UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant To Section☒ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) ofOF THE SECURITIES EXCHANGE ACT OF 1934

For the Securities Exchange Act Of 1934quarterly period ended June 30, 2023

 

For The Quarterly Period Ended September 30, 2017☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 0-52589For the transition period from _______ to _______

 

 Commission file number: 001-37945

FLEXSHOPPER, INC.

(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 NovemberAugust 14, 2017,2023, the Companyissuer had a total of 5,292,28121,752,304 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.

 

 

 

 

 

 

TABLE OF CONTENTS

Page No.
Cautionary Statement About Forward-Looking Statementsii
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements1
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations29
Item 3.Quantitative and Qualitative Disclosures About Market Risk41
Item 4.Controls and Procedures41
PART II - OTHER INFORMATION
Item 1.Legal Proceedings42
Item 1A.Risk Factors42
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds42
Item 3.Defaults Upon Senior Securities42
Item 4.Mine Safety Disclosures42
Item 5.Other Information42
Item 6.Exhibits43
Signatures44

i

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

 Page
●
PART I.     FINANCIAL INFORMATION
Item 1.Financial Statements1general economic conditions, including inflation, rising interest rates, and other adverse macro-economic conditions;
   
 Consolidated Balance Sheets as●the impact of September 30, 2017 (unaudited)deteriorating macro-economic environment, including bank defaults and December 31, 20161closures on our customer’s ability to make the payment they owe our business and on our proprietary algorithms and decisioning tools used in approving customer to be indicative of customer’s ability to perform;
   
 Consolidated Statements of Operations for●our ability to obtain adequate financing to fund our business operations in the Three and Nine Months ended September 30, 2017 and 2016 (unaudited)2future;
   
 Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2017 (unaudited)●3our ability to maintain compliance with financial covenants under our credit agreement;
   
 Consolidated Statements of Cash Flows for ●the Nine Months ended September 30, 2017failure to successfully manage and 2016 (unaudited)4grow our FlexShopper.com e-commerce platform;
   
 Notes●our ability to Consolidated Financial Statements6compete in a highly competitive industry;
   
Item 2.Management’s●our dependence on the success of our third-party retailers and our continued relationships with them;
●our relationship with the bank partner that originate the loans in the bank partner loan model;
●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;
●our ability to attract and retain key executives and employees; the business and financial impact of the COVID-19 pandemic; and
●the other risks and uncertainties described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations15
Item 3.Quantitative and Qualitative Disclosures about Market Risk24
Item 4.Controls and Procedures24
PART II.     OTHER INFORMATION
Item 1.Legal Proceedings25
Item 1A.Risk Factors25
Item 2.Unregistered SalesOperations” sections of Equity Securities and Use of Proceeds25
Item 3.Defaults Upon Senior Securities25
Item 4.Mine Safety Disclosures25
Item 5Other Information25
Item 6.Exhibits26
Signatures27our Annual Report on Form 10-K for the year ended December 31, 2022.

  

CertificationsAny 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.

 

ii

 

 

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 
  June 30,  December 31, 
  2023  2022 
  (Unaudited)    
ASSETS      
CURRENT ASSETS:      
Cash $6,372,699  $6,051,713 
Restricted cash  6,285   121,636 
Lease receivables, net  39,227,399   35,540,043 
Loan receivables at fair value  25,105,046   32,932,504 
Prepaid expenses and other assets  3,068,559   3,489,136 
Lease merchandise, net  24,597,836   31,550,441 
Total current assets  98,377,824   109,685,473 
         
Property and equipment, net  8,830,978   8,086,862 
Right of use asset, net  1,324,953   1,406,270 
Intangible assets, net  14,276,231   15,162,349 
Other assets, net  1,832,175   1,934,728 
Deferred tax asset, net  13,471,568   12,013,828 
Total assets $138,113,729  $148,289,510 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts payable $4,005,219  $6,511,943 
Accrued payroll and related taxes  299,741   310,820 
Promissory notes to related parties, including accrued interest  1,207,798   1,209,455 
Accrued expenses  2,386,547   3,988,093 
Lease liability - current portion  228,358   208,001 
Total current liabilities  8,127,663   12,228,312 
Loan payable under credit agreement to beneficial shareholder, net of unamortized issuance costs of $211,516 at June 30, 2023 and $352,252 at December 31, 2022  80,943,484   80,847,748 
Promissory notes to related parties, net of unamortized issuance costs of $879,348 at June 30, 2023 and $0 at December 31, 2022 and net of current portion  9,870,652   10,750,000 
Promissory note related to acquisition, net of discount of $1,046,551 at June 30, 2023 and $1,165,027 at December 31, 2022  3,133,617   3,158,471 
Loan payable under Basepoint credit agreement, net of unamortized issuance costs of $112,197 at June 30, 2023  7,300,408   - 
Purchase consideration payable related to acquisition  -   8,703,684 
Lease liabilities, net of current portion  1,447,788   1,566,622 
Total liabilities  110,823,612   117,254,837 
         
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 21,752,304 shares at June 30, 2023 and 21,750,804 shares at December 31, 2022  2,176   2,176 
Additional paid in capital  41,602,734   39,819,420 
Accumulated deficit  (37,118,453)  (31,590,583)
Total stockholders’ equity  27,290,117   31,034,673 
  $138,113,729  $148,289,510 

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
June 30,		  For the six months ended
June 30,		 
  2023  2022  2023  2022 
             
Revenues:            
Lease revenues and fees, net $22,906,843  $30,468,476  $47,621,001  $58,234,788 
Loan revenues and fees, net of changes in fair value  1,625,193   6,079,675   7,696,810   7,268,599 
Total revenues  24,532,036   36,548,151   55,317,811   65,503,387 
                 
Costs and expenses:                
Depreciation and impairment of lease merchandise  14,485,417   18,207,305   29,831,205   37,367,916 
Loan origination costs and fees  1,655,424   804,228   3,489,051   1,229,741 
Marketing  1,488,578   3,770,820   2,587,767   5,784,935 
Salaries and benefits  2,976,008   3,014,920   5,702,898   5,979,362 
Operating expenses  5,957,932   5,748,286   11,585,640   11,421,488 
Total costs and expenses  26,563,359   31,545,559   53,196,561   61,783,442 
                 
Operating (loss)/ income  (2,031,323)  5,002,592   2,121,250   3,719,945 
                 
Interest expense including amortization of debt issuance costs  (4,568,557)  (2,347,838)  (9,099,884)  (4,305,906)
(Loss)/ income before income taxes  (6,599,880)  2,654,754   (6,978,634)  (585,961)
Benefit from income taxes  1,302,225   11,734,467   1,450,764   12,594,247 
Net (loss)/ income  (5,297,655)  14,389,221   (5,527,870)  12,008,286 
                 
Dividends on Series 2 Convertible Preferred Shares  (992,493)  (609,777)  (1,964,726)  (1,219,554)
Net (loss)/ income attributable to common and Series 1 Convertible Preferred shareholders $(6,290,148)  13,779,444   (7,492,596)  10,788,732 
                 
Basic and diluted (loss)/ income per common share:                
Basic $(0.22) $0.63  $(0.34) $0.49 
Diluted $(0.22) $0.51  $(0.34) $0.42 
                 
WEIGHTED AVERAGE COMMON SHARES:                
Basic  28,923,393   21,605,234   21,751,807   21,576,312 
Diluted  28,923,393   27,898,824   21,751,807   28,193,268 

 

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 ninesix months ended SeptemberJune 30, 20172023 and 2022

(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, 2023  170,332  $851,660   21,952  $21,952,000   21,750,804  $2,176  $39,819,420  $(31,590,583) $31,034,673 
Provision for compensation expense related to stock-based compensation  -   -   -   -   -   -   420,748   -   420,748 
Exercise of stock options into common stock  -   -   -   -   1,500   -   1,185   -   1,185 
Net loss  -   -   -   -   -   -   -   (230,215)  (230,215)
Balance, March 31, 2023  170,332  $851,660   21,952  $21,952,000   21,752,304  $2,176  $40,241,353  $(31,820,798) $31,226,391 
Provision for compensation expense related to stock-based compensation  -   -   -   -   -   -   443,800   -   443,800 
Extension of warrants  -   -   -   -   -   -   917,581   -   917,581 
Net loss  -   -   -   -   -   -   -   (5,297,655)  (5,297,655)
Balance, June 30, 2023  170,332  $851,660   21,952  $21,952,000   21,752,304  $2,176  $41,602,734  $(37,118,453) $27,290,117 

 

  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-based compensation  -   -   -   -   -   -   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-based compensation  -   -   -   -   -   -   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 

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

 

3

 

 

FLEXSHOPPER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ninesix months ended SeptemberJune 30, 20172023 and 20162022

(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 
  2023  2022 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net (loss)/ income $(5,527,870) $12,008,286 
Adjustments to reconcile net (loss)/ income to net cash provided by/ (used in) operating activities:        
Depreciation and impairment of lease merchandise  29,831,205   37,367,916 
Other depreciation and amortization  3,710,703   2,059,323 
Amortization of debt issuance costs  182,174   106,886 
Amortization of discount on the promissory note related to acquisition  118,476   - 
Compensation expense related to stock-based compensation  864,548   562,705 
Provision for doubtful accounts  22,085,828   27,563,993 
Interest in kind added to promissory notes balance  -   113,509 
Deferred income tax  (1,457,740)  (12,561,074)
Net changes in the fair value of loans receivables at fair value  837,048   (2,457,851)
Changes in operating assets and liabilities:        
Lease receivables  (25,773,184)  (34,275,950)
Loans receivables at fair value  6,990,410   (16,516,074)
Prepaid expenses and other assets  412,391   (155,773)
Lease merchandise  (22,878,600)  (32,562,799)
Purchase consideration payable related to acquisition  208,921   - 
Lease liabilities  (12,243)  (5,091)
Accounts payable  (2,506,724)  (2,740,017)
Accrued payroll and related taxes  (11,079)  25,656 
Accrued expenses  (1,603,202)  1,794,983 
Net cash provided by/ (used in) operating activities  5,471,062   (19,671,372)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property and equipment, including capitalized software costs  (3,114,534)  (2,924,537)
Purchases of data costs  (343,428)  (762,704)
Net cash used in investing activities  (3,457,962)  (3,687,241)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from loan payable under credit agreement  2,750,000   17,800,000 
Repayment of loan payable under credit agreement  (2,795,000)  (1,125,000)
Repayment of loan payable under Basepoint credit agreement  (1,500,000)  - 
Debt issuance related costs  (115,403)  (86,932)
Proceeds from exercise of stock options  1,185   137,057 
Proceeds from promissory notes to related parties  -   7,000,000 
Principal payment under finance lease obligation  (4,917)  (5,592)
Repayment of purchase consideration payable related to acquisition  (143,330)  - 
Repayment of installment loan  -   (5,605)
Net cash provided by/ (used in) financing activities  (1,807,465)  23,713,928 
         
INCREASE IN CASH and RESTRICTED CASH  205,635   355,315 
         
CASH and RESTRICTED CASH, beginning of period  6,173,349   5,094,642 
         
CASH and RESTRICTED CASH, end of period $6,378,984  $5,449,957 
         
Supplemental cash flow information:        
Interest paid $8,453,511  $3,953,765 
Noncash investing and financing activities        
Due date extension of warrants $917,581  $- 

  

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

 

4

 

FLEXSHOPPER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2017 and 2016

(unaudited)

  2017  2016 
Supplemental cash flow information:      
Interest paid $1,179,826  $1,124,342 
Non-cash financing activities:        
Conversion of preferred stock to common stock  -   425,660 
Warrants issued to placement agent in conjunction with sale of Series 2 Preferred Stock  -   150,451 

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

5

 

FLEXSHOPPER, INC.

Notes To Condensed Consolidated Financial Statements

For the ninesix months ended SeptemberJune 30, 20172023 and 20162022

(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, 2016.2022 filed with the SEC on April 24, 2023.

 

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, 20162022 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/period 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 lawsowns 100% of North Carolina on June 24, 2013.FlexLending, LLC, a Delaware limited liability company, and owns 100% of Flex Revolution, 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 retailersFlexLending, LLC and e-tailers.Flex Revolution, LLC.

 

In January 2015, in connection with the credit agreementCredit Agreement entered into in March 2015 (see Note 7)8), 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 durable goods to consumers on a lease-to-own basis (“LTO”). 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.

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.

Flex Revolution, LLC operates a direct origination model for consumers in 11 states. In the direct origination model, applicants who apply and obtain a loan through our platform are underwritten, approved, and funded directly by the Company.


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.

 

Segment Information - Operating segments are defined as components of an enterprise about which separate financial information is available between which resources are allocated by the chief operating decision maker. The Company’s chief operating decision maker is the chief executive officer. The Company has one operating and reportable segment that include all the Company’s financial services, which is consistent with the current organizational structure.

6

 

Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains cash and cash equivalents with high-quality financial institutions, which at times exceed the Federal Deposit Insurance Corporation insurance limits. While the Company monitors daily the cash balances in its operating accounts and adjusts the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which the Company deposits fails or is subject to other adverse conditions in the financial or credit markets. To date, the Company has experienced no loss or lack of access to its invested cash or cash equivalents; however, no assurance can be provided that access to invested cash and cash equivalents will not be impacted by adverse conditions in the financial and credit markets. As of June 30, 2023 and 2022, the Company had no cash equivalents.

Restricted Cash – The Company classifies all cash whose use is limited by contractual provisions as restricted cash. Restricted cash as of June 30, 2023 and December 31, 2022 consists primarily of cash required by our third-party banking partner to cover obligations related to loan participation.

