FiledAs filed with the Securities and Exchange Commission on January 22, 2015.August 13, 2018
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FlexShopper, Inc.FLEXSHOPPER, INC.
(Exact name of registrant as specified in its charter)charter)
Delaware | 20-5456087 | |||
(State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
incorporation or organization) |
Classification Code Number) |
Identification No.) |
FlexShopper, Inc.
2700 NorthN. Military Trail, Ste.Suite 200
Boca Raton, FL 33431
(561) 419-2923(855) 353-9289
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)offices)
Brad Bernstein
Chief Executive Officer
FlexShopper, Inc.
2700 NorthN. Military Trail, Ste.Suite 200
Boca Raton, FL 33431
(561) 419-2923(855) 353-9289
(Name, address, including zip code, and telephone number, including area code, of agent for service)service)
Copies to:to:
Steven Morse, Esq.
Morse & Morse, PLLC
1400 Old Country Road, Ste. 302
Westbury, NY 11590
(516) 487-1446
(516) 497-1452—Facsimile
Approximate date of commencement of proposed sale to the public:
Mark R. Busch K&L Gates LLP 214 North Tryon St., 47th Floor Charlotte, North Carolina 28202 Telephone: (704) 331-7440 | Gregory Sichenzia Sichenzia Ross Ference Kesner LLP 1185 Avenue of the Americas, 37th Floor New York, New York 10036 Telephone: (212) 930-9700 |
As soon as practicable after the effective date of this registration statement.Registration Statement.
(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this formForm are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. þ☐
If this formForm is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨☐
If this formForm is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨☐
If this formForm is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | ||||||||
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| Accelerated filer |
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☐ | ||||||||
Non-accelerated filer | Smaller reporting 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 to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee(1) | ||||||
Common Stock, par value $0.0001 per share (2) | $ | 17,250,000 | $ | 2,147.63 | ||||
Total Registration Fee | $ | 2,147.63 |
(1) | Calculated pursuant to Rule 457(o) on the basis of the maximum aggregate offering price of all of the securities to be registered. |
CALCULATION OF REGISTRATION FEE
Title of each Class of Securities to be Registered |
# Shares Registered | Proposed Aggregate | Amount of Registration Fee | |||||||||
Common Stock, $0.0001 par value(b) | 11,820,187 | 6,501,102.85 | $ | 755.43 | ||||||||
Placement Agent’s Warrants to purchase Common Stock | 1,773,027 | 100 | .01 | |||||||||
Common Stock, $0.0001 par value, underlying Placement Agent’s Warrants(c)(d) | 1,773,027 | 975,164.85 | 113.31 | |||||||||
Total | 7,476,367.70 | $ | 868.75 | |||||||||
The Registrantregistrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrantregistrant shall file a further amendment, which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. The selling securityholdersWe may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any statejurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 22, 2015
PRELIMINARY PROSPECTUS
PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED AUGUST [●], 2018 |
13,593,214 Shares
FLEXSHOPPER, INC.
Common Stock
FlexShopper, Inc.
This prospectus relates to the offer for sale of 13,593,214We are offering [●] shares of our common stock, $0.0001 par value, $0.0001at a price of $ per share of FlexShopper, Inc. by the existing holders of the securities named in this prospectus, whom we refer to as selling securityholders throughout this prospectus. a firm commitment underwritten offering.
Our common stock is quotedlisted on the OTCQBNasdaq Capital Market under the symbol “FPAY”. On December 31, 2014,August 10, 2018, the last reported sale price of our common stock on the OTCQBNasdaq Capital Market was $1.00$3.58 per share. Before you invest, you
Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 9 for a discussion of information that should read carefully this prospectus and any prospectus supplement. For information concerning the selling securityholders and the mannerbe considered in which they may offer and sell shares ofconnection with an investment in our common stock, see “Selling Securityholders” and “Plan of Distribution” in this prospectus.securities.
The distribution of securities offered hereby may be effected in one or more transactions that may take place through the OTCQB or, if our common stock is then listed, on a national securities exchange. These transactions may include ordinary brokers’ transactions, privately negotiated transactions, or sales to one or more dealers for resale of such securities as principals. The transactions may be executed at market prices prevailing at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling securityholders. The selling securityholders and intermediaries through whom such securities are sold may be deemed “underwriters” under the Securities Act of 1933, as amended, with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. See “Plan of Distribution.”
We will not receive any of the proceeds from the sale of our common stock by the selling securityholders. We have agreed to pay expenses of registration of the offered common stock, other than transfer taxes and brokerage fees or commissions.
Per Share | Total | |||||||
Public offering price | $ | |||||||
Underwriting discount(1) | $ | |||||||
Proceeds, before expenses, to us(2) | $ |
Investing in our
(1) | We have also agreed to reimburse the underwriters for certain expenses incurred by them. See “Underwriting” for a description of the compensation payable by us to the underwriters. |
(2) | We estimate the total expenses payable by us, excluding the underwriting discount, will be approximately $300,000. |
We have granted the underwriters a 45-day option to purchase additional shares of common stock involves significant risks. See “Risk Factors” beginning on page 5in an amount up to read about factors you should consider15% of shares sold to the public in this offering to cover over-allotments, if any. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $ and the total proceeds to us, before buying our common stock.expenses, will be $ .
Neither the Securities and Exchange Commission nor any state securities regulatorcommission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to investors on or about , 2018, subject to customary closing conditions.
ThinkEquity
a division of Fordham Financial Management, Inc.
The date of this prospectus is , 20152018.
Unless otherwise stated or the context otherwise requires, the terms “FlexShopper,” “we,” “us,” “our” and the “Company” refer to FlexShopper, Inc., a Delaware corporation, and its consolidated subsidiaries.
You should rely only on the information contained in this document.prospectus and any related free writing prospectus that we may provide to you in connection with this offering. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information from that contained in this prospectus.information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. The selling securityholdersWe are offeringnot, and the underwriters are not, making an offer to sell and seeking offers to buy, shares of our common stock onlythese securities in jurisdictionsany jurisdiction where offers and sales arethe offer or sale is not permitted. TheYou should assume that the information appearing in this document mayprospectus is accurate only be accurateas of the date on the datefront cover of this document,prospectus, regardless of itsthe time of delivery of this prospectus or of any sales of sharessale of our common stock. Our business, financial condition, results of operations or cash flowsand prospects may have changed since suchthat date.
Unless otherwise indicated or unless the context requires otherwise, all references in this prospectus to FlexShopper, Inc. “FlexShopper,” the “Company,” “we,” “us,” “our,” or similar references, mean FlexShopper, Inc. and its subsidiaries on a consolidated basis.
The registration statement containing this prospectus, including the exhibits to the registration statement, provides additional information about us and the shares of our common stock covered by this prospectus. The registration statement, including the exhibits, can be read on the SEC website or at the SEC offices mentioned under the heading “Where You Can Find More Information.”
For investors outside the United States,States: neither we nor the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.prospectus and any such free writing prospectus outside of the United States.
MARKET AND INDUSTRY DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets, which we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements and Other Information Contained In This Prospectus.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
i
This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our securities. This summary is not complete and does not contain all of the information that should be considered before investing in our securities. Potential investors should read the entire prospectus carefully, including the more detailed information regarding our business provided under the “Business” section, the risks of purchasing our securities discussed under the “Risk Factors” section, and our financial statements and the accompanying notes to the financial statements.
Our Company
For more than 60 years the rent-to-own (“RTO”) consumer has primarily been limited to shopping in traditional brick and mortar RTO stores, which have both a limited selection of products and brands and products that are primarily in used condition. In 2013, FlexShopper developed its business with the mission to enable RTO consumers to shop like traditional consumers and provide an “endless aisle” experience by providing access to all durable products from any national or regional retailer through its B2C online and digital channels and its B2B “save the sale” solutions for retailers. In retail, the phrase “save the sale” means offering consumers other finance options when they do not qualify for traditional credit. These channels, located outside traditional brick and mortar RTO stores, comprise the virtual lease-to-own (“LTO”) market.
We focus on improving the quality of life of our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers (including tablets and wearables), smartphones, tires, jewelry and furniture (including accessories), under affordable payment, LTO agreements with no long-term obligation. We have successfully developed and are currently processing LTO transactions using our “LTO Engine,” FlexShopper’s proprietary technology that automates the process of consumers receiving spending limits and entering into leases for durable goods within seconds. The LTO Engine is the basis for FlexShopper’s primary sales channels, which include B2C and B2B channels, as described in further detail below.
The Company is quickly penetrating the LTO market as evidenced by the increase in its gross revenue, illustrated in the chart below.
While most of FlexShopper’s historical growth has been driven by its B2C channel, the Company recently launched its LTO “save the sale” program with a national tire retailer in its 726 corporate stores, which is expected to grow the program’s door count from 31 locations as of March 31, 2018 to over 750 locations by August 31, 2018.
1 |
Industry Overview The LTO industry offers consumers an alternative to traditional methods of obtaining electronics, computers, home furnishings, appliances and other durable goods. FlexShopper’s customers typically do not have sufficient cash or credit to obtain these goods, so they find the short-term nature and affordable payments of LTO attractive. The Lease-Purchase Transaction A lease-purchase transaction is a flexible alternative for consumers to obtain and enjoy brand name merchandise with no long-term obligation. Key features of our lease-purchase transactions include: Brand name merchandise. FlexShopper offers well-known brands such as LG, Samsung, Sony and Vizio home electronics; Frigidaire, General Electric, LG, Samsung and Whirlpool appliances; Acer, Apple, Asus, Samsung and Toshiba computers and/or tablets; Samsung and Apple smartphones; and Ashley, Powell and Standard furniture, among other brands. Convenient payment options. Our customers make payments on a weekly, bi-weekly or monthly basis. Payments are automatically deducted from the customer’s authorized checking account or debit card. Additionally, customers may make additional payments or exercise early payment options, which enable them to save money. No long-term commitment. A customer may terminate a lease-purchase agreement at any time with no long-term obligation by paying amounts due under the lease-purchase agreement and returning the leased item to FlexShopper. Applying has no impact on credit or FICO score. We do not use FICO scores to determine customers’ spending limits so our underwriting does not impact consumers’ credit with the three main credit bureaus. Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer makes all payments during the lease term, which is one year, or exercises early payment options, which typically save the customer money. Key Trends Driving the Industry: Non-prime consumers represent the largest segment of the credit market.Today, 38% of Americans have low credit scores according to Experian, and approximately one in ten adult Americans are credit invisible, or have no credit history, according to the Consumer Financial Protection Bureau. This segment of consumers represents a significant and underserved market. According to Wall Street and industry research, the current addressable market size for non-prime consumers is between $20 and $25 billion, with consumer electronics constituting 44% of such amount. We believe that underwriting consumer electronics online is one of our competitive advantages since this is the majority of our business and has not been a focus of our peers.
Additional industry trends include:
OUR COMPETITIVE STRENGTHS A Unique LTO Platform We believe we have created a unique platform whereby our B2B and B2C sales channels beneficially support and advance each other. For our B2C channels, we directly market to LTO consumers to shop at FlexShopper.com, where they can choose from over 150,000 of the latest products shipped directly to them by certain of the nation’s largest retailers. This generates sales with no acquisition cost for our retail partners; FlexShopper uses this incremental business we have provided to encourage these retailers to incorporate our B2B solutions into their online and in-store sales channels. The lease originations by our retail partners using our B2B LTO programs, which have little to no customer acquisition cost to us, subsidize our B2C customer acquisition costs. This platform is illustrated in the diagram below:
Underwriting and Risk Management Specialized technology and proprietary risk analytics optimized for the non-prime credit market. We have made substantial investments in our underwriting technology and analytics platforms to support rapid scaling, innovation and regulatory compliance. Our team of data scientists and risk analysts uses our risk infrastructure to build and test strategies across the entire underwriting process, using alternative credit data, device authentication, identity verification, and many more data elements. We believe our real-time proprietary technology and risk analytics platform is unique among our competitors in successfully underwriting online consumers and consumer electronics; most of our peers focus on in-store consumers that acquire furniture and appliances, which we believe are easier to underwrite based on our own experiences. In addition, all our applications are processed instantly with approvals and spending limits provided within seconds of submission. LTO Products for Consumers and Retailers Expansive online LTO marketplace.We have made substantial investments in our custom e-commerce platform to provide consumers the greatest selection of popular brands delivered by certain of the nation’s largest retailers, including Best Buy, Walmart, Overstock, Serta and many more. Our platform is custom-built for online LTO transactions, which include underwriting our consumers, serving them LTO leases, syncing and communicating with our retail partners to fulfill orders and all front- and back-end customer relationship management functions, including collections and billing. The result is a comprehensive technology platform that manages all facets of our business and enables us to scale with hundreds of thousands of visitors and products. Omnichannel “save the sale” product for retailers. In retail, the phrase “save the sale” means offering consumers other finance options when they do not qualify for traditional credit. We believe that we have the best omnichannel solution for retailers to “save the sale” with LTO options. To our knowledge, no competitor has an LTO marketplace that provides retailers incremental sales with no acquisition cost. In addition, compared to our peers, our product for consumers typically requires no money down and fewer application fields. We believe this leads to more in-store and online sales. We also believe that we have the best LTO payment technology at checkout for e-tailers, whereby consumers can seamlessly checkout out on a third party’s e-commerce site with our LTO payment plugin. In addition, our “integrationless” in-store technology was a strong selling point for our recent 726-store rollout, since it required no equipment or technology investment from either party. Providing LTO consumers an “endless aisle” of products for lease-to-own.As illustrated by our B2C channels in the above diagram, we offer consumers three ways to acquire products on an LTO basis. At FlexShopper.com our customers can choose from over 150,000 of the latest products shipped by certain of the nation’s largest retailers. If customers want products that are not available on our marketplace, they may use our “personal shopper” service and simply complete a form with a link to the webpage of the desired durable good. We will then facilitate their purchase by providing an LTO arrangement. We also offer consumers the ability to acquire durable goods with our FlexShopper Wallet smartphone application available on Apple and Android devices. With FlexShopper Wallet, consumers may apply for a spending limit and take a picture of a qualifying item in any major retail store and we will fill the order for them. With our B2C channels we believe we are providing LTO consumers with a superior LTO experience and fulfilling our mission to help improve their quality of life by shopping for what they want where they want. A Lean and Scalable Model Compared to the brick-and-mortar LTO industry, which is suffering from the same headwinds as traditional retail stores, we have been successful in addressing the LTO consumer through online channels as also illustrated in the above diagram. We believe our model is efficient and scalable for the following reasons: We have no inventory risk and are completely drop-ship. We do not have any of the costs associated with buying, storing and shipping inventory. Instead, our suppliers ship goods directly to consumers. We serve LTO consumers across the United States without brick-and-mortar stores.We do not have any of the costs associated with physical stores and the personnel needed to operate them.
As our sales grow we achieve more operating leverage.Our model is primarily driven by a technology platform that does not require significant increases in operating overhead to support sales growth. Potential Industry Differentiator: Notice of Allowance from the United States Patent and Trademark Office (“USPTO”) FlexShopper received a Notice of Allowance from the USPTO for its patent application directed to a system that enables e-commerce servers the ability to complete LTO transactions through their e-commerce websites. FlexShopper believes this patent will constitute a significant differentiator for the Company in the industry. Growth Opportunities and Strategies B2B Growth Drivers
B2C Growth Drivers
General
The information below is only a summary of more detailed information included elsewhere in this prospectus. This summary may not contain all the information that is important to you or that you should consider before making a decision to invest in our common stock. Please read this entire prospectus, including the risk factors, carefully.
SUMMARY HISTORICAL AND CONDENSED COMBINED FINANCIAL DATA We report our financial results in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The summary historical combined statement of operations data for the six months ended June 30, 2018 and 2017 and the summary historical combined balance sheet data as of June 30, 2018 presented below have been derived from our unaudited combined financial statements included elsewhere in this prospectus. The summary historical combined statement of operations data for the years ended December 31, 2017 and 2016 and the combined balance sheet data as of December 31, 2017 and 2016 presented below have been derived from our audited combined financial statements included elsewhere in this prospectus. The summary historical combined financial statements should be read in conjunction with such combined financial statements.
Non-GAAP Financial Measures Adjusted EBITDA Adjusted EBITDA represents net income before interest, stock-based compensation, taxes, depreciation (other than depreciation of leased inventory) and amortization. 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:
Adjusted EBITDA is a supplemental measure of FlexShopper’s performance that is neither required by, nor presented in accordance with, U.S. GAAP. Adjusted EBITDA should not be considered as a substitute for U.S. GAAP metrics such as operating loss, net income or any other performance measure derived in accordance with U.S. GAAP.
An investment in our Our business, prospects, results of operations and financial condition could Risks Related to Business
FlexShopper, LLC, which was formed in June 2013 to enter the
We may be unable to successfully implement our ambitions of targeting very large markets in an intensely competitive industry segment without significantly increasing our resources. We do not currently have sufficient funds to fully implement our business plan and will need to raise capital through new financings in addition to the offering described in this prospectus. Such financings could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to borrow from other sources. In addition, such securities may contain rights, preferences or privileges senior to those of the rights of our current stockholders. There can be no assurance that additional funds will be available on terms attractive to us, or at all. If adequate funds are not available, we may be required to curtail or reduce our operations or forced to sell or dispose of our rights or assets. An inability to raise adequate funds on commercially reasonable terms would have a material adverse effect on our business, results of operation and financial condition, including the possibility that a lack of funds could cause our business to fail and liquidate with little or no return to investors. Our business liquidity and capital resources are dependent upon our credit agreement with an institutional lender and our compliance with the terms thereof. We may lose access to new loans under our credit agreement on August 31, 2018 if this offering is
FlexShopper, through FlexShopper 2, LLC (the “Borrower”), is party to a credit agreement (as amended, the “Credit Agreement”) with Wells Fargo Bank, National Association, various lenders from time to time party thereto and WE2014-1, LLC (the “Lender”). The Borrower is permitted to borrow funds under the Credit Agreement based on the Borrower’s cash on hand and the Amortized Order Value of the Borrower’s Eligible Leases (as such terms are defined in the Credit Agreement), less certain deductions described in the Credit Agreement. Under the terms of the Credit Agreement, subject to the satisfaction of certain conditions, the Borrower may borrow up to $25,000,000 from the Lender for a term of two years; however, as of June 30, 2018, there was approximately $8,798,528 in additional availability under the Credit Agreement and the outstanding balance under the Credit Agreement was $16,201,472. The Lender holds security interests in certain leases as collateral under the Credit Agreement. For the term of the Credit Agreement, FlexShopper and its subsidiaries may not incur additional indebtedness (subject to certain exceptions) without the permission of the Lender. 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.
On January 9, 2018, the Lender extended the Commitment Termination Date (as defined in the Credit Agreement) from April 1, 2018 to August 31, 2018. Upon the Commitment Termination Date, the Lender is no longer obligated to lend money to the Borrower and all amounts outstanding under the Credit Agreement will be due on the twelve-month anniversary thereof. We are currently exploring various possible financing options that may be available to us, including the offering described in this Failure to effectively manage our costs could have a material adverse effect on our profitability. Certain elements of our cost structure are largely fixed in nature while consumer spending remains uncertain, which makes it challenging for us to maintain or increase our operating income. The competitiveness in our industry and increasing price transparency mean that the need to achieve efficient operations is greater than ever. As a result, we must continuously focus on managing our cost structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases, charge-offs or indirect spending could materially adversely affect our profitability.
Our LTO business depends on the success of our third-party retail partners and our continued relationships with them. Our
Our growth will depend on our ability to develop our brands, and these efforts may be costly. Our ability to develop the FlexShopper brand will be critical to achieving widespread acceptance of our services and will require a continued focus on active marketing efforts. We will need to continue to spend substantial amounts of money on, and devote substantial resources to, advertising, marketing, and other efforts to create and maintain brand loyalty among our customers. If we fail to promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to
Our LTO business The business of selling goods over the
Failure to successfully manage and grow our FlexShopper.com e-commerce platform could materially adversely affect our business and future prospects. Our FlexShopper.com e-commerce platform provides customers the ability to apply, shop, review our product offerings and prices and enter into lease agreements as well as make payments on existing leases from the comfort of their homes and on their mobile devices. Our e-commerce platform is a significant and essential component of our strategic plan and we believe will drive future growth of our business. In order to promote our products and services and allow customers to transact online and reach new customers, we must effectively maintain, improve and grow our e-commerce platform. There can be no assurance that we will be able to maintain, improve or grow our e-commerce platform in a profitable manner. The success of our business is dependent on factors affecting consumer spending that are not under our control. Consumer spending is affected by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing interest rates, consumer debt and availability of credit, inflation, recession and fears of recession, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for our products and services, such as consumer electronics and residential furniture, resulting in lower revenue and negatively impacting our business and its financial results.
Our customer base presents significant risk of default for non-payment. We bear the risk of non-payment or
Our customers can return merchandise without penalty.
When our customers acquire merchandise through the
We rely on These third-party payment processors may consider our business a high risk since our customer base
We rely on internal models to manage risk, to provide accounting estimates and to make other business decisions. Our results could be adversely affected if those models do not provide reliable estimates or predictions of future activity. The accurate modeling of risks is critical to our business, particularly with respect to managing underwriting and spending limits for our customers. Our expectations regarding customer repayment levels, as well as our allowances for doubtful accounts and other accounting estimates, are based in large part on internal modeling. We also rely heavily on internal models in making a variety of other decisions crucial to the successful operation of our business. It is therefore important that our models are accurate, and any failure in this regard could have a material adverse effect on our results.
Our operations are regulated by and subject to the requirements of various federal and state laws and regulations. These laws and regulations, which may be amended or supplemented or interpreted by the courts from time to time, could expose us to significant compliance costs or burdens or force us to change our business practices in a manner that may be materially adverse to our operations, prospects or financial condition. Currently,
Our virtual LTO business differs in some potentially significant respects from the risks of a typical LTO brick-and-mortar store business, which implicates certain additional regulatory risks. We offer LTO products directly to consumers through our e-commerce marketplace and through the stores and e-commerce sites of third-party retailers. This novel business model implicates certain regulatory risk including, among others:
Any of these risks could have a material adverse effect on FlexShopper’s business. Changes in regulations or customer concerns, in particular as they relate to privacy and protection of customer data, could adversely affect our business. Our business is subject to laws relating to the collection, use, retention, security and transfer of personally identifiable information about our customers. The interpretation and application of privacy and customer data protection laws are in a state of flux and may vary from jurisdiction to jurisdiction. These laws may be interpreted and applied inconsistently and our current data protection policies and practices may not be consistent with those interpretations and applications. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure, or perceived failure, by us to comply with our own privacy policies or with any regulatory requirements or orders or other privacy or consumer protection related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity and adversely affect our operating results. If we fail to protect the integrity and security of customer and employee information, we could damage our reputation or be exposed to litigation or regulatory enforcement, and our business could be adversely impacted. We collect and store certain personal information provided to us by our customers and employees in the ordinary course of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our network security and, if successful, misappropriate confidential customer or employee information. In addition, one of our employees, contractors or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. Loss of customer or employee information could disrupt our operations, damage our reputation and expose us to claims from customers, employees, regulators and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, the costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws and costs incurred to prevent or remediate information security breaches, could adversely impact our business.
The transactions offered to consumers by our businesses may be negatively characterized by consumer advocacy groups, the media and certain federal, state and local government officials, and if those negative characterizations become increasingly accepted by consumers and/or FlexShopper’s retail partners, demand for our goods and the transactions we offer could decrease and our business could be materially adversely affected. Certain consumer advocacy groups, media reports and federal and state legislators have asserted that laws and regulations should be broader and more restrictive regarding LTO transactions. The consumer advocacy groups and media reports generally focus on the total cost to a consumer to acquire an item, which is often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories. This “cost-of-rental” amount, which is generally defined as lease fees paid in excess of the “retail” price of the goods, is from time to time characterized by consumer advocacy groups and media reports as predatory or abusive without discussing benefits associated with LTO programs or the lack of viable alternatives for our customers’ needs. If the negative characterization of these types of LTO transactions becomes increasingly accepted by consumers or FlexShopper’s retail and merchant partners, demand for our products and services could significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, if the negative characterization of these types of transactions is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition. The vast expansion and reach of technology, including social media platforms, has increased the risk that our reputation could be significantly impacted by these negative characterizations in a relatively short amount of time. If we are unable to quickly and effectively respond to such characterizations, we may experience declines in customer loyalty and traffic and our relationships with our retail partners may suffer, which could have a material adverse effect on our business, results of operations and financial condition. The loss of any of our key personnel could harm our business. Our future financial performance will depend to a significant extent on our ability to motivate and retain key management personnel. Further, FlexShopper is seeking to hire additional qualified management for its FlexShopper business. Competition for qualified management personnel is intense, and there can be no assurance that we will be able to hire additional qualified management on terms satisfactory to FlexShopper. Further, in the event we experience turnover in our senior management positions, we cannot assure you that we will be able to recruit suitable replacements. We must also successfully integrate all new management and other key positions within our organization to achieve our operating objectives. Even if we are successful, turnover in key management positions may temporarily harm our financial performance and results of operations until new management becomes familiar with our business. At present, we do not maintain key-man life insurance on any of our executive officers, although we entered into
We depend on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including wage and hour regulations. Our workforce is comprised primarily of employees who work on an hourly basis. To grow our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of hourly associates, while at the same time controlling labor costs. These positions have historically had high turnover rates, which can lead to increased training, retention and other costs. In certain areas where we operate, there is significant competition for employees, including from retailers and the restaurant industries. The lack of availability of an adequate number of hourly employees, or our inability to attract and retain them, or an increase in wages and benefits to current employees could adversely affect our business, results of operations, cash flows and financial condition. We are subject to applicable rules and regulations relating to our relationship with our employees, including wage and hour regulations, health benefits, unemployment and payroll taxes, overtime and working conditions and immigration status. Accordingly, federal, state or local legislated increases in the minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business, prospects, results of operations and financial condition.
Employee misconduct or misconduct by third parties acting on our behalf could harm us by subjecting us to monetary loss, significant legal liability, regulatory scrutiny and reputational harm. Our reputation is critical to maintaining and developing relationships with our existing and potential customers and third parties with whom we do business. There is a risk that our employees or the employees of a third-party retailer with whom we partner could engage in misconduct that adversely affects our reputation and business. For example, if an employee or a third party associated with our business were to engage in, or be accused of engaging in, illegal or suspicious activities including fraud or theft of our customers’ information, we could suffer direct losses from the activity and, in addition, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, customer relationships and ability to attract future customers. Employee or third-party misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect violations of such rules. The precautions that we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees or third-party contractors, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business. Our operations are subject to certain laws generally prohibiting companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, such as the U.S. Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions. Our employees, contractors or agents may violate the policies and procedures we have implemented to ensure compliance with these laws. Any such improper actions could subject us to civil or criminal investigations, could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder lawsuits, could cause us to incur significant legal fees, and could damage our reputation.
Competition in the LTO business The
Much of our customer base continues to experience prolonged economic uncertainty and, in certain areas, unfavorable economic conditions. We believe
The application of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the LTO industry generally and our virtual LTO business more specifically. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the LTO industry and e-commerce and, therefore, in many cases it is not clear how existing statutes apply to our various businesses. In addition, governments are increasingly looking for ways to increase revenues, which has resulted in discussions about tax reform and other legislative action to increase tax revenues, including through indirect taxes. This also could result in other adverse changes in or
System interruption and the lack of integration and redundancy in our order entry and online systems may adversely affect our net sales. Customer access to our customer service center and websites is key to the continued flow of new orders. Anything that would hamper or interrupt such access could adversely affect our net sales, operating results and customer satisfaction. Examples of risks that could affect access include problems with the
We face risk related to the strength of our operational, technological and organizational infrastructure. We are exposed to operational risks that can be manifested in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees, contractors or third parties and exposure to external events. In addition, we are heavily dependent on the strength and capability of our technology systems that we use to manage our internal financial, credit and other systems, interface with our customers and develop and implement effective marketing campaigns. Our ability to operate our business to meet the needs of our existing customers and attract new ones and to run our business in compliance with applicable laws and regulations depends on the functionality of our operational and technology systems. Any disruptions or failures of our operational and technology systems, including those associated with improvements or modifications to such systems, could cause us to be unable to market and manage our products and services and to report our financial results in a timely and accurate manner, all of which could have a negative impact on our results of operations. In some cases, we outsource delivery, maintenance and development of our operational and technological functionality to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. Any increase in the amount of our infrastructure that we outsource to third parties may increase our exposure to these risks.
If we do not respond to technological changes, our services could become obsolete, and we could lose customers. To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce websites and other technologies. We may face material delays in introducing new products and enhancements. If this happens, our customers may forego the use of our websites and use those of our competitors. The
We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties. FlexShopper received a Notice of Allowance from the USPTO for its patent application directed to a system that enables We cannot be certain that the intellectual property used in our business does not and will not infringe the intellectual property rights of others, and we are from time to time subject to third party infringement claims. Due to recent changes in patent law, we face the risk of a temporary increase in patent litigation due to new restrictions on including unrelated defendants in patent infringement lawsuits in the future particularly from entities that own patents but that do not make products or services covered by the patents. Any third party infringement claims against us, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages. Moreover, should we be found liable for infringement, we may be required to seek to enter into licensing agreements, which may not be available on acceptable terms or at all.
In deciding whether to provide a spending limit to customers, we rely on the accuracy and completeness of information furnished to us by or on behalf of our customers. If we and our systems are unable to detect any misrepresentations in this information, this could have a material adverse effect on our results of operations and financial condition. In deciding whether to provide a customer with a spending amount, we rely heavily on information furnished to us by or on behalf of our customers and our ability to validate such information through third-party services, including personal financial information. If a significant percentage of our customers intentionally or negligently misrepresent any of this information, and we or our systems do not or did not detect such misrepresentations, it could have a material adverse effect on our ability to effectively manage our risk, which could have a material adverse effect on our results of operations and financial condition. If we fail to timely contact delinquent customers, then the number of delinquent customer receivables eventually being charged off could increase. We contact customers with delinquent account balances soon after the account becomes delinquent. During periods of increased delinquencies it is important that we are proactive in dealing with these customers rather than simply allowing customer receivables to go to charge-off. During periods of increased delinquencies, it becomes extremely important that we are properly staffed and trained to assist customers in bringing the delinquent balance current and ultimately avoiding charge-off. If we do not properly staff and train our collections personnel, or if we incur any downtime or other issues with our information systems that assist us with our collection efforts, then the number of accounts in a delinquent status or charged-off could increase. In addition, managing a substantially higher volume of delinquent customer receivables typically increases our operational costs. A rise in delinquencies or charge-offs could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our management information systems may not be adequate to meet our evolving business and emerging regulatory needs and the failure to successfully implement them could negatively impact the business and its financial results. We are investing significant capital in new information technology systems to support our growth plan. These investments include redundancies, and acquiring new systems and hardware with updated functionality. We are taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems, with minimal disruptions to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our systems and our business, and may not provide the anticipated benefits. The disruption in our information technology systems, or our inability to improve, integrate or expand our systems to meet our evolving business and emerging regulatory requirements, could impair our ability to achieve critical strategic initiatives and could adversely impact our sales, collections efforts, cash flows and financial condition.
If we fail to maintain adequate systems and processes to detect and prevent fraudulent activity, our business could be adversely impacted. Criminals are using increasingly sophisticated methods to engage in illegal activities such as paper instrument counterfeiting, fraudulent payment or refund schemes and identity theft. As we make more of our services available over the internet and other media we subject ourselves to consumer fraud risk. We use a variety of tools to protect against fraud; however, these tools may not always be successful.
Our failure to maintain an effective system of internal controls could result in inaccurate reporting of financial results and harm our business. We are required to comply with a variety of reporting, accounting and other rules and regulations. As a public reporting company subject to the rules and regulations established from time to time by the SEC and the Nasdaq, we are required to, among other things, establish and periodically evaluate procedures with respect to our disclosure controls and procedures. In addition, as a public company, we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify, on an annual basis, that our internal control over financial reporting is effective. As such, we maintain a system of internal control over financial reporting, but there are limitations inherent in internal control systems. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be appropriate relative to their costs. Furthermore, compliance with existing requirements is expensive and we may need to implement additional finance and accounting and other systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined to be ineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price of our common stock, subject us to regulatory investigations and penalties, and adversely impact our business and financial condition.
Increased costs associated with corporate governance compliance may significantly impact our results of operations. Changing laws, regulations and standards relating to corporate governance, public disclosure and compliance practices, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Sarbanes-Oxley Act of 2002, and new SEC regulations, may create difficulties for companies such as ours in understanding and complying with these laws and regulations. As a result of these difficulties and other factors, devoting the necessary resources to comply with evolving corporate governance and public disclosure standards has resulted in and may in the future result in increased general and administrative expenses and a diversion of management time and attention to compliance activities. We also expect these developments to increase our legal compliance and financial reporting costs. In addition, these developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Moreover, we may be unable to comply with these new laws and regulations on a timely basis. These developments could make it more difficult for us to retain qualified members of our board of directors, or qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.
