Our Independent Registered Public Accounting
Firm is EisnerAmper LLP, Iselin, New Jersey (PCAOB ID: 274)
The reports of the Independent Registered Public Accounting Firm,
Consolidated Financial Statements and Schedules are set forth beginning on F-1.
FLEXSHOPPER,
INC.
CONSOLIDATED
BALANCE SHEETS
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
ASSETS | |
| | |
| |
CURRENT
ASSETS: | |
| | |
| |
Cash | |
$ | 5,094,642 | | |
$ | 8,541,232 | |
Accounts
receivable, net | |
| 29,898,991 | | |
| 10,032,714 | |
Prepaid
expenses | |
| 957,527 | | |
| 869,081 | |
Lease
merchandise, net | |
| 40,942,112 | | |
| 42,822,340 | |
Total
current assets | |
| 76,893,272 | | |
| 62,265,367 | |
| |
| | | |
| | |
PROPERTY
AND EQUIPMENT, net | |
| 7,841,206 | | |
| 5,911,696 | |
| |
| | | |
| | |
OTHER
ASSETS, net | |
| 77,578 | | |
| 72,316 | |
Total
assets | |
$ | 84,812,056 | | |
$ | 68,249,379 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
CURRENT
LIABILITIES: | |
| | | |
| | |
Accounts
payable | |
$ | 7,982,180 | | |
$ | 7,907,619 | |
Accrued
payroll and related taxes | |
| 391,078 | | |
| 352,102 | |
Promissory notes to related parties, net of $1,274 at 2021 and net of $8,276 at 2020 of unamortized issuance costs, including accrued interest | |
| 1,053,088 | | |
| 4,815,546 | |
Current
portion of promissory note – Paycheck Protection Program, including accrued interest | |
| - | | |
| 1,184,952 | |
Accrued
expenses | |
| 2,987,646 | | |
| 2,646,800 | |
Lease
liability - current portion | |
| 172,732 | | |
| 160,726 | |
Total
current liabilities | |
| 12,586,724 | | |
| 17,067,745 | |
| |
| | | |
| | |
Loan payable under credit agreement to beneficial shareholder, net of $413,076 at 2021 and $61,617 at 2020 of unamortized issuance costs and current portion | |
| 50,061,924 | | |
| 37,134,009 | |
Promissory
notes to related parties, net of current portion | |
| 3,750,000 | | |
| - | |
Promissory
note – Paycheck Protection Program, net of current portion | |
| - | | |
| 741,787 | |
Accrued
payroll and related taxes net of current portion | |
| - | | |
| 204,437 | |
Deferred
income tax liability | |
| 495,166 | | |
| - | |
Lease
liabilities net of current portion | |
| 1,774,623 | | |
| 1,947,355 | |
Total
liabilities | |
| 68,668,437 | | |
| 57,095,333 | |
| |
| | | |
| | |
STOCKHOLDERS’
EQUITY | |
| | | |
| | |
Series 1 Convertible Preferred Stock, $0.001 par value - authorized 250,000 shares, issued and outstanding 170,332 shares at $5.00 stated value | |
| 851,660 | | |
| 851,660 | |
Series 2 Convertible Preferred Stock, $0.001 par value - authorized 25,000 shares, issued and outstanding 21,952 shares at $1,000 stated value | |
| 21,952,000 | | |
| 21,952,000 | |
Common stock, $0.0001 par value- authorized 40,000,000 shares, issued and outstanding 21,442,278 shares at 2021 and 21,359,945 shares at 2020 | |
| 2,144 | | |
| 2,136 | |
Additional
paid in capital | |
| 38,560,117 | | |
| 36,843,326 | |
Accumulated
deficit | |
| (45,222,302 | ) | |
| (48,495,076 | ) |
Total
stockholders’ equity | |
| 16,143,619 | | |
| 11,154,046 | |
| |
$ | 84,812,056 | | |
$ | 68,249,379 | |
The
accompanying notes to consolidated financial statements are an integral part of these statements.
FLEXSHOPPER,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
For the years ended December 31, | |
| |
2021 | | |
2020 | |
Revenues: | |
| | |
| |
Lease revenues and fees, net | |
$ | 118,355,184 | | |
$ | 96,939,767 | |
Lease merchandise sold | |
| 7,071,572 | | |
| 5,144,747 | |
Total revenues | |
| 125,426,756 | | |
| 102,084,514 | |
| |
| | | |
| | |
Costs and expenses: | |
| | | |
| | |
Cost of lease revenues, consisting of depreciation and impairment
of lease merchandise | |
| 73,616,293 | | |
| 63,308,210 | |
Cost of lease merchandise sold | |
| 5,561,593 | | |
| 3,424,880 | |
Marketing | |
| 9,129,062 | | |
| 5,880,063 | |
Salaries and benefits | |
| 11,489,208 | | |
| 10,440,693 | |
Operating expenses | |
| 18,265,781 | | |
| 14,404,953 | |
Total costs and expenses | |
| 118,061,937 | | |
| 97,458,799 | |
| |
| | | |
| | |
Operating income | |
| 7,364,819 | | |
| 4,625,715 | |
| |
| | | |
| | |
Gain on extinguishment of debt | |
| 1,931,825 | | |
| - | |
Interest expense including amortization
of debt issuance costs | |
| (5,238,560 | ) | |
| (4,302,561 | ) |
Income before income taxes | |
| 4,058,084 | | |
| 323,154 | |
Provision for income taxes | |
| (785,310 | ) | |
| (663,050 | ) |
Net income/ (loss) | |
| 3,272,774 | | |
| (339,896 | ) |
| |
| | | |
| | |
Deemed dividend from exchange offer of warrants | |
| - | | |
| 713,212 | |
Dividends on Series 2 Convertible Preferred
Shares | |
| 2,439,099 | | |
| 2,438,988 | |
Net income/ (loss) attributable
to common and Series 1 Convertible Preferred shareholders | |
$ | 833,675 | | |
$ | (3,492,096 | ) |
| |
| | | |
| | |
Basic and diluted income/(loss) per common
share: | |
| | | |
| | |
Basic | |
$ | 0.04 | | |
$ | (0.17 | ) |
Diluted | |
| 0.04 | | |
| (0.17 | ) |
| |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES: | |
| | | |
| | |
Basic | |
| 21,387,960 | | |
| 20,995,349 | |
Diluted | |
| 23,227,964 | | |
| 20,995,349 | |
The
accompanying notes to consolidated financial statements are an integral part of these statements.
