UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _______ to _______
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
| (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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As of November 14, 2023, the issuer had a total of
TABLE OF CONTENTS
| Page No. | ||
| Cautionary Statement About Forward-Looking Statements | ii | |
| PART I - FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 41 |
| Item 4. | Controls and Procedures | 41 |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 42 |
| Item 1A. | Risk Factors | 42 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42 |
| Item 3. | Defaults Upon Senior Securities | 42 |
| Item 4. | Mine Safety Disclosures | 42 |
| Item 5. | Other Information | 42 |
| Item 6. | Exhibits | 43 |
| Signatures | 44 | |
i
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Certain information set forth in this report may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the “safe harbor” created by that section. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “should,” “could,” “would,” “seek,” “intend,” “plan,” “goal,” “project,” “estimate,” “anticipate” “strategy,” “future,” “likely” or other comparable terms and references to future periods. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding the expansion of our lease-to-own program, expectations concerning our partnerships with retail partners, investments in, and the success of, our underwriting technology and risk analytics platform, our ability to collect payments due from customers, expected future operating results, and expectations concerning our business strategy.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
| ● | general economic conditions, including inflation, rising interest rates, and other adverse macro-economic conditions; | |
| ● | the impact of deteriorating macro-economic environment, including bank defaults and closures on our customer’s ability to make the payment they owe our business and on our proprietary algorithms and decisioning tools used in approving customer to be indicative of customer’s ability to perform; | |
| ● | our ability to obtain adequate financing to fund our business operations in the future; | |
| ● | our ability to maintain compliance with financial covenants under our credit agreement; | |
| ● | the failure to successfully manage and grow our FlexShopper.com e-commerce platform; | |
| ● | our ability to compete in a highly competitive industry; | |
| ● | our dependence on the success of our third-party retailers and our continued relationships with them; | |
| ● | our relationship with the bank partner that originate the loans in the bank partner loan model; | |
| ● | our compliance with various federal, state and local laws and regulations, including those related to consumer protection; | |
| ● | the failure to protect the integrity and security of customer and employee information; | |
| ● | our ability to attract and retain key executives and employees; the business and financial impact of the COVID-19 pandemic; | |
| ● | our ability to realize the deferred tax asset; and | |
| ● | the other risks and uncertainties described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our Annual Report on Form 10-K for the year ended December 31, 2022. |
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as may be required under federal securities law. We anticipate that subsequent events and developments will cause our views to change. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FLEXSHOPPER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Lease receivables, net | ||||||||
| Loan receivables at fair value | ||||||||
| Prepaid expenses and other assets | ||||||||
| Lease merchandise, net | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible assets, net | ||||||||
| Other assets, net | ||||||||
| Deferred tax asset, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and related taxes | ||||||||
| Promissory notes to related parties, including accrued interest | ||||||||
| Accrued expenses | ||||||||
| Lease liability - current portion | ||||||||
| Total current liabilities | ||||||||
| Loan payable under credit agreement to beneficial shareholder, net of unamortized issuance costs of $ | ||||||||
| Promissory notes to related parties, net of unamortized issuance costs of $ | ||||||||
| Promissory note related to acquisition, net of discount of $ | ||||||||
| Loan payable under Basepoint credit agreement, net of unamortized issuance costs of$ | ||||||||
| Purchase consideration payable related to acquisition | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series 1 Convertible Preferred Stock, $ | ||||||||
| Series 2 Convertible Preferred Stock, $ | ||||||||
| Common stock, $ | ||||||||
| Treasury shares, at cost – | ( | ) | ||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| $ | $ | |||||||
The accompanying notes are an integral part of these condensed consolidated statements.
1
FLEXSHOPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For
the three months ended September 30, | For
the nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Lease revenues and fees, net | $ | $ | $ | $ | ||||||||||||
| Loan revenues and fees, net of changes in fair value | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Depreciation and impairment of lease merchandise | ||||||||||||||||
| Loan origination costs and fees | ||||||||||||||||
| Marketing | ||||||||||||||||
| Salaries and benefits | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating income/ (loss) | ( | ) | ( | ) | ||||||||||||
| Interest expense including amortization of debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income/ (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| (Loss)/ benefit from income taxes | ( | ) | ||||||||||||||
| Net income/ (loss) | ( | ) | ( | ) | ||||||||||||
| Dividends on Series 2 Convertible Preferred Shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss)/ income attributable to common and Series 1 Convertible Preferred shareholders | $ | ( | ) | ( | ) | ( | ) | |||||||||
| Basic and diluted (loss)/ income per common share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| WEIGHTED AVERAGE COMMON SHARES: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated statements.
2
FLEXSHOPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the nine months ended September 30, 2023 and 2022
(unaudited)
| Series
1 Convertible Preferred Stock | Series
2 Convertible Preferred Stock | Common Stock | Treasury Stock | Additional | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Paid in | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| Provision for compensation expense related to stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options into common stock | - | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| Provision for compensation expense related to stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Extension of warrants | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| Provision for compensation expense related to stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| 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, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| Provision for compensation expense related to stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Exercise of stock options into common stock | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| Provision for compensation expense related to stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| Provision for compensation expense related to stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Exercise of stock options into common stock | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated statements.
