UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number: 001-37945

 

 

 

FLEXSHOPPER, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-5456087

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

901 Yamato Road, Suite 260, Boca Raton, Florida   33431
(Address of Principal Executive Offices)   (Zip Code)

 

(855) 353-9289
(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
Common Stock, par value $0.0001 per share   FPAY   The Nasdaq Stock Market LLC

 

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. Yes ☒   No ☐

 

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). Yes ☒   No ☐

 

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 ☐ Non-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. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No 

 

As of November 14, 2023, the issuer had a total of 21,651,529 shares of common stock outstanding.

 

 

 

 

 

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  $5,732,483   $6,051,713 
Restricted cash   5,326    121,636 
Lease receivables, net   41,421,040    35,540,043 
Loan receivables at fair value   31,679,882    32,932,504 
Prepaid expenses and other assets   2,839,591    3,489,136 
Lease merchandise, net   23,596,608    31,550,441 
Total current assets   105,274,930    109,685,473 
           
Property and equipment, net   9,011,047    8,086,862 
Right of use asset, net   1,281,918    1,406,270 
Intangible assets, net   13,833,595    15,162,349 
Other assets, net   1,809,511    1,934,728 
Deferred tax asset, net   13,206,051    12,013,828 
Total assets  $144,417,052   $148,289,510 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES:          
Accounts payable  $4,010,544   $6,511,943 
Accrued payroll and related taxes   603,838    310,820 
Promissory notes to related parties, including accrued interest   192,009    1,209,455 
Accrued expenses   2,834,954    3,988,093 
Lease liability - current portion   236,628    208,001 
Total current liabilities   7,877,973    12,228,312 
Loan payable under credit agreement to beneficial shareholder, net of unamortized issuance costs of $141,148 at September 30, 2023 and $352,252 at December 31, 2022   86,063,852    80,847,748 
Promissory notes to related parties, net of unamortized issuance costs of $764,651 at September 30, 2023 and $0 at December 31, 2022 and net of current portion   9,985,349    10,750,000 
Promissory note related to acquisition, net of discount of $987,313 at September 30, 2023 and $1,165,027 at December 31, 2022   3,191,272    3,158,471 
Loan payable under Basepoint credit agreement, net of unamortized issuance costs of $102,580 at September 30, 2023   7,310,025    - 
Purchase consideration payable related to acquisition   -    8,703,684 
Lease liabilities, net of current portion   1,386,769    1,566,622 
Total liabilities   115,815,240    117,254,837 
           
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 21,752,304 shares at September 30, 2023 and 21,750,804 shares at December 31, 2022   2,176    2,176 
Treasury shares, at cost – 100,775 shares at September 30, 2023   (100,225)   - 
Additional paid in capital   42,074,553    39,819,420 
Accumulated deficit   (36,178,352)   (31,590,583)
Total stockholders’ equity   28,601,812    31,034,673 
   $144,417,052   $148,289,510 

  

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  $21,082,199   $24,512,086   $68,703,201   $82,746,874 
Loan revenues and fees, net of changes in fair value   10,304,247    1,629,365    18,001,057    8,897,964 
Total revenues   31,386,446    26,141,451    86,704,258    91,644,838 
                     
Costs and expenses:                    
Depreciation and impairment of lease merchandise   13,061,958    18,746,897    42,893,163    56,114,813 
Loan origination costs and fees   1,389,107    1,027,097    4,878,158    2,256,838 
Marketing   1,671,137    2,393,185    4,258,904    8,178,120 
Salaries and benefits   3,231,100    2,820,033    8,933,998    8,799,395 
Operating expenses   6,080,725    5,702,800    17,666,366    17,124,288 
Total costs and expenses   25,434,027    30,690,012    78,630,589    92,473,454 
                     
Operating income/ (loss)   5,952,419    (4,548,561)   8,073,669    (828,616)
                     
Interest expense including amortization of debt issuance costs   (4,746,801)   (3,030,142)   (13,846,685)   (7,336,048)
Income/ (loss) before income taxes   1,205,618    (7,578,703)   (5,773,016)   (8,164,664)
(Loss)/ benefit from income taxes   (265,517)   1,298,269    1,185,247    13,892,516 
Net income/ (loss)   940,101    (6,280,434)   (4,587,769)   5,727,852 
                     
Dividends on Series 2 Convertible Preferred Shares   (1,069,456)   (609,778)   (3,034,182)   (1,829,332)
Net (loss)/ income attributable to common and Series 1 Convertible Preferred shareholders  $(129,355)   (6,890,212)   (7,621,951)   3,898,520 
                     
Basic and diluted (loss)/ income per common share:                    
Basic  $(0.01)  $(0.32)  $(0.35)  $0.18 
Diluted  $(0.01)  $(0.32)  $(0.35)  $0.17 
                     
WEIGHTED AVERAGE COMMON SHARES:                    
Basic   21,716,852    21,681,853    21,740,027    21,611,879 
Diluted   21,716,852    21,681,853    21,740,027    22,403,447 