FLEXSHOPPER,
INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the year ended December 31, 2021 and 2020
| |
Series
1 Convertible Preferred Stock | | |
Series
2 Convertible Preferred Stock | | |
Common
Stock | | |
Additional
Paid in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance, January 1, 2020 | |
| 171,191 | | |
$ | 855,955 | | |
| 21,952 | | |
$ | 21,952,000 | | |
| 17,783,960 | | |
$ | 1,779 | | |
$ | 35,313,721 | | |
$ | (48,155,180 | ) | |
$ | 9,968,275 | |
Provision for compensation expense
related to stock options | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 981,261 | | |
| - | | |
| 981,261 | |
Issuance of warrants in connection
with consulting agreements | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 407,494 | | |
| | | |
| 407,494 | |
Exercise of stock options into common
stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| 7,166 | | |
| 1 | | |
| 5,661 | | |
| - | | |
| 5,662 | |
Conversion of preferred stock to
common stock | |
| (859 | ) | |
| (4,295 | ) | |
| - | | |
| - | | |
| 1,136 | | |
| - | | |
| 4,295 | | |
| - | | |
| - | |
Exercise of warrants into common
stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| 105,000 | | |
| 10 | | |
| 131,240 | | |
| - | | |
| 131,250 | |
Exchange offer of warrants | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,462,683 | | |
| 346 | | |
| (346 | ) | |
| - | | |
| - | |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (339,896 | ) | |
| (339,896 | ) |
Balance, December 31, 2020 | |
| 170,332 | | |
| 851,660 | | |
| 21,952 | | |
| 21,952,000 | | |
| 21,359,945 | | |
| 2,136 | | |
| 36,843,326 | | |
| (48,495,076 | ) | |
$ | 11,154,046 | |
Provision for compensation expense
related to stock options | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,125,819 | | |
| - | | |
| 1,125,819 | |
Issuance of warrants in connection
with consulting agreements | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 522,808 | | |
| - | | |
| 522,808 | |
Exercise of stock options into common
stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| 82,333 | | |
| 8 | | |
| 68,164 | | |
| - | | |
| 68,172 | |
Net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,272,774 | | |
| 3,272,774 | |
Balance, December 31, 2021 | |
| 170,332 | | |
$ | 851,660 | | |
| 21,952 | | |
$ | 21,952,000 | | |
| 21,442,278 | | |
$ | 2,144 | | |
$ | 38,560,117 | | |
$ | (45,222,302 | ) | |
$ | 16,143,619 | |
The
accompanying notes to consolidated financial statements are an integral part of these statements.
FLEXSHOPPER,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended December 31, 2021 and 2020
| |
2021 | | |
2020 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net income/(loss) | |
$ | 3,272,774 | | |
$ | (339,896 | ) |
Adjustments to reconcile net income/(loss) to net cash used in
operating activities: | |
| | | |
| | |
Depreciation and impairment of lease merchandise | |
| 73,616,293 | | |
| 63,308,210 | |
Other depreciation and amortization | |
| 2,871,541 | | |
| 2,271,287 | |
Amortization of debt issuance cost | |
| 220,816 | | |
| 305,797 | |
Compensation expense related to issuance of stock options and
warrants | |
| 1,648,627 | | |
| 1,388,755 | |
Provision for doubtful accounts | |
| 40,489,540 | | |
| 31,930,714 | |
Interest in kind added to promissory notes balance | |
| 9,460 | | |
| 13,388 | |
Write off of capitalized software costs | |
| 4,361 | | |
| - | |
Deferred income tax | |
| 495,166 | | |
| - | |
Gain on debt extinguishment | |
| (1,931,825 | ) | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (60,355,817 | ) | |
| (33,691,096 | ) |
Prepaid expenses and other | |
| (87,394 | ) | |
| (195,104 | ) |
Lease merchandise | |
| (71,736,065 | ) | |
| (75,067,446 | ) |
Security deposits | |
| (8,338 | ) | |
| 2,943 | |
Accounts payable | |
| 74,561 | | |
| 3,339,730 | |
Lease liabilities | |
| (5,811 | ) | |
| 198,528 | |
Accrued payroll and related taxes | |
| (165,461 | ) | |
| 43,271 | |
Accrued expenses | |
| 331,541 | | |
| 1,283,372 | |
Net cash used in operating activities | |
| (11,256,031 | ) | |
| (5,207,547 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Purchases of property and equipment, including
capitalized software and data costs | |
| (4,949,544 | ) | |
| (3,098,194 | ) |
Net cash used in investing activities | |
| (4,949,544 | ) | |
| (3,098,194 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from loan payable under credit agreement | |
| 19,850,000 | | |
| 15,033,000 | |
Repayment of loan payable under credit agreement | |
| (6,575,000 | ) | |
| (7,023,250 | ) |
Proceeds from promissory notes- Paycheck Protection Program, net
of fees | |
| - | | |
| 1,914,100 | |
Principal payment under finance lease obligation | |
| (7,707 | ) | |
| (6,664 | ) |
Proceeds from exercise of warrants | |
| - | | |
| 131,250 | |
Proceeds from exercise of stock options | |
| 68,172 | | |
| 5,662 | |
Repayment of installment loan | |
| (11,207 | ) | |
| (11,207 | ) |
Debt issuance related costs | |
| (565,273 | ) | |
| (64,390 | ) |
Net cash provided by financing activities | |
| 12,758,985 | | |
| 9,978,501 | |
| |
| | | |
| | |
(DECREASE)/ INCREASE IN CASH | |
| (3,446,590 | ) | |
| 1,672,760 | |
CASH, beginning of period | |
| 8,541,232 | | |
| 6,868,472 | |
CASH, end of period | |
$ | 5,094,642 | | |
$ | 8,541,232 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 4,945,690 | | |
$ | 3,973,374 | |
Deemed dividend from exchange offer of warrants | |
$ | - | | |
$ | 713,212 | |
Conversion of preferred stock to common stock | |
$ | - | | |
$ | 4,295 | |
The
accompanying notes to consolidated financial statements are an integral part of these statements.
