SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, |
or
| TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ___
| Commission File Number: 0-52589 | ||
 | ||
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| FLEXSHOPPER, INC. | ||
(Exact name of Registrant as specified in its charter) | ||
| Delaware | 20-5456087 | |
| (State of jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) | |
| (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number, including area code: | (866) 950-6669 | |
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.0001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ☐ No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No [X]
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 such filing requirements for the past 90 days. YesX ☒No __.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ]☒ 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 [X].
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: 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 [ ]☐ No [X]
As of June 30, 2013,2014, the number of shares of Common Stock held by non-affiliates was approximately 7,400,00016,908,000 shares (excluding 376,387 shares of Series A Preferred Stock convertible into 1,919,5742,145,406 common shares). The approximate market value based on the last sale (i.e. $0.35$0.75 per share as of June 28, 2013)30, 2014) of the Company’s Common Stock held by non-affiliates was approximately $2,600,000.
The number of shares outstanding of the Registrant’s Common Stock, as of March 1, 2014,19, 2015, was 21,148,862.52,015,322. The Registrant also has outstanding 376,387342,219 shares of Series 1 Preferred Stock convertible into 1,919,5742,166,246 shares of Common Stock.
Documents incorporated by reference: None.
FORWARD-LOOKING STATEMENTS
We believe this annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, based on information currently available to our management. When we use words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “should,” “likely” or similar expressions, we are making forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations set forth under “Business” and/or “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements reflect only our current expectations. We may not update these forward-looking statements, even though our situation may change in the future. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements due to a number of uncertainties, many of which are unforeseen, including:
We qualify all the forward-looking statements contained in this Form 10-K by the foregoing cautionary statements.
PART I
Item 1. Business
Introduction
FlexShopper, Inc. (formerly Anchor Funding Services, Inc.(“we,” “us,” “our” or the “Company”), is a corporation organized under the laws of the State of Delaware on August 16, 2006. FlexShopper Inc. owns 100% of its operating subsidiaries, Anchor Funding Services LLC, a limited liability company, which was incorporated under the laws of the State of North Carolina on March 24, 2004 and FlexShopper, LLC, a limited liability company incorporated under the laws of North Carolina on June 24, 2013. (For a discussionSince the sale of the corporate history of the Company, reference is made to Item 1 of the Company’s Form 10-K for its fiscal year ended December 31, 2011.) Except as otherwise provided in this Form 10-K, unless the context otherwise requires, references in this Form 10-K to the "Company," "we," "us" and "our" refers collectively to the consolidated business and operations of FlexShopper, Inc. and its wholly-owned operating subsidiaries, Anchor Funding Services, LLC and FlexShopper, LLC. References to "Anchor" refer specifically to the business and operationsassets of Anchor Funding Services LLC, which sale was completed in a series of transactions between April and June 2014, FlexShopper, Inc. is a holding corporation with no operations except for those conducted by FlexShopper, LLC. FlexShopper LLC owns two wholly-owned Delaware subsidiaries, namely, FlexShopper 1, LLC and FlexShopper 2, LLC. All references to "FlexShopper" refer specifically to the business and operations of FlexShopper, LLC, unless the context requires otherwise.
Recent Developments
On March 6, 2015, FlexShopper entered into a credit agreement (the “Credit Agreement”) with a Lender. FlexShopper is permitted to borrow funds under the Credit Agreement based on FlexShopper’s cash on hand and the Amortized Order Value of its Eligible Leases (as such terms are defined in December 2013 followed by the operationsCredit Agreement) less certain deductions described in the Credit Agreement. Under the terms of Anchor which are expected to be sold to a competitor or, if such a sale is not successful on terms satisfactorythe Credit Agreement, subject to the Company, then discontinuedsatisfaction of certain conditions, FlexShopper may borrow up to $25,000,000 from the Lender for a term of two years. The borrowing term may be extended for an additional twelve months in 2014.
Overview
In June 2013, we formed a wholly owned subsidiary of FlexShopper Inc., FlexShopper, LLC, for the purpose of developing a business that provides certain types of durable goods to consumers on a lease-to-own basis and also provideprovides lease-to-own terms to consumers of third party retailers and e-tailers. The CompanyFlexShopper has been generating revenues from this new line of business since December 2013. Management believes that the introduction of FlexShopper's lease-to-own (LTO)(“LTO”) programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces. FlexShopper and its online LTO products provide consumers the ability to acquire durable goods, including electronics, computers and furniture on an affordable payment, lease basis. Concurrently, e-tailers and retailers that work with FlexShopper may increase their sales by utilizing FlexShopper's online channels to connect with consumers that want to acquire products on an LTO basis. FlexShopper has been hiring employees to implement its business plan including a Chief Information Officer, Vice President of e-commerce, programmers and customer service and collections personnel.
GROWTH OPPORTUNITIES AND STRATEGIES
FlexShopper believes there is significant opportunity to expand the LTO industry online and into mainstream retail and e-tail. The LTO industry currently serves approximately 6six million consumers annually, generating approximately $8.5 billion in sales primarily through approximately 10,000 LTO brick and mortar stores. Through its strategic sales channels the CompanyFlexShopper believes it will expand the LTO industry, also known as the rent-to-own or RTO industry. The CompanyFlexShopper has successfully developed and is currently processing LTO transactions using its “LTO Engine.” The LTO Engine is the Company’sFlexShopper’s proprietary technology that automates the process of consumers receiving spending limits and entering into leases for durable goods within a few minutes. The LTO engine is the basis for FlexShopper’s primary sales channels which are expected to include 1) serving as the financial and technology partner for thousandsprovide consumers three distinct ways of obtaining brand name durable goods retailerson an LTO basis: 1) At FlexShopper’s LTO e-commerce marketplace, www.flexshopper.com, consumers can choose from over 80,000 different items including electronics, furniture, musical instruments, and e-tailersequipment. 2) selling directly to consumers via the online FlexShopper LTO MarketplaceOn third party e-commerce sites featuring thousands of durable goods and 3) utilizing FlexShopper’s patent pending LTO payment method, consumers can activate FlexShopper’s payment button at check out which checkout. 3) Consumers can use FlexShopper’s automated kiosk in certain retail locations.
FlexShopper is positioning as the payment option of choice for millions of consumers without sufficient cash or credit.
COMPETITIVE STRENGTHS
We believe the following competitive strengths differentiate us:
| · | We currently address the lease to own market through online channels which include our online marketplace and patent pending LTO payment method. These channels give us the ability to currently originate leases in forty five states without the operating expenses associated with having physical store-fronts in those states. |
| · | We believe our three channels described above, provide a compelling package for retailers to adopt to increase their sales with a vast customer base. |
| · | Our LTO online marketplace and patent pending payment method offer consumers more choices in products and retailers than traditional brick and mortar LTO storefronts. Our digital channels provide consumers with a selection of over 80,000 items including brand name products from recognized retailers. |
INDUSTRY OVERVIEW
The lease-to-own industry offers customers an alternative to traditional methods of obtaining electronics, computers, home furnishings and appliances. In a typical industry lease-to-own transaction, the customer has the option to acquire merchandise over a fixed term, usually 12 to 24 months, normally by making weekly lease payments. The customers may cancel the agreement as prescribed in the lease agreement by returning the merchandise, generally with no further lease obligation if their account is current. If customers lease the item to the full term, they obtain ownership of the item, though they can choose to buy it at any time. FlexShopper’s current fixed term to acquire ownership is fifty-two weeks.
The lease-to-own concept is particularly popular with consumers who cannot pay the full purchase price for merchandise at once or who lack the credit to qualify under conventional financing programs. Lease-to-own is also popular with consumers who, despite good credit, do not wish to incur additional debt, have only a temporary need for the merchandise or want to try out a particular brand or model before buying it.
We believe that there is significant market opportunity to expand the LTO market beyond brick and mortar stores by creating an online presence through an LTO e-commerce site and payment method. We believe that the segment of the population targeted by the industry comprises more than 50 million people in the United States and the needs of these consumers are generally underserved.
UNDERWRITING PROCESS
FlexShopper has developed a proprietary technologydecision engine that automates the process of consumers receiving spending limits and entering into leases for durable goods within a few minutes. Included in the determination of a consumer spending limit are factors such as income, and the frequency that they overdraw their bank account, or prepaid debit card.fraud reports, repayment history and charge-off history. The Company obtains such consumer data from multiple third party sources which are monitored and analyzed by our risk department.We will continually update our underwriting models to manage risk of default. Our decision engine also includes fraud tools and information from third party data sources to combat online fraud. We also havewill continuously develop and implement ongoing improvements to reduce losses due to fraudulent activity. In 2015, the Company has enhanced its risk department with two new hires including a standard procedure for processing customer applications manually. Our determinationVice President of a spending limit does not include a credit check.
CUSTOMERS
FlexShopper’s customers typically do not have sufficient cash or credit to obtain durable goods. These consumers find the short-term nature and affordable payments of lease-to-own attractive. The lease-to-own industry serves a highly diverse customer base. According to the Association of Progressive Rental Organizations, approximately 83% of lease to-own customers have household incomes between $15,000 and $50,000 per year. In addition, each year the LTO industry serves approximately six million people. We believe we can expand the LTO market beyond brick and mortar stores with our LTO e-commerce site and online payment method. These sales channels will enable us to serve and target more than 50 million people that we believe do not have sufficient cash or credit for durable goods.
SALES AND MARKETING
We plan to promote our FlexShopper products and services through print advertisements, Internet sites and direct response marketing, and a sales team, all of which are designed to increase our lease transactions and name recognition. Our advertisements emphasize such features as instant spending limit and affordable weekly payments and free delivery.payments. We believe that as the FlexShopper name gains familiarity and national recognition through our advertising efforts, we will continue to educate our customers and potential customers about the lease-to-own payment alternative as well as solidify our reputation as a leading provider of high quality branded merchandise and services.
For each sales channel the CompanyFlexShopper has a marketing strategy that includes but is not limited to the following:
| In-store LTO technology platform |
| Search engine optimization; pay-per click | Direct to retailers/etailers | Direct to retailers/etailers |
| Online affiliate networks | Partnerships with payment aggregators | Consultants & strategic relationships |
| Consultants & strategic relationships |
| Direct |
MANAGEMENT INFORMATION SYSTEMS
FlexShopper uses computer-based management information systems to facilitate its entire business model including underwriting, processing transactions through its sales channels, managing collections and monitoring leased inventory. Through the use of our proprietary software developed in-house, each of our retail partners uses our online merchant portal that automates the process of consumers receiving spending limits and entering into leases for durable goods within a few minutes. The management information system generates reports which enable us to meet our financial reporting requirements.
GOVERNMENT REGULATIONS
The lease to own industry is regulated by and subject to the requirements of various federal, state and local laws and regulations.regulations, many of which are in place for consumer protection. In general such laws regulate applications for leases, late fees, other finance rates, the form of disclosure statements, the substance and sequence of required disclosures, the content of advertising materials and certain collection procedures. Violations of certain provisions of these laws may result in penalties ranging from nominal amounts up to and including forfeiture of fees and other amounts due on leases. We are unable to predict the nature or effect on our operations or earnings of unknown future legislation, regulations and judicial decisions or future interpretations of existing and future legislation or regulations relating to our operations, and there can be no assurance that future laws, decisions or interpretations will not have a material adverse effect on our operations and earnings. See “Risk Factors.”
COMPETITION
The lease-to-own industry is highly competitive. Our operation will competecompetes with other national, regional and local lease-to-own businesses, as well as with rental stores that do not offer their customers a purchase option. Some of these companies have, or may develop, systems that enable consumers to obtain through online facilities spending limits and payment terms and to enter into leases nearly instantaneously, in a manner similar to that provided by FlexShopper’s proprietary technology. Many of our competitors have substantially more resources and greater experience in the lease-to-own business than FlexShopper. With respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores. Competition is based primarily on store location, product selection and availability, customer service, and lease rates and terms. We believe that currently we do not have significant competition for our on-line LTO marketplace and patent pending LTO payment method, however there is no assurance that other companies may not develop similar or competing concepts that could adversely impact the usage or value of our online LTO marketplace or our LTO payment method.
| 6 |
INTELLECTUAL PROPERTY
FlexShopper has filed a provisional patentspatent for a system that enables consumers to buyobtain products on aan LTO basis using mobile devices and tablets and for a lease-to-own method of payment at check-out on e-commerce sites. We can provide no assurances that the CompanyFlexShopper will be granted any patents by the U.S. Patent and Trademark Office. We regard our pending patents, trademarks, service marks, copyrights, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success. In particular, we believe certain proprietary information, including but not limited to our underwriting model, and patent pending systems are central to our business model and we believe give us a key competitive advantage. We rely on trademark and copyright law, trade secret protection, and confidentiality, license and work product agreements with our employees, customers, and others to protect our proprietary rights. See “Risk Factors.”
Operations and Employees of FlexShopper
Brad Bernstein, our Chief Executive Officer manages our day-to-day operations and internal growth and oversees our growth strategy. FlexShopper’s management includes an Executive Vice President of Operations, Chief Financial Officer, Chief Technology Officer with oversight of the Company’s development team and a Vice President of e-commerce. In addition, FlexShopper has a customer service and collections call center. As of December 31, 2014, FlexShopper had 44 full-time employees.
DISCONTINUED OPERATIONS OF ANCHOR
Anchor Funding Services LLC was incorporated under the purchaselaws of the State of South Carolina in January 2003 and later reincorporated under the laws of the State of North Carolina in August 2005. Anchor operated its factoring business for approximately 10 years until the assets were sold in a company’sseries of closings between April and June, 2014. Anchor purchased clients’ accounts receivable which provideprovided businesses with critical working capital so they canit could meet their operational costs and obligations while waiting to receive paymentpayments from theirits customers. Factoring servicesAnchor also provide businessesprovided purchase order financing.
During 2013, FlexShopper decided to concentrate its efforts on the operations of FlexShopper and subsequently on April 30, 2014, we entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with credit and accounts receivable management services. Typically, these businesses do not have adequate resourcesa Bank, pursuant to manage internally their credit and accounts receivable functions. Factoring services are typically a non-recourse arrangement wherebywhich Anchor Funding Services LLC sold to the factor takesBank substantially all of its assets (the “Anchor Assets”), consisting primarily of its factoring portfolio (the “Portfolio Accounts”). The purchase price for the entire credit risk if the customer does not pay dueAnchor Assets was equal to insolvency for any period of time or on a partial non-recourse basis where the factor takes the credit risk for a period of time, which could be 30 to 90 days after the factor purchases an account receivable such that if a client’s customer becomes insolvent during this specific period of time, the factor bears the loss. Under partial non-recourse factoring, after a specific period of time, if the accounts receivable invoice is not collected, the client is required to purchase the accounts receivable invoice back from Anchor. Factoring may also be on a full recourse basis whereby the factor bears no risk of loss if the client’s customer becomes insolvent. We typically advance our clients 75% to 95%(1) 110% of the face value of invoices that we approve in advance on a partial non-recourse or full recourse basis and pay themtotal funds outstanding associated with the difference less our fees when the invoice is collected. For the years ended December 31, 2013 and 2012, our fees for services averaged approximately 2.8% and 2.6%, respectivelyPortfolio Accounts plus (2) an amount equal to 50% of the invoice valuefactoring fee and are tiered such thatinterest income earned by the longer it takes us to collect onPortfolio Accounts during the accounts receivable invoice, the greater our fee. Since our inception, Anchor has incurred net credit losses related to the volume of its invoice purchases totaling approximately $63,000, $42,000 and $12,000 in 2013, 2012 and 2011, respectively. We also offer a factoring product to independent truckers and trucking companies through our transportation funding division, TruckerFunds.com. TruckerFunds.com focuses on buying freight bills from independent, owner operators of trucks and small fleets. We typically advance our trucking clients 90% to 95%12 month period following acquisition (“Earnout Payments”). The sale of the invoices that we approveAnchor Assets was made in advance on a non-recourse basis and pay themseries of closings through June 16, 2014. In connection with each closing, Anchor used the difference less our fees when the invoice is collected. At times we offer non-recourse factoring to transportation companies.
Item 1A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information presented in this Form 10-K, in evaluating us and our business. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of our securities to decline, which in turn could cause you to lose all or part of your investment.
An investment in our common stock involves a high degree of Anchor
Business Risks
Limited operating history.
FlexShopper, LLC, which was formed in June 2013 to enter the lease-to-ownOur business liquidity and capital resources are dependent upon our credit agreement with an institutional lender and our compliance with the terms thereof.On March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (the “Credit Agreement”) with a lender (the “Lender”). The Borrower is crucialpermitted to our business operations.
FlexShopper LTO revenue and earnings growth depend on our ability to execute our growth strategies.
Our primary growth strategies are our FlexShopper LTO online products to consumers and utilization by retailers of FlexShopper’s online channels to connect with customers that want to acquire products on a LTO basis. Effectively managing the development and growth can be challenging, particularly as we develop the management and operational systems necessary to develop this line of business. If we are unable to successfully execute these growth strategies, revenue from this line of business will grow slowly or not atOur LTO business depends on the success of our third-party retail partners and our continued relationships with them.
Our LTO revenues depend in part on the ability of unaffiliated third-party retailers to attract customers. In addition, in most cases, our agreements with such third-party retailers may be terminated at theOur growth will depend on our ability to develop our brands, and these efforts may be costly.
Our ability to develop the FlexShopper brand will be critical to achieving widespread acceptance of our services, and will require a continued focus on active marketing efforts. We will need to continue to spend substantial amounts of money on, and devote substantial resources to, advertising, marketing, and other efforts to create and maintain brand loyalty among our customers. If we fail to promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our business would be harmed.Our LTO business will depend on the continued growth of online and mobile commerce.
The business of selling goods over the Internet and mobile networks is dynamic and relatively new. Concerns about fraud, privacy and other problems may discourage additional consumers from adopting the Internet or mobile devices as modes of commerce, or may prompt consumers to offline channels. In order to expand our user base, we must appeal to and acquire consumers who historically have used traditional means of commerce to purchase goods and may prefer Internet analogues to such traditionalOur customer base presents significant risk of default for non-payment.We bear the risk of non-payment or slow payment by our customers. The nature of our customer base makes it sensitive to adverse economic conditions and less likely to meet our prevailing underwriting standards, which may be more restrictive in an adverse economic environment. As a result, during such periods we may experience decreases in the growth of new customers, and we may curtail spending limits to existing customers, which may adversely affect our net sales and potential profitability.
Our customers can return merchandise without penalty.When our customers acquire merchandise through the FlexShopper LTO program, we actually purchase the merchandise from the retailer and enter the lease-to-own relationship with the customer. Because our customers can return merchandise without penalty, there is risk that we may end up owning a significant amount of merchandise that is difficult to monetize. While we have factored customer returns into our business model, customer return volume may exceed the levels we expect, which could adversely impact our collections, revenues and our financial performance. Returns totaled approximately $77,000 carrying value of leased merchandise during the twelve months ended December 31, 2014.
We rely on third party credit/debit card and ACH (Automated Clearing House) processors to process collections from customers on a weekly basis. Our ability to collect from customers could be impaired if these processors did not work with us.These third-party payment processors may consider our business a high risk since our customer base could have a high incidence of insufficient funds and rejected payments. This could cause a processor to discontinue its services to us, and we may not be able to find a replacement processor. If this occurred, we would have to collect from our customers using less efficient methods, which could adversely impact our collections, revenues and our financial performance.