3
FLEXSHOPPER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2023 and 2022
(unaudited)
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss)/ income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss)/ income to net cash provided by/ (used in) operating activities: | ||||||||
| Depreciation and impairment of lease merchandise | ||||||||
| Other depreciation and amortization | ||||||||
| Amortization of debt issuance costs | ||||||||
| Amortization of discount on the promissory note related to acquisition | ||||||||
| Compensation expense related to stock-based compensation | ||||||||
| Provision for doubtful accounts | ||||||||
| Interest in kind added to promissory notes balance | ||||||||
| Deferred income tax | ( | ) | ( | ) | ||||
| Net changes in the fair value of loans receivables at fair value | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Lease receivables | ( | ) | ( | ) | ||||
| Loans receivables at fair value | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Lease merchandise | ( | ) | ( | ) | ||||
| Security deposits | ( | ) | ||||||
| Purchase consideration payable related to acquisition | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued payroll and related taxes | ||||||||
| Accrued expenses | ( | ) | ||||||
| Net cash provided by/ (used in) operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment, including capitalized software costs | ( | ) | ( | ) | ||||
| Purchases of data costs | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from loan payable under credit agreement | ||||||||
| Repayment of loan payable under credit agreement | ( | ) | ( | ) | ||||
| Repayment of promissory notes to related parties | ( | ) | ||||||
| Repayment of loan payable under Basepoint credit agreement | ( | ) | ||||||
| Debt issuance related costs | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from promissory notes to related parties | ||||||||
| Principal payment under finance lease obligation | ( | ) | ( | ) | ||||
| Repayment of purchase consideration payable related to acquisition | ( | ) | ||||||
| Purchases of treasury stock | ( | ) | ||||||
| Repayment of installment loan | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| (DECREASED)/ INCREASE IN CASH and RESTRICTED CASH | ( | ) | ||||||
| CASH and RESTRICTED CASH, beginning of period | ||||||||
| CASH and RESTRICTED CASH, end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Due date extension of warrants | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
4
FLEXSHOPPER, INC.
Notes To Condensed Consolidated Financial Statements
For the nine months ended September 30, 2023 and 2022
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated 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, 2022 filed with the SEC on April 24, 2023.
The condensed consolidated balance sheet as of December 31, 2022 contained herein has been derived from audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
Certain prior year/period amounts have been reclassified to conform to the current year presentation.
2. BUSINESS
FlexShopper,
Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware in 2006. The Company owns
In January 2015, in connection with the Credit Agreement entered in March 2015 (see Note 8), 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, LLC provides durable goods to consumers on a lease-to-own basis (“LTO”). 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.
FlexLending, LLC participates in a consumer finance program offered by a third-party bank partner. The third-party originates unsecured consumer loans through strategic sales channels. Under this program, FlexLending, LLC purchases a participation interest in each of the loans originated by the third-party.
Flex Revolution, LLC operates a direct origination model for consumers in 11 states. In the direct origination model, applicants who apply and obtain a loan through our platform are underwritten, approved, and funded directly by the Company.
5
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 periods. Actual results could differ from those estimates.
Segment Information - Operating segments are defined as components of an enterprise about which separate financial information is available between which resources are allocated by the chief operating decision maker. The Company’s chief operating decision maker is the chief executive officer. The Company has one operating and reportable segment that include all the Company’s financial services, which is consistent with the current organizational structure.
Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains cash and cash equivalents with high-quality financial institutions, which at times exceed the Federal Deposit Insurance Corporation insurance limits. While the Company monitors daily the cash balances in its operating accounts and adjusts the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which the Company deposits fails or is subject to other adverse conditions in the financial or credit markets. To date, the Company has experienced no loss or lack of access to its invested cash or cash equivalents; however, no assurance can be provided that access to invested cash and cash equivalents will not be impacted by adverse conditions in the financial and credit markets. As of September 30, 2023 and 2022, the Company had no cash equivalents.
Restricted Cash – The Company classifies all cash whose use is limited by contractual provisions as restricted cash. Restricted cash as of September 30, 2023 and December 31, 2022 consists primarily of cash required by our third-party banking partner to cover obligations related to loan participation.
| September 30, 2023 | December 31, 2022 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
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. 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.
6
Lease
Receivables 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. Lease receivables 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.
| September 30, 2023 | December
31, 2022 | |||||||
| Lease receivables | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Lease receivables, net | $ | $ | ||||||
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.
| Nine
Months Ended September 30, 2023 | Year Ended
December 31, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Provision | ||||||||
| Accounts written off | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
Lease Merchandise, net - 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 Company reflects the undepreciated portion of the lease merchandise as depreciation expense and the related cost and accumulated depreciation are removed from lease merchandise. For lease merchandise 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 depreciation and impairment of lease merchandise. The cost, accumulated depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable.
| September
30, 2023 | December 31, 2022 | |||||||
| Lease merchandise at cost | $ | $ | ||||||
| Accumulated depreciation and impairment reserve | ( | ) | ( | ) | ||||
| Lease merchandise, net | $ | $ | ||||||
7
Loan receivables at fair value – The Company elected the fair value option on its entire loan and loan participation receivables portfolio. As such, loan receivables are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations. Accrued and unpaid interest and fees are included in loan receivables at fair value in the consolidated balance sheets. Management believes the reporting of these receivables at fair value method closely approximates the true economics of the loan.
Interest and fees are discontinued when loan receivables become contractually 120 or more days past due. The Company charges-off loans at the earlier of when the loans are determined to be uncollectible or when the loans are 120 days contractually past due. Recoveries on loan receivables that were previously charged off are recognized when cash is received. Changes in the fair value of loan receivables include the impact of current period charge offs associated with these receivables.
The Company estimates the fair value of the loan receivables using a discounted cash flow analysis at an individual loan level to more accurately predict future payments. The Company adjusts expected cash flows for estimated losses and servicing costs over the estimated duration of the underlying assets. These adjustments are determined using historical data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require. Model results may be adjusted by management if the Company does not believe the output reflects the fair value of the instrument, as defined under U.S. GAAP. The models are updated at each measurement date to capture any changes in internal factors such as nature, term, volume, payment trends, remaining time to maturity, and portfolio mix, as well as changes in underwriting or observed trends expected to impact future performance.
Further details concerning loan receivables at fair value are presented within “Fair Value Measurement” section in this Note.