 

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   170,332   $851,660    21,952   $21,952,000    21,750,804   $2,176    -   $-   $39,819,420   $(31,590,583)  $31,034,673 
Provision for compensation expense related to stock-based compensation   -    -    -    -    -    -    -    -    420,748    -    420,748 
Exercise of stock options into common stock   -    -    -    -    1,500    -    -    -    1,185    -    1,185 
Net loss   -    -    -    -    -    -    -    -    -    (230,215)   (230,215)
Balance, March 31, 2023   170,332   $851,660    21,952   $21,952,000    21,752,304   $2,176    -   $-   $40,241,353   $(31,820,798)  $31,226,391 
Provision for compensation expense related to stock-based compensation   -    -    -    -    -    -    -    -    443,800    -    443,800 
Extension of warrants   -    -    -    -    -    -    -    -    917,581    -    917,581 
Net loss        -    -    -    -    -    -    -    -    (5,297,655)   (5,297,655)
Balance, June 30, 2023   170,332   $851,660    21,952   $21,952,000    21,752,304   $2,176    -   $-   $41,602,734   $(37,118,453)  $27,290,117 
Provision for compensation expense related to stock-based compensation   -    -    -    -    -    -    -    -    471,819    -    471,819 
Purchases of treasury stock   
-
    
-
    
-
    
-
    -    
-
    (100,775)    (100,225)   
-
    
-
    (100,225)
Net income        -    -    -    -    -    -    -    -    940,101    940,101 
Balance, September 30, 2023   170,332   $851,660    21,952   $21,952,000    21,752,304   $2,176    (100,775)   $(100,225)  $42,074,553   $(36,178,352)  $28,601,812 

 

    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     170,332     $ 851,660       21,952     $ 21,952,000       21,442,278     $ 2,144     $ 38,560,117     $ (45,222,302 )   $ 16,143,619  
Provision for compensation expense related to stock-based compensation     -       -       -       -       -       -       305,229       -       305,229  
Exercise of stock options into common stock     -       -       -       -       162,956       17       137,040       -       137,057  
Net loss     -       -       -       -       -       -       -       (2,380,935 )     (2,380,935 )
Balance, March 31, 2022     170,332     $ 851,660       21,952     $ 21,952,000       21,605,234     $ 2,161     $ 39,002,386     $ (47,603,237 )   $ 14,204,970  
Provision for compensation expense related to stock-based compensation     -       -       -       -       -       -       257,476       -       257,476  
Net income     -       -       -       -       -       -       -       14,389,221       14,389,221  
Balance, June 30, 2022     170,332     $ 851,660       21,952     $ 21,952,000       21,605,234     $ 2,161     $ 39,259,862     $ (33,214,016 )   $ 28,851,667  
Provision for compensation expense related to stock-based compensation     -       -       -       -       -       -       387,298       -       387,298  
Exercise of stock options into common stock     -       -       -       -       145,570       15       124,433       -       124,448  
Net loss     -       -       -       -       -       -       -       (6,280,434 )     (6,280,434 )
Balance, September 30, 2022     170,332     $ 851,660       21,952     $ 21,952,000       21,750,804     $ 2,176     $ 39,771,593     $ (39,494,450 )   $ 23,082,979  

 

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  $(4,587,769)  $5,727,852 
Adjustments to reconcile net (loss)/ income to net cash provided by/ (used in) operating activities:          
Depreciation and impairment of lease merchandise   42,893,163    56,114,813 
Other depreciation and amortization   5,674,931    3,303,591 
Amortization of debt issuance costs   376,857    163,169 
Amortization of discount on the promissory note related to acquisition   177,714    - 
Compensation expense related to stock-based compensation   1,336,367    950,003 
Provision for doubtful accounts   32,123,950    42,639,102 
Interest in kind added to promissory notes balance   -    128,223 
Deferred income tax   (1,192,223)   (13,924,955)
Net changes in the fair value of loans receivables at fair value   (6,258,279)   1,938,570
Changes in operating assets and liabilities:          
Lease receivables   (38,004,947)   (50,591,071)
Loans receivables at fair value   7,510,901    (24,970,008)
Prepaid expenses and other assets   641,039    344,766 
Lease merchandise   (34,939,330)   (45,825,525)
Security deposits   -    (4,956)
Purchase consideration payable related to acquisition   208,921    - 
Lease liabilities   (19,566)   (8,732)
Accounts payable   (2,501,399)   (4,106,711)
Accrued payroll and related taxes   293,018    312,387 
Accrued expenses   (1,170,585)   264,019 
Net cash provided by/ (used in) operating activities   2,562,763    (27,545,463)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment, including capitalized software costs   (4,565,819)   (4,855,150)
Purchases of data costs   (570,820)   (1,220,722)
Net cash used in investing activities   (5,136,639)   (6,075,872)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from loan payable under credit agreement   7,800,000    32,855,000 
Repayment of loan payable under credit agreement   (2,795,000)   (5,730,000)
Repayment of promissory notes to related parties   (1,000,000)   - 
Repayment of loan payable under Basepoint credit agreement   (1,500,000)   - 
Debt issuance related costs   (115,403)   (86,932)
Proceeds from exercise of stock options   1,185    261,505 
Proceeds from promissory notes to related parties   -    7,000,000 
Principal payment under finance lease obligation   (7,308)   (8,388)
Repayment of purchase consideration payable related to acquisition   (144,913)   - 
Purchases of treasury stock   (100,225)   - 
Repayment of installment loan   -    (8,406)
Net cash provided by financing activities   2,138,336    34,282,779 
           