We rely on internal models to manage risk, to provide accounting estimates and to make other business decisions. Our results could be adversely affected if those models do not provide reliable estimates or predictions of future activity. The accurate modeling of risks is critical to our business, particularly with respect to managing underwriting and spending limits for our customers. Our expectations regarding customer repayment levels, as well as our allowances for doubtful accounts and other accounting estimates, are based in large part on internal modeling. We also rely heavily on internal models in making a variety of other decisions crucial to the successful operation of our business. It is therefore important that our models are accurate, and any failure in this regard could have a material adverse effect on our results. Models are inherently imperfect predictors of actual results because they are based on historical data available to us and our assumptions about factors such as demand, payment rates, default rates, delinquency rates and other factors that may overstate or understate future experience. Our models could produce unreliable results for a number of reasons, including the limitations or lack of historical data to predict results, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a model to products or events outside of the model’s intended use. In particular, models are less dependable when the economic environment is outside of historical experience, as has been the case recently. Due to the factors described above, unanticipated and excessive default and charge-off experience can adversely affect our profitability and financial condition, breach covenants in future credit facilities, limit our ability to secure a credit facility and adversely affect our ability to finance our business.
Our operations are regulated by and subject to the requirements of various federal and state laws and regulations. These laws and regulations, which may be amended or supplemented or interpreted by the courts from time to time, could expose us to significant compliance costs or burdens or force us to change our business practices in a manner that may be materially adverse to our operations, prospects or financial condition.
Currently, 47 states and the District of Columbia specifically regulate rent-to-own, lease-to-own transactions. At the present time, no federal law specifically regulates the rent-to-own industry, although federal legislation to regulate the industry has been proposed from time to time. Any adverse changes in existing laws, or the passage of new adverse legislation by states or the federal government could materially increase both our costs of complying with laws and the risk that we could be sued or be subject to government sanctions if we are not in compliance. In addition, new burdensome legislation might force us to change our business model and might reduce the economic potential of our sales and lease ownership operations.If we fail to protect the integrity and security of customer and employee information, we could be exposed to litigation or regulatory enforcement, and our business could be adversely impacted.
We collect and store certain personal information provided to us by our customers and employees in the ordinary course of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our network security and, if successful, misappropriate confidential customer or employee information. In addition, one of our employees, contractors or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. Loss of customer or employee information could disrupt our operations, damage our reputation and expose us to claims from customers, employees, regulators and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, the costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws and costs incurred to prevent or remediate information security breaches, could adversely impact our business.The loss of any of our key personnel could harm our business.
Our future financial performance will depend to a significant extent on our ability to motivate and retain key management personnel. Further,Competition in the LTO business is intense.The lease-to-own industry is highly competitive. Our operation will compete with other national, regional and local lease-to-own businesses, as well as with rental stores that do not offer their customers a purchase option. Some of these companies have, or may develop, systems that enable consumers to obtain through online facilities spending limits and payment terms and to enter into leases nearly instantaneously, in a manner similar to that provided by FlexShopper’s proprietary technology. Many of our competitors will have substantially more resources and greater experience in the lease-to-own business of FlexShopper. With respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores. Competition is based primarily on store location, product selection and availability, customer service and lease rates and terms. We believe we do not currently have significant competition for our on-line LTO marketplace and patent pending LTO payment method. However, such competition is likely to develop over time, and we may be unable to successfully compete in our target markets. We can provide no assurances that we will be able to successfully compete in the LTO industry.
Worsening of current economic conditions could result in decreased revenues or increased costs.
Although we believe an economic downturn can result in increased business in the lease-to-own market as consumers increasingly find it difficult to purchase home furnishings, electronics and appliances from traditional retailers on store installment credit, it is possible that if the conditions continue for a significant period of time, or get worse, consumers may curtail spending on all or some of the types of merchandise we offer, in which event our revenues may suffer.Changes in regulations or customer concerns, in particular as they relate to privacy and protection of customer data, could adversely affect our business.
Our business is subject to laws relating to the collection, use, retention, security and transfer of personally identifiable information about our customers. The interpretation and application of privacy and customer data protection laws are in a state of flux and may vary from jurisdiction to jurisdiction. These laws may be interpreted and applied inconsistently and our current data protection policies and practices may not be consistent with those interpretations and applications. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure, or perceived failure, by us to comply with our own privacy policies or with any regulatory requirements or orders or other privacy or consumer protection related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity and adversely affect our operating results.System interruption and the lack of integration and redundancy in our order entry and online systems may adversely affect our net sales.
Customer access to our customer service center and websites is key to the continued flow of new orders. Anything that would hamper or interrupt such access could adversely affect our net sales, operating results and customer satisfaction. Examples of risks that could affect access include problems with the Internet or telecommunication infrastructure, limited web access by our customers, local or more systemic impairment of computer systems due to viruses or malware, or impaired access due to breaches of Internet security or denial of service attacks. Changes in the policies of service providers or others that increase the cost of telephone or Internet access could inhibit our ability to market our products or transact orders with customers.We face risk related to the strength of our operational, technological and organizational infrastructure.
We are exposed to operational risks that can be manifested in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees, contractors or third parties and exposure to external events. In addition, we are heavily dependent on the strength and capability of our technology systemsIf we do not respond to technological changes, our services could become obsolete, and we could lose customers.
To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce websites and other technologies. We may face material delays in introducing new products and enhancements. If this happens, our customers may forego the use of our websites and use those of our competitors. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our existing websites and our proprietary technology and systems may become obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers’ orders and payments could harm our business, prospects, financial condition and results of operations.We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.
We cannot be certain that the intellectual property used in our business does not and will not infringe the intellectual property rights of others, and we are from time to time subject to third party infringement claims. Due to recent changes in patent law, we face the risk of a temporary increase in patent litigation due to new restrictions on including unrelated defendants in patent infringement lawsuits in the future particularly from entities that own patents but that do not make products or services covered by the patents. Any third party infringement claims against us, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages. Moreover, should we be found liable for infringement, we may be required to seek to enter into licensing agreements, which may not be available on acceptable terms or at all.
In deciding whether to provide a spending limit to customers, we rely on the accuracy and completeness of information furnished to us by or on behalf of our customers. If we and computer processingour systems are criticalunable to the operations of our business anddetect any failure could cause significant problems.
If we fail to timely contact delinquent customers, then the number of delinquent customer receivables eventually being charged off could increase. We contact customers with delinquent account balances soon after the account becomes delinquent. During periods of increased delinquencies it is important that we haveare proactive in dealing with these customers rather than simply allowing customer receivables to go to charge-off. During periods of increased delinquencies, it becomes extremely important that we are properly staffed and trained to assist customers in bringing the delinquent balance current and ultimately avoiding charge-off. If we do not properly staff and train our clients’ assets may not be sufficient to protect us from a partialcollections personnel, or complete loss if we are required to foreclose.
Our management information systems may not be adequate to meet our evolving business and emerging regulatory needs and the failure to successfully implement them could negatively impact the business and its financial results.We are investing significant capital in a highly competitivenew information technology systems to support our growth plan. These investments include redundancies, and acquiring new systems and hardware with updated functionality. We are taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems, with minimal disruptions to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our systems and our business, and may not provide the anticipated benefits. The disruption in our information technology systems, or our inability to improve, integrate or expand our systems to meet our evolving business and emerging regulatory requirements, could impair our ability to achieve critical strategic initiatives and could adversely impact our sales, collections efforts, cash flows and financial condition.
If we fail to maintain adequate systems and processes to detect and prevent fraudulent activity, our business could be ableadversely impacted. Criminals are using increasingly sophisticated methods to take advantageengage in illegal activities such as paper instrument counterfeiting, fraudulent payment or refund schemes and identity theft. As we make more of attractive funding opportunities.
Our failure to maintain an effective system of internal controls could result in inaccurate reporting of financial results and harm our business. We are required to comply with a variety of reporting, accounting and other rules and regulations. As such, we maintain a system of internal control over financial reporting, but there are limitations inherent in internal control systems. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be appropriate relative to their costs. Furthermore, compliance with existing requirements is expensive and we may need to implement additional finance and accounting and other systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined to be ineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price of our competitors have greater financial, technical, marketing and other resources than we do. They also have greater access to capital than we do and at a lower cost than is available to us. Furthermore, we would expect to face increased price competition if other factors seek to expand within or enter our target markets. Increased competition could causecommon stock, subject us to reduce our pricingregulatory investigations and advance greater amounts as a percentage of a client’s eligible accounts receivable. Even with these changes, in an increasingly competitive market, we may not be able to attractpenalties, and retain new clients. If we cannot engage new clients, our net income could suffer, and our financial performance and condition could be significantly impaired.
Lack of Board Committees
. Currently we have no audit, compensation, nominating or other committees of theControl of FlexShopper. Our secured lender described under Item 1, Item 7 and Item 13 beneficially owns 28.0% of our outstanding Common Stock as of the Company.
We have no established public market for our Securities.
Our outstanding Common StockThe price of our Common Stock may fluctuate significantly.
The market price for our Common Stock, if any, can fluctuate as a result of a variety of factors, including the factors listed above, many of which are beyond our control. These factors include: actual or anticipated variations in quarterly operating results; announcements of new services by our competitors or us; announcements relating to strategic relationships or acquisitions; changes in financial estimates or other statements by securities analysts; and other changes in general economic conditions. Because of this, we may fail to meet or exceed the expectations of ourOur Common Stock is considered to be a “penny stock” and, as such, the market for our Common Stock, should one develop, may be further limited by certain CommissionSEC rules applicable to penny stocks.
We have never declared or paid cash dividends on our common stockCommon Stock, and we do not anticipate paying any cash dividends on our common stockCommon Stock in the foreseeable future.
Increased costs associated with corporate governance compliance may significantly impact our results of operations.Changing laws, regulations and standards relating to corporate governance, public disclosure and compliance practices, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Sarbanes-Oxley Act of 2002, and new SEC regulations, may create difficulties for companies such as ours in understanding and complying with these laws and regulations. As a result of these difficulties and other factors, devoting the necessary resources to comply with evolving corporate governance and public disclosure standards has resulted in and may in the future result in increased general and administrative expenses and a diversion of management time and attention to compliance activities. We also expect these developments to increase our legal compliance and financial reporting costs. In addition, these developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Moreover, we may be unable to comply with these new laws and regulations on a timely basis.
These developments could make it more difficult for us to retain qualified members of our board of directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.
If we sell shares of our common stock or securities convertible into our common stock in future financings, the ownership interest of existing shareholders will be diluted and, as a result, our stock price may go down.We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock. As a result, our existing shareholders will experience immediate dilution upon the purchase of any shares of our common stock sold at a discount. For example, between May 8, 2014 and October 9, 2014, we sold 13,638,368 shares of our common stock in a private placement offering (and to two principal stockholders who are officers and/or directors) at a price of $.55 per share, at a time when the market price of our common stock was above this level. As other capital raising opportunities present themselves, we may enter into financing or similar arrangements in the future. If we issue common stock or securities convertible into common stock, our shareholders will experience dilution and this dilution will be greater if we find it necessary to sell securities at a discount to prevailing market prices.
In January 2015, we filed a registration statement with the Securities and Exchange Commission to register the resale of 13,593,214 shares of our common stock. As of the filing date of this Form 10-K, this registration statement has not been declared effective. Such a large number of shares registered for resale may depress the market price of our common stock.In January 2015, we filed a registration statement with the Securities and Exchange Commission to register the resale of 13,593,214 shares of our common stock. As of the filing date of this Form 10-K, this registration statement has not been declared effective. Such a large number of shares registered for resale may depress the market price of our common stock. Further, substantially all the remaining outstanding common shares not registered in this offering are either free trading shares in the public float or shares available for sale pursuant to Rule 144 of the Securities Act of 1933, as amended. Sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline. If there are more shares of common stock offered for sale than buyers are willing to purchase, then the market price of our common stock may decline to a market price at which buyers are willing to purchase shares.
None
Item 2. Properties
On August 1, 2013, FlexShopper entered into a 39 month lease for additional office space in Boca Raton, FLFlorida to accommodate the FlexShopperFlexShopper’s business and its additional employees. The monthly rent was approximately $6,800. This lease agreement was amended in January 2014 to reflect a 63 month term for a larger suite in an adjoining building. Upon commencement the monthly base rent including operating expenses for the first year will be approximately $15,800$9,600 with annual three percent increases throughout the lease term.
Item 3. Legal Proceedings |
We are not a party to any pending material legal proceedings except as described below. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.
On October 22, 2010, Anchor filed a complaint in the Superior Court of Stamford/Norwalk, Connecticut against the Administrators of the Estate of David Harvey ("Harvey") to recoup a credit loss incurred by FlexShopper’s former subsidiary, Brookridge Funding Services, LLC. Harvey was the owner of a Company that caused the credit loss, and FlexShopper is pursuing its rights under the personal guarantee that Harvey provided. The Complaint is demanding principal of approximately $485,000 plus interest and damages. During the twelve months ended December 31, 2014, there were no current developments involving the current legal proceeding.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stockCommon Stock is quoted on the OTCQB under the symbol “FPAY.” The following table sets forth the range of high and low closing sale prices of our Common Stock for our last two fiscal periods.
| Quarters Ended | High | Low | ||||||
| March 31, 2012 | $ | 0.80 | $ | 0.15 | ||||
| June 30, 2012 | $ | 0.51 | $ | 0.05 | ||||
| September 30, 2012 | $ | 0.51 | $ | 0.30 | ||||
| December 31, 2012 | $ | 0.30 | $ | 0.30 | ||||
| March 31, 2013 | $ | 0.22 | $ | 0.22 | ||||
| June 30, 2013 | $ | 0.35 | $ | 0.35 | ||||
| September 30, 2013 | $ | 0.50 | $ | 0.50 | ||||
| December 31, 2013 | $ | 0.63 | $ | 0.63 | ||||
| High | Low | |||
| 2013 - Quarter Ended | ||||
| December 31 | $0.63 | $0.63 | ||
| September 30 | 0.50 | 0.50 | ||
| June 30 | 0.35 | 0.35 | ||
| March 31 | 0.22 | 0.22 | ||
| 2014 Quarter Ended | ||||
| December 31 | 1.00 | $0.40 | ||
| September 30 | 0.90 | 0.69 | ||
| June 30 | 0.94 | 0.65 | ||
| March 31 | 0.95 | 0.42 |
Our Common Stock has a limited public market. All quotations reflect inter-dealer prices, without e-tailretail mark-up, markdown or commissions and may not necessarily represent actual transactions.
Holders of Record
As of December 31, 2013,2014, there were 606707 holders of record of shares of Common Stock and 6865 holders of record of our Series 1 Preferred Stock. The Company's Transfer AgentFlexShopper's transfer agent is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, NY 10004.
Dividend Policy
The holders of our Series 1 Preferred Stock were entitled to receive dividends from issuance in 2007 through December 31, 2009 as more fully described below. We have not paid or declared any cash dividends on our Common Stock. We currently intend to retain any earnings for future growth and, therefore, do not expect to pay cash dividends on our Common Stock in the foreseeable future.
Recent Sales of Unregistered Securities
The following sales of unregistered securities took place during the quarter ended December 31, 2014:
Date of Sale | Title of Security | Number Sold | Consideration Received | Purchasers | Exemption from Registration Claimed | ||||
October 2014 | Common Stock | 245,456 shares and placement agent warrants to purchase 1,773,027 shares (4) | $135,000 before placement agent compensation of $17,550 | Section 4(2) thereunder | |||||
October 2014 | Common Stock | 194,758 shares | 34,168 Preferred Stock conversion; no commissions paid | Section | |||||
October 2014 | Common Stock Options(1) | Options | Services rendered; no commissions paid | Officers, | Section 4(2) | ||||
| (1) | Options are exercisable at |
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-K. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future plan of operations, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties that may cause the Company’s actual results in future periods to differ materially from forecasted results.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and other Company filings with the Securities and Exchange Commission and in our reports to stockholders. Statements that relate to other than strictly historical facts, such as statements about the Company's plans and strategies and expectations for future financial performance are forward-looking statements within the meaning of the Act. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will” and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance, and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See “Risk Factors” for a discussion of events and circumstances that could affect our financial performance or cause actual results to differ materially from estimates contained in or underlying our forward-looking statements.
Executive Overview
The results of operations from continuing operations below principally reflect the operations of Anchor our national financial services firm for small businesses providing accounts receivable funding (factoring), purchase order finance, outsourcing of accounts receivable management including collections and the risk of customer default and other specialty finance products including, but not limited to, trade finance and government contract funding. For certain service businesses, Anchor also provides back office support, including payroll and invoice processing services. We provide our services to clients nationwide. In December 2013 the company announced that it is actively pursuing the sale of this business. Our principal operations are located in Charlotte, North Carolina and we maintain an executive office in Boca Raton, Florida, which includes our sales and marketing functions.
| Year Ended December 31, | ||||||||||||||||
| 2013 | 2012 | $ Change | % Change | |||||||||||||
| Finance revenues | $ | 2,364,128 | $ | 2,526,626 | $ | (162,498 | ) | (6.4 | ) | |||||||
| Interest expense, net and commissions | (385,918 | ) | (469,364 | ) | 83,446 | (17.8 | ) | |||||||||
| Net finance revenues | 1,978,210 | 2,057,262 | (79,052 | ) | (3.8 | ) | ||||||||||
| Provision for credit losses, net | (62,603 | ) | (41,797 | ) | (20,806 | ) | 49.8 | |||||||||
| Finance revenues, net of interest expense and credit losses | 1,915,607 | 2,015,465 | (99,858 | ) | (5.0 | ) | ||||||||||
| Operating expenses | 2,609,288 | 1,636,606 | 972,682 | 59.4 | ||||||||||||
| Net (loss) income from operations before income taxes | (693,681 | ) | 378,859 | (1,072,540 | ) | - | ||||||||||
| Income tax provision | - | - | - | - | ||||||||||||
| Net (loss) income | $ | (693,681 | ) | $ | 378,859 | $ | (1,072,540 | ) | - | |||||||
| Percentage of | Percentage of Revenues | |||||||
Accounts Receivable | for the Twelve Months | |||||||
| Portfolio As of | Ended | |||||||
| Entity | December 31, 2013 | December 31, 2013 | ||||||
| Trucking company in MI | 8.7 | % | 4.3 | % | ||||
| Cable trenching utility in FL | 6.4 | % | 3.4 | % | ||||
| Importer in MI | 8.4 | % | 3.0 | % | ||||
| Aerospace servicer in NM | 6.2 | % | 3.7 | % | ||||
| Trucking Company in VA | 6.4 | % | 1.9 | % | ||||
| 36.1 | % | 16.3 | % | |||||
Summary of Critical Accounting Policies
Management’s Discussion and Estimates
Accounts Receivable and Allowance for Doubtful Accounts –
| December 31, 2014 | December 31, 2013 | |||||||
| Accounts receivable | $ | 1,509,736 | $ | 119 | ||||
| Allowance for doubtful accounts | 1,380,902 | - | ||||||
| Accounts receivable, net | $ | 128,834 | $ | 119 | ||||
The Company’s reserve is 91.4% of the accounts receivable balance as of December 31, 2014. The reserve is a fixedsignificant percentage of the purchased invoice and purchase order advance. This percentage doesbalance because the Company has not change fromcharged off any customer accounts since inception to assure that it has exhausted all collection efforts with respect to each account including attempts to repossess items. In addition, the date the purchased invoice is funded until the date the purchased invoice is collected.
