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 1934

For The Quarterly Period Endedquarterly period ended September 30, 20172022

 

Commission File Number: 0-52589☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For 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 jurisdiction
of Incorporation)

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

2700 N. Military Trail901 Yamato Road, Suite 200
260, Boca Raton, FLFlorida		 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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareFPAYThe 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 ☐
Non-accelerated filer ☐(Do not check if a smaller reporting company)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, 2017,10, 2022, the Companyissuer had a total of 5,292,28121,750,804 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

●Pageour limited operating history, limited cash and history of losses;
  
PART I.     FINANCIAL INFORMATION●our ability to obtain adequate financing to fund our business operations in the future;
  
Item 1.●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;
●the impact increasing interest rates will have on our Credit Agreement; and
●the other risks and uncertainties described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial StatementsCondition and Results of Operations” sections of our Annual Report on Form 10-K for the year ended December 31, 2021.

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

1Page No.
Cautionary Statement About Forward-Looking Statementsi
   
 Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016PART I - FINANCIAL INFORMATION1
   
Item 1.ConsolidatedFinancial Statements of Operations for the Three and Nine Months ended September 30, 2017 and 2016 (unaudited)21
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2017 (unaudited)3
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016 (unaudited)4
Notes to Consolidated Financial Statements6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1525
Item 3.Quantitative and Qualitative Disclosures About Market Risk38
Item 4.Controls and Procedures38
   
Item 3.Quantitative and Qualitative Disclosures about Market RiskPART II - OTHER INFORMATION24
   
Item 4.1.Controls and ProceduresLegal Proceedings2439
Item 1A.Risk Factors39
PART II.     OTHER INFORMATION
Item 1.Legal Proceedings25
Item 1A.Risk Factors25
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2539
Item 3.Defaults Upon Senior Securities39
Item 4.Mine Safety Disclosures39
Item 5.Other Information39
Item 6.Exhibits40
   
Item 3.SignaturesDefaults Upon Senior Securities25
Item 4.Mine Safety Disclosures25
Item 5Other Information25
Item 6.Exhibits26
Signatures2741

 

Certificationsii

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

FLEXSHOPPER, INC.

CONDENSED 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 
  September 30,  December 31, 
  2022  2021 
  (unaudited)    
ASSETS      
CURRENT ASSETS:      
Cash $5,274,219  $4,986,559 
Restricted cash  481,867   108,083 
Lease receivables, net  33,425,123   25,473,154 
Loan receivables at fair value  26,591,546   3,560,108 
Prepaid expenses and other assets  1,478,800   1,823,256 
Lease merchandise, net  30,652,824   40,942,112 
Total current assets  97,904,379   76,893,272 
         
Property and equipment, net  7,416,249   5,490,434 
Right of use asset, net  1,445,159   1,553,330 
Other assets, net  1,726,443   875,020 
Deferred tax asset, net  13,607,949   - 
Total assets $122,100,179  $84,812,056 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts payable $3,875,469  $7,982,180 
Accrued payroll and related taxes  703,465   391,078 
Promissory notes to related parties, net of $0 at 2022 and $1,274 at 2021 of unamortized issuance costs, including accrued interest  1,182,585   1,053,088 
Accrued expenses  3,243,570   2,987,646 
Lease liability - current portion  198,853   172,732 
Total current liabilities  9,203,942   12,586,724 
         
Loan payable under credit agreement to beneficial shareholder, net of $338,113 at 2022 and $413,076 at 2021 of unamortized issuance costs  77,261,887   50,061,924 
Promissory notes to related parties, net of current portion  10,750,000   3,750,000 
Deferred income tax liability  178,160   495,166 
Lease liabilities net of current portion  1,623,211   1,774,623 
Total liabilities  99,017,200   68,668,437 
         
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 21,750,804 shares at September 30, 2022 and 21,442,278 shares at December 31, 2021  2,176   2,144 
Additional paid in capital  39,771,593   38,560,117 
Accumulated deficit  (39,494,450)  (45,222,302)
Total stockholders’ equity  23,082,979   16,143,619 
  $122,100,179  $84,812,056 

 

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

 

1

 

 

FLEXSHOPPER, INC.

CONDENSED 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
September 30,		  For the nine months ended
September 30,		 
  2022  2021  2022  2021 
             
Revenues:            
Lease revenues and fees, net $24,512,086  $30,740,119  $82,746,874  $94,153,920 
Loan revenues and fees, net of changes in fair value  1,629,365   120,816   8,897,964   179,238 
Total revenues  26,141,451   30,860,935   91,644,838   94,333,158 
                 
Costs and expenses:                
Cost of lease revenues and merchandise sold  18,746,897   18,005,170   56,114,813   59,959,590 
Loan origination costs and fees  1,027,097   166,805   2,256,838   341,989 
Marketing  2,393,185   1,824,402   8,178,120   5,571,237 
Salaries and benefits  2,820,033   2,672,864   8,799,395   8,329,188 
Operating expenses  5,702,800   4,325,825   17,124,288   13,654,038 
Total costs and expenses  30,690,012   26,995,066   92,473,454   87,856,042 
                 
Operating (loss)/ income  (4,548,561)  3,865,869   (828,616)  6,477,116 
                 
Gain on extinguishment of debt  -   -   -   1,931,825 
Interest expense including amortization of debt issuance costs  (3,030,142)  (1,233,617)  (7,336,048)  (3,855,014)
(Loss)/income before income taxes  (7,578,703)  2,632,252   (8,164,664)  4,553,927 
Benefit /(expense) from income taxes  1,298,269   (936,229)  13,892,516   (1,914,473)
Net (loss)/ income  (6,280,434)  1,696,023   5,727,852   2,639,454 
                 
Dividends on Series 2 Convertible Preferred Shares  609,778   609,777   1,829,332   1,829,322 
Net income/(loss) attributable to common and Series 1 Convertible Preferred shareholders $(6,890,212)  1,086,246   3,898,520   810,132 
                 
Basic and diluted income/(loss) per common share:                
Basic $(0.32) $0.05  $0.18  $0.04 
Diluted $(0.32) $0.05  $0.17  $0.03 
                 
WEIGHTED AVERAGE COMMON SHARES:                
Basic  21,681,853   21,383,647   21,611,879   21,377,978 
Diluted  21,681,853   23,577,179   22,403,447   23,682,265 

 

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

 

2

 

 

FLEXSHOPPER, INC.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 20172022 and 2021

(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, 2022  170,332  $851,660   21,952  $21,952,000   21,442,278  $2,144  $38,560,117  $(45,222,302) $16,143,619 
Provision for compensation expense related to stock options  -   -   -   -   -   -   305,229   -   305,229 
Exercise of stock options into common stock  -   -   -   -   162,956   17   137,040   -   137,057 
Net loss  -   -   -   -   -   -   -   (2,380,935)  (2,380,935)
Balance, March 31, 2022  170,332  $851,660   21,952  $21,952,000   21,605,234  $2,161  $39,002,386  $(47,603,237) $14,204,970 
Provision for compensation expense related to stock options  -   -   -   -   -   -   257,476   -   257,476 
Net income  -   -   -   -   -   -   -   14,389,221   14,389,221 
Balance, June 30, 2022  170,332  $851,660   21,952  $21,952,000   21,605,234  $2,161  $39,259,862  $(33,214,016) $28,851,667 
Provision for compensation expense related to stock options  -   -   -   -   -   -   387,298   -   387,298 
Exercise of stock options into common stock  -   -   -   -   145,570   15   124,433   -   124,448 
Net loss  -   -   -   -   -   -   -   (6,280,434)  (6,280,434)
Balance, September 30, 2022  170,332  $851,660   21,952  $21,952,000   21,750,804  $2,176  $39,771,593  $(39,494,450) $23,082,979 

  

  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 warrants 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 
Issuance of warrants in connection with consulting agreement  -   -   -   -   -   -   191,926   -   191,926 
Exercise of stock options into common stock  -   -   -   -   5,333   -   4,214   -   4,214 
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 
Provision for compensation expense related to stock options  -   -   -   -   -   -   265,407   -   265,407 
Issuance of warrants in connection with consulting agreement  -   -   -   -   -   -   117,958   -   117,958 
Exercise of stock options into common stock  -   -   -   -   9,666   1   7,861   -   7,862 
Net Income  -   -   -   -   -   -   -   1,696,023   1,696,023 
Balance, September 30, 2021  170,332  $851,660   21,952  $21,952,000   21,390,944  $2,139  $38,286,010  $(45,855,622) $15,236,187 

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

 

3

 

 

FLEXSHOPPER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 20172022 and 20162021

(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 
  2022  2021 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income $5,727,852  $2,639,454 
Adjustments to reconcile net income to net cash (used in)/ provided by operating activities:        
Depreciation and impairment of lease merchandise  56,114,813   59,959,590 
Other depreciation and amortization  3,303,591   2,032,811 
Amortization of debt issuance costs  163,169   177,647 
Compensation expense related to stock-based compensation and warrants  950,003   1,417,699 
Provision for doubtful accounts  42,639,102   30,566,352 
Proceeds from sale of lease receivables  7,611,586   - 
Interest in kind added to promissory notes balance  128,223   9,460 
Deferred income tax  (13,924,955)  700,199 
Gain on debt extinguishment  -   (1,931,825)
Net changes in the fair value of loan receivables at fair value  1,938,570   54,236 
Changes in operating assets and liabilities:        
Lease receivables  (58,202,657)  (39,915,536)
Loan receivables at fair value  (24,970,008)  (490,995)
Prepaid expenses and other assets  344,766   (80,795)
Lease merchandise  (45,825,525)  (50,470,104)
Security deposits  (4,956)  (8,338)
Lease liabilities  (8,732)  (2,595)
Accounts payable  (4,106,711)  (4,563,434)
Accrued payroll and related taxes  312,387   277,774 
Accrued expenses  264,019   788,228 
Net cash (used in)/ provided by operating activities  (27,545,463)  1,159,828 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property and equipment, including capitalized software costs  (4,855,150)  (2,998,044)
Purchases of data costs  (1,220,722)  (461,379)
Net cash used in investing activities  (6,075,872)  (3,459,424)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from loan payable under credit agreement  32,855,000   4,000,000 
Repayment of loan payable under credit agreement  (5,730,000)  (6,575,000)
Debt issuance related costs  (86,932)  (529,608)
Proceeds from exercise of stock options  261,505   24,988 
Proceeds from promissory notes  7,000,000   - 
Principal payment under finance lease obligation  (8,388)  (5,684)
Repayment of installment loan  (8,406)  (8,406)
Net cash provided by/(used in) financing activities  34,282,779   (3,093,710)
         
INCREASE / (DECREASE) IN CASH and RESTRICTED CASH  661,444   (5,393,306)
         
CASH and RESTRICTED CASH, beginning of period  5,094,642   8,541,232 
         
CASH and RESTRICTED CASH, end of period $5,756,086  $3,147,926 
         
Supplemental cash flow information:        
Interest paid $6,828,663  $3,702,949 

  

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

 

4

 

 

FLEXSHOPPER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSNotes To Consolidated Financial Statements

For the nine months ended September 30, 20172022 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.

2021

5

(Unaudited)

 

FLEXSHOPPER, INC.

Notes To Consolidated Financial Statements

For the nine months ended September 30, 2017 and 2016

(Unaudited)

1. BASIS OF PRESENTATION

 

OurThe unaudited condensed consolidated 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, 2016.2021 filed with the SEC on March 30, 2022.

