Notes To Consolidated Financial Statements
For the nine months ended September
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 September 30, 2019 and December 31, 2018:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
17,877,284
|
|
|
$
|
10,130,269
|
|
|
Allowance for doubtful accounts
|
|
|
(9,900,704
|
)
|
|
|
(3,754,306
|
)
|
|
Accounts receivable, net
|
|
$
|
7,976,580
|
|
|
$
|
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 $9,838,873 and $19,215,275 for the three and nine months ended September 30, 2019,
respectively, and $6,766,876 and $14,209,066 for the three and nine months ended September 30, 2018, respectively.
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Beginning balance
|
|
$
|
3,754,306
|
|
|
$
|
2,139,765
|
|
|
Provision for write-offs
|
|
|
25,361,673
|
|
|
|
23,239,189
|
|
|
Accounts written off
|
|
|
(19,215,275
|
)
|
|
|
(21,624,648
|
)
|
|
Ending balance
|
|
$
|
9,900,704
|
|
|
$
|
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 September 30, 2019 and December 31, 2018:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Lease merchandise at cost
|
|
$
|
45,713,984
|
|
|
$
|
48,893,012
|
|
|
Accumulated depreciation
|
|
|
(18,931,951
|
)
|
|
|
(14,338,295
|
)
|
|
Impairment reserve
|
|
|
(2,440,417
|
)
|
|
|
(2,190,020
|
)
|
|
Lease merchandise, net
|
|
$
|
24,341,616
|
|
|
$
|
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 $103,368 and $208,640 for the three and nine months ended September 30, 2019, respectively, and $167,689 and $425,996
for the three and nine months ended September 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 $0
and $35,000 for the three and nine months ended September 30, 2018.
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 $21,701 for the three and nine months ended September 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 $535,640
and $1,584,666 for the three and nine months ended September 30, 2019, respectively, and $730,554 and $1,737,931 for the three
and nine months ended September 30, 2018, respectively. Capitalized software amortization expense was $513,149 and $1,596,396 for
the three and nine months ended September 30, 2019, respectively and $468,289 and $1,290,562 for the three and nine months ended
September 30, 2018, respectively. The Company wrote off $90,828 of capitalized development costs in 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 for
the nine months ended September 30, 2019 and the three and nine months ended September 30, 2018, 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.
|
|
|
Nine Months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Series 1 Convertible Preferred Stock
|
|
|
216,637
|
|
|
|
145,197
|
|
|
Series 2 Convertible Preferred Stock
|
|
|
5,639,745
|
|
|
|
7,506,249
|
|
|
Series 2 Convertible Preferred Stock issuable upon exercise of warrants
|
|
|
112,785
|
|
|
|
150,111
|
|
|
Common Stock Options
|
|
|
1,755,818
|
|
|
|
445,400
|
|
|
Common Stock Warrants
|
|
|
7,462,489
|
|
|
|
7,182,488
|
|
|
|
|
|
15,187,474
|
|
|
|
15,429,445
|
|
The following table sets forth the computation
of basic and diluted earnings per share for the three months ended September 30, 2019:
|
|
|
September 30,
2019
|
|
|
Numerator
|
|
|
|
|
Net income
|
|
$
|
1,387,982
|
|
|
Convertible Series 2 Preferred Share dividends
|
|
|
(609,717
|
)
|
|
Convertible Series 2 Preferred Share dividends attributable to Series 1 Convertible Preferred Stock
|
|
|
7,386
|
|
|
Net Income attributable to Series 1 Convertible Preferred Stock
|
|
|
(16,814
|
)
|
|
Numerator for diluted EPS – income attributable to common shareholders after assumed conversions
|
|
$
|
768,837
|
|
|
Denominator
|
|
|
|
|
|
Denominator for basic EPS – weighted average shares
|
|
|
17,666,193
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
Common stock options
|
|
|
576,369
|
|
|
Common stock warrants
|
|
|
1,555,824
|
|
|
Denominator for diluted EPS – adjusted weighted average shares
|
|
|
19,798,386
|
|
|
Basic EPS
|
|
$
|
0.04
|
|
|
Diluted EPS
|
|
$
|
0.04
|
|
Stock-Based Compensation - The
fair value of transactions in which the Company exchanges its equity instruments for employee and non-employee services (share-based
payment transactions) is recognized as an expense in the financial statements as services are performed.
Compensation expense is determined by
reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period.
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 September 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:
|
|
|
Nine Months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Lease revenues and fees
|
|
$
|
89,028,352
|
|
|
$
|
58,439,865
|
|
|
Provision for doubtful accounts
|
|
|
25,075,156
|
|
|
|
16,563,888
|
|
|
Lease revenues and fees, net of lessor bad debt expense
|
|
$
|
63,953,196
|
|
|
$
|
41,875,977
|
|
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 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
September 30, 2019, is shown in the table below.
Supplemental balance sheet information
related to leases is as follows:
|
|
|
Balance Sheet Classification
|
|
September 30,
2019
|
|
|
Assets
|
|
|
|
|
|
|
Operating Lease Asset
|
|
Property and Equipment, net
|
|
$
|
1,884,822
|
|
|
Finance Lease Asset
|
|
Property and Equipment, net
|
|
|
33,036
|
|
|
Total Lease Assets
|
|
|
|
$
|
1,917,858
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Operating Lease Liability – current portion
|
|
Current Lease Liabilities
|
|
$
|
116,403
|
|
|
Finance Lease Liability – current portion
|
|
Current Lease Liabilities
|
|
|
5,455
|
|
|
Operating Lease Liability- net of current portion
|
|
Long Term Lease Liabilities
|
|
|
1,885,096
|
|
|
Finance Lease Liability – net of current portion
|
|
Long Term Lease Liabilities
|
|
|
28,075
|
|
|
Total Lease Liabilities
|
|
|
|
$
|
2,035,029
|
|
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
|
|
|
Finance Leases
|
|
|
13.40
|
%
|
|
|
5
|
|
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.
Finance lease expense is recognized on a straight-line basis over the lease term within interest expense in the Company’s
consolidated statements of operations. The Company’s total operating and finance lease expense all relate to lease costs
and amounted to $121,314 and $287,170 for the three and nine months ended September 30, 2019, respectively.
Supplemental cash flow information related
to operating leases is as follows:
|
|
|
Nine months ended
September 30,
2019
|
|
|
Cash payments for operating leases
|
|
$
|
157,719
|
|
|
Cash payments for finance leases
|
|
|
2,391
|
|
|
New operating lease asset obtained in exchange for lease liabilities
|
|
|
1,869,287
|
|
|
New finance lease asset obtained in exchange for lease liabilities
|
|
|
34,772
|
|
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 September 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
|
|
$
|
6,864
|
|
|
2020
|
|
|
303,681
|
|
|
2021
|
|
|
416,998
|
|
|
2022
|
|
|
407,450
|
|
|
2023
|
|
|
419,674
|
|
|
2024 and thereafter
|
|
|
2,048,091
|
|
|
Total undiscounted cash flows
|
|
|
3,602,758
|
|
|
Less: interest
|
|
|
(1,601,259
|
)
|
|
Present value of lease liabilities
|
|
$
|
2,001,499
|
|
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.
Below is a summary of undiscounted finance
lease liabilities as of September 30, 2019. The table also includes a reconciliation of the future undiscounted cash flows to
the present value of the finance lease liabilities included in the consolidated balance sheet.
|
|
|
Finance Leases
|
|
|
2019
|
|
$
|
2,391
|
|
|
2020
|
|
|
9,564
|
|
|
2021
|
|
|
9,564
|
|
|
2022
|
|
|
9,564
|
|
|
2023
|
|
|
9,564
|
|
|
2024 and thereafter
|
|
|
4,831
|
|
|
Total undiscounted cash flows
|
|
|
45,478
|
|
|
Less: interest
|
|
|
(11,948
|
)
|
|
Present value of lease liabilities
|
|
$
|
33,530
|
|
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the
following:
|
|
|
Estimated
Useful Lives
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Furniture, fixtures and vehicle
|
|
2-5 years
|
|
$
|
93,893
|
|
|
$
|
155,165
|
|
|
Website and internal use software
|
|
3 years
|
|
|
9,592,301
|
|
|
|
8,098,483
|
|
|
Computers and software
|
|
3-7 years
|
|
|
568,408
|
|
|
|
704,407
|
|
|
|
|
|
|
|
10,254,602
|
|
|
|
8,958,055
|
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(6,900,648
|
)
|
|
|
(5,621,391
|
)
|
|
Right of use assets, net
|
|
|
|
|
1,917,858
|
|
|
|
-
|
|
|
|
|
|
|
$
|
5,271,812
|
|
|
$
|
3,336,664
|
|
Depreciation and amortization expense
were $530,520 and $490,483 for the three months ended September 30, 2019 and 2018, respectively, and $1,647,290 and $1,387,150
for the nine months ended September 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 18.03% at September 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 September 30, 2019, $1,776,580 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 18.03% at September 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 September 30, 2019, $1,015,185 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 18.03% at September 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 September 30, 2019, $2,030,378 of principal and accrued and unpaid interest was outstanding
on the February Note.
|
|
|
Debt Principal
|
|
|
Interest
|
|
|
2019
|
|
$
|
-
|
|
|
$
|
72,143
|
|
|
2020
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
|
2021
|
|
$
|
3,750,000
|
|
|
$
|
-
|
|
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.
The interest rate charged on amounts borrowed is LIBOR plus 11% per annum. At September 30, 2019, amounts borrowed bear interest
at 13.03%. The Company had $11,899,373 available under the Credit Agreement as of September 30, 2019.
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 September 30, 2019, follows:
|
|
|
September 30,
2019
|
|
|
|
|
Required Covenant
|
|
|
Actual Position
|
|
|
|
|
|
|
|
|
|
|
Equity Book Value not less than
|
|
$
|
8,000,000
|
|
|
$
|
10,628,126
|
|
|
Unrestricted Cash greater than
|
|
|
1,500,000
|
|
|
|
3,172,362
|
|
|
Consolidated Total Debt to Equity Book Value ratio not to exceed
|
|
|
4.75
|
|
|
|
2.39
|
|
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 $725,702 and $2,415,231 for the three and nine months
ended September 30, 2019, respectively, and $689,667 and $2,103,891 for the three and nine months ended September 30, 2018, respectively.
As of September 30, 2019, the outstanding balance under the Credit Agreement was $20,600,627. Such amount is presented in the
consolidated balance sheet net of unamortized issuance costs of $367,346. 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 September 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 upon
liquidation.
|
As
of September 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 nine months ended September 30, 2019. As of September
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 September 30, 2019 totaled approximately
$7,783,368. As of September 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 or , if the closing share price on the last day of the month exceeds $1.25, then such exercise price will be 110% of the
closing share price. The warrants are immediately exercisable and expire following the close of business on June 30, 2023. As
of September 30, 2019, the Company recorded an expense of $84,819 based on a weighted average valuation of $0.30 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
|
|
|
July 31, 2019
|
|
|
40,000
|
|
|
$
|
14,904
|
|
|
$
|
0.37
|
|
|
August 31, 2019
|
|
|
40,000
|
|
|
$
|
14,884
|
|
|
$
|
0.37
|
|
|
September 30, 2019
|
|
|
40,000
|
|
|
$
|
11,831
|
|
|
$
|
0.30
|
|
|
|
|
|
280,000
|
|
|
$
|
84,819
|
|
|
$
|
0.30
|
|
The
following table summarizes information about outstanding stock warrants as of September 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 year
|
|
$
|
5.50
|
|
|
|
177,304
|
|
|
|
|
|
|
2 years
|
|
$
|
1.25
|
|
|
|
6,965,184
|
|
|
|
|
|
|
4 years
|
|
$
|
1.76
|
|
|
|
40,000
|
|
|
|
|
|
|
4 years
|
|
$
|
2.00
|
|
|
|
40,000
|
|
|
|
|
|
|
4 years
|
|
$
|
1.69
|
|
|
|
40,000
|
|
|
|
|
|
|
4 years
|
|
$
|
1,250
|
|
|
|
-
|
|
|
|
439
|
|
|
4 years
|
|
|
|
|
|
|
7,462,489
|
|
|
|
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 nine months ended September 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
|
|
|
(174,933
|
)
|
|
|
1.36
|
|
|
|
|
|
|
|
100,087
|
|
|
Expired
|
|
|
(25,000
|
)
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
1,755,818
|
|
|
$
|
1.75
|
|
|
|
8.83
|
|
|
$
|
952,494
|
|
|
Vested and exercisable at September 30, 2019
|
|
|
803,126
|
|
|
$
|
2.64
|
|
|
|
8.18
|
|
|
$
|
334,420
|
|
The weighted average grant date fair value
of options granted during the nine-month period ended September 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 $117,134 and $445,906 for the three and nine months
ended September 30, 2019, respectively, and $28,544 and $101,025 for the three and nine months ended September 30, 2018, respectively.
Unrecognized compensation cost related to non-vested options at September 30, 2019 amounted to approximately $317,915, which is
expected to be recognized over a weighted average period of 0.93 years.
10.
INCOME TAXES
As of December 31, 2018, the Company had federal
net operating loss carryforwards (“NOL”) 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. NOL’s created after January
1, 2018 do not expire, but are limited.
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 deferred tax asset.