The reconciliation of cash and restricted cash is as follows:

  June 30,
2023		  December 31,
2022		 
       
Cash $6,372,699  $6,051,713 
Restricted cash  6,285   121,636 
Total cash and restricted cash $6,378,984  $6,173,349 

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 SeptemberJune 30, 20172023 and December 31, 2016:2022:

 

  September 30,
2017		  December 31, 2016 
       
Accounts receivable $6,506,104  $11,690,495 
Allowance for doubtful accounts  3,111,378   9,508,708 
Accounts receivable, net $3,394,726  $2,181,787 
  June 30,
2023		  December 31,
2022		 
       
Lease receivables $41,663,220  $48,618,843 
Allowance for doubtful accounts  (2,435,821)  (13,078,800)
Lease receivables, net $39,227,399  $35,540,043 

 

The allowance is a significant percentage of the balance because FlexShopper does not charge off any customer account until it has exhausted all collection efforts with respect to each account, including attempts to repossess items. In addition, while collections are pursued, the same delinquent customers will continue to accrue weekly charges until they are charged off, with such charges being fully reserved for. Accounts receivableLease receivables balances charged off against the allowance were $7,133,260$13,757,036 and $20,713,314$32,728,807 for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, and $1,043,762$23,719,531 and $2,786,979$40,803,098 for the three and ninesix months ended SeptemberJune 30, 2016,2022, respectively.

 

7

  Six Months
Ended
June 30,
2023		  Year Ended
December 31,
2022		 
Beginning balance $13,078,800  $27,703,278 
Provision  22,085,828   57,420,480 
Accounts written off  (32,728,807)  (72,044,958)
Ending balance $2,435,821  $13,078,800 

 

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 Company reflects the undepreciated portion of the lease merchandise as depreciation expense and the related cost and accumulated depreciation are eliminatedremoved 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 costdepreciation and impairment of lease revenue.merchandise. 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 leasedlease merchandise balances consisted of the following as of SeptemberJune 30, 20172023 and December 31, 2016:2022:

 

 September 30,
2017		 December 31, 2016  June 30,
2023		 December 31,
2022		 
Lease merchandise at cost $25,837,079  $33,264,810  $52,734,813  $62,379,920 
Accumulated depreciation  (13,172,776)  (11,578,267)
Impairment reserve  (1,512,668)  (3,116,083)
Accumulated depreciation and impairment reserve  (28,136,977)  (30,829,479)
Lease merchandise, net $11,151,635  $18,570,460  $24,597,836  $31,550,441 

 

Cost


Loan receivables at fair value – The Company elected the fair value option on its entire loan and loan participation receivables portfolio. As such, loan receivables are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of lease merchandise sold representsoperations. Accrued and unpaid interest and fees are included in loan receivables at fair value in the undepreciated costconsolidated balance sheets. Management believes the reporting of rental merchandisethese receivables at fair value method closely approximates the timetrue economics of sale.the loan.

 

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.

Net changes in the fair value of loan receivables included in the consolidated statements of operations in the line loan revenues and fees, net of changes in fair value was a loss of $1,252,600 and $837,048 for the three and six months ended June 30, 2023, respectively, and a gain of $2,981,275 and $2,457,851 for the three and six months ended June 30, 2022, 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. For more information on leases for which the Company is lessee, refer to Note 4 to the consolidated financial statements. 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 with a customer 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 consolidated statements of operations is shown below:

  Three Months ended
June 30,		  Six Months ended
June 30,		 
  2023  2022  2023  2022 
Lease billings and accruals $32,501,656  $39,596,845  $66,756,740  $79,194,274 
Provision for doubtful accounts  (10,847,413)  (15,732,876)  (22,085,828)  (27,563,993)
Gain on sale of lease receivables  1,252,600   6,604,507   2,950,089   6,604,507 
Lease revenues and fees $22,906,843  $30,468,476  $47,621,001  $58,234,788 

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$70,368 and $355,212$140,735 for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, and $118,405$56,283 and $332,900$105,612 for the three and ninesix months ended SeptemberJune 30, 2016,2022, respectively.

Debt issuance costs incurred in conjunction with the subordinated Promissory Notes to related parties 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 $38,233 and $38,233 for the three and six months ended June 30, 2023, respectively, and $0 and $1,274 for the three and six months ended June 30, 2022, respectively.

Debt issuance costs incurred in conjunction with the Basepoint Credit Agreement entered into on June 7, 2023 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 $3,206 and $3,206 for the three and six months ended June 30, 2023, 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 aresites and of assets acquired in connection with Revolution Transaction (See Note 14). The 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 10ten years.


In the Revolution Transaction, the Company identified intangible assets for the franchisee contract-based agreements, the related non-compete agreements, the Liberty Loan brand, the non-contractual customer relationships associated with the corporate locations and the list of previous customers. The franchisee contract-based agreements relate to the assignment of agreements with Liberty Tax franchisees in which their locations and staff are used to assist in the origination and servicing of a loan portfolio in exchange for a share of the net revenue. In addition, there is non-compete embedded in these agreements. The Liberty Loan brand intangible asset relates to the value associated with the established brands acquired in the transaction that would otherwise need to be licensed. The non-contractual customer relationship intangible asset is the value of the customer relationships for the corporate stores acquired in the transaction. The customer list intangible asset relates to the value of valuable customers information that will be used to market additional products. The franchisee contract-based agreement, the Liberty Loan brand and the non-compete intangible assets are amortized on a straight-line basis over the expected useful life of the assets of ten years. The non-contractual customer relationship intangible asset is amortized on a straight-line basis over a five-year estimated useful life. The customer list is amortized on a straight-line basis over a three-year estimated useful life.

 

For intangible assets with finite lives, tests for impairment must be performed if conditions exist that indicate the carrying amount may not be recoverable. Intangible assets amortization expense was $443,059 and $886,118 for the three and six months ended June 30, 2023, respectively, and $769 and $1,538 for the three and six months ended June 30, 2022, respectively.

Property and Equipment - Property and equipment are recorded at cost less accumulated depreciation. Depreciation is recognized over the estimated useful lives of the respective assets on a straight-line basis, ranging from 2 to 7 years. Repairs and maintenance expenditures are expensed as incurred, unless such expenses extend the useful life of the asset, in which case they are capitalized. Depreciation and amortization expense for property and equipment was $1,207,069 and $2,370,418 for the three and six months ended June 30, 2023, respectively, and $1,000,555 and $1,848,129 for the three and six months ended June 30, 2022, 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$1,227,024 and $1,419,273$2,522,838 for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, and $507,738$1,285,088 and $1,355,187$2,270,082 for the three and ninesix months ended SeptemberJune 30, 2016,2022, respectively. Capitalized software amortization expense was $961,061 and $1,870,405 for the three and six months ended June 30, 2023, respectively, and $683,161 and $1,304,855 for the three and six months ended June 30, 2022, 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.

Capitalized data costs amounted to $174,346 and $343,428 for the three and six months ended June 30, 2023, respectively, and $469,650 and $762,704 for the three and six months ended June 30, 2022, respectively. Capitalized data costs amortization expense was $234,417 and $454,167 for the three and six months ended June 30, 2023, respectively, and $120,938 and $209,659 for the three and six months ended June 30, 2022, respectively.

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)9). 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,  June 30, 
 2017 2016  2023 2022 
Series 1 Convertible Preferred Stock  147,417   147,417   225,231   225,231 
Series 2 Convertible Preferred Stock  2,710,124   2,711,124   5,845,695   5,845,695 
Series 2 Convertible Preferred Stock issuable upon exercise of warrants  54,217   54,217   -   116,903 
Common Stock Options  302,900   416,400   5,435,572   3,936,083 
Common Stock Warrants  511,553   511,553   2,255,184   2,255,184 
Performance Share Units  1,250,000   790,327 
  3,726,211   3,840,711   15,011,682   13,169,423 

 

AmountsThe following table sets forth the computation of basic and diluted earnings per common stock set forth in the above table have been adjustedshare for the Reverse Split (see Note 4).six months ended June 30, 2023 and 2022:

 

  Six Months ended 
  June 30, 
  2023  2022 
Numerator      
Net (loss)/ income $(5,527,870) $12,008,286 
Series 2 Convertible Preferred Stock dividends  (1,964,726)  (1,219,554)
Net (loss)/ income attributable to common and Series 1 Convertible Preferred Stock  (7,492,596)  10,788,732 
Net income attributable to Series 1 Convertible Preferred Stock  -   (124,057)
Series 2 Convertible Preferred Stock dividends attributable to Series 1 Convertible Preferred Stock  -   12,599 
Net (loss)/ income attributable to common shares- Numerator for basic EPS  (7,492,596) $10,677,274 
Effect of dilutive securities:        
Series 2 Convertible Preferred Stock dividends  -   1,219,554 
Net (loss)/ income attributable to common shares after assumed conversions- Numerator for diluted EPS  (7,492,596)  11,896,828 
Denominator        
Weighted average of common shares outstanding- Denominator for basic EPS  21,751,807   21,576,312 
Effect of dilutive securities:        
Series 2 Convertible Preferred Stock  -   5,845,695 
Series 1 Convertible Preferred Stock  -   225,231 
Common stock options and performance share units  -   355,753 
Common stock warrants  -   190,277 
Adjusted weighted average of common shares outstanding and assumed conversions- Denominator diluted EPS  21,751,807   28,193,268 
Basic EPS $(0.34) $0.49 
Diluted EPS $(0.34) $0.42 


The following table sets forth the computation of basic and diluted earnings per common share for the three months ended June 30, 2023 and 2022:

  Three Months ended 
  June 30, 
  2023  2022 
Numerator      
Net (loss)/ income $(5,297,655) $14,389,221 
Series 2 Convertible Preferred Stock dividends  (992,493)  (609,777)
Net (loss)/ income attributable to common and Series 1 Convertible Preferred Stock  (6,290,148)  13,779,444 
Net income attributable to Series 1 Convertible Preferred Stock  -   (148,457)
Series 2 Convertible Preferred Stock dividends attributable to Series 1 Convertible Preferred Stock  -   6,291 
Net (loss)/ income attributable to common shares- Numerator for basic EPS  (6,290,148)  13,637,278 
Effect of dilutive securities:        
Series 2 Convertible Preferred Stock dividends  -   609,777 
Net (loss)/ income attributable to common shares after assumed conversions – Numerator for diluted EPS $(6,290,148) $14,247,055 
Denominator        
Weighted average of common shares outstanding- Denominator for basic EPS  28,923,393   21,605,234 
Effect of dilutive securities        
Series 2 Convertible Preferred Stock  -   5,845,695 
Series 1 Convertible Preferred Stock  -   225,231 
Common stock options and performance share units  -   222,664 
Common stock warrants  -   - 
Adjusted weighted average of common shares outstanding and assumed conversions- Denominator for diluted EPS  28,923,393   27,898,824 
Basic EPS $(0.22) $0.63 
Diluted EPS $(0.22) $0.51 

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 accountscash, lease 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)under Basepoint Credit Agreement and under the 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, for the portfolio acquired in the Revolution Transaction (See Note 14), and for the portfolio directly originated.

 

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 June 30, 2023 and December 31, 2022 is as follows:

  Fair Value Measurement Using  Carrying 
Financial instruments – As of June 30, 2023 (1) Level 1  Level 2  Level 3  Amount 
Loan receivables at fair value $-  $-  $25,105,046  $46,133,615 
Promissory note related to acquisition  -   -   3,133,617   3,133,617 

  Fair Value Measurement Using  Carrying 
Financial instruments – As of December 31, 2022 (1) Level 1  Level 2  Level 3  Amount 
Loan receivables at fair value $-  $-  $32,932,504  $42,747,668 
Promissory note related to acquisition  -   -   3,158,471   3,158,471 

(1)For cash, lease 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, the carrying value of loans payable under Basepoint 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 company estimates the fair value of the promissory note related to acquisition using discounted cash flow model. The model uses inputs including estimated cash flows and a discount rate.


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 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 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 June 30, 2023 and December 31, 2022:

  Six Months
Ended
June 30,
2023		  Year Ended
December 31,
2022		 
Beginning balance $32,932,504  $3,560,108 
Purchases of loan participation  311,527   31,216,406 
Obligation of loan participation  (7,128)  12,931 
Purchase of loan portfolio in Revolution Transaction  -   13,320,326 
Loan originations  27,923,504   5,519,303 
Interest and fees(1)  8,528,767   16,680,080 
Collections  (43,747,080)  (27,816,669)
Net charge off (1)  (8,915,014)  (10,653,751)
Net change in fair value(1)  8,077,966   1,093,770 
Ending balance $25,105,046  $32,932,504 

(1)Included in loan revenues and fees, net of changes in fair value in the 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 June 30, 2023 and December 31, 2022:

  June 30, 2023  December 31, 2022 
  Minimum  Maximum  Weighted
Average(2)		  Minimum  Maximum  Weighted
Average		 
Estimated losses(1)  0.9%  92.5%  50.8%  2.0%  92.4%  40.8%
Servicing costs  -   -   4.9%  -   -   4.5%
Discount rate  -   -   20.1%  -   -   21.0%

(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 June 30, 2023 and December 31, 2022 concerning loan receivables at fair value are as follows:

  June 30,
2023		  December 31,
2022		 
Aggregate fair value of loan receivables that are 90 days or more past due $15,308,976  $7,147,585 
Unpaid principal balance of loan receivables that are 90 days or more past due  37,950,094   19,834,547 
Aggregate fair value of loan receivables in non-accrual status  15,159,360   6,947,224 


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

 

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of SeptemberJune 30, 2017 and December 31, 2016,2023, 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.expenses.