 

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.

Thecondensed consolidated balance sheet as of December 31, 20162021 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.

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

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.its subsidiaries 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.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, 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. 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.

FlexLending, LLC participates in a consumer finance program offered by a third-party bank partner. The third-party originates unsecured consumer loans through strategic sales channels. Under this program, FlexLending, LLC purchases a participation interest in each of the loans originated by the third-party.

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.periods. Actual results could differ from those estimates.

 

Restricted Cash – The Company classifies all cash whose use is limited by contractual provisions as restricted cash. Restricted cash as of September 30, 2022 and December 31, 2021 consists primarily of cash required by our third-party banking partner to cover obligations related to loan participation.

6

The reconciliation of cash and restricted cash is as follows:

  September 30,
2022		  December 31,
2021		 
       
Cash $5,274,219  $4,986,559 
Restricted cash  481,867   108,083 
Total cash and restricted cash $5,756,086  $5,094,642 


 

 

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 paymentscompletion of all required lease payments, generally 52 weeks. On any current lease, customers have the option to cancel the agreement in accordance with lease terms and return the merchandise. Accordingly, customerCustomer 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 is recognized as revenue in the period to which the payments relate. Revenues from leases and sales are reported net of sales taxes.

 

Accounts ReceivableLease Receivables 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 receivableLease receivables are principally comprised of lease payments currently owed to FlexShopper which are past due, as FlexShopper has been unable to successfully collect in the aforementioned manner described above. Through June 30, 2016,and therefore the Company has an in-house and near-shore team to collect on the past due amounts. FlexShopper maintains an allowance for doubtful accounts, wasunder which FlexShopper’s policy is to record an allowance for estimated by reservinguncollectible charges, primarily based on historical collection experience that considers both the aging of the lease and the origination channel. Other qualitative factors are considered in estimating the allowance, such as seasonality, underwriting changes and other business trends. We believe our allowance is adequate to absorb 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.expected losses. The accounts receivablelease receivables balances consisted of the following as of September 30, 20172022 and December 31, 2016:2021:

 

  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 
  September 30,
2022		  December 31,
2021		 
       
Lease receivables $46,790,076  $53,176,432 
Allowance for doubtful accounts  (13,364,953)  (27,703,278)
Lease receivables, net $33,425,123  $25,473,154 

 

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,As the same delinquent customers will continuelease ages, the greater the allowance attributable to accrue weekly charges until they are charged off, with such charges being fully reserved for. Accounts receivablethat account to reflect the decreased likelihood of successful collection efforts. Lease receivables balances charged off against the allowance were $7,133,260$16,174,329 and $20,713,314$56,977,427 for the three and nine months ended September 30, 2017,2022, respectively, and $1,043,762$18,437,746 and $2,786,979$27,454,106 for the three and nine months ended September 30, 2016,2021, respectively.

 

7
  Nine Months
Ended
September 30,
2022		  Year
Ended
December 31,
2021		 
Beginning balance $27,703,278  $22,138,541 
Provision  42,639,102   40,342,618 
Accounts written off  (56,977,427)  (34,777,881)
Ending balance $13,364,953  $27,703,278 

 

Lease Merchandise, –net - 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 September 30, 20172022 and December 31, 2016:2021:

 

  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 
  September 30,
2022		  December 31,
2021		 
Lease merchandise at cost $68,329,607  $72,159,063 
Accumulated depreciation  (34,037,173)  (29,505,431)
Impairment reserve  (3,639,610)  (1,711,520)
Lease merchandise, net $30,652,824  $40,942,112 

 

Cost of lease revenue and merchandise sold represents the depreciation and impairment of lease merchandise and the undepreciated cost of rental merchandise at the time of sale.

 

Loan receivables at fair value – The Company elected the fair value option on its entire loan receivables portfolio purchased from its bank partner. As such, loan receivables are carried at fair value in the condensed consolidated balance sheets with changes in fair value recorded in the condensed consolidated statements of operations. Accrued and unpaid interest and fees are included in loan receivables at fair value in the condensed consolidated balance sheets. Management believes the reporting of these receivables at fair value more closely approximates the true economics of the loan receivable.

Interest and fees are discontinued when loan receivables become contractually 120 or more days past due. The Company charges-off loans at the earlier of when the loans are determined to be uncollectible or when the loans are 120 days contractually past due. Recoveries on loan receivables that were previously charged off are recognized when cash is received. Changes in the fair value of loan receivables include the impact of current period charge offs associated with these receivables. 

The Company estimates the fair value of the loan receivables using a discounted cash flow analysis at an individual loan level to more accurately predict future payments. The Company adjusts expected cash flows for estimated losses and servicing costs over the estimated duration of the underlying assets. These adjustments are determined using historical data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require. Model results may be adjusted by management if the Company does not believe the output reflects the fair value of the instrument, as defined under U.S. GAAP. The models are updated at each measurement date to capture any changes in internal factors such as nature, term, volume, payment trends, remaining time to maturity, and portfolio mix, as well as changes in underwriting or observed trends expected to impact future performance.

Further details concerning loan receivables at fair value are presented within “Fair Value Measurement” section in this Note.

A third party bank partner originates our credit product and initially provides all of the funding for the loans. The third-party sells a participation of all loans originated to the Company. FlexShopper services the loans and remits the corresponding portion of any collections to the third party. Loan revenues and fees is representative of the Company’s portion of participation in the loans.

Net changes in the fair value of loan receivables at fair value, which is included in the consolidated statements of operations in the line “loan revenues and fees, net of changes in fair value” was a loss of $4,396,421 and a loss of $1,938,570 for the three and nine months ended September 30, 2022, respectively, and a gain of $4,339 and a loss of $54,236 for the three and nine months ended September 30, 2021, respectively.

Lease 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 leases at the commencement date as a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Under the same Topic, lessors are also required to classify leases. All customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases as a lessor. An operating lease results in the recognition of lease income on a straight-line basis, while the underlying leased asset remains on the lessor’s balance sheet and continues to depreciate.

The breakout of lease revenues and fees, net of lessor bad debt expense, that ties to the condensed consolidated statements of operations is shown below: 

  Three Months ended
September 30,		  Nine Months ended
September 30,		 
  2022  2021  2022  2021 
Lease billings and accruals $38,580,116  $42,528,079  $117,774,390  $124,720,272 
Provision for doubtful accounts  (15,075,109)  (11,787,960)  (42,639,102)  (30,566,352)
Gain on sale of lease receivables  1,007,079   -   7,611,586   - 
Lease revenues and fees $24,512,086  $30,740,119  $82,746,874  $94,153,920 


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$56,283 and $355,212$161,895 for the three and nine months ended September 30, 2017,2022, respectively, and $118,405$41,794 and $332,900$171,918 for the three and nine months ended September 30, 2016,2021, 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 $0 and $1,274 for the three and nine months ended September 30, 2022, respectively, and $1,273 and $5,729 for the three and nine months ended September 30, 2021, 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 areThe patent is 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 $2,307 for the three and nine months ended September 30, 2022 and September 30, 2021, 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$1,485,669 and $1,419,273$3,755,750 for the three and nine months ended September 30, 2017,2022, respectively, and $507,738$900,031 and $1,355,187$2,015,746 for the three and nine months ended September 30, 2016,2021, respectively. Capitalized software amortization expense was $759,825 and $2,064,681 for the three and nine months ended September 30, 2022, respectively, and $572,195 and $1,726,199 for the three and nine months ended September 30, 2021, respectively.

 

Data Costs - The Company buys data from different vendors upon receipt of an application. The data costs directly used to make underwriting decisions are expensed as incurred. Certain data costs that are probable to provide future economic benefit to the Company are capitalized and amortized on a straight-line basis over their estimated useful lives. The probability to provide future economic benefit of the data cost assets is estimated based upon future usage of the information in different areas and products of the Company. At the beginning of the third quarter of 2021, the Company made several changes including the implementation of a more disciplined process around data procurement and storage. Those improvements triggered a change in the estimate of the probability to provide future economic benefit of some data cost.

Capitalized data costs amounted to $458,018 and $1,220,722 for the three and nine months ended September 30, 2022, respectively, and $461,379 for the three and nine months ended September 30, 2021. Capitalized data costs amortization expense was $162,290 and $371,949 for the three and nine months ended September 30, 2022, respectively, and $24,406 for the three and nine months ended September 30, 2021. 

Capitalized data costs net of its amortization are included in the consolidated balance sheets in Other assets, net.

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 undistributeda net income availableloss, as the participating Series 1 Convertible Preferred Stock has no contractual obligation to share in the losses of the Company, there is no loss allocation between common shareholders, basicstock and Series 1 Convertible Preferred Stock.

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 incomeincome/ (loss) 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 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.

 

8

 

 

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, performance share units and warrants. The dilutive effect of stockSeries 2 Convertible Preferred Stock is computed using the if-converted method. The dilutive effect of options, performance share units and warrants isare 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, performance share units and warrants will have a dilutive effect when the average price of common stock during the period exceeds the exercise price of options, performance share units or warrants. When there is a loss from continuing operations, potential common shares are not included in the computation of diluted loss per share since they have an anti-dilutive effect.

 

In computing diluted loss per share, no effect has been given toThe following table reflects the issuancenumber of common stockshares issuable upon conversion or exercise of the following securities as their effect is anti-dilutive:exercise.

 

  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 
  September 30, 
  2022  2021 
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  3,834,047   3,113,715 
Common Stock Warrants  2,255,184   2,432,488 
Performance Share Units  790,327   - 
   13,067,387   11,734,032 

  

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).nine months ended September 30, 2022 and 2021:

 

  Nine Months ended 
  September 30, 
  2022  2021 
Numerator      
Net income $5,727,852  $2,639,454 
Series 2 Convertible Preferred Stock dividends  (1,829,332)  (1,829,322)
Net income attributable to common and Series 1 Convertible Preferred Stock  3,898,520   810,132 
Net income attributable to Series 1 Convertible Preferred Stock  (59,078)  (27,518)
Series 2 Convertible Preferred Stock dividends attributable to Series 1 Convertible Preferred Stock  18,868   19,072 
Net income attributable to common shares - Numerator for basic and diluted EPS $3,858,310  $801,686 
Denominator        
Weighted average of common shares outstanding- Denominator for basic EPS  21,611,879   21,377,978 
Effect of dilutive securities:        
Series 1 Convertible Preferred Stock  225,231   225,231 
Common stock options and performance share units  323,166   1,244,353 
Common stock warrants  243,171   834,703 
Adjusted weighted average of common shares outstanding and assumed conversions- Denominator diluted EPS  22,403,447   23,682,265 
Basic EPS $0.18  $0.04 
Diluted EPS $0.17  $0.03 


The following table sets forth the computation of basic and diluted earnings per common share for the three months ended September 30, 2022 and 2021:

  Three Months ended 
  September 30, 
  2022  2021 
Numerator      
Net (loss)/income $(6,280,434) $1,696,023 
Series 2 Convertible Preferred Stock dividends  (609,778)  (609,777)
Net income attributable to common and Series 1 Convertible Preferred Stock  (6,890,212)  1,086,246 
Net income attributable to Series 1 Convertible Preferred Stock  -   (17,678)
Series 2 Convertible Preferred Stock dividends attributable to Series 1 Convertible Preferred Stock  -   6,356 
Net (loss)/income attributable to common shares - Numerator for basic and diluted EPS $(6,890,212) $1,074,924 
Denominator        
Weighted average of common shares outstanding- Denominator for basic EPS  21,681,853   21,383,647 
Effect of dilutive securities        
Series 1 Convertible Preferred Stock  -   225,231 
Common stock options and performance share units  -   1,112,537 
Common stock warrants  -   855,764 
Adjusted weighted average of common shares outstanding and assumed conversions- Denominator for diluted EPS  21,681,853   23,577,179 
Basic earnings/ (loss) per share $(0.32) $0.05 
Diluted earnings/ (loss) per share $(0.32) $0.05 

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 ana compensation expense in the financial statements as services are performed.

