Notes
To Consolidated Financial Statements
December
31, 2019 and 2018
1. BUSINESS:
FlexShopper,
Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware on August 16, 2006. The Company
owns 100% of FlexShopper, LLC, a limited liability company incorporated under the laws of North Carolina on June 24, 2013. The
Company is a holding corporation with no operations except for those conducted by FlexShopper LLC. FlexShopper LLC provides through
e-commerce sites, certain types of durable goods to consumers on a lease-to-own basis (“LTO”) including consumers
of third-party retailers and e-tailers.
In January 2015, in connection with the
credit agreement entered into in March 2015 (see Note 5), FlexShopper 1 LLC and FlexShopper 2 LLC were organized as wholly owned
Delaware subsidiaries of FlexShopper LLC to conduct operations. FlexShopper LLC, together with its subsidiaries, are hereafter
referred to as “FlexShopper.”
FlexShopper, through FlexShopper 2, LLC
(the “Borrower”), is party to a credit agreement (as amended, the “Credit Agreement”) with WE2014-1, LLC
(the “Lender”) (see Note 5). Upon the Commitment Termination Date, as determined by the lender to be February 28, 2021,
the Lender will no longer be obligated to lend money to the Borrower for new leases and all amounts outstanding under the Credit
Agreement will be due by the twelve-month anniversary thereof. FlexShopper will have, in the earliest Commitment Termination Date
scenario, at least 90 days from the date of notice to the Commitment Termination Date to arrange for a new senior lending facility
if an extension to this agreement is not obtained. If necessary, the Company would curtail marketing expenditures and new lease
originations to optimize operating cash flow until a new facility is obtained or the old facility is retired.
2.
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 December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
18,249,273
|
|
|
$
|
10,130,269
|
|
Allowance for doubtful accounts
|
|
|
(9,976,941
|
)
|
|
|
(3,754,306
|
)
|
Accounts receivable, net
|
|
$
|
8,272,332
|
|
|
$
|
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 will continue to accrue weekly charges until they are charged off. During the years
ended December 31, 2019 and 2018, $28,615,411 and $21,624,648 of accounts receivable balances, respectively, were charged off
against the allowance. During the years ended December 31, 2019 and 2018, the provision for bad debts was $34,838,046 and $23,239,189,
respectively. The following table shows the activity in the allowance for doubtful accounts:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,754,306
|
|
|
$
|
2,139,765
|
|
Provision
|
|
|
34,838,046
|
|
|
|
23,239,189
|
|
Accounts written off
|
|
|
(28,615,411
|
)
|
|
|
(21,624,648
|
)
|
Ending balance
|
|
$
|
9,976,941
|
|
|
$
|
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 December 31, 2019 and December 31, 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Lease merchandise at cost
|
|
$
|
46,807,570
|
|
|
$
|
48,893,012
|
|
Accumulated depreciation
|
|
|
(13,518,181
|
)
|
|
|
(14,338,295
|
)
|
Impairment reserve
|
|
|
(2,226,285
|
)
|
|
|
(2,190,020
|
)
|
Lease merchandise, net
|
|
$
|
31,063,104
|
|
|
$
|
32,364,697
|
|
Cost
of lease merchandise sold represents the undepreciated cost of rental merchandise at the time of sale.
Deferred
Debt Issuance Costs - Debt issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 2015
(see Note 5) are offset against the outstanding balance of the loan payable and 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 $294,847 and $476,085 for the years ended December 31, 2019 and 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 4) 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 $35,000 for the year ended December 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 4) 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 $29,839 for the year ended December 31, 2019.
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 $2,130,922 and $2,270,712 for the years ended December 31, 2019 and 2018, respectively. The Company wrote off $105,575
of capitalized development costs in 2019.
Operating
Expenses - Operating expenses include corporate overhead expenses such as, stock-based compensation, insurance, occupancy,
and other administrative expenses.
Marketing
- Marketing costs, primarily consisting of advertising, are charged to expense as incurred. Direct acquisition costs, primarily
consisting of commissions earned based on lease originations, are capitalized and amortized over the life of the lease.