 

Recent Accounting Pronouncements –Reclassifications

 

In May 2014,Certain prior year/period balances have been reclassified to conform with the FASB issued ASU 2014-09, Revenue from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step modelcurrent year/period presentation. These reclassifications primarily include separating the prepaid expenses, right of use asset and loan revenues and fees, net of changes in fair value as separate line items.  

4. LEASES

Refer 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 condensed 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 scope of the guidance.Company currently does not have any sales-type or direct financing leases as a lessor.

Lease Commitments

 

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 effective for fiscal years, and interim periods within those years,initial 108-month lease term beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases aton the anniversary of the commencement date, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Lessor guidance is largely unchanged. The Company is currently evaluating the effect that the new guidance will have on its financial statements.was September 18, 2019.

 

9

4. REVERSE STOCK SPLITIn September 2021, FlexShopper entered into a 12-month lease for an office space for approximately 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.

 

On October 14, 2016, the Company filed with the Secretary of StateAs part of the StateRevolution Transaction (See Note 14), 22 storefront lease agreements were acquired by FlexShopper. Some of Delaware a certificatethose stores were closed or transferred to franchisees after the Revolution Transaction. As of amendment (the “CertificateJune 30, 2023, 20 storefront lease agreements belong to FlexShopper. The stores are located in Alabama, Michigan, Nevada, and Oklahoma and are used to offer finance products to customers. The monthly average rent for these stores is approximately $1,700 per month. These leases are accounted for under the practical expedient for leases with initial terms for 12 months or less, and as such no related right of Amendment”) to its certificate of incorporation, which Certificate of Amendment effectuated as of October 24, 2016 at 11:59 p.m. Eastern Time (the “Effective Time”) a reverse split 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 shares in the consolidated financial statements and related notes have been retroactively restated to reflect the Reverse Split. The Reverse Split did not change the number of shares of commonuse asset or preferred stock that the Company is authorized to issue, or the par value of the Company’s common or preferred stock.liability was recorded.

 

The Reverse Split resultedCompany determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in the Company’s condensed consolidated balance sheets within the Right of use asset, net, Lease liability- current portion and Lease liabilities net of current portion.


Supplemental balance sheet information related to leases is as follows:

  Balance Sheet Classification June 30,
2023		  December 31,
2022		 
Assets        
Operating Lease Asset Right of use asset, net $1,318,008  $1,395,741 
Finance Lease Asset Right of use asset, net  6,944   10,529 
Total Lease Assets   $1,324,952  $1,406,270 
           
Liabilities          
Operating Lease Liability – current portion Current Lease Liabilities $219,438  $199,535 
Finance Lease Liability – current portion Current Lease Liabilities  8,920   8,466 
Operating Lease Liability – net of current portion Long Term Lease Liabilities  1,447,788   1,562,022 
Finance Lease Liability – net of current portion Long Term Lease Liabilities  -   4,600 
Total Lease Liabilities   $1,676,146  $1,774,623 

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

Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s leases:

  Weighted
Average
Discount
Rate		  Weighted
Average
Remaining
Lease Term
(in years)		 
Operating Leases  13.03%  5 
Finance Leases  13.39%  1 

Operating lease expense is recognized on a straight-line basis over the lease term within operating expenses in the Company’s consolidated statements of operations. Finance lease expense is recognized over the lease term within interest expense and amortization in the Company’s consolidated statements of operations. The Company’s total operating and finance lease expense all relate to lease costs amounted to $97,367 and $194,623 for the three and six months ended June 30, 2023, respectively, and $97,442 and $194,697 for the three and six months ended June 30, 2022, respectively.

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

  Six Months ended 
  June 30, 
  2023  2022 
Cash payments for operating leases $206,736  $200,714 
Cash payments for finance leases  4,782   5,592 


Below is a summary of undiscounted operating lease liabilities as of June 30, 2023. The table also includes a reconciliation of the future undiscounted cash flows to the per share conversion or exercise price andpresent value of the number of shares of common stock issuable uponoperating lease liabilities included in 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.consolidated balance sheet.

 

  Operating
Leases		 
2023 $210,870 
2024  430,134 
2025  443,038 
2026  456,330 
2027  470,019 
2028 and thereafter  303,574 
Total undiscounted cash flows  2,313,965 
Less: interest  (646,739)
Present value of lease liabilities $1,667,226 

Below is a summary of undiscounted finance lease liabilities as of June 30, 2023. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance lease liabilities included in the consolidated balance sheet.

  Finance
Leases		 
2023 $4,782 
2024  4,782 
Total undiscounted cash flows  9,564 
Less: interest  (644)
Present value of lease liabilities $8,920 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

 Estimated Useful Lives September 30,
2017		 December 31, 2016  Estimated
Useful Lives		 June 30,
2023		 December 31,
2022		 
Furniture and fixtures 2-5 years $106,139  $98,564 
Furniture, fixtures and vehicle 2-5 years $395,468 $395,468 
Website and internal use software 3 years  5,352,872   3,933,600  3 years 23,065,295 20,542,457 
Computers and software 3-7 years  680,071   619,477  3-7 years  4,263,799  3,672,103 
  6,139,082   4,651,641    27,724,562 24,610,028 
Less: accumulated depreciation and amortization  (3,290,099)  (2,111,127)    (18,893,584)  (16,523,166)
 $2,848,983  $2,540,514    $8,830,978 $8,086,862 

  

Depreciation and amortization expense for property and equipment was $414,674$1,207,069 and $294,616$2,370,418 for the three and six months ended SeptemberJune 30, 2017 and 2016,2023, respectively, and $1,178,972$1,000,555 and $775,818$1,848,129 for the ninethree and six months ended SeptemberJune 30, 20172022, respectively.


6.INTANGIBLE ASSETS

The following table provides a summary of our intangible assets:

  June 30, 2023
  Estimated
Useful
Life		 Gross Carrying
Amount		  Accumulated
Amortization		  Net Carrying
Amount		 
Patent 10 years $30,760  $(30,414) $346 
Franchisee contract-based agreements 10 years  12,744,367   (743,420)  12,000,947 
Liberty Loan brand 10 years  340,218   (19,845)  320,373 
Non-compete agreements 10 years  86,113   (5,026)  81,087 
Non contractual customer relationships 5 years  1,952,371   (227,780)  1,724,591 
Customer list 3 years  184,825   (35,938)  148,887 
    $15,338,654  $(1,062,423) $14,276,231 

  December 31, 2022
  Estimated
Useful
Life		 Gross Carrying
Amount		  Accumulated
Amortization		  Net Carrying
Amount		 
Patent 10 years $30,760  $(28,876) $1,884 
Franchisee contract-based agreements 10 years  12,744,367   (106,203)  12,638,164 
Liberty Loan brand 10 years  340,218   (2,835)  337,383 
Non-compete agreements 10 years  86,113   (718)  85,395 
Non contractual customer relationships 5 years  1,952,371   (32,540)  1,919,831 
Customer list 3 years  184,825   (5,133)  179,692 
    $15,338,654  $(176,305) $15,162,349 

Depreciation and 2016,amortization expense for intangible assets was $443,059 and $886,118 for the three and six months ended June 30, 2023, respectively, and $769 and $1,538 for the three and six months ended June 30, 2022, respectively.

 

6. LOANS PAYABLE TO SHAREHOLDERAs of June 30, 2023, future estimated amortization expense related to identifiable intangible assets over the next five years is set forth in the following table:

  Amortization
Expense		 
2023 (six months remaining) $884,926 
2024  1,769,160 
2025  1,764,026 
2026  1,707,552 
2027  1,675,012 
Total $7,800,676 


7. PROMISSORY 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. (“Mr. Heiser”), FlexShopper’s Chief Executive 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 June 30, 2023, 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,21.26%. 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 June 30, 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. On March 30, 2023, FlexShopper, LLC executed a fourth amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended from April 1, 2023 to October 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 $1,017,685 as of June 30, 2023 and $1,017,826 as of December 31, 2022.

Interest paid for the 122 Partner Note was $53,346 and $105,988 for the three and six months ended June 30, 2023, respectively, and $69,428 and $102,144 for the three and six months ended June 30, 2022, respectively.

Interest expensed for the 122 Partner Note $53,346 and $105,022 for the three and six months ended June 30, 2023, respectively, and $42,462 and $104,991 for the three and six months ended June 30, 2022, 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 June 30, 2023, amounts outstanding under the NRNS Note bear interest at a rate of 21.26%. 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.

 

On June 29, 2023, the Company, the Borrower, NRNS, Mr. Heiser and PITA Holdings, LLC (“PITA”) entered into an Amendment to Subordinated Debt and Warrants to Purchase Common Stock (the “Amendment”), pursuant to which, among other things, the parties agreed to extend the maturity date of the NRNS Note from July 1, 2024 to July 1, 2025. In order to induce NRNS to enter into the Amendment, the Company extended the expiration date of certain warrants (See Note 9). The cost of the warrant modification was $917,581 and was recorded as a deferred debt cost of NRNS note. No other changes were made to such NRNS Note.

10


 

Principal and accrued and unpaid interest outstanding on the NRNS Note was $10,940,113 as of June 30, 2023 and $10,941,629 as of December 31, 2022.

 

7.Interest paid for the NRNS Note was $573,466 and $1,139,375 for the three and six months ended June 30, 2023, respectively, and $382,497 and $533,783 for the three and six months ended June 30, 2022, respectively.

Interest expensed for the NRNS Note was $573,466 and $1,128,987 for the three and six months ended June 30, 2023, respectively, and $352,207 and $644,445 for the three and six months ended June 30, 2022, respectively.

Amounts payable under the promissory notes are as follows:

  Debt 
2023 $1,207,798 
2024 $10,750,000 

8. 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 and loans as collateral under this Agreement.

On January 29, 2021, the Company and the Lender signed an Omnibus Amendment to the Credit Agreement. This Amendment extended the Commitment Termination Date to April 1, 2024, amended other covenant requirements, partially removed indebtedness covenants and amended eligibility rules. The interest rate 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 June 30, 2023, amounts borrowed bear interest at 16.26%.

On March 8, 2022, pursuant to Amendment No. 15 to Credit Agreement, the Commitment Amount was increased to be up to $82,500,000. The incremental increase in the Commitment Amount was provided by WE 2022-1, LLC, as an additional lender under the Credit Agreement. PriorWE 2022-1, LLC is an affiliate of Waterfall Asset Management, LLC. No other changes were made to the January 2017credit 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.

On October 21, 2022, pursuant to Amendment No. 16 to Credit Agreement, the Commitment Amount was increased to be up to $110,000,000. This amendment described below, amounts borrowed borealso replaced LIBOR references in the Credit Agreement with SOFR (Secured Overnight Financing Rate), as the basis for our 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 withpayments under the Credit Agreement.

 

In January 2017,On June 7, 2023, pursuant to Amendment No. 17 to the Credit Agreement, was amendedthe administrative agent and lender consented, on a one-time basis, to reduce the interest being charged on amounts borrowedformation of a new subsidiary, Flex TX, LLC, and to be LIBOR plus 14% per annumthe Company’s execution and reduceperformance of the non-usage fee on undrawn amounts if the facility is less than 75% drawn on average. Additionally, the Commitment Termination DateRevolution Agreements (as defined below) between the Company and BP Fundco, LLC to incur certain indebtedness and grant a security interest in certain of its assets in connection with (i) a Limited Payment Guaranty (Flex Revolution Loan) between the Credit Agreement) was extended from May 6, 2017 to April 1, 2018. Accordingly, commencing on or after April 1, 2018, principal together withCompany and BP Fundo, LLC and (ii) a Pledge Agreement among the interest thereon is payable periodically through April 1, 2019,Company, Flex Revolution, LLC and BP Fundco, LLC (collectively, the amended maturity date of the loan, as such date may be extended in accordance with the Credit Agreement.

Principal payable within twelve months of the balance sheet date based on the outstanding loan balance at such date is reflected as a current liability in the accompanying balance sheets. Interest expense incurred under the Credit Agreement amounted to $385,989 and $1,256,475 for the three and nine months ended September 30, 2017, respectively, and $340,955 and $1,061,392 for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, the outstanding balance under the Credit Agreement was $8,500,000. The Company repaid $788,207 in the second quarter of 2017 as a result of a pay down of the seasonal over advance from 2016. The Company repaid $2,288,207 in the third quarter of 2017 as a result of lower quarter over quarter lease origination, and $4,172,174 in 2016, resulting primarily from the repayment of the Bridge Loan Amount upon the Equity Raise as described in the fourth amendment“Revolution Agreements”). No other changes were made to the Credit Agreement.

 


The Credit Agreement provides that FlexShopper may not incur additional indebtedness (other than expressly permitted indebtedness) without the permission of the Lender and also prohibits payments of cash dividends on common stock. Additionally, the Credit Agreement includes covenants requiring FlexShopper to maintain a minimum amount of Equity Book Value, maintain a minimum amount of liquidity and cash and maintain a certain ratio of Consolidated Total Debt to Equity Book Value (each capitalized term, as defined in the Credit Agreement). Upon a Permitted Change of Control (as defined in the Credit Agreement), FlexShopper must refinance the debt under the Credit Agreement, subject to the payment of an early termination fee. A summary of the covenant requirements, and FlexShopper’s actual results at June 30, 2023, follows:

  June 30, 2023 
  Required
Covenant		  Actual
Position		 
Equity Book Value not less than $16,452,246  $27,290,117 
Liquidity greater than  1,500,000   6,372,699 
Cash greater than  500,000   6,378,984 
Consolidated Total Debt to Equity Book Value ratio not to exceed  5.25   3.80 

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$0 and $2,750,000 for the three and six months ended June 30, 2023, respectively, and $11,000,000 and $17,800,000 for the three and six months ended June 30, 2022, respectively. The Company repaid under the Credit Agreement and its subsidiaries$220,000 and $2,795,000 for the three and six months ended June 30, 2023, respectively, and $0 and $1,125,000 for the three and six months ended June 30, 2022, respectively.