Net
changes in the fair value of loan receivables included in the consolidated statements of operations in the line loan revenues and fees,
net of changes in fair value was a gain of $
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 leases at the commencement date as 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. For more information on leases for which
the Company is lessee, refer to Note 4 to the consolidated financial statements. 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 with a customer 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.
| Three
Months ended September 30, | Nine
Months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Lease billings and accruals | $ | $ | $ | $ | ||||||||||||
| Provision for doubtful accounts | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain/ (loss) on sale of lease receivables | ( | ) | ||||||||||||||
| Lease revenues and fees | $ | $ | $ | $ | ||||||||||||
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
$
Debt
issuance costs incurred in conjunction with the subordinated Promissory Notes to related parties 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 $
Debt
issuance costs incurred in conjunction with the Basepoint Credit Agreement entered into on June 7, 2023 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 $
Intangible
Assets – Intangible assets consist of a patent on the Company’s LTO payment method at check-out for third party e-commerce
sites and of assets acquired in connection with Revolution Transaction (See Note 14). The patent is 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
8
In the Revolution Transaction, the Company identified intangible assets for the franchisee contract-based agreements, the related non-compete agreements, the Liberty Loan brand, the non-contractual customer relationships associated with the corporate locations and the list of previous customers. The franchisee contract-based agreements relate to the assignment of agreements with Liberty Tax franchisees in which their locations and staff are used to assist in the origination and servicing of a loan portfolio in exchange for a share of the net revenue. In addition, there is non-compete embedded in these agreements. The Liberty Loan brand intangible asset relates to the value associated with the established brands acquired in the transaction that would otherwise need to be licensed. The non-contractual customer relationship intangible asset is the value of the customer relationships for the corporate stores acquired in the transaction. The customer list intangible asset relates to the value of valuable customers information that will be used to market additional products. The franchisee contract-based agreement, the Liberty Loan brand and the non-compete intangible assets are amortized on a straight-line basis over the expected useful life of the assets of ten years. The non-contractual customer relationship intangible asset is amortized on a straight-line basis over a five-year estimated useful life. The customer list is amortized on a straight-line basis over a three-year estimated useful life.
For
intangible assets with finite lives, tests for impairment must be performed if conditions exist that indicate the carrying amount may
not be recoverable. Intangible assets amortization expense was $
Property
and Equipment - Property and equipment are recorded at cost less accumulated depreciation. Depreciation is recognized over the estimated
useful lives of the respective assets on a straight-line basis, ranging from 2 to 7 years. Repairs and maintenance expenditures are expensed
as incurred, unless such expenses extend the useful life of the asset, in which case they are capitalized. Depreciation and amortization
expense for property and equipment was $
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 $
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 and amortized on a straight-line basis over their estimated useful lives. The probability to provide future economic benefit of the data cost assets is estimated based upon future usage of the information in different areas and products of the Company.
Capitalized data costs amounted to $
Capitalized data costs net of its amortization are included in the consolidated balance sheets in Other assets, net.
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 9). 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 net income. Loss attributable to common shareholders is computed by increasing net loss by such dividends. Where the Company has a net loss, as the participating Series 1 Convertible Preferred Stock has no contractual obligation to share in the losses of the Company, there is no loss allocation between common stock and Series 1 Convertible Preferred Stock.
Basic earnings per common share is computed by dividing net income/(loss) 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 during the period.
9
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, performance share units and warrants. The dilutive effect of Series 2 Convertible Preferred Stock is computed using the if-converted method. The dilutive effect of options, performance share units and warrants are 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, performance share units and warrants will have a dilutive effect when the average price of common stock during the period exceeds the exercise price of options, performance share units 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.
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Series 1 Convertible Preferred Stock | ||||||||
| Series 2 Convertible Preferred Stock | ||||||||
| Series 2 Convertible Preferred Stock issuable upon exercise of warrants | ||||||||
| Common Stock Options | ||||||||
| Common Stock Warrants | ||||||||
| Performance Share Units | ||||||||
| Nine Months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Numerator | ||||||||
| Net (loss)/ income | $ | ( | ) | $ | ||||
| Series 2 Convertible Preferred Stock dividends | ( | ) | ( | ) | ||||
| Net (loss)/ income attributable to common and Series 1 Convertible Preferred Stock | ( | ) | ||||||
| Net loss attributable to Series 1 Convertible Preferred Stock | ( | ) | ||||||
| Series 2 Convertible Preferred Stock dividends attributable to Series 1 Convertible Preferred Stock | ||||||||
| $ | ( | ) | $ | |||||
| Denominator | ||||||||
| Weighted average of common shares outstanding- Denominator for basic EPS | ||||||||
| Effect of dilutive securities: | ||||||||
| Series 1 Convertible Preferred Stock | ||||||||
| Common stock options and performance share units | ||||||||
| Common stock warrants | ||||||||
| Adjusted weighted average of common shares outstanding and assumed conversions- Denominator diluted EPS | ||||||||
| Basic EPS | $ | ( | ) | $ | ||||
| Diluted EPS | $ | ( | ) | $ | ||||
10
| Three Months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Numerator | ||||||||
| Net income/ (loss) | $ | $ | ( | ) | ||||
| Series 2 Convertible Preferred Stock dividends | ( | ) | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | |||
| Denominator | ||||||||
| Basic EPS | $ | ( | ) | $ | ( | ) | ||
| Diluted EPS | $ | ( | ) | $ | ( | ) | ||
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 as services are performed.
Compensation expense for stock options 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.
Compensation expense for performance share units is recognized on an accelerated basis over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned. The fair value of performance share units is based on the fair market value of the Company’s common stock on the date of grant (see Note 9).
Fair Value of Financial Instruments – The carrying value of certain financial instruments such as cash, lease receivable, and accounts payable approximate their fair value due to their short-term nature. The carrying value of loans payable under the Credit Agreement, under Basepoint Credit Agreement and under the promissory notes to related parties approximates fair value based upon their interest rates, which approximate current market interest rates.
