Notes
To Consolidated Financial Statements
For
the three months ended March 31, 2020 and 2019
(Unaudited)
1.
BASIS OF PRESENTATION
The
interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X
and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) applicable
to interim financial information. Accordingly, the information presented in the interim financial statements does not include
all information and disclosures necessary for a fair presentation of FlexShopper, Inc.’s financial position, results of
operations and cash flows in conformity with GAAP for annual financial statements. In the opinion of management, these financial
statements reflect all adjustments consisting of normal recurring accruals, necessary for a fair statement of our financial position,
results of operations and cash flows for such periods. The results of operations for any interim period are not necessarily indicative
of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes
thereto contained in FlexShopper, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The
consolidated balance sheet as of December 31, 2019 contained herein has been derived from audited financial statements.
2.
BUSINESS
FlexShopper,
Inc. (“FlexShopper” or the “Company”) is a corporation organized under the laws of the State of Delaware
in 2006. The Company owns 100% of FlexShopper, LLC, a North Carolina limited liability company, which in turns owns 100% of FlexShopper
1, LLC and FlexShopper 2, LLC. The Company is a holding corporation with no operations except for those conducted by FlexShopper,
LLC. FlexShopper, LLC provides through e-commerce sites of durable goods to consumers, including customers of third-party retailers
and e-tailers, on a lease-to-own (“LTO”) basis.
To
date, funds derived from the sale of FlexShopper’s common stock, warrants, Series 1 Convertible Preferred Stock and Series
2 Convertible Preferred Stock and the Company’s ability to borrow both funds against the lease portfolio and from promissory
notes have provided the liquidity and capital resources necessary to fund its operations. Management believes that liquidity needs
for future growth for at least the next 12 months can be met by cash flow from operations generated by the existing portfolio
and/or additional borrowings against the Credit Agreement (see Note 7).
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries after elimination of intercompany balances and transactions.
Estimates
- The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition - Merchandise is leased to customers pursuant to lease purchase agreements which provide for weekly lease terms
with non-refundable lease payments. Generally, the customer has the right to acquire title either through a 90-day same as cash
option, an early purchase option, or through payments of all required lease payments, generally 52 weeks, for ownership. On any
current lease, customers have the option to cancel the agreement in accordance with lease terms and return the merchandise. Accordingly,
customer agreements are accounted for as operating leases with lease revenues recognized in the month they are due on the accrual
basis of accounting. Merchandise sales revenue is recognized when the customer exercises the purchase option and pays the purchase
price. Revenue for lease payments received prior to their due date is deferred and recognized as revenue in the period to which
the payments relate. Revenues from leases and sales are reported net of sales taxes.
Accounts
Receivable and Allowance for Doubtful Accounts - FlexShopper seeks to collect amounts owed under its leases from each customer
on a weekly or monthly basis by charging their bank accounts or credit cards. Accounts receivable are principally comprised of
lease payments currently owed to FlexShopper which are past due, as FlexShopper has been unable to successfully collect in the
manner described above. The allowance for doubtful accounts is based upon revenues and historical experience of balances charged
off as a percentage of revenues. The accounts receivable balances consisted of the following as of March 31, 2020 and December
31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
20,687,556
|
|
|
$
|
18,249,273
|
|
Allowance for doubtful accounts
|
|
|
(12,227,612
|
)
|
|
|
(9,976,941
|
)
|
Accounts receivable, net
|
|
$
|
8,459,944
|
|
|
$
|
8,272,332
|
|
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. Accounts receivable balances
charged off against the allowance were $5,432,256 for the three months ended March 31, 2020 and $5,029,904 for the three months
ended March 31, 2019.
|
|
Three Months Ended
March 31,
2020
|
|
|
Year Ended
December 31,
2019
|
|
Beginning balance
|
|
$
|
9,976,941
|
|
|
$
|
3,754,306
|
|
Provision
|
|
|
7,682,927
|
|
|
|
34,838,046
|
|
Accounts written off
|
|
|
(5,432,256
|
)
|
|
|
(28,615,411
|
)
|
Ending balance
|
|
$
|
12,227,612
|
|
|
$
|
9,976,941
|
|
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 March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Lease merchandise at cost
|
|
$
|
49,090,635
|
|
|
$
|
46,807,570
|
|
Accumulated depreciation
|
|
|
(16,901,851
|
)
|
|
|
(13,518,181
|
)
|
Impairment reserve
|
|
|
(2,290,108
|
)
|
|
|
(2,226,285
|
)
|
Lease merchandise, net
|
|
$
|
29,898,676
|
|
|
$
|
31,063,104
|
|
Lease
merchandise at cost represents the undepreciated cost of rental merchandise at the time of purchase.