(DECREASED)/ INCREASE IN CASH and RESTRICTED CASH   (435,540)   661,444 
           
CASH and RESTRICTED CASH, beginning of period   6,173,349    5,094,642 
           
CASH and RESTRICTED CASH, end of period  $5,737,809   $5,756,086 
           
Supplemental cash flow information:          
Interest paid  $12,676,766   $6,828,663 
Due date extension of warrants  $917,581   $- 

 

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 100% of FlexShopper, LLC, a North Carolina limited liability company, owns 100% of FlexLending, LLC, a Delaware limited liability company, and owns 100% of Flex Revolution, LLC, a Delaware limited liability company. The Company is a holding corporation with no operations except for those conducted by its subsidiaries FlexShopper, LLC, FlexLending, LLC and Flex Revolution, LLC.

 

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.

 

The reconciliation of cash and restricted cash is as follows:

 

   September 30,
2023
   December 31,
2022
 
         
Cash  $5,732,483   $6,051,713 
Restricted cash   5,326    121,636 
Total cash and restricted cash  $5,737,809   $6,173,349 

 

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. 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 

 

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.

 

The net lease merchandise balances consisted of the following as of September 30, 2023 and December 31, 2022:

 

   September 30,
2023
   December 31,
2022
 
Lease merchandise at cost  $47,501,405   $62,379,920 
Accumulated depreciation and impairment reserve   (23,904,797)   (30,829,479)
Lease merchandise, net  $23,596,608   $31,550,441 

 

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 $7,095,327 and $6,258,279 for the three and nine months ended September 30, 2023, respectively, and a loss of $4,396,421 and $1,938,570 for the three and nine months ended September 30, 2022, respectively.

 

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. The breakout of lease revenues and fees, net of lessor bad debt expense, that ties to the consolidated statements of operations is shown below:

 

   Three Months ended
September 30,
   Nine Months ended
September  30,
 
   2023   2022   2023   2022 
Lease billings and accruals  $31,266,666   $38,580,116   $98,023,406   $117,774,390 
Provision for doubtful accounts   (10,038,122)   (15,075,109)   (32,123,950)   (42,639,102)
Gain/ (loss) on sale of lease receivables   (146,345)   1,007,079    2,803,745    7,611,586 
Lease revenues and fees  $21,082,199   $24,512,086   $68,703,201   $82,746,874 

 

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 $70,368 and $211,104 for the three and nine months ended September 30, 2023, respectively, and $56,283 and $161,895 for the three and nine months ended September 30, 2022, respectively.

 

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 $114,698 and $152,930 for the three and nine months ended September 30, 2023, respectively, and $0 and $1,274 for the three and nine months ended September 30, 2022, respectively.

 

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 $9,617 and $12,823 for the three and nine months ended September 30, 2023, 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 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 ten years.

 

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 $442,636 and $1,328,754 for the three and nine months ended September 30, 2023, respectively, and $769 and $2,307 for the three and nine months ended September 30, 2022, respectively.

 

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 $1,271,216 and $3,641,634 for the three and nine months ended September 30, 2023, respectively, and $1,081,204 and $2,929,334 for the three and nine months ended September 30, 2022, respectively.

 

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 $1,231,454 and $3,754,292 for the three and nine months ended September 30, 2023, respectively, and $1,485,669 and $3,755,750 for the three and nine months ended September 30, 2022, respectively. Capitalized software amortization expense was $1,011,106 and $2,881,511 for the three and nine months ended September 30, 2023, respectively, and $759,825 and $2,064,681 for the three and nine months ended September 30, 2022, 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 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 $227,393 and $570,820 for the three and nine months ended September 30, 2023, respectively, and $458,018 and $1,220,722 for the three and nine months ended September 30, 2022, respectively. Capitalized data costs amortization expense was $250,376 and $704,543 for the three and nine months ended September 30, 2023, respectively, and $162,290 and $371,949 for the three and nine months ended September 30, 2022, respectively.

 

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.

 

The following table reflects the number of common shares issuable upon conversion or exercise.

