See notes to condensed consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(unaudited)

See notes to condensed consolidated financial statements.

WESTERN CAPITAL RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periodperiods ended September 30, 20142015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 2015.

For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended December 31, 2013.2014. The condensed consolidated balance sheet at December 31, 2013,2014, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

Nature of Business

References in these financial statement notes to the “Company” or “we” refer to Western Capital Resources, Inc. and its subsidiaries. References to specific companies within our enterprise, such as “PQH,” “WFL,” “EPI”, “AGI,”, “JPPA”, “RAI” or “JPRE” are references only to those companies. Western Capital Resources, Inc. (“WCR”), through its wholly owned is a holding company owning operating subsidiaries, Wyoming Financial Lenders, Inc. (“WFL”), Express Pawn, Inc. (“EP”), and PQH Wireless, Inc. (“PQH”), collectively referred towith the percentages owned by WCR of each subsidiary shown parenthetically, as the “Company,” provides retail financial services to individuals and operates retail cellular and retail pawn stores primarily in the Midwestern and Southwestern United States.  The Company operated 48 “Payday” stores, two combined payday/pawn store, and one pawn store in nine states (Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming)summarized below.

Basis of September 30, 2014. The Company operated 58 cellular retail stores in 14 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon, Texas and Washington) as of September 30, 2014.  Consolidation

The consolidated financial statements include the accounts of WCR, WFL, PQHits wholly owned subsidiaries and EP.other entities in which the Company owns a controlling financial interest. For financial interests in which the Company owns a controlling financial interest, the Company applies the guidance of ASC 810 applicable to reporting the equity and net income or loss attributable to noncontrolling interests. All significant intercompany balances and transactions of the Company have been eliminated in consolidation.

Through our “Consumer Finance” division, we provide non-recourse cash advance and installment loans, collateralized non-recourse pawn loans, check cashing and other money services, and operate retail pawn stores.  The short-term uncollateralized non-recourse consumer loans, known as “cash advance” or “payday” loans, are in amounts that typically range from $100 to $500. Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks and the customer’s post-dated personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations, and generally ranges from $15 to $22 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.

Our pawn stores provide collateralized non-recourse loans, commonly known as “pawn loans,” with maturities of one to four months, depending on applicable state regulations.Allowable service charges vary by state. Our pawn loans earn 17.5% to 20% 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 our 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 else forfeit the merchandise to us upon expiration. At our pawn stores, we sell merchandise acquired through either customer forfeiture of pawn collateral or second-hand merchandise purchased from customers or consigned to us.

We also provide title loans and other ancillary consumer financial products and services that are complementary to our 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.

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

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Significant management estimates relate to the notes and loans receivable allowance, percentage of existing pawn loans that will be forfeited, allocation of and carrying value and impairment of long-lived goodwill and intangible assets, inventory valuation and obsolescence, estimated useful lives of property and equipment, gift certificate liabilities and deferred taxes and tax uncertainties.

Revenue RecognitionReceivables and Loss Allowance

Direct to Consumer

Receivables are recorded when billed or accrued and represent claims against third parties that will be settled in cash. The carrying value of receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The allowance for doubtful accounts is estimated based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past due receivable balances are written-off when internal collection efforts have been unsuccessful in collecting the amount due.

Inventory

Direct to Consumer

Inventory is valued at the lower of cost or market using the weighted-average method of determining cost.

Property and Equipment

Direct to Consumer

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 as follows:

The cost of maintenance and repairs is charged to operations as incurred while renewals and betterments are capitalized.

The Company recognizes fees on cash advance loans on a constant-yield basis ratablycapitalizes certain internal costs, including payroll costs, incurred in connection with the development of software for internal use. These costs are capitalized beginning when the Company has entered the application development stage. The capitalization of these costs ceases when the software is substantially complete and ready for its intended use. Costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over the loans’ terms. Titleestimated useful life of the enhancements.

Deferred Revenue

Direct to Consumer

Sales billed or cash received in advance of actual delivery are deferred and installment loan fees and interest are recognized using the interest method, except that installment loan origination fees are recognizedrecorded 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 servicesincome in the period in which the sale or service is completed.  related deliveries are made.