Deferred Debt Issuance Costs - Debt
issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 2015, and subsequent amendments 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 $86,208
for the three months ended March 31, 2020, and $54,840 for the three months ended March 31, 2019.
Debt issuance costs of $60,000 incurred in
conjunction with the subordinated Promissory Notes entered into on January 25, 2019 and February 19, 2019 are offset against the
outstanding balance of the loan payable and are amortized using the straight-line method over the remaining term of the related
debt, which approximates the effective interest method. Amortization, which is included in interest expense, was $8,139 for the
three months ended March 31, 2020 and $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 $600,261 for the three months ended March 31, 2020 and $547,044 for the three months ended March 31, 2019, respectively.
Capitalized software amortization expense was $436,767 for the three months ended March 31, 2020 and $508,182 and for the three
months ended March 31, 2019.
Operating
Expenses - Operating expenses include corporate overhead expenses such as salaries, stock-based compensation, insurance, occupancy,
and other administrative expenses.
Marketing
Costs - Marketing costs, primarily consisting of advertising, are charged to expense as incurred. Direct acquisition costs,
primarily consisting of commissions earned based on lease originations, are capitalized and amortized over the life of the lease.
Per
Share Data - Per share data is computed by use of the two-class method as a result of outstanding Series 1 Convertible Preferred
Stock, which participates in dividends with the common stock and accordingly has participation rights in undistributed earnings
as if all such earnings had been distributed during the period (see Note 8). Under such method income available to common shareholders
is computed by deducting both dividends declared or, if not declared, accumulated on Series 2 Convertible Preferred Stock from
income from continuing operations and from net income. Loss attributable to common shareholders is computed by increasing loss
from continuing operations and net loss by such dividends. Where the Company has undistributed net income available to common
shareholders, basic earnings per common share is computed based on the total of any dividends paid or declared per common share
plus undistributed income per common share determined by dividing net income available to common shareholders reduced by any dividends
paid or declared on common and participating Series 1 Convertible Preferred Stock by the total of the weighted average number
of common shares outstanding plus the weighted average number of common shares issuable upon conversion of outstanding participating
Series 1 Convertible Preferred Stock during the period. Where the Company has a net loss, basic per share data (including income
from continuing operations) is computed based solely on the weighted average number of common shares outstanding during the period.
As the participating Series 1 Convertible Preferred Stock has no contractual obligation to share in the losses of the Company,
common shares issuable upon conversion of such preferred stock are not included in such computations.
Diluted
earnings per share is based on the more dilutive of the if-converted method (which assumes conversion of the participating Series
1 Convertible Preferred Stock as of the beginning of the period) or the two-class method (which assumes that the participating
Series 1 Convertible Preferred Stock is not converted) plus the potential impact of dilutive non-participating Series 2 Convertible
Preferred Stock, options and warrants. The dilutive effect of stock options and warrants is computed using the treasury stock
method, which assumes the repurchase of common shares at the average market price during the period. Under the treasury stock
method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the
exercise price of options or warrants. When there is a loss from continuing operations, potential common shares are not included
in the computation of diluted loss per share, since they have an anti-dilutive effect.