Interest expense incurred under the Credit Agreement amounted to maintain$3,332,686 and $6,611,523 for the three and six months ended June 30, 2023, respectively, and $1,896,146 and $3,447,990 for the three and six months ended June 30, 2022, respectively. The outstanding balance under the Credit Agreement was $81,155,000 as of the last day of each fiscal quarter during the term of the agreement minimum amounts of Unrestricted CashJune 30, 2023 and Equity Book Value and to achieve Adjusted Operating Cash Flow of not less than certain amounts during such quarters (all such termswas $81,200,000 as defined in the Credit Agreement). As of December 31, 2015,2022. Such amount is presented in the Company was in violationconsolidated balance sheets net of the covenant requiring an Equity Book Valueunamortized issuance costs of at least $7.0 million$211,516 and $352,252 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 312023 and December 31, 2016, increasing2022, respectively. Interest is payable monthly on the outstanding balance of the amounts borrowed. No principal is expected to $10 million atbe repaid in 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.

11

On January 27, 2017, FlexShopper entered into a fifth amendmentnext twelve months due 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, 2017having been extended to April 1, 2018 (with2024, or from reductions in the borrowing base. The Company must repay all borrowed amounts one year after the Commitment Termination Date. Accordingly, all principal is shown as a one-time rightnon-current liability at June 30, 2023.

Since October 2022, the Company has been entering into Interest Rate Cap Agreements with AXOS bank, a financial institution not related with the Lender of extension by the lenders up to August 31, 2018), (2) requireCredit Agreement. These agreements cap the Borrower to refinance the debt undervariable portion (one month SOFR) of the Credit Agreement upon a Permitted Change of Control (as defined in the Credit Agreement)interest rate to 4%, subject to the payment of an early termination fee, (3)which reduce the Company’s exposure to additional increases in 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.rates.

 

8.


9. CAPITAL STRUCTURE

 

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

 

Preferred Stock

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

 

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

●Series 1 Convertible Preferred Stock– Series 1 Convertible Preferred Stock ranks senior to common stock upon liquidation.

 

As of SeptemberJune 30, 2017,2023, each share of Series 1 Convertible Preferred Stock was convertible into 0.606491.32230 shares of the Company’s common stock, subject to certain anti-dilution rights. The holders of the Series 1 Convertible Preferred Stock have the option to convert the shares to common stock at any time. Upon conversion, all accumulated and unpaid dividends, if any, will be paid as additional shares of common stock. The holders of Series 1 Convertible Preferred Stock have the same dividend rights as holders of common stock, as if the Series 1 Convertible Preferred Stock had been converted to common stock.

 

During the year ended December 31, 2016, 85,132 shares of Series 1 Convertible Preferred Stock were converted into 51,983 shares of common stock. As of SeptemberJune 30, 2017,2023, there were 243,065170,332 shares of Series 1 Convertible Preferred Stock outstanding, which arewere convertible into 147,417225,231 shares of common stock.

 

Series 2 Convertible Preferred Stock –On June 10, 2016, the Company entered into a Subscription Agreement with B2 FIE V LLC (the “Investor”), an entity affiliated with Pacific Investment Management Company LLC, providing for the issuance and sale of 20,000 shares of Series 2 Convertible Preferred Stock for gross proceeds of $20.0 million. The Company sold an additional 1,952 shares of Series 2 Convertible Preferred Stock to a different investor for gross proceeds of $1.95 million at a subsequent closing. 

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

 

Pursuant to the authority expressly granted to the Board of Directors by the provisions of the Company’s Certificate of Incorporation, the Board of Directors of the Company created and designated 25,000 shares of Series 2 Convertible Preferred Stock, par value $.001 per share (“Series 2 Preferred Shares”), by filing a Certificate of Designations with the Delaware Secretary of State (the “Series 2 Certificate of Designations”). The Series 2 Preferred Shares were sold for $1,000 per share (the “Stated Value”) and accrue dividends on the Stated Value at an annual rate of 10% compounded annually. Cumulative accrued dividends in arrearsas of June 30, 2023 totaled $2,924,681 at September$21,049,102. As of June 30, 2017. Each2023, 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.

 

As the dividends for the Series 2 Preferred Shares have not been declared by the Company’s Board of Directors, there is no dividends accrual reflected in the Company’s Consolidated Financial Statement. The Series 2 Preferred Shares dividends is reflected on the Consolidated Statement of Operations for purposes of determining the net income attributable to common and Series 1 Convertible Preferred shareholders.

12

 

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 connection with entering into the Credit Agreement on March 6, 2015,issuance of Series 2 Convertible Preferred Stock in June 2016, the Company raised approximately $8.6 millionissued to the placement agent in net proceeds through direct sales of 1.7 millionsuch offering warrants exercisable for 439 shares of itsSeries 2 Convertible Preferred Stock at an initial exercise price of $1,250 per share, which expired by their terms seven years after the date of issuance.

In September 2018, the Company issued warrants exercisable for an aggregate 1,055,184 shares of common stock at an exercise price of $1.25 per warrant to certain affiliatesMr. Heiser and NRNS in connection with partial conversions of their promissory notes (the “Conversion Warrants”). The original expiration date of these warrants was September 28, 2023.

From January 2019 to August 2021, the Company issued to PITA Holdings, LLC (“PITA”) Common Stock Purchase Warrants (the “Consulting Warrants”) to purchase up to an aggregate of 1,200,000 shares of the LenderCompany’s common stock in connection with that certain Consulting Agreement, dated as of February 19, 2019 (as may be amended from time to time), between the Company and other accredited investors for a purchase price of $5.50 per share. As a result of the sale to certainXLR8 Capital Partners LLC (“XLR8”).

PITA, NRNS and XLR8 are affiliates the Lender is considered a beneficial shareholder of the Company.

 

On March 17, 2016,June 29, 2023, the Company’s stockholders, acting by written consent, approvedCompany, FlexShopper, LLC, NRNS, Mr. Heiser and PITA entered into an amendmentAmendment to Subordinated Debt and Warrants to Purchase Common Stock (the “Amendment”), pursuant to which, among other things, the Certificate of Incorporationparties agreed to effect a reverse stock splitextend the maturity date of the Company’s common stock. On October 14, 2016,NRNS Note from July 1, 2024 to July 1, 2025. In order to induce NRNS to enter into the Amendment, the expiration date of the Conversion Warrants and the expiration date date of 840,000 of the Consulting Warrants was extended 30 months from the original expiration date. The cost of the warrant modification was $917,581 and was recorded as a deferred debt cost of NRNS note.

The expense related to warrants was $917,581 and $917,581 for the three and six months ended June 30, 2023, respectively, and $0 and $0 for the three and six months ended June 30, 2022, respectively.

The following table summarizes information about outstanding stock warrants as of June 30, 2023 and December 31, 2022, all of which are exercisable:

Exercise  

Common

Stock Warrants

  

Weighted Average

Remaining

Contractual Life

Price  Outstanding  June 30, 2023 Dec 31, 2022
$1.25   1,055,184  3 years 1 year
$1.25   160,000  3 years Less than 1 year
$1.34   40,000  3 years Less than 1 year
$1.40   40,000  3 years Less than 1 year
$1.54   40,000  3 years Less than 1 year
$1.62   40,000  3 years Less than 1 year
$1.68   40,000  3 years 2 years
$1.69   40,000  3 years Less than 1 year
$1.74   40,000  3 years Less than 1 year
$1.76   40,000  3 years Less than 1 year
$1.91   40,000  3 years Less than 1 year
$1.95   40,000  3 years 2 years
$2.00   40,000  3 years Less than 1 year
$2.01   40,000  3 years Less than 1 year
$2.08   40,000  3 years 2 years
$2.45   40,000  3 years Less than 1 year
$2.53   40,000  3 years Less than 1 year
$2.57   40,000  3 years 2 years
$2.70   40,000  2 years 3 years
$2.78   40,000  3 years Less than 1 year
$2.79   40,000  2 years 2 years
$2.89   40,000  4 years 2 years
$2.93   40,000  3 years Less than 1 year
$2.97   40,000  2 years 2 years
$3.09   40,000  4 years 2 years
$3.17   40,000  4 years 2 years
$3.19   40,000  2 years 3 years
$3.27   40,000  2 years 2 years
     2,255,184     


10. EQUITY COMPENSATION PLANS

In April 2018, the Company filed withadopted the Secretary of State of the State of Delaware a certificate of amendment (the “Certificate of Amendment”) to its certificate of incorporation, which Certificate of Amendment effectuated as of October 24, 2016 at 11:59 p.m. Eastern Time the Reverse Split by a ratio of one-for-10 (see Note 4). All share and per share data in these financial statements and footnotes have been retrospectively adjusted to account for the Reverse Split.

9. STOCK OPTIONS

On January 31, 2007, the Board of Directors adopted our 2007FlexShopper, 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 granted under the Plans vest over periods ranging from immediately upon grant to a three year period and expire ten years from date of grant.

 

Activity in stock options forStock-based compensation expense include the nine months ended September 30, 2017 follows: following components:

  

  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 

13

  Three Months ended
June 30,		  Six Months ended
June 30,		 
  2023  2022  2023  2022 
Stock options $384,396  $232,824  $805,144  $524,107 
Performance share units  59,404   24,652   59,404   38,598 
Total stock-based compensation $443,800  $257,476  $864,548  $562,705 

 

The weighted average grant date fair value of stock-based compensation is recognized as compensation expense over the vesting period. Compensation expense recorded for stock-based compensation in the consolidated statements of operations was $443,800 and $864,548 for the three and six months ended June 30, 2023, respectively, and $257,476 and $562,705 for the three and six months ended June 30, 2022, respectively. Unrecognized compensation cost related to non-vested options granted duringand PSU at June 30, 2023 amounted to $1,441,170, which is expected to be recognized over a weighted average period of 2.24 years.

Stock options:

The fair value of stock options is recognized as compensation expense using 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%
  Six Months
ended
June 30,
2023		  Six Months
ended
June 30,
2022		 
Exercise price $0.79  $1.48 
Expected life  6 years   6 years 
Expected volatility  96%  68%
Dividend yield  0%  0%
Risk-free interest rate  3.54   2.04%

 

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 six month periods ended June 30, 2023 and June 30, 2022 was as follows:

  Number of
options		  Weighted
average
exercise
price		  Weighted
average
contractual
term
(years)		  Aggregate
intrinsic
value		 
Outstanding at January 1, 2023  3,919,228  $1.97      $52,223 
Granted  1,517,844   0.79       75 
Exercised  (1,500)  0.79       345 
Outstanding at June 30, 2023  5,435,572  $1.64   7.27  $1,102,624 
Vested and exercisable at June 30, 2023  4,049,004  $1.84   6.66  $580,962 
                 
Outstanding at January 1, 2022  3,080,904  $2.06      $1,923,642 
Granted  1,050,468   1.48       — 
Exercised  (162,956)  .84       204,030 
Forfeited  (7,333)  2.22       2,273 
Expired  (25,000)  1.70       — 
Outstanding at June 30, 2022  3,936,083  $1.96   7.17  $39,412 
Vested and exercisable at June 30, 2022  2,707,122  $2.06   6.58  $39,412 

The weighted average grant date fair value of options granted during the six month periods ended June 30, 2023 and June 30, 2022 was $0.60 and $0.89 per share respectively.

Performance Share Units:

On February 10, 2022, and on April 21, 2023, the Compensation Committee of the Board of Directors approved awards of performance share units to certain senior executives of the Company (the “2022 PSU”, and the “2023 PSU”, respectively).

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 such as the Company’s Adjusted EBITDA. 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 2023 PSU which could potentially be issued ranges from 0 up to a maximum of 1,250,000 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 2022 PSU were forfeited in April 2023 as the minimum performance component was $22,685not achieved. For the 2023 PSU, the Company determined it was probable that the minimum performance component would be met and $64,896,accordingly commenced amortization in the quarter ended June 30, 2023.

Activity in performance share units for the three and ninesix months ended SeptemberJune 30, 2017, respectively2023 and $45,863 and $124,244 for the three and nine months ended SeptemberJune 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, 2023  790,327  $1.53 
Granted  1,250,000   0.78 
Forfeited/ unearned  (790,327)  1.53 
Vested  —   — 
Non- vested at June 30, 2023  1,250,000  $0.78 
Non- vested at January 1, 2022  —  $— 
Granted  790,327   1.53 
Forfeited/ unearned  —   — 
Vested  —   — 
Non- vested at June 30, 2022  790,327  $1.53 


11. INCOME TAXES

 

10. WARRANTS

On June 24, 2016,Effective income tax rates for interim periods are based on the Company granted warrants to oneCompany’s estimate of the applicable annual income tax rate. The Company’s effective income tax rate varies based upon the estimate of the Company’s placement agents to purchase 439 sharesannual 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 Series 2 Convertible Preferred Stock at an initial exercise price of $1,250 per share. The exercise priceactivity among these jurisdictions results in changes to the effective tax rate utilized to measure the Company’s income tax provision and aggregate number of shares are subject to adjustment as set forth in the agreement.deferred tax assets and liabilities.

