier with service Cricket dealers are permitted to sell the carrier’s line and perform nearly all the services performed by corporate owned Cricket retail stores. We generally locate store operations in areas with a strong potential customer base where the carrier does not maintain a corporate storefront. These locations are generally within the urban core or surrounding areas of a community. As of December 31, 2012, we operated 52 Cricket and 5 Revol cellular retail stores in 14 states.

Our expenses primarily relate to the operations of our retail stores. The most significant expenses include salaries and benefits for our store employees, phones and accessories, provisions for payday and installment loan losses and occupancy expenses for our leased real estate. Our other significant expenses are general and administrative, which includes compensation of employees, professional fees for accounting, audit and legal services, and management / consulting fees.

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

We evaluate our stores based on revenue growth, gross profit contributions and loss ratio (which, for the consumer finance segment, is losses as a percentage of loan revenues), with consideration given to the length of time the storefront has been open and its geographic location. We evaluate changes in comparable storefront financial and other measures on a routine basis to assess operating efficiency. We define comparable storefronts as those that are open during the full periods for which a comparison is being made. For example, comparable storefronts for the annual analysis we undertook as of December 31, 2012 have been open at least 24 months on that date. We monitor newer storefronts for their progress toward profitability and rate of loan growth or units sold.

Revenues increased to $26.51 million in 2012 from $19.49 million in 2011. Payday loan revenues totaled $9.88 million in 2012 compared to $9.66 million in 2011. Sales revenues from our cellular retail phones and accessories sales increased in 2012 to $8.23 million compared to $4.59 million during 2011. Store salaries and benefits expense was $6.63 million in 2012 compared to $4.70 million in 2011, an increase that resulted mainly from the acquisition of additional Cricket cellular retail storefronts in 2012. Our 2012 phone and accessories cost of sales was $5.64 million compared to $2.86 million in 2011. The increase in our cellular retail segment revenues had a corresponding upward impact to our costs of sales. Income from stores increased to $6.10 million in 2012 compared to $5.38 million in 2011. Primarily as a result of these factors, net income increased to $1.78 million in 2012 from net income of $1.44 million in 2011.

In December 2012 we converted the preferred stock to common on a one for one basis, retiring 100% of outstanding Series A Convertible Preferred Stock. Prior to the conversion, we had 10,000,000 shares of Series A Convertible Preferred Stock (10% cumulative dividends, $0.01 par value, $2.10 stated value) authorized, issued and outstanding. One-fourth of the $2.1 million annual preferred dividend accrued each quarter, whether paid or not. Our Board of Directors voted to approve payment of dividends when appropriate and as permitted by Minnesota law. The dividend can be paid either in cash or in shares of our common stock at the discretion of the preferred shareholder. The preferred dividend which accrued through the date of conversion was included in the net income or loss available to common shareholders. As a result, we had a net loss available to common shareholders in 2012 and 2011.

Prior to the date of conversion, our obligation to pay preferred dividends impacted our cash flow and inhibited our ability to grow through stock-funded acquisitions

The preferred dividend obligation also significantly affected our net income available to common shareholders. For example, absent the 2012 preferred dividend of $2.5 million, our net income available to common shareholders would have been approximately $1.8 million.

RESULTS OF OPERATIONS:

YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011

For the year ended December 31, 2012, net income was $1.78 million compared to a net income of $1.44 million in 2011. Income before income taxes was $2.90 million in 2012 compared to $2.32 million in 2011. The major components of each of revenues, store expenses, general and administrative expenses, total operating expenses and income tax expense are discussed below.