Risks Related to our Common Stock and this Offering As an investor, you may lose all of your investment. Investing in our securities involves a high degree of risk. As an investor, you may never recoup all, or even part, of your investment and you may never realize any return on your investment. You must be prepared to lose all of your investment. Because of their significant stock ownership and ability to select nominees to our Board of Directors, certain beneficial owners of our stock, as well as our executive officers and directors, will be able to exert control over the Company and significant corporate decisions. B2 FIE V LLC (“B2 FIE”), a holder of our Series 2 Convertible Preferred Stock issued in June 2016, beneficially owns 31.1% of the voting power of our outstanding stock as of August 2, 2018. Our secured lender under our Credit Agreement beneficially owns 26.6% of the voting power of our outstanding stock as of August 2, 2018. Also, our executive officers and directors beneficially own an additional 9.3% of the voting power of our outstanding stock as of the same date. In the event that they act in concert on future stockholder matters, such persons may have the ability to affect the election of all of our directors and the outcome of all issues submitted to our stockholders. Such concentration of ownership could limit the price that certain investors might be willing to pay in the future for shares of Common Stock and could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Additionally, pursuant to Investor Rights Agreements entered into in connection with their investments in the Company, each of B2 FIE and our secured lender currently has the right to designate on our Board of Directors two and one nominee, respectively. As a result, the presence of directors on our Board of Directors nominated by these investors enables such investors to influence and impact future actions taken by our Board of Directors. The price of our common stock may fluctuate significantly. During the six months ended June 30, 2018, the price for our common stock on the Nasdaq Capital Market ranged from $4.80 to $2.62. The market price for our common stock can fluctuate as a result of a variety of factors, including the factors listed in this Risk Factors section, many of which are beyond our control. These factors include: actual or anticipated variations in quarterly operating results; announcements of new services by our competitors or us; announcements relating to strategic relationships or acquisitions; our ability to meet market expectations with respect to the growth and profitability of each of our operating segments; quarterly variations in our competitors’ results of operations; state or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be, adverse to our operations; changes in financial estimates or other statements by securities analysts; and other changes in general economic conditions. Because of this, we may fail to meet or exceed the expectations of our stockholders or others, and the market price for our common stock could fluctuate as a result. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have never declared or paid cash dividends on our Common Stock, and we do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay cash dividends will be dependent upon our financial condition, operating results, capital requirements, applicable contractual restrictions and other such factors as our Board of Directors may deem relevant. If we sell shares of our common stock or securities convertible into our common stock in future financings, the ownership interest of existing shareholders will be diluted and, as a result, our stock price may go down. We may from time to time issue additional shares of common stock, possibly at a discount from the current trading price of our common stock. As a result, our existing shareholders will experience immediate dilution upon the purchase of any shares of our
Because the offering price per share of our Our certificate of incorporation allows for our Board of Directors to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock. Our Board of Directors has the authority to
We may allocate the net proceeds from this offering in ways that differ from the estimates discussed in the section titled “Use of Proceeds” and with which you may not agree. The allocation of net proceeds of this offering set forth in the “Use of Proceeds” section below represents our estimates based upon our current plans and assumptions regarding industry and general economic conditions and our future revenues and expenditures. The amounts and timing of our actual expenditures will depend on numerous factors, including market conditions, cash generated by our operations, business developments and related rate of growth. We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes. Circumstances that may give rise to a change in the use of proceeds and the alternate purposes for which the proceeds may be used are discussed in the section entitled “Use of Proceeds” below. You may not have an opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use our proceeds. As a result, you and other stockholders may not agree with our decisions. See “Use of Proceeds” for additional information. A large number of shares issued in this offering may be sold in the market A large number of shares issued in this offering may be sold in the market
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS Certain information set forth in this prospectus
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:
Any forward-looking statement made by us in this prospectus 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 applicable law. We anticipate that subsequent events and developments will cause our views to change. You should read this prospectus and the documents filed as exhibits to the registration statement, of which this prospectus is a
We estimate that we will receive net proceeds of approximately $ from this offering, or approximately $ if the underwriters exercise their over-allotment option in full, in each case after deducting the underwriting discount and estimated offering expenses payable by us. We expect to use $[●] of the net proceeds of this offering to repay indebtedness owing under our Credit Agreement, approximately $[●] to repay outstanding subordinated notes and the balance for working capital and other general corporate purposes. Amounts borrowed under the Credit Agreement accrue interest at a The subordinated promissory notes accrue interest at a rate of 3% per annum in excess of the non-default rate of interest from time to time in effect under
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information and Holders Our common stock is currently traded on the Nasdaq Capital Market under the symbol “FPAY.” Prior to November 18, 2016, our common stock was quoted on the OTC Market (OTCQB) under the same symbol.
As of
The following table sets forth the high and low sales prices (or closing bid prices with respect to periods prior to November 18, 2016) for our common stock for the fiscal quarters indicated, as reported on Nasdaq (or on OTC Markets with respect to closing bids for periods prior to November 18, 2016). OTC Market quotations for periods prior to November 18, 2016 reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Dividend Policy
The following table sets forth our actual cash and capitalization, each as of
You should read the following table in conjunction with the sections of this prospectus titled “Use of Proceeds” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016 and the notes thereto and our unaudited consolidated financial statements for the three and six months ended June 30, 2018 and 2017 and the notes thereto, each of which is included herein, for additional information.
The foregoing table and calculations are based on 5,469,501 shares of common stock outstanding as of June 30, 2018 and excludes the following:
If you purchase shares of common stock in this offering, you will experience dilution to the extent of the difference between the public offering price per share in this offering and our pro forma net tangible book value per share immediately after this offering. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Our historical net tangible book value as of June 30, 2018 was $2,642,666, or $0.48 per share of common stock. After giving effect to our sale of [●] shares of common stock in this offering at an assumed public offering price of $[●] per share, which was the last reported sale price of our common stock on the Nasdaq Capital Market on [●], 2018, and after deducting the underwriting discount and estimated offering expenses payable by us, our net tangible book value as of June 30, 2018 would have been $[●], or $[●] per share. This represents an immediate increase in net tangible book value of $[●] per share to existing stockholders and an immediate dilution in net tangible book value of $[●] per share to investors in this offering. The following table illustrates this dilution on a per share basis:
If the underwriters exercise in full their option to purchase additional shares of common stock, the tangible book value per share after giving effect to this offering would be $[●] per share, which amount represents an immediate increase in net tangible book value of $[●] per share of our common stock to existing stockholders and an immediate dilution in net tangible book value of $[●] per share of our common stock to investors purchasing shares in this offering.
The above discussion and tables are based on 5,469,501 shares of common stock outstanding as of June 30, 2018 and excludes the following:
To the extent that any of these options or warrants are exercised, new options are issued under our 2018 Omnibus Equity Compensation Plan or we issue additional shares of common stock or other equity securities in the future, there may be further dilution to new investors participating in this offering.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
The results of operations
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
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
Lease Merchandise
Stock Based Compensation - The fair value of transactions in which FlexShopper exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed. Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the
We regularly review several 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 June 30, 2018 and 2017 are as follows:
* Represents loss Key performance metrics for the six months ended June 30, 2018 and 2017 are as follows:
* Represents loss Key performance metrics for the years ended December 31, 2017 and 2016 are as follows:
* Represents loss Management believes that Adjusted Gross Profit and Adjusted EBITDA, provide relevant and useful information which is widely used by analysts, investors and competitors in our industry in assessing performance. Adjusted Gross Profit represents GAAP revenue less the provision for doubtful accounts and cost of leased inventory and inventory sold. Adjusted Gross Profit provides us with an understanding of the results from the primary operations of our business. We use Adjusted Gross Profit to evaluate our period-over-period operating performance. This measure may be useful to an investor in evaluating the underlying operating performance of our business. Adjusted EBITDA represents net income before interest, stock-based compensation, taxes, depreciation (other than depreciation of leased inventory) and amortization. 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:
Adjusted Gross Profit and Adjusted EBITDA are supplemental measures of FlexShopper’s performance that are 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, net income or any other performance measures derived in accordance with GAAP. Results of Operations Three Months Ended June 30, 2018 compared to Three Months Ended June 30, 2017 The
FlexShopper
Cost of lease revenue and merchandise sold for the three months ended June 30, 2018 was $9,312,117 compared to $8,353,149 for the Provision for Marketing expenses in the three months ended June 30, 2018 was $1,260,237 compared to $818,609 in the three months ended June 30, 2017, an increase of $441,628, or 53.9%. The Company strategically increased marketing expenditures in its digital channels where it is acquiring customers efficiently at it targeted acquisition cost. Salaries and benefits in the three months ended June 30, 2018 was $2,031,788 compared to $1,898,005 in the three months ended June 30, 2017, an increase of $133,783, or 7.0%. Investments in our Other operating expenses for the
Six Months Ended June 30, 2018 compared to Six Months Ended June 30, 2017
FlexShopper
Cost of lease revenue and merchandise sold for the six months ended June 30, 2018 was $20,053,626 compared to $17,123,550 for the six months ended June 30, 2017, representing an increase of $2,930,076, or 17.1%. Cost of lease revenue and merchandise sold for the six months ended June 30, 2018 is comprised of depreciation expense on lease merchandise of $19,395,158 and the net book value of merchandise sold of $658,468. Cost of lease revenue and merchandise sold for the six months ended June 30, 2017 is comprised of depreciation expense on lease merchandise of $16,587,622, the net book value of merchandise sold of $535,928. As the Company’s lease revenues increase, the direct costs associated with them also increase. Provision for doubtful accounts was $10,658,805 and $9,675,629 for the six months ended June 30, 2018 and 2017, respectively. The primary reason for the increase is that the Company does not charge off any customer accounts until it has exhausted all collection efforts, including attempts to repossess items. While collection efforts are pursued, delinquent customers continue to accrue weekly charges resulting in a significant balance requiring a reserve. During the six months ended June 30, 2018 and 2017, $7,442,190 and $13,580,054 of accounts receivable balances were charged off against the allowance, respectively, after the Company exhausted all collection efforts with respect to such accounts. The provision increase was primarily driven by the increase in FlexShopper’s lease portfolio revenue. Marketing expenses in the first half of 2018 were $2,429,187 compared to $1,630,791 in the first half of 2017, an increase of $798,396, or 49.0%. The Company strategically increased marketing expenditures in the first half of 2018 in its digital channels where it is acquiring customers efficiently at its targeted acquisition cost. Salary and benefits expenses in the first half of 2018 were $4,211,164 compared to $3,666,157 in the first half of 2017, an increase of $545,007, or 14.9%. Investments in our software engineering team, much of which occurred throughout 2017, and certain key management hires are the primary reasons for the increase in salaries and benefits expenses. Other operating expenses for the six months ended June 30, 2018 and 2017 included the following:
Twelve Months Ended December 31, 2017 compared to Twelve Months Ended December 31, 2016
The following table details the operating results from
Lease revenues for the
Cost of
Salary and benefits expenses for the year ended December 31,
Key operating expenses for the
Our computer and internet expenses represented the most significant increase, which was
Plan of Operation
We plan to promote our FlexShopper products and services across all sales channels through
For each of our sales
Liquidity and Capital Resources As of June 30, 2018, the Company had cash of $2,055,948 compared to $4,968,915 as of December 31, 2017. As of June 30, 2018, the Company had accounts receivable of $9,905,651 offset by an allowance for doubtful accounts of $5,800,968, resulting in net accounts receivable of $4,104,683. Accounts receivable are principally comprised of lease payments owed to the Company. An allowance for doubtful accounts is estimated based upon historical collection and delinquency percentages. Recent Financings From January 1, 2017, FlexShopper completed the following transactions, each of which has provided liquidity and cash resources to FlexShopper.
Cash Flow Summary Cash Flows from Operating Activities Net cash used in operating activities was $2,412,710 for the six months ended June 30, 2018 and was primarily due to the net loss for the period. Net cash provided by operating activities was $1,873,670 for the six months ended June 30, 2017 and was primarily due to the increase in net revenues and gross profit and more efficient marketing spend for the period. Net cash used by operating activities was $6,598,834 for the year ended December 31, 2017 and was primarily due to the net loss for the period combined with cash used for the purchases of leased merchandise. Net cash used by operating activities was $17,372,429 for the year ended December 31, 2016 and was primarily due to the net loss for the period combined with cash used for the purchases of leased merchandise. Cash Flows from Investing Activities For the six months ended June 30, 2018, net cash used in investing activities was $1,021,551, comprised of $14,164 for the purchase of property and equipment and $1,007,387 for capitalized software costs. For the six months ended June 30, 2017, net cash used in investing activities was $979,562, comprised of $41,595 for the purchase of property and equipment and $937,967 for capitalized software costs. For the year ended December 31, 2017, net cash used in investing activities was $2,021,538 comprised of $127,367 for the purchase of property and equipment and $1,894,171 for capitalized software costs. For the year ended December 31, 2016, net cash used in investing activities was $1,855,088 comprised of $81,514 for the purchase of property and equipment and $1,773,574 for capitalized software costs. Cash Flows from Financing Activities Net cash provided by financing activities was $521,294 for the six months ended June 30, 2018 due to $3,465,000 of funds drawn on the Promissory Notes and $3,550,000 of funds drawn on the Credit Agreement, partially offset by loan repayments on the Credit Agreement of $6,420,852. Net cash provided by financing activities was $8,176,792 for the year ended December 31, 2017 primarily due to the funds drawn on the Credit Agreement of $10,450,000, offset by repayments of amounts borrowed under the Credit Agreement of $2,288,208. Net cash provided by financing activities was $21,243,806 for the year ended December 31, 2016 primarily due to the proceeds from the sale of Series 2 Convertible Preferred Stock of $21,952,000 offset by related costs of $1,519,339, funds drawn on the Credit Agreement of $4,941,359, offset by repayments of amounts borrowed under the Credit Agreement of $4,172,714. Capital Resources To date, funds derived from the sale of FlexShopper’s common stock and Series 2 Convertible Preferred Stock and the Company’s ability to borrow funds against the lease portfolio have provided the liquidity and capital resources necessary to fund its operations. The Company’s ability to borrow additional funds under its credit agreement can be terminated if the Company does not raise $20 million of equity prior to August 31, 2018 (see Note 6). Additionally, the holder of one of its subordinated promissory notes (as described in Notes 5 and 13) provided the Company with a 30-day written notice for payment of $2.5 million of principal and accrued interest. Repayment has been extended to August 31, 2018. Further, pursuant to the terms of the subordinated promissory notes, repayment is not permitted and remedies are not available, other than default interest, without the consent of the Credit Agreement lender. The Company is currently exploring various financing options to provide additional equity capital as well as both extend and lower the cost of our credit facilities going forward, including the offering described in this prospectus. The Company expects that in connection with the completion of this offering (1) it will repay in full the subordinated promissory notes and (2) the Commitment Maturity Date under the credit agreement will be extended to no earlier than [●]. If the Company is unable to obtain additional equity capital and extend the credit facilities, management believes the Company would be able to maintain a positive cash position by servicing and collecting its existing lease portfolio and paying its obligations as they become due but would be forced to curtail or suspend normal business operations, including its discretionary marketing expenditures. Off-Balance Sheet Arrangements The Company does not have any off balance sheet arrangements.
Introduction Since December 2013, we have developed a business that focuses on improving the quality of life of our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers (including tablets and wearables), smartphones, tires, jewelry and furniture (including accessories), under affordable payment lease-to-own (“LTO”) purchase agreements with no long-term obligation, including through an extensive online experience. Our customers can acquire well-known brands such as Samsung, Frigidaire, Hewlett-Packard, LG, Whirlpool, Simmons, Philips, Ashley, Apple and more. We believe that the introduction of FlexShopper’s LTO The Company is quickly penetrating the LTO market as evidenced by the increase in its gross revenue, illustrated in the chart below.
Industry Overview The LTO industry offers consumers an alternative to traditional methods of obtaining electronics, computers, home furnishings, appliances and other durable goods. FlexShopper’s customers typically do not have sufficient cash or credit to obtain these goods, so they find the short-term nature and affordable payments of LTO attractive. The Lease-Purchase Transaction A lease-purchase transaction is a flexible alternative for consumers to obtain and enjoy brand name merchandise with no long-term obligation. Key features of our lease-purchase transactions include: Brand name merchandise. FlexShopper offers well-known brands such as LG, Samsung, Sony and Vizio home electronics; Frigidaire, General Electric, LG, Samsung and Whirlpool appliances; Acer, Apple, Asus, Samsung and Toshiba computers and/or tablets; Samsung and Apple smartphones; and Ashley, Powell and Standard furniture, among other brands. Convenient payment options. Our customers make payments on a weekly, bi-weekly or monthly basis. Payments are automatically deducted from the customer’s authorized checking account or debit card. Additionally, customers may make additional payments or exercise early payment options, which enable them to save money. No long-term commitment. A customer may terminate a lease-purchase agreement at any time with no long-term obligation by paying amounts due under the lease-purchase agreement and returning the leased item to FlexShopper.
Applying has no impact on credit or FICO score. We do not use FICO scores to determine customers’ spending limits so our underwriting does not impact consumers’ credit with the three main credit bureaus. Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer makes all payments during the lease term, which is one year, or exercises early payment options, which typically save the customer money. Key Trends Driving the Industry: Non-prime consumers represent the largest segment of the credit market. Today, 38% of Americans have low credit scores according to Experian, and approximately one in ten adult Americans are credit invisible, or have no credit history, according to the Consumer Financial Protection Bureau. This segment of consumers represents a significant and underserved market.
According to Wall Street and industry research, the current addressable market size for non-prime consumers is between $20 and $25 billion, with consumer electronics constituting 44% of such amount. We believe that underwriting consumer electronics online is one of our competitive advantages since this is the majority of our business and has not been a focus of our peers. Additional industry trends include:
Growth Opportunities and Strategies Like many industries, the internet and other technology is transforming the LTO industry. FlexShopper has positioned itself to take advantage of this transformation by focusing on the expansion of the LTO industry online and into mainstream retail and e-tail. The brick-and-mortar LTO industry currently serves approximately 3.4 million consumers annually, generating approximately $6.1 billion in sales primarily through approximately 6,700 LTO brick and mortar stores. Through its strategic sales channels FlexShopper believes it can expand the LTO industry, also known as the rent-to-own or RTO industry. FlexShopper has successfully developed and is currently processing LTO transactions using its “LTO Engine,” FlexShopper’s proprietary technology that automates the process of consumers receiving spending limits and entering into leases for durable goods to within seconds. The LTO Engine is the basis for FlexShopper’s primary sales channels, which include B2C and B2B channels, illustrated in the diagram below:
We believe we have created a unique platform whereby our B2B and B2C sales channels beneficially support and advance each other. For our B2C channels, we directly market to our consumers LTO opportunities at FlexShopper.com, where they can choose from over 150,000 of the latest products shipped directly to them by certain of the nation’s largest retailers. This generates sales with no acquisition cost for our retail partners; FlexShopper uses this incremental business we have provided to encourage them to incorporate our B2B solutions into their online and in-store sales channels. The lease originations by our retail partners using our B2B channels, which have no customer acquisition cost to us, subsidize our B2C customer acquisition costs. To achieve our goal of being the preeminent “pure play” virtual LTO leader, we intend to execute the following strategies: Continue to grow FlexShopper into a dominant LTO brand. Given strong consumer demand and organic growth potential for our LTO solutions, we believe that significant opportunities exist to expand our presence within current markets via existing marketing channels. As non-prime consumers become increasingly familiar and comfortable with our retail kiosk partnerships, online marketplace and mobile solutions, we plan to capture the new business generated as they migrate away from less convenient legacy brick-and-mortar LTO stores. Expand the range of customers served. We continue to evaluate new product and market opportunities that fit into our overall strategic objective of delivering next-generation retail, online and mobile LTO terms that span the non-prime/near-prime credit spectrum. For example, we are evaluating products with lower fees that would be more focused on the needs of more creditworthy subprime consumers that prefer a less expensive LTO option. In addition, we are continually focused on improving our analytics to effectively underwrite and serve consumers within those segments of the non-prime credit spectrum that we do not currently reach, including profitable deeper penetration of the sub-prime spectrum. We believe the current generation of our underwriting model is performing well and will continue to improve over time as its data set expands.
Pursue additional strategic retail partnerships. We intend to continue targeting regional and national retailers to expand our B2B sales channels. As illustrated in the diagram above, we believe we have the best omnichannel solution for retailers to “save the sale” with LTO options. In retail, the phrase “save the sale” means offering consumers other finance options when they do not qualify for traditional credit. We expect these partnerships to provide us with access to a broad range of potential new customers, with low customer acquisition costs. Expand our relationships with existing customers and retail partners. Customer acquisition costs represent one of the most significant expenses for us due to our high percentage of online customers. In comparison, no acquisition cost is incurred for customers acquired through our retail partnerships. We will seek to expand our strong relationships with existing customers by providing qualified customers with increased spending limits or offering other products and services to them, as well as seek to grow our retail partnerships to reduce our overall acquisition cost. Continue to optimize marketing across all channels. Since we began marketing our services to consumers in 2014, we have made significant progress in targeting our customers and lowering our customer acquisition costs. This is across different media including direct response television and digital channels such as social media, email, and search engines. Our Competitive Strengths The LTO industry is highly competitive. Our operation competes with other national, regional and local LTO businesses, as well as with rental stores that do not offer their customers a purchase option. Some of these companies have, or may develop, systems that enable consumers to obtain through online facilities spending limits and payment terms and to enter into leases nearly instantaneously, in a manner similar to that provided by FlexShopper’s proprietary technology. We believe the following competitive strengths differentiate us: Underwriting and Risk Management Specialized technology and proprietary risk analytics optimized for the non-prime creditmarket. We have made substantial investments in our underwriting technology and analytics platforms to support rapid scaling, innovation and regulatory compliance. Our team of data scientists and risk analysts uses our risk infrastructure to build and test strategies across the entire underwriting process, using alternative credit data, device authentication, identity verification, and many more data elements. We believe our real-time proprietary technology and risk analytics platform is unique among our competitors in successfully underwriting online consumers and consumer electronics; most of our peers focus on in-store consumers that acquire furniture and appliances, which we believe are easier to underwrite based on our own experiences. In addition, all our applications are processed instantly with approvals and spending limits provided within seconds of submission. LTO Products for Consumers and Retailers Expansive online LTO marketplace.We have made substantial investments in our custom e-commerce platform to provide consumers the greatest selection of popular brands delivered by certain of the nation’s largest retailers, including Best Buy, Walmart, Overstock, Serta and many more. Our platform is custom-built for online LTO transactions, which include underwriting our consumers, serving them LTO leases, syncing and communicating with our retail partners to fulfill orders and all front- and back-end customer relationship management functions, including collections and billing. The result is a comprehensive technology platform that manages all facets of our business and enables us to scale with hundreds of thousands of visitors and products. Omnichannel “save the sale” product for retailers. In retail, the phrase “save the sale” means offering consumers other finance options when they do not qualify for traditional credit. We believe that we have the best omnichannel solution for retailers to “save the sale” with LTO options. To our knowledge, no competitor has an LTO marketplace that provides retailers incremental sales with no acquisition cost. In addition, compared to our peers, our product for consumers typically requires no money down and fewer application fields. We believe this leads to more in-store and online sales. We also believe that we have the best LTO payment technology at checkout for e-tailers, whereby consumers can seamlessly checkout out on a third party’s e-commerce site with our LTO payment plugin. In addition, our “integrationless” in-store technology was a strong selling point for our recent 726 store rollout since it required no equipment or technology investment from either party. Providing LTO consumers an “endless aisle” of products for lease-to-own.As illustrated by our B2C channels in the above diagram, we offer consumers three ways to acquire products on an LTO basis. At FlexShopper.com our customers can choose from over 150,000 of the latest products shipped by certain of the nation’s largest retailers. If customers want products that are not available on our marketplace, they may use our “personal shopper” service and simply complete a form with a link to the webpage of the desired durable good. We will then facilitate their purchase by providing an LTO arrangement. We also offer consumers the ability to acquire durable goods with our FlexShopper Wallet smartphone application available on Apple and Android devices. With FlexShopper Wallet, consumers may apply for a spending limit and take a picture of a qualifying item in any major retail store and we will fill the order for them. With our B2C channels we believe we are providing LTO consumers with a superior LTO experience and fulfilling our mission to help improve their quality of life by shopping for what they want where they want.
A Lean and Scalable Model Compared to the brick-and-mortar LTO industry, which is suffering from the same headwinds as traditional retail stores, we have been successful in addressing the LTO consumer through online channels as illustrated in the above diagram illustrating our B2C and B2B sales channels. We believe our model is more efficient and scalable for the following reasons: We have no inventory risk and are completely drop-ship. We do not have any of the costs associated with buying, storing and shipping inventory. Instead, our suppliers ship goods directly to consumers. We serve LTO consumers across the United States without brick-and-mortar stores.We do not have any of the costs associated with physical stores and the personnel needed to operate them. As our sales grow we achieve more operating leverage.Our model is primarily driven by a technology platform that does not require significant increases in operating overhead to support sales growth. Sales and Marketing B2C Channels We use a multi-channel, analytics-powered approach to marketing our products and services, with both broad-reach and highly-targeted channels, including television, digital, telemarketing and marketing affiliates. The goal of our marketing is to promote our brand and primarily to directly acquire new customers at a targeted acquisition cost. Our marketing strategies include the following: Direct response television advertising. We use television advertising supported by our internal analytics and media buys from a key agency to drive and optimize website traffic and lease originations. Digital acquisition. Our online marketing efforts include pay-per-click, keyword advertising, search engine optimization, marketing affiliate partnerships, social media programs and mobile advertising integrated with our operating systems and technology from vendors that allow us to optimize customer acquisition tactics within the daily operations cycle. In 2017 we created and launched our automated digital pay-per-click advertising platform, FLEX-AADS, which enabled us to scale up our pay-per-click marketing by utilizing better segmentation techniques and statistical models that can optimize our bidding adjustments.
User experience and conversion. We measure and monitor website visitor usage metrics and regularly test website design strategies to improve customer experience and conversion rates. B2B Channels We use internal business development personnel and outside consultants that focus on engaging retailers and e-tailers to use our services. This includes promoting FlexShopper at key trade shows and conferences. Management Information Systems FlexShopper uses computer-based management information systems to facilitate its entire business model, including underwriting, processing transactions through its sales channels, managing collections and monitoring leased inventory. Through the use of our proprietary software developed in-house, each of our retail partners uses our online merchant portal that automates the process of consumers receiving spending limits and entering into leases for durable goods generally to within
FlexShopper has
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Brad Bernstein, our Chief Executive Officer, manages our day-to-day operations and internal growth and
In September 2015, we entered into a 48-month lease for additional office space in Fort Lauderdale, Florida to
Legal Proceedings
We are not a party to any material pending
EXECUTIVE OFFICERS, DIRECTORS AND CORPORATE GOVERNANCE Board of Directors Set forth below is background information relating to
Daniel Ballen, age 35, has been a director since November 2016. Mr. Ballen is a Senior Vice President and Portfolio Manager for the alternative investment complex of Pacific Investment Management Company LLC (“PIMCO”), where he focuses on corporate private equity and special situations investing in both North America and Europe. Prior to joining PIMCO in 2014, Mr. Ballen was a member of the private equity investment teams at Pine Brook Partners and Bain Capital, where he executed and managed a number of private equity investments, with a particular focus on companies in the financial services sector. Mr. Ballen started his career in the investment banking division of Bear, Stearns & Co., where he was a member of the U.S. financial institutions advisory team. Mr. Ballen received a Bachelors degree, Summa Cum Laude, from Emory University. Mr. Ballen’s experience in finance makes him a valuable addition to the Board. Mr. Ballen was appointed to the Board in connection with that certain Investor Rights Agreement dated June 10, 2016 (the “B2 FIE Investor Rights Agreement”) entered into by the Company, Brad Bernstein and B2 FIE in connection with B2 FIE’s purchase of Series 2 Preferred Stock. Pursuant to the B2 FIE Investor Rights Agreement, so long as B2 FIE and its affiliate transferees’ ownership percentage of the Company’s outstanding Common Stock, determined on a fully-diluted basis taking into account the conversion of all outstanding shares of Series 1 Preferred Stock and Series 2 Preferred Stock, exceeds 22%, B2 FIE shall have the right to nominate two directors to the Board. For more information regarding the B2 FIE Investor Rights Agreement, please refer to our Form 8-K filed with the SEC on June 13, 2016. Brad Bernstein, age 53, is a co-founder of FlexShopper
T. Scott King, age 66, has been a director since November 2014. From April 2014 through September 2014, Mr. King served as Interim Chief Executive Officer of Gordmans Stores, Inc.
Carl Pradelli, age 51, has been a director since July 2014. Since 2002, Mr. Pradelli has served as President, CEO, co-founder and a director of Nature City LLC, a developer and direct-to-consumer marketer of premium dietary supplements. Nature City LLC principally markets via direct mail and e-commerce channels. From 2002 through 2011, Mr. Pradelli also served as President, CEO and co-founder of Advanced Body Care Solutions, a marketer of health and beauty products using direct response television. Previously, he served as Senior Vice President of the investment banking firm Donaldson, Lufkin & Jenrette, which was acquired in 2000 by Credit Suisse First Boston. From 1999 to 2004, Mr. Pradelli served as a director of Duane Reade, Inc. and on its compensation and governance committees. Mr. Pradelli received an MBA from Wharton Business School at the University of Pennsylvania and a Bachelors of Science in Finance and Accounting from Stern School of Business at New York University. Mr. Pradelli brings to the Board his financial and business experience as well as his experience serving as a public company director, making him an ideal candidate to serve as an independent director and as a financial expert on the Board. Katherine Verner, age 50, has been a director since November 2016. Ms. Verner is a Senior Vice President and Portfolio Manager at PIMCO focused on the oversight of private equity investments within the firm’s alternative investment complex. Ms. Verner has over 25 years of experience in finance and real estate investing for private equity funds, including Oaktree Capital, ORIX and Goldman Sachs/Whitehall. Prior to joining PIMCO, she was a Managing Director of a start-up NPL platform in Europe for Oaktree Capital and Chief Operating Officer of two corporate finance companies, Goldman Sachs Specialty Lending Group and ORIX Finance, and Director of Executive Operations for Goldman Sachs’ international asset management platform. Ms. Verner received a Bachelor of Science degree from Texas A&M University and a Masters in Real Estate from the University of Denver. Ms. Verner’s executive and finance experience make her a valuable addition to the Board.
Board Independence The Board of Directors has determined that each of Mr. Allen, Mr. Ballen, Mr. King, Mr. Pradelli and Ms. Verner is an independent director within the meaning of the director independence standards of the Nasdaq Stock Market. Furthermore, the Board has determined that all of the members of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee are Executive Officers Set forth below is background information relating to
Brad Bernstein is discussed above under “Executive Officers, Directors and Corporate Governance—Board of Directors.” Russ Heiser has served as our Chief Financial Officer since December 2015. From July 2015 to December 2015, Mr. Heiser served as a consultant to the Ravi Radhakrishnanhas
COMPENSATION AND OTHER INFORMATION CONCERNING DIRECTORS AND OFFICERS
The following table sets forth information concerning the Summary Compensation Table
Outstanding Equity Awards at December 31, 2017 The following table provides information regarding equity awards held by the
On January 31, 2007, we entered into an employment agreement to retain the services of Brad Bernstein
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● | Mr. Bernstein is required to devote his full business time and efforts to the business and affairs of FlexShopper. Mr. Bernstein is entitled to indemnification to the full extent permitted by law. Mr. Bernstein is subject to provisions relating to |
Mr. Bernstein is entitled to participate in |
FlexShopper shall, to the extent such benefits can be obtained at a reasonable cost, provide Mr. Bernstein with disability insurance benefits of at least 60% of his gross |
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FlexShopper shall, to the extent such benefits can be obtained at a reasonable cost, provide Mr. Bernstein with life insurance benefits in the amount of at least $500,000. In the event of Mr. Bernstein’s death, his family shall continue to be covered by all of our executive welfare benefit plans, at our expense, to the extent such benefits may, by law, be provided, for 12 months following Mr. Bernstein’s death in accordance with the terms of such plans. |
Termination of Employment
Mr. Bernstein’s employment with FlexShopper may be terminated by mutual agreement. The following description summarizes his severance pay (exclusive of base salary, car allowances and benefits due up to the date of termination), if any, in the event of termination (other than by mutual agreement) and the treatment of his options:
Termination for Cause. In the event of any termination for causeCause (as defined in the agreement), Mr. Bernstein shall not receive any severance pay and any and all stock options granted to him shall terminate according to their terms of grant with any such vested options being exercisable for the shorter of (i) 90 days from the date of termination and (ii) the exercise term of each relevant option grant.