 

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 taxableCompany’s effective income which expire from 2023 to 2036.

The Company expects its effective tax rate for the year ending December 31, 2017 to be zero due to its history of net operating losses and recording a full valuation allowance on deferred tax assets. As a result the Company estimated its effective tax rate for the three and nine months ended SeptemberJune 30, 20172023 was approximately 22%. This was different than the expected federal income tax rate of 21% primarily due to be zero.the impact of non-taxable income from non-deductible equity compensation and state income taxes.

 

During the second quarter of 2022, the Company released the valuation allowance of the Company’s deferred tax asset recorded as of December 31, 2021. The Company’s useCompany had historical cumulative positive pre-tax income plus permanent differences. The realization 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 SeptemberJune 30, 20172023 is more likely than not based on the Company’s projected taxable income.

12. CONTINGENCIES AND OTHER UNCERTAINTIES

Regulatory inquiries

In the first quarter of 2021, FlexShopper, along with a number of other lease-to-own companies, received a subpoena from the California Department of Financial Protection and Innovation (the “DFPI”) requesting the production of documents and information regarding the Company’s compliance with state consumer protection laws. The Company is cooperatively engaging with the DFPI in response to its inquiry. Although the Company believes it is in compliance with all applicable consumer protection laws and regulations in California, this inquiry ultimately could lead to an enforcement action and/or a consent order, and substantial costs, including legal fees, fines, penalties, and remediation expenses.

Litigation

The Company is not involved in any current or pending material litigation. The Company could be involved in litigation incidental to the operation of the business. The Company intends to vigorously defend all matters in which the Company is named defendants, and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that may affect the Company. Although the adequacy of existing insurance coverage of the outcome of any legal proceedings cannot be predicted with certainty, based on the current information available, the Company does not satisfybelieve the realization criteriaultimate liability associated with known claims or litigation, if any, in which the Company is involved will materially affect the Company’s consolidated financial condition or results of operations.

Employment agreements

Certain executive management entered into employment agreements with the Company. The contracts are for a period between three to five years and renew for three successive one-year terms unless receipt of written notices by the parties. The contracts provide that such management may earn discretionary cash bonuses and equity awards, based on financial performance metrics defined each year by the Compensation Committee of the Company’s Board of Directors. Additionally, under certain termination conditions, such contracts provide for severance payments and other benefits.


COVID-19 and other similar health crisis

The Company has recordedbeen, and may in the future, be impacted by COVID-19 or any similar pandemic or health crisis, and this could affect our results of operations, financial condition, or cash flow in the future. The extent and the effects of the impact of any of these events on the operation and financial performance of our business depend on several factors which are highly uncertain and cannot be predicted.

13. COMMITMENTS

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

14. REVOLUTION TRANSACTION

On December 3, 2022, Flex Revolution, LLC, a valuation allowancewholly-owned subsidiary of FlexShopper, Inc. (the “Buyer”) closed a transaction (“Revolution Transaction”) pursuant to an Asset Purchase Agreement with Revolution Financial, Inc., a provider of consumer loans and credit products (collectively with certain of its subsidiaries, “Revolution”), under which the Company acquired the material net assets of the Revolution business.

In consideration for the sale of the Revolution net assets, the Company issued an adjustable promissory note (“Seller Note”) with an initial principal amount of $5,000,000. The Seller Note matures on December 1, 2027, bears interest at 8% per annum and is subject to adjustment based upon the pre-tax net income of the acquired business in 2023. The fair value of the Seller Note as of the acquisition date was $3,421,991. The Seller Note, net of the discount, was $3,133,617 as of June 30, 2023 and $3,158,471 as of December 31, 2022. The Seller Note is included in the condensed consolidated balance sheets in the line Promissory note related to acquisition.

The Revolution Transaction includes the Buyer’s assumption of Revolution’s consumer loan portfolio, related cash and its credit facility (“Revolution Credit Facility”) as this facility is backed by the portfolio acquired. As of December 31, 2022, the Revolution Credit Agreement was not legally transferred to FlexShopper, so this liability was included in the condensed consolidated balance sheets on the line Purchase consideration payable related to acquisition as the Company was obligated for the outstanding balance as December 31, 2022. On June 7, 2023, the Revolution Credit Facility was legally transferred to FlexShopper (See Note 15)

The parties to the Asset Purchase Agreement have each made customary representations and warranties in the Asset Purchase Agreement and have agreed to indemnify each other for breaches of such representations and warranties. The Buyer’s primary recourse in the event of a claim is to offset the tax asset.Seller Note equal to the indemnifiable losses subject to such claim.

 

The Revolution Transaction has been accounted for as a business combination in accordance with ASC 805, Business Combination. The Company measured the net assets acquired in Revolution Transaction at fair value on the acquisition date.

14


 

The fair value of the intangible assets was determined primarily by using discounted cash flow models. The models use inputs including estimated cash flows and a discount rate.

The Company recorded a bargain purchase gain of $14,461,274 related to the Revolution Transaction at acquisition date as the fair value of the net assets acquired exceed the fair value of the purchase price consideration. The Company believes that the most significant reason its management was able to negotiate a bargain purchase was due to the speed with which the seller wanted to close this transaction which resulted in a non-competitive process akin to a forced sale. The strong desire for a prior to year-end closing was for various reasons, including potential credit facility covenant issues and accelerating operating losses after recent regulatory changes.

15. BASEPOINT CREDIT AGREEMENT

On June 7, 2023, the Company, through a wholly owned subsidiary, Flex Revolution, LLC (the “New Borrower”) entered into a Joinder Agreement to a credit agreement (the “Basepoint Credit Agreement”) with Revolution Financial, Inc. (the “Existing Borrower”), the subsidiary guarantors party thereto, the lenders party thereto, the individual guarantor party and BP Fundco, LLC, as administrative agent.

The Existing Borrower with certain of its subsidiaries (collectively, the “Seller”) and Flex Revolution, LLC (the “Buyer”) entered into an Asset Purchase Agreement (See Note 14), pursuant to which the Seller agreed to, among other things, transfer substantially all of its assets to the Buyer.

In the Basepoint Credit Agreement, the New Borrower agreed to become a borrower (the “Borrower”) and a grantor as applicable under the agreement. The Company is a guarantor of the Basepoint Credit Agreement.

The Basepoint Credit Agreement provides for an up to a $20 million credit facility for the origination of consumer loans. The credit facility is backed by eligible principal balance of eligible consumer receivable of the borrower’s portfolio (the “Borrowing Base”). The annual interest rate on loans under the Basepoint Credit Agreement is 13.42%. The principal balance outstanding under the Basepoint Credit Agreement is due on June 7, 2026.

The Basepoint Credit Agreement includes covenants requiring the Borrower and the guarantor to maintain a minimum amount of liquidity that is no less than 5% of the current Borrowing Base and maintain a minimum amount of cash held in the concentration accounts of $200,0000. The tangible net worth of the borrower and the guarantor shall not be less than 10% of the current Borrowing Base and the borrower and the guarantor shall maintain a positive consolidated net income. The terms tangible net worth and positive consolidated net income for the purpose of calculating the covenants under the Basepoint Credit Agreement are defined in the agreement. The Company is in compliance with Basepoint Credit Agreement covenants as of June 30, 2023.

The Basepoint 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 Basepoint Credit Agreement, breaches of representations, warranties or certifications made by or on behalf of the borrower in the Basepoint Credit Agreement and related documents (including certain covenants), deficiencies in the Borrowing Base, certain judgments against the borrower and bankruptcy events.

Interest expense incurred under the Basepoint Credit Agreement amounted to $289,574 and $592,014 for the three and six months ended June 30, 2023, respectively. The outstanding balance under the Basepoint Credit Agreement was $7,412,605 as of June 30, 2023. Such amount is presented in the consolidated balance sheets net of unamortized issuance costs of $112,197 as of June 30, 2023. Interest is payable weekly on the outstanding balance of the amounts borrowed. No principal is expected to be repaid in the next twelve months, or from reductions in the borrowing base. Accordingly, all principal is shown as a non-current liability at June 30, 2023.

16. EMPLOYEE BENEFIT PLAN

The Company sponsors an employee retirement savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute, but not more than statutory limits. The Company makes nondiscretionary 4% Safe Harbor contributions of participants’ eligible earnings who have completed the plan’s eligibility requirements. The contributions are made to the plan on behalf of the employees. Total contributions to the plan were $36,601and $86,762 for the three and six months ended June 30, 2023, respectively, and $30,756 and $81,373 for the three and six months ended June 30, 2022, respectively.


17. SHARE REPURCHASE PROGRAM

On May 17, 2023, the Board of Directors authorized a share repurchase program to acquire up to $2 million of the Company’s common stock. The Company may purchase common stock on the open market, through privately negotiated transactions, or by other means including through the use of trading plans intended to qualify under Rule 10b-18 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions. The timing and total amount of stock repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The share repurchase program will have a term of 18 months and may be suspended or discontinued at any time and does not obligate the company to acquire any amount of common stock.

As of August 14, 2023, the Company didn’t repurchase common stock under this program.

18. NASDAQ NOTICES 

Nasdaq Notices

On April 19, 2023, the Company received a notice (the “Notice”) from the Nasdaq Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, as a result of not having timely filed its Annual Report on Form 10-K for the period ended December 31, 2022 (the “Form 10-K”), the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1), which requires timely filing of all required periodic financial reports with the Securities and Exchange Commission. The Notice had no immediate effect on the listing or trading of the Company’s common stock on The Nasdaq Capital Market. The Notice provided that the Company must submit a plan to regain compliance with Nasdaq Listing Rule 5250(c)(1).

On April 25, 2023, the Company received a letter from Nasdaq indicating that based on the April 24, 2023, filing of the Company’s Form 10-K for the year ended December 31, 2022, the Company regained compliance with Nasdaq Listing Rule 5250(c)(1).

On April 21, 2023, the Company received a letter (the “Second Notice”) from The Nasdaq Stock Market notifying the Company that, because the closing bid price of the Company’s common stock had been below $1.00 per share for 30 consecutive business days, it no longer complied with the $1.00 per share minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) for continued listing on The Nasdaq Capital Market.

On May 31, 2023, the Company received a letter (the “Compliance Notice”) from Nasdaq notifying the Company that the Listing Qualifications Department (the “Staff”) of Nasdaq has determined that for the last 11 consecutive business days, from May 16, 2023 through May 31, 2023, the closing bid price of the Company’s common stock has been at $1.00 per share or greater. Accordingly, the Company has regained compliance with the Minimum Bid Price Requirement, and the Staff has determined that this matter is now closed.


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, 2016.2022. 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, 20162022 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.

 

Executive Overview

 

The resultsSince December 2013, we have developed a business that focuses on improving the quality of operations from continuing operations below principally reflectlife of our customers  by providing them the operationsopportunity to obtain ownership of FlexShopper, LLC (together with the Companyhigh-quality durable products, such as consumer electronics, home appliances, computers (including tablets and its directwearables), smartphones, tires, jewelry and indirect wholly owned subsidiaries, “FlexShopper”)furniture (including accessories), which provide certain types of durable goods to consumers on aunder affordable payment lease-to-own (“LTO”) basis and also provides LTO terms to consumers of third party retailers and e-retailers. FlexShopper began generating revenues from this line of business in December 2013. Management believespurchase agreements with no long-term obligation. We believe that the introduction of FlexShopper’s LTO programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces. FlexShopperWe have successfully developed and its onlineare currently processing LTO platforms providetransactions using FlexShopper’s proprietary technology that automates the process of consumers the ability to acquirereceiving spending limits and entering into leases for durable goods including electronics, computerswithin seconds. FlexShopper’s primary LTO sales channels, which include business to consumer (“B2C”) and furniture, on an affordable payment, lease basis.business to business (“B2B”) channels. Our B2C customers can acquire well-known brands such as Samsung, Frigidaire, Hewlett-Packard, LG, Whirlpool, Ashley and Apple at flexshopper.com. Concurrently, e-retailerse-tailers and retailers that work with FlexShopperFlexShopper’s may increase their sales by utilizing FlexShopper’s online channelsB2B channel to connect with consumers that want to acquire products on an LTO basis. FlexShopper’s LTO sales channels include (1) selling directly to consumers via the online FlexShopper.com LTO Marketplace featuring thousands of durable goods, (2) utilizing FlexShopper’s patent pendingour LTO payment method at check outcheck-out on our partners’ e-commerce sites and through in-store terminals and (3) facilitating LTO transactions with retailers in their physical locations both through their in-store terminals and FlexShopper applications accessed via the Internet.

In 2021, we began to market an unsecured, consumer loan product for our bank partner. In the bank partner origination model, applicants who apply and obtain a loan through our online platform are underwritten, approved, and funded by the bank partner. The product provides flexibility for FlexShopper to offer loans in retailer channels that provide services in addition to durable goods (e.g., tire retailers that provide car repair services) or in states which do not have not yet become partlease purchase agreement regulations. FlexShopper’s bank lending product leverages its marketing and servicing expertise and its partner bank’s national presence to enable improved credit access to consumers. We manage many aspects of the FlexShopper.comloan life cycle on behalf of its bank partner, including customer acquisition, underwriting and loan servicing. This relationship allows FlexShopper’s bank partner to leverage our customer acquisition channel, underwriting and service capabilities, which they would otherwise need to develop in-house. The bank partner uses their own capital to originate loans. The bank partner retains approval rights on all aspects of the program and are primarily responsible for regulatory and compliance oversight. Under the bank partner model, FlexShopper is compensated by the bank partner as a service provider for our role in delivering the technology and services to the bank partner to facilitate origination and servicing of loans throughout each loan’s lifecycle. FlexShopper’s bank partners hold loans originated on our platform. FlexShopper acquires participation rights in such loans ranging from 95 to 100% of the loan. FlexShopper is able to repurpose its technology as well as marketing, underwriting and servicing experience gained from the LTO marketplace.business to facilitate bank partner originations. In the six and three months period ending June 30, 2023, FlexShopper purchased $126,720 and $311,527 respectively in participations, and recognized $2.2 and $0.6 million, respectively, in interest income.