Revenues

Revenues totaled $26.51 million in 2012 compared to $19.49 million in 2011, an increase of $7.02 million or 36%. The increase in total revenues resulted primarily from an increase in the number of cellular retail storefronts in 2012 compared to 2011 and a higher per unit selling price of phones. We originated approximately $69.2 million in payday loans during 2012 compared to $67.50 million in payday loans during the prior year resulting in payday loan fees of $9.88 million in 2012 compared to $9.66 million in 2011. The average loan (including fee) totaled $387 in 2012 versus $382 in the prior year. Our average fee for 2012 was $56 compared to $55 for 2011. Revenues from customers for the sale of cellular phones and accessories totaled $8.22 million in 2012 compared to $4.59 million in 2011. Cricket service fee revenue totaled $6.24 million in 2012 compared to $3.74 million in 2011, an increase related to an increase in dealer fees per unit sold and the increase in unit sales due to the operation of more locations in 2012 compared to 2011. We had 61 cellular retail storefronts open and operating during at least some part of 2012 compared to 49 in 2011. Throughout 2012, we added 16 cellular retail storefronts and closed 4. In comparison, throughout 2011, we added 18 cellular retail storefronts and closed four. Income from installment loan interest increased to $1.06 million in 2012, compared to $.54 million in 2011. Other revenues, including check cashing, title loans, service change fees and other sources, totaled $1.11 million and $.96 million for 2012 and 2011, respectively.

The following table summarizes our revenues:

We expect that our sources of revenue for 2013 to continue to diversify as we continue to increase sales in our Cricket retail operations and look to open new Cricket retail and pawn storefronts.

Store Expenses

Total expenses associated with store operations for 2012 were $20.42 million compared to $14.10 million for 2011, an increase of $6.32 million or 45%. The major components of these expenses are salaries and benefits for our store employees, provision for loan losses, costs of sales for phones and accessories, occupancy costs primarily relating to our store leaseholds, advertising expenses, depreciation of store equipment, amortization of intangible assets and other expenses associated with store operations.

Overall, our most significant increases in store expenses from 2012 to 2011 related to salaries and benefits for our store employees, phones and accessories, and occupancy costs. Our most significant decrease in store expenses over that same period relates to amortization of intangible assets. 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 was $6.63 million in 2012 compared to $4.70 million in 2011, an increase of $1.93 million. This increase is primarily a result of an increase in the number of cellular retail storefronts operating throughout 2012. As a result of these additional cellular retail storefronts, we expect that salaries and benefits for 2013 will increase because the additional storefronts will be operating the entire year. Our salaries and benefits expenses will further increase if we add additional storefronts, whether cellular retail or pawn, in 2013.

Phone and Accessories Cost of Sales.  The increase in our cellular phone and accessory revenues resulted in corresponding increase in costs of sales.  For the year ended December 31, 2012, our costs of sales were $5.64 million compared to $2.86 million in 2011.  Contributing to the increase was a change in the dealer compensation arrangement with Cricket that resulted in lower profit margins on phone unit sales to customers.

Occupancy Costs. Occupancy expenses, consisting primarily of store leases were $2.27 million during 2012 compared to $1.69 million in 2011, an increase of $.58 million primarily resulting from a higher number of storefront days (number of storefronts times days leased for year) in 2012 compared to 2011. Occupancy expenses as a percentage of revenues decreased from 8.65% in 2011 to 8.58% in 2012.

Provisions for Loan Losses. Our provision for losses for 2012 totaled $1.74 million and $1.40 million for 2011. Our provision for loan losses as a percentage of payday and installment loan fee revenue was 15.9% during 2012 versus 13.7% during 2011. The less favorable loss ratio is due to higher loss percentages with installment lending combined with a slightly higher loss ratio from payday loans. Due to our inability to foretell the speed and scope of the current economic recovery or the economy in general, we believe there are uncertainties in what loan losses for 2013 may be.

Advertising.  Advertising and marketing related expense was $.32 million in 2012 compared to $.33 million in 2011. We believe that our advertising expenses in 2013 may increase slightly over those in 2012, mainly as a result of the need to increase advertisement of our pawn stores in 2013.

Depreciation. Depreciation increased by $.06 million in 2012. Depreciation was $.33 million for 2012 and $.27 million for 2011.