Termination for Disability or Death. In the event of termination for disabilityDisability (as defined in the agreement) or death, Mr. Bernstein shall receive all bonuses then earned, six months’ severance pay in the case of death, and the acceleration of certain options. Such options may be exercised for the longer of (i) 12 months from the date of the date of termination and (ii) the exercise term of each relevant option grant.
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Termination without Cause. Mr. Bernstein’s employment with FlexShopper may be terminated by us, in the absence of Cause, and by Mr. Bernstein for Good Reason (as defined in the agreement)agreement, including upon a change of control of the Company). In such event, Mr. Bernstein shall receive 12 months’ severance pay, targeted bonuses, continuation of certain benefits and full vesting of all options. Such options may be exercised for the longer of (i) 12 months from the date of termination and (ii) the exercise term of each relevant option grant.
Voluntary Resignation. Mr. Bernstein’s employment with FlexShopper may be terminated by him without Good Reason. In such event, Mr. Bernstein shall not receive any severance pay and unless termination occurs in the first year of employment, all vested options shall be retained by him for the full exercise term of each relevant option.
Option Grants
Mr. Bernstein is eligible to receive stock options and other compensation as determined at the discretion of the board. See “Executive Officer Outstandingthe section captioned “Outstanding Equity Awards”Awards at December 31, 2017” above for a description of outstanding options granted to Mr. Bernstein.
Termination ofRuss Heiser Employment Agreement with Morry F. Rubin
On December 29, 2014, Mr. Morry F. Rubin resigned1, 2015, we entered into an employment agreement to retain the services of Russ Heiser as Chief ExecutiveFinancial Officer of our company and agreed to terminate his employment agreement. Mr. Rubin is continuing to serve as Chairman ofthe Company. In March 2017, the Board approved an increase in Mr. Heiser’s salary to $237,000. The Board may periodically review Mr. Heiser’s base salary and may determine to increase (but not decrease) the base salary, in accordance with such policies as FlexShopper may hereafter adopt from time to time, if it deems appropriate. The following summarizes Mr. Heiser’s employment agreement.
● | The Agreement shall be automatically renewed for additional one-year terms unless either party notifies the other, in writing, at least 60 days prior to the expiration of the term, of such party’s intention not to renew the Agreement; |
● | Mr. Heiser is required to devote his full business time and efforts to the business and affairs of FlexShopper. Mr. Heiser is entitled to indemnification to the full extent permitted by law. Mr. Heiser is subject to provisions relating to non-compete (other than in the event of any termination by the Company without cause or by Mr. Heiser for good reason) and non-solicitation of employees and customers during the term of the Agreement and for a specified period thereafter; |
● | Mr. Heiser is entitled to participate in our benefit and other compensatory or non-compensatory plans that are available to similarly situated executives of FlexShopper and is entitled to be reimbursed for up to $25,000 of medical costs not covered by FlexShopper’s health insurance per year; |
● | FlexShopper shall, to the extent such benefits can be obtained at a reasonable cost, provide Mr. Heiser with disability insurance benefits of at least 60% of his gross base salary per month. In the event of Mr. Heiser’s disability, Mr. Heiser and his family shall continue to be covered by all of our employee welfare benefit plans at our expense, to the extent such benefits may, by law, be provided, for the lesser of the term of such disability and 24 months, in accordance with the terms of such plans; and |
● | FlexShopper shall, to the extent such benefits can be obtained at a reasonable cost, provide Mr. Heiser with life insurance benefits in the amount of at least $500,000. In the event of Mr. Heiser’s death, his family shall continue to be covered by all of our executive welfare benefit plans, at our expense, to the extent such benefits may, by law, be provided, for 12 months following Mr. Heiser’s death in accordance with the terms of such plans. |
Termination of our companyEmployment
Mr. Heiser’s employment with FlexShopper may be terminated by mutual agreement. The following description summarizes his severance pay (exclusive of base salary, car allowances and we have agreedbenefits due up to compensatethe date of termination), if any, in the event of termination (other than by mutual agreement) and the treatment of his options:
Termination for Cause. In the event of any termination for Cause (as defined in the agreement), Mr. Rubin by paying 50%Heiser shall not receive any severance pay and any and all stock options granted to him shall terminate according to their terms of the health insurance premiums for him and his family under our health insurance plan. Mr. Rubin’s employment agreement had contained provisions similar but not identical to those of Mr. Bernstein’sgrant with the primary differenceany such vested options being the amount of compensation being paid to Mr. Rubin. See Summary Compensation Table above for a description of the compensation paid to Mr. Rubinexercisable for the last two fiscal years.shorter of (i) 90 days from the date of termination and (ii) the exercise term of each relevant option grant.
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We have reviewed our compensation policiesTermination for Disability or Death. In the event of termination for Disability (as defined in the agreement) or death, Mr. Heiser shall receive all bonuses then earned, six months’ severance pay in the case of death, and practicesthe acceleration of certain options. Such options may be exercised for all employees and concluded that any risks arisingthe longer of (i) 12 months from our policies and practices are not reasonably likely to have a material adverse effect on FlexShopper.
DIRECTOR COMPENSATION
Cash Fees and Options
Asthe date of the date of this Prospectus,termination and (ii) the exercise term of each relevant option grant.
Termination without Cause. Mr. Heiser’s employment with FlexShopper has no audit, compensation, corporate governance, nominating or other committeemay be terminated by us, in the absence of Cause, and by Mr. Heiser for Good Reason (as defined in the agreement, including upon a change in control of the BoardCompany). In such event, Mr. Heiser shall receive 12 months’ severance pay, plus targeted bonuses, continuation of Directors, although it intends to establish an audit, compensationcertain benefits and corporate governance committee infull vesting of all options. Such options may be exercised for the near future. The chairmanlonger of (i) 12 months from the date of termination and (ii) the exercise term of each committee that is formedrelevant option grant.
Voluntary Resignation. Mr. Heiser’s employment with FlexShopper may be terminated by us at a laterhim without Good Reason. In such event, Mr. Heiser shall not receive any severance pay and all vested options shall be retained by him for the full exercise term of each relevant option. Any such vested options would continue to be exercisable for the full exercise term of each relevant option grant.
Option Grant
Pursuant to his employment agreement, on December 1, 2015, Mr. Heiser was granted an option to purchase 10,000 shares of Common Stock of the Company with the exercise price based on the closing share price as of December 1, 2015. The option vested and became exercisable as follows: (i) one-third on the six month anniversary of the grant date; (ii) one-third on the one-year anniversary of the grant date will be entitledand (iii) one-third on the two-year anniversary of the grant date.
Director Compensation
Independent directors who are not employees of the Company or any subsidiary of the Company and have not been appointed to the Board in connection with an annual fee of $6,500 and each non-executive director willInvestor Rights Agreement (“Non-Employee Directors”), receive an annual feeretainer in the amount of $6,500 as$30,000, an additional cash retainer of $2,500 if the member serves on a member of the Board, a fee of $1,000 per Board or Committee meeting (or consent in lieu of a meeting),committee, and an activity fee of $1,000 per day for services rendered byadditional $5,000 if the Board member. George Rubin,member chairs a former director until December 29, 2014 is receiving reimbursement of health and dental insurance for him and his wife through December 31, 2015. Members of the Board of Directors are eligible to participate under one or more of our company’s stock option plan(s). On July 25, 2014, we granted Carl Pradellicommittee, all paid quarterly in arrears, as well as options to purchase 180,0006,000 shares exercisable at $.89 per share from the vesting date through July 25, 2024, with one-third vesting on July 25, 2014, one-third vesting on July 25, 2015 and a third vesting on July 25, 2016. On July 25, 2014, we granted T. Scott King options to purchase 180,000 shares, exercisable at $.70 per share from the vesting date through November 13, 2024, with one-third vesting on November 13, 2014, one-third vesting on November 13, 2015 and a third vesting on November 13, 2016. In the event that a director is no longer servingof common stock on the Boardfirst trading day following December 31 of Directors, the director has 90 days to exercise all vested options. Equity incentive awards and cash payments to directors will be determined in the sole discretion of the Board and/or compensation committee of the Board at such times and in such amounts as the Board or a committee thereof determines to make such awards.
Travel Expenses
All directors shall be reimbursed for their reasonable out of pocket expenses associated with attending the meetings.
2014 Director Compensationeach year.
The following table shows the overall compensation earned for the 2014 fiscal yearsets forth information with respect to compensation earned by or awarded to each non-employee and non-executive director of FlexShopper as ofour Non-Employee Directors who served on our Board during the fiscal year ended December 31, 2014.
2017:
DIRECTOR COMPENSATION
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Name and Principal Position | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Option Awards ($) (1) | Non-Equity Incentive Plan Compensa-tion ($) (2) | Nonqualified Deferred Compensa-tion Earnings ($) | All Other Compensa-tion ($) (3) | Total ($) | ||||||||||||||||||||||||
Paul B. Healy, Former Director | $ | 9,500 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 9,500 | |||||||||||||||||
George Rubin, Former Director (4) | $ | 9,500 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | 9,500 | |||||||||||||||||
Carl Pradelli, Director | $ | -- | $ | 54,540 | $ | -0- | -- | -- | -- | $ | 54,540- | ||||||||||||||||||||
T. Scott King Director | $ | -- | $ | 45,360 | $ | -0- | -- | -- | -- | $ | 45,360 |
Name | Fees Earned or Paid in Cash ($) | Option | Total ($) | |||||||||
James Allen | $ | 40,000 | $ | 21,950 | $ | 61,950 | ||||||
T. Scott King | $ | 40,000 | $ | 8,874 | $ | 48,807 | ||||||
Carl Pradelli | $ | 40,000 | $ | 8,874 | $ | 48,807 |
(1) | FASB ASC Topic 718 requires FlexShopper to determine the overall full grant date fair market value of |
this prospectus.
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Indemnification; Director and Officer Liability Insurance
FlexShopper has agreed to indemnify (and advance the costs of defense of) each director (and his legal representatives) to the fullest extent permitted by the laws of the state in which FlexShopper is incorporated, as in effect at the time of the subject act or omission, or by the Certificate of Incorporation and Bylaws of FlexShopper, whichever affords greater protection to each director, and both during and after termination (for any reason). FlexShopper shall cause each director to be covered under a directors and officers' liability insurance policy for his acts (or non-acts) as an officer or director of FlexShopper or any of its affiliates. Such policy shall be maintained by FlexShopper at its expense in an amount of at least $5 million during the term each director serves FlexShopper (including the time period of coverage after each director’s service terminates for any reason whatsoever).
In the event of any litigation or other proceeding between FlexShopper and a director with respect to enforcement of a director’s rights to indemnification and director and officer liability insurance and such litigation or proceeding results in final judgment or order in favor of the Director, which judgment or order is substantially inconsistent with the positions asserted by FlexShopper in such litigation or proceeding, the losing party shall reimburse the prevailing party for all of his/its reasonable costs and expenses relating to such litigation or other proceeding, including, without limitation, his/its reasonable attorneys' fees and expenses.
2007 Omnibus Equity Compensation Plan
On January 31, 2007, the Board adopted our 2007 Omnibus Equity Compensation Plan (the “Plan”), with 2,100,000 common shares authorized for issuance under the Plan. In October 2009, FlexShopper's stockholders approved an increase in the number of shares covered by the Plan to 4,200,000 shares.
The following table shows the amounts that have been granted under the Plan as of December 31, 2014 to named executive officers, directors and others:
2007 Omnibus Equity Compensation Plan | ||||||||
Name and Position | Number of Options | Dollar Value (1) | ||||||
Morry F. Rubin, Former Chief Executive Officer (2) | 1,150,000 | (1) | $ | 302,500 | ||||
Brad Bernstein, President (2) | 1,700,000 | (1) | $ | 352,500 | ||||
Frank Matasavage | 35,000 | $ | 1,000 | |||||
Executive Group (three persons) (2) | 2,885,000 | (1) | $ | 656,000 | ||||
Non-Executive Director Group (two persons) (2) | 360,000 | (1) | $ | 21,600 | ||||
Non-Executive Officer Employee Group | 510,000 | (1) | $ | 80,050 |
___________________
|
The following is a summary of the material features of the Plan:
Shares Subject to the Plan
The maximum number of shares of Common Stock with respect to which awards may be made under the Plan is 4,200,000. In the event of any stock split, reverse stock split, stock dividend, recapitalization, reclassification or other similar event or transaction, the Compensation Committee will make such equitable adjustments to the number, kind and price of shares subject to outstanding grants and to the number of shares available for issuance under the Plan as it deems necessary or appropriate. Shares subject to forfeiture, cancelled or expired awards granted under the Plan will again become available for issuance under the Plan. In addition, shares surrendered in payment of any exercise price or in satisfaction of any withholding obligation arising in connection with an award granted under the Plan will again become available for issuance under the Plan.
Administration
A committee of two or more directors appointed by the Board will administer the Plan (the “Committee”); however, until the Committee is appointed, the Board administers the Plan. The Committee interprets the Plan, selects award recipients, determines the number of shares subject to vested option awards held by each awardNon-Employee Director as of December 31, 2017:
Name | Shares Subject to Outstanding Stock Option Awards (#) | |||
James Allen | 12,000 | |||
T. Scott King | 24,000 | |||
Carl Pradelli | 24,000 |
Mr. Ballen, Mr. Bernstein, Mr. Gitler and establishesMs. Verner receive no compensation for their service on the price, vesting and other terms of each award. While there are no predetermined performance formulas or measures or other specific criteria used to determine recipients of awards under the Plan, awards are based generally upon consideration of the grantee's position and responsibilities, the nature of services provided, the value of the services to us, the present and potential contribution of the grantee to our success, the anticipated number of years of service remaining and other factors which the Board or the Committee deems relevant.Board.
Eligibility
Employees, directors, consultants and other service providers of our Company and its affiliates are eligible to participate in theEquity Compensation Plan provided; however, that only employees of our Company are eligible to receive incentive stock options. The maximum number of shares that are the subject of grants made under the Plan to any individual during any calendar year may not exceed 1,000,000 shares, subject to certain adjustments. A participant in the Plan may not accrue dividend equivalents during any calendar year in excess of $500,000.
Amendment and Termination of PlanTable
The Board may amend, alter or discontinue the Plan at any time; provided, however, that the Board may not amend the Plan without stockholder approval if such approval is required in order to comply with the Internal Revenue Code or applicable laws or to comply with applicable stock exchange requirements. The Plan will terminatefollowing table presents information on the day immediately preceding the tenth anniversaryCompany’s equity compensation plans as of the Plan’s effective date, unless the Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders.December 31, 2017. All outstanding awards relate to our common stock.
Grants
Plan Category | Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||||||||
Equity compensation plans approved by security holders | 335,900 | (1) | $ | 5.61 | 307,000 | (2) | ||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 335,900 | $ | 5.61 | 307,000 |
Grants made under the Plan may consist of incentive stock options, non-qualified stock options, stock appreciation rights or “SARs,” stock awards, stock unit awards, dividend equivalents and other stock-based awards. Each grant is subject to the terms and conditions set forth in the Plan and to those other terms and conditions specified by the Committee and memorialized in a written grant agreement between our Company and grant recipient (the “Grant Instrument”).
Stock Options
The Plan permits the grant of incentive stock options (“ISOs”) to our employees and the employees of our subsidiaries. The Plan also provides for the grant of non-qualified stock options (“NQSOs”) to our employees, directors, and consultants and other individuals who perform services for us (as well as to employees, directors, consultants and service providers of our subsidiaries). The exercise price of any stock option granted under the Plan will be equal to or greater than the fair market value of such stock on the date the option is granted, provided, however, that the exercise price of any incentive stock options granted under the Plan to an employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of our stock or any parent or subsidiary of us, may not be less than 110% of the fair market value of our Common Stock on the date of grant. Generally, payment of the option price may be made (i) in cash, (ii) with the Committee’s consent, by approval of the Committee, by delivering shares of Company Stock owned by the Optionee (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price or by attestation (on a form prescribed by the Committee) to ownership of shares of Company Stock having a Fair Market Value on the date of exercise equal to the Exercise Price, (iii) through a broker in accordance with applicable laws, or (iv) with a combination of cash and shares. The participant must pay the option price and the amount of withholding tax due, if any, at the time of exercise. Shares of Common Stock will not be issued or transferred upon exercise of the option until the option price and the withholding obligation are fully paid.
(1) | Includes outstanding stock options exercisable for 242,900 shares of common stock issued under our 2007 Omnibus Equity Compensation Plan and outstanding stock options exercisable for 93,000 shares of common stock issued under our 2015 Omnibus Equity Compensation Plan. |
(2) | Consists of shares of common stock available for future issuance under our 2015 Omnibus Equity Compensation Plan. No shares of common stock were available for future issuance under our 2007 Omnibus Equity Compensation Plan as of December 31, 2017. |
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Under the Plan, each option is exercisable at such time and to such extent as specified in the pertinent Grant Instrument between our Company and the option recipient. However, no option shall be exercisable with respect to any shares of Common Stock more than ten years after the date of grant of such award (except as otherwise determined by the Committee with respect to non-incentive options) and no incentive stock option that is granted to an employee, who at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of our Company, or any parent or subsidiary of ours, may be exercised more than five years from the date of grant. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members, or one or more trusts or other entities for the benefit of or owned by family members, consistent with the applicable securities laws, according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer.SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Effects of Termination of Service with our Company
Generally, unless provided otherwise in the Grant Instrument, the right to exercise any option or SAR (described below) terminates 90 days following termination of the participant’s relationship with FlexShopper for reasons other than death, disability or termination for “cause” as defined in the Plan. If the participant’s relationship with us terminates due to death or disability, unless provided otherwise in the Grant Instrument, the right to exercise an option or SAR will terminate the earlier of one year following such termination or the original expiration date. If the participant’s relationship with us is terminated for “cause” any option or SAR not already exercised will automatically be forfeited as of the date such termination.
Stock Awards
We may issue awards of our Common Stock pursuant to the terms of the Plan. A stock award may be issued for consideration or for no consideration and may be subject to certain restrictions and risk of forfeiture (such as the completion of a period of service or attainment of a performance goal) as determined by the Committee and set forth in the Grant Instrument governing the stock award. If a participant’s employment terminates before the vesting condition is fulfilled, the shares will be forfeited. While the shares remain unvested, a participant may not sell, assign, transfer, pledge or otherwise dispose of the shares. Unless otherwise determined by the Committee, a stock award entitles the participant to all of the rights of a stockholder of our Company, including the right to vote the shares and the right to receive any dividends thereon.
Stock Units
The Plan provides for the grant of stock units to employees, non-employee directors, or consultants or other individuals who perform services for us, subject to any terms and conditions, including the fulfillment of specified performance goals or other conditions, as may be established by the Committee. Each stock unit represents one hypothetical share of Common Stock and the right of the grantee to receive an amount based on the value of a share of our Common Stock. Payments with respect to stock units may be made in cash or in shares of Common Stock, or in combination of the two as determined by the appointed committee.
Stock Appreciation Rights
The Plan also provides for the grant of SARs, either alone or in tandem with stock options. An SAR entitles its holder to a cash payment of the excess of the fair market value of our Common Stock on the date of exercise, over the fair market value of our Common Stock on the date of grant. An SAR issued in tandem with a stock option will have the same terms as the stock option. The terms of an SAR granted alone, without an option, will be established by the Committee, in the Grant Instrument governing the SAR.
Other Stock-Based Awards
The Committee may grant other stock-based awards, other than those described herein, that are based on, measured by or payable in shares of Common Stock on such terms and conditions as the Committee may determine. Such awards may be subject to the achievement of performance goals or other conditions and may be payable in cash, shares of Common Stock or any combination of cash and shares of Common Stock as the Committee shall determine.
Dividend Equivalents
The Committee may grant dividend equivalents in connection with grants under the Plan. Dividend equivalents may be paid currently or accrued as contingent cash obligations and may be payable in cash or shares of Common Stock, and upon such terms as the appointed committee may establish, including the achievement of specific performance goals.
Change of Control of FlexShopper
In the event of a Change of Control, as that term is defined in the Plan, of our Company, the Committee has discretion to, among other things, accelerate the vesting of outstanding grants, cashout outstanding grants or exchange outstanding grants for similar grants of a successor company. A Change of Control of our Company will be deemed to have taken place upon:
Due to Institutional Lender/Personal Guarantees of Messrs. M. Rubin and Bernstein
On November 8, 2011, Anchor entered into a Rediscount Credit Facility with a commercial bank that was effective November 30, 2011 and replaced its prior credit facility. The facility has repaid and terminated with the sale of Anchor Assets between April and June, 2014. The maximum amount that can be borrowed under the facility was $10 million, and the Bank advanced up to 80% of Anchor's advances to its clients. Anchor paid interest on advances monthly at the 90 Day Libor Rate plus 6.25% and various other monthly fees as defined in the agreement. The agreement required that Anchor maintain at all times a ratio of debt to tangible net worth of no more than four to one (4:1). Management believes that FlexShopper is currently in compliance with this covenant. The agreement contained customary representations and warranties, events of default and limitations, among other provisions. The agreement was collateralized by a first lien on all Anchors' assets. FlexShopper’s President and CEO had provided validity guarantees to the Bank. Anchor owed this financial institution $3,240,942 as of December 31, 2013 and $-0- as of November 30, 2014. .
Related Party Notes
In December 2014, a principal stockholder, Marc Malaga, agreed to loan up to $1,000,000 to us on a secured basis. Mr. Malaga loaned us $500,000 on December 9, 2014 and agreed to advance up to an additional $500,000 at his sole discretion and upon our request. This loan is repayable upon demand with interest at the rate of 15% per annum.
On June 5, 2012, Anchor entered into two Promissory Notes totaling $400,000, one with Morry Rubin and the other with a major stockholder of FlexShopper. Each Promissory Note was for $200,000, had a 90 day term, and earned interest (payable monthly) at 15% per annum. The Promissory Notes were to assist Anchor in providing factoring and purchase order funding facilities to some of its clients. The Promissory Notes were subordinate to and supplemented Anchor's $10 Million Rediscount Credit Facility with a commercial bank. Both promissory notes were paid on September 5, 2012. Anchor paid $15,123 of interest on these notes for year ended December 31, 2012.
2007 Private Placement Offering
In 2007, Fordham Financial Management raised $6,712,500 in gross proceeds and was issued warrants to purchase 1,342,500 shares at an exercise price of $1.10 per share. Currently, their warrants (which are owned by principals of the Fordham and its assignees) expire on January 31, 2018. Fordham was the lead placement agent for our 2014 private placement offering described below.
2014 Private Placement Offering
From May 8, 2014 through October 2014, FlexShopper received gross proceeds of $6,501,101 from the sale of 11,820,187 shares offered through three co-placement agents in a private placement offering at an offering price of $.55 per share. The foregoing excludes the issuance at the final closing date of October 9, 2014 of seven year warrants to purchase 15% of the number of shares sold in the offering, which warrants were issued to the placement agents to purchase 1,773,027 shares, each at an exercise price of $.55 per share.
In addition, pursuant to the terms of the private placement offering, George Rubin and Morry F. Rubin, officers, directors and founders of FlexShopper, each completed the funding of their $500,000 loan to FlexShopper and converted these loans into shares of FlexShopper’s Common Stock at the same offering price per share as that paid by investors in the offering. An aggregate of 1,818,182 shares of FlexShopper’s Common Stock were issued to the Rubins from the conversion of their notes totaling $1,000,000.
As of December 31, 2014, we have 35,015,322 shares of Common Stock and 342,219 shares of Series 1 Preferred Stock issued and outstanding. In this respect, each one share of Series 1 Preferred Stock has the voting rights of 5.7877 common shares, but is convertible into only 5.8 common shares. Accordingly, the 342,219 shares of Series 1 Preferred Stock are convertible into 1,984,870 shares of Common Stock with the equivalent voting rights of 1,980,661 common shares. The following table sets forth certain information regarding the economicbeneficial ownership of our company Common Stockvoting stock as of August 2, 2018 by:
each person or group of | ||
each | ||
each of our directors; | ||
● | each person nominated to become director; and | |
● | all executive officers, directors and |
Unless otherwise noted below, the address of each person listed on the table is c/o FlexShopper, Inc. at 2700 North Military Trail, Ste. 200, Boca Raton, Florida 33431. To our knowledge, each person listed below has sole voting and investment power over the shares shown as beneficially owned except to the extent jointly owned with spouses or otherwise noted below.
Beneficial ownership is determined based onin accordance with the rules and regulations of the SEC. AThe information does not necessarily indicate ownership for any other purpose. Under these rules, shares of stock which a person has beneficial ownershipthe right to acquire (i.e., by the exercise of shares ifany option or the individual has the powerconversion of such person’s Series 1 or Series 2 Preferred Stock) within 60 days after March 5, 2018 are deemed to vote and/or disposebe beneficially owned and outstanding for purposes of shares. This power can be sole or shared, and direct or indirect. In computingcalculating the number of shares and the percentage beneficially owned by a person and the percentage ownership of that person,person. However, these shares of Common Stock subject to options held by that person are counted as outstanding in such cases where the option holder may exercise the options within 60 days of the date hereof. These shares, however, are not counted asdeemed to be beneficially owned and outstanding for the purposes of computing the percentage ownership ofbeneficially owned by any other person. ExceptThe percentage of shares owned as indicated in the footnotes to the table below, each person named in the table has sole voting and dispositive power with respect to theof August 2, 2018 is based upon 5,469,501 shares set forth oppositeof common stock outstanding on that person’s name.date.
Name of Beneficial Owner | Shares of Common Stock Beneficially Owned | % of Shares of Common Stock Beneficially Owned | ||||||
Morry F. Rubin (1) | 6,980,431 | 18.9 | ||||||
George Rubin (1) | 4,896,931 | 13.7 | ||||||
Ilissa and Brad Bernstein (2) | 3,700,000 | 10.1 | ||||||
T. Scott King (3) | 60,000 | * | ||||||
Carl Pradelli (4) | 247,500 | * | ||||||
All officers and directors as a group (five persons) (5) | 15,622,862 | 39.8 | ||||||
Buechel Family Ltd Partnership (6) | 1,627,235 | 4.6 | ||||||
Buechel Patient Care Research & Education Fund (7) | 1,276,665 | 3.6 | ||||||
Marc Malaga (8) | 3,227,254 | 8.9 |
Name and Address of Beneficial Owner | Shares of Common Stock | Number of Shares Underlying Convertible Preferred Stock, Options and Warrants | Total Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||||||||
Stockholders | ||||||||||||||||
B2 FIE V, LLC(1) | — | 2,469,136 | (2) | 2,469,136 | 31.1 | % | ||||||||||
Waterfall Asset Management, LLC(3) | 1,454,546 | — | 1,454,546 | 26.6 | % | |||||||||||
Morry F. Rubin(4) | 541,326 | (5) | 66,667 | (6) | 607,993 | 11.0 | % | |||||||||
George Rubin(7) | 285,526 | (8) | 66,667 | (9) | 352,193 | 6.6 | % | |||||||||
Directors and Executive Officers | ||||||||||||||||
James Allen | — | 24,000 | (10) | 24,000 | * | |||||||||||
Daniel Ballen | — | — | — | * | ||||||||||||
Brad Bernstein | 200,000 | (11) | 90,000 | (12) | 290,000 | 5.2 | % | |||||||||
H. Russell Heiser | 46,622 | 25,000 | (13) | 71,622 | 1.3 | % | ||||||||||
T. Scott King | — | 24,000 | (14) | 24,000 | * | |||||||||||
Marc Malaga(15) | 191,494 | 158,005 | (16) | 312,655 | 6.4 | % | ||||||||||
Carl Pradelli | 18,750 | (17) | 24,000 | (18) | 42,750 | * | ||||||||||
Ravi Radhakrishnan | 65,400 | 10,000 | (19) | 75,400 | 1.4 | % | ||||||||||
Katherine Verner | — | — | — | * | ||||||||||||
All directors and executive officers as a group (9 persons) | 522,266 | 355,005 | 877,271 | 15.1 | % |
_____________________
*Represents less than 1%
* | Less than one percent. |
(1) | Based solely on the Schedule 13D filed on June 21, 2016 by Pacific Investment Management Company LLC (“PIMCO”). According to the filing, B2 FIE V LLC (“B2 FIE”) was formed solely for the purpose of investing in FlexShopper. PIMCO BRAVO Fund II, L.P. (“Bravo II”) is the sole member of B2 FIE and operates as a pooled investment fund and invests (among other things) in operating companies. PIMCO GP XII, LLC (“PIMCO GP”) is the sole general partner of Bravo II. PIMCO is the sole managing member of PIMCO GP and has the power to make voting and investment decisions regarding the Preferred Stock held by B2 FIE. Each of Bravo II, PIMCO GP and PIMCO disclaims beneficial ownership of the Series 2 Preferred Stock except to the extent of its pecuniary interest therein. The address for this investor is 650 Newport Center Drive, Newport Beach, CA 92660. |
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(2) | Consists of shares of common stock issuable upon the conversion of 20,000 shares of Series 2 Preferred Stock. Each share of Series 2 Preferred Stock is convertible into 123.4568 shares of common stock, based on the Series 2 Preferred Stock per share price of $1,000 and a conversion rate of $8.10 per share. This offering will result in the conversion rate per share of Series 2 Preferred Stock increasing from 123.4568 shares of common stock to [●] shares. |
(3) | Based solely on the Schedule 13D filed by the Reporting Persons (as defined below) with the SEC on March 16, 2015. According to the filing, Waterfall Eden Master Fund, Ltd. (“WEMF”) owns 788,277 shares of common stock, or approximately 14.9% of the outstanding shares of common stock. Waterfall Delta Offshore Master Fund, LP (“WDOMF”) owns 442,065 shares of common stock, or approximately 8.4% of the outstanding shares of common stock. Waterfall Delta GP, LLC (“WDGP”), as general partner of WDOMF, may be deemed to share beneficial ownership of the shares owned by WDOMF. Waterfall Sandstone Fund, LP (“WSF”) owns 224,204 shares of common stock, or approximately 4.2% of the outstanding shares of common stock. Waterfall Sandstone GP, LLC (“WSGP” and, collectively with WEMF, WDOMF and WSF, the “Waterfall Funds”), as general partner of WSF, may be deemed to share beneficial ownership of the shares owned by WSF. Waterfall Asset Management, LLC (“Waterfall”), as the investment adviser to the Waterfall Funds, and Messrs. Thomas Capasse and Jack Ross, as members of Waterfall, may be deemed to share beneficial ownership of the 1,454,546 shares of common stock owned by the Waterfall Funds, or approximately 27.5% of the outstanding shares of common stock. Because of the relationships described above, Mr. Capasse, Mr. Ross, WEMF, WDGP, WDOMF, WSGP and WSF (collectively, the “Reporting Persons”) may be deemed to constitute a “group” within the meaning of Rule 13d-5 under the Exchange Act and, as such, each member of the group could be deemed to beneficially own, in the aggregate, all of the shares of common stock held by members of the group. The Reporting Persons do not admit that they constitute a group within the meaning of Rule 13d-5. Each of the Reporting Persons disclaims beneficial ownership of the shares of common stock referred to herein that such Reporting Person does not hold directly. Waterfall and Messrs. Thomas Capasse and Jack Ross share the power to vote and direct the disposition of the shares owned by the Waterfall Funds. WDGP may be deemed to share the power to vote and direct the disposition of the shares owned by the WDOMF, and WSGP may be deemed to share the power to vote and direct the disposition of the shares owned by WSF. The address for each of the Waterfall-associated companies is c/o Waterfall Management, LLC, 1140 Avenue of the Americas, 7th Floor, New York, NY 10036. |
(4) | Morry Rubin’s |
(5) | Based solely on the Schedule 13D filed on March 30, 2012 by Morry Rubin, as modified by the Form 4 filed on May 5, 2016, this amount consists of 515,126 shares of |
(6) | This amount consists of warrants to purchase |
(7) | George Rubin’s address is 120 Central Park South, New York City, New York 10019. |
(8) | According to |
(9) | Based solely on the Schedule 13D/A filed on November 30, 2015 by George Rubin. Consists of warrants to purchase |
(10) |
(11) |
(12) | Consists of vested options to purchase |
(13) | Consists of vested options to purchase |
(14) | Consists of vested options to purchase 24,000 shares |
(15) | The employment of Marc Malaga ended on July 27, 2017. |
(16) | Consists of warrants to purchase 66,667 shares of common stock, vested options to purchase 50,000 shares of common stock, and Series 1 Preferred Stock convertible into 41,338 shares of common stock. |
(17) | Consists of 6,250 shares held in a trust, of which Mr. Pradelli is trustee and |
(18) |
(19) | Consists of vested options to purchase 10,000 shares of common stock. |
47 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2016, our Board of Directors adopted a written policy with regard to related person transactions, which sets forth our procedures and standards for the review, approval or ratification of any transaction required to be reported in our filings with the SEC or in which one of our executive officers or directors has a direct or indirect material financial interest, with limited exceptions. Our policy is that the Corporate Governance and Nominating Committee shall review the material facts of all related person transactions (as defined in the related person transaction approval policy) and either approve or disapprove of the entry into any related person transaction. In the event that obtaining the advance approval of the Corporate Governance and Nominating Committee is not feasible, the Corporate Governance and Nominating Committee shall consider the related person transaction and, if the Corporate Governance and Nominating Committee determines it to be appropriate, may ratify the related person transaction. In determining whether to approve or ratify a related person transaction, the Corporate Governance and Nominating Committee will take into account, among other factors it deems appropriate, whether the related person transaction is on terms comparable to those available from an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.
