Washington, D.C. 20549

 

FormFORM 10-Q

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)

See notes to condensed consolidated financial statements.

Included in loans receivable are cash advance loans that are currently due or past due and cash advance loans that have not been repaid.  This generally is evidenced where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons.  Cash advance loans are carried at cost less the allowance for doubtful accounts.  The Company does not specifically reserve for any individual cash advance loan.  The Company aggregates cash advance loans for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio.  This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.  As a result of the Company’s collection efforts, it historically writes off approximately 45% of the returned items.  Based on days past the check return date, write-offs of returned items historically have tracked at the following approximatelyapproximate percentages: 1 to 30 days – 45%; 31 to 60 days – 67%; 61 to 90 days – 83%; 91 to 120 days – 88%; and 121 to 180 days – 91%90%.  All returned items are charged-off after 180 days, as collections after that date have not been significant.  The loan loss allowance is reviewed quarterly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

A rollforward of the Company’s loans receivable allowance for the threesix months ended March 31,June 30, 2010 and 2009 is as follows:

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 (stock warrants, convertible preferred shares) when dilutive. Potentially dilutive securities Series A Convertible Preferred Stock (10,000,000) was(10,000,000 shares) were anti-dilutive and therefore excluded from the dilutive net loss per share computation for 2010.  

Recent Accounting Pronouncements

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

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

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

Effective March 31, 2010, the Company amended notes payable to related parties.  Under the amended payment terms of the notes, principal and interest payments on the notes are to be made monthly in the aggregate amount of approximately $61,500, beginning April 1, 2010, so as to amortize the outstanding balances of the notes as of March 31, 2010 over the entire term at a 10% rate of interest with all then-outstanding principal and accrued but unpaid interest due and payable on March 1, 2013.

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

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

On March 31, 2010, the Company entered into an Employment Agreement with John Quandahl, its Chief Executive Officer, Chief Operating Officer, and interim Chief Financial Officer.  The Employment Agreement provides Mr. Quandahl with an annual base salary and eligibility for participation in an annual performance-based cash bonus pool for management.  The performance-based bonus provisions permit certain members of management to receive annual bonus payments in cash based on EBITDA targets established by the Board of Directors annually.  The 2010 Bonus Pool EBITDA target is set at $4 million.  If the Company’s actual EBITDA performance for a particular annual period ranges from 85-100% of the established EBITDA target, the cash bonus pool will be 7.5% of EBITDA.  If the Company’s actual EBITDA performance for a particular annual period exceeds 100% of the established EBITDA target, 15% of EBITDA over the established target will be added to the cash bonus pool.

The Company’s payday or short-term consumer loan activities are highly regulated under numerous local, state, and federal laws and regulations, which are subject to change. New laws or regulations could be enacted that could have a negative impact on the Company’s lending activities. Over the past few years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict deferred presentment cash advances.

The Federal Trade Commission has issued an FTC Consumer Alert (Federal Trade Commission, March 2008, Consumer Alert entitled “Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives”) that discourages consumers from obtaining payday loans such as the loans we offer, primarily on the basis that the types of loans we offer are very costly and consumers should consider alternatives to accepting a payday loan. For further information, you may obtain a copy of the alert at www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm.  The federal government also passed legislation, the 2007 Military Authorization Act, prohibiting us from offering or making our loans to members of the military when the interest and fees calculated as an annual percentage rate exceed 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 February 2009, Congress introduced H.R. 1214, the Payday Loan Reform Act of 2009 (an amendment to the Truth in Lending Act).  If enacted, this amendment would restrict charges for a single-payment loan to a 391% effective annual rate, or $15 per $100 for a two-week loan, prohibit loan rollovers, limit borrowers to one outstanding loan at a time and permit only one extended repayment plan every six months.  Presently, the bill is in the House Financing Committee.  We have no further information regarding this bill or any legislative efforts Congress may propose at this time.

In November 2009, Senator Christopher Dodd introduced proposed federal legislation entitled the “Restoring American Financial Stability Act of 2009” which, among other things, would create a federal agency authorized to promulgate consumer protection regulations covering a variety of financial industries, including payday lending.  In MarchJuly 2010, the billDodd-Frank Wall Street Reform and Consumer Protection Act was passed by the U.S. Senate Banking Committee for considerationCongress 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 full Senate.  Presently,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 uncertain whetherexpected that the Bureau will address issues such as rollovers or whenextensions of payday loans.  Future restrictions on the full U.S. Senate may consider and vote uponpayday lending industry could have serious consequences for the bill.  Moreover, becauseCompany.

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 apparently broad regulatory powers that would be afforded toclosure of one or more federal agencies under the currently proposed legislation, it is highly uncertain what impactstore locations or negative publicity.  Any such legislationchange or failure would have upona corresponding impact on our results of operations and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines, and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing a needed.

