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FLEXSHOPPER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2017 and 2016

(unaudited)

The accompanying notes are an integral part of these consolidated statements.

FLEXSHOPPER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2017 and 2016

(unaudited)

The accompanying notes are an integral part of these consolidated statements.

FLEXSHOPPER, INC.

Notes To Consolidated Financial Statements

For the ninethree months ended September 30, 2017March 31, 2019 and 20162018

(Unaudited)

1. BASIS OF PRESENTATION

Our interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information. Accordingly, the information presented in our interim financial statements does not include all information and disclosures necessary for a fair presentation of our financial position, results of operations and cash flows in conformity with GAAP for annual financial statements. In the opinion of management, these financial statements reflect all adjustments consisting of normal recurring accruals, necessary for a fair statement of our financial position, results of operations and cash flows for such periods. The results of operations for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The Company has experienced significant historical operating losses and negative operating cash flows to date. For the nine months ended September 30, 2017, the Company incurred a net loss of approximately $4.3 million. For the year ended December 31, 2016, the Company incurred a net loss of approximately $12.3 million and used approximately $17.4 million in cash flows for operations. Despite such events, management believes that the Company will be able to meet its obligations as they become due through November 14, 2018 based on (1) positive working capital of approximately $11.4 million at September 30, 2017, (2) the ability, to the extent required, to limit or eliminate discretionary spending related to marketing and advertising, (3) borrowing availability under its existing credit agreement to finance the purchase of new leased merchandise through April 1, 2018 (see Note 7), (4) the possibility of amending or extending the existing credit agreement, and (5) refinancing the existing credit agreement with a new credit facility prior to April 1, 2018, the date after which periodic payments are due to the lender in the current credit facility. There can be no assurance that the Company will be successful in renegotiating or replacing its existing credit agreement on terms acceptable to the Company. If the Company is unable to complete these plans it could have a material adverse effect on the Company.2018.

The consolidated balance sheet as of December 31, 20162018 contained herein has been derived from audited financial statements.

2. BUSINESS

FlexShopper, Inc. (the(“FlexShopper” or the “Company”) is a corporation organized under the laws of the State of Delaware on August 16,in 2006. The Company owns 100% of FlexShopper, LLC, a North Carolina limited liability company, incorporated under the lawswhich in turns owns 100% of North Carolina on June 24, 2013.FlexShopper 1, LLC and FlexShopper 2, LLC. The Company is a holding corporation with no operations except for those conducted by FlexShopper, LLC. FlexShopper, LLC provides through e-commerce sites certain types of durable goods to consumers, including customers of third-party retailers and e-tailers, on a lease-to-own basis (“LTO”), including consumers of third party retailers and e-tailers. basis.

In January 2015, in connection withTo date, funds derived from the credit agreement entered into in March 2015 (see Note 7), FlexShopper 1, LLCsale of FlexShopper’s common stock, warrants and FlexShopperSeries 2 LLC were organized as wholly owned Delaware subsidiaries of FlexShopper, LLCConvertible Preferred Stock and the Company’s ability to conductborrow funds against the lease portfolio have provided the liquidity and capital resources necessary to fund its operations. FlexShopper, LLC together with its subsidiaries is hereafter referred to as “FlexShopper.”

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation –- The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany balances and transactions.

Estimates –- The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition –- Merchandise is leased to customers pursuant to lease purchase agreements which provide for weekly lease terms with non-refundable lease payments. Generally, the customer has the right to acquire title for ownership either through a 90 day same as cash option, an early purchase option, or through payments of all required lease payments, generally 52 weeks.weeks, for ownership. On any current lease, customers have the option to cancel the agreement in accordance with lease terms and return the merchandise. Accordingly, customer agreements are accounted for as operating leases with lease revenues recognized in the month they are due on the accrual basis of accounting. Merchandise sales revenue is recognized when the customer exercises the purchase option and pays the purchase price. Revenue from processing fees earned upon exercise by the customer of the 90 day purchase option is recorded upon recognition of the related merchandise sales. Commencing in the quarter ended June 30, 2016, the Company discontinued charging a separate fee upon exercise of such option. Revenue for lease payments received prior to their due date is deferred and recognized as revenue in the period to which the payments relate. Revenues from leases and sales are reported net of sales taxes.

Accounts Receivable and Allowance for Doubtful Accounts –- FlexShopper seeks to collect amounts owed under its leases from each customer on a weekly or monthly basis by charging their bank accounts or credit cards. Accounts receivable are principally comprised of lease payments currently owed to FlexShopper which are past due, as FlexShopper has been unable to successfully collect in the manner described above. Through June 30, 2016, anThe allowance for doubtful accounts was estimated by reserving all accounts in excess of four payments in arrears, adjusted for subsequent collections. Commencing in the quarter ended September 30, 2016, the estimate was revised to provide for doubtful accountsis based upon revenues and historical experience of balances charged off as a percentage of revenues. The accounts receivable balances consisted of the following as of September 30, 2017March 31, 2019 and December 31, 2016:2018:

The allowance is a significant percentage of the balance because FlexShopper does not charge off any customer account until it has exhausted all collection efforts with respect to each account, including attempts to repossess items. In addition, while collections are pursued, the same delinquent customers will continue to accrue weekly charges until they are charged off with such charges being fully reserved for. Accounts receivable balances charged off against the allowance were $7,133,260 and $20,713,314$5,029,904 for the three and nine months ended September 30, 2017, respectively,March 31, 2019 and $1,043,762 and $2,786,979$4,428,276 for the three and nine months ended September 30, 2016, respectively.March 31, 2018.