 

   September 30, 
   2023   2022 
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 
Common Stock Options   4,408,395    3,936,083 
Common Stock Warrants   2,255,184    2,255,184 
Performance Share Units   1,250,000    790,327 
    13,984,505    13,169,423 

 

The following table sets forth the computation of basic and diluted earnings per common share for the nine months ended September 30, 2023 and 2022:

 

   Nine Months ended 
   September 30, 
   2023   2022 
Numerator        
Net (loss)/ income  $(4,587,769)  $5,727,852 
Series 2 Convertible Preferred Stock dividends   (3,034,182)   (1,829,332)
Net (loss)/ income attributable to common and Series 1 Convertible Preferred Stock   (7,621,951)   3,898,520 
Net loss attributable to Series 1 Convertible Preferred Stock   -    (59,078)
Series 2 Convertible Preferred Stock dividends attributable to Series 1 Convertible Preferred Stock   -    18,868 
           
Net (loss)/ income attributable to common shares- Numerator for basic and diluted EPS  $(7,621,951)  $3,858,310 
Denominator          
Weighted average of common shares outstanding- Denominator for basic EPS   21,740,027    21,611,879 
Effect of dilutive securities:          
Series 1 Convertible Preferred Stock   -    225,231 
Common stock options and performance share units   -    323,166 
Common stock warrants   -    243,171 
Adjusted weighted average of common shares outstanding and assumed conversions- Denominator diluted EPS   21,740,027    22,403,447 
Basic EPS  $(0.35)  $0.18 
Diluted EPS  $(0.35)  $0.17 

  

10

 

 

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended September 30, 2023 and 2022:

 

   Three Months ended 
   September 30, 
   2023   2022 
Numerator        
Net income/ (loss)  $940,101   $(6,280,434)
Series 2 Convertible Preferred Stock dividends   (1,069,456)   (609,778)
Net loss attributable to common shares- Numerator for basic and diluted EPS  $(129,355)  $(6,890,212)
Denominator          
Weighted average of common shares outstanding- Denominator for basic and diluted EPS   21,716,852    21,681,853 
Basic EPS  $(0.01)  $(0.32)
Diluted EPS  $(0.01)  $(0.32)

 

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.

 

The Company’s financial instruments that are measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 is as follows:

 

   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  $      -   $       -   $31,679,882   $46,113,207 
Promissory note related to acquisition   -    -    3,191,272    3,191,272 

 

   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  $      -   $       -   $32,932,504   $42,747,668 
Promissory note related to acquisition   -    -    3,158,471    3,158,471 

  

(1) For cash, lease receivable, and accounts payable the carrying amount is a reasonable estimate of fair value due to their short-term nature. The carrying value of loans payable under the Credit Agreement, the carrying value of loans payable under Basepoint Credit Agreement, and the carrying value of promissory notes to related parties approximates fair value based upon their interest rates, which approximate current market interest rates.

 

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, the following table presents a reconciliation of the beginning and ending balances for the years ended September 30, 2023 and December 31, 2022:

 

   Nine Months
Ended
September 30,
2023
   Year Ended
December 31,
2022
 
Beginning balance  $32,932,504   $3,560,108 
Purchases of loan participation   389,949    31,216,406 
Obligation of loan participation   (12,931)   12,931 
Purchase of loan portfolio in Revolution Transaction   -    13,320,326 
Loan originations   42,789,600    5,519,303 
Interest and fees(1)   11,731,851    16,680,080 
Collections   (62,409,370)   (27,816,669)
Net charge off (1)   (10,387,396)   (10,653,751)
Net change in fair value(1)   16,645,675    1,093,770 
Ending balance  $31,679,882   $32,932,504 

 

(1) Included in loan revenues and fees, net of changes in fair value in the consolidated statements of operations.

 

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents quantitative information about the inputs used in the fair value measurement as of September 30, 2023 and December 31, 2022:

 

   September 30, 2023   December 31, 2022 
   Minimum   Maximum   Weighted
Average(2)
   Minimum   Maximum   Weighted
Average
 
Estimated losses(1)   0.1%   92.5%   36.8%   2.0%   92.4%   40.8%
Servicing costs   -    -    4.6%   -    -    4.5%
Discount rate   -    -    20.1%   -    -    21.0%

 

(1) Figure disclosed as a percentage of outstanding principal balance.
   
(2) Unobservable inputs were weighted by outstanding principal balance, which are grouped by origination channel.

 

Other relevant data as of September 30, 2023 and December 31, 2022 concerning loan receivables at fair value are as follows:

 

   September 30,
2023
   December 31,
2022
 
Aggregate fair value of loan receivables that are 90 days or more past due  $23,571,023   $7,147,585 
Unpaid principal balance of loan receivables that are 90 days or more past due   39,128,315    19,834,547 
Aggregate fair value of loan receivables in non-accrual status   23,434,514    6,947,224 

 

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 50% likelihood of being realized upon ultimate settlement. As of September 30, 2023, 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.

 

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 21,622 square feet of office space in Boca Raton, FL to accommodate FlexShopper’s business and its employees. 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, which was September 18, 2019.

 

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 $8,800. This lease is accounted for under the practical expedient for leases with initial terms for 12 months or less, and as such no related right of use asset or liability was recorded.