Merchandise Credits and Gift Card Liabilities

Loans Receivable AllowanceDirect to Consumer

The Company maintains a loan loss allowanceliability for anticipated lossesunredeemed gift cards, gift certificates and merchandise credits until the earlier of redemption, escheatment or a maximum of two years. The Company has concluded that the likelihood of these liabilities being redeemed beyond two years from the date of issuance is remote.

Advertising

Direct to Consumer

The Company expenses advertising costs as they are incurred, except for our paydaydirect-response advertising, which is capitalized and installment loans.We doamortized over its expected period of future benefits, not record loan lossesto exceed six months. Direct-response advertising consists primarily of catalog book production, printing, and postage costs.

Shipping and Handling Costs

Direct to Consumer

The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs are expensed as incurred and included in cost of sales.

Stock-based Compensation

The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or charge-offs of pawn or title loans becausevesting term.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of the collateral exceeds the loan amount.To estimate the appropriate levelCompany’s stock option awards. The determination of the loan loss allowance, we considerfair value of stock-based payment awards on the amountdate of outstanding loan principal,grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest and fees, historical charge offs, currentrate and expected collection patternsdividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and current economic trends. Our current loan loss allowance is based on our historical net write off percentage, net charge offs to loan principal, interest and feethe estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts that originated duringexpensed in the last 24 months, applied against the balance of loan principal, interest and fees outstanding. 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.Company’s financial statements.

IncludedStock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in loans receivable are unpaid principal, interest and fee balances of payday, installment, pawn and title loans that have not reached their maturity date, and “late” payday loans that have reached maturity within the last 180 days and have remaining outstanding balances.  Late payday loans generally are unpaid loans 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 plus accrued interest or fees less payments made and 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.

Combination (Reverse Split) of Common Stock

On May 30, 2014, the Company’s Board of Directors approved a 1-to-20 reverse stock split. The reverse stock split became effective on June 20, 2014. The reverse stock split reduced the number of issued and outstanding shares of common stock to 3,010,765 shares. The reverse stock split similarly reduced by a factor of 20 the authorized number of shares of capital stock that the Company may issue to 12,500,000. The accompanying financial statements and footnotes have been adjusted retroactively to reflect the reverse stock split.subsequent periods if actual forfeitures differ from initial estimate.

Net Income Per Common Share

Basic net income per common share is computed by dividing the income available to common shareholders by the weighted-averageweighted average number of common shares outstanding for the period. ThereDiluted earnings per share gives effect to all dilutive potential common shares outstanding during the period, including stock options, using the treasury stock method. Options to purchase 65,000 shares granted under the 2015 Stock Incentive Plan effective February 6, 2015 (see Note 18) were outstanding at September 30, 2015. These options have a strike price in excess of the market price as of September 30, 2015, were antidilutive and therefore not included in the computation of diluted earnings per share. Thus, there were no dilutive securities atcommon shares as of September 30, 20142015 and 2013.2014.

Segment Reporting

The Company has grouped its operations into twofive segments – Franchise, Cellular Retail, Direct to Consumer, Consumer Finance, division and Cellular Retail division.Corporate. The Consumer Finance division provides financialFranchise segment specializes in the planning, production and ancillary servicesmanagement of visual communications for businesses and also sells used merchandise at retail pawn stores.individuals. The Cellular Retail divisionsegment is an authorized Cricket premier dealer selling cellular phones and accessories, providing ancillary services and accepting service payments from customers. The Direct to Consumer segment consists primarily of online and mail order catalog retailers’ sales of product offerings including seeds, live goods, holiday gifts, garden accessories and home improvement and restoration products. The Consumer Finance segment provides financial and ancillary services and also sells used merchandise at retail pawn stores. The Corporate segment consists of Company activities related to acquisitions and subsequent management of acquired businesses.

Reclassifications

Certain Statement of Income reclassifications have been made in the presentation of our prior financial statements and accompanying notes, including pro forma presentation, to conform to the presentation as of and for the three and nine months ended September 30, 2014.2015.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. This converged standard is effective for annual and interim periods beginning after December 15, 2016. The Company is currently assessing the potential effects on our financial condition and results of operations.