 

Compensation expense for stock options is determined by reference to the fair value of an award on the date of grant and is amortizedrecognized 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 awardsawards.

Compensation expense for performance share units is recognized on an accelerated basis over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned. The fair value of performance share units is based on the fair market value of the Company’s common stock on the date of grant (see Note 9).

 

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)and the carrying value of promissory notes to related parties approximates fair value based upon itstheir interest raterates, which approximatesapproximate current market interest rates.

 


The Company utilizes the fair value option on its entire loan receivables portfolio purchased from its bank partner.

Fair Value Measurements- The Company uses a hierarchical framework that prioritizes and ranks the market observability of inputs used in its fair value measurements. Market price observability is affected by a number of factors, including the type of asset or liability and the characteristics specific to the asset or liability being measured. Assets and liabilities with readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The Company classifies the inputs used to measure fair value into one of three levels as follows:

●Level 1: Quoted prices in active markets for identical assets or liabilities.
●Level 2: Inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable.

●Level 3: Unobservable inputs for the asset or liability measured.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation.

The Company’s financial instruments that are measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 is as follows:

  Fair Value Measurement Using  Carrying 
Financial instruments – As of September 30, 2022 (1) Level 1  Level 2  Level 3  Amount 
Loan receivables at fair value $      -  $       -  $26,591,546  $20,784,782 

  Fair Value Measurement Using  Carrying 
Financial instruments – As of December 31, 2021 (1) Level 1  Level 2  Level 3  Amount 
Loan receivables at fair value $        -  $       -  $3,560,108  $3,151,184 

(1)For cash, accounts receivable, and accounts payable the carrying amount is a reasonable estimate of fair value due to their short-term nature. The carrying value of loans payable under the Credit Agreement and the carrying value of promissory notes to related parties approximates fair value based upon their interest rates, which approximate current market interest rates.

The Company primarily estimates the fair value of its loan receivables portfolio using discounted cash flow models. The models use inputs, such as estimated losses, servicing costs and discount rates, that are unobservable but reflect the Company’s best estimates of the assumptions a market participant would use to calculate fair value. Certain unobservable inputs may, in isolation, have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. An increase to the net loss rate, servicing cost, or discount rate would decrease the fair value of the Company’s loan receivables. When multiple inputs are used within the valuation techniques for loan receivables, a change in one input in a certain direction may be offset by an opposite change from another input.

The following describes the primary inputs to the discounted cash flow models that require significant judgement:

●Estimated losses are estimates of the principal payments that will not be repaid over the life of the loans, net of the expected principal recoveries on charged-off receivables. FlexShopper systems monitor collections and portfolio performance data that are used to continually refine the analytical models and statistical measures used in making marketing and underwriting decisions. Leveraging the data at the core of the business, the Company utilizes the models to estimate lifetime credit losses for loan receivables. Inputs to the models include expected cash flows, historical and current performance, and behavioral information. Management may also incorporate discretionary adjustments based on the Company’s expectations of future credit performance.


●Servicing costs – Servicing costs applied to the expected cash flows of the portfolio reflect the Company’s estimate of the amount investors would incur to service the underlying assets for the remainder of their lives. Servicing costs are derived from the Company internal analysis of our cost structure considering the characteristics of the receivables and have been benchmarked against observable information on comparable assets in the marketplace.

●Discount rates – the discount rates utilized in the cash flow analyses reflect the Company’s estimates of the rates of return that investors would require when investing in financial instruments with similar risk and return characteristics.

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents a reconciliation of the beginning and ending balances for the years ended September 30, 2022 and December 31, 2021:

  Nine months
Ended
September 30,
2022		  Year
Ended
December 31,
2021		 
Beginning balance $3,560,108  $89,445 
Purchases of loan participation  26,844,927   3,309,732 
Obligation of loan participation  467,266   163,307 
Interest and fees(1)  10,836,534   672,272 
Collections  (13,178,721)  (907,169)
Net charge off (1)  (4,450,274)  (146,923)
Net change in fair value(1)  2,511,706   379,444 
Ending balance $26,591,546  $3,560,108 

(1)Included in loan revenues and fees, net of changes in fair value in the condensed consolidated statements of operations

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents quantitative information about the inputs used in the fair value measurement as of September 30, 2022 and December 31, 2021:

  September 30, 2022  December 31, 2021 
  Minimum  Maximum  Weighted
Average(2)		  Minimum  Maximum  Weighted
Average		 
Estimated losses(1)  3.3%  39.2%  19.6%  26.0%  35.0%  34.6%
Servicing costs  -   -   3.9%  -   -  ��4.6%
Discount rate  -   -   20.3%  -   -   11.1%

(1)Figure disclosed as a percentage of outstanding principal balance.
(2)Unobservable inputs were weighted by outstanding principal balance, which are grouped by origination channel.

Other relevant data as of September 30, 2022 and December 31, 2021 concerning loan receivables at fair value are as follows:

  September 30,
2022		  December 31,
2021		 
Aggregate fair value of loan receivables that are 90 days or more past due $507,897  $     - 
Unpaid principal balance of loan receivables that are 90 days or more past due  510,625   - 
Aggregate fair value of loan receivables in non-accrual status  -   - 


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

 

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of September 30, 20172022, and December 31, 2016,2021, 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 3 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

FlexShopper had a lease for retail store space in West Palm Beach, Florida. The term of the guidance.lease was to December 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 monthly rent for this space is approximately $31,500 with annual three percent increases throughout the FASB issued ASU No. 2016-02, Leases, which is effectiveinitial 108-month lease term beginning on the anniversary of the commencement date.

In September 2021, FlexShopper entered into a 12-month lease for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognizean office space for all leasesapproximately 18 people at the Battery at SunTrust Park at Georgia, Atlanta mainly to expand the sales team. This lease was renewed for another twelve month period with a monthly rent of approximately $8,800. This lease is accounted for under the practical expedient for leases with initial terms for 12 months or less, and as such no related right of use asset or liability was recorded.

The rental expense for the nine months ended September 30, 2022 and 2021 was approximately $531,000 and $492,000 respectively. At September 30, 2022, the future minimum annual lease payments are approximately as follows:

2022 $133,000 
2023  506,000 
2024  435,000 
2025  443,000 
2026  456,000 
Thereafter  774,000 
  $2,747,000 

The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in the Company’s consolidated balance sheets beginning January 1, 2019.


Supplemental balance sheet information related to leases is as follows:

  Balance Sheet Classification September 30,
2022		  December 31,
2021		 
Assets        
Operating Lease Asset Right of use asset, net $1,432,446  $1,534,512 
Finance Lease Asset Right of use asset, net  12,713   18,818 
Total Lease Assets   $1,445,159  $1,553,330 
           
Liabilities          
Operating Lease Liability – current portion Current Lease Liabilities $190,140  $163,939 
Finance Lease Liability – current portion Current Lease Liabilities  8,713   8,793 
Operating Lease Liability – net of current portion Long Term Lease Liabilities  1,616,423   1,761,558 
Finance Lease Liability – net of current portion Long Term Lease Liabilities  6,788   13,065 
Total Lease Liabilities   $1,822,064  $1,947,355 

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% 6
Finance Leases  13.36% 2

Operating lease measuredexpense is recognized on a discountedstraight-line basis over the lease term within operating expenses in the Company’s condensed 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 condensed 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 $292,056 and $303,871 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.nine months ended September 30, 2022 and September 30, 2021, respectively.

 

Supplemental cash flow information related to operating leases is as follows:

9
  Nine Months ended 
  September 30, 
  2022  2021 
Cash payments for operating leases $302,075  $300,415 
Cash payments for finance leases  8,388   8,388 


 

 

4. REVERSE STOCK SPLIT

On October 14, 2016, the Company filed with the SecretaryBelow is a summary of Stateundiscounted operating lease liabilities as of September 30, 2022. 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 
2022 $103,371 
2023  417,606 
2024  430,134 
2025  443,038 
2026  456,330 
2027 and thereafter  773,593 
Total undiscounted cash flows  2,624,072 
Less: interest  (817,509)
Present value of lease liabilities $1,806,563 

Below is a summary of undiscounted finance lease liabilities as of September 30, 2022. 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 
2022 $2,931 
2023  9,699 
2024  4,781 
Total undiscounted cash flows  17,411 
Less: interest  (1,910)
Present value of lease liabilities $15,501 

 

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		 September 30,
2022		  December 31,
2021		 
Furniture, fixtures and vehicle 2-5 years $395,468  $391,669 
Website and internal use software 3 years  19,057,770   15,302,020 
Computers and software 3-7 years  3,377,576   2,281,975 
     22,830,814   17,975,664 
Less: accumulated depreciation and amortization    (15,414,565)  (12,485,230)
    $7,416,249  $5,490,434 

 

Depreciation and amortization expense was $414,674were $1,081,204 and $294,616$683,584 for the three months ended September 30, 20172022 and 2016,2021, respectively, and $1,178,972$2,929,335 and $775,818$2,006,098 for the nine months ended September 30, 20172022 and 2016,2021, respectively.

 


6. LOANS PAYABLE TO SHAREHOLDERPROMISSORY NOTES-RELATED PARTIES

 

122 Partners Note- On February 11, 2016, the CompanyJanuary 25, 2019, FlexShopper, LLC (the “Borrower”) 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 “122 Partners 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 122 Partners Note withwas due and payable by the borrower on April 30, 2020 and the borrower can prepay principal and interest at any time without penalty. At September 30, 2022, amounts outstanding under the 122 Partners Note bear interest at a principal stockholder for $1,000,000 at an interest rate of 15% per annum, payable upon demand,18.82%. Obligations under the 122 Partners Note are subordinated to obligations under the Credit Agreement. The 122 Partners 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 122 Partners Note. Obligations under the 122 Partners Note are secured by substantially all of the Company’s assets. The PromissoryBorrower’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 122 Partners Note to April 30, 2021. On March 22, 2021, FlexShopper, LLC executed a second amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2022. On March 31, 2022, FlexShopper, LLC executed a third amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2023. No other changes were made to the 122 Partners Note. Principal and accrued and unpaid interest outstanding on the 122 Partners Note was $1,015,539 as of September 30, 2022 and $1,011,615 as of September 30, 2021.

Interest paid for the 122 Partner Note were $45,278 and $36,779 for the three months ended September 30, 2022 and 2021, respectively, and $147,422 and $113,523 for the nine months ended September 30, 2022 and 2021, respectively.

Interest expensed for the 122 Partner Note were $46,530 and $36,516 for the three months ended September 30, 2022 and 2021, respectively, and $151,521 and $109,628 for the nine months ended September 30, 2022 and 2021, respectively.