Lease Merchandise –- Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is recorded at cost net of accumulated depreciation. The Company depreciates leased merchandise using the straight linestraight-line method over the applicable agreement period for a consumer to acquire ownership, generally twelve months with no salvage value. Upon transfer of ownership of merchandise to customers resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For lease merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company provides an impairment reserve for the undepreciated balance of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable. The impairment charge amounted to approximately $664,000 and $3,948,000$1,348,000 for the three and nine months ended September 30, 2017, respectively,March 31, 2019 and $603,000 and $1,615,000$807,000 for the three and nine months ended September 30, 2016, respectively. March 31, 2018.

The net leased merchandise balances consisted of the following as of September 30, 2017March 31, 2019 and December 31, 2016:2018:

Cost of leaseLease merchandise soldat cost represents the undepreciated cost of rental merchandise at the time of sale.purchase.

Deferred Debt Issuance Costs –- Debt issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 20162015 (see Note 7) are offset against the outstanding balance of the loan payable and are amortized using the straight linestraight-line method over the remaining term of the credit facility. Amortization, which is included in interest expense, was computed using the straight line method over the term of the related debt, which approximates the effective interest method,method. Amortization, which is included in interest expense, was $118,404 and $355,212$54,840 for the three and nine months ended September 30, 2017, respectively,March 31, 2019 and $118,405 and $332,900$118,404 for the three and nine months ended SeptemberMarch 31, 2018.

Debt issuance costs of $35,000 incurred in conjunction with the subordinated Promissory Notes entered into on January 29, 2018 and January 30, 2016, respectively.2018 (see Note 6) are offset against the outstanding balance of the loan payable and are amortized using the straight-line method over the remaining term of the related debt, which approximates the effective interest method. Amortization, which is included in interest expense, was $14,000 for the three months ended March 31, 2018.

Debt issuance costs of $60,000 incurred in conjunction with the subordinated Promissory Notes entered into on January 25, 2019 and February 19, 2019 (see Note 6) are offset against the outstanding balance of the loan payable and are amortized using the straight-line method over the remaining term of the related debt, which approximates the effective interest method. Amortization, which is included in interest expense, was $5,425 for the three months ended March 31, 2019.

Intangible Assets –- Intangible assets consist of a pending patent on the Company’s LTO payment method at check-out for third party e-commerce sites. Patents are stated at cost less accumulated amortization. Patent costs are amortized by using the straight linestraight-line method over the legal life, or if shorter, the useful life of the patent, which has been estimated to be 10 years.

Software Costs –- Costs related to developing or obtaining internal-use software incurred during the preliminary project and post-implementation stages of an internal use software project are expensed 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. Costs associated with minor enhancements and maintenance for the website are included in expenses as incurred. Direct costs incurred in the website’s development stage are capitalized as property and equipment. Capitalized software costs amounted to $481,306 and $1,419,273$547,044 for the three and nine months ended September 30, 2017, respectively,March 31, 2019, and $507,738 and $1,355,187$297,826 for the three and nine months ended September 30, 2016, respectively.March 31, 2018.

Operating Expenses –- Operating expenses include corporate overhead expenses such as salaries, stock basedstock-based compensation, insurance, occupancy, and other administrative expenses.

Marketing Costs - Marketing costs, which primarily consistconsisting of advertising, are charged to expense as incurred.

Per Share Data –- Per share data is computed by use of the two-class method as a result of outstanding Series 1 Convertible Preferred Stock, which participates in dividends with the Company’s common stock and accordingly has participation rights in undistributed earnings as if all such earnings had been distributed during the period (see Note 8). Under such method income available to common shareholders is computed by deducting both dividends declared or, if not declared, accumulated on Series 2 Convertible Preferred Stock from income from continuing operations and from net income. Loss attributable to common shareholders is computed by increasing loss from continuing operations and net loss by such dividends. Where the Company has undistributed net income available to common shareholders, basic earnings per common share is computed based on the total of any dividends paid or declared per common share plus undistributed income per common share determined by dividing net income available to common shareholders reduced by any dividends paid or declared on common and participating Series 1 Convertible Preferred Stock by the total of the weighted average number of common shares outstanding plus the weighted average number of common shares issuable upon conversion of outstanding participating Series 1 Convertible Preferred Stock during the period. Where the Company has a net loss, basic per share data (including income from continuing operations) is computed based solely on the weighted average number of common shares outstanding during the period. As the convertible participating preferred stockSeries 1 Convertible Preferred Stock has no contractual obligation to share in the losses of the Company, common shares issuable upon conversion of such preferred stock are not included in such computations.