 

In late 2022, FlexShopper purchased the assets of Revolution Financial, Inc. (“Revolution”). This purchase facilitated the creation of a direct origination model for consumers in 11 states. In the direct origination model, applicants who apply and obtain a loan through our platform are underwritten, approved, and funded directly by FlexShopper. Also acquired in the purchase were 22 leases for Revolution operated stores, as well as program agreements with 78 additional brick and mortar locations that share net revenue of the loans originated in those locations. In addition, we entered into an agreement to be the exclusive provider of non-prime loans to consumers in Liberty Tax corporate and franchisee locations nationwide. FlexShopper also purchased a portfolio of current customers and information on previous customers in order to market consumer products. FlexShopper is able to repurpose its technology, as well as marketing, underwriting and servicing experience gained from the LTO, business to facilitate loan originations in these locations.


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 SeptemberJune 30, 20172023 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 

2022:

15

 

  June 30,
2023		  December 31,
2022		 
       
Lease receivables $41,663,220  $48,618,843 
Allowance for doubtful accounts  (2,435,821)  (13,078,800)
Lease receivables, net $39,227,399  $35,540,043 

The allowance is a significant percentage of the balance because

FlexShopper does not charge off any customer account until it has exhausted all collection efforts with respect to each account, including attempts to repossess items. In addition, while collections are pursued, the same delinquent customers will continue to accrue weekly charges until they are charged off. Accounts receivableLease receivables balances charged off against the allowance were $7,133,260$13,757,036 and $20,713,314$32,728,807 for the three and ninesix months ended SeptemberJune 30, 20172023, respectively, and $1,043,762$23,719,531 and $2,786,979$40,803,098 for the three and ninesix months ended SeptemberJune 30, 2016,2022, respectively.

 

  Six Months
Ended
June 30,
2023		  Year Ended
December 31,
2022		 
Beginning balance $13,078,800  $27,703,278 
Provision  22,085,828   57,420,480 
Accounts written off  (32,728,807)  (72,044,958)
Ending balance $2,435,821  $13,078,800 

Lease MerchandiseLoan receivables at fair value – Until all payment obligations required for ownershipThe Company elected the fair value option on its entire loan receivables portfolio. As such, loan receivables are satisfied undercarried at fair value on the lease agreement, FlexShopper maintains ownershipconsolidated balance sheets with changes in fair value recorded on the consolidated statements of operations. Accrued and unpaid interest and fees are included in loan receivables at fair value on the consolidated balance sheets. Management believes the reporting of these receivables at fair value more closely approximates the true economics of the lease merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliancesloan receivables.

Interest and household accessories and is recorded at cost net of accumulated depreciation.fees are discontinued when loans receivable become contractually 120 or more days past due. The Company depreciates leased merchandise usingcharges-off loans at the straight line method overearlier of when the applicable agreement period for a consumerloans are determined to acquire ownership, generally twelve months with no salvage value.

Stock Based Compensation - The fair value of transactionsbe 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 which FlexShopper exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed. Compensation expense is determined by reference to the fair value of an award onloan receivables include the dateimpact of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black Scholes pricing model (BSM) to determinecurrent period charge offs associated with these receivables. 


The Company estimates the fair value of all stock option awards.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.

 

In the bank partner origination model, applicants apply and are underwritten through our online platform and the loan is originated and funded by the bank partner. We manage many aspects of the loan life cycle on behalf of our bank partner, including customer acquisition, underwriting and loan servicing. The bank partner uses their own capital to originate loans. FlexShopper’s bank partner holds loans originated on our platform. FlexShopper acquires participation rights in such loans ranging from 95 to 100% of the loan. Loan revenues and fees is representative of the Company’s portion of participation in the loans.

Key Performance Metrics

 

We regularly review a number ofseveral metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Key performance metrics for the three months ended SeptemberJune 30, 20172023 and 2022 are as follows:

 

  Three Months ended
September 30,		       
Adjusted Gross Profit 2017  2016  $ Change  % Change 
             
Lease revenues and fees $16,144,184  $12,072,493  $4,071,691   33.7 
Lease merchandise sold  359,656   255,431   104,225   40.8 
Less: Cost of merchandise sold  280,130   182,879   97,251   53.2 
Less: Provision for doubtful accounts  4,681,832   3,501,023   1,180,809   33.7 
Net revenues  11,541,878   8,644,022   2,897,856   33.5 
Less: Cost of lease revenues, consisting of depreciation and impairment of lease merchandise  8,146,293   5,525,701   2,620,592   47.4 
Adjusted gross profit $3,395,585  $3,118,321  $277,264   8.9 
Gross profit margin  29%  36%        
Net revenues as a percentage of cost of lease revenue  140%  155%        
  Three months ended
June 30,		       
  2023  2022  $ Change  % Change 
Gross Profit:         
Gross lease billings and fees $32,501,656  $39,596,845  $(7,095,189)  (17.9)
Provision for doubtful accounts  (10,847,413)  (15,732,876)  4,885,463   (31.1)
Gain on sale of lease receivables  1,252,600   6,604,507   (5,351,907)  (81.0)
Net lease billing and fees $22,906,843  $30,468,476  $(7,561,633)  (24.8)
Loan revenues and fees  3,446,893   3,098,400   348,493   11.2 
Net changes in the fair value of loans receivable  (1,821,700)  2,981,275   (4,802,975)  (161.1)
Net loan revenues $1,625,193  $6,079,675  $(4,454,482)  (73.3)
Total revenues $24,532,036  $36,548,151  $(12,016,115)  (32.9)
Depreciation and impairment of lease merchandise  (14,485,417)  (18,207,305)  3,721,888   (20.4)
Loans origination costs and fees  (1,655,424)  (804,228)  (851,196)  105.8 
Gross profit $8,391,195  $17,536,618  $(9,145,423)  (52.2)
Gross profit margin  34%  48%        

 

  Three Months ended
September 30,		       
Adjusted EBITDA 2017  2016  $ Change  % Change 
             
Net Loss $(1,727,617) $(2,613,492) $885,875   (33.9)
Add back: Amortization of debt costs  118,404   118,404   -   - 
Add back: Other amortization and depreciation  415,443   295,386   120,057   40.6 
Add back: Interest expense  385,989   340,955   45,034   13.2 
Add back: Stock compensation  22,685   45,863   (23,178)  (50.5)
Adjusted EBITDA $(785,096)* $(1,812,884)* $1,027,788   (56.7)
  Three months ended
June 30,		       
  2023  2022  $ Change  % Change 
Adjusted EBITDA:            
Net (loss)/ income $(5,297,655) $14,389,221  $(19,686,876)  (136.8)
Income taxes  (1,302,225)  (11,734,467)  10,432,242   (88.9)
Amortization of debt issuance costs  111,807   56,283   55,524   98.7 
Amortization of discount on the promissory note related to acquisition  59,238   —   59,238     
Other amortization and depreciation  1,884,544   1,122,263   762,281   67.9 
Interest expense  4,397,513   2,291,555   2,105,958   91.9 
Stock-based compensation  443,800   257,476   186,324   72.4 
Adjusted EBITDA $297,022  $6,382,331  $(6,085,309)  (95.3)

 

16

 

 

Key performance metrics for the ninesix months ended SeptemberJune 30, 20172023 and 2022 are as follows:

 

  Nine Months ended
September 30,		       
Adjusted Gross Profit 2017  2016  $ Change  % Change 
             
Lease revenues and fees $49,458,109  $32,505,343  $16,952,766   52.1 
Lease merchandise sold  1,174,608   747,747   426,861   57.0 
Less: Cost of merchandise sold  816,058   498,594   317,464   63.7 
Less: Provision for doubtful accounts  14,357,461   9,260,469   5,096,992   55.0 
Net revenues  35,459,198   23,494,027   11,965,171   50.9 
Less: Cost of lease revenues, consisting of depreciation and impairment of lease merchandise  24,733,915   16,817,016   7,916,899   47.1 
Adjusted gross profit $10,725,283  $6,677,011  $4,048,272   60.6 
Gross profit margin  30%  28%        
Net revenues as a percentage of cost of lease revenue  142%  139%        
  Six months ended
June 30,		       
  2023  2022  $ Change  % Change 
Gross Profit:         
Gross lease billings and fees $66,756,740  $79,194,274  $(12,437,534)  (15.7)
Provision for doubtful accounts  (22,085,828)  (27,563,993)  5,478,165   (19.9)
Gain on sale of lease receivables  2,950,089   6,604,507   (3,654,418)  (55.3)
Net lease billing and fees $47,621,001  $58,234,788  $(10,613,787)  (18.2)
Loan revenues and fees  8,533,858   4,810,748   3,723,110   77.4 
Net changes in the fair value of loans receivable  (837,048)  2,457,851   (3,294,899)  (134.1)
Net loan revenues $7,696,810  $7,268,599  $428,211   5.9 
Total revenues $55,317,811  $65,503,387  $(10,185,576)  (15.5)
Depreciation and impairment of lease merchandise  (29,831,205)  (37,367,916)  7,536,711   (20.2)
Loans origination costs and fees  (3,489,051)  (1,229,741)  (2,259,310)  183.7 
Gross profit $21,997,555  $26,905,730  $(4,908,175)  (18.2)
Gross profit margin  40%  41%        

 

  Nine Months ended
September 30,		       
Adjusted EBITDA 2017  2016  $ Change  % Change 
             
Net Loss $(4,345,131) $(8,759,916) $4,414,785   (50.4)
Add back: Amortization of debt costs  355,212   332,900   22,312   6.7 
Add back: Other amortization and depreciation  1,181,279   778,125   403,154   51.8 
Add back: Interest expense  1,256,475   1,112,642   143,833   12.9 
Add back: Stock compensation  64,896   124,244   (59,348)  (47.8)
Adjusted EBITDA $(1,487,269)* $(6,412,005)* $4,924,736   (76.8)
  Six months ended
June 30,		       
  2023  2022  $ Change  % Change 
Adjusted EBITDA:            
Net (loss)/ income $(5,527,870) $12,008,286  $(17,536,156)  (146.0)
Income taxes  (1,450,764)  (12,594,247)  11,143,483   (88.5)
Amortization of debt issuance costs  182,174   106,886   75,288   70.4 
Amortization of discount on the promissory note related to acquisition  118,476   —   118,174     
Other amortization and depreciation  3,710,703   2,059,323   1,651,380   80.2 
Interest expense  8,799,234   4,199,020   4,600,214   109.6 
Stock-based compensation  864,548   562,705   301,843   53.6 
Adjusted EBITDA $6,696,501  $6,341,973  $354,226   5.6 

  

* 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 accountsdepreciation and costimpairment of leased inventorylease merchandise and inventory sold. Adjustedloans originations costs and fees. 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)merchandise), 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.

 ●
●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 substitutes for GAAP metrics such as operating loss,income/ (loss), net income or any other performance measures derived in accordance with GAAP.

 

Results of Operations

 

Three Months Ended SeptemberJune 30, 2017 compared2023 Compared to Three Months Ended SeptemberJune 30, 20162022

 

The following table details operating results for the three months ended SeptemberJune 30, 20172023 and 2016:2022:

 

  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 
  2023  2022  $ Change  % Change 
             
Gross lease billings and fees $32,501,656  $39,596,845  $(7,095,189)  (17.9)
Provision for doubtful accounts  (10,847,413)  (15,732,876)  4,885,463   (31.1)
Gain on sale of lease receivables  1,252,600   6,604,507   (5,351,907)  (81.0)
Net lease billing and fees $22,906,843  $30,468,476  $(7,561,633)  (24.8)
Loan revenues and fees  3,446,893   3,098,400   348,493   11.2 
Net changes in the fair value of loans receivable  (1,821,700)  2,981,275   (4,802,975)  (161.1)
Net loan revenues $1,625,193  $6,079,675  $(4,454,482)  (73.3)
Total revenues $24,532,036  $36,548,151  $(12,016,115)  (32.9)
Depreciation and impairment of lease merchandise  (14,485,417)  (18,207,305)  3,721,888   (20.4)
Loans origination costs and fees  (1,655,424)  (804,228)  (851,196)  105.8 
Marketing  (1,488,578)  (3,770,820)  2,282,242   (60.5)
Salaries and benefits  (2,976,008)  (3,014,920)  38,912   (1.3)
Other operating expenses  (5,957,932)  (5,748,286)  (209,646)  3.6 
Operating income/(loss)  (2,031,323)  5,002,592   (7,033,915)  (140.6)
Interest expense  (4,568,557)  (2,347,838)  (2,220,719)  94.6 
Income taxes  1,302,225   11,734,467   (10,432,242)  (88.9)
Net (loss)/ income $(5,297,655) $14,389,221  $(19,686,876)  (136.8)

 

Total


FlexShopper originated 20,070 gross leases less same day modifications and cancellations with an average origination value of $668 for the three months ended June 30, 2023 compared to 34,312 gross leases less same day modifications and cancellations with an average origination value of $579 for the comparable period last year. Net lease revenues for the three months ended SeptemberJune 30, 20172023 were $16,503,839$22,906,843 compared to $12,327,924$30,468,476 for the three months ended SeptemberJune 30, 2016,2022, representing an increasea decrease of $4,175,915,$7,561,633 or 33.9%24.8%. In 2023, 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 33% and 40% for the three months ending June 30, 2023 and 2022, respectively. For the three months ended June 30, 2023, FlexShopper originated 13,893sold leases in default that were fully mature for $1,318,672 and paid fees for $66,072 over that sale, which generated a gain on sale of lease receivables of $1,252,600. For the three months ended June 30, 2022, FlexShopper sold leases in default that were fully mature for $6,929,841 and paid fees for $325,334 over that sale, which generated a gain on sale of lease receivables of $6,604,507.