During the 2010 legislative session in Colorado, House Bill 10-1351 was passed into law.  This bill amended the Colorado Deferred Deposit Loan Act, the existing payday lending law.  The law is effective August 11, 2010 and modifies 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 limits the amount and type of fees that can be charged on these loans, effectively reducing by one-half the fees that can be charged.  At present, the Company plans to continue to operate its operations or prospects, if passed.sole store in Colorado while the impact to profitability of this new law is being assessed.  Currently, we derive 1.41% of our Payday division revenues from fees in Colorado.

The passage of federal or state laws or similar lawsand regulations could, at state levels, wouldany point, essentially prohibit the Company from conducting its payday lending business in its current form, andform.  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 threesix months ended March 31,June 30, 2010 and 2009, the Company had significant revenues by state (shown as a percentage of applicable division’s revenue) as follows:

Quarterly cumulatedCumulated dividends on the Company's Series A Convertible Preferred Stock are $525,000.$525,000 and $1,050,000 for the three and six months ended June 30, 2010, respectively. The Company has $525,000 cumulative unaccrued preferred dividends at March 31,June 30, 2010.

A breakout of other expense is as follows:

On March 26, 2010, the Company and all of the then-current members of its Board of Directors, among others, were sued by former members of our management team, Messrs. Steven Staehr and David Stueve.  In that lawsuit, the plaintiffs have alleged, among other things, that our Board of Directors breached certain of their fiduciary duties primarily in connection with the proposed sale by WERCS of its capital stock in the Company to WCR, LLC.  The complaint seeks injunctive and declaratory relief and unspecified money damages.  The Company believes thesethe claims are entirely meritless.without merit.  While we are unable to predict the ultimate outcome of these claims and proceedings, management currently believes there is not a reasonable possibility that the costs and liabilities of such matters, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.  The Company has removed the lawsuit to federal court, and the plaintiffs have sought to remand the case to state court.  Plaintiffs’ motion to remand the case to state court has been argued and is under advisement by the federal court.

Effective April 1, 2010, WFL, the wholly owned payday lending operating subsidiary of WCR, refinanced its outstanding credit facility.  On that date, WERCS, a Wyoming corporation and the former holder of the Company’s Series A Convertible Preferred Stock, satisfied all of WFL’s financial obligations owing to Banco Popular North America and entered into a Business Loan Agreement and associated $2,000,000 Promissory Note with WFL.  The loan from WERCS extinguished the $1,637,341 that WFL owed to Banco Popular, and the remaining $362,659 will be used for general working capital.

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 necessarily update forward-looking statements even though our situation may change in the future.

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

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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.

 

We provide (through Wyoming Financial Lenders, Inc.) retail financial services to individuals primarily in the midwestern and southwestern United States. These services include non-recourse cash advance loans, check cashing and other money services. At the close of business on March 31,June 30, 2010, we owned and operated 55 stores in 10 states (Colorado, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming).

We provide short-term consumer loans—known as “payday” or “cash advance” loans—in amounts that typically range from $100 to $500. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advanced, plus a fee. The fee varies from state to state based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial increment of $100 borrowed. To repay a payday loan, a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the bank for collection. All of our payday loans and other services are subject to state regulations (which vary from state to state), federal regulations and local regulation, where applicable.

In October 2008, we began operating Cricket Wireless retail stores as an authorized dealer of Cricket Wireless products and services. Authorized dealers are permitted to sell the Cricket line and generally locate their store operations in areas with a strong potential customer base where Cricket does not maintain a corporate storefront. 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. At the close of business on March 31,June 30, 2010, we owned and operated 3331 stores in seven states (Illinois, Indiana, Kansas, Maryland, Missouri, Nebraska, and Texas).

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

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

We evaluate our stores based on revenue growth, gross profit contributions and loss ratio (which is losses as a percentage of revenues)payday loan fees), with consideration given to the length of time the branch has been open and its geographic location.  We evaluate changes in comparable branch financial and other measures on a routine basis to assess operating efficiency.  We define comparable branches as those branches that are open during the full periods for which a comparison is being made.  For example, comparable branches for the annual analysis we undertook as of December 31, 2009 have been open at least 24 months on that date.  We monitor newer branches for their progress toward profitability and rate of loan growth, units sold, or payment volume.

The growthcontraction of the payday loan industry has followed, and continues to be significantly affected by, payday lending legislation and regulation in the various states and nationally.  We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally, and are involved with the efforts of the various industry lobbying efforts.  To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business could be adversely affected.  In Nebraska, legislation was introduced in 2008 (but did not advance) to ban all cash advance or payday loans in Nebraska.  Despite the defeat of this legislation, since we derived approximately 27% of our 2009 and year-to-date 2010 total payday lending revenues in Nebraska, any subsequent attempts to pass similar legislation in Nebraska, or other legislation that would restrict our ability to make cash advance loans in Nebraska, would pose significant risks to our business.