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

Regulatory

Consumer Finance

The Company’s Consumer Finance divisionsegment 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.or issued, interpretations of existing laws or regulations may change, and enforcement action by regulatory agencies may intensify. Over the past several years, consumer advocacy groups and certain media reports have advocated governmental and regulatory action to prohibit or severely restrict sub-prime lending activities of the Company’skind conducted by WFL and EPI. The federal Consumer Financial Protection Bureau has indicated that it will use its authority to further regulate the payday lending activities.industry.

Any adverse change in present local, state or federal laws or regulations that govern or otherwise affect lending could result in ourthe Consumer Finance segment’s curtailment or cessation of operations in certain or all jurisdictions or locations. Furthermore, any actual or perceived failure to comply with any applicable local, state or federal laws or regulations could result in fines, litigation, closure of one or more store locations, or negative publicity. Any such change or failureoutcome would have a corresponding impact on ourthe Company’s results of operations and financial condition, primarily through a decrease in revenues, non-cash charges from the write-down of the carrying value of goodwill and intangible assets resulting from the cessation or curtailment of operations, decrease in our operating income throughand increased legal expenditures or fines, and could also negatively affect ourthe Company’s general business prospects as well if we arethe Company is unable to effectively replace such revenues in a timely and efficient manner or if negative publicity effects ourits ability to obtain additional financing as needed.

In addition, the passage of federal or state laws and regulations or changes in interpretations of them could, at any point, essentially prohibit the CompanyWFL or EPI from conducting its 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 and its financial condition and prospects.

Franchise 

In August 2015, the National Labor Relations Board (NLRB) changed its long-standing joint-employer standard in a widely discussed decision, Browning Ferris Industries of California, Inc. In that decision, the NLRB asserted that two or more entities are joint employers of a single workforce if they share or co-determine, even indirectly, those matters governing the essential terms and conditions of employment. In terms of franchise business models, the NLRB has to date refused to dismiss various labor and wage-violation complaints alleging that McDonalds is a joint employer together with its franchisees. In the past, courts determining whether a franchisor and franchisee are joint employers of a single workforce have generally examined whether the franchisor exercises direct (as opposed to indirect) and significant control over the franchisees' employment-related decisions-i.e., the hiring, firing or discipline of franchisee employees, payment of their wages, or setting of their work schedules. It is presently uncertain what the ultimate outcome will be of attempts by plaintiffs and regulatory authorities to impose employment-related liabilities upon franchisors under the theory that they are joint employers of their franchisees' employees. Nevertheless, the extension of the Browning Ferris principles to franchise business models, and their application to our AlphaGraphics business, could have material and adverse consequences to the operating results, financial condition and prospects of that business and perhaps even its viability.our Company.

For the nine months ended September 30, 2014 and 2013, the Company had significant revenues by state (shown as a percentage of the applicable division’s revenue when over 10%) as follows:Vendor Concentration

Direct to Consumer

* Less than 10%RAI has an agreement with a third-party fulfillment provider that is in effect through January 31, 2016. The fulfillment provider receives and stores inventory, performs periodic cycle counts, picks, packs and ships customer orders. Additional services such as, order taking, processing of customer payments, personalization, customer services, and order processing are also performed by the fulfillment provider. RAI is currently in negotiations to extend the agreement.

JPPA has an agreement with a third party wholesale grower that is in effect until 2019. The grower has agreed to perform research for JPPA and maintain JPPA's research crop in exchange for a reduction in royalties to be paid to JPPA for growing JPPA's patented roses. There is an option to renew the agreement for consecutive two year terms and the agreement calls for a 24 month notice prior to termination.

At September 30, 20142015 and December 31, 2013 our2014, the Company’s outstanding loans receivable aging was as follows:

As a result of the Company’s collection efforts, it historically writes off approximately 42%43% 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%43%; 31 to 60 days – 65%; 61 to 90 days – 83%; 91 to 120 days – 88%; 121 to 150 days – 91%; and 121151 to 180 days – 91%93%.