11
The Company utilizes the fair value option on its entire loan receivables portfolio purchased from its bank partner, for the portfolio acquired in the Revolution Transaction (See Note 14), and for the portfolio directly originated.
Fair Value Measurements - The Company uses a hierarchical framework that prioritizes and ranks the market observability of inputs used in its fair value measurements. Market price observability is affected by a number of factors, including the type of asset or liability and the characteristics specific to the asset or liability being measured. Assets and liabilities with readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The Company classifies the inputs used to measure fair value into one of three levels as follows:
| ● | Level 1: Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2: Inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable. |
| ● | Level 3: Unobservable inputs for the asset or liability measured. |
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation.
| Fair Value Measurement Using | Carrying | |||||||||||||||
| Financial instruments – As of September 30, 2023 (1) | Level 1 | Level 2 | Level 3 | Amount | ||||||||||||
| Loan receivables at fair value | $ | $ | $ | $ | ||||||||||||
| Promissory note related to acquisition | ||||||||||||||||
| Fair Value Measurement Using | Carrying | |||||||||||||||
| Financial instruments – As of December 31, 2022 (1) | Level 1 | Level 2 | Level 3 | Amount | ||||||||||||
| Loan receivables at fair value | $ | $ | $ | $ | ||||||||||||
| Promissory note related to acquisition | ||||||||||||||||
| (1) |
The Company primarily estimates the fair value of its loan receivables portfolio using discounted cash flow models. The models use inputs, such as estimated losses, servicing costs and discount rates, that are unobservable but reflect the Company’s best estimates of the assumptions a market participant would use to calculate fair value. Certain unobservable inputs may, in isolation, have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. An increase to the net loss rate, servicing cost, or discount rate would decrease the fair value of the Company’s loan receivables. When multiple inputs are used within the valuation techniques for loan receivables, a change in one input in a certain direction may be offset by an opposite change from another input.
The Company estimates the fair value of the promissory note related to acquisition using discounted cash flow model. The model uses inputs including estimated cash flows and a discount rate.
12
The following describes the primary inputs to the discounted cash flow models that require significant judgement:
| ● | Estimated losses are estimates of the principal payments that will not be repaid over the life of the loans, net of the expected principal recoveries on charged-off receivables. FlexShopper systems monitor collections and portfolio performance data that are used to continually refine the analytical models and statistical measures used in making marketing and underwriting decisions. Leveraging the data at the core of the business, the Company utilizes the models to estimate lifetime credit losses for loan receivables. Inputs to the models include expected cash flows, historical and current performance, and behavioral information. Management may also incorporate discretionary adjustments based on the Company’s expectations of future credit performance. |
| ● | Servicing costs – Servicing costs applied to the expected cash flows of the portfolio reflect the Company estimate of the amount investors would incur to service the underlying assets for the remainder of their lives. Servicing costs are derived from the Company internal analysis of our cost structure considering the characteristics of the receivables and have been benchmarked against observable information on comparable assets in the marketplace. |
| ● | Discount rates – the discount rates utilized in the cash flow analyses reflect the Company estimates of the rates of return that investors would require when investing in financial instruments with similar risk and return characteristics. |
For
Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs,
| Nine
Months Ended September 30, 2023 | Year
Ended December 31, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Purchases of loan participation | ||||||||
| Obligation of loan participation | ( | ) | ||||||
| Purchase of loan portfolio in Revolution Transaction | ||||||||
| Loan originations | ||||||||
| Interest and fees(1) | ||||||||
| Collections | ( | ) | ( | ) | ||||
| Net charge off (1) | ( | ) | ( | ) | ||||
| Net change in fair value(1) | ||||||||
| Ending balance | $ | $ | ||||||
| (1) |
For
Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs,
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Minimum | Maximum | Weighted Average(2) | Minimum | Maximum | Weighted Average | |||||||||||||||||||
| Estimated losses(1) | % | % | % | % | % | % | ||||||||||||||||||
| Servicing costs | % | % | ||||||||||||||||||||||
| Discount rate | % | % | ||||||||||||||||||||||
| (1) | |
| (2) |
| September
30, 2023 | December 31, 2022 | |||||||
| Aggregate fair value of loan receivables that are 90 days or more past due | $ | $ | ||||||
| Unpaid principal balance of loan receivables that are 90 days or more past due | ||||||||
| Aggregate fair value of loan receivables in non-accrual status | ||||||||
13
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
Reclassifications
Certain prior year/period balances have been reclassified to conform with the current year/period presentation. These reclassifications primarily include separating the prepaid expenses, right of use asset and loan revenues and fees, net of changes in fair value as separate line items.
4. LEASES
Refer to Note 3 to these condensed consolidated financial statements for further information about the Company’s revenue generating activities as a lessor. All the Company’s customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases as a lessor.
Lease Commitments
In
January 2019, FlexShopper entered into a 108-month lease with an option for one additional five-year term for
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. This lease was renewed for another twelve-month period with a monthly rent
of approximately $
As
part of the Revolution Transaction (See Note 14), 22 storefront lease agreements were acquired by FlexShopper. Some of those stores were
closed or transferred to franchisees after the Revolution Transaction. As of September 30, 2023, 20 storefront lease agreements belong
to FlexShopper. The stores are located in Alabama, Michigan, Nevada, and Oklahoma and are used to offer finance products to customers.
The monthly average rent for these stores is approximately $
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in the Company’s condensed consolidated balance sheets within the Right of use asset, net, Lease liability- current portion and Lease liabilities net of current portion.