NRNS Note- FlexShopper LLC (the “Borrower”) previously entered into letter agreements 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 subordinated promissory notes to NRNS (the “NRNS Note”) in full withthe total principal amount of $3,750,000. Payment of principal and accrued interest amounting to $51,250under the NRNS Note was due and payable by the Borrower on June 13, 2016.30, 2021 and FlexShopper, LLC can prepay principal and interest at any time without penalty. At September 30, 2022, amounts outstanding under the NRNS Note bear interest at a rate of 18.82%. Obligations under the NRNS Note are subordinated to obligations under the Credit Agreement. The NRNS 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 NRNS Note. Obligations under the NRNS Note is 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 Note such that the maturity date was extended to April 1, 2022. On February 2, 2022, FlexShopper LLC executed another amendment to the NRNS Note. This last amendment extended the maturity date from April 1, 2022 to July 1, 2024 and increased the credit commitment from $3,750,000 to $11,000,000. No other changes were made to such NRNS Note. Principal and accrued and unpaid interest outstanding on the NRNS Note was $10,917,046 as of September 30, 2022 and $3,793,581 as of September 30, 2021.

 

Interest paid for the NRNS Note were $486,739 and $138,011 for the three months ended September 30, 2022 and 2021, respectively, and $1,020,523 and $426,345 for the nine months ended September 30, 2022 and 2021, respectively.

10

Interest expensed for the NRNS Note were $500,201 and $137,024 for the three months ended September 30, 2022 and 2021, respectively, and $1,144,646 and $411,615 for the nine months ended September 30, 2022 and 2021, respectively.

Amounts payable under the promissory notes are as follows:

  Debt
Principal		  Interest 
2022 $-  $182,585 
2023 $1,000,000  $- 
2024 $10,750,000  $- 


 

 

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$57,500,000 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 is LIBOR plus 11% per annum. The Company paid the lender a fee of $237,000 in consideration of the execution of this Omnibus Amendment. At September 30, 2022, amounts borrowed bear interest at 13.82%.

On March 8, 2022, pursuant to Amendment No. 15 to Credit Agreement, the Commitment Amount was increased to be LIBOR plus 14% per annum and reduce the non-usage fee on undrawn amounts if the facility is less than 75% drawn on average. Additionally,up to $82,500,000. The incremental increase in the Commitment Termination Date (as defined in the Credit Agreement)Amount was extended from May 6, 2017 to April 1, 2018. Accordingly, commencing on or after April 1, 2018, principal together with the interest thereon is payable periodically through April 1, 2019, the amended maturity date of the loan,provided by WE 2022-1, LLC, as such date may be extended in accordance withan additional lender under the Credit Agreement. WE 2022-1, LLC is an affiliate of Waterfall Asset Management, LLC. No other changes were made to the credit agreement. As of July 1, 2022, WE 2022-1, LLC assigned 100% of its Commitment and all Loans to WE 2014-1, LLC. Effective September 27, 2022, WE 2014-1, LLC assigned 100% of its Commitments and all Loans to Powerscourt Investments 32, LP, an affiliate of Waterfall Asset Management, LLC.

 

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 September 30, 2022, follows:

  September 30, 2022 
  Required
Covenant		  Actual
Position		 
Equity Book Value not less than $9,636,387  $23,082,979 
Liquidity greater than  1,500,000   5,274,219 
Cash greater than  500,000   5,756,086 
Consolidated Total Debt to Equity Book Value ratio not to exceed  5.25   3.86 

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 Company borrowed under the Credit Agreement contained financial covenants requiring$15,055,000 and $32,855,000 for the three and nine months ended September 30, 2022, respectively, and $500,000 and $4,000,000 for the three and nine months ended September 30, 2021, respectively. The Company repaid under the Credit Agreement and its subsidiaries to maintain$4,605,000 and $5,730,000 for the three and nine months ended September 30, 2022, respectively, and $1,600,000 and $6,575,000 for the three and nine months ended September 30, 2021, respectively. The Commitment Amount as of November 10, 2022 is $110,000,000 (See Note 14).

Interest expense incurred under the last dayCredit Agreement amounted to $2,426,513 and $5,874,504 for the three and nine months ended September 30, 2022, respectively, and $1,015,930 and $3,147,479 for the three and nine months ended September 30, 2021, respectively. The outstanding balance under the Credit Agreement was $77,600,000 as of each fiscal quarter duringSeptember 30, 2022 and was $50,475,000 as of December 31, 2021. Such amount is presented in the termconsolidated balance sheets net of unamortized issuance costs of $338,113 and $413,076 as of September 30, 2022 and December 31, 2021, respectively. Interest is payable monthly on the outstanding balance of the agreement minimum amounts of Unrestricted Cashborrowed. No principal is expected to be repaid in the next twelve months due to the Commitment Termination Date having been extended to April 1, 2024, or from reductions in the borrowing base. Accordingly, all principal is shown as a non-current liability at September 30, 2022.

On March 5, 2021, the applicable regulators announced that LIBOR will cease to be provided and Equity Book Valuewill no longer be representative (i) immediately after December 31, 2021 for all sterling, euro, Swiss franc and to achieve Adjusted Operating Cash Flow of not less than certain amounts during such quarters (all such termsJapanese yen settings, and the one-week and two-month U.S. dollar settings and (ii) immediately after June 30,2023 for the remaining U.S. dollar settings. The Company’s debt bears interest based on the one-month LIBOR rate. If there is a LIBOR Disruption Event as defined in the Credit Agreement). As of December 31, 2015,Agreement, LIBOR will be replaced with 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.Prime Rate.

 

11

 

 

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 into the Company after December 31, 2016; maintaining at least $1.5 million in Unrestricted Cash; and the ratio of Consolidated Total Debt to Equity Book Value not exceeding 4.75:1. The Company was in compliance with its covenants as of September 30, 2017. The Company had $16,500,000 available under the Credit Agreement as of September 30, 2017.

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 September 30, 2017,2022, 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 September 30, 2017,2022, 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 arrears totaled $2,924,681 atas of September 30, 2017. Each2022 totaled approximately $15,100,505. As of September 30, 2022, 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.

 

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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 nine months ended September 30, 2021, the Company filed with the Secretaryrecorded an expense of State$522,808 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$1.63 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 
July 31, 2021  40,000   55,658   1.39 
August 31, 2021  40,000   62,301   1.56 
   320,000   522,808   1.63 


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 ratioSeptember 30, 2022, 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   1,055,184         1 year
$1.25   160,000    1 year
$1.34   40,000    1 year
$1.40   40,000    1 year
$1.54   40,000    1 year
$1.62   40,000    1 year
$1.68   40,000    2 years
$1.69   40,000    1 year
$1.74   40,000    1 year
$1.76   40,000    1 year
$1.91   40,000    1 year
$1.95   40,000    2 years
$2.00   40,000    1 year
$2.01   40,000    1 year
$2.08   40,000    4 years
$2.45   40,000    1 year
$2.53   40,000    1 year
$2.57   40,000    3 years
$2.70   40,000    4 years
$2.78   40,000    1 year
$2.79   40,000    4 years
$2.89   40,000    3 years
$2.93   40,000    1 year
$2.97   40,000    4 years
$3.09   40,000    4 years
$3.17   40,000    4 years
$3.19   40,000    4 years
$3.27   40,000    4 years
$1,250      439*1 year
     2,255,184  439  

(*)At September 30, 2022, these warrants were exercisable into Series 2 Preferred Stock which, in turn, were convertible into 116,903 shares of common stock


9. STOCK OPTIONSEQUITY COMPENSATION PLANS

 

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

Grants under the 2018 Plan and the Prior Plans may consist of incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares, restricted stock awards, stock unit awards,units, 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 grantedAs of September 30, 2022, approximately 580,000 shares remained available for issuance under the Plans vest over periods ranging from immediately upon grant to a three year period and expire ten years from date of grant.2018 Plan.

 

ActivityStock-based compensation expense include the following components:

  Three Months ended
September 30,		  Nine Months ended
September 30,		 
  2022  2021  2022  2021 
Stock options $238,233  $265,407  $762,340  $894,892 
Performance share units  149,065   -   187,663   - 
Total stock-based compensation $387,298  $265,407  $950,003  $894,892 

The fair value of stock-based compensation is recognized as compensation expense over the vesting period. Compensation expense recorded for stock-based compensation in stock optionsthe consolidated statements of operations was $387,298 and $950,003 for the three and nine months ended September 30, 2017 follows: 2022, respectively, and $265,407 and $894,892 for the three and nine months ended September 30, 2021, respectively. Unrecognized compensation cost related to non-vested options and PSU at September 30, 2022 amounted to $1,452,640, which is expected to be recognized over a weighted average period of 2.38 years.

 

  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 

Stock options:

 

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The weighted average grant date fair value of stock options granted duringis recognized as compensation expense by the nine month period ending September 30, 2017 was $1.69 per share.straight-line method over the vesting period. The Company measured the fair value of each stock option award on the date of grant using the Black-Scholes-Merton (BSM) pricing model with the following weighted average assumptions:

 

2017
Exercise price$4.02 to $5.25
Expected life6 years
Expected volatility38%
Dividend yield0%
Risk-free interest rate1.98% to 2.06%
  Nine months
ended
September 30,
2022		 Nine months
ended
September 30,
2021
Exercise price  $ 0.9 to 1.86  $ 2.38 to 3.09
Expected life 6 years 5 years
Expected volatility 69% 92%
Dividend yield 0% 0%
Risk-free interest rate 1.89 to 4.02 % 0.31 to 0.98 %

 

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.

 


Activity in stock options for the nine months period ended September 30, 2022 and September 30, 2021 was as follows:

  Number of
options		  Weighted
average
exercise
price		  Weighted
average
contractual
term
(years)		  Aggregate
intrinsic
value		 
Outstanding at January 1, 2022  3,080,904  $2.06           $1,923,642 
Granted  1,094,002   1.50       - 
Exercised  (308,526)  0.85       480,029 
Forfeited  (7,333)  2.22       2,273 
Expired  (25,000)  1.70       - 
Outstanding at September 30, 2022  3,834,047  $2.00   6.96  $1,219,962 
Vested and exercisable at September 30, 2022  2,694,862  $2.10   6.48  $928,330 
                 
Outstanding at January 1, 2021  2,595,700  $1.92      $2,491,026 
Granted  592,348   2.52       - 
Exercised  (30,999)  0.81       68,278 
Forfeited  (43,334)  2.13       53,952 
Outstanding at September 30, 2021  3,113,715  $2.04   6.94  $3,855,698 
Vested and exercisable at September 30, 2021  2,127,537  $2.03   7.02  $2,850,630 

The weighted average grant date fair value of options granted during the nine month period ended September 30, 2022 and September 30, 2021 was $0.91 and $1.77 per share, respectively.

Performance Share Units:

On February 10, 2022, the Compensation Committee of the Board of Directors approved awards of performance share units to certain senior executives of the Company.

For performance share units, which are settled in stock, optionsthe number of shares earned is recognizedsubject to both performance and time-based vesting. For the performance component, the number of shares earned is determined at the end of the periods based upon achievement of specified performance conditions as adjusted EBITDA of the Company. When the performance criteria are met, the award is earned and vests assuming continued employment through the specified service period(s). Shares are issued from the Company’s 2018 Omnibus Equity Compensation Plan upon vesting. The number of performance-based shares which could potentially be issued ranges from 0 up to a maximum of 790,327 of the target awards depending on the specified terms and conditions of the target award.