Per
Share Data - Per share data is computed by use of the two-class method as a result of outstanding Series 1 Convertible Preferred
Stock, which participates in dividends with the common stock and accordingly has participation rights in undistributed earnings
as if all such earnings had been distributed during the period (see Note 8). Under such method income available to common shareholders
is computed by deducting both dividends declared or, if not declared, accumulated on Series 2 Convertible Preferred Stock from
income from continuing operations and from net income. Loss attributable to common shareholders is computed by increasing loss
from continuing operations and net loss by such dividends. Where the Company has undistributed net income available to common
shareholders, basic earnings per common share is computed based on the total of any dividends paid or declared per common share
plus undistributed income per common share determined by dividing net income available to common shareholders reduced by any dividends
paid or declared on common and participating Series 1 Convertible Preferred Stock by the total of the weighted average number
of common shares outstanding plus the weighted average number of common shares issuable upon conversion of outstanding participating
Series 1 Convertible Preferred Stock during the period. Where the Company has a net loss, basic per share data (including income
from continuing operations) is computed based solely on the weighted average number of common shares outstanding during the period.
As the participating Series 1 Convertible Preferred Stock has no contractual obligation to share in the losses of the Company,
common shares issuable upon conversion of such preferred stock are not included in such computations.
Diluted
earnings per share is based on the more dilutive of the if-converted method (which assumes conversion of the participating Series
1 Convertible Preferred Stock as of the beginning of the period) or the two-class method (which assumes that the participating
Series 1 Convertible Preferred Stock is not converted) plus the potential impact of dilutive non-participating Series 2 Convertible
Preferred Stock, options and warrants. The dilutive effect of stock options and warrants is computed using the treasury stock
method, which assumes the repurchase of common shares at the average market price during the period. Under the treasury stock
method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the
exercise price of options or warrants. When there is a loss from continuing operations, potential common shares are not included
in the computation of diluted loss per share, since they have an anti-dilutive effect.
In
computing diluted loss per share, no effect has been given to the issuance of common stock upon conversion or exercise of the
following securities as their effect is anti-dilutive:
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Series 1 Convertible Preferred Stock
|
|
|
218,104
|
|
|
|
302,960
|
|
Series 2 Convertible Preferred Stock
|
|
|
5,679,615
|
|
|
|
5,639,745
|
|
Series 2 Convertible Preferred Stock issuable upon exercise of warrants
|
|
|
113,582
|
|
|
|
112,785
|
|
Common Stock Options
|
|
|
2,004,318
|
|
|
|
620,900
|
|
Common Stock Warrants
|
|
|
7,347,388
|
|
|
|
7,182,488
|
|
|
|
|
15,363,007
|
|
|
|
13,858,878
|
|
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 8).
Fair
Value of Financial Instruments - The carrying value of certain financial instruments such as cash, accounts receivable, and
accounts payable approximate their fair value due to their short-term nature. The carrying value of loans payable under the Credit
Agreement increased by unamortized issuance costs (see Note 5) approximates fair value. The carrying value of promissory
notes to related parties approximates fair value based upon their interest rates, which approximate current market interest rates.
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 December 31, 2019, and 2018, the Company has 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 as amended (“Topic 842”), which is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2018. Under Topic 842, lessees are 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 statement of operations 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:
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Lease billings and accruals
|
|
$
|
120,169,406
|
|
|
$
|
82,458,661
|
|
Provision for doubtful accounts
|
|
|
34,838,046
|
|
|
|
23,239,189
|
|
Lease revenues and fees
|
|
$
|
85,331,360
|
|
|
$
|
59,219,472
|
|
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.
3.
LEASES
Lease Commitments
In August 2017, FlexShopper entered into
a 12-month lease with two additional three-year options for retail store space in West Palm Beach, Florida. In April 2018, FlexShopper
exercised its option to extend the term of the lease to September 30, 2021.
In January 2019, FlexShopper entered into
a 108-month lease with an option for one additional five-year term for 21,622 square feet of office space in Boca Raton, FL to
accommodate FlexShopper’s business and its employees (the “January 2019 Lease”). The monthly rent for this space
is approximately $31,500 with annual three percent increases throughout the initial 108-month lease term beginning on the anniversary
of the commencement date.
The rental expense for the years ended
December 31, 2019 and 2018 was approximately $520,700 and $389,900, respectively. At December 31, 2019, the future minimum annual
lease payments are approximately as follows:
2020
|
|
$
|
313,000
|
|
2021
|
|
|
427,000
|
|
2022
|
|
|
417,000
|
|
2023
|
|
|
429,000
|
|
2024
|
|
|
437,000
|
|
Thereafter
|
|
|
1,616,000
|
|
|
|
$
|
3,639,000
|
|
Lessor Information - Refer to Note
2 to these 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 Topic 842.
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 December 31, 2019, is shown in the table below.
Supplemental
balance sheet information related to leases is as follows:
|
|
Balance Sheet Classification
|
|
December 31,
2019
|
|
Assets
|
|
|
|
|
|
Operating Lease Asset
|
|
Property and Equipment, net
|
|
$
|
1,847,932
|
|
Finance Lease Asset
|
|
Property and Equipment, net
|
|
|
31,299
|
|
Total Lease Assets
|
|
|
|
$
|
1,879,231
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Operating Lease Liability - current portion
|
|
Current Lease Liabilities
|
|
$
|
22,088
|
|
Finance Lease Liability - current portion
|
|
Current Lease Liabilities
|
|
|
5,638
|
|
Operating Lease Liability- net of current portion
|
|
Long Term Lease Liabilities
|
|
|
2,040,576
|
|
Finance Lease Liability - net of current portion
|
|
Long Term Lease Liabilities
|
|
|
26,608
|
|
Total Lease Liabilities
|
|
|
|
$
|
2,094,910
|
|
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 Topic 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
|
%
|
|
|
8
|
|
Finance Leases
|
|
|
13.40
|
%
|
|
|
5
|
|
Upon adoption of Topic 842, 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 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 $395,455
for the period ended December 31, 2019, respectively.
Supplemental
cash flow information related to operating leases is as follows:
|
|
December 31,
2019
|
|
Cash payments for operating leases
|
|
$
|
164,664
|
|
Cash payments for finance leases
|
|
|
4,782
|
|
New operating lease asset obtained in exchange for lease liabilities
|
|
|
2,060,288
|
|
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 December 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
|
|
2020
|
|
$
|
303,681
|
|
2021
|
|
|
416,998
|
|
2022
|
|
|
407,450
|
|
2023
|
|
|
419,674
|
|
2024 and thereafter
|
|
|
2,048,091
|
|
Total undiscounted cash flows
|
|
|
3,595,894
|
|
Less: interest
|
|
|
(1,533,230
|
)
|
Present value of lease liabilities
|
|
$
|
2,062,664
|
|
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 nine years with the Company having a one-time option to extend for five years.
Below
is a summary of undiscounted finance lease liabilities as of December 31, 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
|
|
2020
|
|
$
|
9,564
|
|
2021
|
|
|
9,564
|
|
2022
|
|
|
9,564
|
|
2023
|
|
|
9,564
|
|
2024 and thereafter
|
|
|
4,832
|
|
Total undiscounted cash flows
|
|
|
43,088
|
|
Less: interest
|
|
|
(10,842
|
)
|
Present value of lease liabilities
|
|
$
|
32,246
|
|
4. PROPERTY
AND EQUIPMENT:
Property
and equipment consist of the following:
|
|
Estimated
Useful Lives
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Furniture, fixtures and vehicle
|
|
2-5 years
|
|
$
|
95,671
|
|
|
$
|
155,165
|
|
Website and internal use software
|
|
3 years
|
|
|
10,123,830
|
|
|
|
8,098,483
|
|
Computers and software
|
|
3-7 years
|
|
|
596,946
|
|
|
|
704,407
|
|
|
|
|
|
|
10,816,447
|
|
|
|
8,958,055
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(7,435,271
|
)
|
|
|
(5,621,391
|
)
|
Right of use assets, net
|
|
|
|
|
1,879,231
|
|
|
|
-
|
|
|
|
|
|
$
|
5,260,407
|
|
|
$
|
3,336,664
|
|
Depreciation and amortization expense was
$2,199,737 and $1,914,084 for the years ended December 31, 2019 and 2018, respectively.
5. LOANS
PAYABLE TO RELATED PARTIES:
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 6) computed on the basis of a 360-day year, which equaled 17.74%
at December 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.
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 December 31, 2019, $1,776,923
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 17.74% at December
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 December
31, 2019, $1,015,381 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 17.74% at December 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 December 31, 2019, $2,030,769 of principal and accrued
and unpaid interest was outstanding on the February Note.
|
|
Debt Principal
|
|
|
Interest
|
|
2019
|
|
$
|
-
|
|
|
$
|
73,073
|
|
2020
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
2021
|
|
$
|
3,750,000
|
|
|
$
|
-
|
|
6.
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
December 31, 2019, amounts borrowed bear interest at 12.74%. The Company had $3,314,124 available under the Credit Agreement as
of December 31, 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
December 31, 2019, follows:
|
|
December 31,
2019
|
|
|
|
Required
Covenant
|
|
|
Actual Position
|
|
|
|
|
|
|
|
|
Equity Book Value not less than
|
|
$
|
8,000,000
|
|
|
$
|
9,968,275
|
|
Unrestricted Cash greater than
|
|
|
1,500,000
|
|
|
|
6,868,472
|
|
Consolidated Total Debt to Equity Book Value ratio not to exceed
|
|
|
4.75
|
|
|
|
3.38
|
|
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 $3,146,002 for the year ended
December 31, 2019, and $3,067,569 for the year ended December 31, 2018, respectively. As of December 31, 2019, the outstanding
balance under the Credit Agreement was $29,185,876. Such amount is presented in the consolidated balance sheet net of unamortized
issuance costs of $281,138. 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 December 31, 2019.
7.
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 December 31, 2019, each share of Series 1 Convertible Preferred Stock was convertible into 1.27404 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.
As
of December 31, 2018, there were 239,405 shares of Series 1 Convertible Preferred Stock outstanding, which were convertible at
a conversion rate of 1.26547 into 302,960 shares of common stock. In the twelve months ended December 31, 2019, 68,214 shares
of Series 1 Convertible Preferred Stock were converted into 86,323 shares of common stock. As of December 31, 2019, there were
171,191 shares of Series 1 Convertible Preferred Stock outstanding, which are convertible at a conversion rate of 1.27404 into
218,104 shares of common stock. The increase in the conversion price from 2018 to 2019 is due to the Series 1 Convertible Preferred
Stock anti-dilution adjustment as a result of FPAYW warrants and stock options exercised for common stock.
|
●
|
Series
2 Convertible Preferred Stock - On June 10, 2016, the Company entered into a Subscription Agreement with B2 FIE
V LLC (the “Investor”), an entity affiliated with Pacific Investment Management Company LLC, providing for the
issuance and sale of 20,000 shares of Series 2 Convertible Preferred Stock “Series 2 Preferred Stock” for gross
proceeds of $20.0 million. The Company sold an additional 1,952 shares of Series 2 Convertible Preferred Stock to a different
investor for gross proceeds of $1.95 million at a subsequent closing.
|
The
Series 2 Preferred Shares were sold for $1,000 per share (the “Stated Value”) and accrue dividends on the Stated Value
at an annual rate of 10% compounded annually. Cumulative accrued dividends as of December 31, 2019 totaled approximately $8,393,084.
As of December 31, 2018, each Series 2 Preferred Share was convertible into approximately 257 shares. As of December 31, 2019,
each Series 2 Preferred Share was convertible into approximately 259 shares of common stock; provided, the conversion rate
is subject to further increase pursuant to a weighted average anti-dilution provision. The increase in the convertible shares
from 2018 to 2019 is due to the Series 2 Convertible Preferred Stock anti-dilution adjustment as a result of the of FPAYW warrants
and stock options being exercised for common stock. The holders of the Series 2 Preferred Shares have the option to convert such
shares into shares of common stock and have the right to vote with holders of common stock on an as-converted basis. If the average
closing price during any 45-day consecutive trading day period or change of control transaction values the common stock at a price
equal to or greater than $23.00 per share, then conversion shall be automatic. Upon a Liquidation Event or Deemed Liquidation
Event (each as defined in the Certificate of Designations for the Series 2 Preferred Stock), holders of Series 2 Preferred Shares
shall be entitled to receive out of the assets of the Company prior to and in preference to the common stock and Series 1 Convertible
Preferred Stock an amount equal to the greater of (1) the Stated Value, plus any accrued and unpaid dividends thereon, and (2)
the amount per share as would have been payable had all Series 2 Preferred Shares been converted to common stock immediately before
the Liquidation Event or Deemed Liquidation Event.
Common
Stock
The Company 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.
In
September 2018, the Company completed an offering of 10,000,000 units (the “Offering”) issued at a price of $1.00
per unit, each unit consisting of one share of the Company’s common stock and one-half (1/2) of one warrant, each whole
warrant exercisable for one share of common stock at an exercise price $1.25 per warrant. The common stock and warrants included
in the units sold in the Offering were immediately separable and issued separately. The Company raised gross proceeds of $10,007,500,
less underwriting fees and commissions of 7%, or approximately $0.7 million, and incurred other offering expenses of approximately
$0.4 million paid from the proceeds of the offering, resulting in net proceeds of $8.9 million. In connection with the closing
of the Offering, the underwriters exercised their over-allotment option to purchase an additional 750,000 warrants for $7,500
with an exercise price of $1.25 per share (see Note 9).
On
September 28, 2018, both Mr. Heiser and NRNS elected to convert 50% of the outstanding principal and accrued interest on their
promissory notes into equity interests issued in the Offering (see Note 5). As a result, the Company issued 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.
8.
STOCK OPTIONS
On
April 26, 2018 at the Company’s annual meeting, the Company’s stockholders approved the FlexShopper, Inc. 2018 Omnibus
Equity Compensation Plan (the “2018 Plan”). Upon the 2018 Plan’s approval, approximately 1,057,000 shares 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. The Company had 514,815 options available under the 2018
Plan at December 31, 2019.
On October 7, 2019, the Companny’s
CEO, Richard House, Jr., was awarded 350,000 stock options as an inducement to enter into his employment agreement. The vesting
of the inducement award is in five equal annual increments commencing December 31, 2020. The inducement award does not count towards
the options available under the 2018 Plan or Prior Plans.
Activity
in stock options for the year ended December 31, 2018 and 2019 is as follows:
|
|
Number of
options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
contractual
term
(years)
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding at January 1, 2018
|
|
|
335,900
|
|
|
$
|
5.61
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
308,000
|
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(23,000
|
)
|
|
|
4.99
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
620,900
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,694,851
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(203,766
|
)
|
|
|
1.71
|
|
|
|
|
|
|
|
104,868
|
|
Expired
|
|
|
(25,000
|
)
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(82,667
|
)
|
|
|
0.84
|
|
|
|
|
|
|
|
67,911
|
|
Outstanding at December 31, 2019
|
|
|
2,004,318
|
|
|
$
|
1.72
|
|
|
|
8.79
|
|
|
|
2,542,361
|
|
Vested and exercisable at December 31, 2019
|
|
|
804,651
|
|
|
$
|
2.53
|
|
|
|
7.98
|
|
|
$
|
873,997
|
|
The weighted average grant date fair value
of options granted during the twelve-month period ending December 31, 2019 and 2018 was $0.61 and $0.69 per share. The Company
measured the fair value of each option award on the date of grant using the Black-Scholes-Merton pricing model with the following
assumptions:
|
|
2019
|
|
|
2018
|
|
Exercise price
|
|
|
$0.83
to $1.80
|
|
|
|
$0.79
to $4.35
|
|
Expected life
|
|
|
6.8
years
|
|
|
|
6.0
years
|
|
Expected volatility
|
|
|
64
|
%
|
|
|
38
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
1.43%
to 2.55
|
%
|
|
|
2.27%
to 2.99
|
%
|
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 was $595,833 and $133,428 for the year ended December 31, 2019 and December 31, 2018, respectively. Unrecognized
compensation cost related to non-vested options at December 31, 2019 amounted to approximately $497,000, which is expected to
be recognized over a weighted average period of 3.5 years.
9.
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 were immediately exercisable
and expire five years from the date of issuance. The warrants were listed on the Nasdaq Capital Market under the symbol “FPAYW.”
During the year ended December 31, 2019, 35,100 warrants were exercised resulting in gross proceeds of $43,875. On February 4,
2020, we completed the Warrant Exchange Offer. As a result of these transactions, there were no public warrants outstanding as
of February 19, 2020.
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 December 31, 2019, the Company recorded an expense of $127,561 based on a weighted average
valuation of $0.32 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
|
|
|
$
|
14,883
|
|
|
$
|
0.37
|
|
September 30, 2019
|
|
|
40,000
|
|
|
$
|
11,831
|
|
|
$
|
0.30
|
|
October 31, 2019
|
|
|
40,000
|
|
|
$
|
10,630
|
|
|
$
|
0.27
|
|
November 30, 2019
|
|
|
40,000
|
|
|
$
|
13,612
|
|
|
$
|
0.34
|
|
December 31, 2019
|
|
|
40,000
|
|
|
$
|
18,501
|
|
|
$
|
0.46
|
|
|
|
|
400,000
|
|
|
$
|
127,561
|
|
|
$
|
0.32
|
|
The
following table summarizes information about outstanding stock warrants as of December 31, 2019, all of which are exercisable:
|
|
|
Common
|
|
|
Series 2 Preferred
|
|
|
Weighted Average
|
Exercise
|
|
|
Stock Warrants
|
|
|
Stock Warrants
|
|
|
Remaining
|
Price
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Contractual Life
|
$
|
5.50
|
|
|
|
177,304
|
|
|
|
|
|
|
2 years
|
$
|
1.25
|
|
|
|
6,930,084
|
|
|
|
|
|
|
3.5 years
|
$
|
1.76
|
|
|
|
40,000
|
|
|
|
|
|
|
3.5 years
|
$
|
2.00
|
|
|
|
40,000
|
|
|
|
|
|
|
3.5 years
|
$
|
1.69
|
|
|
|
40,000
|
|
|
|
|
|
|
3.5 years
|
$
|
1.54
|
|
|
|
40,000
|
|
|
|
|
|
|
3.5 years
|
$
|
2.01
|
|
|
|
40,000
|
|
|
|
|
|
|
3.5 years
|
$
|
2.78
|
|
|
|
40,000
|
|
|
|
|
|
|
3.5 years
|
$
|
1,250
|
|
|
|
-
|
|
|
|
439
|
|
|
3.5 years
|
|
|
|
|
|
7,347,388
|
|
|
|
439
|
|
|
|
10.
INCOME TAXES:
Reconciliation
of the benefit for income taxes from continuing operations recorded in the consolidated statements of operations with the amounts
computed at the statutory federal tax rates for each year:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Federal tax expense (benefit) at statutory rate
|
|
$
|
167,000
|
|
|
$
|
(2,080,000
|
)
|
State tax expense (benefit), net of federal tax
|
|
|
65,000
|
|
|
|
(207,000
|
)
|
Permanent differences
|
|
|
92,000
|
|
|
|
66,000
|
|
Change in statutory rate
|
|
|
(197,000
|
)
|
|
|
7,000
|
|
Change in valuation allowance
|
|
|
(10,000
|
)
|
|
|
2,545,000
|
|
Other
|
|
|
99,000
|
|
|
|
(331,000
|
|
Expense for income taxes
|
|
$
|
216,000
|
|
|
$
|
-
|
|
Tax affected components of deferred tax
assets and deferred tax liabilities at December 31, 2019 and 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Equity based compensation
|
|
$
|
240,000
|
|
|
$
|
177,000
|
|
Allowance for doubtful accounts
|
|
|
2,478,000
|
|
|
|
870,000
|
|
Fixed assets
|
|
|
(6,476,000
|
)
|
|
|
(7,034,000
|
)
|
Lease impairment
|
|
|
553,000
|
|
|
|
507,000
|
|
Deferred rent
|
|
|
-
|
|
|
|
1,000
|
|
Lease Liability
|
|
|
520,000
|
|
|
|
-
|
|
Right of use asset
|
|
|
(466,000
|
)
|
|
|
|
|
Accrued expenses
|
|
|
-
|
|
|
|
12,000
|
|
Interest expense carryforward
|
|
|
-
|
|
|
|
88,000
|
|
Tax credit carryforward
|
|
|
32,000
|
|
|
|
32,000
|
|
Federal loss carry-forwards
|
|
|
14,047,000
|
|
|
|
15,823,000
|
|
State loss carry forward
|
|
|
353,000
|
|
|
|
816,000
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
11,281,000
|
|
|
|
11,292,000
|
|
Valuation allowance
|
|
|
(11,281,000
|
)
|
|
|
(11,292,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Based on consideration of the available
evidence including historical losses a valuation allowance has been recognized to offset certain deferred tax assets, as management
was unable to conclude that realization of deferred tax assets were more likely than not.
As of December 31, 2019, the Company has
federal net operating loss carryforwards of approximately $66,900,000 and state net operating loss carryforwards of approximately
$6,000,000 available to offset future taxable income. Federal loss carryforwards incurred prior to January 1, 2018, expire from
2024 to 2037. Federal loss carryforwards incurred after January 1, 2018 do not expire. State loss carryforwards expire from 2024
to 2039. Federal and state loss carryforwards are subject to an annual limitation on utilization under Section 382 of the Internal
Revenue Code.
Section 382 of the Internal Revenue Code imposes
a limitation on a corporation’s ability to utilize net operating loss carryforwards (“NOLs”) if it experiences
an “ownership change.” In general, an ownership change may result from transactions increasing the ownership
of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If such a change
were to occur, certain NOLs available to be used could be disallowed and an annual limitation on utilization of other NOLs would
occur.
The components of income tax expense (benefits)
for the years ended December 31, 2019 and 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
Current Income Tax:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
|
-
|
|
State
|
|
|
216,400
|
|
|
|
-
|
|
Deferred Income Tax:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
Sate
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
216,400
|
|
|
$
|
-
|
|
The Company’s effective tax rate
for the year ended December 31, 2019 and 2018 differs from the statutory rate of 21% primarily due to a valuation allowance applied
against the company’s net deferred tax assets. State taxes and permanent differences also impacted the effective tax rate.
The Company accrued a $216,400 current state income tax expense for the year ended December 31, 2019 for certain states in which
taxable income exceeded available net operating loss carryforwards.
The Company files tax returns in the U.S.
federal jurisdiction and various states. At December 31, 2019, federal tax returns remained open for Internal Revenue
Service review for tax years after 2016, while state tax returns remain open for review by state taxing authorities for tax years
after 2015. The IRS completed an examination of the Company’s 2016 tax return during 2018, resulting in a reduction
to the net operating loss carryforward of approximately $50,000. During 2019, the Company was notified that its 2017 federal income
tax return was selected for examination, and that exam remains open as of December 31, 2019. There were no other federal or state
income tax audits being conducted as of December 31, 2019.
The Company completed its analysis and
review of all tax positions taken through December 31, 2019 and does not believe that there are any unrecognized tax benefits
related to tax positions taken on its income tax returns.
11.
COMMITMENTS:
The company does not have any commitments other than real property
leases (see Note 3).
12.
SUBSEQUENT EVENTS:
On February 4, 2020, we completed an exchange offer relating
to our outstanding public warrants, in which the holders of the public warrants were offered 0.62 shares of common stock for each
outstanding warrant tendered (the “Warrant Exchange Offer”). On February 19, 2020, “FPAYW” was removed
from listing on Nasdaq and deregistered under the Securities Exchange Act pending automatic conversion into shares of our common
stock.