FLEXSHOPPER,
INC.
Notes
To Consolidated Financial Statements
For
the year ended December 30, 2021 and 2020
1.
BUSINESS
FlexShopper,
Inc. (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 and owns 100% of FlexLending, LLC, a Delaware limited liability company.
The Company is a holding corporation with no operations except for those conducted by FlexShopper LLC and its subsidiary FlexLending,
LLC.
In
January 2015, in connection with the Credit Agreement entered in March 2015 (see Note 6), FlexShopper 1 LLC and FlexShopper 2 LLC were
organized as wholly owned Delaware subsidiaries of FlexShopper LLC to conduct operations. FlexShopper Inc, together with its subsidiaries,
are hereafter referred to as “FlexShopper.”
FlexShopper
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. The Company effects these transactions by first approving consumers through its proprietary,
risk analytics-powered underwriting model. After receiving a signed consumer lease, the Company then funds the leased item by purchasing
the item from the Company’s merchant partner and leasing it to the consumer. The Company then collects payments from consumers
under their consumer lease.
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 accounting principles generally accepted in the United
States of America (“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 completion of all required lease payments, generally 52 weeks. On any current lease, customers have the option to
cancel the agreement in accordance with lease terms and return the merchandise. 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 is 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
biweekly 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 aforementioned manner and therefore
the Company has an in-house and near-shore team to collect on the past due amounts FlexShopper maintains an allowance for doubtful accounts,
under which FlexShopper’s policy is to record an allowance for estimated uncollectible charges, primarily based on historical collection
experience that considers both the aging of the lease and the origination channel. Other qualitative factors are considered in estimating
the allowance, such as seasonality, underwriting changes and other business trends. We believe our allowance is adequate to absorb all
expected losses.. The accounts receivable balances consisted of the following as of December 31, 2021 and December 31, 2020:
| |
December 31,
2021 | | |
December 31,
2020 | |
Accounts
receivable | |
$ | 57,602,269 | | |
$ | 32,171,255 | |
Allowance
for doubtful accounts | |
| (27,703,278 | ) | |
| (22,138,541 | ) |
Accounts
receivable, net | |
$ | 29,898,991 | | |
$ | 10,032,714 | |
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. As the lease ages, the greater the allowance attributable to that account to reflect
the decreased likelihood of successful collection efforts. Accounts receivable balances charged off against the allowance were $34,924,803
for the year ended December 31, 2021 respectively and $19,769,114 for the year ended December 31, 2020, respectively. During the years
ended December 31, 2021 and 2020, the provision for bad debt was $40,489,540 and $31,930,714, respectively. The following table shows
the activity in the allowance for doubtful accounts:
| |
December 31,
2021 | | |
December 31,
2020 | |
Beginning
balance | |
$ | 22,138,541 | | |
$ | 9,976,941 | |
Provision | |
| 40,489,540 | | |
| 31,930,714 | |
Accounts
written off | |
| (34,924,803 | ) | |
| (19,769,114 | ) |
Ending
balance | |
$ | 27,703,278 | | |
$ | 22,138,541 | |
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, 2021 and December 31, 2020:
| |
December
31, 2021 | | |
December 31,
2020 | |
Lease
merchandise at cost | |
$ | 72,159,063 | | |
$ | 64,335,971 | |
Accumulated
depreciation | |
| (29,505,431 | ) | |
| (19,162,357 | ) |
Impairment
reserve | |
| (1,711,520 | ) | |
| (2,351,274 | ) |
Lease
merchandise, net | |
$ | 40,942,112 | | |
$ | 42,822,340 | |
Cost
of lease merchandise sold represents the undepreciated cost of rental merchandise at the time of sale.
Lease
accounting
The Company accounts for
leases in accordance with Accounting Standards Codification (ASC) Topic 842 Leases (Topic 842). Under Topic 842, lessees are required
to recognize for all leases at the commencement date as 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. Under the same Topic, lessors are also required to classify leases.
All customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases
as a lessor. An operating lease results in the recognition of lease income on a straight-line basis, while the underlying leased asset
remains on the lessor’s balance sheet and continues to depreciate.
The breakout of lease revenues and fees, net
of lessor bad debt expense, is shown below:
|
|
Year
ended
December 31, |
|
| |
2021 | | |
2020 | |
Lease
billings and accruals | |
$ | 158,844,724 | | |
$ | 128,870,481 | |
Provision
for doubtful accounts | |
| (40,489,540 | ) | |
| (31,930,714 | ) |
Lease
revenues and fees | |
$ | 118,355,184 | | |
$ | 96,939,767 | |
Deferred
Debt Issuance Costs - Debt issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 2015 and subsequent
amendments (see Note 6) are offset against the outstanding balance of the loan payable and are amortized using the straight-line method
over the remaining term of the related debt, which approximates the effective interest method. Amortization which is included in interest
expense was $213,814 and $283,912 for the years ended December 31, 2021 and 2020, respectively.
Debt
issuance costs incurred in conjunction with the subordinated Promissory Notes (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 $7,002 and $21,885 for the years ended December
31, 2021 and 2020, respectively.
Intangible Assets - Intangible assets
consist of a patent on the Company’s LTO payment method at check-out for third party e-commerce sites. Patents are stated at cost
less accumulated amortization. Patent costs are amortized by using the straight-line method over the legal life, or if shorter, the useful
life of the patent, which has been estimated to be 10 years. Intangible assets amortization expense was $3,076 for the years ended December
31, 2021 and 2020.
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 $2,816,939
and $2,365,612 for the years ended December 31, 2021 and 2020, respectively. The Company wrote off $4,361 of capitalized development
costs in 2021. Capitalized software amortization expense was $2,317,626 and $2,102,983 for the years ended December 31, 2021 and 2020,
respectively.
Data
Costs - The Company buys data from different vendors upon receipt of an application. The data costs directly used to make underwriting
decisions are expensed as incurred. Certain data costs that are probable to provide future economic benefit to the Company are capitalized
as property and equipment and amortized on a straight-line basis over their estimate useful lives. The probability to provide future
economic benefit of the data cost assets is estimated based upon future usage of the information on different areas and products of the
Company. At the beginning of the third quarter of 2021, the Company made several changes remarked by the implementation of a more discipline
process around data procurement and storage. Those improvements triggered a change in the estimate of the probability to provide future
economic benefit of some data cost.