The fair value of performance share units is based on the fair market value of the Company’s common stock on the date of grant. The compensation expense by the straight line methodassociated with these awards is amortized on an accelerated basis over the vesting period. Compensation expense recorded for optionsperiod based on the Company’s projected assessment of the level of performance that will be achieved and earned. In the event the Company determines it is no longer probable that the minimum performance criteria specified in the statements of operationsplan will be achieved, all previously recognized compensation expense is reversed in the period such a determination is made. The Company determined it was $22,685probable that the minimum performance component would be met and $64,896,accordingly commenced amortization in the quarter ended March 31, 2022.

Activity in performance share units for the three and nine months ended September 30, 2017, respectively and $45,863 and $124,244 for the three and nine months ended September 30, 2016, respectively. Unrecognized compensation cost related to non-vested options at September 30, 2017 amounted to approximately $126,000, which is expected to be recognized over a weighted average period of 2.1 years.2022 was as follows:

 

  Number of
performance
share
units		  Weighted
average
grant date
fair
value		 
Non- vested at January 1, 2022  -   - 
Granted  790,327  $1.53 
Forfeited/ unearned  -   - 
Vested  -   - 
Non- vested at September 30, 2022  790,327  $1.53 


10. WARRANTSINCOME TAXES

 

On June 24, 2016,During the second quarter of 2022, the Company granted warrants to onereleased the valuation allowance of the Company’s placement agents to purchase 439 shares of the Company’s Series 2 Convertible Preferred Stock at an initial exercise price of $1,250 per share. The exercise price and aggregate number of shares are subject to adjustmentdeferred tax asset recorded 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.

Exercise price$1,250
Expected life7 years
Expected volatility38%
Dividend yield0%
Risk-free interest rate1.35%

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.

2021. The Company expects its effective tax rate for the year ending December 31, 2017 to be zero due to its historyhad historical cumulative positive pre-tax income plus permanent differences. The realization of net operating losses and recording a full valuation allowance on deferred tax assets. As a result the Company estimated its effective tax rate for the three and nine months ended September 30, 2017 to be zero.

The Company’s use of net operating loss carryforwards may be subject to limitations imposed by the Internal Revenue Code. Management believes that the deferred tax asset as of September 30, 2017 does2022 is more likely than not satisfybased on the realization criteriarefined and has recorded aupdated net income forecast of the Company for 2022, mainly considering the expansion of our loan portfolio with our bank partner and the sale of past due lease receivables that occurred in the second quarter of the year.

The release of the deferred tax asset valuation allowance to offsetresulted in a tax benefit of approximately $12.5 million in the tax asset.three-month period ended June 30, 2022 and in the nine-month period ended September 30,2022.

 

As of September 30, 2022, the Company had federal and state net operating loss carryforwards of $56,361,269 and $3,419,272, respectively. Our federal loss carryforwards do not expire. The Company’s net operating losses may be subject to annual Section 382 of the Internal Revenue Code limitations due to ownership changes that could impact future realization.

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Effective income tax rates for interim periods are based on our estimate of the applicable 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 activity among these jurisdictions results in changes to the effective tax rate utilized to measure the Company’s income tax provision and deferred tax assets and liabilities.

The Company’s effective income tax rate for the three months ended September 30, 2022 is different than the statutory rate of 21% primally due to the state income taxes and permanent differences. The Company’s effective income tax rate for the nine months ended September 30, 2022 is different than the statutory rate of 21% primally due to the state income taxes, permanent differences and the release of the valuation allowance.

11. 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 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.


 

12. COMMITMENTS

The Company does not have any commitments other than real property leases (Note 4).

13. 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 in the year ended December 31, 2021 a gain from the extinguishment of the loan, including accrued interest, of $1,931,825.

14. SUBSEQUENT EVENTS

Loan Payable Under Credit Agreement

On March 6, 2015, the Company, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as amended and supplemented from 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. See Note 7.

Effective September 27, 2022, WE 2014-1, LLC assigned 100% of its Commitments and all Loans to Powerscourt Investments 32, LP, an affiliate of Waterfall Asset Management, LLC.

On October 21, 2022, pursuant to Amendment No. 16 to the Credit Agreement between FlexShopper 2, LLC, as borrower, and Powerscourt Investments 32, LP, as administrative agent and lender, the Commitment Amount was increased to be up to $110,000,000. This amendment also replaced LIBOR references in the Credit Agreement with SOFR (Secured Overnight Financing Rate), as the basis for our interest payments under the Credit Agreement. No other changes were made to the Credit Agreement.


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, 2016.2021. 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, 20162021 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 and FlexLending, LLC (together with the Company and its direct and indirect wholly owned subsidiaries, “FlexShopper”), which provide. FlexShopper, LLC provides 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.

 

In 2021, through our subsidiary FlexLending, LLC, we began a test to market an unsecured, consumer loan product for our bank partner that would augment our LTO solution. In 2022, based upon the success of this testing, the marketing of our bank partner’s loans has become a strategic solution that we offer to many of our current customers and through our retailer partners.


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, fair value of loan receivables 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 ReceivableLease Receivables 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 receivableLease receivables 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 accountsprimarily based upon revenueshistorical collection experience that considers both the aging of the lease and historical experience of balances charged offthe origination channel. Other qualitative factors are considered in estimating the allowance, such as a percentage of revenues.seasonality, underwriting changes and other business trends. The accounts receivablelease receivables balances consisted of the following as of September 30, 20172022 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 

2021:

15

 

  September 30,
2022		  December 31,
2021		 
       
Lease receivables $46,790,076  $53,176,432 
Allowance for doubtful accounts  (13,364,953)  (27,703,278)
Lease receivables, net $33,425,123  $25,473,154 

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,As the same delinquent customers will continuelease ages, the greater the allowance attributable to accrue weekly charges until they are charged off.that account to reflect the decreased likelihood of successful collection efforts. Accounts receivable balances charged off against the allowance were $7,133,260$16,174,329 and $20,713,314$56,977,427 for the three and nine months ended September 30, 20172022 respectively, and $1,043,762$18,437,746 and $2,786,979$27,454,106 for the three and nine months ended September 30, 2016,2021, respectively.

 


Lease Merchandise, net – Until all payment obligations required for ownership are satisfied under the lease agreement, FlexShopperthe 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 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.

Loan receivables at fair value – The Company elected the fair value option on its entire loan receivables portfolio purchased from its bank partner. As such, loan receivables are carried at fair value in the condensed consolidated balance sheet with changes in fair value recorded in the condensed consolidated statement of operations. Accrued and unpaid interest and fees are included in loan receivables at fair value in the condensed consolidated balance sheets. Management believes the reporting of these receivables at fair value more closely approximates the true economics of the loan receivables.

Interest and fees are discontinued when loans receivable become contractually 120 or more days past due. The Company charges-off loans at the earlier of when the loans are determined to be uncollectible or when the loans are 120 days contractually past due. Recoveries on loan receivables that were previously charged off are recognized when cash is received. Changes in the fair value of loan receivables include the impact of current period charge offs associated with these receivables. 

The Company estimates the fair value of the loan receivables using a discounted cash flow analysis at an individual loan level to more accurately predict future payments. The Company adjusts expected cash flows for estimated losses and servicing costs over the estimated duration of the underlying assets. These adjustments are determined using historical data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require. Model results may be adjusted by management if the Company does not believe the output reflects the fair value of the instrument, as defined under U.S. GAAP. The models are updated at each measurement date to capture any changes in internal factors such as nature, term, volume, payment trends, remaining time to maturity, and portfolio mix, as well as changes in underwriting or observed trends expected to impact future performance.

A third-party bank partner originates our credit product and initially provides all of the funding for the loans. The third-party sells a participation of all loans originated to the Company. FlexShopper services the loans and remits the corresponding portion of any collections to the third party. Loan revenues and fees is representative of the Company’s portion of participation in the loans.

Stock BasedStock-Based Compensation - The fair value of transactions in which FlexShopperthe Company exchanges its equity instruments for employee and non-employee services (share-based payment transactions) is recognized as ana compensation expense in the financial statements as services are performed.

Compensation expense for stock options is determined by reference to the fair value of an award on the date of grant and is amortizedrecognized on a straight-line basis over the vesting period. We haveThe Company has elected to use the Black ScholesBlack-Scholes-Merton (BSM) pricing model (BSM) to determine the fair value of all stock option awards.

 

Compensation expense for performance share units is recognized on an accelerated basis over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned. The fair value of performance share units is based on the fair market value of the Company’s common stock on the date of grant (see Note 9).


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 September 30, 2017 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
September 30,		       
  2022  2021  $ Change  % Change 
Gross Profit:         
Gross lease billings and fees $38,580,116  $42,528,079  $(3,947,963)  (9.3)
Provision for doubtful accounts  (15,075,109)  (11,787,960)  (3,287,149)  27.9 
Gain on sale of lease receivables  1,007,079   -   1,007,079     
Net lease billing and fees $24,512,086  $30,740,119  $(6,228,033)  (20.3)
Loan revenues and fees  6,025,786   116,477   5,909,309   5,073.4 
Net changes in the fair value of loan receivables  (4,396,421)  4,339   (4,400,760)  (101,423.4)
Net loan revenues $1,629,365  $120,816  $1,508,549   1,248.6 
Total revenues $26,141,451  $30,860,935  $(4,719,484)  (15.3)
Cost of lease revenues and merchandise sold  (18,746,897)  (18,005,170)  (741,727)  4.1 
Loans origination costs and fees  (1,027,097)  (166,805)  (860,292)  515.7 
Gross profit $6,367,457  $12,688,960  $(6,321,503)  (49.8)
Gross profit margin  24%  41%        

 

  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
September 30,		       
  2022  2021  $ Change  % Change 
Adjusted EBITDA:            
Net (loss)/income $(6,280,434) $1,696,023  $(7,976,457)  (470.3)
Income taxes  (1,298,269)  936,229   (2,234,498)  (238.7)
Amortization of debt issuance costs  56,283   43,067   13,216   30.7 
Other amortization and depreciation  1,244,267   708,762   535,505   75.6 
Interest expense  2,973,859   1,190,550   1,783,309   149.8 
Stock-based compensation  387,298   265,407   121,891   45.9 
Adjusted EBITDA $(2,916,996) $4,840,038  $(7,757,034)  (160.3)

 

16


 

 

Key performance metrics for the nine months ended September 30, 20172022 and 2021 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%        
  Nine months ended
September 30,		       
  2022  2021  $ Change  % Change 
Gross Profit:         
Gross lease billings and fees $117,774,390  $124,720,272  $(6,945,882)  (5.6)
Provision for doubtful accounts  (42,639,102)  (30,566,352)  (12,072,750)  39.5 
Gain on sale of lease receivables  7,611,586   -   7,611,586     
Net lease billing and fees $82,746,874  $94,153,920  $(11,407,046)  (12.1)
Loan revenues and fees  10,836,534   233,474   10,603,060   4,541.4 
Net changes in the fair value of loan receivables  (1,938,570)  (54,236)  (1,884,334)  3,474.3 
Net loan revenues $8,897,964  $179,238  $8,718,726   4,864.3 
Total revenues $91,644,838  $94,333,158  $(2,688,320)  (2.8)
Cost of lease revenues and merchandise sold  (56,114,813)  (59,959,590)  3,844,777   (6.4)
Loans origination costs and fees  (2,256,838)  (341,989)  (1,914,849)  559.9 
Gross profit $33,273,187  $34,031,579  $(758,392)  (2.2)
Gross profit margin  36%  36%        

 

  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)
  Nine months ended
September 30,		       
  2022  2021  $ Change  % Change 
Adjusted EBITDA:            
Net income $5,727,852  $2,639,454  $3,088,398   117.0 
Income taxes  (13,892,516)  1,914,473   (15,806,989)  (825.7)
Amortization of debt issuance costs  163,169   177,647   (14,478)  (8.1)
Other amortization and depreciation  3,303,590   2,032,811   1,270,779   62.5 
Interest expense  7,172,879   3,677,367   3,495,512   95.1 
Stock-based compensation  950,003   894,892   55,111   6.2 
Product/ infrastructure expenses  -   10,000   (10,000)    
Gain on debt extinguishment  -   (1,931,825)  1,931,825   - 
Adjusted EBITDA $3,424,977  $9,414,819  $(5,989,842)  (63.6)

 

* 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.

