SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
For the transition period from _______ to _______
Commission File Number: 001-37945
FLEXSHOPPER, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of jurisdiction of
incorporation or organization)
901 Yamato Road, Ste. 260
Boca Raton, FL
(Address of principal executive offices)
20-5456087
(I.R.S. Employer
Identification Number)
33431
(Zip Code)
Registrant’s telephone number, including area code: (855) 353-9289
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
Common Stock, $0.0001 Par Value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
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,” “smaller 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 Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, as of the last business day of the
Registrant’s most recently completed second fiscal quarter, was approximately $12,492,000 (based on the closing price of the Registrant’s Common Stock on
June 28, 2019 of $1.10 per share).
The number of shares outstanding of the Registrant’s Common Stock, as of February 28, 2020, was 21,351,594.
Documents incorporated by reference: The Registrant intends to file a definitive proxy statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934 with respect to the 2020 annual meeting of stockholders within 120 days after the end of the fiscal year ended December 31, 2019.
Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, that 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 Annual Report on Form 10-K 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; expectation concerning our joint working arrangements
with retailers, 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:
● our limited operating history, limited cash and history of losses;
● our ability to obtain adequate financing to fund our business operations in the future;
● the failure to successfully manage and grow our FlexShopper.com e-commerce platform;
● our ability to maintain compliance with financial covenants under our credit agreement;
● our dependence on the success of our third-party retailers and our continued relationships with them;
● our compliance with various federal, state and local laws and regulations, including those related to consumer protection;
● our ability to maintain compliance with the listing standards of The Nasdaq Capital Market;
● the failure to protect the integrity and security of customer and employee information; and
● the other risks and uncertainties described in Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of
Operations of this Annual Report.
Any forward-looking statement made by us in this Annual Report is based only on information currently available to us and speaks only as of the date on
which it is made. Except as required by federal securities laws, 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.
i
Item 1. Business
Company Overview
PART I
FlexShopper, Inc. (“we,” “us,” “our,” “FlexShopper” or the “Company”) is a corporation organized under the laws of the State of Delaware in 2006 with its
common stock trading on The Nasdaq Capital Market under the symbol “FPAY”. FlexShopper is a holding corporation that conducts its business through its
wholly-owned subsidiary, FlexShopper, LLC, a limited liability company organized under the laws of North Carolina in 2013. FlexShopper, LLC wholly
owns, directly or indirectly, two Delaware subsidiaries, FlexShopper 1, LLC and FlexShopper 2, LLC. All references to our business operations refer to
FlexShopper, LLC and its wholly-owned subsidiaries, unless the context indicates otherwise.
We are a financial technology company that enables consumers utilizing our e-commerce marketplace to shop for brand name electronics, home furnishings
and other durable goods on a lease-to-own (LTO) basis. We also license our LTO technology platforms to retailers and e-tailers to facilitate transactions
directly with consumers who want to purchase products but do not have sufficient cash or available credit. We effect these transactions by first approving
consumers through our proprietary, risk analytics-powered underwriting model; then collecting money from consumers under an LTO purchase agreement
and funding the LTO transactions by paying merchants for their goods. We hold several registered patents and patent applications on aspects of our LTO
system. For the year ended December 31, 2019, we generated approximately $85 million in net lease revenues and fees and realized approximately $577,000
in net income.
We believe that our LTO programs, which are designed to improve the quality of life of our customers by providing them the ability to obtain ownership of
high-quality durable products under an affordable payment arrangement, support broad untapped expansion opportunities for us within the U.S. consumer
retail and e-commerce marketplaces. Central to our business model is our LTO Engine, the proprietary technology that we developed and use to automate the
online process for consumers to receive payment terms and spending limits and to enter into leases for durable goods, all within minutes. The LTO Engine
allows us to operate through three strategic sales channels: (i) selling directly to consumers via our online FlexShopper.com LTO Marketplace featuring
thousands of durable goods, (ii) utilizing our LTO payment method at check-out on e-commerce sites and through in-store terminals, and (iii) facilitating LTO
transactions with retailers that have not yet become part of the FlexShopper.com LTO Marketplace. We are currently developing and intend to roll-out an
online consumer loan product by levering our underwriting model to augment our LTO solution in these strategic sales channels.
Our Market Opportunity
The LTO industry offers consumers an alternative to traditional methods of obtaining electronics, computers, home furnishings, appliances and other durable
goods. FlexShopper’s customers typically do not have sufficient cash or credit to obtain these goods, so they find the short-term nature and affordable
payments of LTO attractive.