Net loan revenues for our bank partner loan model for the three months ended SeptemberJune 30, 20172023 were a loss of $869,851 compared to 15,594 leasesa gain of $6,079,675 for the comparable period last year. FlexShopper is strategically optimizing and shifting marketing spend into the fourth quarter,three months ended June 30, 2022, representing a perioddecrease 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$6,949,526 or 114%. Our bank partner originated 132 loans at an average loan value of $1,018 for the increasethree months ended June 30, 2023 compared to 10,986 loans at an average loan value of $1,177 for the three months ended June 30, 2022. Our bank partner sold to the Company a 95% participation interest for each loan originated in those periods.

Net loan revenues for our state license loan model for the three months ended June 30, 2023 were $2,495,044 with no prior revenue for 2022 as the quarter.

Company acquired this business at the end of 2022. For the state license loan model, the Company originated 34,015 loans at an average loan value of $412 in the three months ending June 30, 2023.

18

 

CostDepreciation and impairment of lease merchandise for the three months ended June 30, 2023 was $14,485,417 compared to $18,207,305 for the three months ended June 30, 2022, representing a decrease of $3,721,888 or 20.4%. As the Company’s lease portfolio and revenues decrease, the depreciation and related costs associated with the smaller 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 SeptemberJune 30, 20172023 was $8,426,423$1,655,424 compared to $5,708,580$804,228 for the three months ended SeptemberJune 30, 2016,2022, representing an increase of $2,717,843,$851,196 or 47.6%105.8%. CostLoan origination cost and fees is correlated to the volume and dollar amount of lease revenue and merchandise sold forloan products. The increase is also related to the share of net revenues with franchisees.

Marketing expenses in the three months ended SeptemberJune 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 sold for2023 were $1,488,578 compared to $3,770,820 in the three months ended SeptemberJune 30, 2016 is comprised2022, a decrease of depreciation$2,282,242 or 60.5%. Due to the macroeconomic conditions along with tightening approval rates, the Company has slowed down the marketing expenses.

Salaries and benefits 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 associated with them also increase.

Provision for doubtful accounts was $4,681,832 and $3,501,023 forin the three months ended SeptemberJune 30, 2017 and 2016, respectively. The primary reason for the increase is that the Company does not charge off any customer accounts until it has exhausted all collection efforts, including attempts2023 were $2,976,008 compared to repossess items. While collection efforts are pursued, delinquent customers continue to accrue weekly charges resulting$3,014,920 in a significant balance requiring a reserve. The Company anticipates improvement in the performance of its lease portfolio as it continues to refine its underwriting model, enhances its risk department and accumulates additional lease data. During the three months ended SeptemberJune 30, 2017 and 2016, $7,133,260 and $1,043,762 of accounts receivable balances were charged off against the allowance, respectively, after the Company exhausted all collection efforts with respect to such accounts. The significant increase was due to there being a much smaller and younger portfolio of leases against which charge-offs were made in the prior year period.

Marketing expenses in the third quarter of 2017 were $994,576, compared to $2,442,243 in the third quarter of 2016 for a decrease of $1,447,667, or 59.2%. FlexShopper is strategically optimizing and shifting marketing spend into the fourth quarter, a period of seasonally high demand.

Salary and benefits expenses in the third quarter of 2017 were $1,900,925 compared to $1,522,792 in the third quarter of 2016 for2022, an increase of $378,133,$38,912 or 24.8%1.3%. Additional call center personnel needed to supportGenerally, the increase in revenues as well as continued investment in our software engineering team are the primary reasons for the increase in salariessalary and benefits expenses.expense should directionally move with the change in lease and loans originations and the overall size of the portfolios albeit at a slower rate.

 

OperatingOther operating expenses for the three months ended SeptemberJune 30, 20172023 and 20162022 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 
  2023  2022 
Amortization and depreciation $1,884,545  $1,122,263 
Computer and internet expenses  1,149,292   1,170,731 
Legal and professional fees  672,742   1,180,336 
Merchant bank fees  413,603   422,757 
Customer verification expenses  94,104   249,737 
Stock-based compensation expense  443,800   257,476 
Insurance expense  156,728   152,555 
Office and telephone expense  324,846   365,610 
Rent expense  307,211   160,184 
Advertising and recruiting fees  14,622   333,970 
Travel expense  120,056   157,847 
Other  376,383   174,820 
Total $5,957,932  $5,748,286 

  

19

 

 

Nine Months SeptemberAmortization and depreciation expenses in the three months ended June 30, 20172023 were $1,884,545 compared to Nine$1,122,263 in the three months ended June 30, 2022, representing an increase of $762,282 or 68%. 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 and the amortization of the intangible assets acquired in the Revolution Transaction (See Note 14 in the accompanying Consolidated Financial Statements). The rest of the increase is related to the amortization of capitalized of data that is 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 June 30, 2023 were $1,149,292 compared to $1,170,731 in the three months ended June 30, 2022, representing a decrease of $21,439 or 2%. 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 the preparation for new products offered by the Company.

Legal and professional fees expenses in the three months ended June 30, 2023 were $672,742 compared to $1,180,336 in the three months ended June 30, 2022, representing a decrease of $507,594 or 43%. The change is associated with the decrease in the lease portfolio which reduced the need for off-shore servicing and collection support.

Merchant bank fees expenses in the three months ended June 30, 2023 were $413,603 compared to $422,757 in the three months ended June 30, 2022, representing a decrease of $9,154 or 2%. Merchant bank fee expense represents the ACH and card processing fees related to billing consumers. This expense is related to the size of the lease and loan portfolio.

Customer verification expenses in the three months ended June 30, 2023 were $94,104 compared to $249,737 in the three months ended June 30, 2022, representing a decrease of $155,633 or 62%. Customer verification expense is primarily the cost of data used for underwriting new lease and loan applicants. The reduction in marketing expense and the optimization of underwriting and data science costs contributed to the decrease in this expense.

Stock compensation expense in the three months ended June 30, 2023 were $443,800 compared to 257,476 in the three months ended June 30, 2022, representing an increase of $186,324 or 72%. With the passing of Richard House, Jr, our former CEO, on March 16, 2023, and according to his employment agreement, the Company vested all his outstanding stock options which contributed to the increase in this expense.

Rent expense in the three months ended June 30, 2023 were $307,211 compared to $160,184 in the three months ended June 30, 2022, representing an increase of $147,027 or 92%. The increase is related to the monthly lease expense for the storefronts we acquired in the Revolution Transaction.

Six Months Ended SeptemberJune 30, 20162023 Compared to Six Months Ended June 30, 2022

 

The following table details operating results for the ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:

 

  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 
  2023  2022  $ Change  % Change 
             
Gross lease billings and fees $66,756,740  $79,194,274  $(12,437,534)  (15.7)
Provision for doubtful accounts  (22,085,828)  (27,563,993)  5,478,165   (19.9)
Gain on sale of lease receivables  2,950,089   6,604,507   (3,654,418)  (55.3)
Net lease billing and fees $47,621,001  $58,234,788  $(10,613,787)  (18.2)
Loan revenues and fees  8,533,858   4,810,748   3,723,110   77.4 
Net changes in the fair value of loans receivable  (837,048)  2,457,851   (3,294,899)  (134.1)
Net loan revenues $7,696,810  $7,268,599  $428,211   5.9 
Total revenues $55,317,811  $65,503,387  $(10,185,576)  (15.5)
Depreciation and impairment of lease merchandise  (29,831,205)  (37,367,916)  7,536,711   (20.2)
Loans origination costs and fees  (3,489,051)  (1,229,741)  (2,259,310)  183.7 
Marketing  (2,587,767)  (5,784,935)  3,197,168   (55.3)
Salaries and benefits  (5,702,898)  (5,979,362)  276,464   (4.6)
Other operating expenses  (11,585,640)  (11,421,488)  (164,152)  1.4 
Operating income/(loss)  2,121,250   3,719,945   (1,598,695)  (43.0)
Interest expense  (9,099,884)  (4,305,906)  (4,793,978)  111.3 
Income taxes  1,450,764   12,594,247   (11,143,483)  (88.5)
Net (loss)/ income $(5,527,870) $12,008,286  $(17,536,156)  (146.0)

 

Total lease revenues


FlexShopper originated 39,713 gross leases less same day modifications and cancellations with an average origination value of $669 for the ninesix months ended SeptemberJune 30, 2017 were $50,632,7172023 compared to $33,253,090 for the nine months ended September 30, 2016, representing64,923 gross leases less same day modifications and cancellations with an increaseaverage origination value of $17,379,627, or 52.3%. FlexShopper originated 43,992 leases for the nine months ended September 30, 2017 compared to 35,741 leases$557 for the comparable period last year. Continued growth in repeat customers coupled with more efficient marketing spend is primarily responsibleNet lease revenues for the increasesix months ended June 30, 2023 were $47,621,001 compared to $58,234,788 for the six months ended June 30, 2022, representing a decrease of $10,613,787 or 18.2%. In 2023, 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 33% and 35% for the six months ending June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023, FlexShopper sold leases in revenuedefault that were fully mature for $3,105,717 and leases. paid fees for $155,628 over that sale, which generated a gain on sale of lease receivables of $2,950,089. For the six months ended June 30, 2022, FlexShopper sold leases in default that were fully mature for $6,929,841 and paid fees for $325,334 over that sale, which generated a gain on sale of lease receivables of 6,604,507.

 

CostNet loan revenues for our bank partner loan model for the six months ended June 30, 2023 were $2,986,455 compared to $7,268,599 for the six months ended June 30, 2022, representing a decrease of $4,282,144 or 59%. Our bank partner originated 298 loans at an average loan value of $1,077 for the six months ended June 30, 2023 compared to 14,834 loans at an average loan value of $1,204 for the six months ended June 30, 2022. Our bank partner sold to the Company a 95% participation interest for each loan originated in those periods.

Net loan revenues for our state license loan model for the six months ended June 30, 2023 were $4,710,355 with no prior revenue for 2022 as the Company acquired this business at the end of 2022. For the state license loan model, the Company originated 67,381 loans at an average loan value of $412 in the six months ending June 30, 2023.

Depreciation and impairment of lease merchandise for the six months ended June 30, 2023 was $29.831,205 compared to $37,367,916 for the six months ended June 30, 2022, representing a decrease of $7,536,711 or 20%. As the Company’s lease portfolio and revenues decrease, the depreciation and related costs associated with the smaller 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 ninesix months ended SeptemberJune 30, 20172023 was $25,549,973$3,489,051 compared to $17,315,610$1,229,741 for the ninesix months ended SeptemberJune 30, 2016,2022, representing an increase of $8,234,363,$2,259,310 or 47.6%184%. CostLoan origination cost and fees is correlated to the volume and dollar amount of lease revenue and merchandise sold 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 sold for the nine months ended September 30, 2016 is comprised 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 associated with them also increase.

Provision for doubtful accounts was $14,357,461 and $9,260,469 for the nine months ended September 30, 2017 and 2016, respectively.loan products. The primary reason for the increase is thatalso related to the Company does not charge off any customer accounts until it has exhausted all collection efforts, including attempts to repossess items. While collection efforts are pursued, delinquent customers continue to accrue weekly charges resulting in a significant balance requiring a reserve. The Company anticipates improvement in the performanceshare 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 balances were charged off against the allowance, respectively, after the Company exhausted all collection effortsnet revenues 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.franchisees.

 

Marketing expenses in the first ninesix months of 2017ended June 30, 2023 were $2,625,367,$2,587,767 compared to $6,186,417$5,784,935 in the ninesix months of 2016 forended June 30, 2022, a decrease of $3,561,050,$3,197,168 or 57.6%55%. RecognizingDue to the seasonality of its business and periods of less consumer demand for consumer electronics,macroeconomic conditions along with tightening approval rates, the Company strategically reducedhas slowed down the marketing expendituresexpenses.

Salaries and benefits expense in the six months ended June 30, 2023 were $5,702,898 compared to continue to optimize customer acquisition costs.$5,979,362 in the six months ended June 30, 2022, a decrease of $276,464 or 5%. Generally, the salary and benefits expense should directionally move with the change in lease and loans originations and the overall size of the portfolios albeit at a slower rate.