17

 

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 company.company;

 
●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 September 30, 2017 compared2022 Compared to Three Months Ended September 30, 20162021

 

  2022  2021  $ Change  % Change 
             
Gross lease billings and fees $38,580,116  $42,528,079  $(3,947,963)  (9.3)
Provision for doubtful accounts  (15,075,109)  (11,787,960)  (3,287,149)  27.9 
Gain on sale of lease receivables  1,007,079   -   1,007,079     
Net lease billing and fees $24,512,086  $30,740,119  $(6,228,003)  (20.3)
Loan revenues and fees  6,025,786   116,477   5,909,309   5,073.4 
Net changes in the fair value of loan receivables  (4,396,421)  4,339   (4,400,760)  (101,423.4)
Net loan revenues $1,629,365  $120,816  $1,508,549   1,248.6 
Total revenues $26,141,451  $30,860,935  $(4,719,484)  (15.3)
Cost of lease revenue and merchandise sold  (18,746,897)  (18,005,170)  (741,727)  4.1 
Loans origination costs and fees  (1,027,097)  (166,805)  (860,292)  515.7 
Marketing  (2,393,185)  (1,824,402)  (568,783)  31.2 
Salaries and benefits  (2,820,033)  (2,672,864)  (147,169)  5.5 
Other operating expenses  (5,702,800)  (4,325,825)  (1,376,975)  31.8 
Operating (loss)/income  (4,548,561)  3,865,869   (8,414,430)  (217.7)
Interest expense  (3,030,142)  (1,233,617)  (1,796,525)  145.6 
Income taxes  1,298,269   (936,229)  2,234,498   (238.7)
Net (loss)/income $(6,280,434) $1,696,023  $(7,976,457)  (470.3)

The following table details operating results

FlexShopper originated 25,452 gross leases less same day modifications and cancellations with an average origination value of $616 for the three months ended September 30, 20172022 compared to 30,407 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 

Totalcancellations with an average origination value of $522 for the comparable period last year. Net lease revenues for the three months ended September 30, 20172022 were $16,503,839$24,512,086 compared to $12,327,924$30,740,119 for the three months ended September 30, 2016,2021, representing a decrease of $6,228,033 or 20.3%. In 2022, the average origination value per lease was higher compared to the same period last year but volume has decreased due to tightening of approval rates. The provision for doubtful accounts relative to gross lease billings and fees were 39.1% and 27.7% for the three months ending September 30, 2022 and 2021, respectively. Due to favorable market conditions, at the end of September 2022 FlexShopper signed an increaseagreement with a third party to sell leases in default that were fully mature. For the three months ended September 30, 2022, FlexShopper sold leases in default that were fully mature for $1,095,845 and paid fees for $88,766 over that sale, which generated a gain on sale of $4,175,915, or 33.9%. FlexShopper originated 13,893 leaseslease receivables of $1,007,079.

Net loan revenues for the three months ended September 30, 20172022 were $1,629,365 compared to 15,594 leases$120,816 for the comparable period last year. FlexShopper is strategically optimizing and shifting marketing spend into the fourth quarter,three months ended September 30, 2021, representing an increase of $1,508,549 or 1,248.6%. In 2021, we began a periodtest for an unsecured consumer loan product with our bank partner. Our bank partner originated 8,301 loans at an average loan value of seasonally high demand. Cumulative growth in lease originations in current and prior periods, along with repeat customers, increases in lease values and efficient marketing spend are primarily responsible$1,256 for the increase in revenuethree months ended September 30, 2022 compared to 221 loans at an average loan value of $1,078 for the quarter.

three months ended September 30, 2021. Our bank partner sold to the Company a participation interest for each loan originated in those periods. In 2022, based upon the success of this testing, we expanded the program.

18

 

Cost of lease revenue and merchandise sold for the three months ended September 30, 20172022 was $8,426,423$18,746,897 compared to $5,708,580$18,005,170 for the three months ended September 30, 2016,2021, representing an increase of $2,717,843,$741,727 or 47.6%4.1%. CostAs the Company’s lease portfolio and revenues decrease, the depreciation and related costs associated with the lease portfolio also decrease. 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.

Loans origination cost and fees for the three months ended September 30, 2017 is comprised of depreciation expense on lease merchandise of $8,146,293 and the net book value of merchandise sold of $280,130. Cost of lease revenue and merchandise sold2022 was $1,027,097 compared to $166,805 for the three months ended September 30, 20162021, representing an increase of $860,292 or 515.7%. Loan origination cost and fees is comprisedcorrelated to the volume and dollar amount of depreciation expense on lease merchandise of $5,525,701, the net book value of merchandise sold of $182,879. As the Company’s lease revenues increase, the direct costs associatedloan originations for a given period with them also increase.

Provision for doubtful accounts was $4,681,8328,301 and $3,501,023221 loans being originated for the three months ended September 30, 20172022 and 2016,2021, 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

Marketing expenses 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 September 30, 2017 and 2016, $7,133,260 and $1,043,762 of accounts receivable balances2022 were charged off against the allowance, respectively, after the Company exhausted all collection efforts with respect$2,393,185 compared 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$1,824,402 in the prior year period.

three months ended September 30, 2021, an increase of $568,783 or 31.2%. Marketing expenses related to loans in the third quarter of 2017three months ended September 30, 2022 were $994,576,$1,029,973 compared to $2,442,243$38,845 in the third quarterthree months ended September 30, 2021, an increase of 2016 for$991,128 or 2,551.5%. The increase is related to the marketing of consumer loans. Marketing expenses related to leases in the three months ended September 30, 2022, were $1,363,212 compared to $1,785,557 in the three months ended September 30, 2021, a decrease of $1,447,667,$422,345 or 59.2%23.7%. FlexShopperThe decrease is strategically optimizing and shiftingrelated to allocating marketing spend into the fourth quarter, a period of seasonally high demand.to loan originations.

 

SalarySalaries and benefits expensesexpense in the third quarter of 2017three months ended September 30, 2022 were $1,900,925$2,820,033 compared to $1,522,792$2,672,864 in the third quarter of 2016 forthree months ended September 30, 2021, an increase of $378,133,$147,169 or 24.8%5.5%. Additional call center personnel neededDuring the second quarter of 2022, there were some management positions filled in Information Technology and the marketing department to supportassist in the increase in revenues as well as continued investment in our software engineering team are the primary reasons for the increase in salaries and benefits expenses.development of new products.

 

Operating


Other operating expenses for the three months ended September 30, 20172022 and 20162021 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 
  2022  2021 
Amortization and depreciation $1,244,264  $708,762 
Computer and internet expenses  1,322,851   938,862 
Legal and professional fees  981,766   828,789 
Merchant bank fees  390,662   737,254 
Customer verification expenses  316,481   165,297 
Stock-based compensation expense  387,298   265,407 
Insurance expense  146,780   177,511 
Office and telephone expense  343,536   242,733 
Rent expense  191,701   167,804 
Advertising and recruiting fees  164,722   183,426 
Travel expense  92,271   124,981 
Other  120,468   (215,001)
Total $5,702,800  $4,325,825 

 

Amortization and depreciation expenses in the three months ended September 30, 2022 were $1,244,264 compared to $708,762 in the three months ended September 30, 2021, representing an increase of $535,502 or 75.6%. The majority of the increase is related to the amortization of capitalized software costs due to the preparation for new products offered by the Company. The rest of the increase is related to the amortization of capitalized of data not directly used in underwriting decisions and that are probable that they will provide future economic benefit.

Computer and internet expenses in the three months ended September 30, 2022 were $1,322,851 compared to $938,862 in the three months ended September 30, 2021, representing an increase of $383,989 or 40.9%. 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. Also, some of these expenses are related to expanding the IT infrastructure in preparation for new products offered by the company.

Merchant bank fees expenses in the three months ended September 30, 2022 were $390,662 compared to $737,254 in the three months ended September 30, 2021, representing a decrease of $346,592 or 47.0%. Merchant bank fee expense represents the ACH and card processing fees related to billing consumers and therefore a decrease in gross lease billings and fees and a more efficient collection process is the main driver for the decrease in merchant bank fees.

Customer verification expenses in the three months ended September 30, 2022 were $316,481 compared to $165,297 in the three months ended September 30, 2021, representing a increase of $151,184 or 91.5%. Customer verification expense is primarily the cost of data used for underwriting new lease and loan applicants. During the third quarter of 2021, several changes including the implementation of a more disciplined process around data procurement and storage were made by the Company. Those improvements triggered a change in the estimate of the probability of future economic benefit of a portion of the data cost. As a result of this change in the estimate regarding the portion of data costs incurred that are not directly used in underwriting decisions and that are probable that they will provide future economic benefit, the Company capitalized $458,018 of data costs in the quarter ended September 30, 2022. The underwriting and data science team continues to optimize the costs related to underwriting lease and loan applications. However, the increase in new loan applications have increased the cost for this period.

Income taxes in the three months ended September 30, 2022 were $1,298,269 (benefit) compared to $936,229 (expense) in the three months ended September 30, 2021, a decrease of $2,234,498 or 238.7%. The variation is due to the change in the Company’s estimated annual taxable earnings/ loss and the effective income tax rates at the end of each period. The Company’s effective income tax rate for the three months ended September 30, 2022 is different than the statutory rate of 21% primally due to the state income taxes and permanent differences.