Diluted earnings per share is based on the more dilutive of the if-converted method (which assumes conversion of the participating preferred stockSeries 1 Convertible Preferred Stock as of the beginning of the period) or the two-class method (which assumes that the participating preferred stockSeries 1 Convertible Preferred Stock is not converted) plus the potential impact of dilutive non-participating Series 2 Convertible Preferred Stock, options and 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 during the period. Under the treasury stock method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the exercise price of options or warrants. When there is a loss from continuing operations, potential common shares are not included in the computation of diluted loss per share, since they have an anti-dilutive effect.

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:anti-dilutive. The following table reflects a change in the conversion rates of the Series 1 Convertible Preferred Stock and Series 2 Convertible Preferred Stock due to anti-dilution adjustments as a result of FlexShopper’s September 2018 equity offering.

Amounts of common stock set forth in the above table have been adjusted for the Reverse Split (see Note 4).

Stock-Based Compensation –- The fair value of transactions in which the Company exchanges its equity instruments for employee and non-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 haveThe Company has elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards (see Note 9).

Fair Value of Financial Instruments – The carrying value of certain financial instruments such as accounts receivable, accounts payable and accrued expenses approximates their fair value due to the short-term nature of their underlying terms.- The carrying value of loans payable under the Credit Agreement increased by unamortized issuance costs (see Note 7) and notes payable approximates fair value. The carrying value based upon its interest rate which approximates current market interest rates.  of cash, receivables, and payables approximate fair value due to their short-term nature.

Income Taxes –- Deferred tax assets and liabilities are determined based on the estimated future tax effects of net operating loss carryforwards and temporary differences between the tax bases of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The Company records a valuation allowance for its deferred tax assets when management concludes that it is not more likely than not that such assets will be recognized.

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 from 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 September 30, 2017March 31, 2019, and December 31, 2016,2018, the Company hashad not recorded any unrecognized tax benefits.

Interest and penalties related to liabilities for uncertain tax positions if any will be charged to interest and operating expenses, respectively.

Recent Accounting Pronouncements –

- In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date of the standard. The Company is currently evaluating the impact of the newadopted this guidance including method of adoption and related financial statement disclosures,on January 1, 2018 but preliminarily doesit did not anticipatehave a material impact on its financial statements as a majority of the Company’s revenue generating activities are leasing arrangements, which are outside the scope of the guidance.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted.2018. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Lessor guidance is largely unchanged. The Company is currently evaluating the effecthas determined that the new standard will not materially impact the timing of revenue recognition. The new standard resulted in the Company classifying bad debt expense incurred as a reduction of lease revenue and fees within the consolidated statements of earnings including retrospective presentation of prior year financial information. As a result of the change in presentation, the breakout of Lease revenues and fees, net of lessor bad debt expense, that ties the consolidated statements of operations is shown below:

The new standard also impacted the Company as a lessee by requiring all of its operating leases to be recognized on the balance sheet as a right-to-use asset and lease liability. The Company has elected a package of optional practical expedients which includes the option to retain the current classification of leases entered into prior to January 1, 2019. The Company has concluded that there is no material impact to the consolidated balance sheets, consolidated statements of operations, or consolidated statements of cash flows as a result of the new standard. The Company adopted this new guidance will have on its financial statements.January 1, 2019 (see Note 4 below).

4. REVERSE STOCK SPLITLEASES

On October 14, 2016,Lessor Information –Refer to Note 3 to these condensed consolidated financial statements for further information about the Company filed with the Secretary of State of the State of DelawareCompany’s revenue generating activities as a certificate of amendment (the “Certificate of Amendment”) to its certificate of incorporation, which Certificate of Amendment effectuated as of October 24, 2016 at 11:59 p.m. Eastern Time (the “Effective Time”) a reverse splitlessor. All of the Company’s common stock bycustomer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases.

Lessee Information –As a ratiolessee, the Company leases retail, call center and corporate space under operating leases expiring at various times through 2021. At January 1, 2019, the Company recognized $191,001 of one-for-10 (the “Reverse Split”). Atoperating lease assets and $191,001 of operating lease liabilities as a result of adopting ASU 2016-02.

The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in the Effective Time, 52,870,398 outstanding sharesCompany’s consolidated balance sheet beginning January 1, 2019. The breakout of operating lease assets, and current and non-current operating lease liabilities, is shown in the table below.

Supplemental balance sheet information related to leases is as follows:

Operating lease assets and liabilities are recognized at the present value of the Company’s common stock converted into 5,287,040 sharesfuture lease payments at the lease commencement date. The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. The lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company generally uses the base, non-cancelable, lease term when determining the lease assets and liabilities. Under the short-term lease exception provided within ASC 842, the Company does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement.

Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s common stock. All per share amountsoperating leases:

Upon adoption of ASU 2016-02, discount rates for existing operating leases were established as of January 1, 2019.

Operating lease expense is recognized on a straight-line basis over the lease term within operating expenses in the Company’s consolidated statements of operations. The Company’s total operating lease expenses all relate to operating lease costs and numberamounted to $72,116 for the three months ended March 31, 2019.

Below is a summary of sharesundiscounted operating lease liabilities as of March 31, 2019. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the operating lease liabilities included in the consolidated financial statements and related notes have been retroactively restated to reflect the Reverse Split. The Reverse Split did not change the number of shares of common or preferred stock that the Company is authorized to issue, or the par value of the Company’s common or preferred stock.balance sheet.

The Reverse Split resultedCompany entered into an office lease in January 2019. Lease commencement is estimated to be May 2019, at which time the Company will recognize the operating lease asset and liability. The Company will pay a proportionate adjustmentbase monthly rent of $31,532 with payments increasing by 3% on each yearly anniversary of the commencement date. The initial lease term is for 9 years with the Company having a one-time option to the per share conversion or exercise price and the number of shares of common stock issuable upon the conversion or exercise of outstanding preferred stock, stock options and warrants, as well as the number of shares of common stock eligibleextend for issuance under the Company’s 2007 Omnibus Equity Compensation Plan and 2015 Omnibus Equity Compensation Plan.5 years.

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

Depreciation and amortization expense was $414,674were $523,934 and $294,616$434,905 for the three months ended September 30, 2017March 31, 2019 and 2016, respectively, and $1,178,972 and $775,818 for the nine months ended September 30, 2017 and 2016,2018, respectively.

6. LOANS PAYABLE TO SHAREHOLDERPROMISSORY NOTES

January 2018 Notes -On February 11, 2016,January 29, 2018 and January 30, 2018, FlexShopper, LLC entered into letter agreements with Russ Heiser, FlexShopper’s Chief Financial Officer, and NRNS Capital Holdings LLC (“NRNS”), the manager of which is the Chairman of the Company’s Board of Directors, respectively (such letter agreements, together, the “Commitment Letters”), pursuant to which FlexShopper, LLC issued a subordinated promissory note to each of Mr. Heiser and NRNS (together, the “Notes”). The Commitment Letters provided that Mr. Heiser and NRNS would each make advances to FlexShopper, LLC under the applicable Note in aggregate amounts up to $1,000,000 and $2,500,000, respectively. Payments of principal and accrued interest are due and payable by FlexShopper, LLC upon 30 days’ prior written notice from the applicable noteholder and the Company can prepay principal and interest at any time without penalty. However, repayment is not permitted without the consent of the Credit Agreement lender. The Notes bear interest at a rate equal to five (5%) per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement entered into on March 6, 2015 (see Note 7) computed on the basis of a 360-day year, which equaled 18.48% at March 31, 2019.

Upon issuance of the Notes, FlexShopper, LLC drew $500,000 and a subsequent $500,000 on February 20, 2018 on the Note held by Mr. Heiser and $2,500,000 on the Note held by NRNS. On August 29, 2018, FlexShopper, LLC issued amended and restated Notes to Mr. Heiser and NRNS under which (1) the maturity date for such Notes was set at June 30, 2019 and (2) in connection with the completion of an Equity Financing (as defined in the Notes), the holders of such Notes were granted the option to convert up to 50% of the outstanding principal of the Notes plus accrued and unpaid interest thereon into the securities issued in the Equity Financing at a conversion price equal to the price paid to the Company by the underwriters for such securities, net of the underwriting discount. In connection with the offering of units in September 2018, Mr. Heiser and NRNS elected to convert the convertible portion of the Notes, resulting in the issuance by the Company of 602,974 shares of common stock and 301,487 warrants to Mr. Heiser and 1,507,395 shares of common stock and 753,697 warrants to NRNS.

As of March 31, 2019, $544,338 and $1,361,090 of principal and accrued and unpaid interest was outstanding on Mr. Heiser’s Note and NRNS’s Note, respectively. Interest expense incurred under the Notes amounted to $25,900 and $26,159 for Mr. Heiser’s Note and $64,756 and $76,357 for NRNS’ Note, totaling $90,656 for the three months ended March 31, 2019 and March 31, 2018 respectively.

January 2019 Note -On January 25, 2019, FlexShopper, LLC entered into a secured Promissoryletter agreement with 122 Partners, LLC (the lender), pursuant to which FlexShopper, LLC issued a subordinated promissory note to 122 Partners, LLC (the “January Note”) in the principal amount of $1,000,000. H. Russell Heiser, Jr., FlexShopper’s Chief Financial Officer, is a member of 122 Partners, LLC. The Company paid a commitment fee of 2% to the lender totaling $20,000. Payment of principal and accrued interest under the January Note withis due and payable by FlexShopper, LLC on April 30, 2020 and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding under the January Note bear interest at a principal stockholder for $1,000,000 at an interestrate equal to five percent (5.00%) per annum in excess of the non-default rate of 15% per annum, payable upon demand,interest from time to time in effect under the Credit Agreement, which equaled 18.48% at March 31, 2019. Obligations under the January Note are subordinated to obligations under the Credit Agreement. The January Note is subject to customary representations and warranties and events of default. If an event of default occurs and is continuing, FlexShopper, LLC may be required to repay all amounts outstanding under the January Note. Obligations under the January Note are secured by substantiallyessentially all of FlexShopper, LLC’s assets, subject to rights of the lenders under the Credit Agreement. As of March 31, 2019, $1,035,027 of principal and accrued and unpaid interest was outstanding on the January Note.

February 2019 Note -On February 19, 2019, FlexShopper, LLC entered into a letter agreement with NRNS, the manager of which is the Chairman of the Company’s assets.Board of Directors, pursuant to which FlexShopper, LLC issued a subordinated promissory note to NRNS (the “February Note”) in the principal amount of $2,000,000. The PromissoryCompany paid a commitment fee of 2% to the lender totaling $40,000. Payment of principal and accrued interest under the February Note was paid in full with interest amounting to $51,250is due and payable by FlexShopper, LLC on June 13, 2016.30, 2021 and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding under the February Note bear interest at a rate equal to five percent (5.00%) per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement, which equaled 18.48% at March 31, 2019. Obligations under the February Note are subordinated to obligations under the Credit Agreement. The February Note is subject to customary representations and warranties and events of default. If an event of default occurs and is continuing, FlexShopper, LLC may be required to repay all amounts outstanding under the February Note. Obligations under the February Note are secured by essentially all of FlexShopper, LLC’s assets, subject to rights of the lenders under the Credit Agreement. As of March 31, 2019, $2,041,435 of principal and accrued and unpaid interest was outstanding on the February Note.

7. LOAN PAYABLE UNDER CREDIT AGREEMENT

On March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as amended from time to time,time-to-time and including the Fee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo Bank, National Association as paying agent, various lenders from time to time party thereto and WE 2014-1, LLC, an affiliate of Waterfall Asset Management, LLC, as administrative agent and lender (the “Lender”). FlexShopperThe Borrower 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 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, FlexShopperthe Borrower may borrow up to $25,000,000$32,500,000 from the Lender for a term of two years fromuntil the Commitment Termination Date and must repay all borrowed amounts one year thereafter, on the date that is 12 months following the Commitment Termination Date (unless such amounts become due or payable on an earlier date pursuant to the terms of the Credit Agreement (which term has since beenAgreement). On April 1, 2019, the Commitment Termination Date was extended as described below). The borrowing term may be extended 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.February 28, 2021. The Lender receiveswas granted a security interestsinterest in certain leases as collateral under the Credit Agreement. Prior to the January 2017 amendment described below,At March 31, 2019, amounts borrowed borebear interest at the rate of LIBOR plus 15% per annum and a small non-usage fee was assessed on any undrawn amount if the facility is less than 80% drawn on average in any given measurement period. Interest is payable monthly on the outstanding balance of amounts borrowed and, prior to the amendment referred to below, commencing on and after May 6, 2017, principal together with interest thereon was payable periodically through May 6, 2018, the maturity date of the loan, as such date may have been extended in accordance with the Credit Agreement.

In January 2017, the Credit Agreement was amended to reduce the interest being charged on amounts borrowed to be LIBOR plus 14% per annum and reduce the non-usage fee on undrawn amounts if the facility is less than 75% drawn on average. Additionally, the Commitment Termination Date (as defined in the Credit Agreement) was extended from May 6, 2017 to April 1, 2018. Accordingly, commencing on or after April 1, 2018, principal together with the interest thereon is payable periodically through April 1, 2019, the amended maturity date of the loan, as such date may be extended in accordance with the Credit Agreement.

Principal payable within twelve months of the balance sheet date based on the outstanding loan balance at such date is reflected as a current liability in the accompanying balance sheets. Interest expense incurred under the Credit Agreement amounted to $385,989 and $1,256,475 for the three and nine months ended September 30, 2017, respectively, and $340,955 and $1,061,392 for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, the outstanding balance under the Credit Agreement was $8,500,000. The Company repaid $788,207 in the second quarter of 2017 as a result of a pay down of the seasonal over advance from 2016. The Company repaid $2,288,207 in the third quarter of 2017 as a result of lower quarter over quarter lease origination, and $4,172,174 in 2016, resulting primarily from the repayment of the Bridge Loan Amount upon the Equity Raise as described in the fourth amendment to the Credit Agreement.13.48%.

The Credit Agreement provides that FlexShopper may not incur additional indebtedness (other than expressly permitted indebtedness) without the permission of the Lender and also prohibits dividends on common stock. Additionally, the Credit Agreement includes covenants requiring FlexShopper to maintain a minimum amount of Equity Book Value, maintain a minimum amount of Unrestricted Cash (including a reserve upon which the Lender may draw to satisfy unpaid amounts under the Credit Agreement) and maintain a certain ratio of Consolidated Total Debt to Equity Book Value (each capitalized term, as defined in the Credit Agreement). Upon a Permitted Change of Control (as defined in the Credit Agreement), FlexShopper must refinance the debt under the Credit Agreement, subject to the payment of an early termination fee.

The Credit 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 FlexShopper in the Credit Agreement and related documents (including certain financial and expense covenants), deficiencies in the borrowing base, certain judgments against FlexShopper and bankruptcy events.

Prior to the amendment described below, the Credit Agreement contained financial covenants requiring the Company and its subsidiaries to maintain asPrincipal payable within twelve months of the last day of each fiscal quarter duringbalance sheet date based on the term of the agreement minimum amounts of Unrestricted Cash and Equity Book Value and to achieve Adjusted Operating Cash Flow of not less than certain amounts duringoutstanding loan balance at such quarters (all such termsdate is reflected as defineda current liability in the Credit Agreement). As of December 31, 2015, the Company was in violation of the covenant requiring an Equity Book Value of at least $7.0 million as of such date. Under the fourth amendment to the Credit Agreement, the Lender waived this violation. The covenant also required the Company and its subsidiaries to maintain an Equity Book Value of at least $7 million at each of June 30, March 31 and December 31, 2016, increasing to $10 million at the end of each quarter from March 31 through December 31, 2017. On January 27, 2017, the Equity Book Value covenant was amended as discussed below.

On January 27, 2017, FlexShopper entered into a fifth amendment to the Credit Agreement (the “Omnibus Amendment”). The Omnibus Amendment amended the Credit Agreement to, among other things, (1) extend the Commitment Termination Date from May 6, 2017 to April 1, 2018 (with a one-time right of extension by the lenders up to August 31, 2018), (2) require the Borrower to refinance the debtaccompanying balance sheets. Interest expense incurred under the Credit Agreement upon a Permitted Changeamounted to $953,910 for the three months ended March 31, 2019 and $697,952 for the three months ended March 31, 2018. As of Control (as defined inMarch 31, 2019, the Credit Agreement), subject to the payment of an early termination fee, (3) reduce the interest rate charged on amounts borrowed to be LIBOR plus 14% per annum and reduce the non-usage fee on undrawn amounts if the facility is less than 75% drawn on average, and (4) modify certain permitted debt and financial covenants.These modified covenants consist of a reduction of Equity Book Value to not be less than the sum of $6 million and 20% of any additional equity capital invested into the Company after December 31, 2016; maintaining at least $1.5 million in Unrestricted Cash; and the ratio of Consolidated Total Debt to Equity Book Value not exceeding 4.75:1. The Company was in compliance with its covenants as of September 30, 2017. The Company had $16,500,000 availableoutstanding balance under the Credit Agreement was $23,180,627. Such amount is presented in the consolidated balance sheet net of unamortized issuance costs of $277,395. The Company borrowed $1,241,328 and subsequently repaid $6,665,989  in the first quarter of 2019 as a result of September 30, 2017.the pay down of the seasonal advance. Interest is payable monthly on the outstanding balance of the amounts borrowed.

8. CAPITAL STRUCTURE

The Company’s capital structure consists of preferred and common stock as described below:

Preferred Stock

The Company wasis authorized to issue 10,000,000500,000 shares of $0.001 par value preferred stock. On May 10, 2017, the Company’s stockholders approved an amendment to its Certificate of Incorporation to reduce the number of authorizedOf this amount, 250,000 shares of preferred stock to 500,000 shares.have been designated as Series 1 Convertible Preferred Stock and 25,000 shares have been designated as Series 2 Convertible Preferred Stock. The Company’s Board of Directors determines the rights and preferences of the Company’s preferred stock.

Series 1 Convertible Preferred Stock – On January 31, 2007, the Company filed a Certificate of Designations with the Secretary of State of Delaware. 250,000 preferred shares are designated as Series 1 Convertible Preferred Stock. Series 1 Convertible Preferred Stock ranks senior to common stock.

As of September 30, 2017,March 31, 2019, each share of Series 1 Convertible Preferred Stock was convertible into 0.606491.26547 shares of the Company’s common stock, subject to certain anti-dilution rights. The holders of the Series 1 Convertible Preferred Stock have the option to convert the shares to common stock at any time. Upon conversion, all accumulated and unpaid dividends, if any, will be paid as additional shares of common stock. 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, 2016, 85,13268,214 shares of Series 1 Convertible Preferred Stock were converted into 51,98386,323 shares of common stock.stock during the three months ended March 31, 2019. As of September 30, 2017,March 31, 2019, there were 243,065171,191 shares of Series 1 Convertible Preferred Stock outstanding, which are convertible into 147,417216,637 shares of common stock.

Series 2 Convertible Preferred Stock –On June 10, 2016, the Company entered into a Subscription Agreement with

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Series 2 Convertible Preferred Stock-The Company sold to B2 FIE V LLC (the “Investor”), an entity affiliated with Pacific Investment Management Company LLC, providing for the issuance and sale of 20,000 shares of Series 2 Convertible Preferred Stock (“Series 2 Preferred Stock”) for gross proceeds of $20.0 million. The Company sold an additional 1,952 shares of Series 2 Preferred Stock to a different investor for gross proceeds of $1.95 million at a subsequent closing.

Shares of Series 2 Convertible Preferred Stock for gross proceeds of $20.0 million. The Company sold an additional 1,952 shares of Series 2 Convertible Preferred Stock to a different investor for gross proceeds of $1.95 million at a subsequent closing. 

Pursuant to the authority expressly granted to the Board of Directors by the provisions of the Company’s Certificate of Incorporation, the Board of Directors of the Company created and designated 25,000 shares of Series 2 Convertible Preferred Stock, par value $.001 per share (“Series 2 Preferred Shares”), by filing a Certificate of Designations with the Delaware Secretary of State (the “Series 2 Certificate of Designations”). The Series 2 Preferred Shares were sold for $1,000 per share (the “Stated Value”) and accrue dividends on the Stated Value at an annual rate of 10% compounded annually. Cumulative accrued dividends in arrearsas of March 31, 2019 totaled $2,924,681 at September 30, 2017. Eachapproximately $6,564,369. As of March 31, 2019, each share of Series 2 Preferred Share isStock was convertible at a conversion price of $8.10 into approximately 124257 shares of common stock; provided the conversion pricerate is subject to reductionfurther increase pursuant to a weighted average anti-dilution provision contained in the Series 2 Certificate of Designations.provision. The holders of the Series 2 Preferred SharesStock have the option to convert such shares into shares of common stock and have the right to vote with holders of common stock on an as-converted basis. If during the two year period commencing on the date of issuance, the average closing price during any 45 consecutive trading day period equals or exceeds $17.50 per common share, or a change of control transaction (as defined in the Series 2 Certificate of Designations) values the Company’s common stock at $17.50 per share or greater; or after this two year period the average closing price during any 45 day45-day consecutive trading day period or change of control transaction values the common stock at a price equal to or greater than $23.00 per share, then conversion shall be automatic. Upon a Liquidation Event or Deemed Liquidation Event (each as defined in the Series 2 Certificate of Designations)defined), holders of Series 2 Preferred SharesStock shall be entitled to receive out of the assets of the Company prior to and in preference to the common stock and Series 1 Convertible Preferred Stock an amount equal to the greater of (1) the Stated Value, plus any accrued and unpaid dividends thereon, and (2) the amount per share as would have been payable had all shares of Series 2 Preferred SharesStock been converted to common stock immediately before the Liquidation Event or Deemed Liquidation Event. 

Common Stock

Common Stock –The Company wasis authorized to issue 100,000,00040,000,000 shares of $0.0001 par value common stock. On May 10, 2017, at the Company’s annual meeting of stockholders, the Company’s stockholders approved an amendment to the Certificate of Incorporation to reduce the Company’s authorized shares of common stock to 15,000,000. Each share of common stock entitles the holder to one vote at all stockholder meetings. The commons stock is listed on the Nasdaq Capital Market under the symbol “FPAY.”

Warrants

In September 2018, the Company issued warrants exercisable for 5,750,000 shares of common stock at an exercise price of $1.25 per share. The warrants are immediately exercisable and expire five years from the date of issuance. The warrants are listed on the Nasdaq Capital Market under the symbol “FPAYW.”

The Company also issued additional warrants exercisable for an aggregate 1,055,184 shares of common stock at an exercise price of $1.25 per warrant to Mr. Heiser and NRNS in connection with partial conversions of their promissory notes (see Note 6). The warrants are exercisable at $1.25 per share of common stock and expire on September 28, 2023.

In connection with entering into the Credit Agreementissuance of Series 2 Convertible Preferred Stock in June 2016, the Company issued to the placement agent in such offering warrants exercisable for 439 shares of Series 2 Convertible Preferred Stock at an initial exercise price of $1,250 per share, which expire seven years after the date of issuance.

As part of a consulting agreement with XLR8 Capital Partners LLC (the “Consultant”), an entity of which the Company’s Chairman is manager, the Company agreed to issue 40,000 warrants to the Consultant monthly for 12 months beginning on March 6, 2015,1, 2019 at an exercise price of $1.25 per share. The warrants are immediately exercisable and expire following the close of business on June 30, 2023. As of March 31, 2019, the Company raised approximately $8.6 million in net proceeds through direct salesrecorded an expense of 1.7 million shares$11,200 based on the valuation of its common$0.28 per warrant as determined by the fair market value of is the Company’s warrants that are actively traded and listed on the Nasdaq Capital Market under the symbol “FPAYW”.

The following table summarizes information about outstanding stock to certain affiliateswarrants as of the Lender and other accredited investors for a purchase priceMarch 31, 2019, all of $5.50 per share. As a result of the sale to certain affiliates, the Lender is considered a beneficial shareholder of the Company.which are exercisable:

9. STOCK OPTIONS

On March 17, 2016,April 26, 2018 at the Company’s annual meeting, the Company’s stockholders acting by written consent, approved the FlexShopper, Inc. 2018 Omnibus Equity Compensation Plan (the “2018 Plan”). Upon the 2018 Plan’s approval, approximately 1,057,000 shares of Company common stock were available for issuance thereunder, consisting of 750,000 shares authorized for issuance under the 2018 Plan and an amendment to the Certificate of Incorporation to effect a reverse stock split ofaggregate 307,000 shares then remaining available for issuance under the Company’s common stock. On October 14, 2016, the Company filed with the Secretary of State of the State of Delaware a certificate of amendment (the “Certificate of Amendment”) to its certificate of incorporation, which Certificate of Amendment effectuated as of October 24, 2016 at 11:59 p.m. Eastern Time the Reverse Split by a ratio of one-for-10 (see Note 4). All share and per share data in these financial statements and footnotes have been retrospectively adjusted to account for the Reverse Split.

9. STOCK OPTIONS

On January 31, 2007, the Board of Directors adopted our 2007 Omnibus Equity Compensation Plan (the “2007 Plan”), with 210,000 common shares authorized for issuance under the 2007 Plan. In October 2009, the Company’s stockholders approved an increase in the number of shares covered by the 2007 Plan to 420,000 shares. On March 26, 2015, the Board adopted our and 2015 Omnibus Equity Compensation Plan (the “2015 Plan”), and together with 400,000 common shares authorized for issuancethe 2007 Plan, the “Prior Plans”). The 2018 Plan replaced the Prior Plans. No new awards will be granted under the 2015Prior Plans; however, awards outstanding under the Prior Plans upon approval of the 2018 Plan which was ratified byremain subject to and will be paid under the Company’s stockholders on March 15, 2015. The 2007 Plan and 2015 Plan are collectively referred to as the “Plans.” applicable Prior Plan.

Grants under the 2018 Plan and the Prior Plans may consist of incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, stock unit awards, dividend equivalents and other stock basedstock-based awards. Employees, directors and consultants and other service providers are eligible to participate in the 2018 Plan and the Prior Plans. Options granted under the 2018 Plan and the Prior Plans vest over periods ranging from immediately upon grant to a three yearthree-year period and expire ten years from date of grant.

Activity in stock options for the ninethree months ended September 30, 2017March 31, 2019 follows: 

The weighted average grant date fair value of options granted during the nine monththree-month period ending September 30, 2017March 31, 2019 was $1.69$0.34 per share. The Company measured the fair value of each option award on the date of grant using the Black-Scholes-Merton (BSM) pricing model with the following assumptions:

The expected dividend yield is based on the Company’s historical dividend yield. The expected volatility wasis based on the average of historical volatilities for a period comparable to the expected lifevolatility of the options of certain entities considered to be similar to the Company.Company’s common stock. The expected life is based on the simplified expected term calculation permitted by the Securities and Exchange Commission (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 of stock options is recognized as compensation expense by the straight linestraight-line method over the vesting period. Compensation expense recorded for options in the statements of operations was $22,685 and $64,896,$25,529 for the three and nine months ended September 30, 2017, respectivelyMarch 31, 2019 and $45,863 and $124,244$49,702 for the three and nine months ended September 30, 2016, respectively.March 31, 2018. Unrecognized compensation cost related to non-vested options at September 30, 2017March 31, 2019 amounted to approximately $126,000,$163,190, which is expected to be recognized over a weighted average period of 2.11.91 years.

10. WARRANTS

On June 24, 2016, the Company granted warrants to one of the Company’s placement agents to purchase 439 shares of the Company’s Series 2 Convertible Preferred Stock at an initial exercise price of $1,250 per share. The exercise price and aggregate number of shares are subject to adjustment as set forth in the agreement.

The following information was input into the Black Scholes pricing model to compute a total fair value of $150,451.

The following table summarizes information about outstanding stock warrants as of September 30, 2017, all of which are exercisable:

11. INCOME TAXES

As of December 31, 2016,2018, the Company has federal net operating loss carryforwards of approximately $15,075,000$75,400,000 and state net operating loss carryforwards of approximately $10,109,000$18,600,000 available to offset future taxable income which expire from 20232024 to 2036.2037. Losses incurred after January 1, 2018 do not expire.

The Company expects its effective tax rate for the year ending December 31, 2017 to be zero due to its history of net operating losses and recording a full valuation allowance on deferred tax assets. As a result the Company estimated its effective tax rate for the three and nine months ended September 30, 2017 to be zero.

The Company’s use of net operating loss carryforwards may be subject to limitations imposed by the Internal Revenue Code. Management believes that the federal and state deferred tax asset as of September 30, 2017December 31, 2018 does not satisfy the realization criteria and has recorded a full valuation allowance to offset the tax asset.

11. SUBSEQUENT EVENTS