Other than as described below, and compensation agreements and other arrangements which are described under the heading“Compensation And Other Information Concerning Directors And Officers” beginning on page 41, for the period from January 1, 2016 through the date of this prospectus there was not, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 in which any director, executive officer, holder of five percent or more of any class of our capital stock or any member of their immediate families had or will have a direct or indirect material interest.
Promissory Note
On February 11, 2016, FlexShopper entered into a promissory note for $1,000,000, in favor of Marc Malaga, who was then a vice president of the Company. Interest on the promissory note accrued at the rate of 15.0% per annum and all outstanding principal and accrued interest was payable on demand by Mr. Malaga. The promissory note was secured by substantially all of the Company’s assets. The promissory note was paid in full with interest amounting to $51,250 on June 13, 2016.
Sale of Series 2 Preferred Stock
On June 10, 2016, FlexShopper entered into a Subscription Agreement with B2 FIE, an entity affiliated with PIMCO, providing for the issuance and sale of 20,000 shares of Series 2 Preferred Stock for gross proceeds of $20.0 million. The Series 2 Preferred Stock was sold for $1,000 per share (the “Stated Value”) and accrues dividends on the Stated Value at an annual rate of 10%. Each share of Series 2 Preferred Stock is convertible at a conversion rate of $8.10 into approximately 123.4568 shares of Common Stock, subject to reduction pursuant to a weighted average anti-dilution provision contained in the Series 2 Preferred Stock’s Certificate of Designations. Pursuant to the Investor Rights Agreement entered into in connection with this sale of Series 2 Preferred Stock, B2 FIE nominated to the Board Daniel Ballen and Katherine Verner, who are both employees of PIMCO. Additionally, the Investor Rights Agreement provides that so long as B2 FIE and its affiliates’ Ownership Percentage (as defined in the Investor Rights Agreement) exceeds 20%, B2 FIE must approve any change of control transaction involving the Company at a valuation per share of the Series 2 Preferred Shares below the Stated Value and any increase in the size of the Board beyond nine directors. The Investor Rights Agreement also entitles the Investor to certain demand registration rights, piggyback registration rights, and a right of first offer on future issuances of equity securities of FlexShopper.
Amendments to Credit Agreement
On March 29, 2016, a wholly-owned indirect subsidiary of FlexShopper (the “Borrower”) entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement pursuant to which WE 2014-1, LLC (the “Lender”) waived the violation of the Equity Book Value covenant at December 31, 2015, as well as compliance with financial covenants (other than the unrestricted cash covenant) through the completion of FlexShopper’s raising at least $10 million in equity funding, which occurred upon the issuance of Series 2 Preferred Stock on June 10, 2016. In addition, the Fourth Amendment, among other things, provided that Borrower maintain Unrestricted Cash of at least $500,000 on each day and $1,000,000 at the end of each calendar month. The Lender is an entity affiliated with Waterfall Asset Management, LLC a large shareholder of the Company with the right to nominate one director to the Board pursuant to an Investor Rights Agreement.
On January 27, 2017, the Borrower entered into a fifth amendment (the “Omnibus Amendment”) to the Credit Agreement. The Omnibus Amendment amended the Credit Agreement to, among other things, extend the Commitment Termination Date (as defined in the Credit Agreement), 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.
On January 9, 2018, the Borrower entered into a letter agreement with the Lender to extend the Commitment Termination Date from April 1, 2018 to August 31, 2018.
On January 29, 2018 and January 30, 2018, we entered into letter agreements with Russ Heiser, FlexShopper’s Chief Financial Officer, and NRNS Capital Holdings LLC (“NRNS”), respectively (such letter agreements, together, the “Commitment Letters”), pursuant to which we issued a subordinated promissory note to each of Mr. Heiser and NRNS (together, the “Notes”). The Commitment Letters provide that Mr. Heiser and NRNS each shall make advances to the Borrower under the applicable Note in aggregate amounts up to $1,000,000 and $2,500,000, respectively. Upon issuance of the Notes, we drew $500,000 and a subsequent $500,000 on February 20, 2018, on the Note held by Mr. Heiser and $2,500,000 on the Note held by NRNS. Payments of principal and accrued interest are due and payable by us upon 30 days’ prior written notice from the applicable noteholder and we can prepay principal and interest at any time without penalty.
48 |
On April 3, 2018, the Company and WE2014-1, LLC amended the Credit Agreement (the “Sixth Amendment”) to increase advance rates thus providing additional borrowing capacity under the Credit Agreement. Furthermore, the Amendment provides that if the Company raises at least $20 million in equity funding (the “Equity Raise”) on or before July 31, 2018, the Commitment Termination Date (as defined in the Credit Agreement) will be extended to February 28, 2021; provided, however, if the Equity Raise is not completed on or before July 31, 2018, the Commitment Termination Date will be a date determined by the Administrative Agent in its sole discretion, but in no event earlier than July 31, 2018 or later than August 31, 2020. The Commitment Maturity Date (as defined in the Credit Agreement) is one year after the Commitment Termination Date. In addition, upon completion of the Equity Raise, the interest rate charged will be reduced to LIBOR plus eleven percent (11%) per annum.
On July 31, 2018, the Company and WE2014-1, LLC amended the Credit Agreement (the “Seventh Amendment”) to extend the deadline to raise at least $20 million in equity funding set forth in the Sixth Amendment to be August 31, 2018. If the Equity Raise is not completed on or before August 31, 2018, the Commitment Termination Date will be a date determined by the Lender in its sole discretion, but in no event earlier than August 31, 2018 or later than February 28, 2021.
Commitment Letter and Subordinated Promissory Note
On January 29, 2018, FlexShopper, LLC, a wholly-owned subsidiary of FlexShopper, entered into a letter agreement with Russ Heiser, our Chief Financial Officer, pursuant to which FlexShopper, LLC issued a subordinated promissory note to Mr. Heiser. The letter agreement provides that Mr. Heiser shall make advances to FlexShopper, LLC under the promissory note in an aggregate amount up to $1,000,000. Such amounts may be drawn until July 31, 2018 in one or more advances. As of March 5, 2018, FlexShopper, LLC had drawn $1,000,000 on such note. Payments of principal and accrued interest are due and payable by FlexShopper, LLC upon 30 days’ prior written notice from Mr. Heiser and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding under the promissory note bear interest at a rate equal to 3.00% per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement. Obligations under the promissory note are subordinated to obligations under the Credit Agreement.
The following is a brief description of our capital stock. This summary does not purport to be complete in all respects. This description is subject to and qualified entirely by the terms of our Restated Certificate of Incorporation (the “Certificate of Incorporation”), and our amended and restated bylaws, copies of which have been filed with the SEC and are also available upon request from us.
Authorized Capitalization
We have 15,500,000shares of capital stock authorized under our Certificate of Incorporation, consisting of 15,000,000 shares of common stock, $0.0001 par value per share, and 500,000 shares of preferred stock, $0.001 par value per share, of which 250,000 shares of preferred stock have been designated as Series 1 Convertible Preferred Stock and 25,000 shares of preferred stock have been designated as Series 2 Convertible Preferred Stock. As of June 30, 2018, we had 5,469,501 shares of common stock outstanding held of record by 519 stockholders and 239,405 shares of Series 1 Convertible Preferred Stock and 21,952 shares of Series 2 Convertible Preferred Stock outstanding. Our authorized but unissued shares of common and preferred stock are available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.
Common Stock
Based on the 5,469,501 shares of common stock outstanding as of June 30, 2018, and assuming the issuance by us of [●] shares of common stock in this offering, there will be [●] shares of common stock outstanding upon the closing of this offering (or [●] shares if the underwriters exercise their option to purchase additional shares of common stock in full).
Holders of our common stock are entitled to such dividends as may be declared by our board of directors out of funds legally available for such purpose. The shares of common stock are neither redeemable nor convertible. Holders of common stock have no preemptive or subscription rights to purchase any of our securities.
Each holder of our common stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled to cumulate votes in voting for directors.
In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive pro rata our assets, which are legally available for distribution, after payments of all debts and other liabilities. All of the outstanding shares of our common stock are fully paid and non-assessable. The shares of common stock offered by this prospectus will also be fully paid and non-assessable.
Our shares of common stock are listed on the Nasdaq Capital Market under the symbol “FPAY.”
Stock Options and Warrants
As of June 30, 2018, we had reserved the following shares of common stock for issuance pursuant to stock options, warrants, conversion of preferred stock and equity plans:
● | 377,303 shares of common stock issuable upon |
● | 425,400 shares of |
49 |
● | 1,000 shares of |
● | 749,000 shares of our common stock that are reserved for future issuance under our 2018 Omnibus Equity Compensation Plan; |
● | 145,197 shares of our common stock issuable upon conversion of outstanding shares of Series 1 Convertible Preferred Stock; |
● | an estimated [●] shares of our common stock issuable upon conversion of outstanding shares of Series 2 Convertible Preferred Stock, which includes the effect of an estimated anti-dilution reduction in the Series 2 Convertible Preferred Stock conversion price to $[●] based on an assumed offering price of $[●]; and |
● | an estimated [●] shares of our common stock issuable upon conversion of shares of Series 2 Convertible Preferred Stock issuable upon exercise of warrants, which includes the effect of an estimated anti-dilution reduction in the Series 2 Convertible Preferred Stock conversion price to $[●] based on an assumed offering price of $[●]. |
Securities Authorized for Issuance under Equity Compensation Plans.Preferred Stock
Our board of directors has the authority, without further action by the stockholders, to issue up to 500,000 shares of preferred stock from time to time in one or more series, including the Series 1 Convertible Preferred Stock and Series 2 Convertible Preferred Stock described below. The following summary information isboard of directors also has the authority to fix the designations, voting powers, preferences, privileges and relative rights and the limitations of any series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. The board of directors, without stockholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms that could delay or prevent a change of control of us or make removal of management more difficult. Additionally, the issuance of preferred stock may decrease the market price of the common stock and may adversely affect the voting, economic and other rights of the holders of common 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 shares of preferred stock are designated as Series 1 Convertible Preferred Stock, which ranks senior to common stock.
As of June 30, 2018, each share of Series 1 Convertible Preferred Stock was convertible into 0.60649 shares of the Company’s common stock, subject to certain anti-dilution rights. The holders of 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. Additionally, the holders of Series 1 Convertible Preferred Stock vote with holders of common stock, together as a single class, with each share of Series 1 Convertible Preferred Stock entitled to 5.7877 votes.
During the year ended December 31, 20142017, 3,660 shares of Series 1 Convertible Preferred Stock were converted into 2,220 shares of common stock. As of June 30, 2018, there were 239,405 shares of Series 1 Convertible Preferred Stock outstanding which are convertible into 145,197 shares of common stock.
Series 2 Convertible Preferred Stock
On June 10, 2016, the Company entered into a Subscription Agreement with B2 FIE, providing for the issuance and relatessale 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 our 2007 Plan described elsewhere hereina different investor for gross proceeds of $1.95 million at a subsequent closing.
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Pursuant to the authority expressly granted to the Company’s board of directors by the provisions of the Certificate of Incorporation, the board of directors created and designated 25,000 shares of Series 2 Convertible Preferred Stock, par value $0.001 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.
Each Series 2 Preferred Share is convertible at a conversion price of $8.10 into approximately 124 shares of common stock; provided, the conversion price is subject to reduction pursuant to a weighted average anti-dilution provision contained in the Series 2 Certificate of Designations. As a result of this offering, the conversion price of the Series 2 Preferred Shares will be decreased to a price determined by multiplying the current conversion price of $8.10 by a fraction, (i) the numerator of which we have granted options to purchase our Common Stock:
(a) | (b) | (c) | ||||||||||
Plan category | Number of shares of Common Stock to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) | |||||||||
Equity Compensation Plans covering 4,200,000 shares | 3,755,000 | $ | .87 | 445,000 | ||||||||
The following sets forth information with respectis the number of shares of common stock outstanding immediately prior to the selling securityholdersoffering (including shares of common stock issuable upon the exercise of warrants and conversion of outstanding preferred stock) plus the maximum number of shares of common stock that may be offered by such selling securityholders pursuant to this prospectus. The information set forth in the table below is based on information provided by or on behalf of the selling securityholders. An aggregate of up to 13,593,214 shares of common stock may be offeredconsideration received by the selling securityholders, which includes (i) 11,820,187 shares of common stock were sold inCompany from this offering would purchase at the placement offering between May 8, 2014 and October 9, 2014current conversion price, and (ii) 1,773,027 sharesthe denominator of common stock issuable upon exercise of placement agent warrants issued in October 2014 in connection with said private placement offering. The selling securityholders may offer all, some or none of their shares of common stock. We cannot advise you as to whether the selling securityholders will in fact sell any or all of such shares of common stock.
The following table sets forth certain information with respect to each selling securityholder for whom we are registering shares for resale to the public. The table includes selling securityholders who purchased common stock in the private placement and, with respect to the placement agent warrants,which is the number of shares of common stock issuable upon exercise of warrants issuedoutstanding immediately prior to the placement agents. The placement agent warrants are exercisable through October 9, 2021 at an exercise price of $.55 per share, and contain cashless exercise provisions. None of the placement agent warrants have been exercised at the date hereof. Theoffering (including shares of common stock underlyingissuable upon the placement agents’exercise of warrants are restricted from transfer,and conversion of outstanding preferred stock) plus the number of shares of common stock issued in this offering. The sale or pledgeof [●] shares of common stock in this offering for a periodper share price of six months from$[●] would thus result in the dateconversion price being decreased to $[●]. As a result, each Series 2 Preferred Share would be convertible into approximately [●] shares of this prospectus. See “Plan of Distribution” below for further information.
TABLE I
Selling Securityholder | Number of Shares of Common Stock Beneficially Owned | Shares Being Offered | Number of | Percent of | |||||||
Chris Hermann | 100,000 | 100,000 | -0- | -0- | |||||||
Theodore H. Hustead | 200,000 | 200,000 | -0- | -0- | |||||||
Francis Russo | 100,000 | 100,000 | -0- | -0- | |||||||
Mitchell Cohen | 20,000 | 20,000 | -0- | -0- | |||||||
Yogesh Farswani | 42,000 | 42,000 | -0- | -0- | |||||||
Hunse Investments, LP (7) | 100,000 | 100,000 | -0- | -0- | |||||||
Gemini Master Fund, Ltd. (11) | 300,000 | 300,000 | -0- | -0- | |||||||
Fred & Betty Bialek Revocable Trust Dated 12/20/2004 | 54,546 | 54,546 | -0- | -0- | |||||||
Charles C. Hunter | 50,000 | 50,000 | -0- | -0- |
Natan & Miryam Vishlitzky JTWROS | 100,000 | 100,000 | -0- | -0- | |||||||
Jason Eisenbeis Integration Consulting SEP-IRA | 50,000 | 50,000 | -0- | -0- | |||||||
Barry G. Haimes | 300,000 | 300,000 | -0- | -0- | |||||||
William J. Bolt | 100,000 | 100,00 | -0- | -0- | |||||||
Eugene L. Tinker IRA | 45,455 | 45,455 | -0- | -0- | |||||||
Anand Chakraborty | 100,000 | 100,000 | -0- | -0- | |||||||
Terry D. Milam | 45,455 | 45,455 | -0- | -0- | |||||||
Scott R. Schroeder | 100,000 | 100,000 | -0- | -0- | |||||||
Clayton A. Struve | 100,000 | 100,000 | -0- | -0- | |||||||
William H. & Stephanie J. Castigan JTWROS | 50,000 | 50,000 | -0- | -0- | |||||||
Mark Thomas | 50,000 | 50,000 | -0- | -0- | |||||||
Pamela Gingold | 50,000 | 50,000 | -0- | -0- | |||||||
Randall J. Wolfe | 100,000 | 100,000 | -0- | -0- | |||||||
Adolfo & Donna H. Carmona JTWROS | 400,000 | 400,000 | -0- | -0- | |||||||
Thomas Prasil | 100,000 | 100,000 | -0- | -0- | |||||||
Joseph O. Manzi | 200,000 | 200,000 | -0- | -0- | |||||||
Stephen Lesser | 45,455 | 45,455 | -0- | -0- | |||||||
Jason Eisenbeis | 36,364 | 36,364 | -0- | -0- | |||||||
Anthony Farello | 100,000 | 100,000 | -0- | -0- | |||||||
Curt A. Christeson | 50,000 | 50,000 | -0- | -0- | |||||||
RBC Capital Markets LLC Cust FBO Frank Magdlen IRA | 45,455 | 45,455 | -0- | -0- | |||||||
George Blanton and Denise Blanton, as TTEE UTA dated2/2/08 | 50,000 | 50,000 | -0- | -0- | |||||||
Donald T. Clemetson | 50,000 | 50,000 | -0- | -0- | |||||||
Brett W. Wyland Trustee | 50,000 | 50,000 | -0- | -0- | |||||||
Paul Russo | 25,000 | 25,000 | -0- | -0- | |||||||
Barbara Lile-Duzsik | 50,000 | 50,000 | -0- | -0- | |||||||
Allen Gabriel | 25,000 | 25,000 | -0- | -0- | |||||||
Gil Bakal | 40,900 | 40,909 | -0- | -0- | |||||||
Renea Johnson | 50,000 | 50,000 | -0- | -0- | |||||||
C. Stephen Cochennet Trustee for C. Stephen Cochennet | 100,000 | 100,000 | -0- | -0- | |||||||
Howard C. Hutt | 200,000 | 200,000 | -0- | -0- | |||||||
Millenium Trust Company Custodian FBO Brenna Tanzosh IRA | 100,000 | 100,000 | -0- | -0- | |||||||
MIS Equity Strategies, LP (12) | 100,000 | 100,000 | -0- | -0- | |||||||
Kathleen Lockwood | 50,000 | 50,000 | -0- | -0- | |||||||
Caisson Breakwater Global Opportunity Fund, LP (9) | 400,000 | 400,000 | -0- | -0- | |||||||
Caisson Breakwater Fund LTD (9) | 400,000 | 200,000 | -0- | -0- | |||||||
Joseph Chulick III Revocable Trust dtd 7/27/2001 | 25,455 | 25,455 | -0- | * | |||||||
The Anthony & Angela Family Trust | 50,000 | 50,000 | -0- | -0- |
AAR Account Family Limited Partnership (8) | 100,000 | 100,000 | -0- | -0- | |||||||
Howard Richmond | 41,364 | 41,364 | -0- | -0- | |||||||
Stephen Shumpert | 100,000 | 100,000 | -0- | -0- | |||||||
Florence K. Simons Trust, Florence K. Simons, Trustee | 50,000 | 50,000 | -0- | -0- | |||||||
Abraham Bakal | 36,364 | 36,364 | -0- | * | |||||||
SBI Investments LLC, 2014-0, Att: Sea Otter Global Ventures, L.L.C. as Manager (13) | 200,000 | 200,000 | -0- | -0- | |||||||
Jason Chiriano | 25,000 | 25,000 | -0- | -0- | |||||||
John Andrew Elliott | 100,000 | 100,000 | -0- | -0- | |||||||
Brad M. King | 100,000 | 100,000 | -0- | -0- | |||||||
Roger Ramsey | 100,000 | 100,000 | -0- | -0- | |||||||
Mitch Mandich | 100,000 | 100,000 | -0- | -0- | |||||||
Francis E. Belmont | 22,728 | 22,728 | -0- | -0- | |||||||
Euram International Inc., c/o Franger LLC (10) | 22,728 | 22,728 | -0- | -0- | |||||||
Adam McCarthy | 50,000 | 50,000 | -0- | -0- | |||||||
Royce L. Felder | 50,000 | 50,000 | -0- | -0- | |||||||
Kerry F. Walsh | 50,000 | 50,000 | -0- | -0- | |||||||
Lynn Johnston | 100,000 | 100,000 | -0- | -0- | |||||||
Jonathan R.A.E. Talbot | 50,000 | 50,000 | -0- | -0- | |||||||
Minrec Limited c/o Guy Fenton (14) | 50,000 | 50,000 | -0- | -0- | |||||||
Mark Whitmore | 50,000 | 50,000 | -0- | -0- | |||||||
Gerald & Margaret Saggese JTWROS | 100,000 | 100,000 | -0- | -0- | |||||||
RBC Capital Markets, LLC, Custodian FBO Douglas Merrihew | 90,909 | 90,909 | -0- | -0- | |||||||
Charlie D. Langwell | 50,000 | 50,000 | -0- | -0- | |||||||
Papken S. Der Torossian | 100,000 | 100,000 | -0- | -0- | |||||||
John V. Aksak | 50,000 | 50,000 | -0- | -0- | |||||||
Ronald E. Wittmer & Janet M. Wittmer JTWROS | 100,000 | 100,000 | -0- | -0- | |||||||
Michael Keegan McGrath | 100,000 | 100,000 | -0- | -0- | |||||||
Wayne Winget and Marsha Winget JTWROS | 50,000 | 50,000 | -0- | -0- | |||||||
Russell Smith | 100,000 | 100,000 | -0- | -0- | |||||||
Grant Wells | 100,000 | 100,000 | -0- | -0- | |||||||
Eldon L. Buesing | 50,000 | 50,000 | -0- | -0- | |||||||
Trent Agnew | 50,000 | 50,000 | -0- | -0- | |||||||
James Laird | 200,000 | 200,000 | -0- | -0- | |||||||
John Musser | 50,000 | 50,000 | -0- | -0- | |||||||
Richard J. Glover | 100,000 | 100,000 | -0- | -0- | |||||||
Dale Schaffer | 50,000 | 50,000 | -0- | -0- | |||||||
Richard Vaclavik | 50,000 | 50,000 | -0- | -0- | |||||||
Theodore Kutzin, MD | 200,000 | 200,000 | -0- | -0- |
RBC Capital Markets LLC, Custodian FBO William D. Reents | 150,000 | 150,000 | -0- | -0- | |||||||
Robert & Theresa Jeffers JTWROS | 50,000 | 50,000 | -0- | -0- | |||||||
James M. Parr | 30,000 | 30,000 | -0- | -0- | |||||||
Guy V. Wood | 100,000 | 100,000 | -0- | -0- | |||||||
Alfred Bryant | 50,000 | 50,000 | -0- | -0- | |||||||
Dennis & Allison O’Hara JTWROS | 50,000 | 50,000 | -0- | -0- | |||||||
Edwin Ludvik | 500,000 | 500,000 | -0- | -0- | |||||||
Christopher Stephen Gibbs | 50,000 | 50,000 | -0- | -0- | |||||||
Gary Malloy | 50,000 | 50,000 | -0- | -0- | |||||||
Christopher Howard Raine | 100,000 | 100,000 | -0- | -0- | |||||||
Premchand Beharry/Sacha Beharry JTWROS | 297,880 | 200,000 | 97,880 | * | |||||||
Christopher T. Payne and Virginia W. Payne JTWROS | 200,000 | 200,000 | -0- | -0- | |||||||
Jerry E. Winn, Sr. | 200,000 | 200,000 | -0- | -0- | |||||||
Bruce P. Inglis and Nancy M. Inglis JTWROS | 158,300 | 100,000 | 58,300 | * | |||||||
William Rabetz | 50,000 | 50,000 | -0- | -0- | |||||||
Sean Thomas Costelloe | 50,000 | 50,000 | -0- | -0- | |||||||
Avijit Ghosh | 50,000 | 50,000 | -0- | -0- | |||||||
Dr. Samuel Gaby | 50,000 | 50,000 | -0- | -0- | |||||||
Daniel A. Cifonelli | 200,000 | 200,000 | -0- | -0- | |||||||
Cari Olson | 100,000 | 100,000 | -0- | * | |||||||
David Cherry | 209,118 | 100,000 | 109,118 | * | |||||||
Chad Everett Cook | 100,000 | 100,000 | -0- | -0- | |||||||
Marc H. Flicker | 81,.295 | 50,000 | 31,295 | * | |||||||
Buechel Family Ltd. Partnership (1) | 1,627,235 | 350,000 | 1,277,235 | 3.4 | |||||||
Richard D. Klotz | 100,000 | 100,000 | -0- | -0- | |||||||
Steven Odell | 169,595 | 100,000 | 69,595 | * | |||||||
Florine Elizabeth Cook | 50,000 | 50,000 | -0- | -0- | |||||||
Thomas A. Buck & Barbara A. Buck JTWROS | 100,000 | 100,000 | -0- | -0- | |||||||
Roman Klein | 100,000 | 100,000 | -0- | -0- | |||||||
Jason P. and Paris A. Klein Living Trust of 2006 | 100,000 | 100,000 | -0- | -0- | |||||||
Abdul M. Jamal | 100,000 | 100,000 | -0- | -0- | |||||||
Spring Sunshine Corporation (2) | 50,000 | 50,000 | -0- | -0- | |||||||
Lirtzman Group, LLC (3) | 100,000 | 100,000 | -0- | -0- | |||||||
Kenneth Kades | 100,000 | 100,000 | -0- | -0- | |||||||
Luanne Jones | 100,000 | 100,000 | -0- | -0- | |||||||
Fordham Financial Management, Inc.(4)# | 786,603 | 786,603 | -0- | -0- | |||||||
Paulson Investment Company, LLC.(5)# | 671,915 | 671,915 | -0- | -0- | |||||||
Spartan Capital Securities LLC (6)# | 314,509 | 314,509 | -0- | -0- | |||||||
No material relationships exist between any of the selling securityholders and us nor have any such material relationships existed within the past three years, except as follows:
The selling securityholders listedholders of the Series 2 Preferred Shares 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 the average closing price during any 45 day consecutive trading day period or Change of Control Transaction (as defined in the above tables may have sold or transferred, in transactions exempt fromSeries 2 Certificate of Designations) values the registration requirements of the Securities Act, some or all of their common stock since the date on which the informationat 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 above table is presented. Information about the selling securityholders may change over time. Any change in this information will be set forth in prospectus supplements, if required.
We have authorized 65 million sharesSeries 2 Certificate of Common Stock, $.0001 par value and 10 million shares of Preferred Stock, $.001 par value as of the date of this Prospectus. As of the date of this Prospectus, we have outstanding 35,015,321 shares of Common Stock and 342,819 sharesDesignations), holders of Series 12 Preferred Stock convertible into 1,988.35014 shares of Common Stock.
CommonStock
Holders of our Common Stock are entitled to one vote for each Share held at all meetings of stockholders (and written actions in lieu of meetings). Dividends may be declared and paid on our Common Stock from funds lawfully available therefore as, if and when determined by our Board and subject to any preferential rights of any then outstanding preferred stock. We do not intend to pay cash dividends on our Common Stock. Upon the voluntary or involuntary liquidation, sale, merger, consolidation, dissolution or winding up of FlexShopper, holders of Shares of Common Stock willshall be entitled to receive allout of ourthe assets available for distributionof the Company prior to stockholders, subjectand in preference to any preferential rights of any then outstanding preferred stock. Our Common Stock is not redeemable.
Preferred Stock
Our Board is authorized to issue from time to time, subject to any limitation prescribed by law, without further stockholder approval, up to 10,000,000 Shares of Preferred Stock, $.001 par value, in one or more series. Preferred Stock will have such number of Shares, designations, preferences, voting powers, qualificationsthe common stock and special or relative rights or privileges as determined by our Board, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights.
We have designated 2,000,000 Shares of our Preferred Stock as Series 1 Convertible Preferred Stock an amount equal to the greater of which 342,819(1) the Stated Value, plus any accrued and unpaid dividends thereon, and (2) the amount per share as would have been payable had all Series 2 Preferred Shares been converted to common stock immediately before the Liquidation Event or Deemed Liquidation Event.
As of June 30, 2018, there were 21,952 shares of Series 12 Convertible Preferred Stock are currently outstanding. The Series 1 Preferred Stock shall rank senioroutstanding convertible into 2,710,124 shares of common stock; however, such amount will increase as to the payment of dividends and in liquidation as to the Common Stock. The following sets forth the rights, terms and preferencesa result of the Series 1 Preferred Stock. Following is a brief summary ofoffering due to the terms of the Series 1 Preferred Stock:
Convertibility
Each share of Series 1 Preferred Stock is currently convertible into 5.8 shares of FlexShopper’s Common Stock at any time at the option of the holder, subject to adjustment in the event of stock splits, stock dividends, combinations, reclassifications and alike and to weighted average anti-dilution protection for sales of Common Stock at a purchase price below $1.00 per share.provision discussed above.
Dividends
Since January 1, 2010, no preferential dividends are payable on the Series 1 Preferred Stock.
Voting Rights
Each shareAnti-Takeover Effects of Series 1 Preferred Stock has the voting rights equivalent to 5.7877 shares of Common Stock on all Common Stockholder matters.
Liquidation Rights
Each share of Series 1 Preferred Stock has a liquidation preference of $5.00 per share prior to the payment of any distribution to the Common Stockholders.
Our Transfer Agent
The transfer agent for our securities is Continental Stock Transfer & Trust Company, New York, NY.
Certain Anti-takeover Provisions of Delaware Law and Our Charter Documents
The following is a summary of certain provisions of Delaware law, our Certificate of Incorporation and our bylaws. This summary does not purport to be complete and is qualified in its entirety by reference to the corporate law of Delaware and our Certificate of Incorporation and By-Lawsbylaws.
As a
Effect of Delaware corporation, weAnti-Takeover Statute. We are governed by the provisions ofsubject to Section 203 of the Delaware General Corporation Law, which generally has an anti-takeover law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination (as defined below) with any interested stockholder (as defined below) for a period of three years following the date that the stockholder became an interested stockholder, unless:
● | prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; |
● | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares of voting stock outstanding (but not the voting stock owned by the interested stockholder) those shares owned by persons who are directors and officers and by excluding employee stock plans in which employee participants do not have the right to determine whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
● | on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. |
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Section 203 defines “business combination” to include the following:
● | any merger or consolidation involving the corporation and the interested stockholder; |
● | any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; |
● | subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
● | subject to limited exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or | |
● | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation, or who beneficially owns 15% or more of the outstanding voting stock of the corporation at any time within a three-year period immediately prior to the date of determining whether such person is an interested stockholder, and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
Our Charter Documents. Our charter documents include provisions that may have the effect for transactions not approvedof discouraging, delaying or preventing a change in advance by our board of directors. This may discourage takeover attemptscontrol or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares of common stock held by shareholders. In general, Section 203 prohibits a publicly held Delaware corporation from engagingour stockholders. Certain of these provisions are summarized in a “business combination” with an “interested stockholder” for a three-year periodthe following the time that such stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock.paragraphs.
Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:
the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the shareholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.
Authorized but unissued shares
Our authorized but unissued sharescommon stock. One of common stock and preferred stock are available for future issuances without shareholder approval and could be utilized for a varietythe effects of corporate purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans. Thethe existence of authorized but unissued and unreserved common stock and preferred stock could rendermay be to enable our board of directors to make more difficult or to discourage an attempt to obtain control of usour Company by means of a merger, tender offer, proxy contest tender offer, merger or otherwise.
Removalotherwise, and thereby to protect the continuity of directors
Our by-laws provide that a director on our board of directors may be removed from office with or without cause and only by the affirmative vote of the holders of more than 50% of the shares then entitled to vote at an election of our directors.
Limitation on liability and indemnification of directors and officers
Our by-laws provide that our directors and officers shall be indemnified by us to the fullest extent authorized by Delaware law as it now exists or maymanagement. If, in the future be amended, against all expenses and liabilities reasonably incurred in connection with their service for or on our behalf.. Our by-laws also permit us to secure insurance on behalfdue exercise of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit indemnification.
These provisions may discourage shareholders from bringing a lawsuit against our directors for breach of theirits fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, insurance and the indemnity agreements are necessary to attract and retain talented and experienced directors and officers.
There is no pending litigation or proceeding involving any of our directors or officers where indemnification by us would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933, or the Act, may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
Amendment of our Bylaws
Under our by-laws,obligations, the board of directors is expressly authorizedwere to amend, alter, changedetermine that a takeover proposal was not in our best interest, such shares could be issued by the board of directors without stockholder approval in one or repeal our bylaws. The shareholders also havemore transactions that might prevent or render more difficult or costly the abilitycompletion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, by putting a substantial voting block in institutional or other hands that might undertake to amend, alter, changesupport the position of the incumbent board of directors, by effecting an acquisition that might complicate or repeal ourpreclude the takeover, or otherwise.
Cumulative Voting. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors.
Vacancies. Our bylawsprovide that all vacancies may be filled bythe affirmative vote of a majority of directors then in office, even if less than a quorum.