Lease Merchandise –Until all payment obligations required for each customer, times the amount advanced on each purchased invoice outstanding for that customer, times the portion of a year that the advance is outstanding. The customers’ historical yield is based on Anchor’s last six months of experience with the customer along with Anchor’s experience in the customer’s industry, if applicable.
| 2013 | 2012 | |||||||||||||||||||||||
| (Denominator) | (Denominator) | |||||||||||||||||||||||
| Weighted- | Per | Weighted- | Per | |||||||||||||||||||||
| (Numerator) | Average | Share | (Numerator) | Average | Share | |||||||||||||||||||
| Net Loss | Shares | Amount | Net Income | Shares | Amount | |||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| Basic EPS | $ | (693,681 | ) | 18,987,702 | $ | (0.04 | ) | $ | 378,859 | 18,634,369 | $ | 0.02 | ||||||||||||
| Effect of Dilutive Securities – Options and | ||||||||||||||||||||||||
| Convertible Preferred Stock | - | - | - | - | 2,129,263 | - | ||||||||||||||||||
| Diluted EPS | $ | (693,681 | ) | 18,987,702 | $ | ( 0.04 | ) | $ | 378,859 | 20,763,632 | $ | 0.02 | ||||||||||||
Stock Based Compensation -
The fair value of transactions in whichCompensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards.
Results of Operations
The following table details the operating results from continuing operations for the impacttwelve months ended December 31, 2014 and 2013.
| Twelve months ended | Twelve months ended | |||||||
| December 31, 2014 | December 31, 2013 | |||||||
| Revenues | $ | 5,014,620 | $ | 119 | ||||
| Cost of lease revenue and merchandise sold | 3,330,786 | 124 | ||||||
| Operating expenses | 5,178,383 | 655,121 | ||||||
| Provision for bad debts | 1,380,902 | - | ||||||
| Loss from continuing operations before income taxes | (4,875,451 | ) | (655,474 | ) | ||||
| Income tax (provision) benefit | 458,047 | - | ||||||
| Loss from continuing operations | $ | (4,417,404 | ) | $ | (655,474 | ) | ||
Lease revenues for the twelve months ended December 31, 2014 were $5,014,620. FlexShopper began originating leases in late December 2013 and therefore had minimal revenues from continuing operations for the year ended December 31, 2013. FlexShopper originated 13,064 leases in year ended December 31, 2014, its first year of meaningful operations.
Cost of lease revenue and merchandise sold for the year ended December 31, 2014 was principally comprised of depreciation expense on lease merchandise of $2,204,548, the operating resultsnet book value of merchandise sold of $599,238 and a reserve for inventory impairment of $527,000.
Provision for bad debts was $1,380,902 for the twelve months ended December 31, 2014. 2014 was the Company’s first year of meaningful operations during which the Company continuously made changes to its underwriting and risk model to improve portfolio performance. The Company anticipates continued improvement as it continues to refine its risk model with an enhanced risk department which includes new hires in 2015 of a Vice President-Risk and Analytics Manager, both with substantial experience in the non-prime consumer market.
Operating expenses for the years ended December 31, 2014 and 2013 were $5,178,383 and 2012.
| Twelve months ended | Twelve months ended | |||||||
| December 31, 2014 | December 31, 2013 | |||||||
| Payroll, benefits and contract labor | $ | 2,027,976 | $ | 421,168 | ||||
| Legal and professional fees | 379,492 | 123,174 | ||||||
| Stock compensation expense | 439,320 | 51,721 | ||||||
| Computer, internet and office expenses | 221,216 | 26,322 | ||||||
| Advertising | 885,012 | - | ||||||
| Total | $ | 3,953,016 | $ | 622,385 | ||||
FlexShopper had a net loss from continuing operations of $4,875,451 and 655,474 for the years ended December 31, 2014 and 2013 respectively. The net losses are the result of operating expenses associated with starting and operating the new FlexShopper business.
Sale of Anchor
During 2013, the Company decided to concentrate its efforts on the operations of FlexShopper and subsequently on April 30, 2014, Anchor entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with a Bank, pursuant to which Anchor sold to the Bank substantially all of its assets (the “Anchor Assets”), consisting primarily of its factoring portfolio (the “Portfolio Accounts”). The purchase price for the Anchor Assets was equal to (1) approximately $4,445,000 which represented 110% of the total funds outstanding associated with the Portfolio Accounts which resulted in a gain of approximately $445,000 plus (2) an amount equal to 50% of the factoring fee and interest income earned by the Portfolio Accounts during the 12 month period following acquisition (“Earnout Payments”). The Earnout Payments totaled $342,541 for the period ended December 31, 2014. The sale of the Anchor Assets was made in a series of closings through June 16, 2014. In connection with each closing, Anchor used the proceeds thereof to pay the Bank all amounts due for factor advances associated with the Portfolio Accounts acquired pursuant to such closing under Anchor’s Rediscount Facility Agreement with the Bank dated November 30, 2011 (the “Rediscount Facility Agreement”). In accordance with the Purchase Agreement, following the final closing thereunder all obligations of Anchor under the Rediscount Facility Agreement (and the associated Validity Warranty) were paid and satisfied in full and the agreement was terminated. Anchor recorded a gain of $778,015 on the sale of these assets including the earnout payments received through December 31, 2014 which is included in income from discontinued operations.
Plan of Operation
We plan to promote our FlexShopper products and services across all sales channels through strategic partnerships, direct response marketing, and affiliate and internet marketing, all of which are designed to increase our lease transactions and name recognition. Our advertisements emphasize such features as instant spending limit, and affordable weekly payments. We believe that as the FlexShopper name gains familiarity and national recognition through our advertising efforts, we will continue to educate our customers and potential customers about the lease-to-own payment alternative as well as solidify our reputation as a leading provider of high quality branded merchandise and services.
For each sales channel FlexShopper has a marketing strategy that includes but is not limited to the following:
| Online LTO Marketplace | Patent pending LTO Payment Method | In-store LTO technology platform |
| Search engine optimization; pay-per click | Direct to retailers/etailers | Direct to retailers/etailers |
| Online affiliate networks | Partnerships with payment aggregators | Consultants & strategic relationships |
| Direct response television campaigns | Consultants & strategic relationships | |
| Direct mail |
The Company believes it has a competitive advantage by providing all three channels as a bundled package. Management is anticipating a rapid development of the FlexShopper business over the next two years as we are able to penetrate each of our sales channels. To support our anticipated growth, FlexShopper will need the availability of substantial capital resources. See “Liquidity and Capital Resources” below.
Liquidity and Capital Resources
As of December 31, 2014 the Company had cash of $ 2,883,349 compared to $ 960,032 for the same period in 2013.
The Company had accounts receivables of $1,509,736 net of an allowance of $1,380,902 totaling $128,834. Accounts receivable are principally comprised of lease payments owed to the Company. An allowance for doubtful accounts is estimated by reserving all accounts in excess of four payments in arrears adjusted for subsequent collections. Approximately seventy five percent of the Company’s accounts in the portfolio are not currently subject to reserve.
Recent Financings
In fiscal 2014, FlexShopper completed the following transactions, each of which has provided or is expected to provide immediate liquidity and cash resources to FlexShopper.
| 1. | A private placement offering completed with FlexShopper’s placement agents on October 9, 2014 resulting in gross proceeds to FlexShopper of $6,501,100 before offering costs of approximately $912,000. |
| 2. | The sale of certain assets of Anchor Funding Services through an Asset Purchase Agreement. This transaction was completed in a series of closings through June 16, 2014 and resulted in a gain of $788,015. |
| 3. | The receipt of $1 million in funding from George Rubin and Morry F. Rubin through the funding of promissory notes in like principal amount and the conversion of these notes into shares of FlexShopper’s Common Stock at $.55 per share om May 8, 2014. |
| 4. | Entering into a secured promissory note with a principal stockholder pursuant to which we may borrow up to $1,000,000 at an interest rate of 15% per annum, payable upon demand. This note was paid in full on March 6, 2015, concurrent with FlexShopper obtaining the credit facility described below. |
On March 6, 2015, FlexShopper entered into a credit agreement (the “Credit Agreement”) with a Lender. FlexShopper is permitted to borrow funds under the Credit Agreement based on the FlexShopper’s cash on hand and the Amortized Order Value of the its Eligible Leases (as such terms are defined in the Credit Agreement) less certain deductions described in the Credit Agreement. Under the terms of the Credit Agreement, subject to the satisfaction of certain conditions, FlexShopper may borrow up to $25,000,000 from the Lender for a term of two years. The borrowing term may be extended for an additional twelve months in the sole discretion of the Lender. The Credit Agreement contemplates that the Lender may provide additional debt financing to FlexShopper, up to $100 million in total, under two uncommitted accordions following satisfaction of certain covenants and other terms and conditions. The Lender will receive security interests in certain leases as collateral under the Credit Agreement. In connection with entering into the Credit Agreement, on March 6, 2015, FlexShopper raised approximately $8.6 million in net proceeds through direct sales of 17.0 million shares of FlexShopper common stock, par value $0.0001 per share, to certain affiliates of the Lender and other accredited investors for a purchase price of $0.55 per share.
The funds derived from the sale of FlexShopper’s Common Stock in the transactions described above, FlexShopper’s ability to borrow funds under the Credit Agreement and funds from the sale of Anchor’s factoring operations have provided substantial liquidity and capital resources for FlexShopper to purchase durable goods pursuant to lease-to-own transactions and to support FlexShopper’s current general working capital needs. Management believes that the financing transactions described in the preceding paragraph provides sufficient liquidity and capital resources for our anticipated needs through at least December 31, 2015.
Cash Flow Summary
Cash Flows from Operating Activities
Net cash used by continuing activities was $7,202,952 for the year ended December 31, 2014 and was primarily due to our net loss for the period combined with cash used for the purchases of leased merchandise. Net cash provided by discontinued operations from our Anchor operations was $1,175,860, resulting in net cash used by operations of $6,027,092.
For the year ended December 31, 2013 net cash used by continuing activities was $541,042 primarily due to our net loss for the year. Net cash provided by discontinued operations from our Anchor operations was $1,740,364, resulting in net cash provided by operations of $1,199,322.
Cash Flows from Investing Activities
For the year ended December 31, 2014 net cash provided by investing activities was $3,629,227 comprised of income from the sale of discontinued assets of $4,786,464 offset by the purchase of property and equipment of 1,157,237 including capitalized software costs of $1,017,104.
For the year ended December 31, 2013, net cash used in investing activities was $112,908 comprised of $30,760 for patent costs and $82,148 for the purchase of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities from continuing operations was $7,562,124 for the year ended December 31, 2014 and was primarily due to two $1,000,000 promissory notes from shareholders and $6,501,104 of net proceeds from a private placement offering at $.55 per share which was completed between May 8, 2014 and October 9, 2014. Net cash used by discontinued financing activities was $3,240,942 for the year ended December 31, 2014, and was primarily due to payments to a financial institution.
Net cash used by financing activities was $736,821 for the year ended December 31, 2013 and 2012, the Company concluded that it had no material uncertain tax positions.
Item 7A. Quantitative and Qualitative Disclosures Aboutabout Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.
Item 8. Financial Statements and Supplementary Data.
Consolidated Financial Statements
The reportreports of the Independent Registered Public Accounting Firm, Consolidated Financial Statements and Schedules are set forth beginning on the following page.
FLEXSHOPPER,
CONTENTS
| YEARS ENDED DECEMBER 31, | PAGE | |||
| FINANCIAL STATEMENTS | ||||
| Report of Independent Registered Public Accounting Firm | ||||
| Report of Independent Registered Public Accounting Firm | F-3 | |||
| Consolidated Balance Sheets as of December 31, | ||||
| Consolidated Statements of Operations | ||||
| Consolidated Statements of Stockholders' Equity | ||||
| Consolidated Statements of Cash Flows | ||||
| Notes to Consolidated Financial Statements | ||||
Report of Independent Registered Public Accounting Firm
_____
The Board of Directors and Stockholders
FlexShopper, Inc. and Subsidiaries (formerly Anchor Funding Services, Inc.)
We have audited the accompanying consolidated balance sheetssheet of FlexShopper, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012,2014, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2013.year 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 auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the 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 auditsaudit 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 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 provideaudit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FlexShopper, Inc. as of December 31, 2014, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
New York, NY
March 31, 2015
Report of Independent Registered Public Accounting Firm
_____
The Board of Directors and Stockholders
FlexShopper, Inc. (formerly Anchor Funding Services, Inc.)
We have audited the accompanying consolidated balance sheet of FlexShopper, Inc. and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year 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 audit.
We conducted our audit 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 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2013, and 2012, and the consolidated results of its operations and its cash flows for each of the two years in the periodyear ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ Scott and Company LLC
Columbia, South Carolina
March 31, 2014
| F-3 |
FLEXSHOPPER, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
| ASSETS | ||||||||
| 2013 | 2012 | |||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 960,032 | $ | 610,439 | ||||
| Retained interest in purchased accounts receivable, net | 4,966,338 | 7,019,463 | ||||||
| Due from clients | 256,313 | - | ||||||
| Earned but uncollected fee income | 138,480 | 168,805 | ||||||
| Prepaid expenses and other | 52,904 | 100,998 | ||||||
| Lease merchandise | 8,004 | - | ||||||
| Total current assets | 6,382,071 | 7,899,705 | ||||||
| PROPERTY AND EQUIPMENT, net | 58,079 | 14,257 | ||||||
| OTHER ASSETS: | ||||||||
| Intangible assets – patent costs | 30,760 | - | ||||||
| Security deposits | 9,485 | 6,023 | ||||||
| 40,245 | 6,023 | |||||||
| $ | 6,480,395 | $ | 7,919,985 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Due to financial institution | $ | 3,240,942 | $ | 4,977,763 | ||||
| Accounts payable | 47,314 | 86,772 | ||||||
| Accrued payroll and related taxes | 68,141 | 69,338 | ||||||
| Accrued expenses | 55,412 | 59,252 | ||||||
| Collected but unearned fee income | 12,328 | 28,642 | ||||||
| Total current liabilities | 3,424,137 | 5,221,767 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| CONVERTIBLE PREFERRED STOCK, net of issuance | ||||||||
| costs of $1,209,383 | 671,409 | 671,409 | ||||||
| COMMON STOCK | 4,363 | 1,863 | ||||||
| ADDITIONAL PAID IN CAPITAL | 8,545,914 | 7,496,693 | ||||||
| ACCUMULATED DEFICIT | (6,165,428 | ) | (5,471,747 | ) | ||||
| 3,056,258 | 2,698,218 | |||||||
| $ | 6,480,395 | $ | 7,919,985 | |||||
| ASSETS | ||||||||
| 2014 | 2013 | |||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 2,883,349 | $ | 960,032 | ||||
| Accounts receivable, net | 128,834 | 119 | ||||||
| Prepaid expenses | 112,074 | 50,188 | ||||||
| Lease merchandise, net | 4,241,918 | 8,004 | ||||||
| Assets of discontinued operations | 6,500 | 5,363,728 | ||||||
| Total current assets | 7,372,675 | 6,382,071 | ||||||
| PROPERTY AND EQUIPMENT, net | 1,051,697 | 58,079 | ||||||
| OTHER ASSETS: | ||||||||
| Intangible assets, net | 26,492 | 30,760 | ||||||
| Security deposits | 55,003 | 9,485 | ||||||
| 81,495 | 40,245 | |||||||
| $ | 8,505,867 | $ | 6,480,395 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 836,792 | $ | 20,349 | ||||
| Accrued payroll and related taxes | 131,596 | 68,140 | ||||||
| Accrued expenses | 197,584 | 3,693 | ||||||
| Loans payable to shareholder | 1,000,000 | - | ||||||
| Liabilities of discontinued operations | 7,626 | 3,331,955 | ||||||
| Total current liabilities | 2,173,598 | 3,424,137 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||
| STOCKHOLDERS’ EQUITY PREFERRED STOCK, $0.001 par value- authorized 10,000,000 shares, issued | ||||||||
| and outstanding 342,219 in 2014 and 376,387 in 2013 at $5.00 stated value | 1,711,095 | 1,881,935 | ||||||
| COMMON STOCK, $0.0001 par value- authorized 65,000,000 shares issued and | ||||||||
| outstanding 35,015,322 in 2014 and 21,148,862 in 2013 | 3,502 | 2,115 | ||||||
| ADDITIONAL PAID IN CAPITAL | 14,513,433 | 7,337,636 | ||||||
| ACCUMULATED DEFICIT | (9,895,761 | ) | (6,165,428 | ) | ||||
| 6,332,269 | 3,056,258 | |||||||
| $ | 8,505,867 | $ | 6,480,395 | |||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
| For the years ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| FINANCE REVENUES | $ | 2,364,128 | $ | 2,526,626 | ||||
| INTEREST EXPENSE - financial institution | (385,918 | ) | (454,241 | ) | ||||
| INTEREST EXPENSE – related parties | - | (15,123 | ) | |||||
| NET FINANCE REVENUES | 1,978,210 | 2,057,262 | ||||||
| PROVISION FOR CREDIT LOSSES, net of recoveries | (62,603 | ) | (41,797 | ) | ||||
| FINANCE REVENUES, NET OF INTEREST EXPENSE | ||||||||
| AND CREDIT LOSSES | 1,915,607 | 2,015,465 | ||||||
| OPERATING EXPENSES | (2,609,288 | ) | (1,636,606 | ) | ||||
| (LOSS) INCOME FROM OPERATIONS BEFORE | ||||||||
| INCOME TAXES | (693,681 | ) | 378,859 | |||||
| INCOME TAXES | - | - | ||||||
| NET (LOSS) INCOME | $ | (693,681 | ) | $ | 378,859 | |||
| BASIC EARNINGS PER COMMON SHARE: | ||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (0.04 | ) | $ | 0.02 | |||
| DILUTED EARNINGS PER COMMON SHARE: | ||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (0.04 | ) | $ | 0.02 | |||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||
| Basic | 18,987,702 | 18,634,369 | ||||||
| Dilutive | 18,987,702 | 20,763,632 | ||||||
| For the years ended | ||||||||
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenues: | ||||||||
| Lease revenues and fees | $ | 4,269,792 | $ | 119 | ||||
| Lease merchandise sold | 744,828 | - | ||||||
| Total revenues | 5,014,620 | - | ||||||
| Costs and expenses: | ||||||||
| Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | 2,731,548 | 124 | ||||||
| Cost of lease merchandise sold | 599,238 | - | ||||||
| Provision for doubtful accounts | 1,380,902 | - | ||||||
| Operating expenses | 5,178,383 | 655,121 | ||||||
| Total costs and expenses | 9,890,071 | 655,593 | ||||||
| Loss from continuing operations, before income tax benefit | (4,875,451 | ) | (655,474 | ) | ||||
| Income tax benefit | 458,047 | - | ||||||
| Loss from continuing operations | (4,417,404 | ) | (655,474 | ) | ||||
| Income (loss) from discontinued operations (including gain from the sale of discontinued | ||||||||
| operation of $788,015 in 2014), net of income taxes of 458,047 in 2014 | 687,071 | (38,207 | ) | |||||
| Net loss | $ | (3,730,333 | ) | $ | (693,681 | ) | ||
| Basic and diluted (loss) income per common share: | ||||||||
| Loss from continuing operations | $ | (0.15 | ) | $ | (0.04 | ) | ||
| Income from discontinued operations | 0.02 | - | ||||||
| Net loss | $ | (0.13 | ) | $ | (0.04 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic and diluted | 28,244,207 | 18,987,702 | ||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 20132014 and 2012
| Preferred | Common | Additional | Accumulated | |||||||||||||||||
| Stock | Stock | Paid in Capital | Deficit | Total | ||||||||||||||||
| Balance, January 1, 2012 | $ | 671,409 | $ | 1,863 | $ | 7,465,386 | $ | (5,850,606 | ) | $ | 2,288,052 | |||||||||
| Provision for compensation expense related to issued stock options | - | - | 10,229 | - | 10,229 | |||||||||||||||
| Benefit for compensation expense related to expired stock options | - | - | 21,078 | - | 21,078 | |||||||||||||||
| Net income year ended December 31, 2012 | - | - | - | 378,859 | 378,859 | |||||||||||||||
| Balance, December 31, 2012 | 671,409 | 1,863 | 7,496,693 | (5,471,747 | ) | 2,698,218 | ||||||||||||||
| Provision for compensation expense related to issued stock options | - | - | 49,805 | - | 49,805 | |||||||||||||||
| Provision for compensation expense related to issued warrants | - | - | 1,916 | - | 1,916 | |||||||||||||||
| Sale of common stock | - | 2,500 | 997,500 | - | 1,000,000 | |||||||||||||||
| Net loss year ended December 31, 2013 | - | - | - | (693,681 | ) | (693,681 | ) | |||||||||||||
| Balance, December 31, 2013 | $ | 671,409 | $ | 4,363 | $ | 8,545,914 | $ | (6,165,428 | ) | $ | 3,056,258 | |||||||||