Capitalized
data costs amounted to $884,160 for the year ended December 31, 2021. Capitalized data costs amortization expense was $86,717 for the
years ended December 31, 2021.
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 7). 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 income/ (loss) per share
for the year ended December 31, 2021 and the year ended December 31, 2020, no effect has been given to the issuance of common stock upon
conversion or exercise of the Series 2 Convertible Preferred stock as their effect is anti-dilutive.
The following table reflects the number of common
shares issuable upon conversion or exercise.
| |
Year
ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
Series
1 Convertible Preferred Stock | |
| 225,231 | | |
| 225,231 | |
Series
2 Convertible Preferred Stock | |
| 5,845,695 | | |
| 5,845,695 | |
Series
2 Convertible Preferred Stock issuable upon exercise of warrants | |
| 116,903 | | |
| 116,903 | |
Common
Stock Options | |
| 3,080,904 | | |
| 2,595,700 | |
Common
Stock Warrants | |
| 2,255,184 | | |
| 2,112,488 | |
| |
| 11,523,917 | | |
| 10,896,017 | |
The
following table sets forth the computation of basic and diluted earnings per common share for the year ended December 31, 2021 and 2020:
| |
Year ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Numerator | |
| | |
| |
Net income/(loss) | |
$ | 3,272,774 | | |
| (339,896 | ) |
Convertible Series 2 Preferred Share
dividends | |
| (2,439,099 | ) | |
| (2,438,988 | ) |
Net income/(loss) attributable to common and Series 1 Convertible
Preferred Stock | |
| 833,675 | | |
| (2,778,884 | ) |
Deemed dividend from exchange offer of warrants | |
| - | | |
| (713,212 | ) |
Convertible Series 2 Preferred Share dividends attributable
to Series 1 Convertible Preferred Stock | |
| 25,418 | | |
| - | |
Net income attributable to Series 1 Convertible
Preferred Stock | |
| (34,106 | ) | |
| - | |
Net income/(loss) attributable to common
shares - Numerator for basic and diluted EPS | |
$ | 824,987 | | |
| (3,492,096 | ) |
Denominator | |
| | | |
| | |
Weighted average of common shares outstanding- Denominator for
basic EPS | |
| 21,387,960 | | |
| 20,995,349 | |
Effect of dilutive securities: | |
| | | |
| | |
Common stock options | |
| 978,978 | | |
| - | |
Common stock warrants | |
| 861,026 | | |
| - | |
Denominator for diluted EPS – adjusted
weighted average shares | |
| 23,227,964 | | |
| 20,995,349 | |
Basic EPS | |
$ | 0.04 | | |
| (0.17 | ) |
Diluted EPS | |
$ | 0.04 | | |
| (0.17 | ) |
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 a compensation expense in the financial statements.
Compensation expense is
determined by reference to the fair value of an award on the date of grant and is recognized 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 and the carrying value of promissory notes to related parties approximate 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 30, 2021, and 2020, the Company had not recorded any unrecognized tax benefits. Interest and
penalties related to liabilities for uncertain tax positions will be charged to interest and operating expenses, respectively.
Recent
Accounting Pronouncements
In June 2016, the FASB
issued Accounting Standards Update No. 2016-13, as amended “Financial Instruments - Credit Losses (Topic 326)”
revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The
effective date of Topic 326 for public companies that are considered smaller reporting companies as defined by the SEC as for fiscal
years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard
on January 1, 2023.While the Company is continuing to assess the potential effects of adopting the provisions of Topic 326, it does not
expect to have a material effect, if any, on its Consolidated Financial Statements, as this Topic does not cover operating leases receivables.
In March 2020, the FASB
issued guidance codified in ASU 2020-04 and ASU 2021-01, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting,” which provides optional expedients for a limited period of time to ease the potential burden
in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients
and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain
criteria are met. The standard is effective for the Company as of March 12, 2020 through December 31, 2022. An entity can elect to apply
the amendments as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively
from a date within an interim period that includes or is subsequent to March 12, 2020, up to that date that the financial statements
are available to be issued. The Company is currently evaluating the optional expedients and exceptions provided by ASU 2020-04 to determine
the impact on its consolidated financial statements.
3.
LEASES
Refer to Note 2 of these consolidated financial
statements for further information about the Company’s revenue generating activities as a lessor. All customer agreements are considered
operating leases, and the Company currently does not have any sales-type or direct financing leases.
Lease
Commitments
FlexShopper
had a lease for retail store space in West Palm Beach, Florida. The term of the lease was to December 30, 2021. In March 2021, FlexShopper
and the lessor agreed on the early termination of the lease for this property. The monthly rent for this space was approximately $2,300
per month.
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.
In September 2021, FlexShopper entered into a
12-month lease for an office space for approximately 18 people at the Battery at SunTrust Park at Georgia, Atlanta mainly to expand
the sales team. The monthly rent for this space is approximately $6,900 per month. This lease is accounted for under the practical expedient
for leases with initial terms of 12 months or less, and as such no related right of use asset or liability was recorded.
The
rental expense for the year ended December 31, 2021 and 2020 was approximately $679,000 and $688,000 respectively. At December 31, 2021,
the future minimum annual lease payments are approximately as follows:
2022 |
|
$ |
472,000 |
|
2023 |
|
|
427,000 |
|
2024 |
|
|
435,000 |
|
2025 |
|
|
443,000 |
|
2026 |
|
|
456,000 |
|
Thereafter |
|
|
774,000 |
|
|
|
$ |
3,007,000 |
|
The
Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in the Company’s
consolidated balance sheets beginning January 1, 2019.
Supplemental
balance sheet information related to leases is as follows:
|
|
Balance Sheet Classification |
|
December 31,
2021 |
|
|
December 31,
2020 |
|
Assets |
|
|
|
|
|
|
|
|
Operating Lease Asset |
|
Property and Equipment, net |
|
$ |
1,534,512 |
|
|
$ |
1,673,432 |
|
Finance Lease Asset |
|
Property and Equipment, net |
|
|
18,818 |
|
|
|
27,106 |
|
Total Lease Assets |
|
|
|
$ |
1,553,330 |
|
|
$ |
1,700,538 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Operating Lease Liability – current portion |
|
Current Lease Liabilities |
|
$ |
163,939 |
|
|
$ |
153,019 |
|
Finance Lease Liability – current portion |
|
Current Lease Liabilities |
|
|
8,793 |
|
|
|
7,707 |
|
Operating Lease Liability – net of current portion |
|
Long Term Lease Liabilities |
|
|
1,761,558 |
|
|
|
1,925,498 |
|
Finance Lease Liability –
net of current portion |
|
Long Term Lease Liabilities |
|
|
13,065 |
|
|
|
21,857 |
|
Total Lease Liabilities |
|
|
|
$ |
1,947,355 |
|
|
$ |
2,108,081 |
|
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 | |
| 13.03 | % | |
| 7 | |
Finance
Leases | |
| 13.32 | % | |
| 2 | |
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 $401,463 and $433,654 for the year ended December 31, 2021 and December 31, 2020, respectively.
Supplemental
cash flow information related to operating leases is as follows:
| |
Year
ended | |
| |
December
30, | |
| |
2021 | | |
2020 | |
Cash
payments for operating leases | |
$ | 400,771 | | |
$ | 221,433 | |
Cash
payments for finance leases | |
| 11,184 | | |
| 11,049 | |
New
finance lease asset obtained in exchange for lease liabilities | |
| - | | |
| 4,033 | |
Below
is a summary of undiscounted operating lease liabilities as of December 30, 2021. 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 |
|
2022 | |
$ |
405,443 |
|
2023 | |
|
417,606 |
|
2024 | |
|
430,134 |
|
2025 | |
|
443,038 |
|
2026 | |
|
456,330 |
|
2027
and thereafter | |
|
773,594 |
|
Total
undiscounted cash flows | |
|
2,926,145 |
|
Less:
interest | |
|
(1,000,648 |
) |
Present
value of lease liabilities | |
$ |
1,925,497 |
|
Below
is a summary of undiscounted finance lease liabilities as of December 30, 2021. 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 |
|
2022 | |
$ |
11,184 |
|
2023 | |
|
9,699 |
|
2024 | |
|
4,782 |
|
Total
undiscounted cash flows | |
|
25,665 |
|
Less:
interest | |
|
(3,807) |
|
Present
value of lease liabilities | |
$ |
21,858 |
|
4. PROPERTY
AND EQUIPMENT
Property
and equipment consist of the following:
| |
Estimated
Useful Lives | |
December 31,
2021 | | |
December 31,
2020 | |
Furniture,
fixtures and vehicle | |
2-5 years | |
$ | 391,669 | | |
$ | 303,285 | |
Website,
internal use software and data cost | |
3 years | |
| 16,186,179 | | |
| 12,489,441 | |
Computers
and software | |
3-7 years | |
| 2,281,975 | | |
| 1,121,914 | |
| |
| |
| 18,859,823 | | |
| 13,914,640 | |
Less:
accumulated depreciation and amortization | |
| |
| (12,571,947 | ) | |
| (9,703,482 | ) |
Right
of use assets, net | |
| |
| 1,553,330 | | |
| 1,700,538 | |
| |
| |
$ | 7,841,206 | | |
$ | 5,911,696 | |
Depreciation
and amortization expense were $2,872,826 and $2,268,211 for the years ended December 31, 2021 and 2020, respectively.
5. PROMISSORY
NOTES-RELATED PARTIES
122 Partners Note- On January 25, 2019,
FlexShopper, LLC (the “Borrower”) 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 “122 Partners 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. Payment of the principal amount and accrued interest under the 122 Partners Note was due and payable by the borrower on April 30,
2020 and the borrower can prepay principal and interest at any time without penalty. Amounts outstanding under the 122 Partners Note
bear interest at a rate equal to 5.00% per annum in excess of the non-default rate of interest from time to time in effect under the
Credit Agreement. Obligations under the 122 Partners Note are subordinated to obligations under the Credit Agreement. The 122 Partners
Note is subject to customary representations and warranties and events of default. If an event of default occurs and is continuing, the
Borrower may be required to repay all amounts outstanding under the 122 Partners Note. Obligations under the 122 Partners Note are secured
by substantially all of the Borrower’s assets, subject to the senior rights of the lenders under the Credit Agreement. On April
30, 2020, pursuant to an amendment to the subordinated debt financing letter agreement, the Borrower and 122 Partners, LLC agreed to
extend the maturity date of the 122 Partners Note to April 30, 2021. On March 22, 2021, FlexShopper, LLC executed an amendment to the
122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2022. No other changes were made to such
Note. Principal and accrued and unpaid interest outstanding on the 122 Partners Note was $1,011,439 as of December 31, 2021 and $1,015,510
as of December 31, 2020.
Interests paid for the 122 Partner Note were
$148,011 and $165,280 for the year 2021 and 2020, respectively.
Interests expensed for the 122 Partner Note were
$143,940 and $165,409 for the year 2021 and 2020, respectively.
As of March 30, 2022, the Company is finalizing
an amendment to the 122 Partner Note to extend the maturity date for one more year.
NRNS Note- FlexShopper LLC (the “Borrower”)
previously entered into letter agreements with NRNS Capital Holdings LLC (“NRNS”), the manager of which is the Chairman of
the Company’s Board of Directors, pursuant to which the Borrower issued subordinated promissory notes to NRNS (the “NRNS
Note”) in the total principal amount of $3,750,000. Payment of principal and accrued interest under the NRNS Note was due and payable
by the Borrower on June 30, 2021 and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding
under the NRNS Note bear interest at a rate equal to 5.00% per annum in excess of the non-default rate of interest from time to time
in effect under the Credit Agreement. Obligations under the NRNS Note are subordinated to obligations under the Credit Agreement. The
NRNS Note is subject to customary representations and warranties and events of default. If an event of default occurs and is continuing,
the Borrower may be required to repay all amounts outstanding under the NRNS Note. Obligations under the NRNS Note is secured by substantially
all of the Borrower’s assets, subject to rights of the lenders under the Credit Agreement. On March 22, 2021, FlexShopper, LLC
executed an amendment to the NRNS Note such that the maturity date was extended to April 1, 2022. On February 2, 2022, FlexShopper LLC
executed another amendment to the NRNS Note. This last amendment extended the maturity date from April 1, 2022 to July 1, 2024 and increased
the credit commitment from $3,750,000 to $11,000,000. No other changes were made to such NRNS Note. Principal and accrued and unpaid
interest outstanding on the NRNS Note was $3,792,923 as of December 31, 2021 and $3,808,312 as of December 31, 2020.
Interests paid for the NRNS Note were $555,749
and $619,961 for the year 2021 and 2020, respectively.
Interests expensed for the NRNS Note were $540,360
and $620,581 for the year 2021 and 2020, respectively.
Amounts
payable under the promissory notes are as follows:
| |
Debt Principal | | |
Interest | |
2022 | |
$ | 1,000,000 | | |
$ | 54,362 | |
2024 | |
$ | 3,750,000 | | |
| — | |
6.
LOAN PAYABLE UNDER CREDIT AGREEMENT
On
March 6, 2015, FlexShopper, through a wholly-owned subsidiary (“Borrower”), entered into a credit agreement (as amended from
time-to-time, 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 (“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 $57,500,000
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). The Lender was granted a security interest in certain leases as collateral under this Agreement.
On January 29, 2021, the Company and the Lender
signed an Omnibus Amendment to the Credit Agreement. This Amendment extended the Commitment Termination Date to April 1, 2024, amended
other covenant requirements, partially removed indebtedness covenants and amended eligibility rules. The interest rate charged on amounts
borrowed is LIBOR plus 11% per annum. At December 31, 2021, amounts borrowed bear interest at 11.25%.
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 payments of cash 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 liquidity and cash 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, 2021, follows:
|
|
December 31,
2021 |
|
|
|
Required
Covenant |
|
|
Actual
Position |
|
Equity Book Value
not less than |
|
$ |
8,000,000 |
|
|
$ |
16,143,619 |
|
Liquidity greater than |
|
|
1,500,000 |
|
|
|
5,094,642 |
|
Cash greater than |
|
|
500,000 |
|
|
|
5,094,642 |
|
Consolidated Total Debt to Equity
Book Value ratio not to exceed |
|
|
5.25 |
|
|
|
3.40 |
|
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.
As
of December 31, 2021, the Company had $5,268,566 available under the Credit Agreement. Credit availability is subject to a borrowing
base which is redetermined from time to time and based on specific advance rates on eligible current assets. As the Company continues
to originate lease agreements, new leases will be eligible for the borrowing base and this will open more availability under the Credit
Agreement.
Interest expense incurred under the Credit Agreement
amounted to $4,323,830 for the year ended December 31, 2021, and $3,192,019 for the year ended December 31, 2020, respectively. The outstanding
balance under the Credit Agreement was $50,475,000 as of December 31, 2021 and was $37,195,696 as of December 31, 2020. Such amount is
presented in the consolidated balance sheet net of unamortized issuance costs of $413,076 at 2021 and $61,617 at 2020. 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 April 1, 2024, or from reductions in the borrowing base. Accordingly, all principal
is shown as a non-current liability at December 31, 2021.
On March 5, 2021, the applicable regulators announced
that LIBOR will cease to be provided and will no longer be representative (i) immediately after December 31, 2021 for all sterling, euro,
Swiss franc and Japanese yen settings, and the one-week and two-month U.S. dollar settings and (ii) immediately after June 30,2023 for
the remaining U.S. dollar settings. The Company’s debt bears interest based on the one-month LIBOR rate. If there is a LIBOR Disruption
Event as defined in the Credit Agreement, LIBOR will be replaced with the Prime Rate.
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 upon liquidation. |
As
of December 31, 2021, 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 December 31, 2021, there were 170,332 shares of Series 1 Convertible Preferred Stock outstanding, which were convertible into 225,231
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, 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 December 31, 2021 totaled approximately $13,271,173. As
of December 31, 2021, each Series 2 Preferred Share was convertible into approximately 266 shares of common stock; however, 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” (See Note 10).
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 “Consulting Agreement”), an entity of which the Company’s
Chairman is manager, the Company agreed to issue 40,000 warrants to XLR8 Capital Partners LLC 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. On August 30, 2020,
the parties entered into an amendment to the Consulting Agreement to further extend the term for another six-month period through February
28, 2021. The Consulting Agreement automatically renewed for one successive six-month period, therefore the new termination date was
August 31, 2021. There are no additional automatic renewals. The Consulting Agreement and amendments were approved by the Company’s
Compensation Committee.
The
August 2020 amendment also modified the alternative minimum exercise price of the monthly warrant consideration issuable to the Consultant
to $1.60 per share going forward, and the expiration date of the warrants to the date that is four years following the last trading day
of the calendar month relating to the applicable monthly warrant issuance.
During the year ended December
31, 2021, the Company recorded an expense of $522,808 based on a weighted average grant date fair value of $1.63 per warrant.
| |
Warrants | | |
Expense | | |
Grant
date fair value | |
Grant
Date | |
Granted | | |
Recorded | | |
Per Warrant | |
January
31, 2021 | |
| 40,000 | | |
$ | 73,595 | | |
$ | 1.84 | |
February
29, 2021 | |
| 40,000 | | |
| 76,318 | | |
| 1.91 | |
March
31, 2021 | |
| 40,000 | | |
| 63,010 | | |
| 1.58 | |
April
30, 2021 | |
| 40,000 | | |
| 60,542 | | |
| 1.51 | |
May
31, 2021 | |
| 40,000 | | |
| 63,156 | | |
| 1.58 | |
June
30, 2021 | |
| 40,000 | | |
| 68,228 | | |
| 1.71 | |
July
31, 2021 | |
| 40,000 | | |
| 55,658 | | |
| 1.39 | |
August
31, 2021 | |
| 40,000 | | |
| 62,301 | | |
| 1.56 | |
| |
| 320,000 | | |
| 522,808 | | |
| 1.63 | |
During the year ended December 31, 2020, the Company
recorded an expense of $407,494 based on a weighted average valuation of $0.85 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 |
|
April 30, 2020 |
|
|
40,000 |
|
|
$ |
25,412 |
|
|
$ |
0.64 |
|
May 31, 2020 |
|
|
40,000 |
|
|
$ |
33,388 |
|
|
$ |
0.83 |
|
June 30, 2020 |
|
|
40,000 |
|
|
$ |
36,681 |
|
|
$ |
0.92 |
|
July 31, 2020 |
|
|
40,000 |
|
|
$ |
29,587 |
|
|
$ |
0.74 |
|
August 31, 2020 |
|
|
40,000 |
|
|
$ |
46,744 |
|
|
$ |
1.17 |
|
September 30, 2020 |
|
|
40,000 |
|
|
$ |
43,229 |
|
|
$ |
1.08 |
|
October 31,2020 |
|
|
40,000 |
|
|
$ |
37,414 |
|
|
$ |
0.94 |
|
November 30, 2020 |
|
|
40,000 |
|
|
$ |
45,883 |
|
|
$ |
1.15 |
|
December 31, 2020 |
|
|
40,000 |
|
|
$ |
65,157 |
|
|
$ |
1.63 |
|
|
|
|
480,000 |
|
|
$ |
407,494 |
|
|
$ |
0.85 |
|
The expense recorded related to warrants in 2021
and 2020 are included in the line Operating expenses within the Consolidated Statement of Operations.
The
following table summarizes information about outstanding stock warrants as of December 31, 2021, all of which are exercisable:
Exercise
Price |
| |
Common
Stock Warrants Outstanding |
| |
Series
2 Preferred Stock Warrants Outstanding |
| |
Weighted
Average Remaining Contractual Life |
|
$ | 1.25 |
| |
1,055,184 |
| |
|
| |
2 years |
|
$ | 1.25 |
| |
160,000 |
| |
|
| |
1 year |
|
$ | 1.34 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.40 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.54 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.62 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.68 |
| |
40,000 |
| |
|
| |
3 years |
|
$ | 1.69 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.74 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.76 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.91 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 1.95 |
| |
40,000 |
| |
|
| |
3 years |
|
$ | 2.00 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 2.01 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 2.08 |
| |
40,000 |
| |
|
| |
3 years |
|
$ | 2.45 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 2.53 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 2.57 |
| |
40,000 |
| |
|
| |
3 years |
|
$ | 2.70 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 2.78 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 2.79 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 2.89 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 2.93 |
| |
40,000 |
| |
|
| |
1 year |
|
$ | 2.97 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 3.09 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 3.17 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 3.19 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 3.27 |
| |
40,000 |
| |
|
| |
4 years |
|
$ | 1,250 |
| |
|
| |
439 |
* | |
1 year |
|
| |
| |
2,255,184 |
| |
439 |
| |
|
|
(*) | At December 31, 2021, these warrants were convertible into 116,903 shares of common stock |
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. 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 settled with shares 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.
On April 24, 2020, the
Company’s Board of Directors approved an Amendment No. 2 to the 2018 Plan, subject to stockholder approval. On June 10, 2020, 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.
On March 3, 2021, the Company’s
Board of Directors approved an Amendment No. 3 to the 2018 Plan, subject to stockholder approval. On June 9, 2021, 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 2,000,000 shares and (b) the number of shares available for issuance as “incentive stock options” within the meaning of
Internal Revenue Code Section 422 by 2,000,000 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 five-year period and expire ten years from date of grant.
As of December 31, 2021, approximately 2,457,000
shares remained available for issuance under the 2018 Plan.
Activity in stock options for the year ended
December 31, 2021 and December 31, 2020 was as follows:
| |
Number of options | | |
Weighted average exercise price | | |
Weighted average contractual term (years) | | |
Aggregate intrinsic value | |
Outstanding at January 1, 2021 | |
| 2,595,700 | | |
$ | 1.92 | | |
| | | |
$ | 2,491,026 | |
Granted | |
| 626,238 | | |
| 2.52 | | |
| | | |
| 74,482 | |
Exercise | |
| (82,333 | ) | |
| 0.83 | | |
| | | |
| 151,544 | |
Forfeited | |
| (58,701 | ) | |
| 2.65 | | |
| | | |
| 58,285 | |
Outstanding at December 31, 2021 | |
| 3,080,904 | | |
$ | 2.06 | | |
| 6.7 | | |
$ | 1,923,642 | |
Vested and exercisable at December 31, 2021 | |
| 2,307,571 | | |
$ | 2.04 | | |
| 6.9 | | |
$ | 1,674,967 | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at January 1, 2020 | |
| 2,004,318 | | |
$ | 1.72 | | |
| | | |
$ | 2,542,361 | |
Granted | |
| 860,465 | | |
| 2.38 | | |
| | | |
| | |
Exercised | |
| (7,166 | ) | |
| 0.79 | | |
| | | |
| 6,523 | |
Forfeited | |
| (261,917 | ) | |
| 1.90 | | |
| | | |
| 134,070 | |
Outstanding at December 31, 2020 | |
| 2,595,700 | | |
$ | 1.92 | | |
| 7.60 | | |
$ | 2,491,026 | |
Vested and exercisable at December 31, 2020 | |
| 1,730,198 | | |
$ | 1.90 | | |
| 7.82 | | |
$ | 1.967,071 | |
The weighted average grant
date fair value of options granted during twelve-month period ended December 31, 2021 and December 31, 2020 was $1.75 and $1.47 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 weighted average assumptions:
|
|
2021 |
|
|
2020 |
|
Exercise price |
|
$ |
2.52 |
|
|
$ |
2.38 |
|
Expected life |
|
|
5 years |
|
|
|
5 years |
|
Expected volatility |
|
|
91.2 |
% |
|
|
76 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate |
|
|
0.57% |
|
|
|
1.07% |
|
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
fair value of stock options is recognized as compensation expense by the straight-line method over the vesting period. Compensation expense
recorded was $1,125,819 and $981,261 for the year ended December 31, 2021 and December 31, 2020, respectively. Unrecognized compensation
cost related to non-vested options at December 31, 2021 amounted to approximately $802,271, which is expected to be recognized over a
weighted average period of 2.8 years.
9.
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:
| |
2021 | | |
2020 | |
Federal tax at statutory rate | |
$ | 852,198 | | |
$ | 67,862 | |
State tax, net of federal tax | |
| (487,093 | ) | |
| 29,866 | |
Permanent differences | |
| (259,967 | ) | |
| 126,301 | |
Change in statutory rate | |
| 59,168 | | |
| (69,835 | ) |
Change in valuation allowance | |
| 614,112 | | |
| 522,738 | |
Other | |
| 6,892 | | |
| (13,882 | ) |
Expense for income taxes | |
$ | 785,310 | | |
$ | 663,050 | |
Tax
affected components of deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 were as follows:
| |
2021 | | |
2020 | |
Deferred tax assets (liabilities): | |
| | |
| |
Equity based compensation | |
$ | 479,956 | | |
$ | 368,000 | |
Allowance for doubtful accounts | |
| 6,847,189 | | |
| 5,527,000 | |
Fixed assets | |
| (8,085,957 | ) | |
| 256,000 | |
Lease impairment | |
| 423,022 | | |
| 587,000 | |
Lease Liability | |
| 481,312 | | |
| 526,000 | |
Right of use asset | |
| (383,924 | ) | |
| (425,000 | ) |
Tax credit carryforward | |
| 32,394 | | |
| 32,000 | |
Federal loss carry-forwards | |
| 11,838,840 | | |
| 4,779,000 | |
State loss carry forward | |
| 343,914 | | |
| 161,000 | |
Other | |
| (53,414 | ) | |
| (6,000 | ) |
Gross deferred tax | |
| 11,923,332 | | |
| 11,805,000 | |
Valuation allowance | |
| (12,418,498 | ) | |
| (11,805,000 | ) |
Net deferred tax liability | |
$ | (495,166 | ) | |
$ | - | |
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, 2021, the Company has federal
and state net operating loss carryforwards of approximately $56,375,431 and $4,878,909, respectively, available to offset future income.
Our federal loss carryforwards do not expire.
The
components of income tax expense (benefits) for the years ended December 31, 2021 and 2020 were as follows:
| |
2021 | | |
2020 | |
Current Income Tax: | |
| | |
| |
Federal | |
$ | - | | |
$ | - | |
State | |
| 290,144 | | |
| 663,050 | |
Deferred Income Tax: | |
| | | |
| | |
Federal | |
| 495,166 | | |
| - | |
Sate | |
| - | | |
| - | |
| |
$ | 785,310 | | |
$ | 663,050 | |
The Company’s effective tax rate for the
year ended December 31, 2021 and 2020 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 $290,144 current state income tax expense for the year ended December 31, 2021 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, 2021, federal tax returns remained open for Internal Revenue Service review
for tax years after 2017, while state tax returns remain open for review by state taxing authorities for tax years after 2017.
The IRS can examine net operating loss carryforwards from earlier years the extent utilized in years after 2017. During 2019, the Company
was notified that its 2017 federal income tax return was selected for examination. In the second quarter of 2021, the IRS completed their
review with no changes to the reported tax.. There were no other federal or state income tax audits being conducted as of December 31,
2021.
The
Company completed its analysis and review of all tax positions taken through December 31, 2021 and does not believe that there are any
unrecognized tax benefits related to tax positions taken on its income tax returns.
10.
EXCHANGE OFFER OF WARRANTS
On
February 4, 2020, the Company completed an exchange offer relating to its 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 of common stock 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 these transactions, the Company recognized in the year ended December 31, 2020 a deemed dividend of $713,212 resulting from
the excess of the fair value of the common stock over the intrinsic value of the warrants.
11.
CONTINGENCIES AND OTHER UNCERTAINTIES
Regulatory
inquiries
In
the first quarter of 2021, FlexShopper, along with a number of other lease-to-own companies, received a subpoena from the California
Department of Financial Protection and Innovation (the “DFPI”) requesting the production of documents and information regarding
the Company’s compliance with state consumer protection laws. The Company is cooperatively engaging with the DFPI in response to
its inquiry. Although the Company believes it is in compliance with all applicable consumer protection laws and regulations in California,
this inquiry ultimately could lead to an enforcement action and/or a consent order, and substantial costs, including legal fees, fines,
penalties, and remediation expenses.
COVID-19
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 is impacted by this outbreak for an extended period, our results
of operations may be materially adversely affected.
12.
PROMISSORY NOTE- PAYCHECK PROTECTION PROGRAM
FlexShopper,
LLC (the “Borrower”) applied for and received a loan (the “Loan”) on May 4, 2020, 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, and administered through the U.S.
Small Business Administration.
The
Loan was evidenced by a promissory note (the “Note”), dated April 30, 2020, issued by the Borrower to the Lender. The Note
matured on April 30, 2022, and bore 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 might be prepaid by the Borrower at any time prior to maturity with no
prepayment penalty. Proceeds from the Loan were 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 might be forgiven to the extent the Loan proceeds were 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.
On
June 21, 2021 we were notified that effective April 7, 2021, the U.S. Small Business Administration confirmed the waiver of FlexShopper’s
repayment of a $1,914,000 Paycheck Protection Program promissory note issued to the Company on May 4, 2020.
As
a result of the PPP promissory note forgiveness, the Company recognized in the year ended December 31, 2021 a gain from the extinguishment
of the loan, including accrued interest, of $1,931,825.
13.
SUBSEQUENT EVENTS
Prommissory Notes- Related
Parties
FlexShopper,
LLC, previously entered into a commitment letter agreement with NRNS Capital Holdings LLC (“NRNS”) pursuant to which FlexShopper
LLC issued a subordinated promissory note to NRNS (the “NRNS Note”) (See Note 5). On February 2, 2022, FlexShopper, LLC executed
an amendment to the NRNS Note. This amendment extended the maturity date from April 1, 2022 to July 1, 2024 and increased the credit
commitment from $3,750,000 (the principal amount which was outstanding as of December 31, 2021) to $11,000,000. No other changes were
made to the NRNS Note.
Loan Payable Under Credit Agreement
On March 6, 2015, the Company,
through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as amended and supplemented from time
to time, 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. See Note
6
On March 8, 2022, pursuant
to Amendment No. 15 to Credit Agreement, the Commitment Amount was increased to be up to $82,500,000. The incremental increase in the
Commitment Amount was provided by WE 2022-1, LLC, as an additional lender under the Credit Agreement. WE 2022-1, LLC is an affiliate
of Waterfall Asset Management, LLC. No other changes were made to the Credit Agreement.