Special Meeting of Stockholders. Our bylaws provide that special meetings of our stockholders may be called by the chairman of the board of directors, the chief executive officer, or the president (in the absence of the chief executive officer) or by resolution of the board of directors or by the secretary at the request in writing of stockholders owning a majority of the voting power of the outstanding shares.voting stock.
Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee thereof.
Amendment of Bylaws. Our directors are expressly authorized to amend our bylaws.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, thereThinkEquity, a division of Fordham Financial Management, Inc. is acting as representative of the underwriters of the offering. We have entered into an underwriting agreement dated [●], 2018 with the representative. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to each underwriter named below, and each underwriter named below has been a very limited public market for shares of our common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise of outstanding options or warrants or upon conversion of Series 1 Preferred Stock, inseverally agreed to purchase, at the public market afteroffering price less the underwriting discounts set forth on the cover page of this offering, orprospectus, the possibilitynumber of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.
At December 31, 2014, a total of 35,015,322 shares of our common stock are outstanding. Of these outstanding shares, the 11,820,187 shares of common stock registered on the registration statement (excluding 1,773,027shares of common stock issuable on exercise of placement agent warrants) that includes this prospectus will be freely tradablelisted next to its name in the public market without restriction or further registration under the Securities Act, unless these shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act.following table:
The remaining 23,195,135 shares of outstanding common stock are either in the public float or “restricted securities,” as that term is defined in Rule 144 under the Securities Act. An additional 3,755,000 shares, 5,115,531 shares (inclusive of 1,773,027 shares underlying warrants registered for resale) and 1,988,350 shares may be issued upon exercise of outstanding options, warrants or conversion of Series 1 Preferred Stock, respectively. Restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 under the Securities Act.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell such shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to sell such shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell within any three-month period, a number of shares that does not exceed the greater of:
ThinkEquity, a division of Fordham Financial Management, Inc. | [●] | ||||
Total | [●] |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates
The underwriters are also subjectcommitted to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Stock Options
We intend to file a registration statement on Form S-8 under the Securities Act coveringpurchase all of the shares of our common stock subject to options outstanding or reserved for issuance under our stock plan and shares of our common stock issued upon the exercise of options. However, the shares registered on Form S-8 will be subject to volume limitations, manner of sale, notice and public information requirements of Rule 144.
The selling securityholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock received after the date of this prospectus from a selling securityholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. We have not been advised of any arrangements by the selling securityholders for the sale of any of the common stock owned by them.
The selling securityholders may use any one or more of the following methods when disposing of shares or interests therein:
The selling securityholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling securityholders to include the pledgee, transferee or other successors in interest as selling securityholders under this prospectus. The selling securityholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus; provided, however, that prior to any such transfer the following information (or such other information as may be required by the federal securities laws from time to time) with respect to each such selling beneficial owner must be added to the prospectus by way of a prospectus supplement or post-effective amendment, as appropriate: (1) the name of the selling beneficial owner; (2) any material relationship the selling beneficial owner has had within the past three years with us or any of our predecessors or affiliates; (3) the amount of securities of the class owned by such security beneficial owner before the transfer; (4) the amount to be offered for the security beneficial owner’s account; and (5) the amount and (if one percent or more) the percentage of the class to be owned by such security beneficial owner after the transfer is complete.
In connection with the sale of our common stock or interests therein, the selling securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales, if permitted, of the common stock in the course of hedging the positions they assume. The selling securityholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling securityholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling securityholders from the sale of the common stock offered by them will beus, other than those covered by the over-allotment option to purchase priceadditional shares described below, if they purchase any shares. The obligations of the common stock less discounts or commissions, if any. Eachunderwriters may be terminated upon the occurrence of certain events specified in the selling securityholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from sales of common stock by the selling securityholders. If the selling securityholders, namely, Fordham Financial Management, Inc. (“FFM”), Paulson Investment Company, LLC. (“Paulson”) and or Spartan Capital Securities, LLC (“Spartan”) exercise their placement agent warrants for cash, then we will receive the proceeds of such exercise.
We intend to file an Issuer Notification with FINRA with respectunderwriting agreement. Furthermore, pursuant to the filing of this registration statement withunderwriting agreement, the Securities and Exchange Commission under the Securities Act of 1933, as amended. It is anticipated that each of FFM, Paulson and Spartan will then make respective filings with FINRA to permit it to participate in the resale of common stock by the selling securityholders, under which (i) FFM, Paulson and Spartan, have each agreed it will not receive cash commissions or any other compensation from any selling securityholder exceeding 5% of the principal amount of the trade, and (ii) FFM, Paulson and Spartan each will not sell, transfer, assign, pledge, or hypothecate the placement agent warrants it received in connection with the placement or, on exercise thereof, the underlying shares of common stock, or engage in any hedge, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the placement agent warrants or underlying shares of common stock for a period of 180 days immediately following the date of effectiveness or commencement of sales by the selling securityholders. These restrictionsunderwriters’ obligations are subject to specified exceptions set forth in FINRA Rule 5110(g)(2).
The selling securityholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteriacustomary conditions, representations and conform to the requirements of that rule.
The selling securityholders and any underwriters, broker-dealers or agents that participatewarranties contained in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling securityholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of the selling securityholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, and any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.
The selling securityholders and any other person participating in the distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of
common stockagreement, such as receipt by the selling securityholdersunderwriters of officers’ certificates and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to shares of our common stock.legal opinions.
We will make copies of this prospectus (as it may be supplemented or amended from timehave agreed to time) available toindemnify the selling securityholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling securityholders may indemnify any broker-dealer that participates in transactions involving the sale of the sharesunderwriters against certain liabilities, including liabilities arising under the Securities Act. We may also be indemnified by the selling securityholders against civilspecified liabilities, including liabilities under the Securities Act, whichand to contribute to payments the underwriters may arise from any information furnishedbe required to usmake in respect thereof.
The underwriters are offering the common stock, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the selling securityholder expressly for useunderwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in this prospectus.whole or in part.
We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of [●] additional shares (15% of the shares of common stock sold in this offering) from us to cover over-allotments, if any. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $ and the total net proceeds, before expenses, to us will be $ ..
Discounts, Commissions and Reimbursement
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
Per Share | Total with no Over-Allotment | Total with Over-Allotment | ||||||||||
Public offering price | $ | $ | $ | |||||||||
Underwriting discount (7.0%) | $ | $ | $ | |||||||||
Proceeds, before expenses, to us | $ | $ | $ |
The underwriters propose to offer the securities to the public at the public offering price set forth on the cover of this prospectus. In addition, the underwriters may offer some of the shares to other securities dealers at such price less a concession of $ per share. If all of the securities offered by us are not sold at the public offering price, the representative may change the offering price and other selling terms by means of a supplement to this prospectus.
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We have also agreed to pay certain expenses of the representative relating to the offering, subject to a cap of $100,000, including: (a) all filing fees and communication expenses associated with the review of this offering by the Financial Industry Regulatory Authority, Inc. (“FINRA”); (b) fees, expenses and disbursements relating to background checks of our officers and directors, in an amount not to exceed $15,000; (c) fees, expenses and disbursements relating to the registration, qualification or exemption of securities offered under the securities laws of such states and foreign jurisdictions designated by the representative; (d) fees and expenses of the representative’s legal counsel; (e) the costs associated with bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones; (f) $29,500 for fees and expenses for the underwriters’ use of book-building, prospectus tracking and compliance software for this offering; (g) fees and expenses for data services and communications expenses; and (h) up to $20,000 of the representative’s actual accountable road show expenses for the offering.
We have paid an advance of $25,000 to the representative, which will be applied against actual out-of-pocket accountable expenses and reimbursed to the Company to the extent any portion thereof is not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).
We estimate that the total expenses of the offering payable by us, excluding the total underwriting discount, will be approximately $300,000.
Discretionary Accounts
The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.
Lock-Up Agreements
Pursuant to “lock-up” agreements, we and our executive officers, directors and 5% or greater holders of outstanding common stock have agreed, subject to limited exceptions, without the prior written consent of the underwriters’ representative not to directly or indirectly offer to sell, sell, pledge or otherwise transfer or dispose of any of shares of (or enter into any transaction or device that is designed to, or could be expected to, result in the transfer or disposition by any person at any time in the future of) our common stock, enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of our common stock, make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any of our other securities or publicly disclose the intention to do any of the foregoing, subject to customary exceptions, for a period of 180 days from the date of this prospectus, in the case of our directors and officers, and for a period of 90 days from the date of this prospectus, in the case of us and any 5% or greater holder of outstanding common stock.
Right of First Refusal
We have granted the representative a right of first refusal, for a period of 6 months from the consummation of this offering, to act as sole investment banker, book-runner and/or placement agent, at the representative’s sole discretion, for each and every future public and private equity and debt offering, including all equity linked financings (each, a “Subject Transaction”), during such 6 month period, of the Company, or any successor to or subsidiary of the Company, on terms and conditions customary to the representative for such Subject Transactions.
Electronic Offer, Sale and Distribution of Securities
A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling securityholdersgroup members. The representative may agree to keepallocate a number of securities to underwriters and selling group members for sale to its online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus constitutesforms a part, effective untilhas not been approved or endorsed by us, and should not be relied upon by investors.
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Listing
Our common stock is listed on the earlierNasdaq Capital Market under the symbol “FPAY.”
Stabilization
In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.
Stabilizing transactions permit bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum, and are engaged in for the purpose of (1) such time as allpreventing or retarding a decline in the market price of the shares while the offering is in progress.
Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option and/or purchasing shares in the open market.
Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which they may purchase shares through exercise of the over-allotment option. If the underwriters sell more shares than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering.
Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the shares originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.
Passive market making
In connection with this offering, underwriters and selling group members may engage in passive market making transactions in our common stock on the Nasdaq Capital Market in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.
Other Relationships
Certain of the underwriters and their affiliates may in the future provide various investment banking, commercial banking and other financial services for us and our affiliates for which they may in the future receive customary fees.
Offer restrictions outside the United States
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
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Australia
This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer to the offeree under this prospectus.
China
The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional investors.”
European Economic Area—Belgium, Germany, Luxembourg and Netherlands
The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities.
An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:
● | to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; |
● | to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements); |
56 |
● | to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of the Company or any underwriter for any such offer; or |
● | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus Directive. |
France
This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.
Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D. 744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.
Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.
Ireland
The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.
Israel
The securities offered by this prospectus have not been disposedapproved or disapproved by the Israeli Securities Authority (the ISA), or ISA, nor have such securities been registered for sale in Israel. The shares may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public of the securities offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.
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Italy
The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Societ—$$—Aga e la Borsa, “CONSOB” pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:
● | to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and |
● | in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended. |
● | Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be: |
● | made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and |
● | in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws. |
Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors.
Japan
The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the registration statement,FIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or (2)sold, directly or indirectly, in Japan or to, or for the datebenefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to that effect.
Portugal
This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissăo do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
Sweden
This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
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Switzerland
The securities may not be publicly offered in Switzerland and will not be listed on which the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA).
This document is personal to the recipient only and not for general circulation in Switzerland.
United Arab Emirates
Neither this document nor the securities have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates, nor has the Company received authorization or licensing from the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the securities within the United Arab Emirates. This document does not constitute and may not be used for the purpose of an offer or invitation. No services relating to the securities, including the receipt of applications and/or the allotment or redemption of such shares, may be rendered within the United Arab Emirates by the Company.
No offer or invitation to subscribe for securities is valid or permitted in the Dubai International Financial Centre.
United Kingdom
Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”)) has been published or is intended to be published in respect of the securities. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to Rule 144section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.
Any invitation or inducement to engage in investment activity (within the meaning of the Securities Act.
To our knowledge, no selling securityholder is a broker-dealer or an affiliatesection 21 of a broker-dealer, except Fordham Financial Management, Inc., Paulson Investment Company, LLC. and Spartan Capital Securities, LLCFSMA) received placement agent warrants to purchase 786,603 shares, 671,915 shares and 314,509 shares, respectively, of our common stock as part of its compensation in connection with the placement. All placement agent warrantsissue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to the Company.
In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments to which this document relates are exercisable at $.55 per share through October 9, 2021.available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
Canada
The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws. Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor. Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI33-105 regarding underwriter conflicts of interest in connection with this offering.
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The validity of the shares of common stock offered hereby will be passed upon for us by Morse & Morse, PLLC, 1400 Old Country Road, Ste. 302, Westbury, NY 11590. The partners of Morse & Morse, PLLC own shares of common stock and optionsK&L Gates LLP, Charlotte, North Carolina. Sichenzia Ross Ference Kesner LLP, New York, New York, has acted as counsel for the underwriters in connection with certain legal matters related to purchase additional shares of common stock, representing less than 2% of the outstanding common stock.this offering.
Our consolidated financial statements as of December 31, 2013 and 2012 and for each of the two years in the period ended December 31, 2013 included in this prospectus have been so included in reliance on the report of Scott and Company LLC, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being offered. The registration statement, including the attached exhibits, contains additional relevant information about us and our common stock. This prospectus does not contain all of the information set forth in the registration statement and the exhibits thereto. The rules and regulations of the SEC allow us to omit from this prospectus certain information included in the registration statement.
For further information about us and our common stock, you may inspect a copy of the registration statement and the exhibits to the registration statement without charge at the offices of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of the registration statement from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549 upon the payment of the prescribed fees.
You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website atwww.sec.gov that contains reports, proxy and information statements and other information that we and other public companies file electronically with the SEC. You can also inspect our registration statement and our other public filings on this website, and may review future filings we make with the SEC at this website.
FLEXSHOPPER, INC.
CONTENTS
Report of Independent Registered Public Accounting FirmEXPERTS
The Board of Directors and Stockholders
FlexShopper, Inc. and Subsidiaries (formerly Anchor Funding Services, Inc.)
We have audited the accompanying consolidated balance sheets of FlexShopper, Inc. and subsidiaries (the “Company”)Subsidiaries as of December 31, 20132017 and 2012,2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years then ended, have been audited by EisnerAmper LLP, independent registered public accounting firm, as stated in the period ended December 31, 2013. These consolidatedtheir report which is incorporated herein. Such financial statements arehave been incorporated herein in reliance on the responsibilityreport of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including exhibits thereto, under the Securities Act that registers the shares of common stock to be sold in this offering. This prospectus does not contain all the information contained in the registration statement and the exhibits filed as part of the registration statement. For further information with respect to us and our securities, we refer you to the registration statement and the exhibits filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copies of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit.
We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You can read our SEC filings, including the registration statement, at the SEC’s website at www.sec.gov.
You may read and copy this information at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549, at prescribed rates. You may obtain information regarding the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Our website can be accessed at www.flexshopper.com. The information contained on, or that may be obtained from, our website is not, and shall not be deemed to be, a part of this prospectus.
The representations, warranties and covenants made by us in any agreement that is filed as an exhibit to the registration statement of which this prospectus is a part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you. Moreover, such representations, warranties or covenants were made as of an earlier date. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.
This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted our auditsby third parties. Industry publications and third-party research, surveys and studies generally indicate that they have gathered their information from sources they believe to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.
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FLEXSHOPPER, INC.
CONTENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017 | PAGE | |
UNAUDITEDFINANCIAL STATEMENTS | ||
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (Unaudited) | F-2 | |
Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 | F-3 | |
Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2018 | F-4 | |
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 | F-5 | |
Notes to Consolidated Financial Statements for the six months ended June 30, 2018 and 2017 | F-6 | |
YEARS ENDED DECEMBER 31, 2017 AND 2016 | ||
FINANCIAL STATEMENTS | ||
Report of Independent Registered Public Accounting Firm | F-15 | |
Consolidated Balance Sheets as of December 31, 2017 and 2016 | F-16 | |
Consolidated Statements of Operations | F-17 | |
Consolidated Statements of Stockholders’ Equity | F-18 | |
Consolidated Statements of Cash Flows | F-19 | |
Notes to Consolidated Financial Statements | F-20 |
F-1
CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 2,055,948 | $ | 4,968,915 | ||||
Accounts receivable, net | 4,104,683 | 4,259,468 | ||||||
Prepaid expenses | 382,758 | 321,035 | ||||||
Lease merchandise, net | 17,806,583 | 21,415,322 | ||||||
Total current assets | 24,349,972 | 30,964,740 | ||||||
PROPERTY AND EQUIPMENT, net | 3,073,049 | 2,948,164 | ||||||
OTHER ASSETS, net | 94,185 | 95,722 | ||||||
$ | 27,517,206 | $ | 34,008,626 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Current portion of loan payable under credit agreement to beneficial shareholder net of $449,226 at 2018 and $118,404 at 2017 of unamortized issuance costs | $ | 14,402,123 | $ | 14,094,096 | ||||
Accounts payable | 4,513,971 | 7,702,145 | ||||||
Accrued payroll and related taxes | 365,514 | 404,346 | ||||||
Promissory notes | 3,500,000 | - | ||||||
Accrued expenses | 767,921 | 786,095 | ||||||
Total current liabilities | 23,549,529 | 22,986,682 | ||||||
Loan payable under credit agreement to beneficial shareholder net of $40,839 at June 30, 2018 and $39,468 at Dec 31, 2017 of unamortized issuance costs and current portion | 1,309,284 | 4,698,032 | ||||||
Total liabilities | 24,858,813 | 27,684,714 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Series 1 Convertible Preferred Stock, $0.001 par value- authorized 250,000 shares, issued and outstanding 239,405 shares at $5.00 stated value | 1,197,025 | 1,197,025 | ||||||
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 15,000,000 shares, issued and outstanding 5,469,501 shares as of 2018 and 5,294,501 as of 2017 | 547 | 529 | ||||||
Additional paid in capital | 23,041,404 | 22,445,691 | ||||||
Accumulated deficit | (43,532,583 | ) | (39,271,333 | ) | ||||
Total stockholders’ equity | 2,658,393 | 6,323,912 | ||||||
$ | 27,517,206 | $ | 34,008,626 |
The accompanying notes are an integral part of these consolidated statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Lease revenues and fees | $ | 18,588,477 | $ | 16,363,033 | $ | 37,925,373 | $ | 33,313,925 | ||||||||
Lease merchandise sold | 487,830 | 324,227 | 1,102,348 | 814,952 | ||||||||||||
Total revenues | 19,076,307 | 16,687,260 | 39,027,721 | 34,128,877 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | 8,987,412 | 8,126,839 | 19,395,158 | 16,587,622 | ||||||||||||
Cost of lease merchandise sold | 324,705 | 226,310 | 658,468 | 535,928 | ||||||||||||
Provision for doubtful accounts | 5,483,487 | 4,759,879 | 10,658,805 | 9,675,629 | ||||||||||||
Marketing | 1,260,237 | 818,609 | 2,429,187 | 1,630,791 | ||||||||||||
Salaries and benefits | 2,031,788 | 1,898,005 | 4,211,164 | 3,666,157 | ||||||||||||
Operating expenses | 1,918,246 | 1,869,317 | 3,957,184 | 3,542,969 | ||||||||||||
Total costs and expenses | 20,005,875 | 17,698,959 | 41,309,966 | 35,639,096 | ||||||||||||
Operating loss | (929,568 | ) | (1,011,699 | ) | (2,282,245 | ) | (1,510,219 | ) | ||||||||
Interest expense including amortization of debt issuance costs | 1,045,338 | 551,304 | 1,979,005 | 1,107,295 | ||||||||||||
Net loss | (1,974,906 | ) | (1,563,003 | ) | (4,261,250 | ) | (2,617,514 | ) | ||||||||
Dividends on Series 2 Convertible Preferred Shares | 604,824 | 560,236 | 1,208,504 | 1,109,036 | ||||||||||||
Net loss attributable to common shareholders | $ | (2,579,730 | ) | (2,123,239 | ) | (5,469,754 | ) | (3,726,550 | ) | |||||||
Basic and diluted (loss) per common share: | ||||||||||||||||
Net loss | $ | (0.48 | ) | $ | (0.40 | ) | $ | (1.03 | ) | $ | (0.70 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES: | ||||||||||||||||
Basic and diluted | 5,368,390 | 5,290,670 | 5,331,445 | 5,288,975 |
The accompanying notes are an integral part of these consolidated statements.
F-3
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended June 30, 2018
(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, 2018 | 239,405 | $ | 1,197,025 | 21,952 | $ | 21,952,000 | 5,294,501 | $ | 529 | $ | 22,445,691 | $ | (39,271,333 | ) | $ | 6,323,912 | ||||||||||||||||||||
Provision for compensation expense related to stock options | - | - | - | - | - | - | 72,481 | - | 72,481 | |||||||||||||||||||||||||||
Warrants issued in connection with amended credit agreement and subsequent issuance of common stock upon exercise of the warrants | 175,000 | 18 | 523,232 | 523,250 | ||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (4,261,250 | ) | (4,261,250 | ) | ||||||||||||||||||||||||||
Balance, June 30, 2018 | 239,405 | $ | 1,197,025 | 21,952 | $ | 21,952,000 | 5,469,501 | $ | 547 | $ | 23,041,404 | $ | (43,532,583 | ) | $ | 2,658,393 |
The accompanying notes are an integral part of these consolidated statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2018 and 2017
(unaudited)
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (4,261,250 | ) | $ | (2,617,514 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and impairment of lease merchandise | 19,395,158 | 16,587,622 | ||||||
Other depreciation and amortization | 1,191,510 | 1,002,644 | ||||||
Compensation expense related to issuance of stock options | 72,481 | 42,211 | ||||||
Provision for doubtful accounts | 10,658,805 | 9,675,629 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (10,504,020 | ) | (9,885,543 | ) | ||||
Prepaid expenses and other | (60,167 | ) | (110,749 | ) | ||||
Lease merchandise | (15,786,419 | ) | (11,532,939 | ) | ||||
Security deposits | - | (5,928 | ) | |||||
Accounts payable | (3,188,174 | ) | (1,337,021 | ) | ||||
Accrued payroll and related taxes | (38,832 | ) | (25,312 | ) | ||||
Accrued expenses | 108,198 | 80,570 | ||||||
Net cash (used in) provided by operating activities | (2,412,710 | ) | 1,873,670 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment, including capitalized software costs | (1,021,551 | ) | (979,562 | ) | ||||
Net cash (used in) investing activities | (1,021,551 | ) | (979,562 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from exercise of stock options | - | 15,000 | ||||||
Proceeds from exercise of warrants | 1,750 | - | ||||||
Proceeds from promissory notes | 3,465,000 | - | ||||||
Proceeds from loan payable under credit agreement | 3,550,000 | - | ||||||
Repayment of loan payable under credit agreement | (6,420,852 | ) | (788,207 | ) | ||||
Repayment of installment loan | (5,604 | ) | - | |||||
Debt issuance related costs | (69,000 | ) | - | |||||
Net cash provided by (used in) financing activities | 521,294 | (773,207 | ) | |||||
(DECREASE)/INCREASE IN CASH | (2,912,967 | ) | 120,901 | |||||
CASH, beginning of period | 4,968,915 | 5,412,495 | ||||||
CASH, end of period | $ | 2,055,948 | $ | 5,533,396 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 1,422,484 | $ | 416,407 |
The accompanying notes are an integral part of these consolidated statements.
F-5
Notes To Consolidated Financial Statements
For the six months ended June 30, 2018 and 2017
(Unaudited)
1. BASIS OF PRESENTATION
Our interim financial statements have been prepared in accordance with the standardsinstructions to Form 10-Q and Article 8 of the Public Company Accounting Oversight Board (United States). Those standards require that we planRegulation S-X and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ Scott and Company LLC
Columbia, South Carolina
March 31, 2014, except for Note 16, asAmerica (“GAAP”) applicable to whichinterim financial information. Accordingly, the date is January 22, 2015.
ASSETS | ||||||||
2013 | 2012 | |||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 960,032 | $ | 610,439 | ||||
Retained interest in purchased accounts receivable, net | 4,966,338 | 7,019,463 | ||||||
Due from clients | 256,313 | - | ||||||
Earned but uncollected fee income | 138,480 | 168,805 | ||||||
Prepaid expenses and other | 52,904 | 100,998 | ||||||
Lease merchandise | 8,004 | - | ||||||
Total current assets | 6,382,071 | 7,899,705 | ||||||
PROPERTY AND EQUIPMENT, net | 58,079 | 14,257 | ||||||
OTHER ASSETS: | ||||||||
Intangible assets – patent costs | 30,760 | - | ||||||
Security deposits | 9,485 | 6,023 | ||||||
40,245 | 6,023 | |||||||
$ | 6,480,395 | $ | 7,919,985 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Due to financial institution | $ | 3,240,942 | $ | 4,977,763 | ||||
Accounts payable | 47,314 | 86,772 | ||||||
Accrued payroll and related taxes | 68,141 | 69,338 | ||||||
Accrued expenses | 55,412 | 59,252 | ||||||
Collected but unearned fee income | 12,328 | 28,642 | ||||||
Total current liabilities | 3,424,137 | 5,221,767 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
CONVERTIBLE PREFERRED STOCK, net of issuance | ||||||||
costs of $1,209,383 | 671,409 | 671,409 | ||||||
COMMON STOCK | 4,363 | 1,863 | ||||||
ADDITIONAL PAID IN CAPITAL | 8,545,914 | 7,496,693 | ||||||
ACCUMULATED DEFICIT | (6,165,428 | ) | (5,471,747 | ) | ||||
3,056,258 | 2,698,218 | |||||||
$ | 6,480,395 | $ | 7,919,985 |
For the years ended | ||||||||
December 31, | ||||||||
2013 | 2012 | |||||||
FINANCE REVENUES | $ | 2,364,128 | $ | 2,526,626 | ||||
INTEREST EXPENSE - financial institution | (385,918 | ) | (454,241 | ) | ||||
INTEREST EXPENSE – related parties | - | (15,123 | ) | |||||
NET FINANCE REVENUES | 1,978,210 | 2,057,262 | ||||||
PROVISION FOR CREDIT LOSSES, net of recoveries | (62,603 | ) | (41,797 | ) | ||||
FINANCE REVENUES, NET OF INTEREST EXPENSE | ||||||||
AND CREDIT LOSSES | 1,915,607 | 2,015,465 | ||||||
OPERATING EXPENSES | (2,609,288 | ) | (1,636,606 | ) | ||||
(LOSS) INCOME FROM OPERATIONS BEFORE | ||||||||
INCOME TAXES | (693,681 | ) | 378,859 | |||||
INCOME TAXES | - | - | ||||||
NET (LOSS) INCOME | $ | (693,681 | ) | $ | 378,859 | |||
BASIC EARNINGS PER COMMON SHARE: | ||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (0.04 | ) | $ | 0.02 | |||
DILUTED EARNINGS PER COMMON SHARE: | ||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (0.04 | ) | $ | 0.02 | |||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||
Basic | 18,987,702 | 18,634,369 | ||||||
Dilutive | 18,987,702 | 20,763,632 |
Preferred | Common | Additional | Accumulated | |||||||||||||||||
Stock | Stock | Paid in Capital | Deficit | Total | ||||||||||||||||
Balance, January 1, 2012 | $ | 671,409 | $ | 1,863 | $ | 7,465,386 | $ | (5,850,606 | ) | $ | 2,288,052 | |||||||||
Provision for compensation expense related to issued stock options | - | - | 10,229 | - | 10,229 | |||||||||||||||
Benefit for compensation expense related to expired stock options | - | - | 21,078 | - | 21,078 | |||||||||||||||
Net income year ended December 31, 2012 | - | - | - | 378,859 | 378,859 | |||||||||||||||
Balance, December 31, 2012 | 671,409 | 1,863 | 7,496,693 | (5,471,747 | ) | 2,698,218 | ||||||||||||||
Provision for compensation expense related to issued stock options | - | - | 49,805 | - | 49,805 | |||||||||||||||
Provision for compensation expense related to issued warrants | - | - | 1,916 | - | 1,916 | |||||||||||||||
Sale of common stock | - | 2,500 | 997,500 | - | 1,000,000 | |||||||||||||||
Net loss year ended December 31, 2013 | - | - | - | (693,681 | ) | (693,681 | ) | |||||||||||||
Balance, December 31, 2013 | $ | 671,409 | $ | 4,363 | $ | 8,545,914 | $ | (6,165,428 | ) | $ | 3,056,258 | |||||||||
The accompanying notes to consolidated financial statements are an integral partbalance sheet as of these statements.
CASH FLOWS FROM OPERATING ACTIVITIES: | 2013 | 2012 | ||||||
Net (loss) income | $ | (693,681 | ) | $ | 378,859 | |||
Adjustments to reconcile net (loss) income to net cash | ||||||||
provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 38,326 | 19,804 | ||||||
Compensation expense related to issuance of stock options and warrants | 51,721 | 31,307 | ||||||
Allowance for uncollectible accounts | - | 62,949 | ||||||
Decrease (increase) in retained interest in purchased | ||||||||
accounts receivable | 2,053,125 | (751,256 | ) | |||||
Increase in due from client | (256,313 | ) | - | |||||
Decrease (increase) in earned but uncollected | 30,325 | (11,735 | ) | |||||
Decrease (increase) in prepaid expenses and other | 48,094 | (30,074 | ) | |||||
Increase in lease merchandise | (8,004 | ) | - | |||||
Increase in security deposits | (3,462 | ) | (537 | ) | ||||
(Decrease) increase in accounts payable | (39,458 | ) | 41,396 | |||||
(Decrease) increase in accrued payroll and related taxes | (1,197 | ) | 8,420 | |||||
Decrease in collected but not earned | (16,314 | ) | (8,297 | ) | ||||
Increase (decrease) in accrued expenses | (3,840 | ) | 29,643 | |||||
Net cash provided by (used in) operating activities | 1,199,322 | (229,521 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Patent costs | (30,760 | ) | - | |||||
Purchases of property and equipment | (82,148 | ) | (17,031 | ) | ||||
Net cash used in investing activities | (112,908 | ) | (17,031 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
(Payments to) proceeds from financial institution, net | (1,736,821 | ) | 550,420 | |||||
Proceeds from capital contributions | 1,000,000 | - | ||||||
Net cash (used in) provided by financing activities | (736,821 | ) | 550,420 | |||||
INCREASE IN CASH | 349,593 | 303,868 | ||||||
CASH, beginning of period | 610,439 | 306,571 | ||||||
CASH, end of period | $ | 960,032 | $ | 610,439 | ||||
2. BUSINESS
FlexShopper, Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware on August 16, 2006. The Company owns 100% of FlexShopper, LLC, a limited liability company incorporated under the laws of North Carolina on June 24, 2013. The Company is a holding corporation with no operations except for those conducted by FlexShopper, LLC. FlexShopper, LLC provides through e-commerce sites certain types of durable goods to consumers, including customers of third party retailers and 2012
In January 2015, in connection with the credit agreement entered into in March 2015 (see Note 6), FlexShopper 1 LLC and FlexShopper 2 LLC were organized as wholly owned Delaware subsidiaries of FlexShopper, LLC to conduct operations. FlexShopper, LLC together with its subsidiaries are hereafter referred to as “FlexShopper.”
To date, funds derived from the sale of FlexShopper’s common stock and Series 2 Convertible Preferred Stock and the Company’s ability to borrow funds against the lease portfolio have provided the liquidity and capital resources necessary to fund its operations. The Company’s ability to borrow additional funds under its credit agreement can be terminated in August if the Company does not raise $20 million of equity prior to August 31, 2018 (see Note 6). Additionally, the holder of one of its subordinated promissory notes (as described in Notes 5 and 13) provided the Company with a 30-day written notice for payment of $2.5 million of principal and accrued interest. Repayment has been extended to August 31, 2018. Further, pursuant to the terms of the subordinated promissory notes, repayment is not permitted and remedies are not available, other than default interest, without the consent of the Credit Agreement lender. The Company is currently exploring various financing options to provide additional equity capital as well as both extend and lower the cost of our credit facilities going forward. If the Company is unable to obtain additional equity capital and extend the credit facilities, management believes the Company would be able to maintain a positive cash position by servicing and collecting its existing lease portfolio and paying its obligations as they become due but would be forced to curtail or suspend normal business operations, including its discretionary marketing expenditures.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of FlexShopper, Inc. (formerly Anchor Funding Services, Inc. the "Company")Company and its wholly owned subsidiaries Anchor Funding Services, LLC ("Anchor")after elimination of intercompany balances and FlexShopper, LLC ("FlexShopper").
Anchor is a North Carolina limited liability company. Today, the Company operates in two industry segments designated as Anchor and FlexShopper. Anchor purchases company’s accounts receivable, which provide businesses with critical working capital so they can meet their operational costs and obligations while waiting to receive payment from their customers. Anchor also provides back office services to businesses located throughout the United States of America. The Company is actively pursuing the sale of this business. FlexShopper provides certain types of durable goods to consumers on a lease-to-own basis and also provides lease-to-own terms to consumers of third party retailers and e-tailers.