19

 

 

Nine Months Ended September 30, 2017 compared2022 Compared to Nine Months Ended September 30, 20162021

 

The following table details operating results for the nine months ended September 30, 20172022 and 2016:2021:

 

  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 
  2022  2021  $ Change  % Change 
             
Gross lease billings and fees $117,774,390  $124,720,272  $(6,945,882)  (5.6)
Provision for doubtful accounts  (42,639,102)  (30,566,352)  (12,072,750)  39.5 
Gain on sale of lease receivables  7,611,586   -   7,611,586     
Net lease billing and fees $82,746,874  $94,153,920  $(11,407,046)  (12.1)
Loan revenues and fees  10,836,534   233,474   10,603,060   4,541.4 
Net changes in the fair value of loan receivables  (1,938,570)  (54,236)  (1,884,334)  3,474.3 
Net loan revenues $8,897,964  $179,238  $8,718,726   4,864.3 
Total revenues $91,644,838  $94,333,158  $(2,688,320)  (2.8)
Cost of lease revenue and merchandise sold  (56,114,813)  (59,959,590)  3,844,777   (6.4)
Loans origination costs and fees  (2,256,838)  (341,989)  (1,914,849)  559.9 
Marketing  (8,178,120)  (5,571,237)  (2,606,883)  46.8 
Salaries and benefits  (8,799,395)  (8,329,188)  (470,207)  5.6 
Other operating expenses  (17,124,288)  (13,654,038)  (3,470,250)  25.4 
Operating (loss)/income  (828,616)  6,477,116   (7,305,732)  (112.8)
Gain on extinguishment of debt  -   1,931,825   (1,931,825)    
Interest expense  (7,336,048)  (3,855,014)  (3,481,034)  90.3 
Income taxes  13,892,516   (1,914,473)  15,806,989   (825.7)
Net income $5,727,852  $2,639,454  $3,088,398   117.0 

 

TotalFlexShopper originated 90,375 gross leases less same day modifications and cancellations with an average origination value of $574 for the nine months ended September 30, 2022 compared to 108,146 gross leases less same day modifications and cancellations with an average origination value of $523 for the comparable period last year. Net lease revenues for the nine months ended September 30, 20172022 were $50,632,717$82,746,874 compared to $33,253,090$94,153,920 for the nine months ended September 30, 2016,2021, representing a decrease of $11,407,046 or 12.1%. In 2022, the average origination value per lease increased compared to the same period last year but volume has decreased due to tightening of approval rates. The provision for doubtful accounts relative to gross lease billings and fees were 36.2% and 24.5% for the three months ending September 30, 2022 and 2021, respectively. Due to favorable market conditions, at the end of September 2022 FlexShopper signed an increaseagreement with a third party to sell leases in default that were fully mature. As of $17,379,627, or 52.3%.September 30, 2022, FlexShopper originated 43,992sold leases in default that were fully mature for $8,025,686 and paid fees for $414,100 over that sale, which generated a gain on sale of lease receivables of $7,611,586.

Net loan revenues for the nine months ended September 30, 20172022 were $8,897,964 compared to 35,741 leases$179,238 for the comparable period last year. Continued growth in repeat customers couplednine months ended September 30, 2021, representing an increase of $8,718,726 or 4,864.3%. In 2021, we began a test for an unsecured consumer loan product with more efficient marketing spend is primarily responsibleour bank partner. Our bank partner originated 23,135 loans at an average loan value of $1,223 for the increasenine months ended September 30, 2022 compared to 413 loans at an average loan value of $1,002 for the nine months ended September 30, 2021. Our bank partner sold to the Company a participation interest for each loan originated in revenue and leases. those periods. In 2022, based upon the success of this testing, we expanded the program.

 

Cost of lease revenue and merchandise sold for the nine months ended September 30, 20172022 was $25,549,973$56,114,813 compared to $17,315,610$59,959,590 for the nine months ended September 30, 2016,2021, representing an increasea decrease of $8,234,363,$3,844,777 or 47.6%6.4%. CostAs the Company’s lease portfolio and revenues decrease, the depreciation and related costs associated with the lease portfolio also decrease. 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.

Loans origination cost and fees for the nine months ended September 30, 2017 is comprised of depreciation expense on lease merchandise of $24,733,915 and the net book value of merchandise sold of $816,058. Cost of lease revenue and merchandise sold2022 was $2,256,838 compared to $341,989 for the nine months ended September 30, 20162021, representing an increase of $1,914,849 or 559.9%. Loan origination cost and fees is comprisedcorrelated to the volume and dollar amount of depreciation expense on lease merchandise of $16,817,016, the net book value of merchandise sold of $498,594. As the Company’s lease revenues increase, the direct costs associatedloan originations for a given period with them also increase.

Provision for doubtful accounts was $14,357,46123,135 and $9,260,469413 loans being originated for the nine months ended September 30, 20172022 and 2016,2021, 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

Marketing expenses 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 nine months ended September 30, 2017 and 2016, $20,713,314 and $2,786,979 of accounts receivable balances2022 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 first nine months of 2017 were $2,625,367,$8,178,120 compared to $6,186,417$5,571,237 in the nine months ended September 30, 2021, an increase of 2016 for$2,606,883 or 46.8%. Marketing expenses related to loans in the nine months ended September 30, 2022 were $3,662,687 compared to $66,165 in the nine months ended September 30, 2021, an increase of $3,596,522 or 5,435.7%. The increase is related to the marketing of consumer loans. Marketing expenses related to leases in the nine months ended September 30, 2022, were $4,515,433 compared to $5,505,072 in the nine months ended September 30, 2021, a decrease of $3,561,050,$989,639 or 57.6%18.0%. Recognizing the seasonality of its business and periods of less consumer demand for consumer electronics, the Company strategically reducedThe decrease is related to allocating marketing expendituresspend to continue to optimize customer acquisition costs.loan originations.

 

SalarySalaries and benefits expensesexpense in the first nine months of 2017ended September 30, 2022 were $5,567,082$8,799,395 compared to $4,258,753 for$8,329,188 in the same period of 2016 fornine months ended September 30, 2021, an increase of $1,308,329,$470,207 or 30.7%5.6%. Additional call center personnel neededDuring the second quarter of 2022, there were some management positions filled in Information Technology and the marketing department to supportassist in the increase in leases and revenues as well as continued investment in our software engineering team to innovate and enhance our technology platform are the primary reasons for the increase in salaries and benefits expenses.development of new products.

 

Operating


Other operating expenses for the nine months ended September 30, 20172022 and 20162021 included the following:

 

  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 
  2022  2021 
Amortization and depreciation $3,303,590  $2,032,811 
Computer and internet expenses  3,662,429   2,369,048 
Legal and professional fees  3,506,817   2,227,119 
Merchant bank fees  1,305,534   2,022,171 
Customer verification expenses  708,975   1,833,678 
Stock-based compensation expense  950,003   894,892 
Insurance expense  454,517   434,914 
Office and telephone expense  1,065,581   657,767 
Rent expense  531,165   491,911 
Advertising and recruiting fees  598,357   315,728 
Travel expense  401,085   228,336 
Other  636,235   145,663 
Total $17,124,288  $13,654,038 

 

Amortization and depreciation in the nine months ended September 30, 2022 were $3,303,590 compared to $2,032,811 in the nine months ended September 30, 2021, representing an increase of $1,270,779 or 62.5%. The majority of the increase is related to amortization of capitalized software costs due to the preparation for new products offered by the Company. The rest of the increase is related to the amortization of capitalized data not directly used in underwriting decisions and that are probable that they will provide future economic benefit.

Computer and internet expenses in the nine months ended September 30, 2022 were $3,662,429 compared to $2,369,048 in the nine months ended September 30, 2021, representing an increase of $1,293,381 or 54.6%. 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. Also, some of these expenses are related to expanding the IT infrastructure in preparation for new products offered by the company.

Legal and professional fees expenses in the nine months ended September 30, 2022 were $3,506,817 compared to $2,227,119 in the nine months ended September 30, 2021, representing an increase of $1,279,698 or 57.5%. During the second quarter of 2021, the Company onboarded two offshore servicing and collections options to improve flexibility around seasonal call center traffic and improve operational metrics.

Merchant bank fees expenses in the nine months ended September 30, 2022 were $1,305,534 compared to $2,022,171 in the nine months ended September 30, 2021, representing a decrease of $716,637 or 35.4%. Merchant bank fee expense represents the ACH and card processing fees related to billing consumers and therefore a decrease in gross lease billings and fees and a more efficient collection process is the main driver for the decrease in merchant bank fees.

Customer verification expenses in the nine months ended September 30, 2022 were $708,975 compared to $1,833,678 in the nine months ended September 30, 2021, representing a decrease of $1,124,703 or 61.3%. Customer verification expense is primarily the cost of data used for underwriting new lease and loan applicants. During the third quarter of 2021, several changes including the implementation of a more disciplined process around data procurement and storage were made by the Company. Those improvements triggered a change in the estimate of the probability of future economic benefit of a portion of the data cost. As a result of this change in the estimate regarding the portion of data costs incurred that are not directly used in underwriting decisions and that are probable that they will provide future economic benefit, the Company capitalized $1,220,722 of data costs in the period ended September 30, 2022. The underwriting and data science team continues to optimize the costs related to underwriting lease and loan applications

Office and telephone expense in the nine months ended September 30, 2022 were $1,065,581 compared to $657,767 in the nine months ended September 30, 2021, representing an increase of $407,814 or 62.0%. The increase is related to expenses around updating our call center technology in order to increase efficiencies in outbound collections.

Travel expenses in the nine months ended September 30, 2022 were $401,085 compared to $228,336 in the nine months ended September 30, 2021, representing an increase of $172,749 or 75.7%. The increase in travel expense in the first half of 2022 is related to the expansion of retail partner rollouts.

Income taxes in the nine months ended September 30, 2022 were $13,892,516 (benefit) compared to $1,914,473 (expense) in the nine months ended September 30, 2021, an increase of $15,806,989 or 825.7%. The variation was mainly due to the release of the valuation allowance of the Company’s deferred tax asset during the second quarter of 2022. The Company’s effective income tax rate for the nine months ended September 30, 2022 is different than the statutory rate of 21% primally due to the state income taxes, permanent differences and the release of the valuation allowance.

20

 

 

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.

In 2021, we began a test to market an unsecured, consumer loan product for our bank partner that would augment our LTO solution. In 2022, based upon the success of this testing, the marketing of our bank partner’s loans has become a strategic solution that we offer to many of our current customers and through our retailer partners.

To support our anticipated growth, FlexShopper will need the availability of substantial capital resources. See the section captioned “Liquidity and Capital Resources” below.

21

 

Liquidity and Capital Resources

 

As of September 30, 2017,2022, the Company had cash of $3,825,835and restricted cash for $5,756,086 compared to $13,093,333$3,147,926 at the same date in 2016.2021. As of December 31, 2021, the Company had cash and restricted cash for $5,094,642. The increase in cash from December 31, 2021 was primarily due to the proceeds from a loan payable under the Credit Agreement and promissory notes with related parties offset by increases in accounts receivable, loan receivables at fair value and capitalized software, and decrease of lease merchandise.

 

As of September 30, 2017,2022, the Company had net accounts receivable of $3,394,726 consisting of gross receivables of $6,506,104$47,191,369 offset by an allowance for doubtful accounts of $3,111,378.$13,364,953, resulting in net accounts receivable of $33,826,416. Accounts receivable areis 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 Financings

From the beginningAs of 2016 through September 30, 2017, FlexShopper completed2022, the following transactions, eachCompany had loan receivables at fair value of $26,591,546 which has provided liquidity andis measured at fair value. The Company primarily estimates the fair value of its loan receivables using a discounted cash resources to FlexShopper.flow model.

 

1.On February 11, 2016, FlexShopper entered into a secured promissory note with a principal stockholder for $1,000,000 at an interest rate of 15% per annum, payable upon demand, secured by substantially all of the Company’s assets.

2.

On March 29, 2016, we entered into a fourth amendment and waiver (the “Fourth Amendment”) to the credit agreement (the “Credit Agreement”) among FlexShopper 2, LLC, Wells Fargo Bank, National Association, various Lenders from time to time party thereto and WE2014-1, LLC (the “Lender”). The Fourth Amendment amends the Credit Agreement to, among other things, increase the amount of the Borrowing Base (as defined in the Credit Agreement) until the earlier of (i) April 1, 2017 and (ii) the successful raising by the Company of at least $10,000,000 in equity funding (the “Equity Raise”). The Fourth Amendment also includes a waiver of (A) breaches resulting from the Borrower’s non-compliance with certain financial covenants under the Credit Agreement that occurred prior to the effectiveness of the Fourth Amendment and (B) compliance with certain financial covenants under the Credit Agreement for the period from the date of the Fourth Amendment through the earlier of April 1, 2017 or the completion of the Equity Raise. If we fail to maintain compliance with the covenants thereafter, the Lender would be able to accelerate the required repayment of amounts due under the Credit Agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the Credit Agreement.