Amortization of Intangible Assets. Amortization of the customer relationship and other intangible assets was $.22 million for 2012 and $.44 million for 2011. This has been decreasing as intangibles become fully amortized.

Other Store Expenses. Other store expenses increased from $2.42 million in 2011 to $3.26 million in 2012. Other store expenses include bank fees, collection costs, repair and maintenance, supplies, telephone, utilities and network lines, and others. The increase in these expenses during 2012 was primarily due to increased supplies related to our cellular retail store acquisitions and the expansion of our payday location to incorporate pawn operations.

General and Administrative Expenses

Total general and administrative costs for 2012 were $3.19 million compared to $3.07 million for 2011. The major components of these costs are salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses.

Salaries and Benefits. Salaries and benefits expenses for 2012 were $1.83 million compared to $1.74 million for 2011. The Company expects that during 2013 salaries and benefits expenses associated with executive management and corporate headquarters will increase from 2012 levels as we seek out acquisition an expansion opportunities.

Interest Expense. The Company had $.24 million of interest expense in 2012 compared to $.29 million in 2011, a 17.2% decrease due to a reduction in notes payable balances.

Other General and Administrative Expenses. Other general and administrative expenses, such as professional fees, management / consulting fees, utilities, office supplies, and other minor costs associated with corporate headquarters activities were $1.10 million in 2012 compared to $1.01 million during 2011. The increase in these expenses is mainly attributable to an increase in nonrecurring professional fees and management / consulting fees.

Total Operating Expenses

Total operating expenses for 2012 and 2011 were $23.61 million and $17.17 million, respectively. We anticipate our total operating expenses in 2013 to increase compared to 2012 due to acquisition of additional cellular retail storefronts and expansion of current payday location to incorporate pawn sales and operations.

Income Tax Expense

Income tax expense on continuing operations increased to $1.12 million in 2012 compared to $.88 million in 2011 for an effective rate of 38.6% and 38.1%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Summary cash flow data is as follows:

At December 31, 2012, we had cash of $2.25 million compared to cash of $1.91 million on December 31, 2011. For 2013, we believe that our available cash, combined with expected cash flows from operations, will be sufficient to fund our liquidity and capital expenditure requirements through March of 2014. Our expected short-term uses of cash include the reduction in accruals related to operations, scheduled principal and interest payments on long-term debts, repayment of short-term debt, and capital expenditures.

Our overall cash and liquidity position is significantly enhanced by the equity raised in 2012 and the 2012 conversion of our Series A Convertible Preferred Stock to common stock and the payment of a significant portion of the accrued dividends on the preferred stock.

Credit Facilities

On January 26, 2011, the Company and Wyoming Financial Lenders, Inc. entered into a Loan Extension Agreement with WERCS. The Loan Extension Agreement extends the maturity date for the payment of all obligations under the Business Loan Agreement to April 1, 2012. In connection with the extension agreement, the Company made a principal payment of $1,000,000. On March 14, 2012, the Company paid the remaining principal balance and all accrued and unpaid interest.

On October 18, 2011, the Company entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of River City Equity. The promissory note was amended on December 7, 2012. The borrowing arrangement allows the Company to borrow up to $3,000,000 at an interest rate of 12% per annum, with interest payable on a monthly basis. The note matures on March 31, 2014, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits River City Equity to obtain a security interest in all of the Company’s assets. As of December 31, 2012, $2,750,000 has been advanced under this arrangement.

CRITICAL ACCOUNTING POLICIES

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

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

Loans Receivable Allowance

We maintain a loan loss allowance for anticipated losses for our payday and installment loans. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off. We also periodically perform a look-back analysis on our loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. We are aware that as conditions change, we may also need to make additional allowances in future periods.

