The accompanying notes are an integral part
of these consolidated statements.
The accompanying notes are an integral part
of these consolidated statements.
The accompanying notes are an integral part
of these consolidated statements.
The accompanying notes are an integral part
of these consolidated statements.
Notes To Consolidated Financial Statements
For the three months ended March 31,
2019 and 2018
(Unaudited)
1. BASIS OF PRESENTATION
Our 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 our interim financial statements does not include all information and disclosures necessary for a
fair presentation of our 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 our 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 certain types 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 and Series 2 Convertible Preferred Stock and the Company’s ability to borrow funds
against the lease portfolio have provided the liquidity and capital resources necessary to fund its operations.
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 March 31, 2019 and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
12,579,684
|
|
|
$
|
10,130,269
|
|
Allowance for doubtful accounts
|
|
|
(6,069,346
|
)
|
|
|
(3,754,306
|
)
|
Accounts receivable, net
|
|
$
|
6,510,338
|
|
|
$
|
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 $5,029,904 for the three months ended March 31, 2019 and $4,428,276 for the three
months ended March 31, 2018.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Beginning balance
|
|
$
|
3,745,306
|
|
|
$
|
2,139,765
|
|
Provision for write-offs
|
|
|
7,344,944
|
|
|
|
23,239,189
|
|
Accounts written off
|
|
|
(5,029,904
|
)
|
|
|
(21,624,648
|
)
|
Ending balance
|
|
$
|
6,069,346
|
|
|
$
|
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 impairment
charge amounted to approximately $1,348,000 for the three months ended March 31, 2019 and $807,000 for the three months ended
March 31, 2018.
The net leased merchandise balances consisted
of the following as of March 31, 2019 and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Lease merchandise at cost
|
|
$
|
44,941,403
|
|
|
$
|
48,893,012
|
|
Accumulated depreciation
|
|
|
(14,532,742
|
)
|
|
|
(14,338,295
|
)
|
Impairment reserve
|
|
|
(2,226,720
|
)
|
|
|
(2,190,020
|
)
|
Lease merchandise, net
|
|
$
|
28,181,941
|
|
|
$
|
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 (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 $54,840 for the
three months ended March 31, 2019 and $118,404 for the three months ended March 31, 2018.
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 $14,000
for the three months ended March 31, 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 $5,425
for the three months ended March 31, 2019.
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 $547,044
for the three months ended March 31, 2019, and $297,826 for the three months ended March 31, 2018.
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.
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 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.
|
|
Three Months ended
|
|
|
|
March 31,
|
|
|
|
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
|
|
|
605,400
|
|
|
|
444,067
|
|
Common Stock Warrants
|
|
|
7,222,489
|
|
|
|
511,553
|
|
|
|
|
13,797,056
|
|
|
|
3,865,158
|
|
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 March 31, 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, on revenue recognition. The new standard provides
for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement
disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating
to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach
to implement the standard. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim
periods within that reporting period. The Company adopted this guidance on January 1, 2018 but it did not have a material impact
on its financial statements as a majority of the Company’s revenue generating activities are leasing arrangements, which
are outside the scope of the guidance.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018. 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:
|
|
Three Months ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Lease revenues and fees
|
|
$
|
29,129,723
|
|
|
$
|
19,336,896
|
|
Provision for doubtful accounts
|
|
|
7,344,944
|
|
|
|
5,175,318
|
|
Lease revenues and fees, net of lessor bad debt expense
|
|
$
|
21,784,779
|
|
|
$
|
14,161,578
|
|
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 2021. 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, is shown in the table below.
Supplemental balance sheet information
related to leases is as follows:
|
|
Balance Sheet Classification
|
|
March 31,
2019
|
|
Assets
|
|
|
|
|
|
Operating Lease Asset
|
|
Property and Equipment, net
|
|
$
|
131,159
|
|
Total Lease Assets
|
|
|
|
$
|
131,159
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Operating Lease Liability
|
|
Current Operating Lease Liabilities
|
|
$
|
94,249
|
|
Operating Lease Liability
|
|
Long Term Operating Lease Liabilities
|
|
|
37,202
|
|
Total Lease Liabilities
|
|
|
|
$
|
131,451
|
|
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
|
|
|
16.46
|
%
|
|
|
1
|
|
Upon adoption of ASU 2016-02, discount
rates for existing operating leases were established as of January 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 $72,116 for the three months ended March 31, 2019.
Below is a summary of undiscounted operating
lease liabilities as of March 31, 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
|
|
$
|
98,064
|
|
2020
|
|
|
27,730
|
|
2021
|
|
|
21,416
|
|
Total undiscounted cash flows
|
|
|
147,210
|
|
Less: interest
|
|
|
(15,759
|
)
|
Present value of lease liabilities
|
|
$
|
131,451
|
|
The Company entered into an office lease in January 2019. Lease commencement is estimated to be May 2019,
at which time the Company will recognize the operating lease asset and liability. The Company will pay 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
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Furniture, fixtures and vehicle
|
|
2-5 years
|
|
$
|
155,165
|
|
|
$
|
155,165
|
|
Website and internal use software
|
|
3 years
|
|
|
8,645,527
|
|
|
|
8,098,483
|
|
Computers and software
|
|
3-7 years
|
|
|
710,547
|
|
|
|
704,407
|
|
|
|
|
|
|
9,511,239
|
|
|
|
8,958,055
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(6,145,325
|
)
|
|
|
(5,621,391
|
)
|
Right of use assets, net of amortization
|
|
|
|
|
131,159
|
|
|
|
-
|
|
|
|
|
|
$
|
3,497,073
|
|
|
$
|
3,336,664
|
|
Depreciation and amortization expense were
$523,934 and $434,905 for the three months ended March 31, 2019 and 2018, respectively.
6. PROMISSORY NOTES
January 2018 Notes -
On January
29, 2018 and January 30, 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 18.48% at March 31,
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.
As of March 31, 2019, $544,338 and $1,361,090 of principal and accrued and unpaid interest was outstanding
on Mr. Heiser’s Note and NRNS’s Note, respectively. Interest expense incurred under the Notes amounted to $25,900 and
$26,159 for Mr. Heiser’s Note and $64,756 and $76,357 for NRNS’ Note, totaling $90,656 for the three months ended March
31, 2019 and March 31, 2018 respectively.
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 18.48%
at March 31, 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 March 31, 2019, $1,035,027 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 18.48% at March 31, 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 March 31, 2019, $2,041,435 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 March 31, 2019, amounts borrowed bear interest at 13.48%.
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.
|
|
March 31, 2019
|
|
|
|
Required Covenant
|
|
|
Actual Position
|
|
|
|
|
|
|
|
|
Equity Book Value not less than
|
|
$
|
8,000,000
|
|
|
$
|
9,046,095
|
|
Unrestricted Cash greater than
|
|
|
1,500,000
|
|
|
|
2,647,056
|
|
Consolidated Total Debt to Equity Book Value ratio not to exceed
|
|
|
4.75
|
|
|
|
3.11
|
|
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.
Principal payable within twelve months of the balance sheet date based on the outstanding loan balance
at such date is reflected as a current liability in the accompanying balance sheets. Interest expense incurred under the Credit
Agreement amounted to $953,910 for the three months ended March 31, 2019 and $697,952 for the three months ended March 31, 2018.
As of March 31, 2019, the outstanding balance under the Credit Agreement was $23,180,627. Such amount is presented in the consolidated
balance sheet net of unamortized issuance costs of $277,395. The Company borrowed $1,241,328 and subsequently repaid $6,665,989
in the first 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.
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 $0.001 par value preferred stock. 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 determines
the rights and preferences of the Company’s preferred stock.
|
●
|
Series 1 Convertible Preferred Stock
-
Series 1 Convertible Preferred Stock ranks senior to common stock.
|
As of March 31, 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 three months ended March 31, 2019. As of March 31, 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 March 31, 2019 totaled approximately $6,564,369. As of March 31,
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 $0.0001 par value common stock. Each share of common stock entitles the holder to one vote at all stockholder meetings.
The commons stock is listed 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 March 31, 2019, the Company recorded an expense of $11,200 based on the
valuation of $0.28 per warrant as determined by the fair market value of is the Company’s warrants that are actively traded
and listed on the Nasdaq Capital Market under the symbol “FPAYW”.
The following table summarizes information
about outstanding stock warrants as of March 31, 2019, all of which are exercisable:
|
|
|
|
|
|
Series 2 Preferred
|
|
|
Weighted Average
|
Exercise
|
|
|
Common Stock Warrants
|
|
|
Stock Warrants
|
|
|
Remaining
|
Price
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
|
$
|
10.00
|
|
|
|
200,001
|
|
|
|
|
|
|
1 years
|
$
|
5.50
|
|
|
|
177,304
|
|
|
|
|
|
|
3 years
|
$
|
1.25
|
|
|
|
6,845,184
|
|
|
|
|
|
|
4 years
|
$
|
1,250
|
|
|
|
-
|
|
|
|
439
|
|
|
4 years
|
|
|
|
|
|
7,222,489
|
|
|
|
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.
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 three months ended March 31,
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
|
|
|
29,000
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(19,500
|
)
|
|
|
1.27
|
|
|
|
|
|
|
|
788
|
|
Expired
|
|
|
(25,000
|
)
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
605,400
|
|
|
$
|
3.59
|
|
|
|
7.92
|
|
|
$
|
4,408
|
|
Vested and exercisable at March 31, 2019
|
|
|
304,900
|
|
|
$
|
5.39
|
|
|
|
6.58
|
|
|
$
|
-
|
|
The weighted average grant date fair value of options granted during the three-month period ending March
31, 2019 was $0.34 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
|
|
$
|
0.87
|
|
Expected life
|
|
|
5.5 years
|
|
Expected volatility
|
|
|
38
|
%
|
Dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.50
|
%
|
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 statements
of operations was $25,529 for the three months ended March 31, 2019 and $49,702 for the three months ended March 31, 2018. Unrecognized
compensation cost related to non-vested options at March 31, 2019 amounted to approximately $163,190, which is expected to be recognized
over a weighted average period of 1.91 years.
10. INCOME TAXES
As of December 31, 2018, the Company has
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
February 21, 2019, the Company’s Board of Directors approved Amendment No. 1 to the 2018 Plan (the “2018 Plan Amendment”),
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.