3.On June 10, 2016, the Company entered into a Subscription Agreement with B2 FIE V LLC, 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. In addition, the Company sold an additional 1,950 shares of Series 2 Convertible Preferred Stock to certain other investors at a subsequent closing in June 2016 for gross proceeds of $1.95 million.
4.On January 27, 2017, the Borrower entered into a fifth amendment (the “Omnibus Amendment”) to the Credit Agreement. The Omnibus Amendment amends the Credit Agreement to, among other things, extend the Commitment Termination Date (as defined in the Credit Agreement) to April 1, 2018, lower the interest rate, require the Borrower to refinance the debt under the Credit Agreement upon a Permitted Change of Control (as defined in the Credit Agreement) and modify certain permitted debt and financial covenants.

22

 

 

Credit Agreement

On March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as amended from time to time and including the Fee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo Bank, National Association as paying agent, various lenders from time to time party thereto and WE 2014-1, LLC, an affiliate of Waterfall Asset Management, LLC, as administrative agent and lender (the “Lender”). 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 $82,500,000 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 the Commitment Termination Date (unless such amounts become due or payable on an earlier date pursuant to the terms of the 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 the interest rate charged on amounts borrowed was set at LIBOR plus 11% per annum.

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.

The Company borrowed under the Credit Agreement $15,055,000 and $32,855,000 for the three and nine months ended September 30, 2022, respectively, and $500,000 and $4,000,000 for the three and nine months ended September 30, 2021, respectively. The Company repaid under the Credit Agreement and $4,605,000 and $5,730,000 for the three and nine months ended September 30, 2022, respectively, and $1,600,000 and $6,575,000 for the three and nine months ended September 30, 2021, respectively.

Effective September 27, 2022, WE 2014-1, LLC assigned 100% of its Commitments and all Loans to Powerscourt Investments 32, LP, an affiliate of Waterfall Asset Management, LLC.

On October 21, 2022, pursuant to Amendment No. 16 to the Credit Agreement between FlexShopper 2, LLC, as borrower, and Powerscourt Investments 32, LP, as administrative agent and lender, the Commitment Amount was increased to be up to $110,000,000. This amendment also replaced LIBOR references in the Credit Agreement with SOFR (Secured Overnight Financing Rate), as the basis for our interest payments under the Credit Agreement. No other changes were made to 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 “122 Partners 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 122 Partners 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. At September 30, 2022, amounts outstanding under the 122 Partners Note bear interest at a rate of 18.82%. Obligations under the 122 Partners Note are subordinated to obligations under the Credit Agreement. The 122 Partners 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 122 Partners Note. Obligations under the 122 Partners 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 122 Partners Note to April 30, 2021. On March 22, 2021, FlexShopper, LLC executed a second amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2022. On March 31, 2022, FlexShopper, LLC executed a third amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2023. No other changes were made to the 122 Partners Note. As of September 30, 2022, $1,015,539 of principal and accrued and unpaid interest was outstanding on the 122 Partners Note.


The Borrower previously entered into letter agreements 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 subordinated promissory notes to NRNS (the “NRNS Note”) in the total principal amount of $3,750,000. Payment of principal and accrued interest under the NRNS Note was due and payable by the Borrower on June 30, 2021 and FlexShopper, LLC can prepay principal and interest at any time without penalty. At September 30, 2022, amounts outstanding under the NRNS Note bear interest at a rate of 18.82%. Obligations under the NRNS Note are subordinated to obligations under the Credit Agreement. The NRNS 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 NRNS Note. Obligations under the NRNS Note is 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 Note such that the maturity date was extended to April 1, 2022. On February 2, 2022, FlexShopper LLC executed another amendment to the NRNS Note. This last amendment extended the maturity date from April 1, 2022 to July 1, 2024 and increased the credit commitment from $3,750,000 to $11,000,000. No other changes were made to the NRNS Note. As of September 30, 2022, $10,917,046 of principal and accrued and unpaid interest was outstanding on the NRNS Note.

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 $27,545,463 for the nine months ended September 30, 2022 primarily due to the purchases of leased merchandise, participation in loans and change in accounts receivable 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$1,159,828 for the nine months ended September 30, 2017 and was2021 primarily due to the increaseadd back of depreciation and impairment on leased merchandise and provision for doubtful accounts partially offset by purchases of leased merchandise, the change in accounts receivable and accounts payable and the gain on the extinguishment of debt

Cash Flows from Investing Activities

For the nine months ended September 30, 2022, net revenues and gross profit and more efficient marketing spendcash used in investing activities was $6,075,872 comprised of $1,099,400 for the period.purchase of property and equipment, $3,755,750 for capitalized software costs and $1,220,722 for the data costs.

 

For the nine months ended September 30, 2021, net cash used in investing activities was $3,459,424 comprised of $982,298 for the purchase of property and equipment, $2,015,746 for capitalized software costs and $461,379 for data costs.


Cash Flows from Financing Activities

Net cash usedprovided by operatingfinancing activities was $7,109,978$34,282,779 for the nine months ended September 30, 2016 and was primarily2022 due to $32,855,000 of funds drawn on the net loss forCredit Agreement and $7,000,000 of proceeds from promissory notes partially offset by loan repayments on the period.Credit Agreement of $5,730,000

 

Cash Flows from Investing Activities

For the nine months ended September 30, 2017, net cash used in investing activities was $1,487,442, comprised of $68,169 for the purchase of property and equipment and $1,419,273 for capitalized software costs.

For the nine months ended September 30, 2016, net cash used in investing activities was $1,436,701, comprised of $81,514 for the purchase of property and equipment and $1,355,187 for capitalized software costs.

Cash Flows from Financing Activities

Net cash used in financing activities was $2,273,208$3,093,710 for the nine months ended September 30, 2017, comprised of2021 due to loan repayments of amounts borrowed underon the Credit Agreement of $2,288,208,$6,575,000 partially offset by proceeds from the exercise$4,000,000 of stock options of $15,000.

Net cash provided by financing activities was $18,243,806 for the nine months ended September 30, 2016 primarily due to the proceeds from the sale of Series 2 Convertible Preferred Stock of $21,952,000 net of related costs of $1,519,339, and funds drawn on the Credit Agreement of $2,341,359, offset by repayments of amounts borrowed under the Credit Agreement of $4,172,714.Agreement.

 

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 and loan 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.

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. Fortunately, by the end of 2021, the percentage of new customers obtained from brick and mortar locations exceeded pre-pandemic levels.

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. Ifthe pre-pandemic levels. This decreased approval rate, both online and in third party stores, coupled with the retailer closures mentioned above, significantly reduced new lease originations. In 2021, the uniqueness of the pandemic had resulted in significant growth in BNPL (buy now pay later) options that were offered to our consumer segment. Despite a return to near pre-pandemic approval rates, the Company is unable to obtain additional required funding, the Company’s financial conditionstill experienced reduced demand for its product in 2021 and results of operations may be materially adversely affected.2022.

 

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The third impact was on consumer behavior and payment patterns. The combination of stimulus payments and enhanced unemployment benefits measures provided by the Federal and/ or State Government throughout 2020 and early 2021 were 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. The first sign of the return to more normal payment patterns was a reduction in the elevated amount of early pay offs experienced by the Company which occurred in the middle of 2021.

Despite the availability of COVID-19 vaccines in 2021, the number of COVID-19 cases had increased at various times throughout 2021and 2022 as the result of the appearance of new variants.

As of the end of 2021, the reduced demand was evident in our digital marketing channels through the conversion rate of new applicants. However, the enhanced payment performance, versus our expected performance, began 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 been able to grow the overall size of the lease portfolio, net of early payoffs, 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 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 September 30, 2017.2022.

 

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.

 

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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, 2016.2021. 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 other material changes to such risk factors.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:PROCEEDS.

 

Not applicable.None.

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.

 

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ITEM 6. EXHIBITS:

 

Exhibit
Number		 Description
3.1 Restated Certificate of Incorporation of FlexShopper, Inc. (previously filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 20152017 and incorporated herein by reference).
3.2 Amended and Restated Bylaws (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 10-K filed on March 11, 2021 and incorporated herein by reference).
3.3Certificate of Amendment to the Certificate of Incorporation of FlexShopper, Inc.the Company (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 14, 2016September 21, 2018 and incorporated herein by reference).
3.33.4 Certificate of Amendment to the Certificate of Incorporation of FlexShopper, Inc. (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 12, 2017 and incorporated herein by reference)
3.4Amended and Restated Bylaws (previously filed as Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference)
4.1Common Stock Purchase Warrant, dated October 9, 2014, issued by FlexShopper, Inc. to Fordham Financial Management, Inc. (previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (File No. 333-201644) and incorporated herein by reference)
4.2Common Stock Purchase Warrant, dated October 9, 2014, issued by FlexShopper, Inc. to Paulson Investment Company Inc. (previously filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-201644) and incorporated herein by reference)
4.3Common Stock Purchase Warrant, dated October 9, 2014, issued by FlexShopper, Inc. to Spartan Capital Securities, LLC (previously filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-1 (File No. 333-201644) and incorporated herein by reference)
4.4Certificate of Designations of Series 1 Preferred Stock (previously filed as Exhibit 3.4 to the Company’s General Form of RegistrationQuarterly Report on Form 10-SB10-Q filed on April 30, 2007November 5, 2018 and incorporated herein by reference).
4.510.1 Certificate of Designations for Series 2 Convertible Preferred Stock,Amendment No. 16 to Credit Agreement, dated as of June 10, 2016 (previously filedOctober 21, 2022, between FlexShopper 2, LLC, as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 13, 2016borrower and incorporated herein by reference)Powerscourt Investment 32, LP, as administrative agent and lender.
4.631.1 Certificate of Decrease of the Number of Authorized Shares of Preferred Stock of FlexShopper, Inc. Designated as Series 1 Preferred Stock
31.1Rule 13a-14(a) Certification – Principal Executive Officer*
31.2 Rule 13a-14(a) Certification –- Principal Financial Officer*
32.1 Section 1350 Certification – Principal Executive Officer*
32.2 Section 1350 Certification –- Principal Financial Officer*
101.INS Inline XBRL Instance Document,Document.*
101.SCHInline XBRL Taxonomy Extension Schema Document.*
101.SCH101.CAL Document,Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.CAL101.DEF Calculation Linkbase,Inline XBRL Taxonomy Extension Definition Linkbase Document.*
101.DEF101.LAB Linkbase,Inline XBRL Taxonomy Extension Labels Label Linkbase Document.*
101.LAB101.PRE Linkbase,Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
101.PRE104 Presentation Linkbase Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).*

 

+ Indicates a management contract or any compensatory plan, contract or arrangement.

* Filed herewith.

*Filed herewith.

 

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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: November 14, 201710, 2022By:/s/ Brad BernsteinRichard House Jr.
  Brad BernsteinRichard House Jr.
  Chief Executive Officer President and Chairman (Principal
(Principal Executive Officer)

Date: November 14, 2017By:/s/ Russ Heiser
  Russ
Date: November 10, 2022By:/s/ H. Russell Heiser Jr.
  

H. Russell Heiser Jr.

Chief Financial Officer


(Principal Financial and Accounting Officer)

 

 

2741

 

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