A rollforward of the Company’s loans receivable allowance for the nine months ended September 30, 2014 and 2013 is as follows:

A breakdown of accounts receivables by segment as of September 30, 2015 and December 31, 2014 are as follows:

A rollforward of the Company’s property and equipment is as follows:

A rollforward of the Company’s intangible assets consisted of the follows:

As of September 30, 2015, estimated future amortization expense for the amortizable intangible assets is as follows:

Other Non-Current Assets include $145,800 for a note receivable. Our agreement with the borrower includes an approximate 50% forgiveness of principal if, among other terms and conditions, required payments under the agreement are received. The agreement provides for monthly payments of principal over a five-year term ending March 2020.

Deferred revenue and other liabilities consist of the following:

As part of their lending agreement, AGI may draw on a $1,000,000 line of credit (LOC). The LOC bears interest at the greater of (a) the prime rate plus 2.50% per annum or (b) the LIBOR rate plus 5.50% per annum. The LOC matures in August 2017. There was no activity on this LOC during the period ended September 30, 2015 and there was no balance outstanding as of September 30, 2015.

As part of their lending agreement, JPPA may draw on a $4,250,000 LOC. The LOC bears interest at the LIBOR rate plus 2.75% per annum (3.00% as of September 30, 2015). The LOC matures on July, 2016. There was no activity on this LOC during the period ended September 30, 2015 and there was no balance outstanding as of September 30, 2015.

RAI is party to a $2,000,000 revolving LOC from a financial institution. This revolving LOC is collateralized by substantially all the assets of the RAI and matures in November 2015. Interest is payable monthly at LIBOR plus 3.50% per annum (3.75% as of September 30, 2015). There was no outstanding balance at September 30, 2015.

The Company’s long-term debt isnotes payable with financial institutions includes certain financial covenants. Management has determined that the Company borrowers were in compliance with these financial covenants as follows:of September 30, 2015.

A breakout of other operating expense is as follows:

Income tax expense, as a percentage of Income Before Income Taxes, was 45% and 38% for the three months ended September 30, 2015 and 2014, respectively, and 44% and 38% for the nine months ended September 30, 2015 and 2014, respectively. Nondeductible portion of meal and entertainment expense and nondeductible transaction costs contributed to the higher effective tax rates.

Cellular Retail

Effective June 1, 2015, PQH consummated the acquisition of all outstanding membership interests in four separate limited liability companies. The entities acquired, when combined, do not meet the 20% significant subsidiaries thresholds under Rule 210.1-02 as modified by Rule 210.3-05(b) of SEC Reg. S-X. Under the equity method of accounting, the assets acquired and liabilities assumed were recorded at their estimated fair values as of the purchase date as follows:

JPPA, RAI and JPRE Transaction

Effective July 1, 2015, the Company acquired the businesses of JPPA, RAI and JPRE by completing a merger and contribution transaction. In consideration for the acquisition of these businesses, the Company issued to the former owners an aggregate of 3.5 million shares of the Company’s common stock representing approximately 37% of the total issued and outstanding common stock after consummation of the acquisition.

The entities are affiliated entities under common control and in accordance with Accounting Standards Codification Topic 805, “Business Combinations,” and the Company, as the acquirer, recognized the assets and liabilities of the target entities at their historical values as of the date of merger as follows:

The results of the operations for the acquired businesses, as well as the acquisition of AGI (see Note 13 to the Company’s December 31, 2014 Notes to Consolidated Financial Statements) on October 1, 2014 have been included in the consolidated financial statements since the respective dates of acquisition. The following table presents the unaudited pro forma results of operations for the three and nine months ended September 30, 2015 and 2014, as if these acquisitions had been consummated at the beginning of 2014. The pro forma net income below excludes the expenses of the transactions and includes a reduction in management and advisory fees that resulted from the AGI transaction. The pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions been consummated at the beginning of the 2014, or the results that may occur in the future.

The Company has grouped its operations into two segments – Consumer Finance and Cellular Retail.  The Consumer Finance segment provides financial and ancillary services.  The Cellular Retail segment is an authorized Cricket Wireless dealer selling cellular phones and accessories, ancillary services and serving as a payment center for customers.

Segment information related to the three and nine months ended September 30, 2015 and 2014, and 2013 is set forthpresented below: