Notes
To Consolidated Financial Statements
For
the six months ended June 30, 2019 and 2018
(Unaudited)
1.
BASIS OF PRESENTATION
The
interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X
and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) applicable
to interim financial information. Accordingly, the information presented in the interim financial statements does not include
all information and disclosures necessary for a fair presentation of FlexShopper, Inc’s financial position, results of operations
and cash flows in conformity with GAAP for annual financial statements. In the opinion of management, these financial statements
reflect all adjustments consisting of normal recurring accruals, necessary for a fair statement of our financial position, results
of operations and cash flows for such periods. The results of operations for any interim period are not necessarily indicative
of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes
thereto contained in FlexShopper, Inc.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2018.
The
consolidated balance sheet as of December 31, 2018 contained herein has been derived from audited financial statements.
2.
BUSINESS
FlexShopper,
Inc. (“FlexShopper” or the “Company”) is a corporation organized under the laws of the State of Delaware
in 2006. The Company owns 100% of FlexShopper, LLC, a North Carolina limited liability company, which in turns owns 100% of FlexShopper
1, LLC and FlexShopper 2, LLC. The Company is a holding corporation with no operations except for those conducted by FlexShopper,
LLC. FlexShopper, LLC provides through e-commerce sites of durable goods to consumers, including customers of third-party
retailers and e-tailers, on a lease-to-own (“LTO”) basis.
To date, funds derived from the sale of FlexShopper’s
common stock, warrants, Series 1 Convertible Preferred Stock and Series 2 Convertible Preferred Stock and the Company’s ability
to borrow both funds against the lease portfolio and from promissory notes have provided the liquidity and capital resources necessary
to fund its operations. Management believes that liquidity needs for future growth for at least the next 12 months can be met by
cash flow from operations generated by the existing portfolio and/or additional borrowings against the Credit Agreement (see Note
7).
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation -
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries after elimination of intercompany balances and transactions.
Estimates
-
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition
- Merchandise is leased to customers pursuant to lease purchase agreements which provide for weekly lease terms
with non-refundable lease payments. Generally, the customer has the right to acquire title 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. On any
current lease, customers have the option to cancel the agreement in accordance with lease terms and return the merchandise. Accordingly,
customer agreements are accounted for as operating leases with lease revenues recognized in the month they are due on the accrual
basis of accounting. Merchandise sales revenue is recognized when the customer exercises the purchase option and pays the purchase
price. Revenue for lease payments received prior to their due date is deferred and recognized as revenue in the period to which
the payments relate. Revenues from leases and sales are reported net of sales taxes.
Accounts
Receivable and Allowance for Doubtful Accounts -
FlexShopper seeks to collect amounts owed under its leases from each customer
on a weekly or monthly basis by charging their bank accounts or credit cards. Accounts receivable are principally comprised of
lease payments currently owed to FlexShopper which are past due, as FlexShopper has been unable to successfully collect in the
manner described above. The allowance for doubtful accounts is 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 June 30, 2019 and December
31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
17,049,965
|
|
|
$
|
10,130,269
|
|
Allowance for doubtful accounts
|
|
|
(10,152,544
|
)
|
|
|
(3,754,306
|
)
|
Accounts receivable, net
|
|
$
|
6,897,421
|
|
|
$
|
6,375,963
|
|
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 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 $4,346,498 and $9,376,402 for the three
and six months ended June 30, 2019, respectively, and $3,013,914 and $7,442,190 for the three and six months ended June 30, 2018,
respectively.
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Beginning balance
|
|
$
|
3,754,306
|
|
|
$
|
2,139,765
|
|
Provision for write-offs
|
|
|
15,774,640
|
|
|
|
23,239,189
|
|
Accounts written off
|
|
|
(9,376,402
|
)
|
|
|
(21,624,648
|
)
|
Ending balance
|
|
$
|
10,152,544
|
|
|
$
|
3,754,306
|
|
Lease
Merchandise -
Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership
of the lease merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances
and household accessories and is recorded at cost net of accumulated depreciation. The Company depreciates leased merchandise
using the straight-line method over the applicable agreement period for a consumer to acquire ownership, generally twelve months
with no salvage value. Upon transfer of ownership of merchandise to customers resulting from satisfaction of their lease obligations,
the related cost and accumulated depreciation are eliminated from lease merchandise. For lease merchandise returned or anticipated
to be returned either voluntarily or through repossession, the Company provides an impairment reserve for the undepreciated balance
of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated
depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable.
The
net leased merchandise balances consisted of the following as of June 30, 2019 and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Lease merchandise at cost
|
|
$
|
45,325,064
|
|
|
$
|
48,893,012
|
|
Accumulated depreciation
|
|
|
(18,353,830
|
)
|
|
|
(14,338,295
|
)
|
Impairment reserve
|
|
|
(2,546,067
|
)
|
|
|
(2,190,020
|
)
|
Lease merchandise, net
|
|
$
|
24,425,167
|
|
|
$
|
32,364,697
|
|
Lease
merchandise at cost represents the undepreciated cost of rental merchandise at the time of purchase.
Deferred
Debt Issuance Costs -
Debt issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 2015,
and subsequent amendments (see Note 7) are offset against the outstanding balance of the loan payable and are amortized using
the straight-line method over the remaining term of the related debt, which approximates the effective interest method. Amortization,
which is included in interest expense, was $50,431 and $105,271 for the three and six months ended June 30, 2019, respectively,
and $139,903 and $258,307 for the three and six months ended June 30, 2018, respectively.
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 6) are offset against the outstanding balance of the loan payable and are amortized using the straight-line
method over the remaining term of the related debt, which approximates the effective interest method. Amortization, which is included
in interest expense, was $21,000 and $35,000 for the three and six months ended June 30, 2018, respectively.
Debt
issuance costs of $60,000 incurred in conjunction with the subordinated Promissory Notes entered into on January 25, 2019 and
February 19, 2019 (see Note 6) are offset against the outstanding balance of the loan payable and are amortized using the straight-line
method over the remaining term of the related debt, which approximates the effective interest method. Amortization, which is included
in interest expense, was $8,138 and $13,563 for the three and six months ended June 30, 2019, respectively.
Intangible
Assets -
Intangible assets consist of a patent on the Company’s LTO payment method at check-out for third party e-commerce
sites. Patents are stated at cost less accumulated amortization. Patent costs are amortized by using the straight-line method
over the legal life, or if shorter, the useful life of the patent, which has been estimated to be 10 years.
Software Costs -
Costs related
to developing or obtaining internal-use software incurred during the preliminary project and post-implementation stages of an internal
use software project are expensed as incurred and certain costs incurred in the project’s application development stage are
capitalized as property and equipment. The Company expenses costs related to the planning and operating stages of a website. Costs
associated with minor enhancements and maintenance for the website are included in expenses as incurred. Direct costs incurred
in the website’s development stage are capitalized as property and equipment. Capitalized software costs amounted to $513,645
and $1,060,689 for the three and six months ended June 30, 2019, respectively, and $709,561 and $1,007,387 for the three and six
months ended June 30, 2018, respectively. The Company wrote off $102,332 of capitalized development costs in the 2
nd
quarter of 2019.
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, are charged to expense as incurred. Direct acquisition costs,
primarily consisting of commissions earned based on lease originations, are capitalized and amortized over the life of the lease.
Per
Share Data -
Per share data is computed by use of the two-class method as a result of outstanding Series 1 Convertible Preferred
Stock, which participates in dividends with the common stock and accordingly has participation rights in undistributed earnings
as if all such earnings had been distributed during the period (see Note 8). Under such method income available to common shareholders
is computed by deducting both dividends declared or, if not declared, accumulated on Series 2 Convertible Preferred Stock from
income from continuing operations and from net income. Loss attributable to common shareholders is computed by increasing loss
from continuing operations and net loss by such dividends. Where the Company has undistributed net income available to common
shareholders, basic earnings per common share is computed based on the total of any dividends paid or declared per common share
plus undistributed income per common share determined by dividing net income available to common shareholders reduced by any dividends
paid or declared on common and participating Series 1 Convertible Preferred Stock by the total of the weighted average number
of common shares outstanding plus the weighted average number of common shares issuable upon conversion of outstanding participating
Series 1 Convertible Preferred Stock during the period. Where the Company has a net loss, basic per share data (including income
from continuing operations) is computed based solely on the weighted average number of common shares outstanding during the period.
As the participating Series 1 Convertible Preferred Stock has no contractual obligation to share in the losses of the Company,
common shares issuable upon conversion of such preferred stock are not included in such computations.
Diluted
earnings per share is based on the more dilutive of the if-converted method (which assumes conversion of the participating 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 non-participating Series 2 Convertible
Preferred Stock, options and warrants. The dilutive effect of stock options and warrants is computed using the treasury stock
method, which assumes the repurchase of common shares at the average market price during the period. Under the treasury stock
method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the
exercise price of options or warrants. When there is a loss from continuing operations, potential common shares are not included
in the computation of diluted loss per share, since they have an anti-dilutive effect.
In computing diluted loss per share, no effect
has been given to the issuance of common stock upon conversion or exercise of the following securities as their effect is anti-dilutive.
The following table for 2019 reflects a change in the conversion rates of the Series 1 Convertible Preferred Stock and Series 2
Convertible Preferred Stock due to anti-dilution adjustments as a result of FlexShopper’s September 2018 equity offering.
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Series 1 Convertible Preferred Stock
|
|
|
216,637
|
|
|
|
145,197
|
|
Series 2 Convertible Preferred Stock
|
|
|
5,639,745
|
|
|
|
2,710,124
|
|
Series 2 Convertible Preferred Stock issuable upon exercise of warrants
|
|
|
112,785
|
|
|
|
54,217
|
|
Common Stock Options
|
|
|
1,909,151
|
|
|
|
426,400
|
|
Common Stock Warrants
|
|
|
7,342,489
|
|
|
|
377,303
|
|
|
|
|
15,220,807
|
|
|
|
3,713,241
|
|
Stock-Based
Compensation -
The fair value of transactions in which the Company exchanges its equity instruments for employee and non-employee
services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.
Compensation
expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis
over the vesting period. The Company has elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value
of all stock option awards (see Note 9).
Fair
Value of Financial Instruments
- The carrying value of loans payable under the Credit Agreement increased by unamortized issuance
costs (see Note 7) and notes payable approximates fair value. The carrying value of cash, receivables, and payables approximate
fair value due to their short-term nature.
Income
Taxes
- Deferred tax assets and liabilities are determined based on the estimated future tax effects of net operating loss
carryforwards and temporary differences between the tax bases of assets and liabilities and their respective financial reporting
amounts measured at the current enacted tax rates. The Company records a valuation allowance for its deferred tax assets when
management concludes that it is not more likely than not that such assets will be recognized.
The
Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement. As of June 30, 2019, and 2018, the Company had not recorded any unrecognized
tax benefits.
Interest
and penalties related to liabilities for uncertain tax positions will be charged to interest and operating expenses, respectively.
Recent Accounting Pronouncements
- 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. 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. The Company has determined
that the new standard will not materially impact the timing of revenue recognition. The new standard resulted in the Company classifying
bad debt expense incurred as a reduction of lease revenue and fees within the consolidated statements of earnings including retrospective
presentation of prior year financial information. As a result of the change in presentation, the breakout of lease revenues and
fees, net of lessor bad debt expense, that ties the consolidated statements of operations is shown below:
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Lease revenues and fees
|
|
$
|
57,460,765
|
|
|
$
|
37,925,373
|
|
Provision for doubtful accounts
|
|
|
15,774,830
|
|
|
|
10,658,805
|
|
Lease revenues and fees, net of lessor bad debt expense
|
|
$
|
41,685,935
|
|
|
$
|
27,266,568
|
|
The
new standard also impacted the Company as a lessee by requiring all of its operating leases to be recognized on the balance sheet
as a right-to-use asset and lease liability. The Company has elected a package of optional practical expedients which includes
the option to retain the current classification of leases entered into prior to January 1, 2019. The Company has concluded that
there is no material impact to the consolidated balance sheets, consolidated statements of operations, or consolidated statements
of cash flows as a result of the new standard. The Company adopted this new guidance on January 1, 2019 (see Note 4 below).
4.
LEASES
Lessor
Information -
Refer to Note 3 to these condensed consolidated financial statements for further information about the Company’s
revenue generating activities as a lessor. All of the Company’s customer agreements are considered operating leases, and
the Company currently does not have any sales-type or direct financing leases.
Lessee
Information -
As a lessee, the Company leases retail, call center and corporate space under operating leases expiring at various
times through 2028. At January 1, 2019, the Company recognized $191,001 of operating lease assets and $191,001 of operating lease
liabilities as a result of adopting ASU 2016-02.
The
Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in the Company’s
consolidated balance sheet beginning January 1, 2019. The breakout of operating lease assets, and current and non-current operating
lease liabilities at June 30, 2019, is shown in the table below.
Supplemental
balance sheet information related to leases is as follows:
|
|
Balance Sheet Classification
|
|
June 30,
2019
|
|
Assets
|
|
|
|
|
|
Operating Lease Asset
|
|
Property and Equipment, net
|
|
$
|
1,941,203
|
|
Total Lease Assets
|
|
|
|
$
|
1,941,203
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Operating Lease Liability
|
|
Current Operating Lease Liabilities
|
|
$
|
224,998
|
|
Operating Lease Liability
|
|
Long Term Operating Lease Liabilities
|
|
|
1,734,564
|
|
Total Lease Liabilities
|
|
|
|
$
|
1,959,562
|
|
Operating
lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date.
The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not
readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with
similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include
any prepaid lease payments and lease incentives. The lease terms include periods under options to extend or terminate the lease
when it is reasonably certain that the Company will exercise the option. The Company generally uses the base, non-cancelable,
lease term when determining the lease assets and liabilities. Under the short-term lease exception provided within ASC 842, the
Company does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at
commencement.
Below
is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s operating
leases:
|
|
Weighted Average Discount Rate
|
|
|
Weighted Average Remaining Lease Term
(in years)
|
|
Operating Leases
|
|
|
13.50
|
%
|
|
|
9
|
|
Upon
adoption of ASU 2016-02, discount rates for existing operating leases were established as of January 1, 2019. The discount rate
for the new operating lease related to 901 Yamato Road, Boca Raton, FL was established as of June 1, 2019.
Operating lease expense is recognized on a
straight-line basis over the lease term within operating expenses in the Company’s consolidated statements of operations.
The Company’s total operating lease expenses all relate to operating lease costs and amounted to $101,668 and $166,459 for
the three and six months ended June 30, 2019, respectively.
Supplemental
cash flow information related to operating leases is as follows:
|
|
Six months ended June 30, 2019
|
Cash payments for operating leases
|
|
$
|
133,200
|
|
New operating lease asset obtained in exchange for operating lease liabilities
|
|
$
|
1,869,287
|
|
The new operating lease asset obtained in exchange for operating
lease liabilities, as shown above, does not include the $14,900 of direct costs associated with the new operating lease capitalized
as part of the right-of-use asset.
Below
is a summary of undiscounted operating lease liabilities as of June 30, 2019. The table also includes a reconciliation of the
future undiscounted cash flows to the present value of the operating lease liabilities included in the consolidated balance sheet.
|
|
Operating Leases
|
|
2019
|
|
$
|
31,464
|
|
2020
|
|
|
303,681
|
|
2021
|
|
|
416,998
|
|
2022
|
|
|
407,450
|
|
2023
|
|
|
419,674
|
|
2024 and thereafter
|
|
|
2,048,092
|
|
Total undiscounted cash flows
|
|
|
3,627,359
|
|
Less: interest
|
|
|
(1,667,797
|
)
|
Present value of lease liabilities
|
|
$
|
1,959,562
|
|
The
Company entered into an office lease in January 2019. The lease commenced in June 2019, at which time the Company recognized the
operating lease asset and liability. The Company pays a base monthly rent of $31,532 with payments increasing by 3% on each
yearly anniversary of the commencement date. The initial lease term is for 9 years with the Company having a one-time option to
extend for 5 years.
5.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
Estimated
Useful Lives
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Furniture, fixtures and vehicle
|
|
2-5 years
|
|
$
|
93,893
|
|
|
$
|
155,165
|
|
Website and internal use software
|
|
3 years
|
|
|
9,056,840
|
|
|
|
8,098,483
|
|
Computers and software
|
|
3-7 years
|
|
|
544,411
|
|
|
|
704,407
|
|
|
|
|
|
|
9,695,144
|
|
|
|
8,958,055
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(6,370,128
|
)
|
|
|
(5,621,391
|
)
|
Right of use assets, net
|
|
|
|
|
1,941,203
|
|
|
|
-
|
|
|
|
|
|
$
|
5,266,219
|
|
|
$
|
3,336,664
|
|
Depreciation
and amortization expense were $592,836 and $461,761 for the three months ended June 30, 2019 and 2018, respectively, and $1,116,770
and $896,666 for the six months ended June 30, 2019 and 2018, respectively.
6.
PROMISSORY NOTES
January 2018 Notes –
In January
2018, FlexShopper, LLC entered into letter agreements with Russ Heiser, FlexShopper’s Chief Financial Officer, and NRNS Capital
Holdings LLC (“NRNS”), the manager of which is the Chairman of the Company’s Board of Directors, respectively
(such letter agreements, together, the “Commitment Letters”), pursuant to which FlexShopper, LLC issued a subordinated
promissory note to each of Mr. Heiser and NRNS (together, the “Notes”). The Commitment Letters provided that Mr. Heiser
and NRNS would each make advances to FlexShopper, LLC under the applicable Note in aggregate amounts up to $1,000,000 and $2,500,000,
respectively. Payments of principal and accrued interest are due and payable by FlexShopper, LLC upon 30 days’ prior written
notice from the applicable noteholder and the Company can prepay principal and interest at any time without penalty. However, repayment
is not permitted without the consent of the Credit Agreement lender. The Notes bear interest at a rate equal to five (5%) per annum
in excess of the non-default rate of interest from time to time in effect under the Credit Agreement entered into on March 6, 2015
(see Note 7) computed on the basis of a 360-day year, which equaled 18.39% at June 30, 2019.
Upon
issuance of the Notes, FlexShopper, LLC drew $500,000 and a subsequent $500,000 on February 20, 2018 on the Note held by Mr. Heiser
and $2,500,000 on the Note held by NRNS. On August 29, 2018, FlexShopper, LLC issued amended and restated Notes to Mr. Heiser
and NRNS under which (1) the maturity date for such Notes was set at June 30, 2019 and (2) in connection with the completion of
an Equity Financing (as defined in the Notes), the holders of such Notes were granted the option to convert up to 50% of the outstanding
principal of the Notes plus accrued and unpaid interest thereon into the securities issued in the Equity Financing at a conversion
price equal to the price paid to the Company by the underwriters for such securities, net of the underwriting discount. In connection
with the offering of units in September 2018, Mr. Heiser and NRNS elected to convert the convertible portion of the Notes, resulting
in the issuance by the Company of 602,974 shares of common stock and 301,487 warrants to Mr. Heiser and 1,507,395 shares of common
stock and 753,697 warrants to NRNS.
Prior
to Mr. Heiser’s Note maturity date, the Company paid down the entire principal and interest balance on June 28, 2019 in
the amount of $507,339. NRNS amended and restated the NRNS Note such that the maturity date of the revised Note was set at June
30, 2021. In addition, the Company drew $500,000 on the Note held by NRNS on June 28, 2019. As of June 30, 2019, $1,769,030 of
principal and accrued and unpaid interest was outstanding on NRNS’s Note.
January
2019 Note -
On January 25, 2019, FlexShopper, LLC entered into a letter agreement with 122 Partners, LLC (the lender), pursuant
to which FlexShopper, LLC issued a subordinated promissory note to 122 Partners, LLC (the “January Note”) in the principal
amount of $1,000,000. H. Russell Heiser, Jr., FlexShopper’s Chief Financial Officer, is a member of 122 Partners, LLC. The
Company paid a commitment fee of 2% to the lender totaling $20,000. Payment of principal and accrued interest under the January
Note is due and payable by FlexShopper, LLC on April 30, 2020 and FlexShopper, LLC can prepay principal and interest at any time
without penalty. Amounts outstanding under the January Note bear interest at a rate equal to five percent (5.00%) per annum in
excess of the non-default rate of interest from time to time in effect under the Credit Agreement, which equaled 18.39% at June
30, 2019. Obligations under the January Note are subordinated to obligations under the Credit Agreement. The January Note is subject
to customary representations and warranties and events of default. If an event of default occurs and is continuing, FlexShopper,
LLC may be required to repay all amounts outstanding under the January Note. Obligations under the January Note are secured by
essentially all of FlexShopper, LLC’s assets, subject to rights of the lenders under the Credit Agreement. As of June 30,
2019, $1,015,451 of principal and accrued and unpaid interest was outstanding on the January Note.
February
2019 Note -
On February 19, 2019, FlexShopper, LLC entered into a letter agreement with NRNS, the manager of which is the
Chairman of the Company’s Board of Directors, pursuant to which FlexShopper, LLC issued a subordinated promissory note to
NRNS (the “February Note”) in the principal amount of $2,000,000. The Company paid a commitment fee of 2% to the lender
totaling $40,000. Payment of principal and accrued interest under the February Note is due and payable by FlexShopper, LLC on
June 30, 2021 and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding under the
February Note bear interest at a rate equal to five percent (5.00%) per annum in excess of the non-default rate of interest from
time to time in effect under the Credit Agreement, which equaled 18.39% at June 30, 2019. Obligations under the February Note
are subordinated to obligations under the Credit Agreement. The February Note is subject to customary representations and warranties
and events of default. If an event of default occurs and is continuing, FlexShopper, LLC may be required to repay all amounts
outstanding under the February Note. Obligations under the February Note are secured by essentially all of FlexShopper, LLC’s
assets, subject to rights of the lenders under the Credit Agreement. As of June 30, 2019, $2,031,965 of principal and accrued
and unpaid interest was outstanding on the February Note.
7.
LOAN PAYABLE UNDER CREDIT AGREEMENT
On
March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as
amended from time-to-time and including the Fee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo
Bank, National Association as paying agent, various lenders from time to time party thereto and WE 2014-1, LLC, an affiliate of
Waterfall Asset Management, LLC, as administrative agent and lender (the “Lender”). The Borrower is permitted to borrow
funds under the Credit Agreement based on FlexShopper’s 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, the Borrower may borrow up to $32,500,000 from the
Lender until the Commitment Termination Date and must repay all borrowed amounts one year thereafter, on the date that is 12 months
following the Commitment Termination Date (unless such amounts become due or payable on an earlier date pursuant to the terms
of the Credit Agreement). On April 1, 2019, the Commitment Termination Date was extended to February 28, 2021. The Lender was
granted a security interest in certain leases as collateral under the Credit Agreement. At June 30, 2019, amounts borrowed bear
interest at 13.39%.
The
Credit Agreement provides that FlexShopper may not incur additional indebtedness (other than expressly permitted indebtedness)
without the permission of the Lender and also prohibits dividends on common stock. Additionally, the Credit Agreement includes
covenants requiring FlexShopper to maintain a minimum amount of Equity Book Value, maintain a minimum amount of Unrestricted Cash
(including a reserve upon which the Lender may draw to satisfy unpaid amounts under the Credit Agreement) and maintain a certain
ratio of Consolidated Total Debt to Equity Book Value (each capitalized term, as defined in the Credit Agreement). Upon a Permitted
Change of Control (as defined in the Credit Agreement), FlexShopper must refinance the debt under the Credit Agreement, subject
to the payment of an early termination fee. A summary of the covenant requirements, and FlexShopper’s actual results at
June 30, 2019, follows:
|
|
June 30,
2019
|
|
|
|
Required Covenant
|
|
|
Actual Position
|
|
|
|
|
|
|
|
|
Equity Book Value not less than
|
|
$
|
8,000,000
|
|
|
$
|
9,081,391
|
|
Unrestricted Cash greater than
|
|
|
1,500,000
|
|
|
|
2,791,829
|
|
Consolidated Total Debt to Equity Book Value ratio not to exceed
|
|
|
4.75
|
|
|
|
2.81
|
|
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.
Availability under the Credit Agreement is
subject to a borrowing base which is redetermined from time to time and based on specific advance rates on eligible current assets.
Interest expense incurred under the Credit Agreement amounted to $735,619 and $1,689,529 for the three and six months ended June
30, 2019, respectively, and $716,272 and $1,414,224 for the three and six months ended June 30, 2018, respectively. As of June
30, 2019, the outstanding balance under the Credit Agreement was $20,707,641. Such amount is presented in the consolidated balance
sheet net of unamortized issuance costs of $226,963. The Company borrowed $117,015 and subsequently repaid $2,590,000 in
the second quarter of 2019 as a result of the pay down of the seasonal advance. Interest is payable monthly on the outstanding
balance of the amounts borrowed. No principal is expected to be repaid in the next twelve months due to the Commitment Termination
Date having been extended to February 28, 2021, or from reductions in the borrowing base. Accordingly, all principal is shown
as a non-current liability at June 30, 2019.
8.
CAPITAL STRUCTURE
The
Company’s capital structure consists of preferred and common stock as described below:
Preferred
Stock
The
Company is authorized to issue 500,000 shares of preferred stock, par value $0.001 per share. Of this amount, 250,000 shares have
been designated as Series 1 Convertible Preferred Stock and 25,000 shares have been designated as Series 2 Convertible Preferred
Stock. The Company’s Board of Directors has the right to determine the rights and preferences of any future designation
of the Company’s preferred stock, subject to the terms of the Series 1 and Series 2 Convertible Preferred Stock.
|
●
|
Series
1 Convertible Preferred Stock
-
Series 1 Convertible Preferred Stock ranks senior to common stock.
|
As
of June 30, 2019, each share of Series 1 Convertible Preferred Stock was convertible into 1.26547 shares of the Company’s
common stock, subject to certain anti-dilution rights. The holders of the Series 1 Convertible Preferred Stock have the option
to convert the shares to common stock at any time. Upon conversion, all accumulated and unpaid dividends, if any, will be paid
as additional shares of common stock. The holders of Series 1 Convertible Preferred Stock have the same dividend rights as holders
of common stock, as if the Series 1 Convertible Preferred Stock had been converted to common stock.
68,214
shares of Series 1 Convertible Preferred Stock were converted into 86,323 shares of common stock during the six months ended June
30, 2019. As of June 30, 2019, there were 171,191 shares of Series 1 Convertible Preferred Stock outstanding, which are convertible
into 216,637 shares of common stock.
|
●
|
Series
2 Convertible Preferred Stock
-
The Company sold to B2 FIE V LLC (the “Investor”), an entity affiliated
with Pacific Investment Management Company LLC, providing 20,000 shares of Series 2 Convertible Preferred Stock (“Series
2 Preferred Stock”) for gross proceeds of $20.0 million. The Company sold an additional 1,952 shares of Series 2 Preferred
Stock to a different investor for gross proceeds of $1.95 million at a subsequent closing.
|
Shares
of Series 2 Preferred Stock 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, 2019 totaled approximately $7,173,651.
As of June 30, 2019, each share of Series 2 Preferred Stock was convertible into approximately 257 shares of common stock; provided
the conversion rate is subject to further increase pursuant to a weighted average anti-dilution provision. The holders of the
Series 2 Preferred Stock 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 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), holders of Series 2 Preferred Stock shall be
entitled to receive out of the assets of the Company prior to and in preference to the common stock and Series 1 Convertible Preferred
Stock an amount equal to the greater of (1) the Stated Value, plus any accrued and unpaid dividends thereon, and (2) the amount
per share as would have been payable had all shares of Series 2 Preferred Stock been converted to common stock immediately before
the Liquidation Event or Deemed Liquidation Event.
Common
Stock
The
Company is authorized to issue 40,000,000 shares of common stock, par value $0.0001 per share. Each share of common stock entitles
the holder to one vote at all stockholder meetings. The common stock is traded on the Nasdaq Capital Market under the symbol “FPAY.”
Warrants
In
September 2018, the Company issued warrants exercisable for 5,750,000 shares of common stock at an exercise price of $1.25 per
share. The warrants are immediately exercisable and expire five years from the date of issuance. The warrants are listed on the
Nasdaq Capital Market under the symbol “FPAYW.”
The
Company also issued additional warrants exercisable for an aggregate 1,055,184 shares of common stock at an exercise price of
$1.25 per warrant to Mr. Heiser and NRNS in connection with partial conversions of their promissory notes (see Note 6). The warrants
are exercisable at $1.25 per share of common stock and expire on September 28, 2023.
In
connection with the issuance of Series 2 Convertible Preferred Stock in June 2016, the Company issued to the placement agent in
such offering warrants exercisable for 439 shares of Series 2 Convertible Preferred Stock at an initial exercise price of $1,250
per share, which expire seven years after the date of issuance.
As
part of a consulting agreement with XLR8 Capital Partners LLC (the “Consultant”), an entity of which the Company’s
Chairman is manager, the Company agreed to issue 40,000 warrants to the Consultant monthly for 12 months beginning on March 1,
2019 at an exercise price of $1.25 per share. The warrants are immediately exercisable and expire following the close of business
on June 30, 2023. As of June 30, 2019, the Company recorded an expense of $43,200 based on a weighted average valuation of $0.27
per warrant as determined by the fair market value of the Company’s warrants that are actively traded and listed on the
Nasdaq Capital Market under the symbol “FPAYW”.
Grant
|
|
Warrants
|
|
|
Expense
|
|
|
Valuation
|
|
Date
|
|
Granted
|
|
|
Recorded
|
|
|
Per Warrant
|
|
March 31, 2019
|
|
|
40,000
|
|
|
$
|
11,200
|
|
|
$
|
0.28
|
|
April 30, 2019
|
|
|
40,000
|
|
|
$
|
10,000
|
|
|
$
|
0.25
|
|
May 31, 2019
|
|
|
40,000
|
|
|
$
|
10,000
|
|
|
$
|
0.25
|
|
June 30, 2019
|
|
|
40,000
|
|
|
$
|
12,000
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,000
|
|
|
$
|
43,200
|
|
|
$
|
0.27
|
|
The
following table summarizes information about outstanding stock warrants as of June 30, 2019, all of which are exercisable:
|
|
|
Common
|
|
|
Series 2 Preferred
|
|
|
Weighted Average
|
Exercise
|
|
|
Stock Warrants
|
|
|
Stock Warrants
|
|
|
Remaining
|
Price
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
|
$
|
10.00
|
|
|
|
200,001
|
|
|
|
|
|
|
1 years
|
$
|
5.50
|
|
|
|
177,304
|
|
|
|
|
|
|
2 years
|
$
|
1.25
|
|
|
|
6,965,184
|
|
|
|
|
|
|
4 years
|
$
|
1,250
|
|
|
|
-
|
|
|
|
439
|
|
|
4 years
|
|
|
|
|
|
7,342,489
|
|
|
|
439
|
|
|
|
9.
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 of
Company common stock were available for issuance thereunder, consisting of 750,000 shares authorized for issuance under the 2018
Plan and an aggregate 307,000 shares then remaining available for issuance under the Company’s 2007 Omnibus Equity Compensation
Plan (the “2007 Plan”) and 2015 Omnibus Equity Compensation Plan (the “2015 Plan”, and together with the
2007 Plan, the “Prior Plans”). The 2018 Plan replaced the Prior Plans. No new awards will be granted under the Prior
Plans; however, awards outstanding under the Prior Plans upon approval of the 2018 Plan remain subject to and will be paid under
the applicable Prior Plan.
On
February 21, 2019, the Company’s Board of Directors approved Amendment No. 1 to the 2018 Plan, subject to stockholder approval.
On May 2, 2019, the Company’s stockholders approved the 2018 Plan Amendment that increased (a) the total number of shares
available for issuance under the 2018 Plan by 1,000,000 shares and (b) the number of shares available for issuance as “incentive
stock options” within the meaning of Internal Revenue Code Section 422 by 1,000,000 shares.
Grants
under the 2018 Plan and the Prior Plans 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 and other
service providers are eligible to participate in the 2018 Plan and the Prior Plans. Options granted under the 2018 Plan and the
Prior Plans vest over periods ranging from immediately upon grant to a three-year period and expire ten years from date of grant.
Activity
in stock options for the six months ended June 30, 2019 follows:
|
|
Number of options
|
|
|
Weighted average exercise price
|
|
|
Weighted average contractual term (years)
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding at January 1, 2019
|
|
|
620,900
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,334,851
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(21,600
|
)
|
|
|
1.35
|
|
|
|
|
|
|
|
855
|
|
Expired
|
|
|
(25,000
|
)
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
1,909,151
|
|
|
$
|
1.72
|
|
|
|
9.12
|
|
|
$
|
379,582
|
|
Vested and exercisable at June 30, 2019
|
|
|
742,434
|
|
|
$
|
2.76
|
|
|
|
8.34
|
|
|
$
|
-
|
|
The
weighted average grant date fair value of options granted during the six-month period ended June 30, 2019 was $0.52 per share.
The Company measured the fair value of each option award on the date of grant using the Black-Scholes-Merton (BSM) pricing model
with the following assumptions:
Exercise price
|
|
$
|
0.85
|
|
Expected life
|
|
|
6.8 years
|
|
Expected volatility
|
|
|
63
|
%
|
Dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
The
expected dividend yield is based on the Company’s historical dividend yield. The expected volatility is based on the historical
volatility of the Company’s common stock. The expected life is based on the simplified expected term calculation permitted
by the Securities and Exchange Commission (the “SEC”), which defines the expected life as the average of the contractual
term of the options and the weighted-average vesting period for all option tranches. The risk-free interest rate is based on the
annual yield on the grant date of a zero-coupon U.S. Treasury bond the maturity of which equals the option’s expected life.
The
value of stock options is recognized as compensation expense by the straight-line method over the vesting period. Compensation
expense recorded for options in the consolidated statements of operations was $303,243 and $328,772 for the three and six months
ended June 30, 2019, respectively, and $22,779 and $72,481 for the three and six months ended June 30, 2018, respectively. Unrecognized
compensation cost related to non-vested options at June 30, 2019 amounted to approximately $548,396, which is expected to be recognized
over a weighted average period of 1.14 years.
10.
INCOME TAXES
As
of December 31, 2018, the Company had federal net operating loss carryforwards of approximately $75,400,000 and state net operating
loss carryforwards of approximately $18,600,000 available to offset future taxable income which expire from 2024 to 2037. Losses
incurred after January 1, 2018 do not expire
.
Management
believes that the federal and state deferred tax asset as of December 31, 2018 does not satisfy the realization criteria and has
recorded a full valuation allowance to offset the tax asset.
11.
SUBSEQUENT EVENTS
On
July 2, 2019, the Company received notification with regard to the Company regaining compliance with The Nasdaq Stock Market listing
requirements relating to satisfying the minimum $1.00 bid price.