With payday loan industry growth and fragmentation, we believe there are opportunitiesIn an effort to grow our business, primarily through acquisitions as opposed to organic growth.  We continually evaluate opportunities in numerous states in which we currently operate and evaluating the regulatory environment and market potential in the various states in which we currently do not have stores.  In addition to expandingexpand our geographic reach, our strategic expansion plans also involve the expansion and diversification of our product and service offerings.  For this reason, we have focused, and will continue to focus, a significant amount of time and resources on the development of our Cricket Wireless retail stores.  We believe that successful expansion, both geographically and product- and service-wise, will help to mitigate the regulatory and economic risk inherent in our business by making us less reliant on (i) cash advance lending alone and (ii) any particular aspect of our business that is concentrated geographically.

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

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

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

Included in loans receivable are cash advance loans that are currently due or past due and cash advance loans that have not been repaid.  This generally is evidenced where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s account, a closed account, or other reasons.  Cash advance loans are carried at cost less the allowance for doubtful accounts.  The Company does not specifically reserve for any individual cash advance loan.  The Company aggregates cash advance loans for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the portfolio.  This methodology takes into account several factors, including the maturity of the store location and charge-off and recovery rates.  The Company utilizes a software program to assist with the tracking of its historical portfolio statistics.  As a result of the Company’s collection efforts, it historically writes off approximately 45% of the returned items.  Based on days past the check return date, write-offs of returned items historically have tracked at the following approximatelyapproximate percentages: 1 to 30 days – 45%; 31 to 60 days – 67%; 61 to 90 days – 83%; 91 to 120 days – 88%; and 121 to 180 days – 91%90%.  All returned items are charged-off after 180 days, as collections after that date have not been significant.  The loan loss allowance is reviewed quarterlymonthly and any adjustment to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is recorded.

A rollforward of the Company’s loans receivable allowance for the threesix months ended March 31,June 30, 2010 and 2009 is as follows:

The Company assesses the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable; goodwill is tested on an annual basis. Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets' carrying value over the estimated fair value.

For the three-month period ended March 31,June 30, 2010, net income was $.48$.22 million compared to net income of $.23$.06 million for the three months ended March 31,June 30, 2009. During the three months ended March 31,June 30, 2010, income from operations before income taxes was $.78$.29 million compared to $.38$.08 million for the three months ended March 31,June 30, 2009. The major components of revenues, store expenses, general and administrative expenses, total operating expenses and income tax expense from continuing operations are discussed below.

The following table summarizes our revenues for the three months ended March 31,June 30, 2010 and 2009, respectively:

 

Store Expenses

Total expenses associated with store operations for the three months ended March 31,June 30, 2010 were $3.22$3.03 million, compared to $3.61$3.60 million for the three months ended March 31, 2009.June 30, 2009, or a 15.9% reduction for the interim periods.  The major components of these expenses are salaries and benefits for our store employees, provision for loan losses, costs of sales for phones and accessories, occupancy costs 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 for the three months ended March 31,June 30, 2010 and 2009 related to our costs of occupancy. Our most significant decreases in store expenses over that same period related to the provision for loan losses,salaries and benefits, phone and accessories cost of sales.  Salariessales, amortization of intangible assets, and benefits related to ourother store employees remained stable between the interim periods.operation expenses.  A discussion and analysis of the various components of our store expenses appears below.

General and Administrative Expenses

Total general and administrative costs for the three months ended March 31,June 30, 2010 were $.65$.82 million compared to $.78$.77 million for the period ended March 31,June 30, 2009. For the three months ended March 31,June 30, 2010, the major components of these costs were salaries and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative expenses. A discussion of the various components of our general and administrative costs for the three months ended March 31,June 30, 2010 and 2009 appears below:

Income Tax Expense

Income tax expense for the three months ended March 31,June 30, 2010 was $.30$.07 million compared to income tax expense of $.15$.02 million for the three months ended March 31,June 30, 2009, an effective rate of 38%25% for both interim periods.

For the six-month period ended June 30, 2010, net income was $.70 million compared to net income of $.28 million for the six months ended June 30, 2009. During the six months ended June 30, 2010, income from operations before income taxes was $1.07 million compared to $.45 million for the six months ended June 30, 2009. The major components of revenues, store expenses, general and 39.7%administrative expenses, total operating expenses and income tax expense from continuing operations are discussed below.

Income tax expense for the six months ended June 30, 2010 was $.37 million compared to income tax expense of $.17 million for the six months ended June 30, 2009, an effective rate of 34% and 37%, respectively.

Summary cash flow data is as follows:

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

Not applicable.

Evaluation of Disclosure Controls and Procedures

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

As of March 31,June 30, 2010, our Chief Executive Officer and Interim Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of March 31,June 30, 2010.