In
computing diluted loss per share for the three months ended March 31, 2020 and the three months ended March 31, 2019, 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 induced conversion of warrants.
|
|
Three Months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Series 1 Convertible Preferred Stock
|
|
|
226,366
|
|
|
|
216,637
|
|
Series 2 Convertible Preferred Stock
|
|
|
5,845,695
|
|
|
|
5,639,745
|
|
Series 2 Convertible Preferred Stock issuable upon exercise of warrants
|
|
|
116,903
|
|
|
|
112,785
|
|
Common Stock Options
|
|
|
2,419,818
|
|
|
|
605,400
|
|
Common Stock Warrants
|
|
|
1,752,488
|
|
|
|
7,222,489
|
|
|
|
|
10,361,270
|
|
|
|
13,797,056
|
|
The
following table sets forth the computation of basic and diluted earnings per share:
|
|
Three Months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
Net income
|
|
$
|
51,685
|
|
|
$
|
503,543
|
|
Convertible Series 2 Preferred Share dividends
|
|
|
(609,717
|
)
|
|
|
(609,168
|
)
|
Deemed dividend from exchange offer of warrants
|
|
|
(713,212
|
)
|
|
|
-
|
|
Numerator for basic and diluted EPS
|
|
$
|
(1,271,244
|
)
|
|
$
|
(105,625
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted EPS - weighted average shares
|
|
|
19,903,435
|
|
|
|
17,650,847
|
|
Basic EPS
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
Diluted EPS
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
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.
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 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 March 31, 2020, and 2019, 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.
4.
LEASES
Lease
Commitments
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:
|
|
Three Months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Lease billings and accruals
|
|
$
|
31,380,632
|
|
|
$
|
29,129,723
|
|
Provision for doubtful accounts
|
|
|
7,682,927
|
|
|
|
7,344,944
|
|
Lease revenues and fees
|
|
$
|
23,697,705
|
|
|
$
|
21,784,779
|
|
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.
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 three months ended March 31, 2020 and 2019 was approximately $167,000 and $99,000, respectively. At March
31, 2020, the future minimum annual lease payments are approximately as follows:
2020
|
|
$
|
305,000
|
|
2021
|
|
|
428,000
|
|
2022
|
|
|
419,000
|
|
2023
|
|
|
429,000
|
|
2024
|
|
|
437,000
|
|
Thereafter
|
|
|
1,616,000
|
|
|
|
$
|
3,634,000
|
|
Lessor
Information - Refer to Note 3 to these condensed consolidated financial statements for further information about the Company’s
revenue generating activities as a lessor. All of the Company’s customer agreements are considered operating leases, and
the Company currently does not have any sales-type or direct financing leases.
Lessee
Information - As a lessee, the Company leases retail, call center and corporate space under operating leases expiring at various
times through 2028. At January 1, 2019, the Company recognized $191,001 of operating lease assets and $191,001 of operating lease
liabilities as a result of adopting 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 March 31, 2020, is shown in the table below.
Supplemental
balance sheet information related to leases is as follows:
|
|
Balance Sheet Classification
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Operating Lease Asset
|
|
Property and Equipment, net
|
|
$
|
1,813,072
|
|
|
$
|
1,847,932
|
|
Finance Lease Asset
|
|
Property and Equipment, net
|
|
|
33,322
|
|
|
|
31,299
|
|
Total Lease Assets
|
|
|
|
$
|
1,846,394
|
|
|
$
|
1,879,231
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Liability - current portion
|
|
Current Lease Liabilities
|
|
$
|
122,221
|
|
|
$
|
22,088
|
|
Finance Lease Liability - current portion
|
|
Current Lease Liabilities
|
|
|
6,982
|
|
|
|
5,638
|
|
Operating Lease Liability- net of current portion
|
|
Long Term Lease Liabilities
|
|
|
2,003,638
|
|
|
|
2,040,576
|
|
Finance Lease Liability
- net of current portion
|
|
Long Term Lease Liabilities
|
|
|
27,732
|
|
|
|
26,608
|
|
Total Lease Liabilities
|
|
|
|
$
|
2,160,573
|
|
|
$
|
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 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 leases:
|
|
Weighted Average Discount
Rate
|
|
|
Weighted Average Remaining
Lease Term
(in years)
|
|
Operating Leases
|
|
|
13.44
|
%
|
|
|
8
|
|
Finance Leases
|
|
|
13.30
|
%
|
|
|
4
|
|
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 for space in
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 and amortization 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 $106,880 for the three
months ended March 31, 2020.
Supplemental
cash flow information related to operating leases is as follows:
|
|
Three Months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash payments for operating leases
|
|
$
|
6,864
|
|
|
$
|
66,000
|
|
Cash payments for finance leases
|
|
|
2,661
|
|
|
|
-
|
|
New operating lease asset obtained in exchange for lease liabilities
|
|
|
-
|
|
|
|
191,000
|
|
New finance lease asset obtained in exchange for lease liabilities
|
|
|
4,033
|
|
|
|
-
|
|
Below
is a summary of undiscounted operating lease liabilities as of March 31, 2020. 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
|
|
$
|
296,813
|
|
2021
|
|
|
416,998
|
|
2022
|
|
|
407,450
|
|
2023
|
|
|
419,674
|
|
2024
|
|
|
432,264
|
|
2025 and thereafter
|
|
|
1,615,830
|
|
Total undiscounted cash flows
|
|
|
3,589,029
|
|
Less: interest
|
|
|
(1,463,170
|
)
|
Present value of lease liabilities
|
|
$
|
2,125,859
|
|
The
Company entered into an office lease in January 2019. The lease commenced in June 2019, at which time the Company recognized the
operating lease asset and liability. The Company pays a base monthly rent of $31,532 with payments increasing by 3% on each yearly
anniversary of the commencement date. The initial lease term is for 9 years with the Company having a one-time option to extend
for 5 years.
Below
is a summary of undiscounted finance lease liabilities as of March 31, 2020. 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
|
|
$
|
8,388
|
|
2021
|
|
|
11,184
|
|
2022
|
|
|
11,184
|
|
2023
|
|
|
9,699
|
|
2024
|
|
|
4,782
|
|
Total undiscounted cash flows
|
|
|
45,237
|
|
Less: interest
|
|
|
(10,523
|
)
|
Present value of lease liabilities
|
|
$
|
34,714
|
|
5.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
Estimated
Useful Lives
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Furniture, fixtures and vehicle
|
|
2-5 years
|
|
$
|
99,429
|
|
|
$
|
95,671
|
|
Website and internal use software
|
|
3 years
|
|
|
10,724,091
|
|
|
|
10,123,830
|
|
Computers and software
|
|
3-7 years
|
|
|
639,341
|
|
|
|
596,946
|
|
|
|
|
|
|
11,462,861
|
|
|
|
10,816,447
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(7,894,515
|
)
|
|
|
(7,435,271
|
)
|
Right of use assets, net
|
|
|
|
|
1,846,394
|
|
|
|
1,879,231
|
|
|
|
|
|
$
|
5,414,740
|
|
|
$
|
5,260,407
|
|
Depreciation
and amortization expense were $459,244 and $523,934 for the three months ended March 31, 2020 and 2019, respectively.
6.
PROMISSORY NOTES
January 2018 Notes - In January 2018,
FlexShopper, LLC entered into letter agreements with Russ Heiser, FlexShopper’s Chief Financial Officer, and NRNS Capital
Holdings LLC (“NRNS”), the manager of which is the Chairman of the Company’s Board of Directors, respectively
(such letter agreements, together, the “Commitment Letters”), pursuant to which FlexShopper, LLC issued a subordinated
promissory note to each of Mr. Heiser and NRNS (together, the “Notes”). The Commitment Letters provided that Mr. Heiser
and NRNS would each make advances to FlexShopper, LLC under the applicable Note in aggregate amounts up to $1,000,000 and $2,500,000,
respectively. Payments of principal and accrued interest are due and payable by FlexShopper, LLC upon 30 days’ prior written
notice from the applicable noteholder and the Company can prepay principal and interest at any time without penalty. However, repayment
is not permitted without the consent of the Credit Agreement lender. The Notes bear interest at a rate equal to five (5%) per annum
in excess of the non-default rate of interest from time to time in effect under the Credit Agreement entered into on March 6, 2015
computed on the basis of a 360-day year, which equaled 16.7% at March 31, 2020.
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 March 31, 2020, $1,828,886 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 subordinated debt financing letter agreement with 122 Partners, LLC, as 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 the principal amount and accrued interest under the January
2019 Note was 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 16.7% at March
31, 2020. 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,
2020, $1,045,068 of principal and accrued and unpaid interest was outstanding on the January Note. On April 30, 2020, pursuant
to an amendment to the subordinated debt financing letter agreement, FlexShopper, LLC and 122 Partners, LLC agreed to extend the
maturity date of the January Note to April 30, 2021.
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 16.7% at March 31, 2020. 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, 2020, $2,090,156 of principal and accrued
and unpaid interest was outstanding on the February Note.
Amounts
payable under the promissory notes are as follows:
|
|
Debt Principal
|
|
|
Interest
|
|
2020
|
|
$
|
1,000,000
|
|
|
$
|
214,110
|
|
2021
|
|
$
|
3,750,000
|
|
|
$
|
-
|
|
7.
LOAN PAYABLE UNDER CREDIT AGREEMENT
On
March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as
amended from time-to-time and including the Fee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo
Bank, National Association as paying agent, various lenders from time to time party thereto and WE 2014-1, LLC, an affiliate of
Waterfall Asset Management, LLC, as administrative agent and lender (the “Lender”). The Borrower is permitted to borrow
funds under the Credit Agreement based on FlexShopper’s cash on hand and the Amortized Order Value of its Eligible Leases
(as such terms are defined in the Credit Agreement) less certain deductions described in the Credit Agreement. Under the terms
of the Credit Agreement, subject to the satisfaction of certain conditions, the Borrower may borrow up to $32,500,000 from the
Lender until the Commitment Termination Date and must repay all borrowed amounts one year thereafter, on the date that is 12 months
following the Commitment Termination Date (unless such amounts become due or payable on an earlier date pursuant to the terms
of the Credit Agreement). On April 1, 2019, the Commitment Termination Date was extended to February 28, 2021. The Lender was
granted a security interest in certain leases as collateral under the Credit Agreement. The interest rate charged on amounts borrowed
is LIBOR plus 11% per annum. At March 31, 2020, amounts borrowed bear interest at 11.70%. The Company had $4,767,123 available
under the Credit Agreement as of March 31, 2020.
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
March 31, 2020, follows:
|
|
March 31, 2020
|
|
|
|
Required Covenant
|
|
|
Actual Position
|
|
|
|
|
|
|
|
|
Equity Book Value not less than
|
|
$
|
8,000,000
|
|
|
$
|
10,367,024
|
|
Unrestricted Cash greater than
|
|
|
1,500,000
|
|
|
|
5,454,520
|
|
Consolidated Total Debt to Equity Book Value ratio not to exceed
|
|
|
4.75
|
|
|
|
3.13
|
|
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. 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 $901,530 for the three months ended March 31, 2020 and $953,910 for the three months ended March
31, 2019. As of March 31, 2020, the outstanding balance under the Credit Agreement was $27,732,877. Such amount is presented in
the consolidated balance sheet net of unamortized issuance costs of $194,931. 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 upon liquidation.
|
As
of March 31, 2020, each share of Series 1 Convertible Preferred Stock was convertible into 1.32230 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 March 31, 2020, there were 171,191 shares of Series 1 Convertible Preferred Stock outstanding, which are convertible into 226,366
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.
|
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 March 31, 2020 totaled approximately $9,002,801.
As of March 31, 2020, each Series 2 Preferred Share was convertible into approximately 266 shares of common stock; provided,
the conversion rate is subject to further increase pursuant to a weighted average anti-dilution provision. The holders of the
Series 2 Preferred Stock have the option to convert such shares into shares of common stock and have the right to vote with holders
of common stock on an as-converted basis. If the average closing price during any 45-day consecutive trading day period or change
of control transaction values the common stock at a price equal to or greater than $23.00 per share, then conversion shall be
automatic. Upon a Liquidation Event or Deemed Liquidation Event (each as defined), holders of Series 2 Preferred Stock shall be
entitled to receive out of the assets of the Company prior to and in preference to the common stock and Series 1 Convertible Preferred
Stock an amount equal to the greater of (1) the Stated Value, plus any accrued and unpaid dividends thereon, and (2) the amount
per share as would have been payable had all shares of Series 2 Preferred Stock been converted to common stock immediately before
the Liquidation Event or Deemed Liquidation Event.
Common
Stock
The
Company is authorized to issue 40,000,000 shares of common stock, par value $0.0001 per share. Each share of common stock entitles
the holder to one vote at all stockholder meetings. The common stock is traded on the Nasdaq Capital Market under the symbol “FPAY.”
Warrants
In September 2018, the Company issued
warrants exercisable for 5,750,000 shares of common stock at an exercise price of $1.25 per share (the “Public Warrants”).
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”.
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. 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. In February 2020, this agreement was extended for an additional six months through August 31, 2020.
During
the three months ended March 31, 2020, the Company recorded an expense of $43,999 based on a weighted average valuation of $0.37
per warrant.
|
|
Warrants
|
|
|
Expense
|
|
|
Valuation
|
|
Grant Date
|
|
Granted
|
|
|
Recorded
|
|
|
Per Warrant
|
|
January 31, 2020
|
|
|
40,000
|
|
|
$
|
16,503
|
|
|
$
|
0.41
|
|
February 29, 2020
|
|
|
40,000
|
|
|
$
|
18,727
|
|
|
$
|
0.47
|
|
March 31, 2020
|
|
|
40,000
|
|
|
$
|
8,769
|
|
|
$
|
0.22
|
|
|
|
|
120,000
|
|
|
$
|
43,999
|
|
|
$
|
0.37
|
|
The
following table summarizes information about outstanding stock warrants as of March 31, 2020, 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
|
|
|
|
1,215,184
|
|
|
|
|
|
|
3 years
|
$
|
1.76
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
2.00
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
1.69
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
1.54
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
2.01
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
2.78
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
2.53
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
2.93
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
1.40
|
|
|
|
40,000
|
|
|
|
|
|
|
3 years
|
$
|
1,250
|
|
|
|
-
|
|
|
|
439
|
|
|
3 years
|
|
|
|
|
|
1,752,488
|
|
|
|
439
|
|
|
|
9.
STOCK OPTIONS
On
April 26, 2018 at the Company’s annual meeting, the Company’s stockholders approved the FlexShopper, Inc. 2018 Omnibus
Equity Compensation Plan (the “2018 Plan”). Upon the 2018 Plan’s approval, approximately 1,057,000 shares of
Company common stock were available for issuance thereunder, consisting of 750,000 shares authorized for issuance under the 2018
Plan and an aggregate 307,000 shares then remaining available for issuance under the Company’s 2007 Omnibus Equity Compensation
Plan (the “2007 Plan”) and 2015 Omnibus Equity Compensation Plan (the “2015 Plan”, and together with the
2007 Plan, the “Prior Plans”). The 2018 Plan replaced the Prior Plans. No new awards will be granted under the Prior
Plans; however, awards outstanding under the Prior Plans upon approval of the 2018 Plan remain subject to and will be paid under
the applicable Prior Plan.
On
February 21, 2019, the Company’s Board of Directors approved Amendment No. 1 to the 2018 Plan, subject to stockholder approval.
On May 2, 2019, the Company’s stockholders approved the 2018 Plan Amendment that increased (a) the total number of shares
available for issuance under the 2018 Plan by 1,000,000 shares and (b) the number of shares available for issuance as “incentive
stock options” within the meaning of Internal Revenue Code Section 422 by 1,000,000 shares.
Grants
under the 2018 Plan and the Prior Plans consist of incentive stock options, non-qualified stock options, stock appreciation rights,
stock awards, stock unit awards, dividend equivalents and other stock-based awards. Employees, directors and consultants and other
service providers are eligible to participate in the 2018 Plan and the Prior Plans. Options granted under the 2018 Plan and the
Prior Plans vest over periods ranging from immediately upon grant to a three-year period and expire ten years from date of grant.
Activity
in stock options for the three months ended March 31, 2020 and March 31, 2019 is as follows:
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
contractual
term
(years)
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding at January 1, 2020
|
|
|
2,004,318
|
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
425,000
|
|
|
|
2.53
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(9,500
|
)
|
|
|
1.17
|
|
|
|
|
|
|
|
4,453
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
2,419,818
|
|
|
$
|
1.86
|
|
|
|
8.05
|
|
|
$
|
539,949
|
|
Vested and exercisable at March 31, 2020
|
|
|
853,485
|
|
|
$
|
2.49
|
|
|
|
7.77
|
|
|
$
|
226,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
3.59
|
|
|
|
6.58
|
|
|
|
|
|
The
weighted average grant date fair value of options granted during the three-month period ended March 31, 2020 and March 31, 2019
was $1.39 and $0.34 per share respectively. 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:
|
|
Three Months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Exercise price
|
|
$
|
2.53
|
|
|
$
|
0.87
|
|
Expected life
|
|
|
5.1
years
|
|
|
|
5.5
years
|
|
Expected volatility
|
|
|
64
|
%
|
|
|
38
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
1.69
|
%
|
|
|
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 consolidated statements of operations was $171,815 for the three months ended March 31, 2020,
and $25,529 for the three months ended March 31, 2019. Unrecognized compensation cost related to non-vested options at March 31,
2020 amounted to approximately $912,915, which is expected to be recognized over a weighted average period of 3.44 years.
10.
INCOME TAXES
As
of March 31, 2020, the Company had federal net operating loss carryforwards (“NOL”) of approximately $66,900,000 and
state net operating loss carryforwards of approximately $6,000,000 available to offset future taxable income which expire from
2024 to 2037. NOL’s created after January 1, 2018 do not expire, but are limited.
Management
believes that the federal and state deferred tax asset as of March 31, 2020 does not satisfy the realization criteria and has
recorded a full valuation allowance to offset the deferred tax asset.
11.
EXCHANGE OFFER OF WARRANTS
On February 4, 2020, the Company completed
an exchange offer relating to 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”).
In total, 5,351,290 warrants were exchanged
for 3,317,812 shares in accordance with the Warrant Exchange Offer.
On February 19, 2020, the Company exchanged
all remaining untendered public warrants for common stock at a rate of 0.56 shares per public warrant in accordance with the terms
of the Warrant Agreement (the “Mandatory Conversion of Warrants”). In total 258,610 warrants were exchanged for 144,871
shares in this transaction.
As a result of this transaction, the Company
recognized a deemed dividend of $713,212 resulting from the excess intrinsic value at the date of the exchange of the total issued
common stock over the warrants.
Also, on February 19, 2020, “FPAYW”
was removed from listing on Nasdaq and deregistered under the Securities Exchange Act.
12.
CONTINGENCIES AND OTHER UNCERTAINTIES
The
extent of the impact and effects of the recent outbreak of the coronavirus (COVID-19) on the operation and financial performance
of our business will depend on future developments, including the duration and spread of the outbreak, the recovery time of the
disrupted supply chains, or the uncertainty with respect to the accessibility of additional liquidity or capital markets, all
of which are highly uncertain and cannot be predicted. If the demand for the Company’s leases are impacted by this outbreak
for an extended period, our results of operations may be materially adversely affected.
13.
COMMITMENTS
The
Company does not have any commitments other than real property leases (Note 4).
14.
SUBSEQUENT EVENTS
Paycheck Protection Program
FlexShopper, LLC (the “Borrower”)
applied for and received a loan (the “Loan”) from Customers Bank (the “Lender”) in the principal amount
of $1,914,100, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”), which was enacted March 27, 2020.
The Loan is evidenced by a promissory note
(the “Note”), dated April 30, 2020, issued by the Borrower to the Lender. The Note matures on April 30, 2022, and bears
interest at the rate of 1.00% per annum, payable monthly commencing on November 30, 2020, following an initial deferral period
as specified under the PPP. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalty. Proceeds
from the Loan will be available to the Borrower to fund designated expenses, including certain payroll costs, group health care
benefits and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire sum of the principal
amount and accrued interest may be forgiven to the extent the Loan proceeds are used for qualifying expenses as described in the
CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. The Company intends
to cause the Borrower to use the entire Loan amount for designated qualifying expenses and to apply for forgiveness of the Loan
in accordance with the terms of the PPP.
Promissory note
On April 30, 2020, FlexShopper, LLC and
122 Partners, LLC, as lender, agreed to extend the maturity date of the subordinated promissory note in the principal amount of
$1,000,000, issued by FlexShopper, LLC pursuant to the subordinated debt financing letter agreement, dated January 25, 2019, to
April 30, 2021. For more information, see Note 6 to Notes to Consolidated Financial Statements.