 

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 $1,700 per month. These leases are accounted for under the practical expedient for leases with initial terms for 12 months or less, and as such no related right of use asset or liability was recorded.

 

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

 

 

Supplemental balance sheet information related to leases is as follows:

 

   Balance Sheet Classification  September 30,
2023
   December 31,
2022
 
Assets           
Operating Lease Asset  Right of use asset, net  $1,276,709   $1,395,741 
Finance Lease Asset  Right of use asset, net   5,209    10,529 
Total Lease Assets     $1,281,918   $1,406,270 
              
Liabilities             
Operating Lease Liability – current portion  Current Lease Liabilities  $229,824   $199,535 
Finance Lease Liability – current portion  Current Lease Liabilities   6,804    8,466 
Operating Lease Liability – net of current portion  Long Term Lease Liabilities   1,386,769    1,562,022 
Finance Lease Liability – net of current portion  Long Term Lease Liabilities   -    4,600 
Total Lease Liabilities     $1,623,397   $1,774,623 

 

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%   5 
Finance Leases   13.39%   1 

  

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 $96,453 and $290,056 for the three and nine months ended September 30, 2023, respectively, and $97,023 and $292,056 for the three and nine months ended September 30, 2022, respectively.

 

Supplemental cash flow information related to operating leases is as follows:

 

   Nine Months ended 
   September 30, 
   2023   2022 
Cash payments for operating leases  $311,137   $302,075 
Cash payments for finance leases   7,308    8,388 

 

15

 

 

Below is a summary of undiscounted operating lease liabilities as of September 30, 2023. 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
 
2023  $106,469 
2024   430,134 
2025   443,038 
2026   456,330 
2027   470,019 
2028 and thereafter   303,573 
Total undiscounted cash flows   2,209,563 
Less: interest   (592,970)
Present value of lease liabilities  $1,616,593 

 

Below is a summary of undiscounted finance lease liabilities as of September 30, 2023. 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
 
2023  $2,391 
2024   4,782 
Total undiscounted cash flows   7,173 
Less: interest   (369)
Present value of lease liabilities  $6,804 

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

   Estimated
Useful Lives
  September 30,
2023
   December 31,
2022
 
Furniture, fixtures and vehicle  2-5 years  $395,868   $395,468 
Website and internal use software  3 years   24,296,749    20,542,457 
Computers and software  3-7 years   4,483,230    3,672,103 
       29,175,847    24,610,028 
Less: accumulated depreciation and amortization      (20,164,800)   (16,523,166)
      $9,011,047   $8,086,862 

  

Depreciation and amortization expense for property and equipment was $1,271,217 and $3,641,635 for the three and nine months ended September 30, 2023, respectively, and $1,081,204 and $2,929,335 for the three and nine months ended September 30, 2022, respectively.

 

16

 

 

6. INTANGIBLE ASSETS

 

The following table provides a summary of our intangible assets:

 

   September 30, 2023
   Estimated
Useful Life
  Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
 
Patent  10 years  $30,760   $(30,760)  $- 
Franchisee contract-based agreements  10 years   12,744,367    (1,062,029)   11,682,338 
Liberty Loan brand  10 years   340,218    (28,350)   311,868 
Non-compete agreements  10 years   86,113    (7,180)   78,933 
Non contractual customer relationships  5 years   1,952,371    (325,400)   1,626,971 
Customer list  3 years   184,825    (51,340)   133,485 
      $15,338,654   $(1,505,059)  $13,833,595 

 

   December 31, 2022
   Estimated
Useful Life
  Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
 
Patent  10 years  $30,760   $(28,876)  $1,884 
Franchisee contract-based agreements  10 years   12,744,367    (106,203)   12,638,164 
Liberty Loan brand  10 years   340,218    (2,835)   337,383 
Non-compete agreements  10 years   86,113    (718)   85,395 
Non contractual customer relationships  5 years   1,952,371    (32,540)   1,919,831 
Customer list  3 years   184,825    (5,133)   179,692 
      $15,338,654   $(176,305)  $15,162,349 

 

Depreciation and amortization expense for intangible assets was $442,636 and $1,328,754 for the three and nine months ended September 30, 2023, respectively, and $769 and $2,307 for the three and nine months ended September 30, 2022, respectively.

 

As of September 30, 2023, future estimated amortization expense related to identifiable intangible assets over the next five years is set forth in the following table:

 

   Amortization
Expense
 
2023 (three months remaining)  $442,290 
2024   1,769,160 
2025   1,764,026 
2026   1,707,552 
2027   1,675,012 
Total  $7,358,040 

 

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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 $1,000,000. H. Russell Heiser, Jr. (“Mr. Heiser”), FlexShopper’s Chief Executive 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 Promissory Note Borrower on April 30, 2020 and the Promissory Note Borrower can prepay principal and interest at any time without penalty. Obligations under the 122 Partners Note were subordinated to obligations under the Credit Agreement. The 122 Partners Note was subject to customary representations and warranties and events of default. If an event of default occurs and is continuing, the Promissory Note Borrower may be required to repay all amounts outstanding under the 122 Partners Note. Obligations under the 122 Partners Note were secured by substantially all of the Promissory Note 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 Promissory Note Borrower and 122 Partners, LLC agreed to extend the maturity date of the 122 Partners Note to April 30, 2021. On March 22, 2021, the Promissory Note Borrower executed a second amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2022. On June 30, 2022, the Promissory Note Borrower executed a third amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2023. On March 30, 2023, the Promissory Note Borrower executed a fourth amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended from April 1, 2023 to October 1, 2023. On September 6, 2023, the Promissory Note Borrower paid all the principal and interest outstanding as of that date.