 

SalaryOther operating expenses for the six months ended June 30, 2023 and benefits2022 included the following:

  2023  2022 
Amortization and depreciation $3,710,703  $2,059,326 
Computer and internet expenses  2,293,053   2,339,578 
Legal and professional fees  1,478,516   2,525,051 
Merchant bank fees  846,687   914,872 
Customer verification expenses  187,212   392,494 
Stock-based compensation expense  864,549   562,705 
Insurance expense  308,778   307,737 
Office and telephone expense  684,060   722,045 
Rent expense  600,103   339,464 
Advertising and recruiting fees  14,622   433,635 
Travel expense  238,547   308,814 
Other  358,810   515,767 
Total $11,585,640  $11,421,488 


Amortization and depreciation expenses in the first ninesix months of 2017ended June 30, 2023 were $5,567,082$3,710,703 compared to $4,258,753 for$2,059,326 in the same period of 2016 forsix months ended June 30, 2022, representing an increase of $1,308,329,$1,651,377 or 30.7%80%. Additional call center personnel neededThe majority of the increase is related to supportthe amortization of capitalized software costs due to the preparation for new products offered by the Company and the amortization of the intangible assets acquired in the Revolution Transaction (See Note 14 in the accompanying Consolidated Financial Statements). The rest of the increase is related to the amortization of capitalized of data that is not directly used in underwriting decisions and that are probable that they will provide future economic benefit.

Computer and internet expenses in the six months ended June 30, 2023 were $2,293,053 compared to $2,339,578 in the six months ended June 30, 2022, representing a decrease of $46,525 or 2%. 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 the preparation for new products offered by the Company.

Legal and professional fees expenses in the six months ended June 30, 2023 were $1,478,516 compared to $2,525,051 in the six months ended June 30, 2022, representing a decrease of $1,046,535 or 41%. The change is associated with the decrease in the lease portfolio which reduced the need for off-shore servicing and collection support.

Merchant bank fees expenses in the six months ended June 30, 2023 were $846,687 compared to $914,872 in the six months ended June 30, 2022, representing a decrease of $68,185 or 7%. Merchant bank fee expense represents the ACH and card processing fees related to billing consumers. This expense is related to the size of the lease and loan portfolio.

Customer verification expenses in the six months ended June 30, 2023 were $187,212 compared to $392,494 in the six months ended June 30, 2022, representing a decrease of $205,282 or 52%. Customer verification expense is primarily the cost of data used for underwriting new lease and loan applicants. The reduction in marketing expense and the optimization of underwriting and data science costs contributed to the decrease in this expense.

Stock compensation expense in the six months ended June 30, 2023 were $864,549 compared to $562,705 in the six months ended June 30, 2022, representing an increase of $301,844 or 54%. With the passing of Richard House, Jr, our former CEO, on March 16, 2023, and according to his employment agreement, the Company vested all his outstanding stock options which contributed to the increase in leases and revenues as well as continued investmentthis expense.

Rent expense in our software engineering teamthe six months ended June 30, 2023 were $600,103 compared to innovate and enhance our technology platform are$339,464 in the primary reasonssix months ended June 30, 2022, representing an increase of $260,639 or 77%. The increase is related to the monthly lease expense for the increasestorefronts we acquired in salaries and benefits expenses.

Operating expenses for the nine months ended September 30, 2017 and 2016 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 

Revolution Transaction.

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 to market an unsecured, consumer loan product for our bank partner. In 2022, 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.

In late 2022, FlexShopper purchased the assets of Revolution Financial, Inc.. This purchase facilitated the creation of a direct origination model for consumers in 11 states. In the direct origination model, applicants who apply and obtain a loan through our platform are underwritten, approved, and funded directly by FlexShopper.

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 SeptemberJune 30, 2017,2023, the Company had cash and restricted cash of $3,825,835$6,378,984 compared to $13,093,333$4,988,308 at the same date in 2016.

2022. As of September 30, 2017,December 31, 2022, the Company had net accounts receivablecash and restricted cash of $3,394,726 consisting$6,173,349. The increase in cash from December 31, 2022, was primarily due to the cash generated by the portfolio and the reduction in originations. 

As of grossJune 30, 2023, the Company had lease receivables of $6,506,104$41,663,220 offset by an allowance for doubtful accounts of $3,111,378.$2,435,821, resulting in net accounts receivable of $39,227,399. 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 FinancingsAs of June 30, 2023, the Company had loan receivables of $25,105,046 which is measured at fair value. The Company primarily estimates the fair value of its loan receivables using a discounted cash flow models that have been internally developed.

 

FromCredit 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 beginningFee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo Bank, National Association as paying agent, various lenders from time to time party thereto and WE 2014-1, LLC, an affiliate of 2016 through September 30, 2017,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 completedmay not incur additional indebtedness (other than expressly permitted indebtedness) without the following transactions, eachpermission of which has providedthe 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 cash resourcesmaintain a certain ratio of Consolidated Total Debt to FlexShopper.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.

 

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.

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.

 

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

 

 

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, 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.

On June 7, 2023, pursuant to Amendment No. 17 to the Credit Agreement, the administrative agent and lender consented, on a one-time basis, to the formation of a new subsidiary, Flex TX, LLC, and to the Company’s execution and performance of the Revolution Agreements between the Company and BP Fundco, LLC to incur certain indebtedness and grant a security interest in certain of its assets in connection with (i) a Limited Payment Guaranty (Flex Revolution Loan) between the Company and BP Fundo, LLC and (ii) a Pledge Agreement among the Company, Flex Revolution, LLC and BP Fundco, LLC (collectively, the “Revolution Agreements”). No other changes were made to the Credit Agreement.

The Company borrowed under the Credit Agreement $0 and $2,750,000 for the three and six months ended June 30, 2023, respectively, and $11,000,000 and $17,800,000 for the three and six months ended June 30, 2022, respectively. The Company repaid under the Credit Agreement and $220,000 and $2,795,000 for the three and six months ended June 30, 2023, respectively, and $0 and $1,125,000 for the three and six months ended June 30, 2022, respectively.

Since October 2022, the Company has been entering into Interest Rate Cap Agreements with AXOS bank, a financial institution not related with the Lender of the Credit Agreement. These agreements cap the variable portion (one month SOFR) of the Credit Agreement interest rate to 4%, which reduced the Company’s exposure to additional increases in interest rates.

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 Executive 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 June 30, 2023, amounts outstanding under the 122 Partners Note bear interest at a rate of 20.94%. 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 June 30, 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. On March 30, 2023, FlexShopper, LLC executed a fourth amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended from April 1, 2023 to October 1, 2023. No other changes were made to the 122 Partners Note. As of June 30, 2023, $1,017,685 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 June 30, 2023, amounts outstanding under the NRNS Note bear interest at a rate of 20.94%. 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.

On June 29, 2023, the Company, the Borrower, NRNS, Mr. Heiser and PITA Holdings, LLC (“PITA”) entered into an Amendment to Subordinated Debt and Warrants to Purchase Common Stock (the “Amendment”), pursuant to which, among other things, the parties agreed to extend the maturity date of the NRNS Note from July 1, 2024 to July 1, 2025. In order to induce NRNS to enter into the Amendment, the Company extended the expiration date of certain warrants (See Note 9). The cost of the warrant modification was $917,581 and was recorded as a deferred debt cost of NRNS note. No other changes were made to such NRNS Note.

Principal and accrued and unpaid interest outstanding on the NRNS Note was $10,940,113 as of June 30, 2023.


Cash Flow Summary

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities was $2,173,989$5,471,062 for the ninesix months ended SeptemberJune 30, 20172023 and was primarily due to the increasepurchases of leased merchandise and the change in net revenueslease receivable offset by the add back of provision for doubtful accounts and gross profitthe add back of depreciation and more efficient marketing spend for the period.impairment on leased merchandise.

 

Net cash used byin operating activities was $7,109,978$19,671,372 for the ninesix months ended SeptemberJune 30, 2016 and2022 was primarily due to the net losspurchases of leased merchandise, participation in loans and the change in lease receivable partially offset by the add back of provision for doubtful accounts and the period.add back of depreciation and impairment on leased merchandise.

 

Cash Flows from Investing Activities

 

For the ninesix months ended SeptemberJune 30, 2017,2023, net cash used in investing activities was $1,487,442,$3,457,962 comprised of $68,169the use of $3,114,534 for the purchase of property and equipment, and $1,419,273 forincluding capitalized software costs, and $343,428 of data costs.

 

For the ninesix months ended SeptemberJune 30, 2016,2022, net cash used in investing activities was $1,436,701, comprised$3,687,241comprised of $81,514$2,924,537 for the purchase of property and equipment, and $1,355,187 forincluding capitalized software costs, and $762,704 of data costs.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities was $2,273,208 for the nine months ended September 30, 2017, comprised of repayments of amounts borrowed under the Credit Agreement of $2,288,208, offset by proceeds from the exercise of stock options of $15,000.

Net cash provided by financing activities was $18,243,806$1,807,465 for the ninesix months ended SeptemberJune 30, 20162023 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,$2,795,000 and the repayment of Basepoint credit agreement of $1,500,000 offset by repayments of amounts borrowed under the Credit Agreement of $4,172,714.$2,750,000 and repayments of the purchase consideration payable related to the Revolution Transaction.

 

Net cash provided by financing activities was $23,713,928 for the six months ended June 30, 2022 due to $17,800,000 of funds drawn on the Credit Agreement and $7,000,000 of proceeds from Promissory Notes partially offset by loan repayments on the Credit Agreement of $1,125,000.

Capital Resources and Financial Condition

 

TheTo date, funds derived from the sale of FlexShopper’sthe Company’s common stock, warrants, Series 1 Convertible Preferred Stock and Series 2 Convertible Preferred Stock, proceeds from promissory notes to related parties 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 Company to raiseexisting portfolio and/or additional investment capital sooner than expected. Ifborrowings against the Credit Agreement (see Note 8).

Financial Impact of COVID-19 Pandemic

As of August 14, 2023, the Company is unable to obtain additional required funding,not experiencing any material impact from the Company’s financial conditionCOVID-19 Pandemic. However, our business has been, and may in the future be, impacted by COVID-19 or any similar pandemic or health crisis, and this could affect our results of operations, may be materially adversely affected.financial condition, or cash flow in the future.

 

23

 

 

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

In connection with our December 31, 2022 financial statements, we identified a material weakness in our internal control over financial reporting. This material weakness was due to a lack of effective controls over certain account analysis and accounting judgments related to the foregoing,complex and ambiguous concepts associated with business combination accounting. The business combination that led to the material weakness was a unique, one-time transaction, where the initial intangible assets initially identified by the Company were not accurate.

As of June 30, 2023, the material weakness described above was remediated as management of the Company increased the use of external consultants.

The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level at SeptemberJune 30, 2017.2023.

 

ThereRichard House, Jr., the Company’s former Chief Executive Officer and Principal Executive Officer, passed away on March 16, 2023. H. Russell Heiser, Jr., who was the Chief Financial Officer of the Company, was appointed by the Company’s Board of Directors to become the Chief Executive Officer of the Company effective March 20, 2023. In such capacity, Mr. Heiser has been designated as the Principal Executive Officer, in addition to also being the Principal Financial and Accounting Officer of the Company.

Other than the remediation of the material weakness and the change in Chief Executive Officer, there were no other 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.

 

24

 

 

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, 2016.2022. 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.

 

25

 

 

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, 2019 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.the Company (previously filed as Exhibit 3.13.4 to the Company’s Quarterly Report on Form 10-Q filed on November 5, 2018 and incorporated herein by reference).
10.1

Amendment No. 1 to Amended and Restated Employment Agreement, dated April 21, 2023 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 12, 2017April 27, 2023 and incorporated herein by reference).

3.410.2 AmendedAmendment No. 17 to Credit Agreement, dated as of June 5, 2023, between FlexShopper 2, LLC, as borrower, and Restated BylawsPowerscourt Investment 32 LP, as administrative agent and lender (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 Registration on Form 10-SB filed on April 30, 2007 and incorporated herein by reference)
4.5Certificate of Designations for Series 2 Convertible Preferred Stock, dated as of June 10, 2016 (previously filed as Exhibit 4.110.1 to the Company’s Current Report on Form 8-K filed on June 13, 20162023 and incorporated herein by reference).
4.610.3 CertificateJoinder Agreement, Consent, Waiver and Second Amendment to Credit Agreement, dated as of DecreaseJune 7, 2023, between Revolution Financial,Inc., as existing borrower, and Flex Revolution, LLC, as the new borrower, the subsidiary guarantors party hereto, the lenders party thereto, the individual guarantor party hereto, and BP Fundco, LLC, as administrate agent (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 13, 2023 and incorporated herein by reference).
10.4Amendment to Subordinated Debt and Warrants to Purchase Common Stock, dated as of June 29, 2023, between FlexShopper, Inc.,FlexShopper, LLC and NRNS Capital Holdings LLC and, for purposes of the Number of Authorized Shares of Preferred Stock of FlexShopper, Inc. Designatedwarrants only, Harold R. Heiser and PITA Holdings, LLC (previously filed as Series 1 Preferred StockExhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 3, 2023 and incorporated herein by reference).
31.1 Rule 13a-14(a) Certification – Principal Executive and Financial Officer*
31.232.1 Rule 13a-14(a) Certification – Principal Financial Officer*
32.1Section 1350 Certification – Principal Executive and Financial Officer*
32.2101.INS Section 1350 Certification – Principal Financial Officer*Inline XBRL Instance Document.*
101.INS101.SCH XBRL Instance Document,Inline 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.

 

26

 

 

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: NovemberAugust 14, 20172023By:/s/ Brad BernsteinH. Russell Heiser, Jr.
  Brad BernsteinH. Russell Heiser, Jr.
  Chief Executive Officer President
(Principal Executive Officer and Chairman (Principal Executive Officer)

Date: November 14, 2017By:/s/ Russ Heiser
Russ Heiser

Chief Financial Officer

(
Principal Financial and Accounting Officer)

 

27


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