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, January 1, 2013: As previously reported | 376,387 | $ | 671,409 | 18,634,369 | $ | 1,863 | $ | 7,496,693 | $ | (5,471,747 | ) | $ | 2,698,218 | |||||||||||||||
| Reclassification of preferred stock issuance costs | - | 1,210,526 | - | (1,210,526 | ) | |||||||||||||||||||||||
| As reclassified | 376,387 | 1,881,935 | 18,634,369 | 1,863 | 6,286,167 | (5,471,747 | ) | 2,698,218 | ||||||||||||||||||||
| Provision for compensation expense related to issued stock options | - | - | - | - | 49,805 | - | 49,805 | |||||||||||||||||||||
| Provision for compensation expense related to issued warrants | - | - | - | - | 1,916 | - | 1,916 | |||||||||||||||||||||
| Sale of common stock | - | - | 2,514,493 | 252 | 999,748 | - | 1,000,000 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (693,681 | ) | (693,681 | ) | |||||||||||||||||||
| Balance, December 31, 2013 | 376,387 | 1,881,935 | 21,148,862 | 2,115 | 7,337,636 | (6,165,428 | ) | 3,056,258 | ||||||||||||||||||||
| Provision for compensation expense related to issued stock options | - | - | - | - | 299,700 | - | 299,700 | |||||||||||||||||||||
| Provision for compensation expense related to issued warrants | - | - | - | - | 139,620 | - | 139,620 | |||||||||||||||||||||
| Exercise of stock options | - | - | 33,333 | 3 | 11,634 | - | 11,637 | |||||||||||||||||||||
| Sale of common stock, net of placement and other issuance costs of $1,537,489 | - | - | 11,820,187 | 1,183 | 4,962,432 | - | 4,963,615 | |||||||||||||||||||||
| Warrants issued to placement agents | 586,872 | 586,872 | ||||||||||||||||||||||||||
| Conversion of shareholder loans to common stock | - | - | 1,818,182 | 182 | 999,818 | - | 1,000,000 | |||||||||||||||||||||
| Conversion of preferred shares to common stock | (34,168 | ) | (170,840 | ) | 194,758 | 19 | 170,821 | - | - | |||||||||||||||||||
| Accrued interest on shareholder loans contributed to capital | - | - | - | - | 4,900 | - | 4,900 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (3,730,333 | ) | (3,730,333 | ) | |||||||||||||||||||
| Balance, December 31, 2014 | 342,219 | $ | 1,711,095 | 35,015,322 | $ | 3,502 | $ | 14,513,433 | $ | (9,895,761 | ) | $ | 6,332,269 | |||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
| CASH FLOWS FROM OPERATING ACTIVITIES: | 2013 | 2012 | ||||||
| Net (loss) income | $ | (693,681 | ) | $ | 378,859 | |||
| Adjustments to reconcile net (loss) income to net cash | ||||||||
| provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 38,326 | 19,804 | ||||||
| Compensation expense related to issuance of stock options and warrants | 51,721 | 31,307 | ||||||
| Allowance for uncollectible accounts | - | 62,949 | ||||||
| Decrease (increase) in retained interest in purchased | ||||||||
| accounts receivable | 2,053,125 | (751,256 | ) | |||||
| Increase in due from client | (256,313 | ) | - | |||||
| Decrease (increase) in earned but uncollected | 30,325 | (11,735 | ) | |||||
| Decrease (increase) in prepaid expenses and other | 48,094 | (30,074 | ) | |||||
| Increase in lease merchandise | (8,004 | ) | - | |||||
| Increase in security deposits | (3,462 | ) | (537 | ) | ||||
| (Decrease) increase in accounts payable | (39,458 | ) | 41,396 | |||||
| (Decrease) increase in accrued payroll and related taxes | (1,197 | ) | 8,420 | |||||
| Decrease in collected but not earned | (16,314 | ) | (8,297 | ) | ||||
| Increase (decrease) in accrued expenses | (3,840 | ) | 29,643 | |||||
| Net cash provided by (used in) operating activities | 1,199,322 | (229,521 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Patent costs | (30,760 | ) | - | |||||
| Purchases of property and equipment | (82,148 | ) | (17,031 | ) | ||||
| Net cash used in investing activities | (112,908 | ) | (17,031 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| (Payments to) proceeds from financial institution, net | (1,736,821 | ) | 550,420 | |||||
| Proceeds from capital contributions | 1,000,000 | - | ||||||
| Net cash (used in) provided by financing activities | (736,821 | ) | 550,420 | |||||
| INCREASE IN CASH | 349,593 | 303,868 | ||||||
| �� | ||||||||
| CASH, beginning of period | 610,439 | 306,571 | ||||||
| CASH, end of period | $ | 960,032 | $ | 610,439 | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | 2014 | 2013 | ||||||
| Net loss | $ | (3,730,333 | ) | $ | (693,681 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| (Income) loss from discontinued operation | (687,071 | ) | 38,207 | |||||
| Depreciation and amortization | 162,210 | 38,326 | ||||||
| Depreciation of lease merchandise | 2,160,467 | 123 | ||||||
| Impairment of lease merchandise | 527,000 | - | ||||||
| Amortization of patent costs | 4,268 | - | ||||||
| Compensation expense related to issuance of stock options | 299,700 | 49,805 | ||||||
| Compensation expense related to issuance of warrants | 139,620 | 1,916 | ||||||
| Provision for doubtful accounts | 1,380,902 | - | ||||||
| Other | 4,900 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) in accounts receivable | (1,509,617 | ) | (119 | ) | ||||
| (Increase) in prepaid expenses and other | (61,888 | ) | (50,188 | ) | ||||
| (Increase) in lease merchandise | (6,921,381 | ) | (8,128 | ) | ||||
| (Increase) in security deposits | (45,518 | ) | (9,485 | ) | ||||
| Increase in accounts payable | 816,443 | 20,349 | ||||||
| Increase in accrued payroll and related taxes | 63,455 | 68,140 | ||||||
| Increase in accrued expenses | 193,891 | 3,693 | ||||||
| Net cash used in operating activities - continuing operations | (7,202,952 | ) | (541,042 | ) | ||||
| Net cash provided by operating activities - discontinued operations | 1,175,860 | 1,740,364 | ||||||
| Net cash (used in) provided by operating activities | (6,027,092 | ) | 1,199,322 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | (1,157,237 | ) | (67,947 | ) | ||||
| Patent costs | - | (30,760 | ) | |||||
| Net cash used in investing activities – continuing operations | (1,157,237 | ) | (98,707 | ) | ||||
| Net cash used in investing activities- discontinued operations | - | (14,201 | ) | |||||
| Proceeds from sale of discontinued operations | 4,786,464 | - | ||||||
| Net cash provided by (used in) investing activities | 3,629,227 | (112,908 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Loans from shareholders | 2,000,000 | - | ||||||
| Proceeds from exercise of stock options | 11,637 | - | ||||||
| Proceeds from sale of common stock | 6,501,104 | 1,000,000 | ||||||
| Payment of costs related to issuance of common stock | (950,617 | ) | - | |||||
| Net cash provided by financing operations – continuing operations | 7,562,124 | 1,000,000 | ||||||
| Net cash used in financing operations - discontinued operations | (3,240,942 | ) | (1,736,821 | ) | ||||
| Net cash provided by (used in) financing activities | 4,321,182 | (736,821 | ) | |||||
| INCREASE IN CASH | 1,923,317 | 349,593 | ||||||
| CASH, beginning of period | 960,032 | 610,439 | ||||||
| CASH, end of period | $ | 2,883,349 | $ | 960,032 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 81,370 | * | $ | 369,487 | * | ||
| Non-cash Financing activities: | ||||||||
| Conversion of shareholders loans to common stock | $ | 1,000,000 | $ | - | ||||
| Conversion of preferred stock to common stock | $ | 170,840 | $ | - |
*Discontinued operations
The accompanying notes to consolidated financial statements are an integral part of these statements.
Notes To Consolidated Financial Statements
December 31, 20132014 and 2012
1.BUSINESS:
FlexShopper Inc.(the “Company”) is a corporation organized under the laws of the State of Delaware on August 16, 2006. The consolidated financial statements include the accountsCompany owns 100% of FlexShopper, Inc. (formerly Anchor Funding Services, Inc.LLC, a limited liability company incorporated under the "Company") and its wholly owned subsidiaries,laws of North Carolina on June 24, 2013. Since the sale of the assets of Anchor Funding Services LLC ("Anchor"(“Anchor”), which sale was completed in a series of transactions between April and FlexShopper, LLC ("FlexShopper").
In January 2015, in connection with the credit agreement entered into in March 2015, (See Note 13) FlexShopper is1 LLC and FlexShopper 2 LLC were organized as wholly owned Delaware subsidiaries of FlexShopper to conduct operations.
During 2013, the Company decided to concentrate its efforts on the operations of FlexShopper and subsequently, an agreement was entered into with a North Carolina limited liability company. FlexShopper is developing a business that will directly provide certain categoriesfinancial institution to sell substantially all of durable goodsthe operating assets of Anchor which provided accounts receivable funding to consumersbusinesses located throughout the United States. The sale was finalized in June 2014 (Note 3). The consolidated statements of operations and cash flows for the years ended December 31, 2014 and 2013 reflect the historical operations of Anchor as discontinued operations. The consolidated balance sheets as of December 31, 2014 and 2013 reflects amounts attributable to Anchor as assets and liabilities of discontinued operations. We have generally presented the notes to our consolidated financial statements on a lease-to-ownthe basis and currently provides lease-to-own terms to consumers of third party retailers. FlexShopper began generating revenues in December 2013; the amount of these revenues is immaterial to the financial statements.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -
The accompanying consolidated financial statements includeEstimates –
The preparation ofRevenue Recognition –
Accounts Receivable and Allowance for Doubtful Accounts –FlexShopper seeks to collect amounts owed under its leases from each customer on a deferralweekly basis by charging their bank account or credit card. Accounts receivable are principally comprised of revenue for lease payments received priorcurrently owed to FlexShopper which are past due as FlexShopper has been unable to successfully collect in the month due. Our revenue recognition accounting policy matchesmanner described above. An allowance for doubtful accounts is estimated by providing an allowance for all accounts in excess of four payments in arrears, adjusted for subsequent collections. FlexShopper is developing historical data to assess the lease revenue withestimate of the corresponding costs, mainly depreciation, associated withallowance in the leased merchandise.
| December 31, 2014 | December 31, 2013 | |||||||
| Accounts receivable | $ | 1,509,736 | $ | 119 | ||||
| Allowance for doubtful accounts | 1,380,902 | - | ||||||
| Accounts receivable, net | $ | 128,834 | $ | 119 | ||||
The allowance is a reserve account. For factoring transactions, Anchor purchases a customer’s accounts receivable and advances them asignificant percentage of the invoice total. The difference betweenbalance because FlexShopper has not charged off any customer accounts since inception to assure that it has exhausted all collection efforts with respect to each account including attempts to repossess items. In addition, the purchase price and amount advancedsame delinquent customers will continue to accrue weekly charges until they are charged off or FlexShopper has exhausted collection efforts. FlexShopper will charge off accounts upon determining that collection is maintained in a reserve account. The reserve account is used to offset any potential losses Anchor may have related tonot probable.
Lease Merchandise –Until all payment obligations for ownership are satisfied under the purchased accounts receivable. For purchase order transactionslease agreement, the company advances and pays for 100%Company maintains ownership of the product’s cost.
| December 31, 2014 | December 31, 2013 | |||||||
| Lease merchandise at cost | $ | 6,929,509 | $ | 8,128 | ||||
| Accumulated depreciation | 2,160,591 | 124 | ||||||
| Impairment reserve | 527,000 | - | ||||||
| Lease merchandise, net | $ | 4,241,918 | $ | 8,004 | ||||
Cost of lease merchandise sold represents the fair valueundepreciated cost of rental merchandise at the retained interest in purchased accounts receivable approximates its recorded value becausetime of the relatively short-term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected.
Intangible Assets -
| December 31, 2014 | December 31, 2013 | |||||||
| Patent costs | $ | 30,760 | $ | 30,760 | ||||
| Accumulated amortization | 4,268 | - | ||||||
| Patent costs, net | $ | 26,492 | $ | 30,760 | ||||
Software Costs - Costs related to developing or useful lives fromobtaining internal-use software incurred during the time theypreliminary project and post-implementation stages of an internal use software project are first availableexpensed as incurred and certain costs incurred in the project’s application development stage are capitalized as property and equipment. The Company expenses costs related to the planning and operating stages of a website. Direct costs incurred in the website’s development stage are capitalized as property and equipment. Costs associated with minor enhancements and maintenance for use.
Operating Expenses –Operating expenses include all corporate overhead expenses such as salaries, payroll taxes and benefits, stock based compensation, occupancy, advertising and other administrative expenses.
Advertising Costs –
The Company charges advertising costs to expense as incurred. Total advertising costs were approximatelyPer Share Data –Per share data is computed by use of the two-class method as a result of outstanding convertible preferred stock which participates in dividends with the common stock and 2012, respectively.
Diluted earnings per share includeis based on the more dilutive of the if-converted method (which assumes conversion of the preferred stock as of the beginning of the period) or the two-class method (which assumes that the preferred stock is not converted) plus the potential impact of dilutive securities, such as convertible preferred stock, stock options and stock warrants. The dilutive effect of stock options and warrants is computed using the treasury stock method, which assumes the repurchase of common shares at the average market price.
| 2013 | 2012 | |||||||||||||||||||||||
| (Denominator) | (Denominator) | |||||||||||||||||||||||
| Weighted- | Per | Weighted- | Per | |||||||||||||||||||||
| (Numerator) | Average | Share | (Numerator) | Average | Share | |||||||||||||||||||
| Net Loss | Shares | Amount | Net Income | Shares | Amount | |||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| Basic EPS | $ | (693,681 | ) | 18,987,702 | $ | (0.04 | ) | $ | 378,859 | 18,634,369 | $ | 0.02 | ||||||||||||
| Effect of Dilutive Securities – Options and | ||||||||||||||||||||||||
| Convertible Preferred Stock | - | - | - | - | 2,129,263 | - | ||||||||||||||||||
| Diluted EPS | $ | (693,681 | ) | 18,987,702 | $ | (0.04 | ) | $ | 378,859 | 20,763,632 | $ | 0.02 | ||||||||||||
In computing diluted loss per share, no effect has been given to the issuance of common stock upon conversion or exercise of the following securities as their effect is anti-dilutive:
| Twelve months ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Convertible preferred stock | 1,984,870 | 1,919,573 | ||||||||||||||
| Options | 3,755,000 | 2,923,205 | ||||||||||||||
| Warrants | 5,115,531 | 3,342,504 | ||||||||||||||
| 10,855,378 | 8,185,282 | |||||||||||||||
Stock Based Compensation -
The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards.
Income Taxes – Deferred tax assets and liabilities are determined based on the operating results for the years ended December 31, 2013 and 2012.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements plus deferred income taxesfrom such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of December 31, 2014 and 2013, the Company has not recorded any unrecognized tax benefits.
Interest and penalties related to the differences between financial statement and taxable income.
Reclassifications –In addition to reclassifications related to discontinued operations referred to in our financial statements. The Company applied this guidance to all its tax positions, including tax positions taken and those expected to be taken, under the transition provision of the interpretation. For the years endedNote 1, certain stockholder equity balances at December 31, 2013 and 2012,have been reclassified to conform to the Company concluded that it had no material uncertain tax positions.
Recent Accounting Pronouncements
The FASBFinancial Accounting Standards Board (‘FASB”) amended the Comprehensive Income topic of the ASC in February 2013 with ASU No. 2013-02. The amendment addresses reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendment does not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the amendment does require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendment wasguidance became effective for the Company on a prospective basis forin the first quarter of fiscal year 2013.2014. This amendment did not have a materialany effect on the Company’s financial statements.
In July 2013 the FASB issued ASU 2013-11, , "Presentation“Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, "” which among other things, require an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as denoted within the ASU. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We areThe adoption of this standard in 2014 did not have any effect on the Company’s financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. ASU No. 2014-08 is effective prospectively for fiscal years beginning after December 15, 2014 with early adoption permitted. The Company has early adopted this update in the second quarter of 2014.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of the provisions of this new standard on ourits financial position and results of operations.
In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the potential impacts of the new standard on its existing stock-based compensation plans.
In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The term probable is used consistently with respectits use in Topic 450, Contingencies. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
3.DISCONTINUED OPERATIONS:
During 2013, the Company decided to ASU 2013-11.
The assets and liabilities of the discontinued operations are not expected to have a material impactpresented separately under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations” in the Company’s financial position, results of operations or cash flows.
| December 31, 2013 | December 31, 2012 | |||||||
| Purchased invoices | $ | 6,085,940 | $ | 8,921,203 | ||||
| Purchase order advances | 365,394 | 21,156 | ||||||
| Reserve account | (1,481,996 | ) | (1,842,447 | ) | ||||
| Allowance for uncollectible invoices | (3,000 | ) | (80,449 | ) | ||||
| $ | 4,966,338 | $ | 7,019,463 | |||||
| December 31, 2013 | December 31, 2012 | |||||||
| Staffing | $ | 192,806 | $ | 185,557 | ||||
| Transportation | 1,592,900 | 1,773,290 | ||||||
| Service | 3,063,021 | 4,528,668 | ||||||
| Manufacturing | 120,611 | 612,397 | ||||||
| $ | 4,969,338 | $ | 7,099,912 | |||||
| For the years ending December 31, | ||||||||
| 2013 | 2012 | |||||||
| Balance - beginning of year | $ | 80,449 | $ | 17,500 | ||||
| Provision for credit losses | 12,200 | 62,949 | ||||||
| Write-offs | (89,649 | ) | - | |||||
| Balance - end of year | $ | 3,000 | $ | 80,449 | ||||
| For the years ending December 31, | ||||||||
| 2013 | 2012 | |||||||
| Purchased invoices | $ | 83,653,644 | $ | 95,875,787 | ||||
| Purchase order advances | 843,193 | 435,928 | ||||||
| $ | 84,496,837 | $ | 96,311,715 | |||||
| December 31, 2014 | December 31, 2013 | |||||||
| Assets of discontinued operations: | ||||||||
| Retained interest in purchased accounts receivable | $ | 6,500 | $ | 4,966,338 | ||||
| Earned but uncollected fees | - | 141,077 | ||||||
| Due from client | - | 256,313 | ||||||
| $ | 6,500 | $ | 5,363,728 | |||||
| Liabilities of discontinued operations: | ||||||||
| Accounts payable | $ | - | $ | 26,966 | ||||
| Accrued expenses | 7,626 | 51,719 | ||||||
| Due to financial institution | - | 3,240,942 | ||||||
| Deferred revenue | - | 12,328 | ||||||
| $ | 7,626 | $ | 3,331,955 | |||||
Major classes of income and expenses related to the Food Service Company was approximately $1,453,500. Under a Court Order approved settlement with the Food Service Company, Anchor collected approximately $1,153,500 of the Food Service Company’s accounts receivable. By Court Order, the final balance of $300,000 is to be paid to Anchor in twelve monthly installments of $25,000 beginning November 8, 2013.
| Twelve months ended | ||||||||
| December 31, 2014 | December 31, 2013 | |||||||
| Finance revenues | $ | 735,357 | $ | 2,364,128 | ||||
| Interest expense and other fees -financial institution | (109,878 | ) | (385,918 | ) | ||||
| Benefit (Provision) for credit losses | 24,904 | (62,603 | ) | |||||
| Net finance revenues | 650,383 | 1,915,607 | ||||||
| Operating expenses | (446,733 | ) | (1,953,814 | ) | ||||
| Other income | 153,453 | - | ||||||
| 357,103 | (38,207 | ) | ||||||
| Gain on sale of discontinued assets | 788,015 | - | ||||||
| Income (loss) from discontinued operations before income taxes | $ | 1,145,118 | $ | (38,207 | ) | |||
4.PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
| Estimated | |||||||||
| Useful Lives | December 31, 2013 | December 31, 2012 | |||||||
| Furniture and fixtures | 2-5 years | $ | 64,945 | $ | 46,818 | ||||
| Computers and software | 3-7 years | 251,525 | 187,505 | ||||||
| 316,470 | 234,323 | ||||||||
| Less: accumulated depreciation | (258,391 | ) | (220,066 | ) | |||||
| $ | 58,079 | $ | 14,257 | ||||||
| Estimated Useful Lives | December 31, 2014 | December 31, 2013 | ||||||||
| Furniture and fixtures | 2-5 years | $ | 99,982 | $ | 64,945 | |||||
| Website and internal use software | 3 years | 1,017,103 | - | |||||||
| Computers and software | 3-7 years | 355,213 | 251,525 | |||||||
| 1,472,298 | 316,470 | |||||||||
| Less: accumulated depreciation and amortization | (420,601 | ) | (258,391 | ) | ||||||
| $ | 1,051,697 | $ | 58,079 | |||||||
Depreciation and amortization expense was $38,326$162,210 and $19,804$38,326 for the years ended December 31, 2014 and 2013, respectively.