Included in loans receivable are payday and installment loans that are currently due and payday loans that have reached maturity within the last 180 days and 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. Loans are carried at cost less the loans receivable allowance. We do not specifically reserve for any individual loan. We aggregate loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates. We utilize a software program to assist with the tracking of its historical portfolio statistics.  All returned items are charged-off after 180 days, as collections after that date have not been significant. The loan loss allowance is reviewed monthly and any adjustment to the loans receivable allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

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

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 – 67%; 61 to 90 days – 84%; 91 to 120 days – 89%; and 121 to 180 days – 92%. A rollforward of our loans receivable allowance for the years ended December 31, 2012 and 2011 is as follows:

Valuation of Long-lived and Intangible Assets

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

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

Due to the effect of our capital structure involving preferred stock and related cumulative preferred dividends and the effect of the minimal amount of float for our common stock, the market capitalization approach of valuing the reporting unit as a whole is not practical. The discounted future cash flows method is utilized in estimating value. When estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any.

In determining the estimated future discounted cash flows, we consider current and projected future levels of income, as well as strategic plans, business trends, prospects, and market and economic conditions. Impairment tests involve the use of judgments and estimates related to the fair market value of the business operations with which goodwill is associated, taking into consideration both historical operating performance and anticipated financial position and future earnings. We believe that the estimates of future cash flows and fair value determined as of October 1, 2012 are reasonable. Changes in estimates of those cash flows and fair value, however, could affect the evaluation. Based upon this evaluation, we concluded that the fair value exceeded the carrying value of net assets and there was no impairment.

As of December 31, 2012, we evaluated whether any triggering events or changes in circumstances had occurred subsequent to our annual impairment test. As part of this evaluation, we considered additional qualitative factors, including whether there had been any significant adverse changes in legal factors or in our business climate, adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or likely sale or disposal of all or a significant portion of our reporting unit. This analysis resulted in a determination that no triggering events or changes in circumstances had occurred.

OFF BALANCE SHEET ARRANGEMENTS

We have no off balance sheet arrangements.

FORWARD-LOOKING STATEMENTS

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

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

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

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

ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX OF FINANCIAL INFORMATION

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS

Board of Directors

Western Capital Resources, Inc.

Omaha, Nebraska

We have audited the accompanying consolidated balance sheets of Western Capital Resources, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Capital Resources, Inc. and Subsidiaries as of December 31, 2012 and 2011 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Minneapolis, Minnesota

/s/ Lurie Besikof Lapidus & Company, LLP

March 29, 2013

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See notes to consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

See notes to consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of Business / Basis of Presentation

Western Capital Resources, Inc. (WCR) through its wholly owned operating subsidiaries, Wyoming Financial Lenders, Inc. (WFL) and PQH, Inc. (PQH), collectively referred to as the Company, provides retail financial services and retail cellular phone sales to individuals primarily in the Midwestern United States.  The Company operated 51 “Payday” stores and one payday/pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) as of December 31, 2012 and 52 “Payday” stores at December 31, 2011. The Company operated 57 cellular retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas, and Washington) as of December 31, 2012 and 45 cellular retail stores as of December 31, 2011.  The consolidated financial statements include the accounts of WCR, WFL, and PQH. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company, through its “Consumer Finance” division, provides non-recourse cash advance and installment loans, collateralized non-recourse pawn loans, check cashing and other money services.  The short-term consumer loans, known as cash advance loans or “payday” loans, are in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $22 per each $100 borrowed. To repay a cash advance loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. Installment loans provide customers with cash in exchange for a promissory note with a maturity of generally three to six months and are unsecured. The fee and interest rate on installment loans vary based on applicable regulations.

In August 2012 we opened our first pawn store by converting an existing payday location into a joint payday/pawn store. The company provides collateralized non-recourse loans, commonly known as “pawn loans”, with a maturity of four months. Allowable service charges will vary by state and loan size. Our pawn loans earn 15% per month. The loan amount varies depending on the valuation of each item pawned. We generally lend from 30% to 55% of the collateral’s estimated resale value depending on an evaluation of several factors. Customers then have the option to redeem the pawned merchandise during the term or at expiration of the pawn loan or forfeiting the merchandise to us on expiration. At our pawn stores we sell merchandise that was acquired through either customer forfeiture of pawn collateral, second-hand merchandise purchased from customers or consigned to us.