14
| Balance Sheet Classification | September
30, 2023 | December 31, 2022 | ||||||||
| Assets | ||||||||||
| Operating Lease Asset | Right of use asset, net | $ | $ | |||||||
| Finance Lease Asset | Right of use asset, net | |||||||||
| Total Lease Assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Operating Lease Liability – current portion | Current Lease Liabilities | $ | $ | |||||||
| Finance Lease Liability – current portion | Current Lease Liabilities | |||||||||
| Operating Lease Liability – net of current portion | Long Term Lease Liabilities | |||||||||
| Finance Lease Liability – net of current portion | Long Term Lease Liabilities | |||||||||
| Total Lease Liabilities | $ | $ | ||||||||
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.
| Weighted
Average Discount Rate | Weighted
Average Remaining Lease Term (in years) | |||||||
| Operating Leases | % | |||||||
| Finance Leases | % | |||||||
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 amounted
to $
| Nine Months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash payments for operating leases | $ | $ | ||||||
| Cash payments for finance leases | ||||||||
15
| Operating Leases | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 and thereafter | ||||
| Total undiscounted cash flows | ||||
| Less: interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| Finance Leases | ||||
| 2023 | $ | |||
| 2024 | ||||
| Total undiscounted cash flows | ||||
| Less: interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
5. PROPERTY AND EQUIPMENT
| Estimated Useful Lives | September
30, 2023 | December 31, 2022 | ||||||||
| Furniture, fixtures and vehicle | $ | $ | ||||||||
| Website and internal use software | ||||||||||
| Computers and software | ||||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
Depreciation
and amortization expense for property and equipment was $
16
6. INTANGIBLE ASSETS
| September 30, 2023 | ||||||||||||||
| Estimated
Useful Life | Gross Carrying Amount | Accumulated
Amortization | Net Carrying
Amount | |||||||||||
| Patent | $ | $ | ( | ) | $ | - | ||||||||
| Franchisee contract-based agreements | ( | ) | ||||||||||||
| Liberty Loan brand | ( | ) | ||||||||||||
| Non-compete agreements | ( | ) | ||||||||||||
| Non contractual customer relationships | ( | ) | ||||||||||||
| Customer list | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||
| Estimated
Useful Life | Gross Carrying Amount | Accumulated
Amortization | Net Carrying
Amount | |||||||||||
| Patent | $ | $ | ( | ) | $ | |||||||||
| Franchisee contract-based agreements | ( | ) | ||||||||||||
| Liberty Loan brand | ( | ) | ||||||||||||
| Non-compete agreements | ( | ) | ||||||||||||
| Non contractual customer relationships | ( | ) | ||||||||||||
| Customer list | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||||
Depreciation
and amortization expense for intangible assets was $
| Amortization Expense | ||||
| 2023 (three months remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ | |||
17
7. PROMISSORY NOTES-RELATED PARTIES
122
Partners Note - On January 25, 2019, FlexShopper, LLC (the “Promissory Note Borrower”) entered into a subordinated debt
financing letter agreement with 122 Partners, LLC, as lender, pursuant to which the Promissory Note Borrower issued a subordinated promissory
note to 122 Partners, LLC (the “122 Partners Note”) in the principal amount of $
Interest
paid for the 122 Partner Note was $
Interest
expensed for the 122 Partner Note was $
NRNS
Note - FlexShopper LLC (the “Promissory Note 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 Promissory
Note Borrower issued subordinated promissory notes to NRNS (the “NRNS Note”) in the total principal amount of $
On
June 29, 2023, the Company, the Promissory Note Borrower, NRNS, Mr. Heiser and PITA Holdings, LLC (“PITA”) entered into an
Amendment to Subordinated Debt and Warrants to Purchase Common Stock (the “Amendment”), pursuant to which, among other things,
the parties agreed to extend the maturity date of the NRNS Note from July 1, 2024 to July 1, 2025. In order to induce NRNS to enter into
the Amendment, the Company extended the expiration date of certain warrants (See Note 9). The cost of the warrant modification was $
18
Principal
and accrued and unpaid interest outstanding on the NRNS Note was $
Interest
paid for the NRNS Note was $
Interest
expensed for the NRNS Note was $
| Debt | ||||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
8. 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 $
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
On
March 8, 2022, pursuant to Amendment No. 15 to Credit Agreement, the Commitment Amount was increased to be up to $
On
October 21, 2022, pursuant to Amendment No. 16 to Credit Agreement, the Commitment Amount was increased to be up to $
On June 7, 2023, pursuant to Amendment No. 17 to the Credit Agreement, the administrative agent and lender consented, on a one-time basis, to the formation of a new subsidiary, Flex TX, LLC, and to the Company’s execution and performance of the Revolution Agreements (as defined below) between the Company and BP Fundco, LLC to incur certain indebtedness and grant a security interest in certain of its assets in connection with (i) a Limited Payment Guaranty (Flex Revolution Loan) between the Company and BP Fundo, LLC and (ii) a Pledge Agreement among the Company, Flex Revolution, LLC and BP Fundco, LLC (collectively, the “Revolution Agreements”). No other changes were made to the Credit Agreement.
19
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.
| September 30, 2023 | ||||||||
| Required Covenant | Actual
Position | |||||||
| Equity Book Value not less than | $ | $ | ||||||
| Liquidity greater than | ||||||||
| Cash greater than | ||||||||
| Consolidated Total Debt to Equity Book Value ratio not to exceed | ||||||||
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.
The
Company borrowed under the Credit Agreement $
Interest
expense incurred under the Credit Agreement amounted to $
Since
October 2022, the Company has been entering into Interest Rate Cap Agreements with AXOS bank, a financial institution not related with
the Lender of the Credit Agreement. These agreements cap the variable portion (one month SOFR) of the Credit Agreement interest rate
to
20
9. CAPITAL STRUCTURE
The Company’s capital structure consists of preferred and common stock as described below:
Preferred Stock
The
Company is authorized to issue
| ● | Series 1 Convertible Preferred Stock – Series 1 Convertible Preferred Stock ranks senior to common stock upon liquidation. |
As
of September 30, 2023, each share of Series 1 Convertible Preferred Stock was convertible into
As
of September 30, 2023, there were
| ● | Series 2 Convertible Preferred Stock – The Company sold to B2 FIE V LLC (the “Investor”), an entity affiliated with Pacific Investment Management Company LLC, |
The
Series 2 Preferred Shares were sold for $
As the dividends for the Series 2 Preferred Shares have not been declared by the Company’s Board of Directors, there is no dividends accrual reflected in the Company’s Consolidated Financial Statement. The Series 2 Preferred Shares dividends is reflected on the Consolidated Statement of Operations for purposes of determining the net income attributable to common and Series 1 Convertible Preferred shareholders.
Common Stock
The
Company is authorized to issue
21
Warrants
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
In
September 2018, the Company issued warrants exercisable for an aggregate
From
January 2019 to August 2021, the Company issued to PITA Holdings, LLC (“PITA”) Common Stock Purchase Warrants (the “Consulting
Warrants”) to purchase up to an aggregate of
PITA, NRNS and XLR8 are affiliates of the Company.
On June 29, 2023, the Company, FlexShopper, LLC, NRNS,
Mr. Heiser and PITA entered into an Amendment to Subordinated Debt and Warrants to Purchase Common Stock (the “Amendment”),
pursuant to which, among other things, the parties agreed to extend the maturity date of the NRNS Note from July 1, 2024 to July 1, 2025.
In order to induce NRNS to enter into the Amendment, the expiration date of the Conversion Warrants and the expiration date of
The
expense related to warrants was $
| Exercise | Common Stock Warrants | Weighted Average Remaining Contractual Life | ||||||||
| Price | Outstanding | September 30, 2023 | December 31, 2022 | |||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
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10. EQUITY COMPENSATION PLANS
In April 2018, the Company adopted the FlexShopper, Inc. 2018 Omnibus Equity Compensation Plan (the “2018 Plan”). 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.
Grants under the 2018 Plan and the Prior Plans consist of incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares, restricted stock units, 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.
| Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock options | $ | $ | $ | $ | ||||||||||||
| Performance share units | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
The fair value of stock-based compensation is
recognized as compensation expense over the vesting period. Compensation expense recorded for stock-based compensation in the consolidated
statements of operations was $
Stock options:
| Nine Months ended September 30, 2023 | Nine
Months ended September 30, 2022 | |||||||
| Exercise price | $ | $ | ||||||
| Expected life | | | ||||||
| Expected volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
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, 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.
23
| Number of options | Weighted average exercise price | Weighted average contractual term (years) | Aggregate intrinsic value | |||||||||||||
| Outstanding at January 1, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ( | ) | - | |||||||||||||
| Outstanding at September, 2023 | $ | $ | ||||||||||||||
| Vested and exercisable at September 30, 2023 | $ | $ | ||||||||||||||
| Outstanding at January 1, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
| Vested and exercisable at September 30, 2022 | $ | $ | ||||||||||||||
The
weighted average grant date fair value of options granted during the nine month periods ended September 30, 2023 and September 30, 2022
was $
Performance Share Units:
On February 10, 2022, and on April 21, 2023, the Compensation Committee of the Board of Directors approved awards of performance share units to certain senior executives of the Company (the “2022 PSU”, and the “2023 PSU”, respectively).
For
performance share units, which are settled in stock, the number of shares earned is subject to both performance and time-based vesting.
For the performance component, the number of shares earned is determined at the end of the periods based upon achievement of specified
performance conditions such as the Company’s Adjusted EBITDA. When the performance criteria are met, the award is earned and vests
assuming continued employment through the specified service period(s). Shares are issued from the Company’s 2018 Omnibus Equity
Compensation Plan upon vesting. The number of 2023 PSU which could potentially be issued ranges from
The fair value of performance share units is based on the fair market value of the Company’s common stock on the date of grant. The compensation expense associated with these awards is amortized on an accelerated basis over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned. In the event the Company determines it is no longer probable that the minimum performance criteria specified in the plan will be achieved, all previously recognized compensation expense is reversed in the period such a determination is made. The 2022 PSU were forfeited in April 2023 as the minimum performance component was not achieved. For the 2023 PSU, the Company determined it was probable that the minimum performance component would be met and accordingly commenced amortization in the quarter ended June 30, 2023.
| Number
of performance share units | Weighted average grant date fair value | |||||||
| Non- vested at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited/ unearned | ( | ) | ||||||
| Vested | ||||||||
| Non- vested at September 30, 2023 | $ | |||||||
| Non- vested at January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Forfeited/ unearned | ||||||||
| Vested | ||||||||
| Non- vested at September 30, 2022 | $ | |||||||
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11. INCOME TAXES
Effective income tax rates for interim periods are based on the Company’s estimate of the applicable annual income tax rate. The Company’s effective income tax rate varies based upon the estimate of the Company’s annual taxable earnings and the allocation of those taxable earnings across the various states in which we operate. Changes in the annual allocation of the Company’s activity among these jurisdictions results in changes to the effective tax rate utilized to measure the Company’s income tax provision and deferred tax assets and liabilities.
The
Company’s effective income tax rate for the nine months ended September 30, 2023 was approximately
During the second quarter of 2022, the Company released the valuation allowance of the Company’s deferred tax asset recorded as of December 31, 2021. The Company had historical cumulative positive pre-tax income plus permanent differences. The realization of the deferred tax asset as of September 30, 2023 is more likely than not based on the Company’s projected taxable income.
12. 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.
Litigation
The Company is not involved in any current or pending material litigation. The Company could be involved in litigation incidental to the operation of the business. The Company intends to vigorously defend all matters in which the Company is named defendants, and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that may affect the Company. Although the adequacy of existing insurance coverage of the outcome of any legal proceedings cannot be predicted with certainty, based on the current information available, the Company does not believe the ultimate liability associated with known claims or litigation, if any, in which the Company is involved will materially affect the Company’s consolidated financial condition or results of operations.