F-6
Revenue Recognition –Anchor charges fees - Merchandise is leased to its customers in one of two ways as follows:
Retained Interest in Purchased Accounts Receivable –Retained interestand Allowance for Doubtful Accounts - FlexShopper seeks to collect amounts owed under its leases from each customer on a weekly basis by charging their bank accounts or credit cards. Accounts receivable are principally comprised of lease payments currently owed to FlexShopper which are past due, as FlexShopper has been unable to successfully collect in purchasedthe manner described above. The allowance for doubtful accounts receivable represents the gross amountis based upon revenues and historical experience of invoices purchased and advances on purchase orders from clients less amounts maintained in a reserve account. For factoring transactions, Anchor purchases a customer’s accounts receivable and advances thembalances charged off as a percentage of revenues. The accounts receivable balances consisted of the invoice total. following as of June 30, 2018 and December 31, 2017:
June 30, 2018 | December 31, 2017 | |||||||
Accounts receivable | $ | 9,905,651 | $ | 6,399,233 | ||||
Allowance for doubtful accounts | (5,800,968 | ) | (2,139,765 | ) | ||||
Accounts receivable, net | $ | 4,104,683 | $ | 4,259,468 |
The difference betweenallowance is a significant percentage of the purchase pricebalance 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 continue to accrue weekly charges until they are charged off with such charges being fully reserved for. Accounts receivable balances charged off against the allowance were $3,013,914 and amount advanced$7,442,190 for the three and six months ended June 30, 2018, respectively, and $7,162,533 and $13,580,054 for the three and six months ended June 30, 2017, respectively.
Lease Merchandise - Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is maintained inrecorded at cost net of accumulated depreciation. The Company depreciates leased merchandise using the straight-line method over the applicable agreement period for a consumer to acquire ownership, generally twelve months with no salvage value. Upon transfer of ownership of merchandise to customers resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For lease merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company provides an impairment reserve account.for the undepreciated balance of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated depreciation and impairment reserve account is used to offset any potential losses Anchor may have related to such merchandise are written off upon determination that no salvage value is obtainable. The impairment charge amounted to approximately $1,312,000 and $2,119,000 for the purchased accounts receivable. For purchase order transactionsthree and six months ended June 30, 2018, respectively, and $1,782,000 and $3,284,000 for the company advancesthree and pays for 100%six months ended June 30, 2017, respectively.
The net leased merchandise balances consisted of the product’s cost.
June 30, 2018 | December 31, 2017 | |||||||
Lease merchandise at cost | $ | 34,655,190 | $ | 34,501,555 | ||||
Accumulated depreciation | (15,050,985 | ) | (11,974,953 | ) | ||||
Impairment reserve | (1,797,622 | ) | (1,111,280 | ) | ||||
Lease merchandise, net | $ | 17,806,583 | $ | 21,415,322 |
Lease merchandise at cost represents the undepreciated cost of their December 31, 2012 retained interestrental merchandise at the time of sale.
F-7
Deferred Debt Issuance Costs - Debt issuance costs incurred in purchased accounts receivable to be uncollectible.
Debt issuance costs of $35,000 incurred in conjunction with the subordinated Promissory Notes entered into on January 29, 2018 and January 30, 2018 (see Note 5) are offset against the outstanding balance of the purchased receivableloan payable and are amortized using the fact thatstraight-line method over the majorityremaining term of these invoices have been subsequently collected.
Intangible Assets -Intangible assets primarilyconsist of a pending patent costs,on the Company’s LTO payment method at check-out for third party e-commerce sites. Patents are stated at cost less any accumulated amortization and any provision for impairment.amortization. Patent costs are amortized by using the straight linestraight-line method over the legal life, or if shorter, the useful life of their legal (20 years)the patent, which has been estimated to be 10 years.
Software Costs - Costs related to developing or useful lives fromobtaining internal-use software incurred during the time theypreliminary project and post-implementation stages of an internal use software project are first available for use.
Operating Expenses - Operating expenses include corporate overhead expenses such as salaries, stock-based compensation, insurance, occupancy, and other administrative expenses.
Marketing Costs -Marketing costs, primarily consisting of advertising, costsare charged to expense as incurred. Total advertising costs were approximately $282,000
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 common stock and $267,000 foraccordingly has participation rights in undistributed earnings as if all such earnings had been distributed during the years ended December 31, 2013period (see Note 7). 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 2012, respectively.
F-8
Diluted earnings per share includeis based on the more dilutive of the if-converted method (which assumes conversion of the participating Series 1 Convertible Preferred Stock as of the beginning of the period) or the two-class method (which assumes that the participating Series 1 Convertible Preferred Stock is not converted) plus the potential impact of dilutive securities, such as convertible preferred stock, stocknon-participating Series 2 Convertible Preferred Stock, options and stock warrants. ��The dilutive effect of stock options and warrants is computed using the treasury stock method, which assumes the repurchase of common shares at the average market price.
2013 | 2012 | |||||||||||||||||||||||
(Denominator) | (Denominator) | |||||||||||||||||||||||
Weighted- | Per | Weighted- | Per | |||||||||||||||||||||
(Numerator) | Average | Share | (Numerator) | Average | Share | |||||||||||||||||||
Net Loss | Shares | Amount | Net Income | Shares | Amount | |||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
Basic EPS | $ | (693,681 | ) | 18,987,702 | $ | (0.04 | ) | $ | 378,859 | 18,634,369 | $ | 0.02 | ||||||||||||
Effect of Dilutive Securities – Options and | ||||||||||||||||||||||||
Convertible Preferred Stock | - | - | - | - | 2,129,263 | - | ||||||||||||||||||
Diluted EPS | $ | (693,681 | ) | 18,987,702 | $ | (0.04 | ) | $ | 378,859 | 20,763,632 | $ | 0.02 |
In computing diluted loss per share, no effect has been given to the issuance of common stock upon conversion or exercise of the following securities as their effect is anti-dilutive:
Six Months ended | ||||||||
June 30, | ||||||||
2018 | 2017 | |||||||
Series 1 Convertible Preferred Stock | 145,197 | 147,417 | ||||||
Series 2 Convertible Preferred Stock | 2,710,124 | 2,710,124 | ||||||
Series 2 Convertible Preferred Stock issuable upon exercise of warrants | 54,217 | 54,217 | ||||||
Common Stock Options | 426,400 | 297,900 | ||||||
Common Stock Warrants | 377,303 | 511,553 | ||||||
3,713,241 | 3,721,211 |
Stock BasedStock-Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.
Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards.
Fair Value of Financial Instruments –- The carrying value of cash equivalents, retained interest in purchased accounts receivable, due to financial institution, accountsloans payable and accrued liabilitiesunder the Credit Agreement increased by unamortized issuance costs (see Note 6) approximates their fair value.
CashIncome Taxes - Deferred tax assets and Cash Equivalents – Cash and cash equivalents consist primarily of highly liquid cash investment funds with original maturities of three months or less when acquired.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements plus deferred income taxesfrom such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of June 30, 2018, and 2017, the Company had not recorded any unrecognized tax benefits.
Interest and penalties related to the differences between financial statement and taxable income.
F-9
Recent Accounting Pronouncements - In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statements.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. The Company appliedadopted this guidance to all its tax positions, including tax positions taken and those expected to be taken, under the transition provision of the interpretation. For the years ended December 31, 2013 and 2012, the Company concluded thaton January 1, 2018 but it had no material uncertain tax positions.
In July 2013,February 2016, the FASB issued ASU 2013-11 , "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, "No. 2016-02, Leases, which among other things, require an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as denoted within the ASU. The amendments in this ASU areis effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Lessor guidance is largely unchanged. The Company is currently evaluating the impact on our financial statements with respect to ASU 2013-11.
December 31, 2013 | December 31, 2012 | |||||||
Purchased invoices | $ | 6,085,940 | $ | 8,921,203 | ||||
Purchase order advances | 365,394 | 21,156 | ||||||
Reserve account | (1,481,996 | ) | (1,842,447 | ) | ||||
Allowance for uncollectible invoices | (3,000 | ) | (80,449 | ) | ||||
$ | 4,966,338 | $ | 7,019,463 |
December 31, 2013 | December 31, 2012 | |||||||
Staffing | $ | 192,806 | $ | 185,557 | ||||
Transportation | 1,592,900 | 1,773,290 | ||||||
Service | 3,063,021 | 4,528,668 | ||||||
Manufacturing | 120,611 | 612,397 | ||||||
$ | 4,969,338 | $ | 7,099,912 |
For the years ending December 31, | ||||||||
2013 | 2012 | |||||||
Balance - beginning of year | $ | 80,449 | $ | 17,500 | ||||
Provision for credit losses | 12,200 | 62,949 | ||||||
Write-offs | (89,649 | ) | - | |||||
Balance - end of year | $ | 3,000 | $ | 80,449 |
For the years ending December 31, | ||||||||
2013 | 2012 | |||||||
Purchased invoices | $ | 83,653,644 | $ | 95,875,787 | ||||
Purchase order advances | 843,193 | 435,928 | ||||||
$ | 84,496,837 | $ | 96,311,715 |
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Estimated | |||||||||
Useful Lives | December 31, 2013 | December 31, 2012 | |||||||
Furniture and fixtures | 2-5 years | $ | 64,945 | $ | 46,818 | ||||
Computers and software | 3-7 years | 251,525 | 187,505 | ||||||
316,470 | 234,323 | ||||||||
Less: accumulated depreciation | (258,391 | ) | (220,066 | ) | |||||
$ | 58,079 | $ | 14,257 |
Estimated Useful Lives | June 30, 2018 | December 31, 2017 | ||||||||
Furniture, fixtures and vehicle | 2-5 years | $ | 155,165 | $ | 153,909 | |||||
Website and internal use software | 3 years | 6,835,158 | 5,827,771 | |||||||
Computers and software | 3-7 years | 704,407 | 691,499 | |||||||
7,694,730 | 6,673,179 | |||||||||
Less: accumulated depreciation and amortization | (4,621,681 | ) | (3,725,015 | ) | ||||||
$ | 3,073,049 | $ | 2,948,164 |
Depreciation and amortization expense was $38,326$461,761 and $19,804$393,830 for the yearsthree months ended DecemberJune 30, 2018 and 2017, respectively, and $896,666 and $764,298 for the six months ended June 30, 2018 and 2017, respectively.
5. PROMISSORY NOTES
On January 29, 2018 and January 30, 2018, the Company entered into letter agreements with Russ Heiser, the Company’s Chief Financial Officer, and NRNS Capital Holdings LLC (“NRNS”), respectively (such letter agreements, together, the “Commitment Letters”), for consideration of a one-time commitment fee of 1% of the lenders’ aggregate commitment, totaling $35,000, pursuant to which the Company issued a subordinated promissory note to each of Mr. Heiser and NRNS (together, the “Notes”). The Commitment Letters provide that Mr. Heiser and NRNS each shall make advances to the Company under the applicable Note in aggregate amounts up to $1,000,000 and $2,500,000, respectively. Payments of principal and accrued interest are due and payable by the Company upon 30 days’ prior written notice from the applicable noteholder and the Company can prepay principal and interest at any time without penalty. However, repayment is not permitted without the consent of the Credit Agreement Lender. Upon issuance of the Notes, the Company drew $500,000 and a subsequent $500,000 on February 20, 2018 on the Note held by Mr. Heiser and $2,500,000 on the Note held by NRNS. The Notes bear interest at a rate equal to three (3%) per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement entered into on March 6, 2015 (see Note 6) computed on the basis of a 360-day year, which equaled 15.9% at June 30, 2018. Interest expense incurred under the Notes amounted to $47,829 for Mr. Heiser’s Note and $119,574 for NRNS’ Note, totaling $167,403 for the three months ended June 30, 2018, and $73,988 for Mr. Heiser’s Note and $195,931 for NRNS’ Note, totaling $269,919 for the six months ended June 30, 2018.
On July 31, 20132018, FlexShopper agreed to extend and 2012, respectively.
F-10
6. DUE TO FINANCIAL INSTITUTION:
On November 8, 2011, AnchorMarch 6, 2015, FlexShopper entered into a Rediscountcredit agreement (as amended from time-to-time and including the Fee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo Bank, National Association as paying agent, various lenders from time to time party thereto and WE 2014-1, LLC as administrative agent and lender (the “Lender”). FlexShopper is permitted to borrow funds under the Credit FacilityAgreement 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, FlexShopper may borrow up to $25,000,000 from the Lender for a term of two years from the date of the Credit Agreement (which term has since been extended, as described below). The Lender receives security interests in certain leases as collateral under 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 dividends on common stock. 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.
On January 27, 2017, FlexShopper entered into a Commercial Bankfifth amendment to the Credit Agreement (the “Omnibus Amendment”). The Omnibus Amendment amended the Credit Agreement to, among other things, (1) extend the date after which the Company may no longer borrow additional funds (the “Commitment Termination Date”) from May 6, 2017 to April 1, 2018 (with a one-time right of extension by the Lender up to August 31, 2018 that was effective November 30, 2011exercised by the Lender on January 9, 2018), (2) require the Company to refinance the debt under the Credit Agreement upon a Permitted Change of Control (as defined in the Credit Agreement), subject to the payment of an early termination fee, (3) reduce the interest rate charged on amounts borrowed to be LIBOR plus 14% per annum and replaced its prior credit facility. The maximum amount that can be borrowed underreduce the non-usage fee on undrawn amounts if the facility is $10less 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 be not less than the sum of $6 million and 20% of any additional equity capital invested into the Bank willCompany 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 date upon which we must repay all remaining amounts owing under the Credit Agreement (the “Commitment Maturity Date”) is one year after the Commitment Termination Date.
On April 3, 2018, FlexShopper entered into a sixth amendment to the Credit Agreement (the “Sixth Amendment”). The Sixth Amendment amended the Credit Agreement to increase advance uprates, thus providing additional borrowing capacity under the Credit Agreement. The Sixth Amendment also provided for 175,000 warrants with an exercise price of $0.01 to 80%be issued to the Lender, which warrants were exercised by the Lender on May 23, 2018. The warrants were accounted for at fair value based on the date of Anchor's advancesissuance. The portion of the proceeds allocated to its clients. Anchor pays interestthe warrants was accounted for as paid-in capital with a corresponding discount to the loan payable which was amortized over the remaining life of the agreement.
Principal payable within twelve months of the balance sheet date based on advances monthlythe outstanding loan balance at the 90 Day Libor Rate plus 6.25% and various other monthly feessuch date is reflected as defineda current liability in the agreement. The agreement requires that Anchor maintain at all times a ratio of debtaccompanying balance sheets. Interest expense incurred under the Credit Agreement amounted to tangible net worth of not higher than four to one (4:1).$716,272 and $1,414,224 for the three and six months ended June 30, 2018, respectively, and $432,899 and $870,486 for the three and six months ended June 30, 2017, respectively. As of DecemberJune 30, 2018, the outstanding balance under the Credit Agreement was $16,201,472. Such amount is presented in the consolidated balance sheet net of unamortized issuance costs of $490,065. The Company repaid $565,852 in the second quarter of 2018. Interest is payable monthly on the outstanding balance of the amounts borrowed.
On July 31, 2013, the Company was in compliance. The agreement contains customary representations and warranties, events of default and limitations, among other provisions. The agreement is collateralized by2018, FlexShopper entered into a first lien on all Anchors' assets. The agreement’s next anniversary date is November 30, 2014 and automatically renews each year for an additional year provided that the Company has not provided 60 days’ noticeseventh amendment to the Bank in advanceCredit Agreement (see Note 11).
F-11
7. CAPITAL STRUCTURE
The Company’s capital structure consists of preferred and common stock as described below:
The Company is authorized to issue 10,000,000250,000 shares of $.001$0.001 par value preferred stock.Series 1 Convertible Preferred Stock and 25,000 shares of $0.001 par value Series 2 Convertible Preferred Stock. The Company’s Board of Directors determines the rights and preferences of itsthe Company’s preferred stock.
Series 1 Convertible Preferred Stock -On January 31, 2007, the Company filed a Certificate of DesignationDesignations with the Secretary of State of Delaware. Effective with this filing, 2,000,000 preferred shares becameOn November 9, 2017, the Company filed a Certificate of Decrease of the Number of Authorized Shares of Preferred Stock of FlexShopper, Inc. Designated as Series 1 Convertible Preferred Stock.Stock, reducing the number of shares designated as Series 1 Convertible Preferred Stock will rank senior to Common Stock.
As of the Company’s Common Stock. The holder of the Series 1 Convertible Preferred Stock has the option to convert the shares to Common Stock at any time. Upon conversion all accumulated and unpaid dividends will be paid as additional shares of Common Stock.
Series 1 Convertible | Common | |||||||
Preferred Stock | Stock | |||||||
Balance, January 1, 2012 | 376,387 | 18,634,369 | ||||||
Preferred Stock Conversions | - | - | ||||||
Common Stock Issuances | - | - | ||||||
Balance, December 31, 2012 | 376,387 | 18,634,369 | ||||||
Preferred Stock Conversions | - | - | ||||||
Common Stock Issuances | - | 2,514,493 | ||||||
Balance, December 31, 2013 | 376,387 | 21,148,862 |
During the year ended December 31, 2017, 3,660 shares of Series 1 Convertible Preferred Stock were converted into 2,220 shares of common stock. As of June 30, 2018, there were 239,405 shares of Series 1 Convertible Preferred Stock outstanding, which are convertible into 145,197 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.
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 $0.001 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 as of June 30, 2018 total approximately $4,736,865. Each Series 2 Preferred Share is convertible at a conversion price of $8.10 into approximately 124 shares of common stock; provided, the conversion price is subject to reduction pursuant to a weighted average anti-dilution provision contained in the Series 2 Certificate of Designations. The holders of the Series 2 Preferred Shares 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 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), holders of Series 2 Preferred Shares 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 Series 2 Preferred Shares been converted to common stock immediately before the Liquidation Event or Deemed Liquidation Event.
Common Stock - The Company was 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 authorized shares of common stock to 15,000,000. Each share of common stock entitles the holder to one vote at all stockholder meetings.
In connection with entering into the Credit Agreement on March 6, 2015, the Company raised approximately $8.6 million in net proceeds through direct sales of 1.7 million shares of its common stock to certain affiliates of the Lender and other accredited investors for a purchase price of $5.50 per share. As a result of the sale to certain affiliates, the Lender is considered a beneficial shareholder of the Company.
Warrants - On April 3, 2018, FlexShopper entered into the Sixth Amendment to the Credit Agreement. The Sixth Amendment provided for warrants exercisable for 175,000 shares of common stock with an exercise price per share of $0.01 to be issued to the Lender. On May 23, 2018, the Lender exercised the warrants. As of June 30, 2018, FlexShopper had outstanding warrants exercisable for (i) 377,303 shares of common stock and (ii) 439 shares of series 2 preferred stock warrants outstanding. See Note 7.9.
F-12
8. STOCK OPTIONS
On April 26, 2018 at the Company’s annual meeting, the Company’s stockholders approved the FlexShopper, Inc. 2018 Omnibus Equity Compensation Plan (the “2018 Plan”). Upon the 2018 Plan’s approval, approximately 1,057,000 shares ofAnchor’sof Company common stock exercisable at $.25 per share. The options vest one-third immediatelywere available for issuance, consisting of 750,000 shares authorized for issuance under the 2018 Plan and one-third on each ofan aggregate 307,000 shares then remaining available for issuance under the successive anniversary dates from Mr. Healy joining the board until fully vested.
Grants under the 2018 Plan and the Prior Plans consist of incentive to the Company’s employees,stock options, non-qualified stock options, stock appreciation rights, stock awards, stock unit awards, dividend equivalents and other stock-based awards. Employees, directors and consultants by enabling themand other service providers are eligible to shareparticipate in the future growth2018 Plan and the Prior Plans. Options granted under the 2018 Plan and the Prior Plans vest over periods ranging from immediately upon grant to a three-year period and expire ten years from date of the business.
Activity in |
Number of options | Weighted average exercise price | Weighted average contractual term (years) | Aggregate intrinsic value | |||||||||||||
Outstanding at January 1, 2018 | 335,900 | $ | 5.61 | |||||||||||||
Granted | 109,500 | 3.12 | ||||||||||||||
Canceled/Forfeited | (19,000 | ) | 4.61 | |||||||||||||
Outstanding at June 30, 2018 | 426,400 | $ | 5.02 | 7.36 | $ | 59,192 | ||||||||||
Vested and exercisable at June 30, 2018 | 275,034 | $ | 5.86 | 6.25 | $ | 37,302 | ||||||||||
Vested and exercisable at June 30, 2018 and expected to vest thereafter | 426,400 | $ | 5.02 | 7.36 | $ | 59,193 |
The weighted average grant date fair value of December 31, 2013:
Exercise | Number | Remaining | Number | ||||||||
Price | Outstanding | Contractual Life | Exercisable | ||||||||
$ | 1.25 | 1,605,000 | 4 years | 1,605,000 | |||||||
$ | 1.00 | 45,000 | 6 years | 33,750 | |||||||
$ | 0.62 | 500,000 | 6 years | 500, 000 | |||||||
$ | 0.17 | 500,000 | 9 years | 500,000 | |||||||
$ | 0.25 | 180,000 | 10 years | 120,000 | |||||||
$ | 0.35 | 100,000 | 10 years | 33,333 | |||||||
$ | 0.30 | 60,000 | 10 years | 20,000 | |||||||
$ | 0.45 | 25,000 | 10 years | 8,333 | |||||||
3,015,000 | 2,820,416 |
Exercise price | $ | |||
6 years | ||||
38 | % | |||
0 | % | |||
2.27% to | % |
The fairexpected dividend yield is based on the Company’s historical dividend yield. The expected volatility was based on the average of historical volatilities for a period comparable to the expected life of the options of certain entities considered to be similar to the Company. The expected life is based on the simplified expected term calculation permitted by the Securities and Exchange Commission (the “SEC”), which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The risk-free interest rate is based on the annual yield on the grant date of a zero-coupon U.S. Treasury bond the maturity of which equals the option’s expected life.
The value amountsof stock options is recognized as compensation expense by the straight-line method over the vesting period. Compensation expense recorded for these options in the statementstatements of operations was $49,805$22,779 and $10,229$72,481, for the yearsthree and six months ended December 31, 2013June 30, 2018, respectively, and 2012,$19,321 and $42,211 for the three and six months ended June 30, 2017, respectively.
F-13
2013 | 2012 | 2011 | ||||||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||||||
Outstanding at beginning of year | 2,830,000 | 0.88 | 2,430,000 | 1.12 | 2,440,000 | 1.10 | ||||||||||||||||||
Granted | 195,000 | 0.35 | 680,000 | 0.19 | - | - | ||||||||||||||||||
Cancelled | (10,000 | ) | 0.45 | (280,000 | ) | 1.25 | (10,000 | ) | 1.00 | |||||||||||||||
Exercised | - | - | - | - | - | - | ||||||||||||||||||
Outstanding at end of year | 3,015,000 | 0.85 | 2,830,000 | 0.88 | 2,430,000 | 1.12 | ||||||||||||||||||
Exercisable at end of year | 2,820,416 | 0.88 | 2,198,750 | 1.08 | 2,401,250 | 1.12 |
Exercise price | $ | 1.10 | ||
Term | 7 years | |||
Volatility | 40% | |||
Dividends | 0 | % | ||
Discount rate | .05 | % |
9. WARRANTS
The following table summarizes information about outstanding stock warrants as of December 31, 2013:
Weighted Average | |||||||||||
Exercise | Number | Remaining | Number | ||||||||
Price | Outstanding | Contractual Life | Exercisable | ||||||||
$ | 1.10 | 1,342,500 | 1 Month | 1,342,500 | |||||||
$ | 1.00 | 2,000,004 | 7 years | 2,000,004 |
Series 2 Preferred | Weighted Average | |||||||||||
Exercise | Common Stock Warrants | Stock Warrants | Remaining | |||||||||
Price | Outstanding | Outstanding | Contractual Life | |||||||||
$ | 10.00 | 200,000 | 1 years | |||||||||
$ | 5.50 | 177,303 | 3 years | |||||||||
$ | 1,250 | - | 439 | 5 years | ||||||||
377,303 | 439 |
On April 3, 2018, FlexShopper entered into the Sixth Amendment to the Credit Agreement. The Company recorded revenues from United States companies inSixth Amendment provided for 175,000 warrants with an exercise price of $0.01 to be issued to the following industries as follows:
Industry | For the year ending December 31, | |||||||
2013 | 2012 | |||||||
Staffing | $ | 80,780 | $ | 69,773 | ||||
Transportation | 627,095 | 782,058 | ||||||
Service | 1,365,379 | 1,426,583 | ||||||
Other | 20,357 | 105,483 | ||||||
Manufacturing | 173,844 | - | ||||||
Apparel | 96,673 | 142,729 | ||||||
$ | 2,364,128 | $ | 2,526,626 |
10. INCOME TAXES
As of December 31, 2013, Anchor has five clients that account for an aggregate of approximately 36.1% of its accounts receivable portfolio and approximately 16.3% of its revenues for the year ended December 31, 2013. The transactions and balances with these clients as of and for the year ended December 31, 2013 are summarized below:
Percentage of Accounts Receivable | Percentage of Revenues for | |||||||
Portfolio | the Twelve Months | |||||||
As of | Ended | |||||||
Entity | December 31, 2013 | December 31, 2013 | ||||||
Trucking company in MI | 8.7 | % | 4.3 | % | ||||
Cable trenching utility in FL | 6.4 | % | 3.4 | % | ||||
Importer in MI | 8.4 | % | 3.0 | % | ||||
Aerospace servicer in NM | 6.2 | % | 3.7 | % | ||||
Trucking Company in VA | 6.4 | % | 1.9 | % | ||||
36.1 | % | 16.3 | % |
For the year ending December 31, | ||||||||
2013 | 2012 | |||||||
To a financial institution | $ | 369,487 | $ | 446,922 | ||||
To a related party | - | 15,123 | ||||||
Total | $ | 369,487 | $ | 462,045 |
2013 | 2012 | |||||||
Federal tax expense at statutory rate | $ | (235,000 | ) | $ | 146,000 | |||
State tax expense | (10,000 | ) | 15,000 | |||||
Permanent items | 5,000 | − | ||||||
Change in valuation allowance | (240,000 | ) | (161,000 | ) | ||||
Income taxes | $ | - | $ | - |
2013 | 2012 | |||||||
Equity based compensation | $ | 102,000 | $ | 91,000 | ||||
Allowance for doubtful accounts | 1,000 | 31,000 | ||||||
Net operating loss carry-forwards | 1,660,000 | 1,385,000 | ||||||
Gross deferred tax assets | 1,763,000 | 1,507,000 | ||||||
Fixed assets and intangible basis difference | (19,000 | ) | (3,000 | ) | ||||
1,744,000 | 1,504,000 | |||||||
Valuation allowance | (1,744,000 | ) | (1,504,000 | ) | ||||
Income taxes | $ | - | $ | - |
Amount | Expiration | |||||||
Federal | $ | 4,313,000 | 2022 - 2025 | |||||
State | $ | 1,669,000 | 2022 - 2025 |
Management believes that the federal and state deferred tax returns in the U.S. federal jurisdiction and various states. At December 31, 2013, federal tax returns remained open for Internal Revenue Service review for tax years after 2010, while state tax returns remain open for review by state taxing authorities for tax years after 2009. There were no federal or state income tax audits being conductedasset as of December 31, 2013.2017 does not satisfy the realization criteria and has recorded a full valuation allowance to offset the tax asset.
11. SUBSEQUENT EVENTS
Amendment to Credit Agreement
On July 31, 2018, FlexShopper, through a wholly-owned indirect subsidiary, entered into Amendment No. 7 (the “Amendment”) to the Credit Agreement. The Amendment amended the Credit Agreement provides that, among other things, if the Company raises at least $20 million in equity funding (the “Equity Raise”) on or before August 31, 2018, the Commitment Termination Date (as defined in the Credit Agreement) will be extended to February 28, 2021; provided, however, if the Equity Raise is not completed on or before August 31, 2018, the Commitment Termination Date will be a date determined by the Administrative Agent in its sole discretion, but in no event earlier than August 31, 2018 or later than February 28, 2021. In addition, upon completion of the Equity Raise, the interest rate charged will be reduced to LIBOR plus eleven percent (11%) per annum. The Commitment Maturity Date (as defined in the Credit Agreement) is one year after the Commitment Termination Date.
Modification to Promissory Note
On July 5, 2018, FlexShopper, pursuant to the terms of the Promissory Note, received a 30-day written notice for payment of principal and interest from NRNS Capital Holdings LLC (“NRNS”). On July 31, 2018, NRNS rescinded notice and extended the payment in full of all principal and interest under NRNS’ Note (as described in Note 5) until on or before August 31, 2018 (or any later date agreed to by NRNS). In consideration of the extension, FlexShopper agreed that from July 31, 2018 until August 31, 2018, the unpaid principal balance of the Note will bear interest at a rate equal to five percent (5.00%) per annum in excess of the non-default rate of interest from time to time in effect under the Senior Credit Agreement (as defined in the Note). Pursuant to the terms of the subordinated promissory notes, repayment is not permitted and remedies are not available, other than default interest, without the consent of the Credit Agreement lender.
F-14
Report of Independent Registered Public Accounting Firm
_______
The Board of Directors and Stockholders of
FlexShopper, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FlexShopper, Inc. (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
/s/ EisnerAmper LLP
EISNERAMPER LLP
New York, NY
March 8, 2018
F-15
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 4,968,915 | $ | 5,412,495 | ||||
Accounts receivable, net | 4,259,468 | 2,181,787 | ||||||
Prepaid expenses | 321,035 | 361,777 | ||||||
Lease merchandise, net | 21,415,322 | 18,570,460 | ||||||
Total current assets | 30,964,740 | 26,526,519 | ||||||
PROPERTY AND EQUIPMENT, net | 2,948,164 | 2,540,514 | ||||||
OTHER ASSETS, net | 95,722 | 88,591 | ||||||
$ | 34,008,626 | $ | 29,155,624 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Current portion of loan payable under credit agreement to beneficial shareholder net of $118,404 of unamortized issuance costs | $ | 14,094,096 | $ | - | ||||
Accounts payable | 7,702,145 | 3,917,747 | ||||||
Accrued payroll and related taxes | 404,346 | 296,333 | ||||||
Accrued expenses | 786,095 | 259,104 | ||||||
Total current liabilities | 22,986,682 | 4,473,184 | ||||||
Loan payable under credit agreement to beneficial shareholder net of $39,468 in 2017 and $631,488 in 2016 of unamortized issuance costs and current portion | 4,698,032 | 10,156,719 | ||||||
Total liabilities | 27,684,714 | 14,629,903 | ||||||
COMMITMENTS (Note 10) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Series 1 Convertible Preferred stock, $0.001 par value- authorized 250,000 shares, issued and outstanding 239,405 shares in 2017 and 243,065 in 2016 at $5.00 stated value | 1,197,025 | 1,215,325 | ||||||
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 15,000,000 shares, issued and outstanding 5,294,501 shares in 2017 and 5,287,281 in 2016 | 529 | 529 | ||||||
Additional paid in capital | 22,445,691 | 22,298,439 | ||||||
Accumulated deficit | (39,271,333 | ) | (30,940,572 | ) | ||||
Total stockholders’ equity | 6,323,912 | 14,525,721 | ||||||
$ | 34,008,626 | $ | 29,155,624 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-16
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Revenues: | ||||||||
Lease revenues and fees | $ | 65,412,131 | $ | 46,513,235 | ||||
Lease merchandise sold | 1,634,233 | 1,066,350 | ||||||
Total revenues | 67,046,364 | 47,579,585 | ||||||
Costs and expenses: | ||||||||
Cost of lease revenues, consisting of depreciation and impairment of lease merchandise | 31,453,246 | 22,734,553 | ||||||
Cost of lease merchandise sold | 998,800 | 687,991 | ||||||
Provision for doubtful accounts | 19,135,207 | 13,281,242 | ||||||
Marketing | 6,094,330 | 10,193,052 | ||||||
Salaries and benefits | 7,862,714 | 5,946,401 | ||||||
Other operating expenses | 7,664,566 | 5,064,869 | ||||||
Total costs and expenses | 73,208,863 | 57,908,108 | ||||||
Operating loss | (6,162,499 | ) | (10,328,523 | ) | ||||
Interest expense including amortization of debt issuance costs | 2,168,262 | 1,925,184 | ||||||
Net loss | (8,330,761 | ) | (12,253,707 | ) | ||||
Cumulative dividends on Series 2 Convertible Preferred Shares | 2,316,396 | 1,211,964 | ||||||
Net loss attributable to common shareholders | $ | (10,647,157 | ) | $ | (13,465,671 | ) | ||
Basic and diluted (loss) per common share: | ||||||||
Net loss | $ | (2.01 | ) | $ | (2.57 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic and diluted | 5,290,944 | 5,249,476 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2017 and 2016
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, 2016 | 328,197 | $ | 1,640,985 | - | - | 5,210,408 | $ | 521 | $ | 23,213,318 | $ | (18,686,865 | ) | $ | 6,167,959 | |||||||||||||||||||||
Sale of Series 2 Preferred Stock | - | - | 21,952 | $ | 21,952,000 | - | - | - | - | 21,952,000 | ||||||||||||||||||||||||||
Fair value of warrants issued to placement agent in conjunction with sale of Series 2 Preferred Stock | - | - | - | - | - | - | 150,451 | - | 150,451 | |||||||||||||||||||||||||||
Costs related to sale of Series 2 Preferred Stock | - | - | - | - | - | - | (1,669,790 | ) | - | (1,669,790 | ) | |||||||||||||||||||||||||
Provision for compensation expense related to issued stock options | - | - | - | - | - | - | 136,308 | - | 136,308 | |||||||||||||||||||||||||||
Conversion of preferred stock to common stock | (85,132 | ) | (425,660 | ) | - | - | 51,873 | 5 | 425,655 | - | - | |||||||||||||||||||||||||
Exercise of stock options | - | - | - | - | 25,000 | 3 | 42,497 | - | 42,500 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (12,253,707 | ) | (12,253,707 | ) | |||||||||||||||||||||||||
Balance, December 31, 2016 | 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 issued stock options | - | - | - | - | - | - | 113,952 | - | 113,952 | |||||||||||||||||||||||||||
Exercise of stock options | - | - | - | - | 5,000 | - | 15,000 | - | 15,000 | |||||||||||||||||||||||||||
Conversion of preferred stock to common stock | (3,660 | ) | (18,300 | ) | - | - | 2,220 | - | 18,300 | - | - | |||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (8,330,761 | ) | (8,330,761 | ) | |||||||||||||||||||||||||
Balance, December 31, 2017 | 239,405 | $ | 1,197,025 | 21,952 | $ | 21,952,000 | 5,294,501 | $ | 529 | $ | 22,445,691 | $ | (39,271,333 | ) | $ | 6,323,912 |
The Company’s reportable segments consistaccompanying notes to consolidated financial statements are an integral part of Anchorthese statements.
F-18
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (8,330,761 | ) | $ | (12,253,707 | ) | ||
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
Depreciation and impairment of lease merchandise | 31,453,246 | 22,734,553 | ||||||
Other depreciation and amortization | 2,090,581 | 1,566,507 | ||||||
Compensation expense related to issuance of stock options and warrants | 113,952 | 136,308 | ||||||
Provision for uncollectible accounts | 19,135,207 | 13,281,242 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (21,212,888 | ) | (14,710,870 | ) | ||||
Prepaid expenses and other | 32,296 | (124,707 | ) | |||||
Lease merchandise | (34,298,108 | ) | (30,100,878 | ) | ||||
Security deposits | (10,206 | ) | (1,493 | ) | ||||
Accounts payable | 3,784,397 | 2,133,818 | ||||||
Accrued payroll and related taxes | 108,013 | 44,814 | ||||||
Accrued expenses | 535,437 | (78,016 | ) | |||||
Net cash (used in) operating activities | (6,598,834 | ) | (17,372,429 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment, including capitalized software costs | (2,021,538 | ) | (1,855,088 | ) | ||||
Net cash (used in) investing activities | (2,021,538 | ) | (1,855,088 | ) | ||||
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 | 10,450,000 | 4,941,359 | ||||||
Repayment of loan payable under credit agreement | (2,288,208 | ) | (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 in 2016 | - | 20,432,661 | ||||||
Net cash provided by financing operations | 8,176,792 | 21,243,806 | ||||||
(DECREASE)/ INCREASE IN CASH | (443,580 | ) | 2,016,289 | |||||
CASH, beginning of year | 5,412,495 | 3,396,206 | ||||||
CASH, end of year | $ | 4,968,915 | $ | 5,412,495 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 1,649,795 | $ | 1,459,756 | ||||
Non-cash financing activities: | ||||||||
Conversion of preferred stock to common stock | $ | 18,300 | $ | 425,660 | ||||
Warrants issued to placement agent in conjunction with sale of Series 2 Preferred Stock | $ | - | $ | 150,451 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-19
Notes To Consolidated Financial Statements
December 31, 2017 and FlexShopper. Anchor purchases company’s accounts receivable, which provide businesses2016
1.BUSINESS:
FlexShopper, Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware on August 16, 2006. The Company owns 100% of FlexShopper, LLC, a limited liability company incorporated under the laws of North Carolina on June 24, 2013. The Company is a holding corporation with critical working capital so they can meet their operational costs and obligations while waiting to receive payment from their customers.no operations except for those conducted by FlexShopper LLC. FlexShopper LLC provides through e-commerce sites, certain types of durable goods to consumers on a lease-to-own basis and also provides lease-to-own terms to(“LTO”) including consumers of third party retailers and e-tailers.
In January 2015, in connection with the Company’s segments is as follows:
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Assets: | ||||||||
FlexShopper | $ | 718,896 | $ | − | ||||
Anchor | 5,761,499 | 7,919,985 | ||||||
Total | $ | 6,480,395 | $ | 7,919,985 | ||||
Revenues: | ||||||||
FlexShopper | $ | 119 | $ | − | ||||
Anchor | 2,364,009 | 2,526,626 | ||||||
Total | $ | 2,364,128 | $ | 2,526,626 | ||||
Net (loss) income: | ||||||||
FlexShopper | $ | (655,474 | ) | $ | − | |||
Anchor | (38,207 | ) | 378,859 | |||||
Total | $ | (693,681 | ) | $ | 378,859 |
2014 | $ | 86,900 | ||
2015 | 117,600 | |||
2016 | 122,000 | |||
2017 | 126,000 | |||
2018 | 129,600 | |||
Thereafter | 77,200 | |||
$ | 659,300 |
16. SUBSEQUENT EVENTS“FlexShopper.”
On April 30, 2014, Anchor entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with a Bank, pursuant to which Anchor sold to the Bank substantially all of its assets (the “Anchor Assets”), consisting primarily of its factoring portfolio (the “Portfolio Accounts”). The purchase price for the Anchor Assets equalled (1) 110% of the total funds outstanding associated with the Portfolio Accounts plus (2) an amount equal to 50% of the factoring fee and interest income earned by the Portfolio Accounts during the 12 month period following acquisition (“Earnout Payments”). The sale of the Anchor Assets took place in a series of closings through May 15, 2014. In connection with each closing, Anchor used the proceeds thereof to pay to Bank all amounts due for factor advances associated with the Portfolio Accounts acquired pursuant to such closing under Anchor’s Rediscount Facility Agreement with the Bank entered into as of November 30, 2011 (the “Rediscount Facility Agreement”). In accordance with the Purchase Agreement, following the final closing thereunder all obligations of Anchor under the Rediscount Facility Agreement (and the associated Validity Warranty) are paid and satisfied in full and such agreement has been terminated and has no further force and effect.
On March 19, 2014 upon approval of the Board, FlexShopper entered into two Promissory Notes totaling $1,000,000, one with Morry Rubin and the other with a major shareholder and Director of the company. Each demand Promissory Note is for $500,000 and earns interest (payable monthly) at 10% per annum. The Promissory Notes are to assist FlexShopper in purchasing merchandise for lease to support FlexShopper’s growth.
FLEXSHOPPER, INC
ASSETS
(Unaudited)
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
CURRENT ASSETS: | (Unaudited) | |||||||
Cash | $ | 4,499,914 | $ | 960,032 | ||||
Accounts receivable, net of allowance for doubtful accounts of $593,180 in 2014 | 25,641 | 119 | ||||||
Prepaid expenses | 156,929 | 50,188 | ||||||
Lease merchandise, net | 2,572,850 | 8,004 | ||||||
Assets of discontinued operations | 30,448 | 5,363,728 | ||||||
Total current assets | 7,285,782 | 6,382,071 | ||||||
PROPERTY AND EQUIPMENT, net | 164,828 | 58,079 | ||||||
OTHER ASSETS: | ||||||||
Intangible assets – patent costs | 30,760 | 30,760 | ||||||
Security deposits | 57,253 | 9,485 | ||||||
88,013 | 40,245 | |||||||
$ | 7,538,623 | $ | 6,480,395 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY
| ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 164,938 | $ | 20,349 | ||||
Accrued payroll and related taxes | 169,194 | 68,140 | ||||||
Accrued expenses | 127,481 | 3,693 | ||||||
Liabilities of discontinued operations | 140,508 | 3,331,955 | ||||||
Total current liabilities | 602,121 | 3,424,137 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY PREFERRED STOCK, net of issuance costs of | ||||||||
$1,209,383 | 610,459 | 671,409 | ||||||
COMMON STOCK | 3,477 | 2,115 | ||||||
ADDITIONAL PAID IN CAPITAL | 15,335,324 | 8,548,162 | ||||||
ACCUMULATED DEFICIT | (9,012,758 | ) | (6,165,428 | ) | ||||
6,936,502 | 3,056,258 | |||||||
$ | 7,538,623 | $ | 6,480,395 | |||||
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements
|
Additional | ||||||||||||||||||||||||||||
Preferred stock | Common Stock | Paid in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, December 31, 2013 | 376,387 | $ | 671,409 | 21,148,862 | $ | 2,115 | $ | 8,548,162 | $ | (6,165,428 | ) | $ | 3,056,258 | |||||||||||||||
Provision for compensation expense related to issued stock options | - | - | - | - | 271,700 | - | 271,700 | |||||||||||||||||||||
Provision for compensation expense related to issued warrants | - | - | - | - | 11,200 | - | 11,200 | |||||||||||||||||||||
Exercise of stock options | - | - | 33,333 | 3 | 11,634 | - | 11,637 | |||||||||||||||||||||
Sale of common stock, net of issuance costs of $39,000 | - | - | 11,574,731 | 1,158 | 5,431,879 | - | 5,433,037 | |||||||||||||||||||||
Conversion of officers loans to common stock | - | - | 1,818,182 | 182 | 999,818 | - | 1,000,000 | |||||||||||||||||||||
Conversion of preferred shares to common stock | (34,168 | ) | (60,950 | ) | 194,758 | 19 | 60,931 | - | - | |||||||||||||||||||
Net loss | - | - | - | - | - | (2,847,330 | ) | (2,847,330 | ) | |||||||||||||||||||
Balance, September 30, 2014 | 342,219 | $ | 610,459 | 34,769,866 | $ | 3,477 | $ | 15,335,324 | $ | (9,012,758 | ) | $ | 6,936,502 |
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
FLEXSHOPPER, INC.
Notes To Consolidated Financial Statements
For the Three and Nine months ended September 30, 2014 and 2013
(Unaudited)
The Consolidated Balance Sheet as of September 30, 2014, the Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and September 30, 2013 and Consolidated Statement of Changes In Stockholders’ Equity for the nine months ended September 30, 2014, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 have been prepared by us without audit. In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly in all material respects our financial position as of September 30, 2014, results of operations for the three and nine month periods ended September 30, 2014 and 2013 and cash flows for the nine month periods ended September 30, 2014 and 2013, and are not necessarily indicative of the results to be expected for the full year.
This report should be read in conjunction with our Form 10-K for our fiscal year ended December 31, 2013.
1.BACKGROUND AND DESCRIPTION OF BUSINESS:
The consolidated financial statements include the accounts of FlexShopper, Inc. (formerly Anchor Funding Services, Inc. the “Company”) and its wholly owned subsidiary, FlexShopper, LLC (“FlexShopper”). FlexShopper, Inc. is a Delaware holding corporation. FlexShopper, Inc. has no operations; substantially all operations of the Company are the responsibility of FlexShopper.
FlexShopper is a North Carolina Limited Liability Company formed in September 2013 that provides certain types of durable goods to consumers on a lease-to-own basis and also provides lease-to-own terms to consumers of third party retailers and e-tailers. The Company has been generating revenues from this new line of business since December 2013. Management believes that the introduction of FlexShopper's lease-to-own (LTO) programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces. FlexShopper and its online LTO products provide consumers the ability to acquire durable goods, including electronics, computers and furniture on an affordable payment, lease basis. Concurrently, e-tailers and retailers that work with FlexShopper may increase their sales by utilizing FlexShopper's online channels to connect with consumers that want to acquire products on an LTO basis.
During 2013, the Company decided to concentrate its efforts on the operations of FlexShopper and subsequently, the Company entered into an agreement with a financial institution to sell substantially all of the operating assets of its wholly owned subsidiary, Anchor Funding Services, LLC (“Anchor”) which provided accounts receivable funding to business located throughout the United States. The sale was finalized in June 2014 (See Note 3). The consolidated statements of operations for the three and nine months ended September 30, 2014 and the consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013 reflect the historical operations of Anchor as discontinued operations. The 2014 consolidated balance sheet contains amounts attributable to Anchor which are classified as discontinued. Accordingly, we have generally presented the notes to our consolidated financial statements on the basis of continuing operations. In addition, unless stated otherwise, any reference to statement of operations items in these financial statements refers to results from continuing operations.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -The accompanying consolidated financial statements include the accounts of FlexShopper, Inc.the Company and its wholly owned subsidiary FlexShopper, LLC. The company’s wholly owned subsidiary, Anchor Funding Services, LLC (“Anchor”) is reflected in the consolidated statementssubsidiaries after elimination of operationsintercompany balances and the consolidated statements of cash flows as discontinued operations for the three and nine months ended September 30, 2014 and 2013.transactions.
Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Lease Purchase Transaction -The lease purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise with no long-term obligation. Key features of the lease purchase transaction in our program include:
Brand name merchandise. We offer the ability to acquire on-line or in participating retailers well-known brands of home electronics, appliances, computers and/or tablets; and furniture.
Convenient payment drafting. We charge our customers’ bank account or debit card primarily on a weekly basis and will accommodate bi-weekly requests. Lease payments together with applicable fees, constitute our primary revenue source.
Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has completed the payments required in the lease purchase agreement to own the merchandise, generally 52 weeks, or exercises the 90 day same as cash early purchase option. Under this option, if within 90 days of the lease the customer pays the cash price inclusive of a nominal processing fee, ownership transfers to the customer. After 90 days, the customer may also choose an early payment option to acquire ownership which would be less expensive than making 52 weekly payments.
Revenue Recognition - Merchandise is leased to customers pursuant to lease purchase agreements which provide for weekly and bi-weekly lease terms with non-refundable lease payments. Generally the customer has the right to acquire title either through a 90 day same as cash option, an early purchase option, or through payments of all required lease payments, generally 52 weeks, for ownership. LeaserevenuesarerecognizedinthemonthOn any current lease, customers have the option to cancel the agreement in accordance with lease terms and return the merchandise. Accordingly, customer agreements are accounted for as operating leases with lease revenues recognized in the month they are dueonthe accrualdue on the accrual basis of accounting.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,sales. Commencing in the quarter ended June 30, 2016, the Company discontinued charging a separate fee upon exercise of such fees amounted to approximately $15,000 and $22,000 for the three and nine month period ended September 30, 2014, respectively.option. Revenue for lease payments receivedpayments received priorto to their due date is deferred. Our revenue recognition accounting policy matchesdeferred and recognized as revenue in the lease revenuewithperiod to which the corresponding costs,mainly deprpayments relate. Revenues from leases and sales are reported net of sales taxes.eciationassociatedwith the leased merchandise.
Accounts Receivable and Allowance for Doubtful Accounts – FlexShopper seeks to collect amounts owed under its leases from each customer on a weekly basis by charging his or her bank account or credit card. Accounts receivable are principally comprised of lease payments currently owed to FlexShopper which are past due as FlexShopper has been unable to successfully collect in the aforementioned manner. Through June 30, 2016, an allowance for doubtful accounts was estimated by reserving all accounts in excess of four payments in arrears, adjusted for subsequent collections. Commencing in the quarter ended September 30, 2016, the estimate was revised to provide for doubtful accounts based upon revenues and historical experience of balances charged off as a percentage of revenues. The accounts receivable balances consisted of the following as of December 31, 2017 and December 31, 2016:
December 31, 2017 | December 31, 2016 | |||||||
Accounts receivable | $ | 6,399,233 | $ | 11,690,495 | ||||
Allowance for doubtful accounts | (2,139,765 | ) | (9,508,708 | ) | ||||
Accounts receivable, net | $ | 4,259,468 | $ | 2,181,787 |
F-20
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. The allowance for bad debt at January 1, 2016 was $4,727,278. During the years ended December 31, 2017 and 2016, $26,504,150 and $8,499,812 of accounts receivable balances, respectively, were charged off against the allowance. During the years ended December 31, 2017 and 2016, the provision for bad debts was $19,135,207 and $13,281,242, respectively.
Lease Merchandise –Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease merchandise.Leasemerchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is recorded at cost.cost net of accumulated depreciation. The Company depreciates leased merchandise using the straight line method over the applicable agreement period for a consumer to acquire ownership, generally twelve months with no salvage value. When indicatorsUpon transfer of impairment existownership of merchandise to customers resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For lease merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company recordsprovides an impairment reserve againstfor the carrying valueundepreciated balance of the leased merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The Companycost, accumulated depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is developing historicalobtainable. The impairment charge off informationamounted to assess recoverabilityapproximately $4,575,000 and estimate of$5,021,000 for the impairment reserve.years ended December 31, 2017 and 2016 respectively. The net leased merchandise balances consisted of the following as of September 30, 2014.December 31, 2017 and 2016:
Lease merchandise – at cost | $ | 3,892,682 | ||
Accumulated depreciation | (1,019,832 | ) | ||
Impairment reserve | (300,000 | ) | ||
Lease merchandise – net | $ | 2,572,850 |
Intangible Assets -Patent costs, are stated at cost less any accumulated amortization and any provision for impairment. Patent costs are amortized by using the straight line method over the shorter of their legal (20 years) or useful lives from the time they are first available for use.
December 31, 2017 | December 31, 2016 | |||||||
Lease merchandise at cost | $ | 34,501,555 | $ | 33,264,810 | ||||
Accumulated depreciation | (11,974,953 | ) | (11,578,267 | ) | ||||
Impairment reserve | (1,111,280 | ) | (3,116,083 | ) | ||||
Lease merchandise, net | $ | 21,415,322 | $ | 18,570,460 |
Cost of Lease Merchandise Sold –Cost oflease merchandise sold represents the net book valueundepreciated cost of rental merchandise at the time of sale.
GeneralDeferred Debt Issuance Costs – Debt issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 2015 (see Note 5) are offset against the outstanding balance of the loan payable and Administrativeare 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 $473,616 and $451,304 for the years ended December 31, 2017 and 2016, 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 $1,894,172 and $1,773,574 for the years ended December 31, 2017 and 2016, respectively.
Operating Expenses –General and AdministrativeOperating expenses include all corporate overhead expenses such as, salaries, payroll taxes and benefits, stock based compensation, insurance, occupancy, administrative, provision for doubtful accounts, advertising and other administrative expenses.
F-21
Advertising Costs –Marketing The Company chargescosts which primarily consist of advertising costsare charged to expense as incurred. Total advertising costs were approximately $228,100 and $416,300 for the three months and nine months ended September 30, 2014. Prior year advertising costs are included in discontinued operations.
Per Share Data (EPS) – BasicPer 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 common stock and accordingly, has participation rights in undistributed earnings as if all such earnings had been distributed during the period (see Note 6). 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 (loss)income. Loss attributable to common shareholders is computed by increasing loss from continuing operations and net loss by such dividends. Where the Company has undistributed net income available to common shareholders, basic earnings per common share is computed based on the total of any dividends paid or declared per common share plus undistributed income per common share determined by dividing net income available to common shareholders reduced by any dividends paid or declared on common and participating Series 1 Convertible Preferred Stock by the total of the weighted average number of common shares outstanding plus the weighted average number of common shares issuable upon conversion of outstanding participating Series 1 Convertible Preferred Stock during the period. Where the Company has a net (loss)loss, basic per share data (including income for the period byfrom continuing operations) is computed based solely on the weighted average number of common shares outstanding during the period. DilutiveAs 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.
Diluted earnings per share includeis based on the more dilutive of the if-converted method (which assumes conversion of the participating preferred stock as of the beginning of the period) or the two-class method (which assumes that the participating preferred stock is not converted) plus the potential impact of dilutive securities, such as convertible preferred stock, stocknon-participating Series 2 Convertible Preferred Stock, options and stock warrants. The dilutive effect of stock options and warrants is computed using the treasury stock method, which assumes the repurchase of common shares at the average market price.
price during the period. Under the treasury stock method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the exercise price of options or warrants. Also whenWhen there is a loss from continuing operations, potential common shares are not included in the computation of diluted loss per share, since they have an anti-dilutive effect.
In computing diluted loss per share, no effect has been given to the issuance of common stock upon conversion or exercise of the following securities as their effect is anti-dilutive:
Three months ended | Nine months ended | Year ended December 31, | ||||||||||||||||||||||
September 30, | September 30, | 2017 | 2016 | |||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||
Convertible preferred stock | 2,090,954 | 1,919,573 | 2,163,623 | 1,919,573 | ||||||||||||||||||||
Series 1 Convertible Preferred Stock | 145,197 | 147,417 | ||||||||||||||||||||||
Series 2 Convertible Preferred Stock | 2,710,124 | 2,710,124 | ||||||||||||||||||||||
Series 2 Convertible Preferred Stock issuable upon exercise of warrants | 54,217 | 54,217 | ||||||||||||||||||||||
Options | 3,650,121 | 2,992,692 | 3,461,284 | 2,891,783 | 335,900 | 411,600 | ||||||||||||||||||
Warrants | 3,342,504 | 3,342,504 | 3,342,504 | 3,342,504 | 511,553 | 511,553 | ||||||||||||||||||
9,083,579 | 8,254,769 | 8,967,411 | 8,153,860 | 3,756,991 | 3,834,911 |
Stock Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.
Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards. See Note 7.
See Note 8 to our financial statements for the impact on the operating results for the three and nine months ended September 30, 2014 and 2013.
Fair Value of Financial Instruments – The carrying value of cash equivalents, accountsloans payable and accrued liabilities due to their short term nature approximateunder the Credit Agreement increased by unamortized issuance costs (see Note 5) approximates fair value.
Income Taxes – The Company is a “C” corporation for income Deferred tax purposes. In a “C” corporation income taxesassets and liabilities are provided fordetermined based on the estimated future tax effects of transactions reported in the financial statements plus deferred income taxes related to thenet operating loss carryforwards and temporary differences between the tax bases of assets and liabilities and their respective financial statement and taxable income.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.
F-22
The primary differences between financial statement and taxable income for the Company are as follows:
· Expense related to the issuance of equity instruments
· Use of the reserve method of accounting for bad debts
· Net operating loss carryforwards.
The deferredrecognizes a tax asset represents the futurebenefit from an uncertain tax return consequences of utilizing these items. Deferred tax assets are reduced by a valuation reserve, when management cannot conclude thatposition only if it is more likely than not that if the net deferred tax assetsposition will ever be realized.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 December 31, 2017 and 2016, the Company has not recorded any unrecognized tax benefits.
The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarificationInterest and penalties related to the process associated with accountingliabilities for uncertain tax positions recognized in our financial statements. The Company applied this guidancewill be charged to all its tax positions, including tax positions takeninterest and those expected to be taken. For the nine months ended September 30, 2014 and 2013, the Company concluded that it had no material uncertain tax positions.operating expenses, respectively.
The Company classifies interest accrued on unrecognized tax benefits with interest expense. Penalties accrued on unrecognized tax benefits are classified with operating expenses.
Recent Accounting Pronouncements –
The FASB amended the Comprehensive Income topic of the ASC in February 2013 with ASU No. 2013-02. The amendment addresses reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendment does not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the amendment does require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The guidance became effective for the Company in the first quarter of fiscal year 2014. This amendment did not have any effect on the Company’s financial statements.
In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU No. 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. ASU No. 2014-08 is effective prospectively for fiscal years beginning after December 15, 2014 with early adoption permitted.The Company has early adopted this update in the second quarter of 2014.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ThisCustomers, on revenue recognition. The new standard provides guidance for the recognition, measurement and disclosure ofa single five-step model to be applied to all revenue resulting from contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and will supersede virtually alluncertainty 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 current revenue recognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of the provisions of this new standard on its financial position and results of operations.
In June 2014, FASB issuedstandard. ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-122014-09 is effective for annual reporting periods beginning after December 15, 2015,2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date of the standard. The Company evaluated the impact of the new guidance but it does not have a material impact on its financial statements as a majority of the Company’s revenue generating activities are leasing arrangements which are outside the scope of the guidance.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Lessor guidance is largely unchanged. The Company is currently evaluating the potential impacts ofeffect that the new standardguidance will have on its existing stock-based compensation plans.
In August 2014, the FASB issued ASU 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The term probable is used consistently with its use in Topic 450, Contingencies. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.statements.
3.DISCONTINUED OPERATIONS:PROPERTY AND EQUIPMENT:
During 2013, the Company decided to concentrate its efforts on the operations of FlexShopperProperty and subsequently on April 30, 2014, Anchor entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with a Bank, pursuant to which Anchor sold to the Bank substantially all of its assets (the “Anchor Assets”), consisting primarily of its factoring portfolio (the “Portfolio Accounts”). The purchase price for the Anchor Assets was equal to (1) 110% of the total funds outstanding associated with the Portfolio Accounts plus (2) an amount equal to 50% of the factoring fee and interest income earned by the Portfolio Accounts during the 12 month period following acquisition (“Earnout Payments”). The Earnout Payments totaled $183,443 for the three and nine months ended September 30, 2014. The sale of the Anchor Assets was made in a series of closings through June 16, 2014. In connection with each closing, Anchor used the proceeds thereof to pay the Bank all amounts due for factor advances associated with the Portfolio Accounts acquired pursuant to such closing under Anchor’s Rediscount Facility Agreement with the Bank dated November 30, 2011 (the “Rediscount Facility Agreement”). In accordance with the Purchase Agreement, following the final closing thereunder all obligations of Anchor under the Rediscount Facility Agreement (and the associated Validity Warranty) were paid and satisfied in full and the agreement was terminated to have no further force and effect. Anchor recorded a gain of $445,474 on the sale of these assets for the nine months ended September 30, 2014 which is included in income from discontinued operations. Such gain excludes the contingent Earnout Payments which are being recorded as income when earned.
The assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations” in the accompanying Balance Sheets at September 30, 2014 and December 31, 2013 andequipment consist of the following:
September 30, 2014 | December 31, 2013 | |||||||
Assets of discontinued operations: | ||||||||
Retained interest in purchased accounts receivable | $ | 8,150 | $ | 4,966,338 | ||||
Earned but uncollected fees | - | 141,077 | ||||||
Due from client | 22,298 | 256,313 | ||||||
$ | 30,448 | $ | 5,363,728 | |||||
Liabilities of discontinued operations: | ||||||||
Accounts payable | $ | 62,015 | $ | 26,966 | ||||
Accrued expenses | 39,151 | 51,719 | ||||||
Due to financial institution | 39,342 | 3,240,942 | ||||||
Deferred revenue | - | 12,328 | ||||||
$ | 140,508 | $ | 3,331,955 |
Estimated Useful Lives | December 31, 2017 | December 31, 2016 | ||||||||
Furniture, fixtures and vehicle | 2-5 years | $ | 153,909 | $ | 98,564 | |||||
Website and internal use software | 3 years | 5,827,771 | 3,933,600 | |||||||
Computers and software | 3-7 years | 691,499 | 619,477 | |||||||
6,673,179 | 4,651,641 | |||||||||
Less: accumulated depreciation and amortization | (3,725,015 | ) | (2,111,127 | ) | ||||||
$ | 2,948,164 | $ | 2,540,514 |
Major classes of incomeDepreciation and expenses shown as income from discontinued operations inamortization expense was $1,613,888 and $1,112,127 for the Consolidated Statement of Operations are as follows:years ended December 31, 2017 and 2016, respectively.
Three months ended | Nine months ended | |||||||||||||||
September 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||||||
Finance revenues | $ | 25,490 | $ | 546,872 | $ | 735,357 | $ | 1,853,081 | ||||||||
Interest expense-financial institution | (532 | ) | (87,656 | ) | (109,878 | ) | (298,069 | ) | ||||||||
Benefit (Provision) for credit losses | - | 45,675 | 24,904 | (59,325 | ) | |||||||||||
Net finance revenues | 24,958 | 504,891 | 650,383 | 1,495,687 | ||||||||||||
Operating expenses | (196,056 | ) | (770,064 | ) | (441,336 | ) | (1,723,140 | ) | ||||||||
Commissions on sale and other income | 308,216 | - | 308,216 | - | ||||||||||||
Gain on sale of discontinued assets | - | - | 445,474 | - | ||||||||||||
Net income (loss) from discontinued operations | $ | 137,118 | $ | (265,173 | ) | $ | 962,737 | $ | (227,453 | ) |
4. LOANS PAYABLE TO SHAREHOLDER:
On February 11, 2016, the Company 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. The Promissory Note was paid in full with interest amounting to $51,250 on June 13, 2016.
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4.PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
Estimated | ||||||||||
Useful Lives | September 30, 2014 | December 31, 2013 | ||||||||
Furniture and fixtures | 2-5 years | $ | 99,982 | $ | 64,945 | |||||
Computers and software | 3-7 years | 365,361 | 251,525 | |||||||
465,343 | 316,470 | |||||||||
Less: accumulated depreciation | (300,515 | ) | (258,391 | ) | ||||||
$ | 164,828 | $ | 58,079 |
Depreciation expense was $23,717 and $7,023 for the quarters ended September 30, 2014 and 2013, respectively and $42,125 and $19,681 for the nine months ended September 30, 2014 and 2013, respectively.
5. LOANSLOAN PAYABLE SHAREHOLDERS:UNDER CREDIT AGREEMENT
On March 19, 2014 upon approval of the Board of Directors,6, 2015, FlexShopper entered into two Promissory Notes totaling $1,000,000, onea credit agreement (as amended from time to time, and including the Fee Letter (as defined therein), the “Credit Agreement”) with CEO Morry RubinWells Fargo Bank, National Association as paying agent, various lenders from time to time party thereto and WE 2014-1, LLC as administrative agent and lender (the “Lender”). FlexShopper is permitted to borrow funds under the Credit Agreement based on FlexShopper’s cash on hand and the other with a major shareholder and DirectorAmortized 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 Company. Each demand Promissory Note wasCredit Agreement, subject to the satisfaction of certain conditions, FlexShopper may borrow up to $25,000,000 from the Lender for $500,000a term of two years from the date of the Credit Agreement (which term has since been extended, as described below).
The Credit Agreement provides that FlexShopper may not incur additional indebtedness (other than expressly permitted indebtedness) without the permission of the Lender and earnedalso prohibits dividends on common stock. The Credit Agreement includes customary events of default, including, among others, failures to make payment of principal and interest, (payable monthly) at 10% per annum. The Promissory Notes were to assistbreaches 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 purchasing merchandise for leasethe Credit Agreement and related documents (including certain financial and expense covenants), deficiencies in the borrowing base, certain judgments against FlexShopper and bankruptcy events.
On January 27, 2017, FlexShopper entered into a fifth amendment to support FlexShopper’s growth. Inthe Credit Agreement (the “Omnibus Amendment”). The Omnibus Amendment amended the Credit Agreement to, among other things, (1) extend the Commitment Termination Date from May 2014 these loans were converted6, 2017 to April 1, 2018 (with a one-time right of extension by the lenders up to August 31, 2018), (2) require the Company to refinance the debt under the Credit Agreement upon a Permitted Change of Control (as defined in the Credit Agreement), subject to the payment of an early termination fee, (3) reduce the interest rate charged on amounts borrowed to be LIBOR plus 14% per annum and reduce the non-usage fee on undrawn amounts if the facility is less than 75% drawn on average, and (4) modify certain permitted debt and financial covenants.These modified covenants consist of a reduction of Equity Book Value to not be less than the sum of $6 million and 20% of any additional equity capital invested into sharesthe 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 December 31, 2017. The Company had $1,061,000 available under the Credit Agreement as of December 31, 2017.
Principal payable within twelve months of the Company’s Common Stockbalance sheet date based on the outstanding loan balance at such date is reflected as a pricecurrent liability in the accompanying balance sheets. Interest expense incurred under the Credit Agreement for the years ended December 31, 2017 and 2016 was $1,694,096 and $1,422,630, respectively. As of $0.55 per share. (See Note 6).December 31, 2017, the outstanding balance under the Credit Agreement was $18,950,000. The Company repaid $788,208 in the second quarter of 2017 as a result of a pay down of the seasonal over advance from 2016. The Company repaid $1,500,000 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. Interest is payable monthly on the outstanding balance of the amounts borrowed.
See Note 11 for subsequent events related to the Credit Agreement.
6. CAPITAL STRUCTURE:
The Company’s capital structure consists of preferred and common stock as described below:
Preferred Stock –The Company iswas authorized to issue 10,000,000 shares of $.001$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 authorized shares of preferred stock to 500,000 shares. The Company’s Board of Directors determines the rights and preferences of itsthe Company’s preferred stock.
Series 1 Convertible Preferred Stock –On January 31, 2007, the Company filed a Certificate of DesignationDesignations with the Secretary of State of Delaware. Effective with this filing, 2,000,000250,000 preferred shares becameare designated as Series 1 Convertible Preferred Stock. Series 1 Convertible Preferred Stock will rankranks senior to Common Stock.common stock.
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As of December 31, 2017, each share of Series 1 Convertible Preferred Stock was convertible into 5.10.60649 shares of the Company’s Common Stock,common stock, subject to certain anti-dilution rights. As a result of the Common Stock offering described below and the sale of Common Stock to officers and/or directors as set forth under Note 7, each share of Series 1 Preferred Stock is currently convertible into 5.8 shares of the Company’s Common Stock. The holderholders of the Series 1 Convertible Preferred Stock hashave the option to convert the shares to Common Stockcommon stock at any time. Upon conversion, all accumulated and unpaid dividends, if any, will be paid as additional shares of Common Stock.
common stock. The dividend rate on Series 1 Convertible Preferred Stock was 8%. Dividends were paid between 2007 and 2009 annually on December 31st in the form of additional Series 1 Convertible Preferred Stock unless the Board of Directors approved a cash dividend. Dividends on Series 1 Convertible Preferred Stock ceased to accrue on the earlier of December 31, 2009, or on the date they were converted to Common Shares. Thereafter, the holders of Series 1 Convertible Preferred Stock have the same dividend rights as holders of Common Stock,common stock, as if the Series 1 Convertible Preferred Stock had been converted to Common Stock.common stock.
During the nine monthsyear ended September 30, 2014, 34,168 preferred shares were converted into 194,758 common shares. As of September 30, 2014 there were 342,219December 31, 2016, 85,132 shares of Series 1 Convertible Preferred Stock outstanding.were converted into 51,983 shares of common stock. During the year ended December 31, 2017, 3,660 shares of Series 1 Convertible Preferred Stock were converted into 2,220 shares of common stock. As of December 31, 2017, there were 239,405 shares of Series 1 Convertible Preferred Stock outstanding, which are convertible into 145,197 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.
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 dividends in arrears totaled $3,528,361 at December 31, 2017. Each Series 2 Preferred Share is convertible at a conversion price of $8.10 into approximately 124 shares of common stock; provided, the conversion price is subject to reduction pursuant to a weighted average anti-dilution provision contained in the Series 2 Certificate of Designations. The holders of the Series 2 Preferred Shares 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 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), holders of Series 2 Preferred Shares 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 Series 2 Preferred Shares been converted to common stock immediately before the Liquidation Event or Deemed Liquidation Event.
Common Stock – The Company iswas authorized to issue 65,000,000100,000,000 shares of $.0001$0.0001 par value Common Stock.common stock. On May 10, 2017, at the Company’s annual meeting of stockholders, the Company’s stockholders approved an amendment to the Certificate of Incorporation to reduce the Company’s authorized shares of common stock to 15,000,000. Each share of Common Stockcommon stock entitles the holder to one vote at all stockholder meetings. Dividends on Common Stock will be determined annually by the Company’s Board of Directors.
DuringIn connection with entering into the fourth quarter of 2013,Credit Agreement on March 6, 2015, the Company raised $1,000,000 from the sale of its restricted Common Stock at $.40 per share. An aggregate of 2,500,000 shares of Common Stock were sold under Rule 506 and/or Section 4(2) of the Securities Act of 1933 as amended. The Company also issued 14,493 shares to consultants for services rendered.
From May through October 2014, the Company received gross proceeds of $6,501,101 from the sale of 11,820,187 shares offered through three co-placement agentsapproximately $8.6 million in a private placement offering at an offering price of $.55 per share. During the second and third quarters of 2014, the Company received net proceeds from this offeringthrough direct sales of $5,472,008 from the sale of 11,574,7301.7 million shares of its Common Stock under Rule 506 and/or Section 4(2)common stock to certain affiliates of the Securities ActLender and other accredited investors for a purchase price of 1933 as amended. The foregoing excludes the issuance at the final closing date of October 9, 2014 of seven year warrants to purchase 15%$5.50 per share. As a result of the number of shares sold insale to certain affiliates, the offering, which warrants were issued to the placement agents. As of September 30, 2014, the placement agents have earned warrants to purchase 1,766,209 shares. The forgoing does not include warrants to purchase 6,818 warrants which were earned at the final closing on October 9, 2014, bringing the total number of placement agent warrants to 1,773,027, each at an exercise price of $.55 per share.
In addition, pursuant to the termsLender is considered a beneficial shareholder of the private placement offering, George Rubin and Morry F. Rubin, officers, directors and founders of the Company, each completed the funding of their $500,000 loan to the Company and converted these loans into shares of the Company’s Common Stock at the same offering price per share as that paid by investors in the offering. An aggregate of 1,818,182 shares of the Company’s Common Stock were issued to the Rubins from the conversion of their notes totaling $1,000,000.
7. RELATED PARTY TRANSACTIONS:
On March 20, 2012, M. Rubin and B. Bernstein were each granted 10 year options to purchase 250,000 shares of common stock each for a total of 500,000 shares. These options were fully vested in 2013. See Note 8.Company.
On March 24, 2014, B. Bernstein was granted 10 year options17, 2016, the Company’s stockholders, acting by written consent, approved an amendment to purchase 250,000 sharesthe Certificate of Incorporation to effect a reverse stock split of the Company’s common stock. These options vested onOn October 14, 2016, the dateCompany filed with the Secretary of grant.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 the Reverse Split by a ratio of one-for-10. All share and per share data in these financial statements and footnotes have been retrospectively adjusted to account for the Reverse Split.
On July 25, 2014, a new Director
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See the last paragraph of Note 6.7. STOCK OPTIONS
On January 31, 2007, the Board of Directors adopted our 2007 Omnibus Equity Compensation Plan (the “Plan”“2007 Plan”), with 2,100,000210,000 common shares authorized for issuance under the Plan. In October 2009, the Company'sCompany’s stockholders approved an increase in the number of shares covered by the Plan to 4,200,000420,000 shares.
The general purpose of On March 26, 2015, the plan is to provide an incentive toBoard adopted our 2015 Omnibus Equity Compensation Plan (the “2015 Plan”), with 400,000 common shares authorized for issuance under the 2015 Plan, which was ratified by the Company’s employees,stockholders on September 15, 2015. The 2007 Plan and 2015 Plan are collectively referred to as the “Plans.” Grants under the Plans may consist of incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, stock unit awards, dividend equivalents and other stock based awards. Employees, directors and consultants by enabling themand other service providers are eligible to shareparticipate in the future growthPlans. 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. Employees, directors and consultants and other service providers are eligible to participate in the business.Plan. Options granted under the plan vest over periods ranging from immediately upon grant to a three year period and expire ten years from date of grant.
Activity in stock options for the nine monthsyear ended September 30, 2014 is:December 31, 2017 follows:
Number of options | Weighted average exercise price | Weighted average contractual term (years) | Aggregate intrinsic value | |||||||||||||
Outstanding at January 1, 2016 | 406,700 | $ | 8.50 | |||||||||||||
Granted | 70,700 | 5.70 | ||||||||||||||
Forfeited | (40,800 | ) | 6.70 | |||||||||||||
Exercised | (25,000 | ) | 1.70 | |||||||||||||
Outstanding at December 31, 2016 | 411,600 | 8.63 | ||||||||||||||
Granted | 106,000 | 4.24 | ||||||||||||||
Forfeited | (16,700 | ) | 6.01 | |||||||||||||
Expired | (160,000 | ) | 12.50 | |||||||||||||
Exercised | (5,000 | ) | 3.00 | |||||||||||||
Outstanding at December 31, 2017 | 335,900 | $ | 5.61 | 7.19 | $ | 52,500 | ||||||||||
Vested and exercisable at December 31, 2017 | 212,500 | $ | 6.27 | 6.01 | $ | 52,500 | ||||||||||
Vested and exercisable at December 31, 2017 and expected to vest thereafter | 331,600 | $ | 5.61 | 7.19 | $ | 52.500 |
The weighted average grant date fair value of options granted during 2016 and 2017 was $2.03 and $1.65 per share respectively. The Company measured the fair value of each option award on the date of grant using the Black Scholes option pricing model (BSM) with the following table summarizes information about outstanding stock options as of September 30, 2014:assumptions:
Exercise | Number | Remaining | Number | |||||||||
Price | Outstanding | Contractual Life | Exercisable | |||||||||
$ | 1.25 | 1,605,000 | 4 years | 1,605,000 | ||||||||
$ | 1.00 | 45,000 | 6 years | 45,000 | ||||||||
$ | 0.62 | 500,000 | 6 years | 500,000 | ||||||||
$ | 0.17 | 500,000 | 9 years | 500,000 | ||||||||
$ | 0.80 | 550,000 | 10 years | 550,000 | ||||||||
$ | 0.25 | 120,000 | 10 years | 120,000 | ||||||||
$ | 0.30 | 50,000 | 10 years | 16,667 | ||||||||
$ | 0.45 | 25,000 | 10 years | 8,333 | ||||||||
$ | 0.75 | 55,000 | 10 years | - | ||||||||
$ | 0.83 | 25,000 | 10 years | - | ||||||||
$ | 0.90 | 30,000 | 10 years | 7,500 | ||||||||
$ | 0.89 | 180,000 | 10 years | 60,000 | ||||||||
$ | 0.79 | 1,000 | 10 years | 333 | ||||||||
$ | 0.55 | 20,000 | 10 years | - | ||||||||
3,706,000 | 3,412,833 |
2016 | 2017 | |||||||
Exercise price | $ | 4.90 to $6.60 | $ | 4.02 to$ 5.25 | ||||
Expected life | 5.5 years | 5.8 years | ||||||
Expected volatility | 38 | % | 38 | % | ||||
Dividend yield | 0 | % | 0 | % | ||||
Risk-free interest rate | 1.13% to 1.73 | % | 1.89% to 2.06 | % |
9. WARRANTS:
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The expected dividend yield is based on the Company’s historical dividend yield. The expected volatility was based on the average of historical volatilities for a period comparable to the expected life of the options of certain entities considered to be similar to the Company. The expected life is based on the simplified expected term calculation permitted by the SEC which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The risk-free interest rate is based on the annual yield on the grant date of a zero-coupon U.S. Treasury bond the maturity of which equals the option’s expected life.
The value of stock options is recognized as compensation expense by the straight line method over the vesting period. Compensation expense recorded for options in the statements of operations was $113,952 and $136,308 for the years ended December 31, 2017 and 2016, respectively. Unrecognized compensation cost related to non-vested options at December 31, 2017 amounted to $128,781 which is expected to be recognized over a weighted average period of 2.12 years.
8. WARRANTS:
On June 24, 2016, the Company has outstandinggranted warrants to one of itsthe Company’s placement agents to purchase 1,342,500439 shares of the Company’s common stock, which warrants were due to expire on January 31, 2014 but were extended by the Company through January 31, 2018. These warrants are now exercisableSeries 2 Convertible Preferred Stock at $1.10an initial exercise price of $1,250 per share. The exercise price and aggregate number of shares are subject to adjustment as set forth in the agreement.
The following information was input into BSM (Blackthe Black Scholes Model)pricing model to compute a perfair value of $342.71 for each warrant pricefor a total fair value of $.104:$150,451.
Exercise price | $ | 1.10 | |||
Term | 4 years | ||||
Volatility | 37% | ||||
Dividends | 0 | % | |||
Discount rate | .09 | % |
For the three and nine months ended September 30, 2014 and 2013, the Company recorded compensation expense of $4,200 and $1,916 and $7,000 and $1,916 respectively, related to the issuance of these warrants.
Exercise price | $ | 1,250 | ||
Expected life | 7 years | |||
Expected volatility | 38 | % | ||
Dividend yield | 0 | % | ||
Risk-free interest rate | 1.35 | % |
The following table summarizes information about outstanding stock warrants as of September 30, 2014:December 31, 2017, all of which are exercisable:
Weighted Average | ||||||||||||
Exercise | Number | Remaining | Number | |||||||||
Price | Outstanding | Contractual Life | Exercisable | |||||||||
$ | 1.10 | 1,342,500 | 4 years | 1,342,500 | ||||||||
$ | 1.00 | 2,000,004 | 7 years | 2,000,004 | ||||||||
3,342,504 |
Exercise | Common Stock Warrants | Series 2Preferred Stock Warrants | Weighted Average Remaining | |||||||||
Price | Outstanding | Outstanding | Contractual Life | |||||||||
$ | 11.00 | 134,250 | 1 years | |||||||||
$ | 10.00 | 200,000 | 3 years | |||||||||
$ | 5.50 | 177,303 | 4 years | |||||||||
$ | 1,250 | - | 439 | 6 years | ||||||||
511,553 | 439 |
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The foregoing table does not include seven-year warrants to purchase 1,773,027 shares of the Company’s Common Stock at an offering price of $.55 per share issued in October 2014 to the placement agents of the Company’s private placement offering which had a series of closings from May 2014 through October 2014.
9. INCOME TAXES:
10.SUPPLEMENTAL DISCLOSURES OF CASH FLOW:Reconciliation of the benefit for income taxes from continuing operations recorded in the consolidated statements of operations with the amounts computed at the statutory federal tax rates for each year:
2017 | 2016 | |||||||
Federal tax benefit at statutory rate | $ | (2,830,000 | ) | $ | (4,167,000 | ) | ||
State tax benefit, net of federal tax | (142,000 | ) | (293,000 | ) | ||||
Permanent differences | 39,000 | 43,000 | ||||||
Change in statutory rate | 86,000 | 216,000 | ||||||
Change in valuation allowance | (1,934,000 | ) | 4,075,000 | |||||
Change in federal tax rate | 4,747,000 | - | ||||||
Other | 34,000 | 126,000 | ||||||
Benefit for income taxes | $ | - | $ | - |
Non-cash financing
Tax affected components of deferred tax assets and investing activities consisteddeferred tax liabilities at December 31, 2017 and 2016 were as follows:
2017 | 2016 | |||||||
Deferred tax assets: | ||||||||
Equity based compensation | $ | 170,000 | $ | 254,000 | ||||
Allowance for doubtful accounts | 493,000 | 3,462,000 | ||||||
Lease merchandise | 779,000 | 813,000 | ||||||
Fixed assets | 4,000 | 11,000 | ||||||
Lease Impairment | 256,000 | 1,135,000 | ||||||
Deferred rent | 2,000 | - | ||||||
Accrued expenses | 45,000 | - | ||||||
Federal loss carry-forwards | 6,302,000 | 4,668,000 | ||||||
State loss carry forward | 696,000 | 338,000 | ||||||
Gross deferred tax assets | 8,747,000 | 10,681,000 | ||||||
Valuation allowance | (8,747,000 | ) | (10,681,000 | ) | ||||
Net deferred tax assets | $ | - | $ | - |
Based on consideration of the following:
For the three and nine months ended September 30, 2014
Conversionavailable evidence including historical losses a valuation allowance has been recognized to offset deferred tax assets, as management was unable to conclude that realization of shareholders’ loans to common stock - $1,000,000
Conversion of convertible preferred stock to common stock - $ 60,950
For the three and nine months ended September 30, 2013
None
11.INCOME TAXES:deferred tax assets were more likely than not.
As of September 30, 2014,December 31, 2017, the Company had approximately $4.3 million ofhas federal net operating loss carryforwards (“NOL”) for income tax purposes. The NOL’s expire in various years from 2022 through 2025. The Company’s use of approximately $30,008,000 and state net operating loss carryforwards is subjectof approximately $16,011,000 available to limitations imposed byoffset future taxable income which expire from 2014 to 2037.
Section 382 of the Internal Revenue Code. Management believes thatCode imposes a limitation on a corporation’s ability to utilize net operating loss carryforwards (“NOLs”) if it experiences an “ownership change.” In general, an ownership change may result from transactions increasing the deferred tax assets asownership of September 30, 2014 do not satisfycertain stockholders in the realization criteria and has recordedstock of a valuation allowance for the entire net tax asset. By recordingcorporation by more than 50 percentage points over a valuation allowance for the entire amount of future tax benefits, thethree-year period. The Company has not recognizedperformed a deferred tax benefit for income taxes in its statements of operations.formal Section 382 study and determined an ownership change has occurred.
Lease CommitmentsF-28
The Company has lease agreementsfiles tax returns in the U.S. federal jurisdiction and various states. At December 31, 2017, federal tax returns remained open for office spaceInternal Revenue Service review for tax years after 2013, while state tax returns remain open for review by state taxing authorities for tax years after 2013. There were no federal or state income tax audits being conducted as of December 31, 2017.
Under the 2017 tax reform bill signed into law on December 22, 2017, corporations will be taxed at a flat rate of 21%. The 21% rate will be applied for tax years beginning January 1, 2018. For tax years prior to 2018, a tiered tax bracket structure was used with tax rates ranging from 15% to 35% depending on the amount of corporate income subject to tax for the year. Deferred tax assets and deferred tax liabilities were revalued using enacted tax rate(s) expected to apply to taxable income in Charlotte, NC,the period in which the deferred tax asset/liability is expected to be settled or realized. The effects of the change in tax rates on deferred tax balances were recognized through continuing operations in the period in which the new legislation was enacted. As the law was enacted on December 22, 2017, the impact to the net deferred tax assets due to the change in tax rate was recognized in the financial statements period ending December 31, 2017. Consequently, we have recorded a decrease related to the deferred income tax assets and Boca Raton, FL. All lease agreements are with unrelated parties.the valuation allowance of $4,747,000 for the year ended December 31, 2017 to reflect these changes.
The Company has two Charlotte leasescompleted its analysis and review of all tax positions taken through December 31, 2017 and does not believe that there are any unrecognized tax benefits related to tax positions taken on its income tax returns.
10. COMMITMENTS:
Lease Commitments
FlexShopper entered into a lease, as amended, for adjoiningoffice space that expired May 31, 2014. The monthly rent forthrough June 2019. On March 14, 2017, FlexShopper amended the combined space is approximately $2,340. The Company renewed the leaseslease agreement for an additional year at the same terms.suite in an adjoining building.
On September 1, 2015, FlexShopper entered into a 48 month lease for additional office space in Fort Lauderdale, Florida to accommodate its call and customer service center.
On August 1, 2013,25, 2017, FlexShopper entered into a 3912 month lease with two additional three year options for officeretail store space in Boca Raton, FL to accommodate the FlexShopper business and its additional employees. The monthly rent was approximately $6,800. This lease agreement was amended in January 2014 to reflect a 63 month term for a larger suite in an adjoining building. Upon commencement the monthly base rent including operating expenses for the first year will be approximately $15,800 with annual three percent increases throughout the lease term.West Palm Beach, Florida.
Anchor had a lease for office space in Medley, FL, which was to expire on May 12, 2014. Anchor terminated this lease in 2013 and forfeited its security deposit.
The rental expense for the nine monthsyears ended September 30, 2014December 31, 2017 and 20132016 was approximately $116,000$331,900 and $42,000,$274,300, respectively. At September 30, 2014, TheDecember 31, 2017, the future minimum annual lease payments are approximately as follows:
2015 | $ | 135,800 | ||||
2016 | 120,600 | |||||
2017 | 124,400 | |||||
2018 | 128,100 | |||||
2019 | 109,500 | |||||
$ | 618,400 |
Contingencies
2018 | $ | 256,385 | ||
2019 | 144,201 | |||
$ | 400,586 |
We are not a party to any pending material legal proceedings except as described below. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.11. SUBSEQUENT EVENT:
On October 22, 2010, Anchor filedJanuary 9, 2018, the Credit Agreement was modified to extend the Commitment Termination Date from April 1, 2018 to August 31, 2018. (See Note 5)
On January 29, 2018 and January 30, 2018, the Company entered into letter agreements with Russ Heiser, the Company’s Chief Financial Officer, and NRNS Capital Holdings LLC (“NRNS”), respectively (such letter agreements, together, the “Commitment Letters”), pursuant to which the Company issued a complaintsubordinated promissory note to each of Mr. Heiser and NRNS (together, the “Notes”). The Commitment Letters provide that Mr. Heiser and NRNS each shall make advances to the Company under the applicable Note in aggregate amounts up to $1,000,000 and $2,500,000, respectively. Such amounts may be drawn by the Superior Court of Stamford/Norwalk, Connecticut against the AdministratorsCompany until July 31, 2018 in one or more advances. Upon issuance of the EstateNotes, the Company drew $500,000 on the Note held by Mr. Heiser and $2,500,000 on the Note held by NRNS. Payments of David Harvey (“Harvey”) to recoup a credit loss incurredprincipal and accrued interest are due and payable by the Company’s former subsidiary, Brookridge Funding Services, LLC. Harvey wasCompany upon 30 days’ prior written notice from the owner of a Company that caused the credit lossapplicable noteholder and the Company is pursuing its rights under the personal guarantee that Harvey provided. The Complaint is demandingcan prepay principal of approximately $485,000 plusand interest and damages.
On September 9, 2014 the Company received $124,774 from Harvey as a final settlement, which is included in discontinued operations.at any time without penalty.
13. SUBSEQUENT EVENTSF-29
In October 2014, the Company received gross proceeds of $135,000 from the sale of 245,456 shares of the Company’s Common Stock.
Shares
Common Stock
13,593,214 Shares
Flexshopper, Inc.
Common Stock
, 2015
PROSPECTUS
ThinkEquity
A division of Fordham Financial Management, Inc.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the variouscosts and expenses, to be incurredother than the underwriting discount, payable by us in connection with the sale and distribution of our common stockthe securities being registered hereby, all of which will be borne by us (except any commissions and expenses incurred for brokerage, accounting, tax or legal services or any other expenses incurred by the selling securityholders in disposing of the shares).registered. All amounts shown are estimatesestimated except the SEC registration feefee.
SEC Filing Fee | $ | 2,148 | ||
Underwriters’ Legal Fees and Expenses | $ | 100,000 | ||
Printing Expenses | $ | 20,000 | ||
Accounting Fees and Expenses | $ | 25,000 | ||
Legal Fees and Expenses | $ | 100,000 | ||
Transfer Agent and Registrar Expenses | $ | 10,000 | ||
Miscellaneous | $ | 42,852 | ||
Total | $ | 300,000 |
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following summary is qualified in its entirety by reference to the complete text of any statutes referred to below and the FINRA filing fee.Restated Certificate of Incorporation of FlexShopper, Inc., a Delaware corporation.
Legal fees and expenses | 25,000 | * | ||
Accounting fees and expenses | 10,000 | * | ||
Filing fees and Miscellaneous fees and expenses | 15,000 | * | ||
Total | $ | 50,000 | * | |
________________
*Estimated
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The Registrant’s certificate of incorporation contains provisions that eliminate, to the maximum extent permitted by the General Corporation Law of the State of Delaware, the personal liability of the Registrant’s directors and executive officers for monetary damages for breach of their fiduciary duties as directors or officers. The Registrant’s certificate of incorporation and bylaws provide that the Registrant must indemnify its directors and executive officers and may indemnify its employees and other agents to the fullest extent permitted by the General Corporation Law of the State of Delaware.
SectionsSection 145 and 102(b)(7) of the General Corporation Law of the State of Delaware provide that(the “DGCL”) permits a Delaware corporation mayto indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that hethe person is or she was a director, executive officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses including(including attorneys’ fees,fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or herthe person in connection with such action, suit or proceeding if he or shethe person acted in good faith and in a manner he or shethe person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or herthe person’s conduct was unlawful, except that, inunlawful.
In the case of an action by or in the right of the corporation, Section 145 of the DGCL permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification may generallyshall be made in respect of any claim, issue or matter as to which such person isshall have been adjudged to be liable to the corporation.corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery or such other court shall deem proper.
The Registrant has
Section 145 of the DGCL also permits a Delaware corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145 of the DGCL.
Article TENTH of our Restated Certificate of Incorporation states that our directors shall not be personally liable to us or to our stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. Under Section 102(b)(7) of the DGCL, the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty can be limited or eliminated except (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL (relating to unlawful payment of dividend or unlawful stock purchase or redemption); or (iv) for any transaction from which the director derived an improper personal benefit.
Article EIGHTH of our Fourth Amended and Restated Certificate of Incorporation provides that we shall indemnify our officers and directors to the full extent permitted by the DGCL.
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We have obtained directors’ and officers’ liability insurance insuring our directors and officers against liability for acts or omissions in their capacities as directors or officers, subject to certain exclusions.
In addition, we have entered into employment agreements with its executiveto indemnify certain of our officers in addition to the indemnification provided for in itsthe certificate of incorporation and bylaws.
The Registrant has purchased These agreements, among other things, indemnify our directors and intends to maintain insurancesome of our officers for certain expenses (including attorney’s fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in our right, on behalfaccount of each and anyservices by that person who is or wasas a director or officer of FlexShopper, Inc. or as a director or officer of any of our subsidiaries, or as a director or officer of any other company or enterprise that the Registrant against any loss arising from any claim asserted against him or her and incurred by him or her in any such capacity, subjectperson provides services to certain exclusions.
The Placement Agency Agreement entered into in connection with the placement provides for indemnification by the placement agent of the Registrant and its executive officers and directors, and by the Registrant of the placement agent, for certain liabilities, including liabilities arising under the Securities Act.
See also the undertakings set out in response to Item 17 herein.
During the last three years, we sold the following unregistered securities, it being understood that no unregistered securities were sold by the Registrant during the fiscal years ended December 31, 2012 and 2011:
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at our request.
May 2014 | Common Stock | 4,657,456 | $2,561,600, Before placement agent compensation of $333,008 | Accredited Investors | Section 4(2) and/or Rule 506 promulgated thereunder |
May 2014 | Common Stock | 1,818,181 | $1,000,000 | Accredited Investors | Section 3(a)(9) |
June 2014 | Common Stock | 2,068,183 | $1,137,500, before placement agent compensation of $168,208 | Accredited Investors | Section 4(2) and/ or Rule 506 promulgated thereunder |
July 2014 | Common Stock | 1,803,182 | $991,750, before placement agent compensation of $128,927 | Accredited Investors | Section 4(2) and/or Rule 506 promulgated thereunder |
August 2014 | Common Stock | 1,665,909 | $916,250, before placement agent compensation of$119,112 | Accredited Investors | Section 4(2) and/or Rule 506 promulgated thereunder |
September 2014 | Common Stock | 1,380,000 | $759,000, before placement agent compensation of $98,670 | Accredited Investors | Section 4(2) and/or Rule 506 promulgated thereunder |
October 2014 | Common Stock | 245,456 shares and placement agent warrants to purchase 1773,027 shares (4) | $135,000 before placement agent compensation of $16,200 | Accredited Investors | Section 4(2) and/or Rule 506 promulgated thereunder |
2014 | Common Stock | 194,758 shares | 34,168 Preferred Stock conversion; no commissions paid | Accredited Investors | Section 3(a)(9) |
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) Options are exercisable at $0.35 per share.
(2) Options are exercisable at $0.30 per share.
(3) Options are exercisable at $0.45 per share.
(4) Warrants are exercisable at $.55 per share.February 2016 Promissory Note
NoneOn February 11, 2016, a subsidiary of the foregoing transactions, except those common stock sales which took place between May and October 2014, involved any underwriters, underwriting discounts or commissions, or any public offering, and the registrant believes that each transaction was exempt from the registration requirementsCompany issued a promissory note in a principal amount of $1,000,000 (the “Promissory Note”) in favor of Marc Malaga, an executive officer of the Securities ActCompany at the time, in reliance on the following exemptions:
Series 2 Preferred Stock Offering
On June 10, 2016, the Company entered into a Subscription Agreement with B2 FIE, providing for the issuance and sale of shares of 20,000 shares Series 2 Convertible Preferred Stock at a purchase price of $1,000 per share, for gross proceeds of $20.0 million, and 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 (collectively, the “Series 2 Preferred Stock Offering”). The Company engaged a registered broker dealer to serve as placement agent for the Series 2 Preferred Stock Offering (the “Placement Agent”) and the Placement Agent received selling commissions equal to 6% of the first $20.0 million, and 2% of the next $1.95 million, of gross proceeds of the Series 2 Preferred Shares sold in the Series 2 Preferred Stock Offering. Additionally, the Placement Agent was granted seven-year warrants to purchase a number of shares of Series 2 Preferred Stock equal to 2% of the total number of such shares sold in the Offering at an exercise price of $1,250 per share. The Series 2 Preferred Stock was sold without registration under the Securities Act or state securities laws in reliance on the exemptions provided by Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder as transactions by an issuer not involvingand in reliance on similar exemptions under applicable state laws.
January 2018 Promissory Notes
On January 29, 2018 and January 30, 2018, a public offering. Each recipientsubsidiary of the securitiesCompany entered into letter agreements with Russ Heiser, our Chief Financial Officer, and NRNS Capital Holdings LLC (“NRNS”), respectively (such letter agreements, together, the “Commitment Letters”), pursuant to which we issued a subordinated promissory note to each of Mr. Heiser and NRNS (together, the “Notes”). The Commitment Letters provide that Mr. Heiser and NRNS each shall make advances to the Borrower under the applicable Note in these transactions represented hisaggregate amounts up to $1,000,000 and $2,500,000, respectively. Such amounts may be drawn by us until July 31, 2018 in one or her intentionmore advances. Upon issuance of the Notes, we drew $500,000 and a subsequent $500,000 on February 20, 2018 on the Note held by Mr. Heiser and $2,500,000 on the Note held by NRNS. The Notes bear interest at a rate equal to acquirethree (3%) per annum in excess of the securitiesnon-default rate of interest from time to time in effect under the Credit Agreement originally entered into on March 6, 2015 among FlexShopper 2, LLC as borrower and the lenders party thereto. The Notes were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
On July 5, 2018, FlexShopper, pursuant to the terms of the Notes, received a 30-day written notice for investment onlypayment of principal and interest from NRNS. On July 31, 2018, NRNS rescinded the notice and extended the demand for payment in full of all principal and interest under NRNS’ Note until on or before August 31, 2018 (or any later date agreed to by NRNS). In consideration of the extension, FlexShopper agreed that from July 31, 2018 until August 31, 2018, the unpaid principal balance of the Note will bear interest at a rate equal to five percent (5.00%) per annum in excess of the non-default rate of interest from time to time in effect under the Company’s Credit Agreement. Pursuant to the terms of the Notes, repayment is not withpermitted until all obligations under the Credit Agreement have been paid in full and such holder will be prohibited from exercising remedies (other than the imposition of default interest).
Secured Lender Warrant
On April 3, 2018, the Company, through a viewwholly-owned indirect subsidiary (the “Borrower”), entered into Amendment No. 6 (including related documentation, the “Amendment”) to or for resale inthe Credit Agreement originally entered into on March 6, 2015 by and among the Borrower and our secured lender and certain other lenders thereunder from time to time. In connection with any distribution thereof, and appropriate legends were affixedthe Borrower’s entry into the Amendment, the Company issued to our secured lender a warrant exercisable for 175,000 shares of the Company’s common stock at a per share certificatesexercise price of $0.01 (the “Warrant”). The Warrant was issued in each such transaction. In each case,reliance on the recipient received adequate information about the registrant or had adequate access, through his or her relationship with the registrant, to information about the registrant. The registrant further believes these exemptions are available because the securities were not offered pursuant to a general solicitation and such issuances were otherwise made in compliance with the requirementsexemption from registration provided by Section 4(a)(2) of Regulation D and Rule 506. The securities issued in such transactions are restricted and may not be resold except pursuant to an effective registration statement filed under the Securities Act or pursuant to a valid exemption fromand was exercised in full by the registration requirements of the Securities Act.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits |
The following exhibits are all previously filed in connection with our Form 10-SB, as amended, unless otherwise noted:
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* To be filed by amendment.
† Indicates management compensatory plan, contract or arrangement.
All financial statement schedules are omitted because they are not applicable or the information is in the registrant’s consolidated financial statements and related notes.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Sectionsection 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percenta 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;statement.
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(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered whichthat remain unsold at the termination of the offering.
(4) For determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5)(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Anyany preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Anyany free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) Thethe portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Anyany other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(5) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus as filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(6) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(7) That, insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that the registrant meets all of the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boca Raton, State of Florida, on this 22nd13th day of January, 2015.August 2018.
/s/ Brad Bernstein | ||
Brad Bernstein | ||
Chief Executive Officer and Director | ||
(Principal Executive Officer) |
Each person whose signature appears below constitutes and appoints Brad Bernstein and Russ Heiser and each of them, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, severally, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, any subsequent registration statements pursuant to Rule 462 of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Dated: August 13, 2018 | /s/ Brad Bernstein | ||||
Brad Bernstein | |||||
Chief Executive Officer and Director | |||||
(Principal Executive Officer) | |||||
| /s/ Russ Heiser | ||||
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(Principal Financial Officer and Principal Accounting Officer) | |||||
Dated: August 13, 2018 | /s/ James D. Allen | ||||
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Dated: August 13, 2018 | /s/ Carl L. Pradelli | ||||
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Dated: August 13, 2018 | /s/ T. Scott King | ||||
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Dated: August 13, 2018 | /s/ Daniel Ballen | ||||
| Daniel Ballen, Director | ||||
Dated: August 13, 2018 | /s/
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Katherine Verner, Director |
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