5. LOANS PAYABLE SHAREHOLDERS:
On March 19, 2014, upon approval of the Board of Directors, FlexShopper entered into two Promissory Notes totaling $1,000,000, one with former CEO Morry Rubin and 2012, respectively.
6. CAPITAL STRUCTURE:
The Company’s capital structure consists of preferred and common stock as described below:
Preferred Stock –
The Company is authorized to issue 10,000,000 shares of $.001 par value preferred stock. The Company’s Board of Directors determines the rights and preferences of its preferred stock.On January 31, 2007, the Company filed a Certificate of Designation with the Secretary of State of Delaware. Effective with this filing, 2,000,000 preferred shares became Series 1 Convertible Preferred Stock. Series 1 Convertible Preferred Stock will rank senior to Common Stock.
Each share of Series 1 Convertible Preferred Stock iswas convertible into 5.1 shares of the Company’s Common Stock.Stock, subject to certain anti-dilution rights. As a result of the Common Stock offering described below and the sale of Common Stock to officers and/or directors, each share of Series 1 Preferred Stock is currently convertible into 5.8 shares of the Company’s Common Stock and has voting rights of 5.877 common shares. The holder of the Series 1 Convertible Preferred Stock has the option to convert the shares to Common Stock at any time. Upon conversion, all accumulated and unpaid dividends willwere to be paid as additional shares of Common Stock.
The dividend rate on Series 1 Convertible Preferred Stock iswas 8%. Dividends arewere paid between 2007 and 2009 annually on December 31st in the form of additional Series 1 Convertible Preferred Stock unless the Board of Directors approvesapproved a cash dividend. Dividends on Series 1 Convertible Preferred Stock shall ceaseceased to accrue on the earlier of December 31, 2009, or on the date they arewere converted to Common Shares. Thereafter, the holders of Series 1 Convertible Preferred Stock have the same dividend rights as holders of Common Stock, as if the Series 1 Convertible Preferred Stock had been converted to Common Stock.
During the year ended December 31, 2014, 34,168 preferred shares were converted into 194,758 common shares. As of December 31, 2014 there were 342,219 shares of Series 1 Convertible Preferred Stock outstanding which are convertible into 1,984,870 shares of common stock. (See Note 13)
Common Stock –
The Company is authorized to issue 65,000,000 shares of $.0001 par value Common Stock. Each share of Common Stock entitles the holder to one vote at all stockholder meetings. Dividends on Common Stock will be determined annually by the Company’s Board of Directors.During the lastfourth quarter of 2013, the Company raised $1,000,000 from the sale of its restricted Common Stock at $.40 per share. An aggregate of 2,500,000 shares of Common Stock were sold under Rule 506 and/or Section 4(2) of the Securities Act of 1933 as amended. The Company also issued 14,493 shares to consultants for services rendered.
From May through October 2014, the Company received gross proceeds of $6,501,100 from the sale of 11,820,187 shares offered through three co-placement agents in Series 1 Convertible Preferred Stock and Common Stocka private placement offering at an offering price of $.55 per share under Rule 506 and/or Section 4(2) of the Securities Act of 1933 as amended. In connection therewith seven year warrants to purchase 1,773,027 common shares forat an exercise price of $.055 per share were issued to placement agents.
In addition, pursuant to the years ended December 31, 2013 and 2012 is summarized as follows:
| Series 1 Convertible | Common | |||||||
| Preferred Stock | Stock | |||||||
| Balance, January 1, 2012 | 376,387 | 18,634,369 | ||||||
| Preferred Stock Conversions | - | - | ||||||
| Common Stock Issuances | - | - | ||||||
| Balance, December 31, 2012 | 376,387 | 18,634,369 | ||||||
| Preferred Stock Conversions | - | - | ||||||
| Common Stock Issuances | - | 2,514,493 | ||||||
| Balance, December 31, 2013 | 376,387 | 21,148,862 | ||||||
7. STOCK OPTIONS
On January 31, 2007, the Board of Directors adopted our 2007 Omnibus Equity Compensation Plan (the “Plan”), with 2,100,000 common shares authorized for issuance under the Plan. In October 2009, the Company's stockholders approved an increase in the number of shares covered by the Plan to 4,200,000 shares.
Employees, directors and consultants by enabling themand other service providers are eligible to shareparticipate in the future growthPlan. Options granted under the plan vest over periods ranging from immediately upon grant to a three year period and expire ten years from date of the business.
On March 24, 2014, B. Bernstein an officer and Brad Bernstein (“B. Bernstein”), the Presidentdirector of the Company entered into employment contractswas granted 10 year options to purchase 250,000 shares of common stock. These options vested on the date of grant.
On July 25, 2014, and stock option agreements. Additionally,October 14, 2014, two new Directors of the Company were each granted 10 year options to purchase 180,000 shares of common stock. These options vest one third annually commencing at closing two non-employee directors entered into stock option agreements.
Activity in |
| Exercise | Number | Remaining | Number | ||||||||
| Price | Outstanding | Contractual Life | Exercisable | ||||||||
| $ | 1.25 | 1,605,000 | 4 years | 1,605,000 | |||||||
| $ | 1.00 | 45,000 | 6 years | 33,750 | |||||||
| $ | 0.62 | 500,000 | 6 years | 500, 000 | |||||||
| $ | 0.17 | 500,000 | 9 years | 500,000 | |||||||
| $ | 0.25 | 180,000 | 10 years | 120,000 | |||||||
| $ | 0.35 | 100,000 | 10 years | 33,333 | |||||||
| $ | 0.30 | 60,000 | 10 years | 20,000 | |||||||
| $ | 0.45 | 25,000 | 10 years | 8,333 | |||||||
| 3,015,000 | 2,820,416 | ||||||||||
| Weighted average exercise price | Weighted average contractual term | Aggregate intrinsic value | Number of shares | |||||||||||||
| Outstanding at January 1, 2014 | $ | 0.85 | 4.05 | $ | 295,553 | 3,015,000 | ||||||||||
| Granted | $ | 0.80 | 9.43 | 1,121,000 | ||||||||||||
| Canceled | $ | 0.46 | 7.50 | (347,667 | ) | |||||||||||
| Exercised | $ | 0.35 | 8.45 | (33,333 | ) | |||||||||||
| Outstanding at December 31, 2014 | $ | 0.87 | 5.30 | $ | 757,650 | 3,755,000 | ||||||||||
| Vested and exercisable at December 31, 2014 | $ | 0.89 | 4.74 | $ | 757,650 | 3,314,999 | ||||||||||
| Vested and exercisable at December 31, 2014 and expected to vest thereafter | $ | 0.89 | 5.30 | 757,650 | 3,704,400 | |||||||||||
| The intrinsic value of the options exercised during 2014 was $21,666 | ||||||||||||||||
The weighted average grant date fair value of options granted during 2014 was $0.06 per share. The Company measured the fair value of each option award on the date of grant using the Black Scholes option pricing model (BSM) with the following assumptions:
| 2014 | ||||
| Exercise price | ||||
| 6 years | ||||
| 37% | ||||
| 0 | % | |||
| 1.64% to |
The fairexpected dividend yield is based on the Company’s historical dividend yield. The expected volatility was based on the average of historical volatilities for a period comparable to the expected life of the options of certain entities considered to be similar to the Company. The expected life is based on the simplified expected term calculation permitted by the SEC which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The risk-free interest rate is based on the annual yield on the grant date of a zero-coupon U.S. Treasury bond the maturity of which equals the option’s expected life.
The value amountsof stock options is recognized as compensation expense by the straight line method over the vesting period. Compensation expense recorded for these options in the statementstatements of operations was $49,805$299,700 and $10,229$49,805 for the years ended December 31, 2014 and 2013, and 2012, respectively.
| 2013 | 2012 | 2011 | ||||||||||||||||||||||
| Options | Price | Options | Price | Options | Price | |||||||||||||||||||
| Outstanding at beginning of year | 2,830,000 | 0.88 | 2,430,000 | 1.12 | 2,440,000 | 1.10 | ||||||||||||||||||
| Granted | 195,000 | 0.35 | 680,000 | 0.19 | - | - | ||||||||||||||||||
| Cancelled | (10,000 | ) | 0.45 | (280,000 | ) | 1.25 | (10,000 | ) | 1.00 | |||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||||
| Outstanding at end of year | 3,015,000 | 0.85 | 2,830,000 | 0.88 | 2,430,000 | 1.12 | ||||||||||||||||||
| Exercisable at end of year | 2,820,416 | 0.88 | 2,198,750 | 1.08 | 2,401,250 | 1.12 | ||||||||||||||||||
8. WARRANTS:
On January 31, 2014 the expiration date of outstanding warrants issued to one of the Company’s placement agent was issued warrantsagents to purchase 1,342,500 shares of the Company’s common stock. These warrants werestock at $1.10 per share, due to expire on January 31, 2013, but were2014 was extended onby the condition that each warrant holder accept a new exercise price of $1.35 per share. Currently, these warrants are scheduled to expire onCompany through January 31, 2018 and are currently exercisable at the original price of $1.10 per share.2018. The following information was input into BSM to compute a per warrantfair value price of $.023:
| Exercise price | $ | 1.10 | ||
| Term | 7 years | |||
| Volatility | 40% | |||
| Dividends | 0 | % | ||
| Discount rate | .05 | % | ||
| Exercise price | $ | 1.10 | |||
| Term | 4 years | ||||
| Expected volatility | 37% | ||||
| Dividend yield | 0 | % | |||
| Risk-free interest rate | .09 | % | |||
For the years ended December 31, 2014 and 2013, compensation expense of $139,620 and $1,916 respectively was recorded related to these warrants.
The following table summarizes information about outstanding stock warrants as of December 31, 2014 all of which are exercisable:
| Weighted Average | |||||||||
| Exercise | Number | Remaining | |||||||
| Price | Outstanding | Contractual Life | |||||||
| $ | 1.10 | 1,342,500 | 3 years | ||||||
| 1.00 | 2,000,004 | 6 years | |||||||
| $ | 0.55 | 1,773,027 | 7 years | ||||||
| 5,115,531 | |||||||||
9. INCOME TAXES:
For the year ended December 31, 2013,2014, the Company recorded compensation expense of $1,916 relatedincome tax benefit allocated to continuing operations represents the issuance of these warrants.
| Weighted Average | |||||||||||
| Exercise | Number | Remaining | Number | ||||||||
| Price | Outstanding | Contractual Life | Exercisable | ||||||||
| $ | 1.10 | 1,342,500 | 1 Month | 1,342,500 | |||||||
| $ | 1.00 | 2,000,004 | 7 years | 2,000,004 | |||||||
| Industry | For the year ending December 31, | |||||||
| 2013 | 2012 | |||||||
| Staffing | $ | 80,780 | $ | 69,773 | ||||
| Transportation | 627,095 | 782,058 | ||||||
| Service | 1,365,379 | 1,426,583 | ||||||
| Other | 20,357 | 105,483 | ||||||
| Manufacturing | 173,844 | - | ||||||
| Apparel | 96,673 | 142,729 | ||||||
| $ | 2,364,128 | $ | 2,526,626 | |||||
| Percentage of Accounts Receivable | Percentage of Revenues for | |||||||
| Portfolio | the Twelve Months | |||||||
| As of | Ended | |||||||
| Entity | December 31, 2013 | December 31, 2013 | ||||||
| Trucking company in MI | 8.7 | % | 4.3 | % | ||||
| Cable trenching utility in FL | 6.4 | % | 3.4 | % | ||||
| Importer in MI | 8.4 | % | 3.0 | % | ||||
| Aerospace servicer in NM | 6.2 | % | 3.7 | % | ||||
| Trucking Company in VA | 6.4 | % | 1.9 | % | ||||
| 36.1 | % | 16.3 | % | |||||
| For the year ending December 31, | ||||||||
| 2013 | 2012 | |||||||
| To a financial institution | $ | 369,487 | $ | 446,922 | ||||
| To a related party | - | 15,123 | ||||||
| Total | $ | 369,487 | $ | 462,045 | ||||
Reconciliation of the utilization of net operating loss carryforwards, therefore no current taxes were incurred.
| 2013 | 2012 | |||||||
| Federal tax expense at statutory rate | $ | (235,000 | ) | $ | 146,000 | |||
| State tax expense | (10,000 | ) | 15,000 | |||||
| Permanent items | 5,000 | − | ||||||
| Change in valuation allowance | (240,000 | ) | (161,000 | ) | ||||
| Income taxes | $ | - | $ | - | ||||
| 2014 | 2013 | |||||||
| Federal tax benefit at statutory rate | $ | (1,657,000 | ) | $ | (235,000 | ) | ||
| State tax benefit, net of federal tax | (61,000 | ) | (10,000 | ) | ||||
| Permanent differences | (38,000 | ) | 5,000 | |||||
| Increase in valuation allowance | 1,298,000 | 240,000 | ||||||
| Benefit for income taxes | $ | (458,000 | ) | $ | - | |||
Tax affected components of deferred tax bases of assets and liabilities resulted in deferred taxes. Deferred tax assetsliabilities at December 31, 20132014 and 20122013 were as follows; certain prior year numbers have been reclassified to conform to current year presentation.
| 2013 | 2012 | |||||||
| Equity based compensation | $ | 102,000 | $ | 91,000 | ||||
| Allowance for doubtful accounts | 1,000 | 31,000 | ||||||
| Net operating loss carry-forwards | 1,660,000 | 1,385,000 | ||||||
| Gross deferred tax assets | 1,763,000 | 1,507,000 | ||||||
| Fixed assets and intangible basis difference | (19,000 | ) | (3,000 | ) | ||||
| 1,744,000 | 1,504,000 | |||||||
| Valuation allowance | (1,744,000 | ) | (1,504,000 | ) | ||||
| Income taxes | $ | - | $ | - | ||||
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Equity based compensation | $ | 229,000 | $ | 102,000 | ||||
| Allowance for doubtful accounts | 552,000 | 1,000 | ||||||
| Lease merchandise | 582,000 | - | ||||||
| Net operating loss carry-forwards | 1,680,000 | 1,660,000 | ||||||
| Gross deferred tax assets | 3,043,000 | 1,763,000 | ||||||
| Valuation allowance | (3,042,000 | ) | (1,744,000 | ) | ||||
| Net deferred tax assets | 1,000 | 19,000 | ||||||
| Deferred tax liabilities: | ||||||||
| Fixed assets | (1,000 | ) | (19,000 | ) | ||||
| $ | - | $ | - | |||||
Based on consideration of the available evidence including historical losses which must be treated as substantial negative evidence and the potential of future taxable income, a $1,744,000 valuation allowance has been recognized to adjustoffset deferred tax assets, and liabilitiesas management was unable to the amountconclude that realization of net operating losses that are expected to be realized. If realized, thedeferred tax benefit for this item will reduce current tax expense for that period as it did for the year endedassets were more likely than not.
As of December 31, 2012.
| Amount | Expiration | |||||||
| Federal | $ | 4,313,000 | 2022 - 2025 | |||||
| State | $ | 1,669,000 | 2022 - 2025 | |||||
Section 382 of the Internal Revenue Code imposes a limitation on a corporation's ability to utilize net operating loss carryforwards (“NOLs”) if it experiences an “ownership change.” In general, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If such a change were to occur, certain NOLs available to be used could be disallowed and an annual limitation on utilization of other NOLs would occur.
The Company files tax returns in the U.S. federal jurisdiction and various states. At December 31, 2013,2014, federal tax returns remained open for Internal Revenue Service review for tax years after 2010, while state tax returns remain open for review by state taxing authorities for tax years after 2009. There were no federal or state income tax audits being conducted as of December 31, 2013.
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Assets: | ||||||||
| FlexShopper | $ | 718,896 | $ | − | ||||
| Anchor | 5,761,499 | 7,919,985 | ||||||
| Total | $ | 6,480,395 | $ | 7,919,985 | ||||
| Revenues: | ||||||||
| FlexShopper | $ | 119 | $ | − | ||||
| Anchor | 2,364,009 | 2,526,626 | ||||||
| Total | $ | 2,364,128 | $ | 2,526,626 | ||||
| Net (loss) income: | ||||||||
| FlexShopper | $ | (655,474 | ) | $ | − | |||
| Anchor | (38,207 | ) | 378,859 | |||||
| Total | $ | (693,681 | ) | $ | 378,859 |
10. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
On August 1, 2013, FlexShopper entered into a 39 month lease for additionalof office space in Boca Raton, FL to accommodate the FlexShopper business and its additional employees. Theproviding for monthly rent wasof approximately $6,800. This lease agreement was amended in January 2014 to reflect a 63 month term for a larger suite in an adjoining building. Upon commencement the monthly base rent including operating expenses for the first year will be approximately $15,800approximated $9,600 with annual three percent increases throughout the lease term.
The rental expense for the years ended December 31, 20132014 and 20122013 was approximately $58,921$163,500 and $46,571,$58,800, respectively. TheAt December 31, 2014, the future minimum annual lease payments are approximately as follows:
| 2014 | $ | 86,900 | ||
| 2015 | 117,600 | |||
| 2016 | 122,000 | |||
| 2017 | 126,000 | |||
| 2018 | 129,600 | |||
| Thereafter | 77,200 | |||
| $ | 659,300 | |||
| 2015 | $ | 118,000 | ||||
| 2016 | 121,500 | |||||
| 2017 | 125,300 | |||||
| 2018 | 129,000 | |||||
| 2019 | 77,000 | |||||
| $ | 570,800 |
Contingencies
On October 22, 2010, Anchor filed a complaint in the Superior Court of Stamford/Norwalk, Connecticut against the Administrators of the Estate of David Harvey (“Harvey”) to recoup a credit loss incurred by the Company’s former subsidiary, Brookridge Funding Services, LLC. Harvey was the owner of a Company that caused the credit loss and the Company is pursuing its rights under the personal guarantee that Harvey provided. The Complaint is demanding principal of approximately $485,000 plus interest and damages.