Employment agreements
Certain
executive management entered into employment agreements with the Company. The contracts are for a period between
25
COVID-19 and other similar health crisis
The Company has been, and may in the future, be impacted by COVID-19 or any similar pandemic or health crisis, and this could affect our results of operations, financial condition, or cash flow in the future. The extent and the effects of the impact of any of these events on the operation and financial performance of our business depend on several factors which are highly uncertain and cannot be predicted.
13. COMMITMENTS
The Company does not have any commitments other than real property leases (Note 4).
14. REVOLUTION TRANSACTION
On December 3, 2022, Flex Revolution, LLC, a wholly-owned subsidiary of FlexShopper, Inc. (the “Buyer”) closed a transaction (“Revolution Transaction”) pursuant to an Asset Purchase Agreement with Revolution Financial, Inc., a provider of consumer loans and credit products (collectively with certain of its subsidiaries, “Revolution”), under which the Company acquired the material net assets of the Revolution business.
In
consideration for the sale of the Revolution net assets, the Company issued an adjustable promissory note (“Seller Note”)
with an initial principal amount of $
The Revolution Transaction includes the Buyer’s assumption of Revolution’s consumer loan portfolio, related cash and its credit facility (“Revolution Credit Facility”) as this facility is backed by the portfolio acquired. As of December 31, 2022, the Revolution Credit Agreement was not legally transferred to FlexShopper, so this liability was included in the condensed consolidated balance sheets on the line Purchase consideration payable related to acquisition as the Company was obligated for the outstanding balance as December 31, 2022. On June 7, 2023, the Revolution Credit Facility was legally transferred to FlexShopper (See Note 15)
The parties to the Asset Purchase Agreement have each made customary representations and warranties in the Asset Purchase Agreement and have agreed to indemnify each other for breaches of such representations and warranties. The Buyer’s primary recourse in the event of a claim is to offset the Seller Note equal to the indemnifiable losses subject to such claim.
The Revolution Transaction has been accounted for as a business combination in accordance with ASC 805, Business Combination. The Company measured the net assets acquired in Revolution Transaction at fair value on the acquisition date.
The fair value of the intangible assets was determined primarily by using discounted cash flow models. The models use inputs including estimated cash flows and a discount rate.
The
Company recorded a bargain purchase gain of $
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15. BASEPOINT CREDIT AGREEMENT
On June 7, 2023, the Company, through a wholly owned subsidiary, Flex Revolution, LLC (the “New Borrower”) entered into a Joinder Agreement to a credit agreement (the “Basepoint Credit Agreement”) with Revolution Financial, Inc. (the “Existing Borrower”), the subsidiary guarantors party thereto, the lenders party thereto, the individual guarantor party and BP Fundco, LLC, as administrative agent.
The Existing Borrower with certain of its subsidiaries (collectively, the “Seller”) and Flex Revolution, LLC (the “Buyer”) entered into an Asset Purchase Agreement (See Note 14), pursuant to which the Seller agreed to, among other things, transfer substantially all of its assets to the Buyer.
In the Basepoint Credit Agreement, the New Borrower agreed to become a borrower (the “Basepoint Borrower”) and a grantor as applicable under the agreement. The Company is a guarantor of the Basepoint Credit Agreement.
The
Basepoint Credit Agreement provides for an up to a $
The
Basepoint Credit Agreement includes covenants requiring the Basepoint Borrower and the guarantor to maintain a minimum amount of liquidity
that is no less than
The Basepoint 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 Basepoint Credit Agreement, breaches of representations, warranties or certifications made by or on behalf of the Basepoint Borrower in the Basepoint Credit Agreement and related documents (including certain covenants), deficiencies in the Borrowing Base, certain judgments against the Basepoint Borrower and bankruptcy events.
Interest
expense incurred under the Basepoint Credit Agreement amounted to $
16. EMPLOYEE BENEFIT PLAN
The
Company sponsors an employee retirement savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Participating
employees may contribute, but not more than statutory limits. The Company makes nondiscretionary
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17. SHARE REPURCHASE PROGRAM
On May 17, 2023, the Board of Directors authorized a share repurchase program to acquire up to $
The
Company purchased under the share repurchase program
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing at the end of our Form 10-K for the fiscal year ended December 31, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The “Risk Factors” section of our Form 10-K for the fiscal year ended December 31, 2022 should be read for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Executive Overview
Since December 2013, we have developed a business that focuses on improving the quality of life of our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, home appliances, computers (including tablets and wearables), smartphones, tires, jewelry and furniture (including accessories), under affordable payment lease-to-own (“LTO”) purchase agreements with no long-term obligation. We believe that the introduction of FlexShopper’s LTO programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces. We have successfully developed and are currently processing LTO transactions using FlexShopper’s proprietary technology that automates the process of consumers receiving spending limits and entering into leases for durable goods within seconds. FlexShopper’s primary LTO sales channels, which include business to consumer (“B2C”) and business to business (“B2B”) channels. Our B2C customers can acquire well-known brands such as Samsung, Frigidaire, Hewlett-Packard, LG, Whirlpool, Ashley and Apple at flexshopper.com. Concurrently, e-tailers and retailers FlexShopper’s may increase their sales by utilizing FlexShopper’s B2B channel to connect with consumers that want to acquire products on an LTO basis. FlexShopper’s LTO sales channels include (1) selling directly to consumers via the online FlexShopper.com LTO Marketplace featuring thousands of durable goods, (2) utilizing our LTO payment method at check-out on our partners’ e-commerce sites and (3) facilitating LTO transactions with retailers in their physical locations both through their in-store terminals and FlexShopper applications accessed via the Internet.