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 “Cellular Retail” division that is an authorized Cricket and Revol dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Significant management estimates relate to the loans receivable allowance, percentage of existing pawn loans that will be forfeited, allocation of and carrying value of goodwill and intangible assets, inventory valuation and obsolescence and deferred taxes and tax uncertainties.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 recognizes fees on redeemed pawn loans on a constant-yield basis ratably over the loans’ terms. No fees are recognized on forfeited pawn loans. The Company records revenue from check cashing fees, sales of phones, accessories, and pawn inventory, 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 and installment loans. We do not record loan losses or charge-offs of pawn or title loans because the value of the collateral exceeds the loan amount. To estimate the appropriate level of the loan loss allowance, we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off. The Company also periodically performs a look-back analysis on its loan loss allowance to verify the historical allowance established tracks with the actual subsequent loan write-offs and recoveries. The Company is aware that as conditions change, it may also need to make additional allowances in future periods.

Included in loans receivable are payday, installment and title loans that are currently due and payday loans that have reached maturity within the last 180 days and 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.   Loans are carried at cost less the loans receivable allowance.  The Company does not specifically reserve for any individual loan.  The Company aggregates loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio.  This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.   All returned items are charged-off after 180 days, as collections after that date have not been significant.  The loans receivable allowance is reviewed monthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

Inventory

Cellular Retail division inventory, consisting of phones and accessories, is stated at cost, determined on the specific identification and a first-in, first-out basis, respectively. Pawn merchandise inventory is stated at the lower of cost or market where the principal amount of an unpaid loan becomes the inventory cost of the forfeited collateral.

Property and Equipment

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

Goodwill

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

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

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

Long- Lived Assets

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

Due to the effect of our capital structure involving preferred stock and related cumulative preferred dividends and the effect of the minimal amount of float for our common stock,, the market capitalization approach of valuing the reporting unit as a whole is not practical. The discounted future cash flows method is utilized in estimating value. When estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any. There were no impairment charges recorded in 2012 or 2011.

Concentrations of Credit Risk

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

Income Taxes

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

Net Loss Per Common Share

Basic net loss per common share is computed by dividing the loss available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted net loss per common share is computed by dividing the net loss available to common shareholders’ by the sum of the weighted average number of common shares outstanding plus potentially dilutive common share equivalents (convertible preferred shares) when dilutive. The 10 million shares of potentially dilutive Series A Convertible Preferred Stock outstanding at December 31, 2011 were anti-dilutive and therefore excluded from the dilutive net loss per share computation:

Fair Value of Financial Instruments

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

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity the option to first assess qualitative factors to determine whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. The results of the qualitative assessment would be used as a basis in determining whether it is necessary to perform the two-step quantitative impairment test. If the qualitative assessment supports the conclusion that it is more-likely-than-not that the fair value of the asset exceeds its carrying amount, the entity would not need to perform the two-step quantitative impairment test. The objective of this update is to reduce the cost and complexity of performing impairment tests for indefinite-lived intangible assets other than goodwill, and to improve consistency in impairment testing among long-lived asset categories. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this ASU did not have a material effect on our financial condition or results of operations.

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

The Company’s Consumer Finance division 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 as needed.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 with reduced profitability due to these regulatory changes.

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.

As evidenced in the previous paragraphs, the passage of federal or state laws and regulations could, at any point, essentially prohibit the Company from conducting its payday lending business in its current form. Any such legal or regulatory change would certainly have a material and adverse effect on the Company, its operating results, financial condition and prospects, and perhaps even its viability.