11. EMPLOYMENT AGREEMENTS
On January 31, 2007, the Company entered into an employment agreement to retain the services of Brad Bernstein who currently serves as Chief Executive Officer and President. For fiscal 2013 and fiscal 2014, Mr. Bernstein received an annual salary of $240,000.Mr. Bernstein’s employment agreement currently expires on January 31, 2016 and will automatically renew for an additional one year unless either party notifies the other, in writing, at least 60 days prior to the expiration date of the term of such party’s intention not to renew the agreement. In the event Mr. Bernstein's services are terminated due to death or disability, Mr. Bernstein would receive six months’ severance pay. In the event Mr. Bernstein is terminated without cause, Mr. Bernstein would receive 12 months’ severance pay.
Morry F. Rubin, Chairman of the Board and former Chief Executive Officer had also entered into an employment agreement on January 31, 2007. Pursuant to the employment agreement, Mr. Rubin received compensation of $85,307 and $98,538 for 2013 and 2014, respectively. On December 29, 2014, Mr. Rubin resigned as Chief Executive Officer of our Company and agreed to terminate his employment agreement. Mr. Rubin is continuing to serve as Chairman of the Board of the Company and we have agreed to compensate Mr. Rubin by paying 50% of the health insurance premiums for him and his family under our health insurance plan.
12. FOURTH QUARTER ADJUSTMENT
In the fourth quarter of 2014, the Company capitalized $1,017,104 of website and internal use software costs and correspondingly recognized $103,222 of accumulated amortization, or a net adjustment of $913,822 of which $627,646 related to amounts expensed in prior quarters of 2014 as follows:
| Quarter Ended | Amount | |||||
| March 31 | $ | 158,529 | ||||
| June 30 | 233,751 | |||||
| September 30 | 235,366 | |||||
| $ | 627,646 |
The effects of such adjustments on net loss for the prior quarters follows (unaudited):
| Quarter Ended: | ||||||||||||
| Net loss: | March 31, | June 30, | September 30, | |||||||||
| As previously reported | $ | (1,201,375 | ) | $ | (1,244,069 | ) | $ | (1,364,623 | ) | |||
| Adjustment | 158,529 | 233,751 | 235,366 | |||||||||
| As adjusted | $ | (1,042,846 | ) | $ | (1,010,318 | ) | $ | (1,129,257 | ) | |||
| Basic and diluted loss per common share: | ||||||||||||
| As previously reported | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.04 | ) | |||
| Adjustment | 0.01 | 0.01 | 0.01 | |||||||||
| As adjusted | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.03 | ) | |||
13. SUBSEQUENT EVENTS
On March 6, 2014, Anchor signed a non-binding letter of intent with a financial institution to sell its factoring business. There can be no assurances given that the Company will sell its Anchor factoring business on terms satisfactory to the Company, if at all.
In connection with entering into the Credit Agreement, on March 6, 2015, FlexShopper raised approximately $8.6 million in net proceeds through direct sales of 17.0 million shares of FlexShopper common stock, (the “Shares”), to certain affiliates of the Lender and other accredited investors (the “Investors”) for a purchase price of $0.55 per share.
As a result of the transactions described in the preceding paragraph, each share of Series 1 Convertible Preferred Stock is for $500,000now convertible into 6.33 shares of the Company’s common stock or a total of 2,166,246 common shares. as a result of the anti-dilution rights of the Preferred Stock.
On March 26, 2015, our Lender pursuant to its rights under the transaction documents executed on March 6, 2015, nominated as a board member and earns interest (payable monthly) at 10% per annum.the board approved effective April 1, 2015 the election of Philip Gitler. On the same date, the board approved a resolution, subject to stockholder approval and a filing of an amendment to the Company’s Certificate of Incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of Common Stock from 65 million shares to 100 million shares. Also, the board approved a 2015 Stock Option Plan identical to the existing 2007 Plan with 4,000,000 shares of its Common Stock that may be issued under the Plan. The Promissory Notes are2015 Plan is subject to assist FlexShopperapproval of an increase in purchasing merchandise for lease to support FlexShopper’s growth.the number of shares of authorized Common Stock described above and stockholder approval within 12 months.
| F-17 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9.A Controls and Procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable e-tail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (1992). Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2013.2014. There were no changes in our internal control over financial reporting during the quarter ended December 31, 20132014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our independent auditors have not audited and are not required to audit this assessment of our internal control over financial reporting for the fiscal year ended December 31, 2013.
Item 9.B. Other Information.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The names, ages and principal occupations of the Company's presentFlexShopper's executive officers and directors as of the date of this Form 10-K are listed below.
Name | Age | Position | |||
| Brad Bernstein | Chief Executive Officer, President, | ||||
| Director | |||||
| Carl Pradelli | 48 | Director | |||
| Frank Matasavage | 59 | Chief Financial Officer | |||
| Philip Gitler (1) | 41 | Director |
_________________
| (1) |
Effective April 1, 2015, the Board of Directors consists of five members. The terms of all officersdirectors expire at the annual meeting of directors following the annual stockholders meeting. Officers serve at the pleasure of the Board and may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time, subject to their rights under employment agreements.
Biographical Informationof Officers and Directors
Morry F. Rubin
has been a director ofBrad Bernstein
Carl Pradellihas been a director since July 2014. Mr. Pradelli has been President, CEO, co-founder and a director since 2002 of Nature City LLC. Nature City is a developer and direct to consumer marketer of premium dietary supplements. Nature City principally markets via direct mail and e-commerce channels. From 2002 through 2011, Mr. Pradelli served as President, CEO and co-founder of Advanced Body Care Solutions, a company which marketed health and beauty products using direct response television. Previously, he was employed by Donaldson, Lufkin & Jenrette, which was acquired in 2000 by Credit Suisse First Boston at which time he was serving as a Senior Vice President. Mr. Pradelli has served as a director of Duane Reade, Inc. and on its compensation and governance committees. Mr. Pradelli received his MBA from Wharton Business School at the University of Pennsylvania and his BS in Finance and Accounting from Stern School of Business at New York University. Mr. Pradelli brings to the Board his financial and business experience as well as serving as a director of Duane Reade and as a member of its board committees, making him an ideal candidate to serve as an independent director and as a financial expert on our Board of Directors.
T. Scott King has been a director since November 2014. From April 2014 through September 2014, Mr. King served as Interim Chief Executive Officer of Gordmans Stores, Inc. (traded on NASDAQ under the symbol GMAN), an Omaha based apparel and home décor retailer with 99 stores. Mr. King has also served as Gordmans Chairman of the Board. From 2003 through 2014, Mr. King served as Senior Managing Director of Operations of Sun Capital Partners, a Boca Raton based private equity firm with an excess of $10 billion under management. From 1999 through 2003, he served as President and Chief Executive Officer of Waterlink Inc. (traded on the NASDAQ under the symbol WLK), an Ohio based, international provider of water and waste water solutions. Prior to that time he was employed for approximately 20 years with Sherwin-Williams Company, an international manufacturer and retailer of paint and coatings. Mr. King served on the Board of Directors of The Limited, ShopKo, Furniture Brands Inc. and Boston Market. He also serves on the Board of Advisors of State University of NY at Oswego, School of Business, where he received his B.A. Degree in Business. Mr.King brings to the Board his financial and business experience as well as serving as a director on various Boards of Directors of public entities, making him an ideal candidate to serve as an independent director and as a financial expert on our Board of Directors.
Frank Matasavage, has been Chief Financial Officer of the Company since June 2012.December 2014 and previously served as the Registrant’s Controller since 2014. Mr. Healy was added to our Board as he is an experienced media executive specializing in corporate finance, capital raising, investor relationsMatasavage previously worked at FriendFinder Networks Inc. a publically traded internet technology and corporate governance.entertainment company from 2004 thru 2013. Mr. Healy currently servesMatasavage has 30 years’ experience as a Senior Adviser to Sonenshine Partners an investment bank providing strategicChief Financial Officer and financial advisory services in New York City. Previously, Mr. Healy served as CEO of Connexiti LLC, a supply-chain-centric intelligence database platform; Principal and Managing Director at Frank N. Magid Associates; Vice President, Corporate Development at Hollinger International Inc.; and Vice President of Media Private Banking at The Chase Manhattan Bank. He serves as a Trustee of Kenyon College and Board Chair of The Kenyon Review. Mr. Healy graduated from Kenyon College. He is an independent director.
Philip Gitler,will becomea director of Technology and earned an MBA in Finance from Georgia State University. Hethe Company April 1, 2015. Mr. Gitler is a registered Professional Engineermanaging director at Waterfall Asset Management, LLC, an investment adviser focused on structured credit and whole loans. Prior to joining Waterfall in Georgia.
Key Employees
In July 2013, the CompanyFlexShopper hired Justin Metzl as Vice President of eCommerce.eCommerce, a non-executive officer position. Mr. Metzl leads overall eCommerce strategy including marketing, user experience, product management, web analytics, search engine marketing, e-mail marketing, mobile and social media. Prior to joining FlexShopper, Mr. Metzl was Director of User Experience I eCommerce for 5five years at TigerDirect.com (Ranked Internet Retailer Top-25 largest eCommerce sites). He managed, defined and designed the online user experience, eCommerce strategy, alb/multivariate testing strategy, personalization and product recommendations, mobile strategy and socialmedia initiatives. Before TigerDirect,Mr. Metzl was Director of eCommerce for 7seven years at Alienware (Dell(a Dell Subsidiary). Mr. Metzl brings over 12 years of web & eCommerce experience in B2C &and B2B to drive revenue, improve conversion and satisfy the overall customer experience. Mr. Metzl attended Virginia Polytechnic Institute and State University and majored in Management Science and Information Technology.
Corporate Governance
Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the General Corporation Law of the State of Delaware and our By-Laws. Members of the Board are kept informed of our business through discussions with the Chief Executive Officer and other key members of management, by reviewing materials provided to them by management.
We continue to review our corporate governance policies and practices by comparing our policies and practices with those suggested by various groups or authorities active in evaluating or setting best practices for corporate governance of public companies. Based on this review, we have adopted, and will continue to adopt, changes that the Board believes are the appropriate corporate governance policies and practices for our Company. We have adopted changes and will continue to adopt changes, as appropriate, to comply with the Sarbanes-Oxley Act of 2002 and subsequent rule changes made by the SEC and any applicable securities exchange.
DirectorQualificationsand Diversity
The board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded companies or shall have achieved a high level of distinction in their chosen fields. The board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in the finance and capital market industries.
Risk Oversight
Enterprise risks are identified and prioritized by management and each prioritized risk is assigned to the full board for oversight. These risks include, without limitation, the following:
| • | risks and exposures associated with strategic, financial and execution risks and other current matters that may present material risk to our operations, plans, prospects or reputation; |
| • | risks and exposures associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines and credit and liquidity matters; |
| • | risks and exposures relating to corporate governance; and management and director succession planning; and |
| • | risks and exposures associated with leadership assessment, and compensation programs and arrangements, including incentive plans. |
Board Leadership Structure
We currently have a Chairman of the Board who presides at all meetings of the Board. The Chairman is appointed on an annual basis by at least a majority vote of the remaining directors. Currently, the offices of Chairman of the Board and Chief Executive Officer are not entirely separated, as our Chief Executive officer is also Co-Chairman of the Board. The Companyseparated. FlexShopper has no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer. The Board believes that ultimately the separation of the offices of the Chairman of the Board and Chief Executive Officer is likely to be part of the succession planning process and that it is in the best interests of the company to make this determination from time to time.
Limitation of Directors’ Liability and Indemnification
Our directors are not personally liable to us or to any of our stockholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director’s duty of loyalty to us or our stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law of the State of Delaware or any other statute of the State of Delaware is amended to authorize the further elimination or limitation of the liability of our directors, then the liability of our directors will be limited to the fullest extent permitted by the statutes of the State of Delaware, as so amended, and such elimination or limitation of liability shall be in addition to, and not in lieu of, the provided limitation on the liability of a director. To the maximum extent permitted by law, we fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was our director or officer, or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. To the extent permitted by law, we may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was our employee or agent, or is or was serving at our request as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. We will, if so requested by a director or officer, advance expenses (including attorneys’ fees) incurred by such director or officer in advance of the final disposition of such action, suit or proceeding upon the receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such director or officer is not entitled to indemnification. We may advance expenses (including attorneys’ fees) incurred by an employee or agent in advance of the final disposition of such action, suit or proceeding upon such terms and conditions, if any, as our Board deems appropriate.
Independent Directors
Currently, T. Scott King and Carl Pradelli are each deemed by management to be an “independent director” and “Financial Expert” of FlexShopper. Philip Gitler, whose appointment to the Companyboard is effective April 1, 2015, is a nominee to the board through the Company’s transaction documents with our institutional lender as described under “Item 13.” Mr. Gitler would have been considered an independent director, except for his relationship and affiliation with our institutional lender.
Lack of Committees
As of the date of this Form 10-K, FlexShopper has no audit, compensation, corporate governance, nominating or other committee of the Board of Directors.
Code of Ethics
We have in place a Code of Ethics for Senior Financial Officers (the "Code of Ethics") that applies to all of our executive officers. The Sarbanes-Oxley Act of 2002, as amended, required each corporation to have an audit committee consisting solely of independent directors and to identify the independent directors who are considered to be a “financial expert.” Under the National Association of Securities Dealers Automated Quotations definition, an “independent director means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $120,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of Anchor has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of Anchor’s outside auditor.
• honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
• full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, promote:
• compliance with applicable governmental laws, rules and regulations; • the |
• accountability for adherence to the Code of Ethics.
We intend to disclose any amendments to or waivers of a codeprovision of ethics and none is anticipated until an audit committee is appointed to oversee its anticipated provisions.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the “Commission”). Officers, directors and greater than ten percent stockholders are required by the Commission's regulations to furnish us with copies of all Section 16(a) forms they file. During fiscal year 2013,2014, none of our officers, directors or 10% or greater stockholders are believed to have filed any forms late to the best of our knowledge.
Item 11. Executive Compensation.
The following table sets forth the overall compensation earned over the fiscal years ended December 31, 20132014 and 20122013 by (1) each person who served as the principal executive officer of the CompanyFlexShopper or its subsidiarysubsidiaries during fiscal year 2013;2014; (2) our most highly compensated (up to a maximum of two) executive officers as of December 31, 20132014 with compensation during fiscal year ended 20132014 of $100,000 or more; and (3) those two individuals, if any, who would have otherwise been in included in section (2) above but for the fact that they were not serving as an executive of us as of December 31, 2013.
| Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Options Awards ($)(1) | Non-Equity Incentive Plan Compensation ($) | Non-qualified Deferred Compensation Earnings ($) | All Other Compen- sation ($) (2)(3) | Total ($) | ||||||||||||||||||||||||||||
| Morry F. Rubin | 2014 | $ | 86,538 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -- | $ | 12,000 | $ | 98,538 | |||||||||||||||||||
| Former CEO(4) | 2013 | $ | 67,308 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 18,000 | $ | 85,308 | |||||||||||||||||||
| Brad Bernstein | 2014 | $ | 240,000 | $ | -0- | $ | -0- | $ | 103,250 | $ | -0- | $ | -0- | $ | 12,000 | $ | 343,250 | |||||||||||||||||||
| CEO and President | 2013 | $ | 240,000 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 12,000 | $ | 252,000 | |||||||||||||||||||
| Frank Matasavage | 2014 | $ | 120,462 | $ | -- | $ | -- | $ | 12,655 | $ | -- | $ | -- | $ | -- | $ | 133,117 | |||||||||||||||||||
| CFO | 2013 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- |
____________________
| (1) | Topic 718 requires |
(2) Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from FlexShopper except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, FlexShopper relating to life insurance for the benefit of the named executive officer; and (vii) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column.
(3) Includes compensation for service as a director described under Director Compensation, below.
(4) Does not include monies paid to Mr. Rubin on an investment in the CompanyFlexShopper as described under "Item 13".
For a description of the material terms of each named executive officers’ employment agreement, including the terms of any contract, agreement, plan or other arrangement that provides for any payment to a named executive officer in connection with his or her resignation, retirement or other termination, or a change in control of the company seeFlexShopper. See section below entitled “Employment Agreements.”
No outstanding common share purchase option or other equity-based award granted to or held by any named executive officer in 2013the past two fiscal years were repriced or otherwise materially modified, including extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined, nor was there any waiver or modification of any specified performance target, goal or condition to payout.
Executive Officer Outstanding Equity Awards At Fiscal Year-End
The following table provides certain information concerning any common share purchase options, stock awards or equity incentive plan awards held by each of our named executive officers that were outstanding, exercisable and/or vested as of December 31, 2013.
| Option Awards | Stock Awards | ||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options(#) Exercisable | Number of Securities Underlying Unexercised Options(#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value Of Unearned Shares, Units Or Other Rights That Have Not Vested | ||||||||||||||||||||||||
| Morry F. Rubin | 650,000 | - 0 - | -0- | 1.25 | 01/31/2017 | -0- | N/A | -0- | N/A | ||||||||||||||||||||||||
| Morry F. Rubin | 250,000 | - 0 - | -0- | 0.62 | 03/23/2019 | -0- | N/A | -0- | N/A | ||||||||||||||||||||||||
| Morry F. Rubin | 250,000 | - 0 - | -0- | 0.17 | 03/20/2022 | -0- | N/A | -0- | N/A | ||||||||||||||||||||||||
| Brad Bernstein | 950,000 | - 0 - | -0- | 1.25 | 01/31/2017 | -0- | N/A | -0- | N/A | ||||||||||||||||||||||||
| Brad Bernstein | 250,000 | - 0 - | -0- | 0.62 | 03/23/2019 | -0- | N/A | -0- | N/A | ||||||||||||||||||||||||
| Brad Bernstein | 250,000 | - 0 - | -0- | 0.17 | 03/20/2022 | -0- | N/A | -0- | N/A | ||||||||||||||||||||||||
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options(#) Exercisable | Number of Securities Underlying Unexercised Options(#) Unexercis-able | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock that have not Vested (#) | Market Value of Shares or Units of Stock that have not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested | Equity Incentive Plan Awards: Market or Payout Value of un-earned Shares, Units or Other Rights that have not Vested | |||||||||||||||||||||||
| Morry F. Rubin | 650,000 | -0- | -0- | 1.25 | 01/31/2017 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Morry F. Rubin | 250,000 | -0- | -0- | 0.62 | 03/23/2019 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Morry F. Rubin | 250,000 | -0- | -0- | 0.17 | 03/20/2022 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Brad Bernstein | 950,000 | -0- | -0- | 1.25 | 01/31/2017 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Brad Bernstein | 250,000 | -0- | -0- | 0.62 | 03/23/2019 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Brad Bernstein | 250,000 | -0- | -0- | 0.17 | 03/20/2022 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Brad Bernstein | 250,000 | -0- | -0- | 0.70 | 03/24/2024 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Frank Matasavage | -0- | 25,000 | -0- | .75 | 01/20/2024 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
| Frank Matasavage | 3,333 | 6,667 | -0- | .70 | 12/29/2024 | -0- | N/A | -0- | N/A | |||||||||||||||||||||||
Employment Agreements
On January 31, 2007, we entered into an employment agreement with Morry F. Rubin (“M. Rubin”) to retain his services as Co-chairman and Chief Executive Officer. We also entered into an employment agreement to retain the services of Brad Bernstein (“Bernstein”) as President. Mr. Bernstein currently serves as Chief Executive Officer. FlexShopper pays Mr. Bernstein a fixed base salary $240,000 during each year of his Employment Term. The Board may periodically review Mr. Bernstein’s Base Salary and may determine to increase (but not decrease) the Base Salary, in accordance with such policies as FlexShopper may hereafter adopt from time to time, if it deems appropriate. The following summarizes the employment agreementsagreement of M. RubinMr. Bernstein.