 

Interest paid for the 122 Partner Note was $58,020 and $163,183 for the three and nine months ended September 30, 2023, respectively, and $45,278 and $147,422 for the three and nine months ended September 30, 2022, respectively.

  

Interest expensed for the 122 Partner Note was $40,335 and $145,357 for the three and nine months ended September 30, 2023, respectively, and $46,530 and $151,521 for the three and nine months ended September 30, 2022, respectively.

 

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 $3,750,000. Payment of principal and accrued interest under the NRNS Note was due and payable by the Promissory Note Borrower on June 30, 2021 and the Promissory Note Borrower can prepay principal and interest at any time without penalty. At September 30, 2023, amounts outstanding under the NRNS Note bear interest at a rate of 21.44%. 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 Promissory Note 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 Promissory Note Borrower’s assets, subject to rights of the lenders under the Credit Agreement. On March 22, 2021, the Promissory Note Borrower executed an amendment to the NRNS Note such that the maturity date was extended to April 1, 2022. On February 2, 2022, the Promissory Note Borrower 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.

 

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 $917,581 and was recorded as a deferred debt cost of NRNS note. No other changes were made to such NRNS Note.

 

18

 

 

Principal and accrued and unpaid interest outstanding on the NRNS Note was $10,942,009 as of September 30, 2023 and $10,941,629 as of December 31, 2022.

 

Interest paid for the NRNS Note was $585,334 and $1,715,838 for the three and nine months ended September 30, 2023, respectively, and $486,739 and $1,020,523 for the three and nine months ended September 30, 2022, respectively.

  

Interest expensed for the NRNS Note was $587,230 and $1,716,217 for the three and nine months ended September 30, 2023, respectively, and $500,201 and $1,144,646 for the three and nine months ended September 30, 2022, respectively.

 

Amounts payable under the promissory notes are as follows:

 

   Debt 
2023  $192,009 
2024  $- 
2025  $10,750,000 

 

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 $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 and loans 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. The Company paid the Lender a fee of $237,000 in consideration of the execution of this Omnibus Amendment. At September, 2023, amounts borrowed bear interest at 16.44%.

 

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. As of July 1, 2022, WE 2022-1, LLC assigned 100% of its Commitment and all Loans to WE 2014-1, LLC. Effective September 27, 2022, WE 2014-1, LLC assigned 100% of its Commitments and all Loans to Powerscourt Investments 32, LP, an affiliate of Waterfall Asset Management, LLC.

 

On October 21, 2022, pursuant to Amendment No. 16 to Credit Agreement, the Commitment Amount was increased to be up to $110,000,000. This amendment also replaced LIBOR references in the Credit Agreement with SOFR (Secured Overnight Financing Rate), as the basis for our interest payments under the Credit Agreement.

 

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. A summary of the covenant requirements, and FlexShopper’s actual results at September 30, 2023, follows:

 

   September 30, 2023 
   Required
Covenant
   Actual
Position
 
Equity Book Value not less than  $16,452,246   $28,601,812 
Liquidity greater than   1,500,000    5,732,483 
Cash greater than   500,000    5,737,809 
Consolidated Total Debt to Equity Book Value ratio not to exceed   5.25    3.77 

 

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 $5,050,000 and $7,800,000 for the three and nine months ended September 30, 2023, respectively, and $15,055,000 and $32,855,000 for the three and nine months ended September 30, 2022, respectively. The Company repaid under the Credit Agreement $0 and $2,795,000 for the three and nine months ended September 30, 2023, respectively, and $4,605,000 and $5,730,000 for the three and nine months ended September 30, 2022, respectively.

 

Interest expense incurred under the Credit Agreement amounted to $3,503,486 and $10,115,009 for the three and nine months ended September 30, 2023, respectively, and $2,426,513 and $5,874,504 for the three and nine months ended September 30, 2022, respectively. The outstanding balance under the Credit Agreement was $86,205,000 as of September 30, 2023 and was $81,200,000 as of December 31, 2022. Such amount is presented in the consolidated balance sheets net of unamortized issuance costs of $141,148 and $352,252 as of September 30, 2023 and December 31, 2022, respectively. 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. The Company must repay all borrowed amounts one year after the Commitment Termination Date. Accordingly, all principal is shown as a non-current liability at September 30, 2023.