For the years ended December 31, 2012 and 2011, the Company had significant revenues by state (shown as a percentage of applicable division’s revenue when 10% or more) as follows:

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

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 – 67%; 61 to 90 days – 84%; 91 to 120 days – 89%; and 121 to 180 days – 92%.  A rollforward of the Company’s loans receivable allowance for the year ended December 31, 2012 and 2011 is as follows:

Property and equipment consisted of the following:

Depreciation expense on all operations for the year ended December 31, 2012 and 2011 was $353,896 and $299,130, respectively.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible assets consisted of the follows:

As of December 31, 2012, estimated future amortization expense for the customer relationships is as follows:

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

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

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Estimated repayments are as follows:

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

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

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

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

It is the Company’s practice to recognize penalties and/or interest related to income tax matters in interest and penalties expense. As of December 31, 2012 and 2011, the Company had an immaterial amount of accrued interest and penalties.

The Company is subject to income taxes in the U.S. federal jurisdiction and various states and local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company and has concluded that as of December 31, 2012, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes the Company is no longer subject to income tax examinations for years prior to 2009.

Capitalization

At December 31, 2012, the Company’s authorized capital stock consists of 250,000,000 shares of no par value capital stock. All shares have equal voting rights and are entitled to one vote per share.

Of the 250,000,000 shares of authorized capital, 240,000,000 have been designated as common stock and 10,000,000 as Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock had a 10% cumulative dividend and could be converted on a share-for-share basis into common stock. The Company had the right to redeem some or all of the Series A Convertible Preferred Stock at any time, upon 60 days notice, at $3.50 per share, plus any cumulative unpaid dividends. Effective December 10, 2012, all of the outstanding preferred stock was converted to common. At December 31, 2011, 10,000,000 shares of Series A Convertible Preferred Stock were issued and outstanding.

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.

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.

The Company filed amendments to the registration statement on July 27, August 28, September 18, and October 9, 2012. The SEC declared the registration statement, as amended, effective on October 15. The Company distributed the subscription rights on such date and commenced its registered rights offering of common stock. This offering terminated on November 14, 2012.

Gross proceeds from the sale of 45 million shares of common stock at $0.10 per share was $4.5 million.

Preferred Stock Conversion to Common

On December 10, 2012, the Company entered into a Preferred Stock Conversion Agreement with WCR, LLC, a Delaware limited liability company, and Richard E. Miller, a director of the Company. WCR, LLC and Richard E. Miller were the holders of all of the Company’s 10,000,000 shares of issued and outstanding Series A Convertible Preferred Stock. Pursuant to the Preferred Stock Conversion Agreement, the preferred shareholders converted all of their respective preferred shares into 10,000,000 shares of common stock at the conversion rate set forth in the Certificate Designation for the Series A Convertible Preferred Stock (i.e., a one-for-one share basis). In consideration of the preferred shareholders’ conversion of their preferred shares, the Company paid all of the dividends accrued but unpaid on account of the Series A Convertible Preferred Stock through the date of conversion (i.e., December 10, 2012). The total amount of accrued but unpaid dividends on the Series A Convertible Preferred Stock at December 10, 2012 was $6,055,163. In this regard, the Company delivered to the preferred shareholders cash in the amount of $5,650,000 and demand promissory notes in the aggregate principal amount of $405,163. The demand promissory notes accrue no interest and will be due and payable, if no earlier payment demand is made, on April 30, 2013.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2008 Stock Incentive Plan

On February 2, 2008, the Board of Directors of the Company approved and adopted the Company’s 2008 Stock Incentive Plan, pursuant to which an aggregated of 2,000,000 shares of common stock have been reserved for issuance.  No options under this plan have been granted as of December 31, 2012.

The Company had no stock options or stock warrants outstanding at December 31, 2012.  

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

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

The Company leases its facilities under operating leases with terms ranging from month to month to six years, with rights to extend for additional periods. Rent expense on all operations was approximately $2,305,800 and $1,704,000 in 2012 and 2011, respectively.  Future minimum lease payments are approximately as follows:  

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A breakout of other expense is as follows: