UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section☒ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the Securities Exchange Act Of 1934quarterly period ended June 30, 2021
For The Quarterly Period Ended September 30, 2017☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-52589For the transition period from _______ to _______
Commission file number: 001-37945
FLEXSHOPPER, INC.
FlexShopper, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-5456087 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
260, Boca Raton, | 33431 | |
(Address of Principal Executive Offices) | (Zip Code) |
(855) 353-9289
(Registrant’s telephone number)
(855) 353-9289 |
(Registrant’s Telephone Number, Including Area Code) |
Not ApplicableSecurities registered pursuant to Section 12(b) of the Act:
(Former name or former address, if changed since last report)
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.0001 per share | FPAY | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrantregistrant: (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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive DateData File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 preceding months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “small reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Non-accelerated filer ☒ | |||
Accelerated filer ☐ | ||||
Smaller reporting company ☒ | ||||
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 14, 2017,August 9, 2021, the Companyissuer had a total of 5,292,28121,381,278 shares of common stock outstanding, excluding 243,065 outstanding shares of Series 1 Preferred Stock convertible into 147,417 shares of common stock and excluding 21,952 outstanding shares of Series 2 Preferred Stock convertible into 2,710,124 shares of common stock.outstanding.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
ThisCertain information set forth in this report contains certain “forward-lookingmay contain forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). We intend such forward-looking statementswhich are intended to be covered by the safe harbor provisions for forward-looking“safe harbor” created by that section. Forward-looking statements, contained in the Private Securities Reform Act of 1995, and are including this statement for purposes of these safe harbor provisions. “Forward-looking statements,” which are based on certain assumptions and describe our future plans, strategies and expectations, maycan generally be identified by the use of forward-looking terms such words as “believe,” “expect,” “anticipate,“may,” “will,” “should,” “planned,“could,” “estimated”“would,” “seek,” “intend,” “plan,” “goal,” “project,” “estimate,” “anticipate” “strategy,” “future,” “likely” or other comparable terms and “potential.”references to future periods. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, but are not limitedamong others, statements we make regarding the expansion of our lease-to-own program, expectations concerning our partnerships with retail partners, investments in, and the success of, our underwriting technology and risk analytics platform, our ability to estimates with respect tocollect payments due from customers, expected future operating results, and expectations concerning our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. strategy.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: general and local economic conditions; competition, policies or guidelines; changes in legislation or regulation; other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and the other risks and uncertainties described in the Risk Factors and in Management’s Discussion and Analysis of Financial Condition and Results of Operations sections of our most recent Annual Report on Form 10-K and any subsequently filed Quarterly Reports on Form 10-Q. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
FLEXSHOPPER, INC.
Form 10-Q Quarterly Report
Table of Contents
● | |
our ability to obtain adequate financing to fund our business operations in the future; | |
the failure to successfully manage and grow our FlexShopper.com e-commerce platform; | |
● | our ability to maintain compliance with financial covenants under our Credit Agreement; |
● | our dependence on the success of our third-party retail partners and our continued relationships with them; |
● | our compliance with various federal, state and local laws and regulations, including those related to consumer protection; |
● | the failure to protect the integrity and security of customer and employee information; |
● | the impact future inflation will have on our operating results and financial condition; |
● | the business and financial impact of the continuing COVID-19 pandemic; and |
● | the other risks and uncertainties described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial |
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as may be required under federal securities law. We anticipate that subsequent events and developments will cause our views to change. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.
i
TABLE OF CONTENTS
Page No. | |||
Cautionary Statement About Forward-Looking Statements | i | ||
Item 1. | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 | |
Item 4. | Controls and Procedures | 30 | |
Item | |||
Item 1A. | Risk Factors | 31 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 3. | Defaults Upon Senior Securities | 31 | |
Item 4. | Mine Safety Disclosures | 31 | |
Item 5. | Other Information | 31 | |
Item 6. | Exhibits | 32 | |
Certifications
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FLEXSHOPPER, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 3,825,835 | $ | 5,412,495 | ||||
Accounts receivable, net | 3,394,726 | 2,181,787 | ||||||
Prepaid expenses | 348,522 | 361,777 | ||||||
Lease merchandise, net | 11,151,635 | 18,570,460 | ||||||
Total current assets | 18,720,718 | 26,526,519 | ||||||
PROPERTY AND EQUIPMENT, net | 2,848,983 | 2,540,514 | ||||||
OTHER ASSETS: | ||||||||
Intangible assets, net | 18,033 | 20,340 | ||||||
Security deposits | 78,458 | 68,251 | ||||||
96,491 | 88,591 | |||||||
$ | 21,666,192 | $ | 29,155,624 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Current portion of loan payable under credit agreement to beneficial shareholder net of $138,138 of unamortized issuance costs | $ | 4,111,862 | $ | - | ||||
Accounts payable | 2,729,547 | 3,917,747 | ||||||
Accrued payroll and related taxes | 148,945 | 296,333 | ||||||
Accrued expenses | 303,490 | 259,104 | ||||||
Total current liabilities | 7,293,844 | 4,473,184 | ||||||
Loan payable under credit agreement to beneficial shareholder, net of $138,138 in 2017 and $631,488 in 2016 of unamortized issuance costs | 4,111,862 | 10,156,719 | ||||||
Total liabilities | 11,405,706 | 14,629,903 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Series 1 Convertible Preferred stock, $0.001 par value- authorized 250,000 shares, issued and outstanding 243,065 shares in 2017 and 2016 at $5.00 stated value | 1,215,325 | 1,215,325 | ||||||
Series 2 Convertible Preferred stock, $0.001 par value- authorized 25,000 shares, issued and outstanding 21,952 shares in 2017 and 2016 at $1,000 stated value | 21,952,000 | 21,952,000 | ||||||
Common stock, $0.0001 par value- authorized 15,000,000 shares, issued and outstanding 5,292,281 shares in 2017 and 5,287,281 in 2016 | 529 | 529 | ||||||
Additional paid in capital | 22,378,335 | 22,298,439 | ||||||
Accumulated deficit | (35,285,703 | ) | (30,940,572 | ) | ||||
10,260,486 | 14,525,721 | |||||||
$ | 21,666,192 | $ | 29,155,624 |
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 5,147,213 | $ | 8,541,232 | ||||
Accounts receivable, net | 13,150,666 | 10,032,714 | ||||||
Prepaid expenses | 1,043,917 | 869,081 | ||||||
Lease merchandise, net | 37,633,318 | 42,822,340 | ||||||
Total current assets | 56,975,114 | 62,265,367 | ||||||
PROPERTY AND EQUIPMENT, net | 5,875,217 | 5,911,696 | ||||||
OTHER ASSETS, net | 66,498 | 72,316 | ||||||
Total assets | $ | 62,916,829 | $ | 68,249,379 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 3,802,071 | $ | 7,907,619 | ||||
Accrued payroll and related taxes | 790,106 | 352,102 | ||||||
Promissory notes to related parties, net of $3,820 at 2021 and net of $8,276 at 2020 of unamortized issuance costs, including accrued interest | 4,802,626 | 4,815,546 | ||||||
Current portion of promissory note – Paycheck Protection Program, including accrued interest | - | 1,184,952 | ||||||
Accrued expenses | 2,500,944 | 2,646,800 | ||||||
Lease liability - current portion | 156,144 | 160,726 | ||||||
Total current liabilities | 12,051,891 | 17,067,745 | ||||||
Loan payable under credit agreement to beneficial shareholder, net of $458,058 at 2021 and $61,617 at 2020 of unamortized issuance costs and current portion | 35,266,942 | 37,134,009 | ||||||
Promissory note – Paycheck Protection Program, net of current portion | - | 741,787 | ||||||
Accrued payroll and related taxes net of current portion | 204,437 | 204,437 | ||||||
Deferred income tax liability | 378,859 | - | ||||||
Lease liabilities net of current portion | 1,865,762 | 1,947,355 | ||||||
Total liabilities | 49,767,891 | 57,095,333 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Series 1 Convertible Preferred Stock, $0.001 par value - authorized 250,000 shares, issued and outstanding 170,332 shares at $5.00 stated value | 851,660 | 851,660 | ||||||
Series 2 Convertible Preferred Stock, $0.001 par value - authorized 25,000 shares, issued and outstanding 21,952 shares at $1,000 stated value | 21,952,000 | 21,952,000 | ||||||
Common stock, $0.0001 par value- authorized 40,000,000 shares, issued and outstanding 21,381,278 shares at 2021 and 21,359,945 shares at 2020 | 2,138 | 2,136 | ||||||
Additional paid in capital | 37,894,784 | 36,843,326 | ||||||
Accumulated deficit | (47,551,645 | ) | (48,495,076 | ) | ||||
Total stockholders’ equity | 13,148,937 | 11,154,046 | ||||||
$ | 62,916,829 | $ | 68,249,379 |
The accompanying notes are an integral part of these consolidated statements.
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Lease revenues and fees | $ | 16,144,184 | $ | 12,072,493 | $ | 49,458,109 | $ | 32,505,343 | ||||||||
Lease merchandise sold | 359,656 | 255,431 | 1,174,608 | 747,747 | ||||||||||||
Total revenues | 16,503,840 | 12,327,924 | 50,632,717 | 33,253,090 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | 8,146,293 | 5,525,701 | 24,733,915 | 16,817,016 | ||||||||||||
Cost of lease merchandise sold | 280,130 | 182,879 | 816,058 | 498,594 | ||||||||||||
Provision for doubtful accounts | 4,681,832 | 3,501,023 | 14,357,461 | 9,260,469 | ||||||||||||
Marketing | 994,576 | 2,442,243 | 2,625,367 | 6,186,417 | ||||||||||||
Salaries and benefits | 1,900,925 | 1,522,792 | 5,567,082 | 4,258,753 | ||||||||||||
Operating expenses | 1,723,309 | 1,307,418 | 5,266,278 | 3,546,215 | ||||||||||||
Total costs and expenses | 17,727,065 | 14,482,056 | 53,366,161 | 40,567,464 | ||||||||||||
Operating loss | (1,223,225 | ) | (2,154,132 | ) | (2,733,444 | ) | (7,314,374 | ) | ||||||||
Interest expense including amortization of debt issuance costs | 504,392 | 459,360 | 1,611,687 | 1,445,542 | ||||||||||||
Net loss | (1,727,617 | ) | (2,613,492 | ) | (4,345,131 | ) | (8,759,916 | ) | ||||||||
Dividends on Series 2 Convertible Preferred Shares | 603,680 | 548,747 | 1,712,716 | 663,111 | ||||||||||||
Net loss attributable to common shareholders | $ | (2,331,297 | ) | $ | (3,162,239 | ) | $ | (6,057,847 | ) | $ | (9,423,027 | ) | ||||
Basic and diluted (loss) per common share: | ||||||||||||||||
Net loss | $ | (0.44 | ) | $ | (0.60 | ) | $ | (1.14 | ) | $ | (1.80 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES: | ||||||||||||||||
Basic and diluted | 5,292,281 | 5,276,714 | 5,290,077 | 5,236,954 |
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenues: | ||||||||||||||||
Lease revenues and fees, net | $ | 28,636,794 | $ | 22,900,280 | $ | 59,741,458 | $ | 46,597,985 | ||||||||
Lease merchandise sold | 2,051,759 | 1,629,850 | 3,730,765 | 2,774,892 | ||||||||||||
Total revenues | 30,688,553 | 24,530,130 | 63,472,223 | 49,372,877 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | 17,864,471 | 15,898,255 | 39,064,981 | 32,095,204 | ||||||||||||
Cost of lease merchandise sold | 1,738,180 | 1,291,090 | 3,064,623 | 1,921,871 | ||||||||||||
Marketing | 1,914,095 | 938,049 | 3,746,835 | 1,969,194 | ||||||||||||
Salaries and benefits | 2,747,005 | 2,276,516 | 5,656,324 | 4,825,385 | ||||||||||||
Operating expenses | 5,213,789 | 3,337,162 | 9,328,213 | 6,508,853 | ||||||||||||
Total costs and expenses | 29,477,540 | 23,741,072 | 60,860,976 | 47,320,507 | ||||||||||||
Operating income | 1,211,013 | 789,058 | 2,611,247 | 2,052,370 | ||||||||||||
Gain on extinguishment of debt | 1,931,825 | - | 1,931,825 | - | ||||||||||||
Interest expense including amortization of debt issuance costs | (1,222,400 | ) | (1,051,120 | ) | (2,621,397 | ) | (2,262,747 | ) | ||||||||
Income before income taxes | 1,920,438 | (262,062 | ) | 1,921,675 | (210,377 | ) | ||||||||||
Provision for income taxes | (978,244 | ) | - | (978,244 | ) | - | ||||||||||
Net income/(loss) | 942,194 | (262,062 | ) | 943,431 | (210,377 | ) | ||||||||||
Deemed dividend from exchange offer of warrants | - | - | - | (713,212 | ) | |||||||||||
Dividends on Series 2 Convertible Preferred Shares | (609,773 | ) | (609,728 | ) | (1,219,545 | ) | (1,219,445 | ) | ||||||||
Net income/(loss) attributable to common and Series 1 Convertible Preferred shareholders | $ | 332,421 | (871,790 | ) | (276,114 | ) | (2,143,034 | ) | ||||||||
Basic and diluted income/(loss) per common share: | ||||||||||||||||
Basic | $ | 0.02 | (0.04 | ) | (0.01 | ) | (0.10 | ) | ||||||||
Diluted | 0.01 | $ | (0.04 | ) | (0.01 | ) | (0.10 | ) | ||||||||
WEIGHTED AVERAGE COMMON SHARES: | ||||||||||||||||
Basic | 21,605,461 | 21,351,914 | 21,375,096 | 20,627,674 | ||||||||||||
Diluted | 23,603,477 | 21,351,914 | 21,375,096 | 20,627,674 |
The accompanying notes are an integral part of these consolidated statements.
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the ninesix months ended SeptemberJune 30, 20172021 and 2020
(unaudited)
Series 1 Convertible Preferred Stock | Series 2 Convertible Preferred Stock | Common Stock | Additional Paid in | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance, January 1, 2017 | 243,065 | $ | 1,215,325 | 21,952 | $ | 21,952,000 | 5,287,281 | $ | 529 | $ | 22,298,439 | $ | (30,940,572 | ) | $ | 14,525,721 | ||||||||||||||||||||
Provision for compensation expense related to stock options | - | - | - | - | 64,896 | - | 64,896 | |||||||||||||||||||||||||||||
Exercise of stock options | 5,000 | - | 15,000 | 15,000 | ||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (4,345,131 | ) | (4,345,131 | ) | |||||||||||||||||||||||||
Balance, September 30, 2017 | 243,065 | $ | 1,215,325 | 21,952 | $ | 21,952,000 | 5,292,281 | $ | 529 | $ | 22,378,335 | $ | (35,285,703 | ) | $ | 10,260,486 |
Series 1 Convertible Preferred Stock | Series 2 Convertible Preferred Stock | Common Stock | Additional Paid in | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance, January 1, 2021 | 170,332 | $ | 851,660 | 21,952 | $ | 21,952,000 | 21,359,945 | $ | 2,136 | $ | 36,843,326 | $ | (48,495,076 | ) | $ | 11,154,046 | ||||||||||||||||||||
Provision for compensation expense related to stock options | - | - | - | - | - | - | 380,263 | - | 380,263 | |||||||||||||||||||||||||||
Issuance of warrants in connection with consulting agreement | - | - | - | - | - | - | 212,923 | - | 212,923 | |||||||||||||||||||||||||||
Exercise of stock options into common stock | - | - | - | - | 16,000 | 2 | 12,910 | - | 12,912 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 1,237 | 1,237 | |||||||||||||||||||||||||||
Balance, March 31, 2021 | 170,332 | $ | 851,660 | 21,952 | $ | 21,952,000 | 21,375,945 | $ | 2,138 | $ | 37,449,422 | $ | (48,493,839 | ) | $ | 11,761,381 | ||||||||||||||||||||
Provision for compensation expense related to stock options | - | - | - | - | - | - | 249,222 | - | 249,222 | |||||||||||||||||||||||||||
Exercise of stock options into common stock | - | - | - | - | 5,333 | 0 | 4,214 | - | 4,214 | |||||||||||||||||||||||||||
Issuance of warrants in connection with consulting agreement | - | - | - | - | - | - | 191,926 | - | 191,926 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 942,194 | 942,194 | |||||||||||||||||||||||||||
Balance, June 30, 2021 | 170,332 | 851,660 | 21,952 | 21,952,000 | 21,381,278 | 2,138 | 37,894,784 | (47,551,645 | ) | 13,148,937 |
Series 1 Convertible Preferred Stock | Series 2 Convertible Preferred Stock | Common Stock | Additional Paid in | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance, January 1, 2020 | 171,191 | $ | 855,955 | 21,952 | $ | 21,952,000 | 17,783,960 | $ | 1,779 | $ | 35,313,721 | $ | (48,155,180 | ) | $ | 9,968,275 | ||||||||||||||||||||
Provision for compensation expense related to stock options | - | - | - | - | - | - | 171,815 | - | 171,815 | |||||||||||||||||||||||||||
Issuance of warrants in connection with consulting agreement | - | - | - | - | - | - | 43,999 | - | 43,999 | |||||||||||||||||||||||||||
Exercise of warrants into common stock | - | - | - | - | 105,000 | 10 | 131,240 | - | 131,250 | |||||||||||||||||||||||||||
Exchange offer of warrants | - | - | - | - | 3,462,683 | 346 | (346 | ) | - | - | ||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 51,685 | 51,685 | |||||||||||||||||||||||||||
Balance, March 31, 2020 | 171,191 | $ | 855,955 | 21,952 | $ | 21,952,000 | 21,351,643 | $ | 2,135 | $ | 35,660,429 | $ | (48,103,495 | ) | $ | 10,367,024 | ||||||||||||||||||||
Provision for compensation expense related to stock options | - | - | - | - | - | - | 452,033 | - | 452,033 | |||||||||||||||||||||||||||
Exercise of stock options into common stock | - | - | - | - | 3,333 | 1 | 2,633 | - | 2,634 | |||||||||||||||||||||||||||
Issuance of warrants in connection with consulting agreement | - | - | - | - | - | - | 95,481 | - | 95,481 | |||||||||||||||||||||||||||
Conversion of preferred stock to common stock | (859 | ) | (4,295 | ) | - | - | 1,136 | - | 4,295 | - | - | |||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (262,062 | ) | (262,062 | ) | |||||||||||||||||||||||||
Balance, June 30, 2020 | 170,332 | $ | 851,660 | 21,952 | $ | 21,952,000 | 21,356,112 | $ | 2,136 | $ | 36,214,871 | $ | (48,365,557 | ) | $ | 10,655,110 |
The accompanying notes are an integral part of these consolidated statements.
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ninesix months ended SeptemberJune 30, 20172021 and 20162020
(unaudited)
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (4,345,131 | ) | $ | (8,759,916 | ) | ||
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
Depreciation and impairment of lease merchandise | 24,733,916 | 16,817,016 | ||||||
Other depreciation and amortization | 1,536,491 | 1,111,026 | ||||||
Compensation expense related to issuance of stock options | 64,896 | 124,244 | ||||||
Provision for doubtful accounts | 14,357,461 | 9,260,469 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (15,570,400 | ) | (9,890,775 | ) | ||||
Prepaid expenses and other | 13,255 | (92,188 | ) | |||||
Lease merchandise | (17,315,091 | ) | (16,414,758 | ) | ||||
Security deposits | (10,207 | ) | (143 | ) | ||||
Accounts payable | (1,188,200 | ) | 801,278 | |||||
Accrued payroll and related taxes | (147,388 | ) | (126,617 | ) | ||||
Accrued expenses | 44,386 | 60,386 | ||||||
Net cash provided by (used in) operating activities | 2,173,988 | (7,109,978 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment, including capitalized software costs | (1,487,441 | ) | (1,436,701 | ) | ||||
Net cash (used in) investing activities | (1,487,441 | ) | (1,436,701 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds of loans from shareholder | - | 1,000,000 | ||||||
Repayment of loans from shareholder | - | (1,000,000 | ) | |||||
Proceeds from loan payable under credit agreement | - | 1,941,359 | ||||||
Repayment of loan payable under credit agreement | (2,288,207 | ) | (4,172,714 | ) | ||||
Proceeds from exercise of stock options | 15,000 | 42,500 | ||||||
Proceeds from sale of Series 2 Convertible Preferred Stock, net of related costs of $1,519,339 | - | 20,432,661 | ||||||
Net cash (used in) provided by financing activities | (2,273,207 | ) | 18,243,806 | |||||
(DECREASE) INCREASE IN CASH | (1,586,660 | ) | 9,697,127 | |||||
CASH, beginning of period | 5,412,495 | 3,396,206 | ||||||
CASH, end of period | $ | 3,825,835 | $ | 13,093,333 |
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income/(loss) | $ | 943,431 | $ | (210,377 | ) | |||
Adjustments to reconcile net income/(loss) to net used in/cash provided by operating activities: | ||||||||
Depreciation and impairment of lease merchandise | 39,064,981 | 32,095,204 | ||||||
Other depreciation and amortization | 1,324,049 | 1,062,139 | ||||||
Amortization of debt issuance costs | 134,580 | 184,233 | ||||||
Compensation expense related to issuance of stock options and warrants | 1,034,334 | 763,328 | ||||||
Provision for doubtful accounts | 18,804,705 | 15,564,198 | ||||||
Interest in kind added to promissory notes balance | 9,461 | 2,989 | ||||||
Deferred income tax | 378,859 | - | ||||||
Gain on debt extinguishment | (1,931,825 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (21,922,656 | ) | (15,261,863 | ) | ||||
Prepaid expenses and other | (174,222 | ) | 81,916 | |||||
Lease merchandise | (33,875,960 | ) | (27,113,342 | ) | ||||
Security deposits | 4,280 | 2,943 | ||||||
Lease Liabilities | (2,598 | ) | 197,443 | |||||
Accounts payable | (4,105,547 | ) | (1,488,607 | ) | ||||
Accrued payroll and related taxes | 438,010 | 84,922 | ||||||
Accrued expenses | (158,248 | ) | (170,185 | ) | ||||
Net cash used in/provided by operating activities | (34,366 | ) | 5,794,941 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment, including capitalized software costs | (1,367,154 | ) | (1,399,360 | ) | ||||
Net cash used in investing activities | (1,367,154 | ) | (1,399,360 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from loan payable under credit agreement | 3,500,000 | 2,412,000 | ||||||
Repayment of loan payable under credit agreement | (4,975,000 | ) | (5,864,250 | ) | ||||
Debt issuance related costs | (526,565 | ) | - | |||||
Proceeds from exercise of warrants | - | 131,250 | ||||||
Proceeds from exercise of stock options | 17,126 | 2,634 | ||||||
Proceeds from promissory notes, net of fees | - | 1,914,100 | ||||||
Principal payment under finance lease obligation | (2,457 | ) | (3,175 | ) | ||||
Repayment of instalment loan | (5,603 | ) | (5,603 | ) | ||||
Net cash used in financing activities | (1,992,499 | ) | (1,413,044 | ) | ||||
INCREASE/(DECREASE) IN CASH | (3,394,019 | ) | 2,982,537 | |||||
CASH, beginning of period | $ | 8,541,232 | $ | 6,868,472 | ||||
CASH, end of period | $ | 5,147,213 | $ | 9,851,009 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 2,506,589 | $ | 2,120,502 | ||||
Deemed dividend from exchange offer of warrants | $ | - | $ | 713,212 | ||||
Conversion of preferred stock to common stock | $ | - | $ | 4,295 |
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)
2017 | 2016 | |||||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 1,179,826 | $ | 1,124,342 | ||||
Non-cash financing activities: | ||||||||
Conversion of preferred stock to common stock | - | 425,660 | ||||||
Warrants issued to placement agent in conjunction with sale of Series 2 Preferred Stock | - | 150,451 |
The accompanying notes are an integral part of these consolidated statements.
FLEXSHOPPER, INC.
Notes To Consolidated Financial Statements
For the ninesix months ended SeptemberJune 30, 20172021 and 20162020
(Unaudited)
1. BASIS OF PRESENTATION
OurThe 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 ourthe interim financial statements does not include all information and disclosures necessary for a fair presentation of ourFlexShopper, Inc.’s 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 ourFlexShopper, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020 filed with the SEC on March 8, 2021.
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.
The consolidated balance sheet as of December 31, 20162020 contained herein has been derived from audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
2. BUSINESS
2. BUSINESS
FlexShopper, Inc. (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 lawsand owns 100% of North Carolina on June 24, 2013.FlexLending, LLC, a Delaware limited liability company. 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 on a lease-to-own basis (“LTO”), including consumers of third party retailers and e-tailers.its subsidiary FlexLending, LLC.
In January 2015, in connection with the credit agreementCredit Agreement entered into in March 2015 (see Note 7), FlexShopper 1 LLC and FlexShopper 2 LLC were organized as wholly owned Delaware subsidiaries of FlexShopper LLC to conduct operations. FlexShopper LLCInc, together with its subsidiaries, isare hereafter referred to as “FlexShopper.”
FlexShopper provides through e-commerce sites, certain types of durable goods to consumers on a lease-to-own basis (“LTO”) including consumers of third-party retailers and e-tailers. The Company effects these transactions by first approving consumers through its proprietary, risk analytics-powered underwriting model. After receiving a signed consumer lease, the Company then funds the leased item by purchasing the item from the Company’s merchant partner and leasing it to the consumer. The Company then collects payments from consumers under their consumer lease.
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 day90-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 biweekly 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 SeptemberJune 30, 20172021 and December 31, 2016:2020:
September 30, 2017 | December 31, 2016 | |||||||
Accounts receivable | $ | 6,506,104 | $ | 11,690,495 | ||||
Allowance for doubtful accounts | 3,111,378 | 9,508,708 | ||||||
Accounts receivable, net | $ | 3,394,726 | $ | 2,181,787 |
June 30, 2021 | December 31, 2020 | |||||||
Accounts receivable | $ | 45,051,239 | $ | 32,171,255 | ||||
Allowance for doubtful accounts | (31,900,573 | ) | (22,138,541 | ) | ||||
Accounts receivable, net | $ | 13,150,666 | $ | 10,032,714 |
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.off. As the customer ages, the greater the allowance attributable to that account to reflect the decreased likelihood of successful collection efforts. Accounts receivable balances charged off against the allowance were $7,133,260$2,006,509 and $20,713,314$9,042,673 for the three and ninesix months ended SeptemberJune 30, 2017,2021 respectively and $1,043,762$6,584,965 and $2,786,979$12,017,220 for the three and ninesix months ended SeptemberJune 30, 2016,2020, respectively.
Six Months Ended June 30, 2021 | Year Ended December 31, 2020 | |||||||
Beginning balance | $ | 22,138,541 | $ | 9,976,941 | ||||
Provision | 18,804,705 | 31,930,714 | ||||||
Accounts written off | (9,042,673 | ) | (19,769,114 | ) | ||||
Ending balance | $ | 31,900,573 | $ | 22,138,541 |
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 for the three and nine months ended September 30, 2017, respectively, and $603,000 and $1,615,000 for the three and nine months ended September 30, 2016, respectively.
The net leased merchandise balances consisted of the following as of SeptemberJune 30, 20172021 and December 31, 2016:2020:
September 30, 2017 | December 31, 2016 | |||||||
Lease merchandise at cost | $ | 25,837,079 | $ | 33,264,810 | ||||
Accumulated depreciation | (13,172,776 | ) | (11,578,267 | ) | ||||
Impairment reserve | (1,512,668 | ) | (3,116,083 | ) | ||||
Lease merchandise, net | $ | 11,151,635 | $ | 18,570,460 |
June 30, 2021 | December 31, 2020 | |||||||
Lease merchandise at cost | $ | 69,111,583 | $ | 64,335,971 | ||||
Accumulated depreciation | (29,224,625 | ) | (19,162,357 | ) | ||||
Impairment reserve | (2,253,640 | ) | (2,351,274 | ) | ||||
Lease merchandise, net | $ | 37,633,318 | $ | 42,822,340 |
Cost of lease merchandise sold represents the undepreciated cost of rental merchandise at the time of sale.
Lessor accounting
The Company accounts for leases in accordance with Accounting Standards Codification (ASC) Topic 842 Leases (Topic 842). Under Topic 842, lessees are required to recognize for all leases at the commencement date as 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. The breakout of lease revenues and fees, net of lessor bad debt expense, that ties the consolidated statements of operations is shown below:
Six Months ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Lease billings and accruals | $ | 78,546,163 | $ | 62,162,183 | ||||
Provision for doubtful accounts | (18,804,705 | ) | (15,564,198 | ) | ||||
Lease revenues and fees | $ | 59,741,458 | $ | 46,597,985 |
Deferred Debt Issuance Costs –- Debt issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 2016 (see Note 7)2015, and subsequent amendments 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$41,603 and $355,212$130,124 for the three and ninesix months ended SeptemberJune 30, 2017,2021, respectively, and $118,405$84,416 and $332,900$170,624 for the three and ninesix months ended SeptemberJune 30, 2016,2020, respectively.
Debt issuance costs incurred in conjunction with the subordinated Promissory Notes 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 $1,273 and $4,456 for three and six months ended June 30, 2021 and $5,471 and $13,609 for the three and six months ended June 30, 2020, respectively.
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. Intangible assets amortization expense was $769 and $1,538 for the three and six months ended June 30, 2021, respectively, and $769 and $1,538 for the three and six months ended June 30, 2020, respectively.
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$526,723 and $1,419,273$1,115,715 for the three and ninesix months ended SeptemberJune 30, 2017,2021, respectively, and $507,738$598,097 and $1,355,187$1,198,358 for the three and ninesix months ended SeptemberJune 30, 2016,2020, respectively. Capitalized software amortization expense was $583,437 and $1,154,004 for the three and six months ended June 30, 2021, respectively, and $569,217 and $1,005,984 for the three and six months ended June 30, 2020.
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. Direct acquisition costs, primarily consisting of commissions earned based on lease originations, are capitalized and amortized over the life of the lease.
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 lossincome/(loss) per share for the six months ended June 30, 2021 and the six months ended June 30, 2020, 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 induced conversion of warrants occurred in February 2020.
Nine Months ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Series 1 Convertible Preferred Stock | 147,417 | 147,417 | ||||||
Series 2 Convertible Preferred Stock | 2,710,124 | 2,711,124 | ||||||
Series 2 Convertible Preferred Stock issuable upon exercise of warrants | 54,217 | 54,217 | ||||||
Common Stock Options | 302,900 | 416,400 | ||||||
Common Stock Warrants | 511,553 | 511,553 | ||||||
3,726,211 | 3,840,711 |
Six Months ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Series 1 Convertible Preferred Stock | 225,231 | 225,231 | ||||||
Series 2 Convertible Preferred Stock | 5,845,695 | 5,845,695 | ||||||
Series 2 Convertible Preferred Stock issuable upon exercise of warrants | 116,903 | 116,903 | ||||||
Common Stock Options | 3,117,310 | 2,571,411 | ||||||
Common Stock Warrants | 2,352,488 | 1,872,488 | ||||||
11,657,627 | 10,613,728 |
AmountsThe following table sets forth the computation of basic and diluted earnings per common stock set forth in the above table have been adjustedshare for the Reverse Split (see Note 4).six months ended June 30, 2021 and 2020:
Six Months ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Numerator | ||||||||
Net income/(loss) | $ | 943,431 | $ | (210,377 | ) | |||
Convertible Series 2 Preferred Share dividends | (1,219,545 | ) | (1,219,445 | ) | ||||
Deemed dividend from exchange offer of warrants | - | (713,212 | ) | |||||
Numerator for basic and diluted EPS | $ | (276,114 | ) | $ | (2,143,034 | ) | ||
Denominator | ||||||||
Denominator for basic and diluted EPS - weighted average shares | 21,375,096 | 20,627,674 | ||||||
Basic EPS | $ | (0.01 | ) | $ | (0.10 | ) | ||
Diluted EPS | $ | (0.01 | ) | $ | (0.10 | ) |
The following table sets forth the computation of basic and diluted earnings per common share for the three months ended June 30, 2021 and 2020:
Three Months ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Numerator | ||||||||
Net income/(loss) | $ | 942,194 | $ | (262,062 | ) | |||
Convertible Series 2 Preferred Share dividends | (609,773 | ) | (609,728 | ) | ||||
Net income/(loss) attributable to common and Series 1 Convertible Preferred Stock | 332,421 | (871,790 | ) | |||||
Convertible Series 2 Preferred Share dividends attributable to Series 1 Convertible Preferred Stock | 6,357 | - | ||||||
Net income attributable to Series 1 Convertible Preferred Stock | (9,822 | ) | - | |||||
Net income/(loss) attributable to common shares - Numerator for basic and diluted EPS | $ | 328,956 | $ | (871,790 | ) | |||
Denominator | ||||||||
Weighted average of common shares outstanding | 21,380,230 | 21,351,914 | ||||||
Weighted average of common shares issuable upon conversion of outstanding Series 1 Convertible Preferred Stock | 225,231 | - | ||||||
Denominator for basic EPS- weighted average shares | 21,605,461 | 21,351,914 | ||||||
Effect of dilutive securities | ||||||||
Common stock options | 1,156,512 | - | ||||||
Common stock warrants | 841,504 | - | ||||||
Denominator for diluted EPS – adjusted weighted average shares | 23,603,477 | 21,351,914 | ||||||
Basic EPS | $ | 0.02 | $ | (0.04 | ) | |||
Diluted EPS | $ | 0.01 | $ | (0.04 | ) |
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).awards.
Fair Value of Financial Instruments – - The carrying value of certain financial instruments such as cash, accounts receivable, and accounts payable and accrued expenses approximatesapproximate their fair value due to thetheir short-term nature of their underlying terms.nature. The carrying value of loans payable under the Credit Agreement increased by unamortized issuance costs (see Note 7)approximates fair value. The carrying value of promissory notes to related parties approximates fair value based upon itstheir interest raterates, which approximatesapproximate current market interest rates.
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 SeptemberJune 30, 20172021, and December 31, 2016,2020, 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 –4. LEASES
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 modelRefer to be appliedNote 2 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 new guidance including method of adoption and related financial statement disclosures, but preliminarily does not anticipate a material impact on itsthese consolidated financial statements as a majority offor further information about the Company’s revenue generating activities as a lessor. All the Company’s customer agreements are leasing arrangements which are outsideconsidered operating leases, and the scopeCompany currently does not have any sales-type or direct financing leases.
Lease Commitments
In August 2017, FlexShopper entered into a 12-month lease with two additional three-year options for retail store space in West Palm Beach, Florida. In April 2018, FlexShopper exercised its option to extend the term of the guidance.lease to September 30, 2021. In March 2021, FlexShopper and the lessor agreed on the early termination of the lease for this property. The monthly rent for this space was approximately $2,300 per month.
In February 2016,January 2019, FlexShopper entered into a 108-month lease with an option for one additional five-year term for 21,622 square feet of office space in Boca Raton, FL to accommodate FlexShopper’s business and its employees (the “January 2019 Lease”). The monthly rent for this space is approximately $31,500 with annual 3 percent increases throughout the FASB issued ASU No. 2016-02, Leases, whichinitial 108-month lease term beginning on the anniversary of the commencement date.
The rental expense for the six months ended June 30, 2021 and 2020 was approximately $324,000 and $353,000 respectively. At June 30, 2021, the future minimum annual lease payments are approximately as follows:
2021 | $ | 204,000 | ||
2022 | 417,000 | |||
2023 | 427,000 | |||
2024 | 435,000 | |||
2025 | 443,000 | |||
Thereafter | 1,230,000 | |||
$ | 3,156,000 |
The Company determines if an arrangement is effective for fiscal years,a lease at inception. Operating lease assets and interim periods within those years,liabilities are included in the Company’s consolidated balance sheets beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be requiredJanuary 1, 2019. The breakout of operating lease assets, and current and non-current operating lease liabilities at June 30, 2021, is shown in the table below.
Supplemental balance sheet information related to recognize for all leases is as follows:
Balance Sheet Classification | June 30, 2021 | December 31, 2020 | ||||||||
Assets | ||||||||||
Operating Lease Asset | Property and Equipment, net | $ | 1,596,454 | $ | 1,673,432 | |||||
Finance Lease Asset | Property and Equipment, net | 22,962 | 27,106 | |||||||
Total Lease Assets | $ | 1,619,416 | $ | 1,700,538 | ||||||
Liabilities | ||||||||||
Operating Lease Liability - current portion | Current Lease Liabilities | $ | 147,912 | $ | 153,019 | |||||
Finance Lease Liability - current portion | Current Lease Liabilities | 8,232 | 7,707 | |||||||
Operating Lease Liability - net of current portion | Long Term Lease Liabilities | 1,848,157 | 1,925,498 | |||||||
Finance Lease Liability - net of current portion | Long Term Lease Liabilities | 17,605 | 21,857 | |||||||
Total Lease Liabilities | $ | 2,021,906 | $ | 2,108,081 |
Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement datedate. 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 whichor right-of-use asset for any leases that have a lease term of 12 months or less at commencement.
Below is a lessee’s obligation to makesummary of the weighted-average discount rate and weighted-average remaining lease payments arising from aterm for the Company’s leases:
Weighted Average Discount Rate | Weighted Average Remaining Lease Term (in years) | |||||||
Operating Leases | 13.03 | % | 7 | |||||
Finance Leases | 13.31 | % | 3 |
Operating lease measuredexpense is recognized on a discountedstraight-line basis over the lease term within operating expenses in the Company’s consolidated statements of operations. Finance lease expense is recognized over the lease term within interest expense and a right-to-use asset, which is an asset that representsamortization in the lessee’s rightCompany’s consolidated statements of operations. The Company’s total operating and finance lease expense all relate to use or control the use of a specified assetlease costs and amounted to $201,171 and $219,767 for the lease term. Lessor guidance is largely unchanged. The Company is currently evaluating the effect that the new guidance will have on its financial statements.six months ended June 30, 2021 and June 30, 2020, respectively.
Supplemental cash flow information related to operating leases is as follows:
Six Months ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Cash payments for operating leases | $ | 202,007 | $ | 14,454 | ||||
Cash payments for finance leases | 5,592 | 5,547 | ||||||
New finance lease asset obtained in exchange for lease liabilities | - | 4,033 |
4. REVERSE STOCK SPLIT
On October 14, 2016, the Company filed with the SecretaryBelow is a summary of Stateundiscounted operating lease liabilities as of June 30, 2021. The table also includes a reconciliation of the State of Delaware a certificate of amendment (the “Certificate of Amendment”)future undiscounted cash flows 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 splitthe present value of the Company’s common stock by a ratio of one-for-10 (the “Reverse Split”). At the Effective Time, 52,870,398 outstanding shares of the Company’s common stock converted into 5,287,040 shares of the Company’s common stock. All per share amounts and number of sharesoperating lease liabilities included in the consolidated financial statements and related notes have been retroactively restatedbalance sheet.
Operating Leases | ||||
2021 | $ | 198,766 | ||
2022 | 405,443 | |||
2023 | 417,606 | |||
2024 | 430,134 | |||
2025 | 443,038 | |||
2026 and thereafter | 1,229,925 | |||
Total undiscounted cash flows | 3,124,912 | |||
Less: interest | (1,128,843 | ) | ||
Present value of lease liabilities | $ | 1,996,069 |
Below is a summary of undiscounted finance lease liabilities as of June 30, 2021. The table also includes a reconciliation of the future undiscounted cash flows 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 parpresent value of the Company’s common or preferred stock.finance lease liabilities included in the consolidated balance sheet.
The Reverse Split resulted in a proportionate adjustment 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 eligible for issuance under the Company’s 2007 Omnibus Equity Compensation Plan and 2015 Omnibus Equity Compensation Plan.
Finance Leases | ||||
2021 | $ | 5,592 | ||
2022 | 11,184 | |||
2023 | 9,699 | |||
2024 | 4,781 | |||
Total undiscounted cash flows | 31,256 | |||
Less: interest | (5,419 | ) | ||
Present value of lease liabilities | $ | 25,837 |
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated Useful Lives | September 30, 2017 | December 31, 2016 | ||||||||
Furniture and fixtures | 2-5 years | $ | 106,139 | $ | 98,564 | |||||
Website and internal use software | 3 years | 5,352,872 | 3,933,600 | |||||||
Computers and software | 3-7 years | 680,071 | 619,477 | |||||||
6,139,082 | 4,651,641 | |||||||||
Less: accumulated depreciation and amortization | (3,290,099 | ) | (2,111,127 | ) | ||||||
$ | 2,848,983 | $ | 2,540,514 |
Estimated Useful Lives | June 30, 2021 | December 31, 2020 | ||||||||
Furniture, fixtures and vehicle | 2-5 years | $ | 386,988 | $ | 303,285 | |||||
Website and internal use software | 3 years | 13,605,156 | 12,489,441 | |||||||
Computers and software | 3-7 years | 1,289,650 | 1,121,914 | |||||||
15,281,794 | 13,914,640 | |||||||||
Less: accumulated depreciation and amortization | (11,025,993 | ) | (9,703,482 | ) | ||||||
Right of use assets, net | 1,619,416 | 1,700,538 | ||||||||
$ | 5,875,217 | $ | 5,911,696 |
Depreciation and amortization expense was $414,674were $671,887 and $294,616$601,357 for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively and $1,178,972$1,322,511 and $775,818$1,060,601 for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
6. PROMISSORY NOTES-RELATED PARTIES
6. LOANS PAYABLE TO SHAREHOLDERJanuary 2018 Notes - In January 2018, FlexShopper, LLC entered into letter agreement with NRNS Capital Holdings LLC (“NRNS”), the manager of which is the Chairman of the Company’s Board of Directors, pursuant to which FlexShopper, LLC issued a subordinated promissory note to NRNS. The principal amount of the January 2018 Note is $1,750,000 as of June 30, 2021. 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 computed on the basis of a 360-day year, which equaled 16.25% at June 30, 2021.
NRNS amended and restated the Note such that the maturity date of the revised Note was extended to April 1, 2022. As of June 30, 2021, $1,770,798 of principal and accrued and unpaid interest was outstanding on NRNS’s Note.
January 2019 Note -On February 11, 2016, the CompanyJanuary 25, 2019, FlexShopper, LLC entered into a secured Promissorysubordinated debt financing letter agreement with 122 Partners, LLC, as 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 the principal amount and accrued interest under the January 2019 Note withwas 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 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 16.25% at June 30, 2021. 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. On April 30, 2020, pursuant to an amendment to the subordinated debt financing letter agreement, FlexShopper, LLC and 122 Partners, LLC agreed to extend the maturity date of the January Note to April 30, 2021. On March 22, 2021, FlexShopper, LLC executed an amendment to the 122 Partners Note such that the maturity date of the January Note was set at April 1, 2022. No other changes were made to such Note. As of June 30, 2021, $1,011,879 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 5 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 16.25% at June 30, 2021. 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. On March 22, 2021, FlexShopper, LLC executed an amendment to the NRNS and February Note such that the maturity date was set at April 1, 2022. No other changes were made to such Note. As of June 30, 2021, $2,023,769 of principal and accrued and unpaid interest was outstanding on the February Note.
Amounts payable under the promissory notes are as follows:
Debt Principal | Interest | |||||||
2021 | $ | - | $ | 56,446 | ||||
2022 | $ | 4,750,000 | $ | - |
7. LOAN PAYABLE UNDER CREDIT AGREEMENT
On March 6, 2015, FlexShopper, through a wholly-owned subsidiary (“Borrower”), entered into a credit agreement (as amended from time to time, and including the Fee Letter (as defined therein),time-to-time, 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”(“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$47,500,000 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 been extended, as described below)Agreement). 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. The Lender receiveswas granted a security interestsinterest in certain leases as collateral under this Agreement.
On January 29, 2021, the Company and the Lender signed an Omnibus Amendment to the Credit Agreement. PriorThis Amendment extended the Commitment Termination Date to the January 2017 amendment described below, amounts borrowed boreApril 1, 2024, amended other covenant requirements, partially removed indebtedness covenants and amended eligibility rules. The 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 beis LIBOR plus 14%11% per annum and reduceannum. The Company paid the non-usagelender a fee on undrawn amounts if the facility is less than 75% drawn on average. Additionally, the Commitment Termination Date (as definedof $237,000 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 dateconsideration of the loan, as such date may be extended in accordance with the Credit Agreement.execution of this Omnibus Amendment. At June 30, 2021, amounts borrowed bear interest at 11.25%.
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.
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 payments of cash 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 liquidity and cash 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. A summary of the covenant requirements, and FlexShopper’s actual results at June 30, 2021, follows:
June 30, 2021 | ||||||||
Required Covenant | Actual Position | |||||||
Equity Book Value not less than | $ | 8,000,000 | $ | 13,148,936 | ||||
Liquidity greater than | 1,500,000 | 5,147,213 | ||||||
Cash greater than | 500,000 | 5,147,213 | ||||||
Consolidated Total Debt to Equity Book Value ratio not to exceed | 5.25 | 3.05 |
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 as of the last day of each fiscal quarter during 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 during such quarters (all such terms as defined 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 debt under the Credit Agreement upon a Permitted Change of Control (as defined in 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 into2021, 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$988,192 available under the Credit Agreement as of September 30, 2017.is subject to a borrowing base which is redetermined from time to time and based on specific advance rates on eligible current assets. As the Company continue to originate lease agreements, new leases will be eligible for the borrowing base and this will open more availability under 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 $1,006,310 and $2,131,549 for the three and the six months ended June 30, 2021, respectively, and $763,910 and $1,665,440 for the three and six months ended June 30, 2020, respectively. As of June 30, 2021, the outstanding balance under the Credit Agreement was $35,725,000. Such amount is presented in the consolidated balance sheet net of unamortized issuance costs of $458,058. 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.
● | Series 1 Convertible Preferred Stock- Series 1 Convertible Preferred Stock ranks senior to common stock upon liquidation. |
As of SeptemberJune 30, 2017,2021, each share of Series 1 Convertible Preferred Stock was convertible into 0.606491.32230 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, 85,132 shares of Series 1 Convertible Preferred Stock were converted into 51,983 shares of common stock. As of SeptemberJune 30, 2017,2021, there were 243,065170,332 shares of Series 1 Convertible Preferred Stock outstanding, which arewere convertible into 147,417225,231 shares of common stock.
Series 2 Convertible Preferred Stock –On June 10, 2016, the Company entered into a Subscription Agreement with 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 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.
● | Series 2 Convertible Preferred Stock- The Company sold to B2 FIE V LLC (the “Investor”), an entity affiliated with Pacific Investment Management Company LLC, 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. |
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 June 30, 2021 totaled $2,924,681 at Septemberapproximately $12,051,617. As of June 30, 2017. Each2021, each Series 2 Preferred Share iswas convertible at a conversion price of $8.10 into approximately 124266 shares of common stock; provided,however, 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 100,000,000 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 authorized40,000,000 shares of common stock, to 15,000,000.par value $0.0001 per share. Each share of common stock entitles the holder to one vote at all stockholder meetings. The common stock is traded 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 “Public Warrants”). The warrants were immediately exercisable and expire five years from the date of issuance. The warrants were 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. 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 “Consulting Agreement”), an entity of which the Company’s Chairman is manager, the Company agreed to issue 40,000 warrants to XLR8 Capital Partners LLC monthly for 12 months beginning on March 6, 2015,1, 2019 at an exercise price of $1.25 per share or, if the Company raised approximately $8.6 million in net proceeds through direct sales of 1.7 million shares of its common stock to certain affiliatesclosing share price on the last day of the Lender and other accredited investors for a purchasemonth exceeds $1.25, then such exercise price of $5.50 per share. As a resultwill be 110% of the sale to certain affiliates,closing share price. The warrants are immediately exercisable and expire following the Lender is considered a beneficial shareholderclose of business on June 30, 2023. In February 2020, this agreement was extended for an additional six months through August 31, 2020. On August 30, 2020, the Company.
On March 17, 2016, the Company’s stockholders, acting by written consent, approvedparties entered into an amendment to the Certificate of IncorporationConsulting Agreement to effect a reverse stock splitfurther extend the term for another six-month period through February 28, 2021. The Consulting Agreement automatically renewed for one successive six-month period, therefore the new termination date is August 31, 2021. There are no additional automatic renewals. The Consulting Agreement and amendments were approved by the Company’s Compensation Committee.
The August 2020 amendment also modified the alternative minimum exercise price of the Company’s common stock. On October 14, 2016,monthly warrant consideration issuable to the Consultant to $1.60 per share going forward, and the expiration date of the warrants to the date that is four years following the last trading day of the calendar month relating to the applicable monthly warrant issuance.
During the six months ended June 30, 2021, the Company filed with the Secretaryrecorded an expense of State$404,849 based on a weighted average grant date fair value of the State of Delaware a certificate of amendment (the “Certificate of Amendment”) to its certificate of incorporation, which Certificate of Amendment effectuated$1.69 per warrant.
Warrants | Expense | Grant date fair value | ||||||||||
Grant Date | Granted | Recorded | Per Warrant | |||||||||
January 31, 2021 | 40,000 | $ | 73,595 | $ | 1.84 | |||||||
February 29, 2021 | 40,000 | 76,318 | 1.91 | |||||||||
March 31, 2021 | 40,000 | 63,010 | 1.58 | |||||||||
April 30, 2021 | 40,000 | 60,542 | 1.51 | |||||||||
May 31, 2021 | 40,000 | 63,156 | 1.58 | |||||||||
June 30, 2021 | 40,000 | 68,228 | 1.71 | |||||||||
240,000 | 404,849 | 1.69 |
The following table summarizes information about outstanding stock warrants as of October 24, 2016 at 11:59 p.m. Eastern Time the Reverse Split by a ratioJune 30, 2021, all 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.which are exercisable:
Common | Series 2 Preferred | Weighted Average | ||||||||||||
Exercise | Stock Warrants | Stock Warrants | Remaining | |||||||||||
Price | Outstanding | Outstanding | Contractual Life | |||||||||||
$ | 1.25 | 1,215,184 | 2 years | |||||||||||
$ | 1.34 | 40,000 | 2 years | |||||||||||
$ | 1.40 | 40,000 | 2 years | |||||||||||
$ | 1.54 | 40,000 | 2 years | |||||||||||
$ | 1.62 | 40,000 | 2 years | |||||||||||
$ | 1.68 | 40,000 | 3 years | |||||||||||
$ | 1.69 | 40,000 | 2 years | |||||||||||
$ | 1.74 | 40,000 | 2 years | |||||||||||
$ | 1.76 | 40,000 | 2 years | |||||||||||
$ | 1.91 | 40,000 | 2 years | |||||||||||
$ | 1.95 | 40,000 | 3 years | |||||||||||
$ | 2.00 | 40,000 | 2 years | |||||||||||
$ | 2.01 | 40,000 | 2 years | |||||||||||
$ | 2.08 | 40,000 | 3 years | |||||||||||
$ | 2.45 | 40,000 | 2 years | |||||||||||
$ | 2.53 | 40,000 | 2 years | |||||||||||
$ | 2.57 | 40,000 | 4 years | |||||||||||
$ | 2.78 | 40,000 | 2 years | |||||||||||
$ | 2.79 | 40,000 | 4 years | |||||||||||
$ | 2.89 | 40,000 | 4 years | |||||||||||
$ | 2.93 | 40,000 | 2 years | |||||||||||
$ | 3.09 | 40,000 | 4 years | |||||||||||
$ | 3.17 | 40,000 | 4 years | |||||||||||
$ | 3.27 | 40,000 | 4 years | |||||||||||
$ | 3.89 | 40,000 | 4 years | |||||||||||
$ | 5.50 | 177,304 | 1 year | |||||||||||
$ | 1,250 | 439 | * | 2 years | ||||||||||
2,352,488 | 439 |
(*) | At June 30, 2021, these warrants were convertible into 116,903 shares of common stock |
9. STOCK OPTIONS
On January 31, 2007,April 26, 2018 at the Board of Directors adopted our 2007Company’s annual meeting, the Company’s stockholders approved the FlexShopper, Inc. 2018 Omnibus Equity Compensation Plan (the “2007“2018 Plan”),. Upon the 2018 Plan’s approval, approximately 1,057,000 shares of Company common stock were available for issuance thereunder. The 2018 Plan replaced the Prior Plans. No new awards will be granted under the Prior Plans; however, awards outstanding under the Prior Plans upon approval of the 2018 Plan remain subject to and will be settled with 210,000 common shares authorizedunder the applicable Prior Plan.
On February 21, 2019, the Company’s Board of Directors approved Amendment No. 1 to the 2018 Plan, subject to stockholder approval. On May 2, 2019, the Company’s stockholders approved the 2018 Plan Amendment that increased (a) the total number of shares available for issuance under the 2007 Plan. In October 2009,2018 Plan by 1,000,000 shares and (b) the number of shares available for issuance as “incentive stock options” within the meaning of Internal Revenue Code Section 422 by 1,000,000 shares.
On April 24, 2020, the Company’s Board of Directors approved an Amendment to the 2018 Plan, subject to stockholder approval. On June 10, 2020, the Company’s stockholders approved an increase inthe 2018 Plan Amendment that increased (a) the total number of shares available for issuance under the 2018 Plan by 1,000,000 shares and (b) the number of shares coveredavailable for issuance as “incentive stock options” within the meaning of Internal Revenue Code Section 422 by the 2007 Plan to 420,0001,000,000 shares.
On March 26, 2015,3, 2021, the Company’s Board adopted our 2015 Omnibus Equity Compensationof Directors approved an Amendment to the 2018 Plan, (the “2015 Plan”), with 400,000 commonsubject to stockholder approval. On June 9, 2021, the Company’s stockholders approved the 2018 Plan Amendment that increased (a) the total number of shares authorizedavailable for issuance under the 20152018 Plan which was ratified by 2,000,000 shares and (b) the Company’s stockholders on March 15, 2015. The 2007 Plan and 2015 Plan are collectively referred tonumber of shares available for issuance as “incentive stock options” within the “Plans.” meaning of Internal Revenue Code Section 422 by 2,000,000 shares.
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 ninesix months ended SeptemberJune 30, 20172021 and June 30, 2020 is as follows:
Number of shares | Weighted average exercise price | Weighted average contractual term (years) | Aggregate intrinsic value | |||||||||||||
Outstanding at January 1, 2017 | 411,600 | $ | 8.63 | |||||||||||||
Granted | 73,000 | 4.31 | ||||||||||||||
Forfeited | (16,700 | ) | 6.01 | |||||||||||||
Expired | (160,000 | ) | 12.50 | |||||||||||||
Exercised | (5,000 | ) | 3.00 | |||||||||||||
Outstanding at September 30, 2017 | 302,900 | $ | 5.78 | 7.15 | $ | 188,859 | ||||||||||
Vested and exercisable at September 30, 2017 | 203,000 | $ | 6.32 | 6.17 | $ | 103,659 | ||||||||||
Vested and exercisable at September 30, 2017 and expected to vest thereafter | 298,000 | $ | 6.32 | 7.15 | $ | 188,859 |
Number of options | Weighted average exercise price | Weighted average contractual term (years) | Aggregate intrinsic value | |||||||||||||
Outstanding at January 1, 2021 | 2,595,700 | $ | 1.92 | $ | 2,491,026 | |||||||||||
Granted | 568,278 | 2.50 | ||||||||||||||
Exercise | (21,333 | ) | 0.80 | 48,496 | ||||||||||||
Forfeited | (25,335 | ) | 2.28 | 30,987 | ||||||||||||
Outstanding at June 30, 2021 | 3,117,310 | 2.03 | 7.17 | 3,555,431 | ||||||||||||
Vested and exercisable at June 30, 2021 | 2,084,461 | 2.01 | 7.19 | 2,635,699 | ||||||||||||
Outstanding at January 1, 2020 | 2,004,318 | $ | 1.72 | $ | 2,542,361 | |||||||||||
Granted | 634,756 | 2.58 | ||||||||||||||
Forfeited | (64,330 | ) | 0.92 | 18,520 | ||||||||||||
Expired | (3,333 | ) | 0.79 | 3,166 | ||||||||||||
Outstanding at June 30, 2020 | 2,571,411 | $ | 1.95 | 7.94 | $ | 1,165,626 | ||||||||||
Vested and exercisable at June 30, 2020 | 1,623,746 | $ | 1.97 | 8.23 | $ | 971,228 |
The weighted average grant date fair value of options granted during the nine monthsix-month period ending Septemberended June 30, 20172021 and June 30, 2020 was $1.69$1.77 and $1.52 per share.share respectively. 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:
Six Months ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Exercise price | $ | 2.38 to 2.97 | $ | 1.74 to 2.89 | ||||
Expected life | 5 years | 5 years | ||||||
Expected volatility | 93 | % | 71 | % | ||||
Dividend yield | 0 | 0 | % | |||||
Risk-free interest rate | 0.31% to 0.93 | % | 0.28% to 1.72 | % |
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 consolidated statements of operations was $22,685$249,222 and $64,896,$629,485 for the three and ninesix months ended SeptemberJune 30, 2017,2021, respectively, and $45,863$452,033 and $124,244$623,848 for the three and ninesix months ended SeptemberJune 30, 2016,2020, respectively. Unrecognized compensation cost related to non-vested options at SeptemberJune 30, 20172021 amounted to approximately $126,000,$ 1,215,000 which is expected to be recognized over a weighted average period of 2.12.65 years.
10. INCOME TAXES
10. WARRANTS
On June 24, 2016,Effective income tax rates for interim periods are based on our estimate of the Company granted warrants to oneapplicable annual income tax rate. The Company’s effective income tax rate varies based upon the estimate of our annual taxable earnings and the allocation of those taxable earnings across the various states in which we operate. Changes in the annual allocation of the Company’s placement agentsactivity among these jurisdictions results in changes 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:
Series 2 Preferred | Weighted Average | |||||||||||||
Exercise | Common Stock Warrants | Stock Warrants | Remaining | |||||||||||
Price | Outstanding | Outstanding | Contractual Life | |||||||||||
$ | 11.00 | 134,250 | 2 years | |||||||||||
$ | 10.00 | 200,000 | 4 years | |||||||||||
$ | 5.50 | 177,303 | 5 years | |||||||||||
$ | 1,250 | - | 439 | 7 years | ||||||||||
511,553 | 439 |
11. INCOME TAXES
As of December 31, 2016, the Company has federal net operating loss carryforwards of approximately $15,075,000 and state net operating loss carryforwards of approximately $10,109,000 available to offset future taxable income, which expire from 2023 to 2036.
The Company expects its effective tax rate forutilized to measure the year ending December 31, 2017 to be zero due to its history of net operating lossesCompany’s income tax provision and recording a full valuation allowance on deferred tax assets. As a result the Company estimated itsassets and liabilities.
The Company’s effective income tax rate for the three and ninesix months ended SeptemberJune 30, 20172021 was approximately 51%. This was different than the expected federal income tax rate of 21% primarily due to be zero.the impact of the valuation allowance provided against our deferred tax assets. Non-taxable income from the forgiveness of PPP loans, non-deductible equity compensation, and state income taxes also impacted the effective tax rate.
The Company’s use of net operating loss carryforwards may be subject to limitations imposed by the Internal Revenue Code. Management believes that thecertain federal and state deferred tax assetassets as of SeptemberJune 30, 2017 does2021 do not satisfy the realization criteria and has recorded a valuation allowance to reduce the carrying value of the Company’s deferred tax assets to the extent that realization is not more likely than not. Deferred tax liabilities are recorded to the extent that reversing taxable temporary differences cannot be offset with existing deferred tax assets. Utilization of the tax asset.Company’s NOL carryforwards may be subject to annual limitations under Internal Revenue Code Section 382.
11. EXCHANGE OFFER OF WARRANTS
On February 4, 2020, the Company completed an exchange offer relating to outstanding public warrants, in which the holders of the public warrants were offered 0.62 shares of common stock for each outstanding warrant tendered (the “Warrant Exchange Offer”).
In total, 5,351,290 warrants were exchanged for 3,317,812 shares in accordance with the Warrant Exchange Offer.
On February 19, 2020, the Company exchanged all remaining untendered public warrants for common stock at a rate of 0.56 shares per public warrant in accordance with the terms of the Warrant Agreement (the “Mandatory Conversion of Warrants”). In total 258,610 warrants were exchanged for 144,871 shares in this transaction.
As a result of this transaction, the Company recognized a deemed dividend of $713,212 resulting from the excess of the fair value of the common stock over the intrinsic value of the warrants.
12. CONTINGENCIES AND OTHER UNCERTAINTIES
Regulatory inquiries
In the first quarter of 2021, FlexShopper, along with a number of other lease-to-own companies, received a subpoena from the California Department of Financial Protection and Innovation (the “DFPI”) requesting the production of documents and information regarding the Company’s compliance with state consumer protection laws. The Company is cooperatively engaging with the DFPI in response to its inquiry. Although the Company believes it is in compliance with all applicable consumer protection laws and regulations in California, this inquiry ultimately could lead to an enforcement action and/or a consent order, and substantial costs, including legal fees, fines, penalties, and remediation expenses.
COVID-19
The extent of the impact and effects of the recent outbreak of the coronavirus (COVID-19) on the operation and financial performance of our business will depend on future developments, including the duration and spread of the outbreak, the recovery time of the disrupted supply chains, or the uncertainty with respect to the accessibility of additional liquidity or capital markets, all of which are highly uncertain and cannot be predicted. If the demand for the Company’s leases is impacted by this outbreak for an extended period, our results of operations may be materially adversely affected.
13. COMMITMENTS
The Company does not have any commitments other than real property leases (Note 4).
14. PROMISSORY NOTE- PAYCHECK PROTECTION PROGRAM
FlexShopper, LLC (the “Borrower”) applied for and received a loan (the “Loan”) on May 4, 2020, from Customers Bank (the “Lender”) in the principal amount of $1,914,100, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020, and administered through the U.S. Small Business Administration.
The Loan was evidenced by a promissory note (the “Note”), dated April 30, 2020, issued by the Borrower to the Lender. The Note matured on April 30, 2022, and bore interest at the rate of 1.00% per annum, payable monthly commencing on November 30, 2020, following an initial deferral period as specified under the PPP. The Note might be prepaid by the Borrower at any time prior to maturity with no prepayment penalty. Proceeds from the Loan were available to the Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire sum of the principal amount and accrued interest might be forgiven to the extent the Loan proceeds were used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP.
On June 21, 2021 we were notified that effective April 7, 2021, the U.S. Small Business Administration confirmed the waiver of FlexShopper’s repayment of a $1,914,000 Paycheck Protection Program promissory note issued to the Company on May 4, 2020.
As a result of the PPP promissory note forgiveness, the Company recognized a gain from the extinguishment of the loan, including accrued interest, of $1,931,825.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing at the end of our Form 10-K for the fiscal year ended December 31, 2016.2020. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The “Risk Factors” section of our Form 10-K for the fiscal year ended December 31, 20162020 should be read for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
At FlexShopper, our highest priority remains the safety, health and well-being of our employees, their families and our communities and we remain committed to serving the needs of our customers. The COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the full impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the residual impact of COVID-19 on our industry becomes clearer.
Executive Overview
The results of operations from continuing operations below principally reflect the operations of FlexShopper, LLC (together with the Company and its direct and indirect wholly owned subsidiaries, “FlexShopper”), which provideprovides certain types of durable goods to consumers on a lease-to-own (“LTO”) basis and also provides LTO terms to consumers of third partythird-party retailers and e-retailers. FlexShopper began generating revenues from this line of business in December 2013. Management believes that the introduction of FlexShopper’s LTO programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces. FlexShopper and its online LTO platforms provide consumers the ability to acquire durable goods, including electronics, computers and furniture, on an affordable payment, lease basis. Concurrently, e-retailers 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’s sales channels include (1) selling directly to consumers via the online FlexShopper.com, an LTO Marketplace featuring thousands of durable goods, (2) utilizing FlexShopper’s patent pending LTO payment method at check out on e-commerce sites and through in-store terminals and (3) facilitating LTO transactions with retailers that have not yet become part of the FlexShopper.com LTO marketplace.
Summary of Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to credit provisions, intangible assets, contingencies, litigation and income taxes. Management bases its estimates and judgments on historical experience as well as various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, reflect the more significant judgments and estimates used in the preparation of our financial statements.
Accounts Receivable and Allowance for Doubtful Accounts –- FlexShopper seeks to collect amounts owed under its leases from each customer on a weekly or biweekly 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, anAn allowance for doubtful accounts wasis 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 accounts 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 SeptemberJune 30, 20172021 and December 31, 2016:
September 30, 2017 | December 31, 2016 | |||||||
Accounts receivable | $ | 6,506,104 | $ | 11,690,495 | ||||
Allowance for doubtful accounts | 3,111,378 | 9,508,708 | ||||||
Accounts receivable, net | $ | 3,394,726 | $ | 2,181,787 |
2020:
June 30, 2021 | December 31, 2020 | |||||||
Accounts receivable | $ | 45,051,239 | $ | 32,171,255 | ||||
Allowance for doubtful accounts | (31,900,573 | ) | (22,138,541 | ) | ||||
Accounts receivable, net | $ | 13,150,666 | $ | 10,032,714 |
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. As the customer account ages, the greater the allowance attributable to that account to reflect the decreased likelihood of successful collection efforts. Accounts receivable balances charged off against the allowance were $7,133,260$2,006,509 and $20,713,314$9,042,673 for the three and ninesix months ended SeptemberJune 30, 20172021 respectively and $1,043,762$6,584,965 and $2,786,979$12,017,220 for the three and ninesix months ended SeptemberJune 30, 2016,2020, respectively.
Lease Merchandise –- Until all payment obligations required for ownership are satisfied under the lease agreement, FlexShopper 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.
Stock Based Compensation - The fair value of transactions in which FlexShopper 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 ScholesBlack-Scholes-Merton pricing model (BSM)(“BSM”) to determine the fair value of all stock option awards.
Key Performance Metrics
We regularly review a number ofseveral metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Key performance metrics for the three months ended SeptemberJune 30, 20172021 and 2020 are as follows:
Three Months ended September 30, | ||||||||||||||||
Adjusted Gross Profit | 2017 | 2016 | $ Change | % Change | ||||||||||||
Lease revenues and fees | $ | 16,144,184 | $ | 12,072,493 | $ | 4,071,691 | 33.7 | |||||||||
Lease merchandise sold | 359,656 | 255,431 | 104,225 | 40.8 | ||||||||||||
Less: Cost of merchandise sold | 280,130 | 182,879 | 97,251 | 53.2 | ||||||||||||
Less: Provision for doubtful accounts | 4,681,832 | 3,501,023 | 1,180,809 | 33.7 | ||||||||||||
Net revenues | 11,541,878 | 8,644,022 | 2,897,856 | 33.5 | ||||||||||||
Less: Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | 8,146,293 | 5,525,701 | 2,620,592 | 47.4 | ||||||||||||
Adjusted gross profit | $ | 3,395,585 | $ | 3,118,321 | $ | 277,264 | 8.9 | |||||||||
Gross profit margin | 29 | % | 36 | % | ||||||||||||
Net revenues as a percentage of cost of lease revenue | 140 | % | 155 | % |
Three months ended June 30, | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Gross Profit: | ||||||||||||||||
Gross lease revenues and fees | $ | 38,608,150 | 30,781,551 | 7,826,599 | 25.4 | |||||||||||
Lease merchandise sold | 2,051,759 | 1,629,850 | 421,909 | 25.9 | ||||||||||||
Gross billings | 40,659,909 | 32,411,401 | 8,248,508 | 25.4 | ||||||||||||
Provision for doubtful accounts | (9,971,356 | ) | (7,881,271 | ) | (2,090,085 | ) | 26.5 | |||||||||
Net revenues | 30,688,553 | 24,530,130 | 6,158,423 | 25.1 | ||||||||||||
Cost of merchandise sold | (1,738,180 | ) | (1,291,090 | ) | (447,090 | ) | 34.6 | |||||||||
Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | (17,864,471 | ) | (15,898,255 | ) | (1,966,216 | ) | 12.4 | |||||||||
Gross profit | $ | 11,085,902 | $ | 7,340,785 | $ | 3,745,117 | 51.0 | |||||||||
Gross profit margin | 36 | % | 30 | % |
Three Months ended September 30, | ||||||||||||||||
Adjusted EBITDA | 2017 | 2016 | $ Change | % Change | ||||||||||||
Net Loss | $ | (1,727,617 | ) | $ | (2,613,492 | ) | $ | 885,875 | (33.9 | ) | ||||||
Add back: Amortization of debt costs | 118,404 | 118,404 | - | - | ||||||||||||
Add back: Other amortization and depreciation | 415,443 | 295,386 | 120,057 | 40.6 | ||||||||||||
Add back: Interest expense | 385,989 | 340,955 | 45,034 | 13.2 | ||||||||||||
Add back: Stock compensation | 22,685 | 45,863 | (23,178 | ) | (50.5 | ) | ||||||||||
Adjusted EBITDA | $ | (785,096 | )* | $ | (1,812,884 | )* | $ | 1,027,788 | (56.7 | ) |
Three months ended June 30, | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Adjusted EBITDA: | ||||||||||||||||
Net income/ (loss) | $ | 942,194 | $ | (262,062 | ) | $ | 1,204,256 | 459.5 | ||||||||
Provision for income taxes | 978,244 | - | 978,244 | |||||||||||||
Amortization of debt costs | 42,877 | 89,888 | (47,011 | ) | (52.3 | ) | ||||||||||
Other amortization and depreciation | 672,656 | 602,126 | 70,530 | 11.7 | ||||||||||||
Interest expense | 1,179,523 | 961,233 | 218,290 | 22.7 | ||||||||||||
Stock compensation | 249,222 | 452,033 | (202,811 | ) | (44.9 | ) | ||||||||||
Product/ infrastructure expenses | - | 63,376 | (63,376 | ) | ||||||||||||
Warrants compensation – consulting agreement | - | 95,481 | (95,481 | ) | ||||||||||||
Gain on debt extinguishment | (1,931,825 | ) | - | (1,931,825 | ) | |||||||||||
Adjusted EBITDA | $ | 2,132,891 | $ | 2,002,075 | $ | 130,816 | 6.5 |
Key performance metrics for the ninesix months ended SeptemberJune 30, 20172021 and 2020 are as follows:
Nine Months ended September 30, | ||||||||||||||||
Adjusted Gross Profit | 2017 | 2016 | $ Change | % Change | ||||||||||||
Lease revenues and fees | $ | 49,458,109 | $ | 32,505,343 | $ | 16,952,766 | 52.1 | |||||||||
Lease merchandise sold | 1,174,608 | 747,747 | 426,861 | 57.0 | ||||||||||||
Less: Cost of merchandise sold | 816,058 | 498,594 | 317,464 | 63.7 | ||||||||||||
Less: Provision for doubtful accounts | 14,357,461 | 9,260,469 | 5,096,992 | 55.0 | ||||||||||||
Net revenues | 35,459,198 | 23,494,027 | 11,965,171 | 50.9 | ||||||||||||
Less: Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | 24,733,915 | 16,817,016 | 7,916,899 | 47.1 | ||||||||||||
Adjusted gross profit | $ | 10,725,283 | $ | 6,677,011 | $ | 4,048,272 | 60.6 | |||||||||
Gross profit margin | 30 | % | 28 | % | ||||||||||||
Net revenues as a percentage of cost of lease revenue | 142 | % | 139 | % |
Six months ended June 30, | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Gross Profit: | ||||||||||||||||
Gross lease revenues and fees | $ | 78,546,163 | $ | 62,162,183 | $ | 16,383,980 | 26.4 | |||||||||
Lease merchandise sold | 3,730,765 | 2,774,892 | 955,873 | 34.4 | ||||||||||||
Gross billings | 82,276,928 | 64,937,075 | 17,339,853 | 26.7 | ||||||||||||
Provision for doubtful accounts | (18,804,705 | ) | (15,564,198 | ) | (3,240,507 | ) | 20.8 | |||||||||
Net revenues | 63,472,223 | 49,372,877 | 14,099,346 | 28.6 | ||||||||||||
Cost of merchandise sold | (3,064,623 | ) | (1,921,871 | ) | (1,142,752 | ) | 59.5 | |||||||||
Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | (39,064,981 | ) | (32,095,204 | ) | (6,969,778 | ) | 21.7 | |||||||||
Gross profit | $ | 21,342,619 | $ | 15,355,802 | $ | 5,986,816 | 39.0 | |||||||||
Gross profit margin | 34 | % | 31 | % |
Nine Months ended September 30, | ||||||||||||||||
Adjusted EBITDA | 2017 | 2016 | $ Change | % Change | ||||||||||||
Net Loss | $ | (4,345,131 | ) | $ | (8,759,916 | ) | $ | 4,414,785 | (50.4 | ) | ||||||
Add back: Amortization of debt costs | 355,212 | 332,900 | 22,312 | 6.7 | ||||||||||||
Add back: Other amortization and depreciation | 1,181,279 | 778,125 | 403,154 | 51.8 | ||||||||||||
Add back: Interest expense | 1,256,475 | 1,112,642 | 143,833 | 12.9 | ||||||||||||
Add back: Stock compensation | 64,896 | 124,244 | (59,348 | ) | (47.8 | ) | ||||||||||
Adjusted EBITDA | $ | (1,487,269 | )* | $ | (6,412,005 | )* | $ | 4,924,736 | (76.8 | ) |
Six months ended June 30, | ||||||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||||||
Adjusted EBITDA: | ||||||||||||||||
Net income/ (loss) | $ | 943,431 | $ | (210,377 | ) | $ | 1,153,808 | 548.4 | ||||||||
Provision for income taxes | 978,244 | - | 978,244 | |||||||||||||
Amortization of debt costs | 134,580 | 184,233 | (49,653 | ) | (27.0 | ) | ||||||||||
Other amortization and depreciation | 1,324,049 | 1,062,139 | 261,910 | 24.7 | ||||||||||||
Interest expense | 2,486,817 | 2,078,514 | 408,303 | 19.6 | ||||||||||||
Stock compensation | 629,486 | 623,848 | 5,638 | 0.9 | ||||||||||||
Product/infrastructure expenses | 10,000 | 184,440 | (174,440 | ) | (94.6 | ) | ||||||||||
Warrants compensation – consulting agreement | - | 139,480 | (139,480 | ) | ||||||||||||
Gain on debt extinguishment | (1,931,825 | ) | - | (1,931,825 | ) | |||||||||||
Adjusted EBITDA | $ | 4,574,782 | $ | 4,062,277 | $ | 512,505 | 12.6 |
* Represents loss
We refer to Adjusted Gross Profit and Adjusted EBITDA in the above tables as we use these measures to evaluate our operating performance and make strategic decisions about the Company. Management believes that Adjusted Gross Profit and Adjusted EBITDA provide relevant and useful information which is widely used by analysts, investors and competitors in our industry in assessing performance.
Adjusted Gross Profit represents GAAP revenue less the provision for doubtful accounts and cost of leased inventory and inventory sold. Adjusted Gross Profit provides us with an understanding of the results from the primary operations of our business. We use Adjusted Gross Profit to evaluate our period-over-period operating performance. This measure may be useful to an investor in evaluating the underlying operating performance of our business.
Adjusted EBITDA represents net income before interest, stock basedstock-based compensation, taxes, depreciation (other than depreciation of leased inventory), amortization, and amortization.one-time or non-recurring items. We believe that Adjusted EBITDA provides us with an understanding of one aspect of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA may be useful to an investor in evaluating our operating performance and liquidity because this measure:
● | is widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to |
● | is a financial measurement that is used by rating agencies, lenders and other parties to evaluate our credit worthiness; and |
● | is used by our management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting. |
Adjusted Gross Profit and Adjusted EBITDA areis a supplemental measuresmeasure of FlexShopper’s performance that areis neither required by, nor presented in accordance with, GAAP. Adjusted Gross Profit and Adjusted EBITDA should not be considered as substitutesa substitute for GAAP metrics such as operating loss,income/ (loss), net income or any other performance measures derived in accordance with GAAP.
Results of Operations
Three Months Ended SeptemberJune 30, 2017 compared2021 Compared to Three Months Ended SeptemberJune 30, 20162020
The following table details operating results for the three months ended SeptemberJune 30,2021 and 2020:
2021 | 2020 | $ Change | % Change | |||||||||||||
Gross lease revenues and fees | $ | 38,608,150 | $ | 30,781,551 | $ | 7,826,599 | 25.4 | |||||||||
Provision for doubtful accounts | $ | (9,971,356 | ) | $ | (7,881,271 | ) | $ | (2,090,085 | ) | 26.5 | ||||||
Net lease billing and fees | $ | 28,636,794 | $ | 22,900,280 | $ | 5,736,514 | 25.0 | |||||||||
Lease merchandise sold | 2,051,759 | 1,629,850 | 421,909 | 25.9 | ||||||||||||
Total revenues | 30,688,553 | 24,530,130 | 6,158,423 | 25.1 | ||||||||||||
Cost of lease revenue and merchandise sold | (19,602,651 | ) | (17,189,345 | ) | (2,413,306 | ) | �� | 14.0 | ||||||||
Marketing | (1,914,095 | ) | (938,049 | ) | (976,046 | ) | 104.1 | |||||||||
Salaries and benefits | (2,747,005 | ) | (2,276,516 | ) | (470,489 | ) | 20.7 | |||||||||
Other operating expenses | (5,213,789 | ) | (3,337,162 | ) | (1,876,627 | ) | 56.2 | |||||||||
Operating income | 1,211,013 | 789,058 | 421,955 | 52.6 | ||||||||||||
Gain on extinguishment of debt | 1,931,825 | - | 1,931,825 | |||||||||||||
Interest expense | (1,222,400 | ) | (1,051,120 | ) | (171,280 | ) | 16.3 | |||||||||
Provision for incomes taxes | (978,244 | ) | - | (978,244 | ) | |||||||||||
Net income/ (loss) | $ | 942,194 | (262,062 | ) | $ | 1,204,256 | 459.5 |
FlexShopper originated 38,531 gross leases less same day modifications and cancellations with an average origination value of $516 for the three months ended June 30, 20172021 compared to 33,941 gross leases less same day modifications and 2016:
2017 | 2016 | $ Change | % Change | |||||||||||||
Total revenues | $ | 16,503,840 | $ | 12,327,924 | $ | 4,175,916 | 33.9 | |||||||||
Cost of lease revenue and merchandise sold | 8,426,423 | 5,708,580 | 2,717,843 | 47.6 | ||||||||||||
Provision for doubtful accounts | 4,681,832 | 3,501,023 | 1,180,809 | 33.7 | ||||||||||||
Marketing | 994,576 | 2,442,243 | (1,447,667 | ) | (59.2 | ) | ||||||||||
Salaries and benefits | 1,900,925 | 1,522,792 | 378,133 | 24.8 | ||||||||||||
Other operating expenses | 1,723,309 | 1,307,418 | 415,891 | 31.8 | ||||||||||||
Operating loss | (1,223,225 | ) | (2,154,132 | ) | 930,907 | 43.2 | ||||||||||
Interest expense | 504,392 | 459,360 | 45,032 | 9.8 | ||||||||||||
Net loss | $ | (1,727,617 | ) | $ | (2,613,492 | ) | $ | 885,875 | 33.9 |
cancellations with an average origination value of $452 for the comparable period last year. Total lease revenues for the three months ended SeptemberJune 30, 20172021 were $16,503,839$28,636,794 compared to $12,327,924$22,900,280 for the three months ended SeptemberJune 30, 2016,2020, representing an increase of $4,175,915,$5,736,514, or 33.9%25%. FlexShopper originated 13,893 leases for the three months ended September 30, 2017 compared to 15,594 leases for the comparable period last year. FlexShopper is strategically optimizing and shifting marketing spend into the fourth quarter, a period of seasonally high demand. CumulativeContinued growth in lease originations in current and prior periods, along with repeat customers, increases in lease values and efficient marketing spend arecoupled with the expansion of retail partners, is primarily responsible for the increase in revenue forlease originations. Increased lease originations grows the quarter.
overall size of the current lease portfolio and raises lease revenue.
Cost of lease revenue and merchandise sold for the three months ended SeptemberJune 30, 20172021 was $8,426,423$19,602,651 compared to $5,708,580$17,189,345 for the three months ended SeptemberJune 30, 2016,2020, representing an increase of $2,717,843,$2,413,306, or 47.6%14.0%. Cost of lease revenue and merchandise sold for the three months ended SeptemberJune 30, 20172021 is comprised of depreciation expense onand impairment of lease merchandise of $8,146,293$17,864,471 and the net book value of merchandise sold of $280,130.$1,738,180. Cost of lease revenue and merchandise sold for the three months ended SeptemberJune 30, 20162020 is comprised of depreciation expense and impairment on lease merchandise of $5,525,701,$15,898,255 and the net book value of merchandise sold of $182,879.$1,291,090. As the Company’s lease portfolio and revenues increase, the directdepreciation and related costs associated with themthe larger portfolio also increase. Asset level performance within the portfolio, as well as, the mix of early paid off leases, will alter the average depreciable term of the leases within the portfolio and result in increases or decreases in cost of lease revenue and merchandise sold relative to lease revenue.
Provision for doubtful accounts was $4,681,832 and $3,501,023 forMarketing expenses in the three months ended SeptemberJune 30, 2017 and 2016, respectively. The primary reason for the increase is that the Company does not charge off any customer accounts until it has exhausted all collection efforts, including attempts2021 were $1,914,095 compared to repossess items. While collection efforts are pursued, delinquent customers continue to accrue weekly charges resulting$938,049 in a significant balance requiring a reserve. The Company anticipates improvement in the performance of its lease portfolio as it continues to refine its underwriting model, enhances its risk department and accumulates additional lease data. During the three months ended SeptemberJune 30, 2017 and 2016, $7,133,260 and $1,043,762 of accounts receivable balances were charged off against the allowance, respectively, after the Company exhausted all collection efforts with respect to such accounts. The significant increase was due to there being a much smaller and younger portfolio of leases against which charge-offs were made in the prior year period.
Marketing expenses in the third quarter of 2017 were $994,576, compared to $2,442,243 in the third quarter of 2016 for a decrease of $1,447,667, or 59.2%. FlexShopper is strategically optimizing and shifting marketing spend into the fourth quarter, a period of seasonally high demand.
Salary and benefits expenses in the third quarter of 2017 were $1,900,925 compared to $1,522,792 in the third quarter of 2016 for2020, an increase of $378,133,$976,046, or 24.8%104.1%. Additional call center personnel neededThe Company’s marketing expenditures are primarily related to supportincreasing new lease consumers to order to grow the increase in revenueslease portfolio. The primary source of new consumers is through digital marketing channels directing potential consumers to FlexShopper.com. The focus on digital marketing allows the Company to have enhanced reporting on the efficiency of marketing spending to ensure that it is acquiring customers at its targeted acquisition cost. A smaller portion of marketing expense is related to commissions related to retail partnerships as well as continued investment in our software engineering team are the primary reasons for the increase in salariesremarketing efforts to drive repeat consumer activity.
Salaries and benefits expenses.in the three months ended June 30, 2021 were $2,747,005 compared to $2,276,516 in the three months ended June 30, 2020, an increase of $470,489 or 20.7 %. Generally, the salary and benefits expense should directionally move with the change in lease originations and the overall size of the lease portfolio albeit at a slower rate. In this quarter, there were also some management positions filled in operational roles to increase efficiencies in the call center and other operational departments.
Operating
Other operating expenses for the three months ended SeptemberJune 30, 20172021 and 20162020 included the following:
Three months ended | Three months ended | |||||||
September 30, 2017 | September 30, 2016 | |||||||
Amortization and depreciation | $ | 533,847 | $ | 295,385 | ||||
Computer and internet expenses | 349,775 | 73,064 | ||||||
Legal and professional fees | 185,291 | 170,101 | ||||||
Merchant bank fees | 257,854 | 162,858 | ||||||
Stock compensation expense | 22,685 | 45,863 | ||||||
Other | 373,856 | 560,147 | ||||||
Total | $ | 1,723,308 | $ | 1,307,418 |
2021 | 2020 | |||||||
Amortization and depreciation | $ | 672,656 | $ | 602,126 | ||||
Computer and internet expenses | 761,295 | 418,258 | ||||||
Legal and professional fees | 896,292 | 326,342 | ||||||
Merchant bank fees | 844,571 | 470,252 | ||||||
Customer verification expenses | 810,557 | 511,697 | ||||||
Stock compensation expense | 249,222 | 452,033 | ||||||
Insurance expense | 161,751 | 111,257 | ||||||
Office and telephone expense | 217,973 | 76,905 | ||||||
Rent expense | 157,634 | 186,390 | ||||||
Advertising and recruiting fees | 103,343 | 43,702 | ||||||
Travel expenses | 73,024 | 10,700 | ||||||
Other | 265,471 | 127,500 | ||||||
Total | $ | 5,213,789 | $ | 3,337,162 |
Nine Months September
Computer and internet expenses in the three months ended June 30, 20172021 were $761,295 compared to Nine$418,258 in the three months ended June 30, 2020, representing an increase of $343,037 or 82%. A significant portion of computer and internet expense is related to scaling both the consumer facing website and the Company’s back end billing and collection systems. As the lease portfolio grows, the back-office systems will need to scale also but at a much lower rate. In this quarter, there were some additional costs related to the creation and optimization of new operational processes.
Legal and professional fees expenses in the three months ended June 30, 2021 were $896,292 compared to $326,342 in the three months ended June 30, 2020, representing an increase of $569,950 or 174.6%. During the second quarter of 2021, the Company onboarded two off-shore servicing and collections options to improve flexibility around seasonal call center traffic and improve operational metrics. In addition, the expense recorded for warrants granted as part of the consulting agreement with XLR8 Capital Partner increased in the three months period ended June 30,2021 as the weighted average valuation per warrant was $1.6 in the three months ended June 30, 2021 compared to $0.80 per warrant for the same period in 2020.
Merchant bank fees expenses in the three months ended June 30, 2021 were $844,571 compared to $470,252 in the three months ended June 30, 2020, representing an increase of $374,319 or 79.6%. Merchant bank fee expense represents the ACH and card processing fees related to billing consumers and therefore an increase in revenue is the main driver for the increase in merchant bank fees.
Customer verification expenses in the three months ended June 30, 2021 were $810,557 compared to $511,697 in the three months ended June 30, 2020, representing an increase of $298,860 or 58.4%. Customer verification expense is primarily the cost of data used for underwriting new lease applicants. The number of new lease applicants is directly correlated with changes in marketing expense. The underwriting and data science team continues to optimize the costs related to underwriting lease applications.
Six Months Ended SeptemberJune 30, 20162021 Compared to Six Months Ended June 30, 2020
The following table details operating results for the ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
2017 | 2016 | $ Change | % Change | |||||||||||||
Total revenues | $ | 50,632,717 | $ | 33,253,090 | $ | 17,379,627 | 52.3 | |||||||||
Cost of lease revenue and merchandise sold | 25,549,973 | 17,315,610 | 8,234,363 | 47.5 | ||||||||||||
Provision for doubtful accounts | 14,357,461 | 9,260,469 | 5,096,992 | 55.0 | ||||||||||||
Marketing | 2,625,367 | 6,186,417 | (3,561,050 | ) | (57.6 | ) | ||||||||||
Salaries and benefits | 5,567,082 | 4,258,753 | 1,308,329 | 30.7 | ||||||||||||
Other operating expenses | 5,266,278 | 3,546,215 | 1,720,063 | 48.5 | ||||||||||||
Operating loss | (2,733,444 | ) | (7,314,374 | ) | 4,580,930 | 62.6 | ||||||||||
Interest expense | 1,611,687 | 1,445,542 | 166,145 | 11.5 | ||||||||||||
Net loss | $ | (4,345,131 | ) | $ | (8,759,916 | ) | $ | 4,414,785 | 50.4 |
2021 | 2020 | $ Change | % Change | |||||||||||||
Gross lease revenues and fees | $ | 78,546,163 | $ | 62,162,183 | $ | 16,383,980 | 26.4 | |||||||||
Provision for doubtful accounts | $ | (18,804,705 | ) | $ | (15,564,198 | ) | $ | (3,240,507 | ) | 20.8 | ||||||
Net lease billing and fees | $ | 59,741,458 | $ | 46,597,985 | $ | 13,143,473 | 28.2 | |||||||||
Lease merchandise sold | 3,730,765 | 2,774,892 | 955,873 | 34.4 | ||||||||||||
Total revenues | 63,472,223 | 49,372,877 | 14,099,346 | 28.6 | ||||||||||||
Cost of lease revenue and merchandise sold | (42,129,604 | ) | (34,017,075 | ) | (8,112,529 | ) | 23.8 | |||||||||
Marketing | (3,746,835 | ) | (1,969,194 | ) | (1,777,641 | ) | 90.3 | |||||||||
Salaries and benefits | (5,656,324 | ) | (4,825,385 | ) | (830,939 | ) | 17.2 | |||||||||
Other operating expenses | (9,328,213 | ) | (6,508,853 | ) | (2,819,360 | ) | 43.3 | |||||||||
Operating income | 2,611,247 | 2,052,370 | 558,877 | 27.2 | ||||||||||||
Gain on extinguishment of debt | 1,931,825 | - | 1,931,825 | |||||||||||||
Interest expense | (2,621,397 | ) | (2,262,747 | ) | (358,650 | ) | 15.9 | |||||||||
Provision for incomes taxes | (978,244 | ) | - | (978,244 | ) | |||||||||||
Net income/ (loss) | $ | 943,431 | $ | (210,377 | ) | $ | 1,153,808 | 548.4 |
Total lease revenuesFlexShopper originated 77,830 gross leases less same day modifications and cancellations with an average origination value of $524 for the ninesix months ended SeptemberJune 30, 2017 were $50,632,7172021 compared to $33,253,090 for the nine months ended September 30, 2016, representing70,068 gross leases less same day modifications and cancellations with an increaseaverage origination value of $17,379,627, or 52.3%. FlexShopper originated 43,992 leases for the nine months ended September 30, 2017 compared to 35,741 leases$464 for the comparable period last year. Total lease revenues for the six months ended June 30, 2021 were $59,741,458 compared to $46,597,985 for the six months ended June 30, 2020, representing an increase of $13,143,473, or 28.2%. Continued growth in repeat customers, coupled with more efficient marketing spendthe expansion of retail partners, is primarily responsible for the increase in revenuelease originations. Increased lease originations grows the overall size of the current lease portfolio and leases. raises lease revenue.
Cost of lease revenue and merchandise sold for the ninesix months ended SeptemberJune 30, 20172021 was $25,549,973$42,129,604 compared to $17,315,610$34,017,075 for the ninesix months ended SeptemberJune 30, 2016,2020, representing an increase of $8,234,363,$8,112,529, or 47.6%23.8%. Cost of lease revenue and merchandise sold for the ninesix months ended SeptemberJune 30, 20172021 is comprised of depreciation expense onand impairment of lease merchandise of $24,733,915$39,064,981 and the net book value of merchandise sold of $816,058.$3,064,623. Cost of lease revenue and merchandise sold for the ninesix months ended SeptemberJune 30, 20162020 is comprised of depreciation expense onand impairment of lease merchandise of $16,817,016,$32,095,204 and the net book value of merchandise sold of $498,594.$1,921,871. As the Company’s lease portfolio and revenues increase, the directdepreciation and related costs associated with themthe larger portfolio also increase.
Provision for doubtful accounts was $14,357,461 and $9,260,469 for Asset level performance within the nine months ended September 30, 2017 and 2016, respectively. The primary reason for the increase is that the Company does not charge off any customer accounts until it has exhausted all collection efforts, including attempts to repossess items. While collection efforts are pursued, delinquent customers continue to accrue weekly charges resulting in a significant balance requiring a reserve. The Company anticipates improvement in the performance of its lease portfolio, as it continueswell as, the mix of early paid off leases, will alter the average depreciable term of the leases within the portfolio and result in increases or decreases in cost of lease revenue and merchandise sold relative to refine its underwriting model, enhances its risk department and accumulates additional lease data. During the nine months ended September 30, 2017 and 2016, $20,713,314 and $2,786,979 of accounts receivable balances were charged off against the allowance, respectively, after the Company exhausted all collection efforts with respect to such accounts. The significant increase was due to there being a much smaller and younger portfolio of leases against which charge-offs were made in the prior year period.revenue.
Marketing expenses in the first ninesix months of 2017ended June 30, 2021 were $2,625,367,$3,746,835 compared to $6,186,417$1,969,194 in the ninesix months ended June 30, 2020, an increase of 2016 for a decrease$1,777,641, or 90.3%. The Company marketing expenditures are primarily related to increasing new lease consumers to order to grow the lease portfolio. The primary source of $3,561,050, or 57.6%. Recognizing the seasonality of its business and periods of less consumer demand for consumer electronics,new consumers is through digital marketing channels directing potential consumers to FlexShopper.com. The focus on digital marketing allows the Company strategically reducedto have enhanced reporting on the efficiency of marketing expendituresspending to continueensure that it is acquiring customers at its targeted acquisition cost. A smaller portion of marketing expense is related to optimize customer acquisition costs.commissions related to retail partnerships as well as remarketing efforts to drive repeat consumer activity.
SalarySalaries and benefits in the six months ended June 30, 2021 were $5,656,324 compared to $4,825,385 in the six months ended June 30, 2020, an increase of $830,939, or 17.2%. Generally, the salary and benefits expense should directionally move with the change in lease originations and the overall size of the lease portfolio albeit at a slower rate. In this quarter, there were also some management positions filled in operational roles to increase efficiencies in the call center and other operational departments.
Other operating expenses for the six months ended June 30,2021 and 2020 included the following:
2021 | 2020 | |||||||
Amortization and depreciation | $ | 1,324,049 | $ | 1,062,139 | ||||
Computer and internet expenses | 1,430,187 | 847,573 | ||||||
Legal and professional fees | 1,398,330 | 1,030,079 | ||||||
Merchant bank fees | 1,284,917 | 942,713 | ||||||
Customer verification expenses | 1,668,382 | 918,512 | ||||||
Stock compensation expense | 629,486 | 623,848 | ||||||
Insurance expense | 257,404 | 218,978 | ||||||
Office and telephone expense | 415,034 | 162,458 | ||||||
Rent expense | 324,106 | 353,027 | ||||||
Advertising and recruiting fees | 132,302 | 42,538 | ||||||
Travel expenses | 103,355 | 56,874 | ||||||
Other | 360,661 | 250,114 | ||||||
Total | $ | 9,328,213 | $ | 6,508,853 |
Computer and internet expenses in the first ninesix months of 2017ended June 30, 2021 were $5,567,082$1,430,187 compared to $4,258,753$847,573 in the six months ended June 30, 2020, representing an increase of $582,614 or 68.7%. A significant portion of computer and internet expense is related to scaling both the consumer facing website and the Company’s back end billing and collection systems. As the lease portfolio grows, the back-office systems will need to scale also but at a much lower rate. In this quarter, there were some additional costs related to the creation and optimization of new operational processes.
Legal and professional fees expenses in the six months ended June 30, 2021 were $1,398,330 compared to $1,030,079 in the six months ended June 30, 2020, representing an increase of $368,251 or 35.7%. During the second quarter of 2021, the Company onboarded two off-shore servicing and collections options to improve flexibility around seasonal call center traffic and improve operational metrics. Also, the expense recorded for warrants granted as part of the consulting agreement with XLR8 Capital Partner increased in the six months period ended June 30,2021 as the weighted average valuation per warrant was $1.69 in the six months ended June 30, 2021 compared to $0.58 per warrant for the same period of 2016 forin 2020.
Merchant bank fees expenses in the three months ended June 30, 2021 were $1,284,917 compared to $942,713 in the three months ended June 30, 2020, representing an increase of $1,308,329,$342,204 or 30.7%36.3%. Additional call center personnel neededMerchant bank fee expense represents the ACH and card processing fees related to support thebilling consumers and therefore an increase in leases and revenues as well as continued investment in our software engineering team to innovate and enhance our technology platform arerevenue is the primary reasonsmain driver for the increase in salaries and benefits expenses.merchant bank fees.
OperatingCustomer verification expenses forin the ninesix months ended SeptemberJune 30, 20172021 were $1,668,382 compared to $918,512 in the six months ended June 30, 2020, representing an increase of $749,870 or 81.6%. Customer verification expense is primarily the cost of data used for underwriting new lease applicants. The number of new lease applicants is directly correlated with changes in marketing expense. The underwriting and 2016 includeddata science team continues to optimize the following:costs related to underwriting lease applications.
Nine months ended | Nine months ended | |||||||
September 30, 2017 | September 30, 2016 | |||||||
Amortization and depreciation | $ | 1,536,491 | $ | 778,125 | ||||
Computer and internet expenses | 894,924 | 188,082 | ||||||
Legal and professional fees | 706,480 | 446,591 | ||||||
Merchant bank fees | 749,791 | 427,601 | ||||||
Stock compensation expense | 64,896 | 124,244 | ||||||
Other | 1,313,696 | 1,581,572 | ||||||
Total | $ | 5,266,278 | $ | 3,546,215 |
Plan of OperationOperations
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.transactions. Our advertisements emphasize such features as instant spending limitlimits 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 qualityhigh-quality branded merchandise and services.
For each of our sales channels, FlexShopper has a marketing strategy that includes the following:
Online LTO Marketplace | Patent pending LTO Payment Method | In-store LTO technology platform | ||
Search engine optimization; pay-per click | Direct to retailers/e-retailers | Direct to retailers/e-retailers | ||
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 over competitors in the LTO industry by providing all three channels as a bundled package to retailers and e-retailers. Management is anticipating a rapid development of the FlexShopper business 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 the section captioned “Liquidity and Capital Resources” below.
Liquidity and Capital Resources
As of SeptemberJune 30, 2017,2021, the Company had cash of $3,825,835$5,147,213 compared to $13,093,333$9,851,009 at the same date in 2016.
2020. As of September 30, 2017,December 31, 2020, the Company had netcash of $8,541,232. The decrease in cash from December 31, 2020, was primarily due to the repayments on the Credit Agreement and lease merchandise acquired.
As of June 30, 2021, the Company had accounts receivable of $3,394,726 consisting of gross receivables of $6,506,104$45,051,239 offset by an allowance for doubtful accounts of $3,111,378.$31,900,573, resulting in net accounts receivable of $13,150,666. Accounts receivable are principally comprised of past due lease payments owed to the Company. An allowance for doubtful accounts is estimated based upon historical collection and delinquency percentages.
Recent FinancingsCredit Agreement
FromOn March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as amended from time to time and including the beginningFee 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 2016 through September 30, 2017, FlexShopper completedWaterfall Asset Management, LLC, as administrative agent and lender (the “Lender”). The Borrower is permitted to borrow funds under the Credit Agreement based on FlexShopper’s recently collected payments 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, the Borrower may currently borrow up to $47,500,000 from the Lender until the Commitment Termination Date and must repay all borrowed amounts one year thereafter, on the date that is 12 months following transactions, eachthe Commitment Termination Date (unless such amounts become due or payable on an earlier date pursuant to the terms of which has provided liquiditythe Credit Agreement). On January 29, 2021, pursuant to an amendment to the Credit Agreement, the Commitment Termination Date was extended to April 1, 2024, the Lender was granted a security interest in certain leases as collateral under the Credit Agreement and cash resourcesthe interest rate charged on amounts borrowed was set at LIBOR plus 11% per annum. On February 26, 2021 an amendment to FlexShopper.the Credit Agreement was signed to extend the deadline to receive approval from a third party to enter into a Backup Servicer Agreement.
| ||
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 cash and liquidity 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 may refinance the debt under the Credit Agreement, subject to the payment of an early termination fee.
In addition, the Lender and its affiliates have a right of first refusal on certain FlexShopper transactions involving leases or other financial products. 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 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.
As of June 30, 2021, the Company had $988,192 available under the Credit Agreement.
Financing Activity
On January 25, 2019, FlexShopper, LLC (the “Borrower”) entered into a subordinated debt financing letter agreement with 122 Partners, LLC, as 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. Payment of the principal amount and accrued interest under the January Note was due and payable by the borrower on April 30, 2020 and the borrower can prepay principal and interest at any time without penalty. Amounts outstanding under the January Note bear interest at a rate equal to 5.00% per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement. 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, the Borrower may be required to repay all amounts outstanding under the January Note. Obligations under the January Note are secured by substantially all of the Borrower’s assets, subject to the senior rights of the lenders under the Credit Agreement. On April 30, 2020, pursuant to an amendment to the subordinated debt financing letter agreement, the Borrower and 122 Partners, LLC agreed to extend the maturity date of the January Note to April 30, 2021. On March 22, 2021, FlexShopper, LLC executed an amendment to the 122 Partners Note such that the maturity date of the January Note was extended to April 1, 2022. No other changes were made to such Note. As of June 30, 2021, $1,011,879 of principal and accrued and unpaid interest was outstanding on the January Note.
On February 19, 2019, the Borrower entered into a letter agreement with NRNS Capital Holdings LLC (“NRNS”), the manager of which is the Chairman of the Company’s Board of Directors, pursuant to which the Borrower issued a subordinated promissory note to NRNS (the “February Note”) in the principal amount of $2,000,000. Payment of principal and accrued interest under the February Note is due and payable by the Borrower on June 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 5.00% per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement. 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, the Borrower may be required to repay all amounts outstanding under the February Note. Obligations under the February Note are secured by substantially all of the Borrower’s assets, subject to rights of the lenders under the Credit Agreement. On March 22, 2021, FlexShopper, LLC executed an amendment to the NRNS and February Note such that the maturity date was extended to April 1, 2022. No other changes were made to such Note. As of June 30, 2021, $2,023,769 of principal and accrued and unpaid interest was outstanding on the February Note.
The Company is pursuing a refinancing of both related party subordinated notes with a non-related party note with a term that is similar to the Credit Agreement.
The Company applied for and received a loan (the “Loan”) on May 4, 2020, from Customers Bank (the “PPP Lender”) in the principal amount of $1,914,100, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020, and administered through the U.S. Small Business Administration (the “SBA”).
The Loan was evidenced by a promissory note (the “Note”), dated April 30, 2020, issued by the Borrower to the PPP Lender. The Note matured on April 30, 2022, and bore interest at the rate of 1.00% per annum, payable monthly commencing the later of on November 30, 2020 or the SBA review of the forgiveness application. The Note might be prepaid by the Borrower at any time prior to maturity with no prepayment penalty. Proceeds from the Loan were available to the Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire sum of the principal amount and accrued interest might be forgiven to the extent the Loan proceeds were used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP.
On June 21, 2021 we were notified that effective April 7, 2021, the U.S. Small Business Administration confirmed the waiver of FlexShopper’s repayment of a $1,914,000 Paycheck Protection Program promissory note issued to the Company on May 4, 2020.
As a result of the PPP promissory note forgiveness, the Company recognized a gain from the extinguishment of the loan, including accrued interest, of $1,931,825.
Cash Flow Summary
Cash Flows from Operating Activities
Net cash used in operating activities was $34,366 for the six months ended June 30, 2021 primarily due to the purchases of leased merchandise and the change in accounts receivable and accounts payable partially offset by the add back of depreciation and impairment on leased merchandise and provision for doubtful accounts.
Net cash provided by operating activities was $2,173,989$5,794,941 for the ninesix months ended SeptemberJune 30, 2017 and was2020 primarily due to the increaseadd back of depreciation and impairment on leased merchandise and provision for doubtful accounts partially offset by the purchases of leased merchandise and the change in net revenuesaccounts receivable and gross profit and more efficient marketing spend for the period.accounts payable.
Net cash used by operating activities was $7,109,978 for the nine months ended September 30, 2016 and was primarily due to the net loss for the period.
Cash Flows from Investing Activities
For the ninesix months ended SeptemberJune 30, 2017,2021, net cash used in investing activities was $1,487,442,$1,367,154 comprised of $68,169$251,439 for the purchase of property and equipment and $1,419,273$1,115,715 for capitalized software costs.
For the ninesix months ended SeptemberJune 30, 2016,2020, net cash used in investing activities was $1,436,701,$1,399,360 comprised of $81,514$201,000 for the purchase of property and equipment and $1,355,187$1,198,360 for capitalized software costs.
Cash Flows from Financing Activities
Net cash used in financing activities was $2,273,208$1,992,499 for the ninesix months ended SeptemberJune 30, 2017, comprised of2021 due to loan repayments of amounts borrowed underon the Credit Agreement of $2,288,208,$4,975,000 partially offset by proceeds from$3,500,000 of funds drawn on the exercise of stock options of $15,000.Credit Agreement.
Net cash provided byused in financing activities was $18,243,806$1,413,044 for the ninesix months ended SeptemberJune 30, 2016 primarily2020 due to loan repayments on the proceeds from the saleCredit Agreement of Series 2 Convertible Preferred Stock$5,864,250 partially offset by $2,412,000 of $21,952,000 net of related costs of $1,519,339, and funds drawn on the Credit Agreement and by $1,914,100 of $2,341,359, offset by repayments of amounts borrowedproceeds received under the Credit Agreement of $4,172,714.Paycheck Protection Program.
Capital Resources
TheTo date, funds derived from the sale of FlexShopper’s common stock, warrants, Series 1 Convertible Preferred Stock and Series 2 Convertible Preferred Stock and FlexShopper’sthe Company’s ability to borrow funds underagainst the Credit Agreementlease portfolio have provided the liquidity and capital resources necessary for FlexShopper to purchase durable goods pursuant to lease-to-own transactions and to support FlexShopper’s current general working capital needs. fund its operations.
Management believes that the financing transactions described in this section above successfully renegotiated or replaced on terms acceptable to the Company will provide sufficient liquidity and capital resourcesneeds for our anticipated needsfuture growth through at least August 2018. However, therethe next 12 months can be no assurances that unforeseen circumstances will not requiremet by cash flow from operations generated by the existing portfolio and/or additional borrowings against the Credit Agreement (see Note 7).
Financial Impact of COVID-19 Pandemic
The COVID-19 Pandemic and the related stimulus programs had an impact on the Company. The immediate impact early in the second quarter of 2020 was a transition to a significant percentage of the Company’s employees working remotely. Fortunately, our South Florida location requires a thorough Hurricane Impact plan enabling all our employees to work remotely, if necessary. All employees, via specially configured laptops, are able to access the same data and have the same functionality as if they were in the office. Throughout the pandemic, FlexShopper rotated select groups of employees into the office in order to adjust to the other business impacts on the business. As of the end of June 2021, approximately 30% of our employees are working remotely.
The other impacts of the business can be broken into three categories. The first is the decrease is the availability of our lease financing product. Pre-COVID-19, approximately 40% of new customers were obtained through brick and mortar or B2B retailers. The pandemic-related closing and limited operations of retailers, as well as shelter in place orders, limited our new customers from this channel substantially over the second quarter and third quarter of 2020. Through the first half of the second quarter of 2021 there was diminished demand from our B2B retailers resulting from pandemic related issues. Moreover, since the crisis began, a number of our brick and mortar rollouts and pilots have been delayed or put on hold as our retailer partners attempt to return to a more stable operational environment.
The second impact was a Company reaction in the second quarter of 2020 to the uniqueness of the pandemic. Not knowing what the potential impact to consumer payment patterns would be, the Company significantly tightened approval rates. It was not until the end of the third quarter of 2020, that approval rates returned to raise additional investment capital sooner than expected. If the Company is unable to obtain additional required funding,pre-pandemic levels. This decreased approval rate, both online and in third party stores, coupled with the Company’s financial condition and results of operations may be materially adversely affected.retailer closures mentioned above, significantly reduced new lease originations.
The third impact was on consumer behavior and payment patterns. The combination of stimulus measures was especially impactful to our typical customer. As a result of enhanced income, the demand for our products was reduced, the likelihood of consumers choosing early payoff options increased substantially and, on a positive note, the asset level performance of our full-term customer, relative to their expected performance, increased substantially.
As of the end of July 2021, we still are experiencing the impact of the continued stimulus in our consumers’ behavior. Payment patterns are still skewing to a greater number of early payoffs versus pre-pandemic levels and reduced demand is evident in our digital marketing channels through the conversion rate of new applicants. However, the enhanced payment performance, versus our expected performance, is beginning to wane which would seem to be a potential initial indicator of a return to the Pre-COVID-19 environment.
Finally, throughout the pandemic, the Company has continued to grow the lease portfolio despite the items mentioned previously. At no point, have there been liquidity concerns or covenant complications. In fact, our credit facility was upsized, our product breadth increased and our covenants reduced in the first half of 2021.
Off-Balance Sheet Arrangements
The Company does not have any off balanceoff-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level at SeptemberJune 30, 2017.2021.
There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:PROCEEDINGS.
We are not currently a party to any pending legal proceedings that we believe will have a material adverse effect on our business, financial condition or results of operations. We may, however, be subject to various claims and legal proceedings.actions arising in the ordinary course of business from time to time.
ITEM 1A. RISK FACTORS:FACTORS.
In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. There have been no material changes to such risk factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:PROCEEDS.
Not applicable.As of June 30, 2021, the Company had issued warrants exercisable for 1,120,000 shares of its common stock to XLR8 Capital Partners LLC (“XLR8”) pursuant to that certain Consulting Agreement, dated February 19, 2019, by and between the Company and XLR8. Of these warrants, warrants for 120,000 shares of common stock were issued during the quarter ended June 30, 2021. The 1,120,000 warrants are exercisable immediately at a weighted average exercise price of $2.13 per share and an exercise price range from $1.25 to $3.89 and will remain exercisable until June 30, 2023. In connection with the issuance of the warrants, the Company relied on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.
The following table details the warrants granted for the three months ended June 30, 2021:
Warrants | ||||
Grant Date | Granted | |||
April 30, 2021 | 40,000 | |||
May 31, 2021 | 40,000 | |||
June 30, 2021 | 40,000 | |||
120,000 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:SECURITIES.
Not applicable.None.
ITEM 4. MINE SAFETY DISCLOSURES:DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION:INFORMATION.
On November 10, 2017, we filed with the Delaware Secretary of State a Certificate of Decrease of the Number of Authorized Shares of Preferred Stock of FlexShopper, Inc. Designated as Series 1 Preferred Stock (the “Certificate of Decrease”). A copy of the Certificate of Decrease is filed as an exhibit to this Form 10-Q.None.
ITEM 6. EXHIBITS:
+ Indicates a management contract or any compensatory plan, contract or arrangement.
* Filed herewith.
Filed herewith. |
+ | Indicates a management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FLEXSHOPPER, INC. | ||
Date: | By: | /s/ |
Chief Executive Officer (Principal Executive Officer) |
Date: August 9, 2021 | By: | /s/ H. Russell Heiser |
H. Russell Heiser | ||
Chief Financial Officer
|
2733