 

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 4%, which reduce the Company’s exposure to additional increases in interest rates.

 

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 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 September 30, 2023, 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 September 30, 2023, 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 September 30, 2023 totaled $22,118,558. As of September 30, 2023, 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.

 

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 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.”

 

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 439 shares of Series 2 Convertible Preferred Stock at an initial exercise price of $1,250 per share, which expired by their terms seven years after the date of issuance.

 

In September 2018, the Company issued 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 “Conversion Warrants”). The original expiration date of these warrants was September 28, 2023 (and extended as described below).

 

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 1,200,000 shares of the Company’s common stock in connection with that certain Consulting Agreement, dated as of February 19, 2019 (as may be amended from time to time), between the Company and XLR8 Capital Partners LLC (“XLR8”).

 

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 840,000 of the Consulting Warrants was extended 30 months from the original expiration date. The cost of the warrant modification was $917,581 and was recorded as a deferred debt cost of NRNS note.

 

The expense related to warrants was $0 and $917,581 for the three and nine months ended September 30, 2023, respectively, and $0 and $0 for the three and nine months ended September 30, 2022, respectively.

 

The following table summarizes information about outstanding stock warrants as of September 30, 2023 and December 31, 2022, all of which are exercisable:

  

Exercise  

Common

Stock Warrants

  

Weighted Average

Remaining

Contractual Life

Price   Outstanding   September 30, 2023  December 31, 2022
$1.25    1,055,184   2 years  1 year
$1.25    160,000   2 years  Less than 1 year
$1.34    40,000   2 years  Less than 1 year
$1.40    40,000   2 years  Less than 1 year
$1.54    40,000   2 years  Less than 1 year
$1.62    40,000   2 years  Less than 1 year
$1.68    40,000   2 years  2 years
$1.69    40,000   2 years  Less than 1 year
$1.74    40,000   2 years  Less than 1 year
$1.76    40,000   2 years  Less than 1 year
$1.91    40,000   2 years  Less than 1 year
$1.95    40,000   2 years  2 years
$2.00    40,000   2 years  Less than 1 year
$2.01    40,000   2 years  Less than 1 year
$2.08    40,000   2 years  2 years
$2.45    40,000   2 years  Less than 1 year
$2.53    40,000   2 years  Less than 1 year
$2.57    40,000   2 years  2 years
$2.70    40,000   2 years  3 years
$2.78    40,000   2 years  Less than 1 year
$2.79    40,000   2 years  2 years
$2.89    40,000   4 years  2 years
$2.93    40,000   2 years  Less than 1 year
$2.97    40,000   2 years  2 years
$3.09    40,000   3 years  2 years
$3.17    40,000   4 years  2 years
$3.19    40,000   2 years  3 years
$3.27    40,000   2 years  2 years
      2,255,184       

 

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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. 

 

Stock-based compensation expense include the following components:

  

   Three Months ended
September 30,
   Nine Months ended
September 30,
 
   2023   2022   2023   2022 
Stock options  $242,180   $238,233   $1,047,323   $762,340 
Performance share units   229,639    149,065    289,044    187,663 
Total stock-based compensation  $471,819   $387,298   $1,336,367   $950,003 

 

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 $471,819 and $1,336,367 for the three and nine months ended September 30, 2023, respectively, and $387,298 and $950,003 for the three and nine months ended September 30, 2022, respectively. Unrecognized compensation cost related to non-vested options and PSU at September 30, 2023 amounted to $1,464,380, which is expected to be recognized over a weighted average period of 2.14 years.

 

Stock options:

 

The fair value of stock options is recognized as compensation expense using the straight-line method over the vesting period. The Company measured the fair value of each stock option award on the date of grant using the Black-Scholes-Merton (BSM) pricing model with the following weighted average assumptions:

 

   Nine Months
ended
September 30,
2023
   Nine Months
ended
September 30,
2022
 
Exercise price  $0.8   $1.5 
Expected life    6 years    

 6 years

 
Expected volatility   95%   69%
Dividend yield   0%   0%
Risk-free interest rate   3.59%   2.12%

 

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.

 

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Activity in stock options for the nine month periods ended September 30, 2023 and September 30, 2022 was as follows:

 

   Number of
options
   Weighted
average
exercise
price
   Weighted
average
contractual
term
(years)
   Aggregate
intrinsic
value
 
Outstanding at January 1, 2023   3,919,228   $1.97        $52,223 
Granted   1,596,567    0.80         75 
Exercised   (1,500)   0.79         345 
Forfeited   (1,105,900)   1.91         - 
Outstanding at September, 2023   4,408,395   $1.56    7.56   $561,402 
Vested and exercisable at September 30, 2023   3,183,408   $1.74    7.12   $328,031 
                     
Outstanding at January 1, 2022   3,080,904   $2.06        $1,923,642 
Granted   1,094,002    1.50         
-
 
Exercised   (308,526)   0.85         480,029 
Forfeited   (7,333)   2.22         2,273 
Expired   (25,000)   1.70         
-
 
Outstanding at September 30, 2022   3,834,047   $2.00    6.96   $1,219,962 
Vested and exercisable at September 30, 2022   2,694,862   $2.10    6.48   $928,330 

 

The weighted average grant date fair value of options granted during the nine month periods ended September 30, 2023 and September 30, 2022 was $0.61 and $0.91 per share respectively.