Termination of Employment.
Mr. Bernstein’s employment with the CompanyFlexShopper may be terminated by mutual agreement. The following description summarizes thehis severance pay (exclusive of base salary, car allowances and benefits due up to the date of termination), if any, of each Executive in the event of termination (other than by mutual agreement) and the treatment of each Executive’shis options:
Termination for Cause
. In the event of any termination for cause (as defined in the agreement),Termination for Disability or Death
. In the event of termination for disability (as defined in the agreement) or death,Termination without Cause
.Voluntary Resignation
.Option Grants.
Mr. Bernstein are eachis eligible to receive stock options and other compensation as determined at the discretion of the board. See “Executive Officer Outstanding Equity Awards at Fiscal Year-End”Awards” above for a description of outstanding options granted to Messrs. M.Mr. Bernstein.
Termination of Employment Agreement with Morry F. Rubin
On December 29, 2014, Mr. Morry F. Rubin resigned as Chief Executive Officer of our company and Bernsteinagreed to terminate his employment agreement. Mr. Rubin is continuing to serve as Chairman of December 31, 2013.
Review of Risks Arising from Compensation Policies and Practices
We have reviewed our compensation policies and practices for all employees and concluded that any risks arising from our policies and practices are not reasonably likely to have a material adverse effect on the Company.
DIRECTOR COMPENSATION
Cash Fees and Options
As of the Companydate of this Form 10-K, FlexShopper has no audit, compensation, corporate governance, nominating or other committee of the Board of Directors, although it intends to establish an audit, compensation and corporate governance committee in the near future. The chairman of each committee that is formed by us at a later date will be entitled to an annual fee of $6,500 and each non-executive director will receive an annual fee of $6,500 as a member of the Board, a fee of $1,000 per Board or Committee meeting (or consent in lieu of a meeting), and an activity fee of $1,000 per day for services rendered by the Board member. George Rubin, a former director until December 29, 2014 is receiving the samereimbursement of health and dental insurance benefits as those provided to our executive officers to the extent permitted by the rulesfor him and regulations applicable thereto and an additional medical reimbursement of up to $25,000 per annum.his wife through December 31, 2015. Members of the Board of Directors are eligible to participate under one or more of our company’s stock option plan(s). On January 31, 2007, we established a stock option plan and granted non-statutory stock options to purchase 950,000, shares and 650,000 shares to Brad Bernstein and Morry F. Rubin, respectively, exercisable at $1.25 per share. These options have a term of ten years and vest one-third on the date of grant, one-third on February 29, 2008 and one-third on February 28, 2009. On March 23, 2009,July 25, 2014, we granted non-statutory stock options to purchase 250,000 shares to each of Rubin and Bernstein, exercisable at $0.62 per share; these options have a term of 10 years and vested on the date of grant. On March 20, 2012, we granted non-statutory stock options to purchase 250,000 shares to each of Rubin and Bernstein, exercisable at $0.17 per share; these options have a term of 10 years and vested. On June 14, 2012, we granted Paul B. HealyCarl Pradelli options to purchase 180,000 shares, exercisable at $0.25$.89 per share from the vesting date through June 14, 2022,July 25, 2024, with one-third vesting on June 14, 2012, oneJuly 25, 2014, one-third vesting on July 25, 2015 and a third vesting on June 14, 2013 andJuly 25, 2016. In November 2014, we granted T. Scott King options to purchase 180,000 shares, exercisable at $.70 per share from the remainingvesting date through November 13, 2024, with one-third vesting on June 14, 2014.November 13, 2014, one-third vesting on November 13, 2015 and a third vesting on November 13, 2016. In the event that a director is no longer serving on the Board of Directors, the director has 90 days to exercise all vested options. Equity incentive awards and cash payments to directors will be determined in the sole discretion of the Board and/or compensation committee of the Board at such times and in such amounts as the Board or a committee thereof determines to make such awards.
Travel Expenses
All directors shall be reimbursed for their reasonable out of pocket expenses associated with attending the meetings.
2014 Director Compensation
The following table shows the overall compensation earned for the 20132014 fiscal year with respect to each non-employee and non-executive directorsdirector of the CompanyFlexShopper as of December 31, 2013.
| DIRECTOR COMPENSATION | ||||||||||||||||||||||||||||
Name and Principal Position | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Option Awards ($) (1) | Non-Equity Incentive Plan Compensation ($) (2) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) (3) | Total ($) | |||||||||||||||||||||
| Paul B. Healy, Director | $ | 10,500 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 10,500 | ||||||||||||||
| George Rubin, Director (4) | $ | 10,500 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 6,822 | $ | 17,322 | ||||||||||||||
DIRECTOR COMPENSATION
| Name and Principal Position | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Option Awards ($)(1) | Non-Equity Incentive Plan Compensa-tion ($) | Nonqualified Deferred Compensa-tion Earnings ($) | All Other Compensa-tion ($) (2) | Total ($) | |||||||||||||||||||||||||
| Paul B. Healy, Former Director | $ | 9,500 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 9,500 | ||||||||||||||||||
| George Rubin, Former Director (3) | $ | 9,500 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 7,400 | $ | 16,900 | ||||||||||||||||||
| Carl Pradelli, Director | $ | 3,700 | $ | 54,540 | $ | -0- | -- | -- | -- | $ | 58,240- | |||||||||||||||||||||
| T. Scott King Director | $ | 2,600 | $ | 45,360 | $ | -0- | -- | -- | -- | $ | 47,960 | |||||||||||||||||||||
| (1) | Topic 718 requires |
| (2) |
| Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from |
| All other compensation includes the payment of health insurance which is not provided to other non-employee directors. Mr. Rubin's compensation excludes monies earned as an investor. See |
Indemnification; Director and Officer Liability Insurance.
FlexShopper has agreed to indemnify (and advance the costs of defense of) each director (and his legal representatives) to the fullest extent permitted by the laws of the state in which the CompanyFlexShopper is incorporated, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and Bylaws of the Company,FlexShopper, whichever affords greater protection to each director, and both during and after termination (for any reason). The CompanyFlexShopper shall cause each director to be covered under a directors and officers' liability insurance policy for his acts (or non-acts) as an officer or director of the CompanyFlexShopper or any of its affiliates. Such policy shall be maintained by the CompanyFlexShopper at its expense in an amount of at least $5 million during the term each director serves the CompanyFlexShopper (including the time period of coverage after each director’s service terminates for any reason whatsoever).
2007 Omnibus Equity Compensation Plan
On January 31, 2007, the Board adopted our 2007 Omnibus Equity Compensation Plan (the “Plan”), with 2,100,000 common shares authorized for issuance under the Plan. In October 2009, the Company'sFlexShopper's stockholders approved an increase in the number of shares covered by the Plan to 4,200,000 shares.
| 2007 Omnibus Equity Compensation Plan | ||||||||
| Name and Position | Dollar Value ($) | Number of Options | ||||||
| (1) | ||||||||
| Morry R. Rubin, Chief Executive Officer (2) | 115,250 | 1,150,000 | ||||||
| Brad Bernstein, President (2) | 115,250 | 1,450,000 | ||||||
| Executive Group (two persons) (2) | 230,500 | 2,600,000 | ||||||
| Non-Executive Director Group (one person) (2) | 68,400 | 180,000 | ||||||
| Non-Executive Officer Employee Group | 17,110 | 225,000 | ||||||
| 2007 Omnibus Equity Compensation Plan | ||||||||
| Name and Position | Number of Options | Dollar Value (1) | ||||||
| Morry F. Rubin, Former Chief Executive Officer | 1,150,000 | (1) | $ | 302,500 | ||||
| Brad Bernstein, Chief Executive Officer | 1,700,000 | (1) | $ | 352,500 | ||||
| Frank Matasavage | 35,000 | $ | 1,000 | |||||
| Executive Group (three persons) | 2,885,000 | (1) | $ | 656,000 | ||||
| Non-Executive Director Group (two persons) | 360,000 | (1) | $ | 21,600 | ||||
| Non-Executive Officer Employee Group | 510,000 | (1) | $ | 80,050 | ||||
| (1) | The dollar value of these options is based upon the fair market value of our |
The following is a summary of the material features of the Plan:
Shares Subject to the Plan
The maximum number of shares of common stockCommon Stock with respect to which awards may be made under the Plan is 4,200,000. In the event of any stock split, reverse stock split, stock dividend, recapitalization, reclassification or other similar event or transaction, the Compensation Committee will make such equitable adjustments to the number, kind and price of shares subject to outstanding grants and to the number of shares available for issuance under the Plan as it deems necessary or appropriate. Shares subject to forfeiture, cancelled or expired awards granted under the Plan will again become available for issuance under the Plan. In addition, shares surrendered in payment of any exercise price or in satisfaction of any withholding obligation arising in connection with an award granted under the Plan will again become available for issuance under the Plan.
Administration
A committee of two or more directors appointed by the Board will administer the Plan (the “Committee”); however, until the Committee is appointed, the Board administers the Plan. The Committee interprets the Plan, selects award recipients, determines the number of shares subject to each award and establishes the price, vesting and other terms of each award. While there are no predetermined performance formulas or measures or other specific criteria used to determine recipients of awards under the Plan, awards are based generally upon consideration of the grantee's position and responsibilities, the nature of services provided, the value of the services to us, the present and potential contribution of the grantee to our success, the anticipated number of years of service remaining and other factors which the Board or the Committee deems relevant.
| 31 |
Eligibility
Employees, directors, consultants and other service providers of our Company and its affiliates are eligible to participate in the Plan, provided; however, that only employees of our Company are eligible to receive incentive stock options. Other than consultants and other service providers, the number of currently eligible employees in the Plan is five. The maximum number of shares that are the subject of grants made under the Plan to any individual during any calendar year may not exceed 1,000,000 shares, subject to certain adjustments. A participant in the Plan may not accrue dividend equivalents during any calendar year in excess of $500,000.
Amendment and Termination of Plan
The Board may amend, alter or discontinue the Plan at any time; provided, however, that the Board may not amend the Plan without stockholder approval if such approval is required in order to comply with the Internal Revenue Code or applicable laws or to comply with applicable stock exchange requirements. The Plan will terminate on the day immediately preceding the tenth anniversary of the Plan’s effective date, unless the Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders.
Grants
Grants made under the Plan may consist of incentive stock options, non-qualified stock options, stock appreciation rights or “SARs”,“SARs,” stock awards, stock unit awards, dividend equivalents and other stock-based awards. Each grant is subject to the terms and conditions set forth in the Plan and to those other terms and conditions specified by the Committee and memorialized in a written grant agreement between our Company and grant recipient (the “Grant Instrument”).
Stock Options
The Plan permits the grant of incentive stock options (“ISOs”) to our employees and the employees of our subsidiaries. The Plan also provides for the grant of non-qualified stock options (“NQSOs”) to our employees, directors, and consultants and other individuals who perform services for us (as well as to employees, directors, consultants and service providers of our subsidiaries). The exercise price of any stock option granted under the Plan will be equal to or greater than the fair market value of such stock on the date the option is granted, provided, however, that the exercise price of any incentive stock options granted under the Plan to an employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of our stock or any parent or subsidiary of us, may not be less than 110% of the fair market value of our common stockCommon Stock on the date of grant. Generally, payment of the option price may be made (i) in cash, (ii) with the Committee’s consent, by approval of the Committee, by delivering shares of Company Stock owned by the Optionee (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price or by attestation (on a form prescribed by the Committee) to ownership of shares of Company Stock having a Fair Market Value on the date of exercise equal to the Exercise Price, (iii) through a broker in accordance with applicable laws, or (iv) with a combination of cash and shares. The participant must pay the option price and the amount of withholding tax due, if any, at the time of exercise. Shares of common stockCommon Stock will not be issued or transferred upon exercise of the option until the option price and the withholding obligation are fully paid.
Under the Plan, each option is exercisable at such time and to such extent as specified in the pertinent Grant Instrument between our Company and the option recipient. However, no option shall be exercisable with respect to any shares of common stockCommon Stock more than ten years after the date of grant of such award (except as otherwise determined by the Committee with respect to non-incentive options) and no incentive stock option that is granted to an employee, who at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of our Company, or any parent or subsidiary of ours, may be exercised more than five years from the date of grant. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members, or one or more trusts or other entities for the benefit of or owned by family members, consistent with the applicable securities laws, according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer.
Effects of Termination of Service with our Company
Generally, unless provided otherwise in the Grant Instrument, the right to exercise any option or SAR (described below) terminates ninety (90)90 days following termination of the participant’s relationship with the CompanyFlexShopper for reasons other than death, disability or termination for “cause” as defined in the Plan. If the participant’s relationship with us terminates due to death or disability, unless provided otherwise in the Grant Instrument, the right to exercise an option or SAR will terminate the earlier of one year following such termination or the original expiration date. If the participant’s relationship with us is terminated for “cause” any option or SAR not already exercised will automatically be forfeited as of the date such termination.
Stock Awards
We may issue awards of our common stockCommon Stock pursuant to the terms of the Plan. A stock award may be issued for consideration or for no consideration and may be subject to certain restrictions and risk of forfeiture (such as the completion of a period of service or attainment of a performance goal) as determined by the Committee and set forth in the Grant Instrument governing the stock award. If a participant’s employment terminates before the vesting condition is fulfilled, the shares will be forfeited. While the shares remain unvested, a participant may not sell, assign, transfer, pledge or otherwise dispose of the shares. Unless otherwise determined by the Committee, a stock award entitles the participant to all of the rights of a stockholder of our Company, including the right to vote the shares and the right to receive any dividends thereon.
Stock Units
The Plan provides for the grant of stock units to employees, non-employee directors, or consultants or other individuals who perform services for us, subject to any terms and conditions, including the fulfillment of specified performance goals or other conditions, as may be established by the Committee. Each stock unit represents one hypothetical share of common stockCommon Stock and the right of the grantee to receive an amount based on the value of a share of our common stock.Common Stock. Payments with respect to stock units may be made in cash or in shares of common stock,Common Stock, or in combination of the two as determined by the appointed committee.
Stock Appreciation Rights
The Plan also provides for the grant of SARs, either alone or in tandem with stock options. An SAR entitles its holder to a cash payment of the excess of the fair market value of our common stockCommon Stock on the date of exercise, over the fair market value of our common stockCommon Stock on the date of grant. An SAR issued in tandem with a stock option will have the same terms as the stock option. The terms of an SAR granted alone, without an option, will be established by the Committee, in the Grant Instrument governing the SAR.
Other Stock-Based Award
The Committee may grant other stock-based awards, other than those described herein, that are based on, measured by or payable in shares of common stockCommon Stock on such terms and conditions as the Committee may determine. Such awards may be subject to the achievement of performance goals or other conditions and may be payable in cash, shares of common stockCommon Stock or any combination of cash and shares of common stockCommon Stock as the Committee shall determine.
Dividend Equivalents
The Committee may grant dividend equivalents in connection with grants under the Plan. Dividend equivalents may be paid currently or accrued as contingent cash obligations and may be payable in cash or shares of common stock,Common Stock, and upon such terms as the appointed committee may establish, including the achievement of specific performance goals.
Change of Control of the Company
In the event of a Change of Control, as that term is defined in the Plan, of our Company, the Committee has discretion to, among other things, accelerate the vesting of outstanding grants, cashout outstanding grants or exchange outstanding grants for similar grants of a successor company. A Change of Control of our Company will be deemed to have taken place upon:
| • | the acquisition by any person of direct or indirect ownership of securities representing more than 50% of the voting power of our then outstanding stock; | |
| • | a consolidation or merger of our Company resulting in the stockholders of | |
| • | the sale of substantially all of our assets; or | |
| • | the liquidation or dissolution of our Company. |
2015 Omnibus Equity Compensation Plan
On March 26, 2015, the Board adopted the 2015 Omnibus Equity Compensation Plan, subject to stockholder approval of an increase in our authorized number of shares of Common Stock, to 100 million shares and stockholder approval of the 2015 Plan within one year of March 26, 2015. The number of shares under the Plan is 4 million shares.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
As of March 24, 2014,19, 2015, we have 21,148,86252,015,322 shares of Common Stock and 376,387342,219 shares of Series 1 Preferred Stock issued and outstanding. In this respect, each one share of Series 1 Preferred Stock has the voting rights of 5.7877 common shares, but is convertible into only 5.16.33 common shares. Accordingly, the 376,387342,219 shares of Series 1 Preferred Stock are convertible into 1,919,5742,166,246 shares of Common Stock with the equivalent voting rights of 2,178,4151,980,661 common shares. The following table sets forth information regarding the economic ownership of our company Common Stock by:
| each of our | ||
| all executive officers and directors as a group. |
Beneficial ownership is determined based on the rules and regulations of the Commission.SEC. A person has beneficial ownership of shares if the individual has the power to vote and/or dispose of shares. This power can be sole or shared, and direct or indirect. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stockCommon Stock subject to options held by that person are counted as outstanding in such cases where the option holder may exercise the options within 60 days of the date hereof. These shares, however, are not counted as outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the table below, each person named in the table has sole voting and dispositive power with respect to the shares set forth opposite that person’s name.
| Name of Beneficial Owner | Shares of Common Stock Beneficially Owned | % of Shares of Common Stock Beneficially Owned | ||||||
| Morry F. Rubin (1) | 6,071,340 | 26.5 | ||||||
| George Rubin (1) | 3,987,840 | 18.3 | ||||||
| Ilissa and Brad Bernstein (2) | 3,700,000, | 16.2 | ||||||
| Paul B. Healy (3) | 120,000 | * | ||||||
| All officers and directors as a group (four persons) (4) | 13,617,180 | 53.5 | ||||||
| Buechel Family Ltd Partnership (5) | 1,254,966 | 5.6 | ||||||
| Buechel Patient Care Research & Education Fund (5) | 1,254,966 | 5.6 | ||||||
| Marc Malaga (6) | 3,179,584 | 14.4 | ||||||
| Name and address of Beneficial Owner |
Shares of Common Stock Beneficially Owned | % of Shares of Common Stock Beneficially Owned | ||||||
| Morry F. Rubin (1) | 6,980,431 | 13.0 | ||||||
| George Rubin (1) | 4,896,931 | 9.3 | ||||||
| Ilissa and Brad Bernstein (2) | 3,700,000 | 6.9 | ||||||
| T. Scott King (3) | 60,000 | * | ||||||
| Carl Pradelli (4) | 247,500 | * | ||||||
| All officers and directors as a group (five persons) (5) | 15,622,862 | 27.7 | ||||||
| Buechel Family Ltd Partnership (6) | 1,644,095 | 3.1 | ||||||
| Buechel Patient Care Research & Education Fund (7) | 1,293,462 | 2.4 | ||||||
| Marc Malaga (8) | 3,263,408 | 6.1 | ||||||
Waterfall Asset Management, LLC (9) | 14,545,455 | 28.0 | ||||||
_________________
*Represents less than 1% of the outstanding shares.