In 2021, we began to market an unsecured, consumer loan product for our bank partner. In the bank partner origination model, applicants who apply and obtain a loan through our online platform are underwritten, approved, and funded by the bank partner. The product provides flexibility for FlexShopper to offer loans in retailer channels that provide services in addition to durable goods (e.g., tire retailers that provide car repair services) or in states which do not have lease purchase agreement regulations. FlexShopper’s bank lending product leverages its marketing and servicing expertise and its partner bank’s national presence to enable improved credit access to consumers. We manage many aspects of the loan life cycle on behalf of its bank partner, including customer acquisition, underwriting and loan servicing. This relationship allows FlexShopper’s bank partner to leverage our customer acquisition channel, underwriting and service capabilities, which they would otherwise need to develop in-house. The bank partner uses their own capital to originate loans. The bank partner retains approval rights on all aspects of the program and are primarily responsible for regulatory and compliance oversight. Under the bank partner model, FlexShopper is compensated by the bank partner as a service provider for our role in delivering the technology and services to the bank partner to facilitate origination and servicing of loans throughout each loan’s lifecycle. FlexShopper’s bank partner holds loans originated on our platform. FlexShopper acquires participation rights in such loans ranging from 95 to 100% of the loan. FlexShopper is able to repurpose its technology as well as marketing, underwriting and servicing experience gained from the LTO business to facilitate bank partner originations. In the three and nine months period ending September 30, 2023, FlexShopper purchased $78,422 and $389,949 respectively in participations, and recognized $0.15 million and $2.3 million, respectively, in interest income.
In late 2022, FlexShopper purchased the assets of Revolution Financial, Inc. (“Revolution”). This purchase facilitated the creation of a direct origination model for consumers in 11 states. In the direct origination model, applicants who apply and obtain a loan through our platform are underwritten, approved, and funded directly by FlexShopper. Also acquired in the purchase were 22 leases for Revolution operated stores, as well as program agreements with 78 additional brick and mortar locations that share net revenue of the loans originated in those locations. In addition, we entered into an agreement to be the exclusive provider of non-prime loans to consumers in Liberty Tax corporate and franchisee locations nationwide. FlexShopper also purchased a portfolio of current customers and information on previous customers in order to market consumer products. FlexShopper is able to repurpose its technology, as well as marketing, underwriting and servicing experience gained from the LTO, business to facilitate loan originations in these locations.
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Summary of Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to credit provisions, intangible assets, contingencies, litigation, fair value of loan receivables and income taxes. Management bases its estimates and judgments on historical experience as well as various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, reflect the more significant judgments and estimates used in the preparation of our financial statements.
Lease Receivables 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. Lease receivables 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. An allowance for doubtful accounts is estimated primarily based upon 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. The lease receivables balances consisted of the following as of September 30, 2023 and December 31, 2022:
| September
30, 2023 | December 31, 2022 | |||||||
| Lease receivables | $ | 53,168,976 | $ | 48,618,843 | ||||
| Allowance for doubtful accounts | (11,747,936 | ) | (13,078,800 | ) | ||||
| Lease receivables, net | $ | 41,421,040 | $ | 35,540,043 | ||||
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. Lease receivables balances charged off against the allowance were $726,007 and $33,454,814 for the three and nine months ended September 30, 2023, respectively, and $16,174,329 and $56,977,427 for the three and nine months ended September 30, 2022, respectively.
| Nine Months Ended September 30, 2023 | Year Ended
December 31, 2022 | |||||||
| Beginning balance | $ | 13,078,800 | $ | 27,703,278 | ||||
| Provision | 32,123,950 | 57,420,480 | ||||||
| Accounts written off | (33,454,814 | ) | (72,044,958 | ) | ||||
| Ending balance | $ | 11,747,936 | $ | 13,078,800 | ||||
Loan receivables at fair value – The Company elected the fair value option on its entire loan receivables portfolio. As such, loan receivables are carried at fair value on the consolidated balance sheets with changes in fair value recorded on the consolidated statements of operations. Accrued and unpaid interest and fees are included in loan receivables at fair value on the consolidated balance sheets. Management believes the reporting of these receivables at fair value more closely approximates the true economics of the loan receivables.
Interest and fees are discontinued when loans receivable become contractually 120 or more days past due. The Company charges-off loans at the earlier of when the loans are determined to be uncollectible or when the loans are 120 days contractually past due. Recoveries on loan receivables that were previously charged off are recognized when cash is received. Changes in the fair value of loan receivables include the impact of current period charge offs associated with these receivables.
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The Company estimates the fair value of the loan receivables using a discounted cash flow analysis at an individual loan level to more accurately predict future payments. The Company adjusts expected cash flows for estimated losses and servicing costs over the estimated duration of the underlying assets. These adjustments are determined using historical data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require. Model results may be adjusted by management if the Company does not believe the output reflects the fair value of the instrument, as defined under U.S. GAAP. The models are updated at each measurement date to capture any changes in internal factors such as nature, term, volume, payment trends, remaining time to maturity, and portfolio mix, as well as changes in underwriting or observed trends expected to impact future performance.
In the bank partner origination model, applicants apply and are underwritten through our online platform and the loan is originated and funded by the bank partner. We manage many aspects of the loan life cycle on behalf of our bank partner, including customer acquisition, underwriting and loan servicing. The bank partner uses their own capital to originate loans. FlexShopper’s bank partner holds loans originated on our platform. FlexShopper acquires participation rights in such loans ranging from 95 to 100% of the loan. Loan revenues and fees are representative of the Company’s portion of participation in the loans.
Key Performance Metrics
We regularly review several metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
Key performance metrics for the three months ended September 30, 2023 and 2022 are as follows:
| Three
months ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Gross Profit: | ||||||||||||||||
| Gross lease billings and fees | $ | 31,266,666 | $ | 38,580,116 | $ | (7,313,450 | ) | (19.0 | ) | |||||||
| Provision for doubtful accounts | (10,038,122 | |||||||||||||||