 

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 0 up to a maximum of 1,250,000 of the target awards depending on the specified terms and conditions of the target award.

 

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.

 

Activity in performance share units for the nine months ended September 30, 2023 and September 30, 2022 was as follows:

 

   Number of
performance
share units
   Weighted
average
grant date
fair value
 
Non- vested at January 1, 2023   790,327   $1.53 
Granted   1,250,000    0.78 
Forfeited/ unearned   (790,327)   1.53 
Vested   -    - 
Non- vested at September 30, 2023   1,250,000   $0.78 
Non- vested at January 1, 2022   -   $- 
Granted   790,327    1.53 
Forfeited/ unearned   -    - 
Vested   -    - 
Non- vested at September 30, 2022   790,327   $1.53 

 

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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 20.5%. This was different than the expected federal income tax rate of 21% primarily due to the impact of non-taxable income from non-deductible equity compensation and state income taxes.

 

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 three to five years and renew for three successive one-year terms unless receipt of written notices by the parties. The contracts provide that such management may earn discretionary cash bonuses and equity awards, based on financial performance metrics defined each year by the Compensation Committee of the Company’s Board of Directors. Additionally, under certain termination conditions, such contracts provide for severance payments and other benefits.

 

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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 $5,000,000. The Seller Note matures on December 1, 2027, bears interest at 8% per annum and is subject to adjustment based upon the pre-tax net income of the acquired business in 2023. The fair value of the Seller Note as of the acquisition date was $3,421,991. The Seller Note, net of the discount, was $3,191,272 as of September 30, 2023 and $3,158,471 as of December 31, 2022. The Seller Note is included in the condensed consolidated balance sheets in the line Promissory note related to acquisition.

 

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 $14,461,274 related to the Revolution Transaction at acquisition date as the fair value of the net assets acquired exceed the fair value of the purchase price consideration. The Company believes that the most significant reason its management was able to negotiate a bargain purchase was due to the speed with which the seller wanted to close this transaction which resulted in a non-competitive process akin to a forced sale. The strong desire for a prior to year-end closing was for various reasons, including potential credit facility covenant issues and accelerating operating losses after recent regulatory changes.

 

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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 $20 million credit facility for the origination of consumer loans. The credit facility is backed by eligible principal balance of eligible consumer receivable of the Basepoint borrower’s portfolio (the “Borrowing Base”). The annual interest rate on loans under the Basepoint Credit Agreement is 13.42%. The principal balance outstanding under the Basepoint Credit Agreement is due on June 7, 2026.

 

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 5% of the current Borrowing Base and maintain a minimum amount of cash held in the concentration accounts of $200,0000. The tangible net worth of the Basepoint Borrower and the guarantor shall not be less than 10% of the current Borrowing Base and the Basepoint Borrower and the guarantor shall maintain a positive consolidated net income. The terms tangible net worth and positive consolidated net income for the purpose of calculating the covenants under the Basepoint Credit Agreement are defined in the agreement. The Company is in compliance with Basepoint Credit Agreement covenants as of September 30, 2023.

 

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 $251,456 and $843,470 for the three and nine months ended September 30, 2023, respectively. The outstanding balance under the Basepoint Credit Agreement was $7,412,605 as of September 30, 2023. Such amount is presented in the consolidated balance sheets net of unamortized issuance costs of $102,580 as of September 30, 2023. Interest is payable weekly on the outstanding balance of the amounts borrowed. No principal is expected to be repaid in the next twelve months, or from reductions in the borrowing base. Accordingly, all principal is shown as a non-current liability at September, 2023.

 

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 4% Safe Harbor contributions of participants’ eligible earnings who have completed the plan’s eligibility requirements. The contributions are made to the plan on behalf of the employees. Total contributions to the plan were $39,939 and $126,701 for the three and nine months ended September 30, 2023, respectively, and $31,204 and $112,577 for the three and nine months ended September 30, 2022, respectively.

 

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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 $2 million of the Company’s common stock. The Company may purchase common stock on the open market, through privately negotiated transactions, or by other means including through the use of trading plans intended to qualify under Rule 10b-18 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions. The timing and total amount of stock repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The share repurchase program will have a term of 18 months and may be suspended or discontinued at any time and does not obligate the company to acquire any amount of common stock. The objective of this program is to repurchases shares of common stock opportunistically when management believes that the Company’s stock is trading below the Company’s determination of long-term fair value. The shares of common stock when repurchased by the Company will become treasury shares.

 

The Company purchased under the share repurchase program 100,775 shares of common stock for a net cost of $100,225 for the three and nine months ended September 30, 2023.

 

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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