| (1) | Morry Rubin’s beneficial ownership includes |
| (2) | Of the 3,700,000 shares beneficially owned by them, 2,000,000 common are owned by Ilissa Bernstein, Brad Bernstein’s wife. The remaining 1,700,000 shares represent vested options to purchase a like amount of shares of Common Stock granted to Brad Bernstein. | |
| (3) | Includes vested options to purchase |
| (4) | Includes |
| (5) | Includes 11,319,518 shares of Common Stock and all options and warrants | |
| (6) | Includes |
| (7) | Includes 1,092,725 shares of Common Stock and 31,712 Preferred shares convertible into 200,737 shares of Common Stock. The Buechel Patient Care Research & Education Fund is a 501(c)(3) organization, the principals of which are Drs. Frederick Buechel Sr. and Jr. and Mr. Mark Buechel. This education fund is being shown in the table since it may be deemed to be under common control of Dr. Frederick Buechel who is the general partner referenced in footnote (6) of the Buechel Family Ltd Partnership. The address for this investor is c/o Fordham Financial Management, Inc., 17 Battery Place South, Suite 643, New York, NY 10004. |
(8) | Includes 1,914,941 common shares, warrants to purchase 666,672 shares, options to purchase 250,000 shares and | |
| (9) | Waterfall Eden Master Fund, Ltd. owns 7,882,774 shares of Common Stock, or approximately 15.2% of the outstanding shares of Common Stock. Waterfall Delta Offshore Master Fund, LP owns 4,420,646 shares of Common Stock, or approximately 8.5% of the outstanding shares of Common Stock. Waterfall Delta GP, LLC, as general partner of Waterfall Delta Offshore Master Fund, LP, may be deemed to share beneficial ownership of the shares owned by Waterfall Delta Offshore Master Fund, LP. Waterfall Sandstone Fund, LP owns 2,242,035 shares of Common Stock, or approximately 4.3% of the outstanding shares of Common Stock. Waterfall Sandstone GP, LLC, as general partner of Waterfall Sandstone Fund, LP, may be deemed to share beneficial ownership of the shares owned by Waterfall Sandstone Fund, LP. Waterfall, as the investment adviser to the Waterfall Funds, and Messrs. Capasse and Ross, as members of Waterfall, may be deemed to share beneficial ownership of the 14,545,455 shares of Common Stock owned by the Waterfall Funds, or approximately 28.0% of the outstanding shares of Common Stock. Because of the relationships described above, the Reporting Persons may be deemed to constitute a “group” within the meaning of Rule 13d-5 under the Securities Exchange Act of 1934, as amended, and as such, each member of the group could be deemed to beneficially own, in the aggregate, all of the shares of Common Stock held by members of the group. The Reporting Persons do not admit that they constitute a group within the meaning of Rule 13d-5. Each of the Reporting Persons disclaims beneficial ownership of the shares of Common Stock referred to herein that such Reporting Person does not hold directly. Waterfall and Messrs. Capasse and Ross share the power to vote and direct the disposition of the shares owned by the Waterfall Funds. Waterfall Delta GP, LLC may be deemed to share the power to vote and direct the disposition of the shares owned by the Waterfall Delta Offshore Master Fund, LP, and Waterfall Sandstone GP, LLC may be deemed to share the power to vote and direct the disposition of the shares owned by Waterfall Sandstone Fund, LP.The address for each of the Waterfall associated companies is c/o Waterfall Management, LLC, 1140 Avenue of the Americas, 7th Floor, New York, NY 10036.This information has been obtained from a Schedule 13-D filed by Waterfall with the SEC on March 15, 2015. |
Securities Authorized for Issuance under Equity Compensation Plans.
The following summary information is as of December 31, 20132014 and relates to our 2007 Plan described elsewhere herein under “Item 1” pursuant to which we have granted options to purchase our common stock:
| (a) | (b) | (c) | ||||||||||
Plan category | Number of shares of common stock to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) | |||||||||
| Equity Compensation Plans | 3,015,000 | $ | 0.85 | 1,185,000 | ||||||||
| (a) | (b) | (c) | ||||||||||
| Plan category | Number of shares of Common Stock to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) | |||||||||
| Equity Compensation Plans covering 4,200,000 shares | 3,755,000 | $ | .87 | 445,000 | ||||||||
Item 13. Certain Relationships and Related Transactions and Director Independence.
Due to Institutional Lender/Personal Guarantees of Messrs. M. Rubin and Bernstein
On November 8, 2011, Anchor entered into a Rediscount Credit Facility with a Commercial Bankcommercial bank that was effective November 30, 2011 and replaced its prior credit facility. The facility was repaid and terminated with the sale of Anchor Assets between April and June, 2014. The maximum amount that cancould be borrowed under the facility iswas $10 million, and the Bank will advanceadvanced up to 80% of Anchor's advances to its clients. Anchor payspaid interest on advances monthly at the 90 Day Libor Rate plus 6.25% and various other monthly fees as defined in the agreement. The agreement requiresrequired that Anchor maintain at all times a ratio of debt to tangible net worth of no more than four to one (4:1). At December 31, 2012, the Company was in compliance with this covenant. The agreement containscontained customary representations and warranties, events of default and limitations, among other provisions. The agreement iswas collateralized by a first lien on all Anchors' assets. The agreement’s anniversary date is November 30, 2013 and automatically renews each year for an additional year provided that the Company has not provided 60 days’ notice to the Bank in advance of the anniversary date. The facility was renewed through November 30, 2014. This facility contains certain standard covenants, representations and warranties for loans of this type. In the event that we fail to comply with the covenant(s) and the lender does not waive such non-compliance, we could be in default of our credit facility, which could subject us to penalty rates of interest and accelerate the maturity of the outstanding balances in addition to other legal remedies, including foreclosure on collateral. The Company’sFlexShopper’s President and CEO havehad provided validity guarantees to the Bank. Anchor owed this financial institution $3,240,942 as of December 31, 2013.
Related Party Transactions prior to 2012
FlexShopper entered into a promissory Note for $1,000,000, with a shareholder and executive of the Company’s Form 10-K for its fiscal year endedCompany. The note is payable on demand. The note was funded in increments of $500,000 on December 31, 2011 for a description of related party transactions which occurred prior to fiscal year 2012.
2014 Private Placement Offering
From May 8, 2014 through October 2014, FlexShopper received gross proceeds of $6,501,101 from the sale of 11,820,187 shares offered through three co-placement agents in a private placement offering at an offering price of $.55 per share. The foregoing excludes the issuance at the final closing date of October 9, 2014 of seven year warrants to support FlexShopper’s growth.
In addition, pursuant to the terms of the private placement offering, George Rubin and Morry F. Rubin, officers, directors and founders of FlexShopper, each completed the funding of their $500,000 loan to FlexShopper and converted these loans into shares of FlexShopper’s Common Stock at the same offering price per share as that paid by investors in the offering. An aggregate of 1,818,182 shares of FlexShopper’s Common Stock were issued to the Rubins from the conversion of their notes totaling $1,000,000.
2015 Credit and Equity Financings
On March 6, 2015, FlexShopper, Inc. (“FlexShopper”), through a wholly-owned subsidiary (the “Borrower”), entered into two Promissory Notes totaling $400,000, onea credit agreement (the “Credit Agreement”) with Morry RubinWE 2014-1, LLC, an affiliate of Waterfall Asset Management, LLC (“Waterfall”), and certain other lenders thereunder from time to time (collectively, the “Lender”). The Borrower is permitted to borrow funds under the Credit Agreement based on the Borrower’s cash on hand and the other with a major shareholderAmortized Order Value of the company. Each Promissory Note wasBorrower’s Eligible Leases (as such terms are defined in the Credit Agreement) less certain deductions described in the Credit Agreement. Under the terms of the Credit Agreement, subject to the satisfaction of certain conditions, the Borrower may borrow up to $25,000,000 from the Lender for $200,000, had a 90 day term of two years. The borrowing term may be extended for an additional twelve months in the sole discretion of the Lender. The Credit Agreement contemplates that the Lender may provide additional debt financing to the Borrower, up to $100 million in total, under two uncommitted accordions following satisfaction of certain covenants and earnedother terms and conditions. The Lender will receive security interests in certain leases as collateral under the Credit Agreement. For the term of the Credit Agreement, FlexShopper and its subsidiaries may not incur additional indebtedness (other than certain indebtedness expressly permitted under the Credit Agreement) without the permission of the Lender. Waterfall and its affiliates will have a right of first refusal on certain subsequent FlexShopper transactions involving leases or other financial products during the term of the Credit Agreement and up to three months following the termination thereof.
Pursuant to the Credit Agreement, amounts borrowed by the Borrower will bear interest (payable monthly) at 15%the rate of LIBOR plus a mid-teen percent per annum. annum, and a small non-usage fee will be assessed on any undrawn amount if the facility is less than 80% drawn on average in any given measurement period commencing three months after the closing of the facility.
The Promissory NotesCredit Agreement includes customary events of default, including, among others, failures to make payment of principal and interest, breaches or defaults under the terms of the Credit Agreement and related agreements entered into with the Lender, breaches of representations, warranties or certifications made by or on behalf of the Borrower in the Credit Agreement and related documents (including certain financial and expense covenants), deficiencies in the borrowing base, certain judgments against the Borrower and bankruptcy events. If an event of default occurs and is continuing, the Lender may, among other things, terminate any remaining commitments available to the Borrower, declare all outstanding principal and interest immediately due and payable and enforce any and all liens created in connection with the Credit Agreement. In connection with the closing under the Credit Agreement, the Company will pay placement agent fees totaling $850,000.
In connection with entering into the Credit Agreement, on March 6, 2015, FlexShopper raised approximately $8.6 million in net proceeds through direct sales of 17.0 million shares of FlexShopper common stock, par value $0.0001 per share (the “Shares”), to certain affiliates of Waterfall and other accredited investors (the “Investors”) for a purchase price of $0.55 per share (the “Equity Purchases”). The Shares were placed pursuant to assist Anchor in providing factoringRule 506 of Regulation D under the Securities Act of 1933. The Shares were not registered under the Securities Act of 1933 and purchase order funding facilitiesmay not be offered or sold absent registration or an applicable exemption from registration requirements.
In connection with the issuance of the Shares to somethe Investors, on March 6, 2015, FlexShopper entered into Investor Rights Agreements with certain of its clients.the Investors. The Promissory Notes were subordinateInvestor Rights Agreement entered into with affiliates of Waterfall provides that, so long as the those Investors beneficially own at least 10% of FlexShopper common stock then issued and outstanding, Waterfall will have the right to nominate one director to the FlexShopper Board of Directors (the “Board”). Upon the closing of the Equity Purchases, those Investors beneficially own more than 10% of FlexShopper common stock then issued and supplemented Anchor's $10 Million Rediscount Credit Facilityoutstanding and thus are entitled to nominate one director to the Board. On March 26, 2015, the Board of Directors elected Philip Gitler to the board as a nominee of the Lender effective April 1, 2015. The Investor Rights Agreement with a Commercial Bank. Both promissory notes were paidaffiliates of Waterfall also entitles those Investors to certain demand registration rights and certain preemptive rights on September 5, 2012. Anchor paid $15,123future sales of interest on these notes for year ended December 31, 2012.
Independent Directors
Currently, the CompanyFlexShopper has no audit, compensation, corporate governance, nominating or other committee of the Board of Directors. Under the National Association of Securities Dealers Automated QuotationsNASDAQ definition, an “independent directordirector” means a person other than an officer or employee of the CompanyFlexShopper or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’sFlexShopper’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company;FlexShopper; (2) has not (or whose immediate family members have not) been paid more than $120,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholderstockholder or executive officer of an organization which the companyFlexShopper made, or from which the companyFlexShopper received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of AnchorFlexShopper has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of Anchor’sFlexShopper’s outside auditor. Currently, Paul B. Healy isT. Scott King and Carl Pradelli are each deemed by management to be an “independent director” and “Financial Expert” (as defined herein under “Lack of Committees”) of FlexShopper. Mr. Gitler would have been considered an independent director, of the Company.
Item 14. Principal Accounting Fees and Services.
Audit Fees
During fiscal 2013, the aggregate fees billed for professional services rendered by Scott and Company LLC (the “Independent Auditors”) for the 2012 audit of the Company's annual consolidated financial statements totaled approximately $49,500, excluding expenses. $49,500 was paid toDuring fiscal 2014, the aggregate fees billed for professional services rendered by Scott and Company LLC for the 20112013 audit of the Company’s annual consolidated financial statements totaled approximately $54,450, excluding expenses. The audit in 2012.
Financial Information Systems Design and Implementation Fees
During 20132014 and 2012,2013, there were $-0- inno fees billed for professional services by Scott and Company LLC, rendered in connection with, directly or indirectly, operating or supervising the operation of its information system or managing its local area network.
All Other Fees
During 2013, there were $24,000 in fees, excluding expenses, billed for professional services rendered by Scott and Company, LLC for review of the Company’s quarterly filings with the Securities and Exchange Commission. During fiscal year 2012,2014, there were $24,000$17,000 in fees billed for professional services rendered by Scott and Company LLC for review of the Company's first two quarterly filings with the Commission.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements
The following documents are filed under “Item 8. Financial Statements and Supplementary Data”and are included as part of this Form 10-K as the financial statements of the Company for the years ended December 31, 20132014 and 2012:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders’ Equity
Consolidated Statement of Cash Flows
Consolidated Notes to Financial Statements
Exhibits
The following exhibits are all previously filed in connection with our Form 10-SB , as amended, unless otherwise noted.
| 2.1 | Exchange Agreement | |
| 3.1 | Certificate of Incorporation-BTHC,INC. | |
| 3.2 | Certificate of Merger of BTHC XI, LLC into BTHC XI, Inc. | |
| 3.3 | Certificate of Amendment | |
| 3.4 | Designation of Rights and Preferences-Series 1 Convertible Preferred Stock | |
| 3.5 | Certificate of Amendment dated October 16, 2013(11) | |
| 3.6 | Amended and Restated By-laws | |
| 4.1 | ||
| 4.2 | Placement Agent Warrant issued to Paulson Investment Company, Inc. on October 9, 2014(13) | |
| 4.3 | Placement Agent Warrant issued to Spartan Capital Securities, LLC on October 9, 2014(13) | |
| 10.1 | Directors’ Compensation Agreement-George Rubin | |
| 10.2 | Employment Contract-Morry F. Rubin | |
| 10.3 | Employment Contract-Brad Bernstein | |
| 10.4 | Agreement-Line of Credit | |
| 10.5 | Fordham Financial Management-Consulting Agreement | |
| 10.6 | Facilities Lease – Florida | |
| 10.7 | Facilities Lease – North Carolina | |
| 10.8 | Loan and Security Agreement (1) | |
| 10.9 | Revolving Note (1) | |
| 10.10 | Debt Subordination Agreement (1) | |
| 10.11 | Guaranty Agreement (Morry Rubin) (1) | |
| 10.12 | Guaranty Agreement (Brad Bernstein)(1) | |
| 10.13 | Continuing Guaranty Agreement (1) | |
| 10.14 | Pledge Agreement (1) | |
| 10.16 | Asset Purchase Agreement between | |
| 10.17 | Senior Credit Facility between | |
| 10.18 | Senior Credit Facility Guarantee - Michael P. Hilton and John A. McNiff III (4) | |
| 10.19 | Employment Agreement - Michael P. Hilton (4) | |
| 10.20 | Employment Agreement - John A. McNiff (4) | |
| 10.21 | Accounts Receivable Credit Facility with Greystone Commercial Services LP (3) | |
| 10.22 | Memorandum of Understanding - Re: Rescission | |
| 10.23 | Rescission Agreement and Exhibits Thereto (5) | |
| 10.24 | Termination Agreement by and between Brookridge Funding Services LLC and MGM Funding LLC.(5) | |
| 10.25 | First Amendment to Factoring Agreement (6) | |
| 10.26 | Promissory Note dated April 26, 2011 between Anchor Funding Services, Inc. and MGM Funding, LLC (7) | |
| 10.27 | Rediscount Facility Agreement with TAB Bank (8) | |
10.28 10.29 | Form of Validity Warranty to TAB Bank (8) | |
Amendment to Employment Agreement of Morry F. Rubin | ||
| Asset Purchase Agreement dated April 30, 2014 * | ||
| 10.31 | Credit Agreement, dated as of March 6, 2015, among FlexShopper 2, LLC, Wells Fargo Bank, N.A., various Lenders from time to time party thereto and WE 2014-1, LLC. (14) | |
| 10.32 | Investor Rights Agreement, dated as of March 6, 2015, by and among FlexShopper, Inc., the Management Stockholders and affiliates of Waterfall (14) | |
| 10.33 | Form of Investor Rights Agreement, dated as of March 6, 2015, by and among FlexShopper, Inc. and the Investors party thereto (14) | |
| 10.34 | January 2014 amendment to Boca Raton, Florida lease* | |
| 14.1 | Code of Ethics for Senior Financial Officers* | |
| 21.0 | Subsidiaries of | |
| 31.1 | Rule 13a-14(a) Certification – Principal Executive Officer * | |
| 31.2 | Rule 13a-14(a) Certification – Principal Financial Officer * | |
| 32.1 | Section 1350 Certification – Principal Executive Officer * | |
| 32.2 | Section 1350 Certification – Principal Financial Officer * | |
| 99.1 | 2007 Omnibus Equity Compensation Plan | |
| 99.2 | Form of Non-Qualified Option under 2007 Omnibus Equity Compensation Plan | |
| 99.3 | Amendment to 2007 Omnibus Equity Compensation Plan increasing the Plan to 4,200,000 shares (9) | |
| 99.4 | Press Release | |
| 101.INS | XBRL Instance Document,XBRL Taxonomy Extension Schema * | |
| 101.SCH | Document, XBRL Taxonomy Extension * | |
| 101.CAL | Calculation Linkbase, XBRL Taxonomy Extension Definition * | |
| 101.DEF | Linkbase,XBRL Taxonomy Extension Labels * | |
| 101.LAB | Linkbase, XBRL Taxonomy Extension * | |
| 101.PRE | Presentation Linkbase * | |
| ___________________ | ||
* Filed herewith. | ||
| (1) | Incorporated by reference to the Registrant’s Form 8-K filed November 24, 2008 (date of earliest event November 21, |
| (2) | Incorporated by reference to the Registrant's Form 8-K filed December 8, 2009 (date of earliest event |
| (3) | Incorporated by reference to the Registrant's Form 8-K filed December 2, 2009 (date of earliest event -November 30, 2009). |
| (4) | Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2009. |
| (5) | Incorporated by reference to the Registrant's Form 8-K filed October 12, 2010 (date of earliest event |
| (6) | Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2010. |
| (7) | Incorporated by reference to the Registrant's Form 8-K filed April 28, 2011 (date of earliest event |
| (8) | |
| Incorporated by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2011. | |
| (9) | Incorporated by reference to |
| (10) | Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2012. |
(11) | Incorporated by reference to the Registrant’s Form 8-K dated October 16, 2013. |
| (12) | Incorporated by reference to the Registrant’s Form 8-K dated April 30, 2014. |
| (13) | Incorporated by reference to the Registrant’s Form S-1 Registration Statement filed in January 2015. |
| (14) | Incorporated by reference to the Registrant’s form 8-K dated March 6, 2015. |
(b) Financial Statement Schedules
We are not filing any financial statement schedules as part of this Form 10-K because such schedules are either not applicable or the required information is included in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FLEXSHOPPER, INC. | |||
| By: | /s/ Brad Bernstein | ||
| Brad Bernstein, President | |||
| and Principal | |||
Dated: Boca Raton, Florida
March 31, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| Signatures | Title | Date | ||
| /s/ Brad Bernstein | President and | March 31, | ||
| Brad Bernstein | Principal | |||
| /s/ Morry F. Rubin | ||||
| March 31, | ||||
| /s/ | Director | March 31, | ||
| /s/ Carl Pradelli | Director | March 31, 2015 | ||
| Carl Pradelli | ||||
| /s/ Frank Matasavage | Principal Financial Officer | March 31, 2015 | ||
| Frank Matasavage |
Morry F. Rubin, Brad Bernstein, George RubinT. Scott King and Paul B. HealyCarl Pradelli represent all the current members of the Board of Directors.