The Lease-Purchase Transaction
A lease-purchase transaction is a flexible alternative for consumers to obtain and enjoy brand name merchandise with no long-term obligation. Key features
of our lease-purchase transactions include:
Brand name merchandise. FlexShopper offers well-known brands such as LG, Samsung, Sony and Vizio home electronics; Frigidaire, General Electric, LG,
Samsung and Whirlpool appliances; Acer, Apple, Asus, Samsung and Toshiba computers and/or tablets; Samsung and Apple smartphones; and Ashley,
Powell and Standard furniture, among other brands.
Convenient payment options. Our customers make payments on a weekly, bi-weekly or monthly basis. Payments are automatically deducted from the
customer’s authorized checking account or debit card. Additionally, customers may make additional payments or exercise early payment options, which
enable them to save money.
1
No long-term commitment. A customer may terminate a lease-purchase agreement at any time with no long-term obligation by paying amounts due under the
lease-purchase agreement and returning the leased item to FlexShopper.
Applying has no impact on credit or FICO score. We do not use FICO scores to determine customers’ spending limits so our underwriting does not impact
consumers’ credit with the three main credit bureaus.
Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer makes all payments during the lease
term, which is one year, or exercises early payment options, which typically save the customer money.
Key Trends Driving the Industry
Non-prime consumers represent the largest segment of the credit market. According to Experian’s 2019 Consumer Credit Review published on January 13,
2020, 34% of Americans had low credit scores and approximately 50 million American adults were underbanked, sub-prime or credit invisible, or have no
credit history according to Experian’s The Number of Americans With Bank Accounts Rises published on March 25, 2019. This segment of consumers
represents a significant and underserved market.
We believe that the current addressable market size for non-prime consumers is between $20 and $25 billion with a significant concentration in consumer
electronics. We believe that underwriting consumer electronics online is one of our competitive advantages since this is the majority of our business and has
not been a focus of our peers.
Additional industry trends include:
● Consumers recognizing that they have more convenient options to acquire the products they want.
● The difficult retail climate leading retailers to embrace “save the sale” financing to increase sales with new consumers.
● Technology advances in online underwriting and LTO digital functionality continuing to drive the B2B market segment by making it easier for
retailers and consumers to transact on an LTO basis in an efficient and timely manner.
2
Our Growth and Expansion Strategy
Like many industries, the internet and other technology is transforming the LTO industry. FlexShopper has positioned itself to take advantage of this
transformation by focusing on the expansion of the LTO industry online and into mainstream retail and e-tail. Through its strategic sales channels,
FlexShopper believes it can expand the LTO industry, also known as the rent-to-own or RTO industry. FlexShopper has successfully developed and is
currently processing LTO transactions using its “LTO Engine,” FlexShopper’s proprietary technology that automates the process of consumers receiving
spending limits and entering into leases for durable goods to within seconds. The LTO Engine is the basis for FlexShopper’s primary sales channels, which
include B2C and B2B channels, illustrated in the diagram below:
We believe we have created a unique platform whereby our B2B and B2C sales channels beneficially advance each other. For our B2C channels, we directly
market to our consumers LTO opportunities at FlexShopper.com, where they can choose from over 135,000 of the latest products shipped directly to them by
certain of the nation’s largest retailers. This generates sales for our retail partners, which encourages them to incorporate our B2B solutions into their online
and in-store sales channels. The lease originations by our retail partners using our B2B channels, which have no customer acquisition cost to us, subsidize our
B2C customer acquisition costs. Meanwhile, our B2C marketing promotes FlexShopper.com, which provides incremental sales for our retail partners as well
as benefitting our FlexShopper.com business.
To achieve our goal of being the preeminent “pure play” virtual LTO leader, we intend to execute the following strategies:
Continue to grow FlexShopper into a dominant LTO brand. Given strong consumer demand and organic growth potential for our LTO solutions, we
believe that significant opportunities exist to expand our presence within current markets via existing marketing channels. As non-prime consumers become
increasingly familiar and comfortable with our retail kiosk partnerships, online marketplace and mobile solutions, we plan to capture the new business
generated as they migrate away from less convenient legacy brick-and-mortar LTO stores.
3
Expand the range of customers served. We continue to evaluate new product and market opportunities that fit into our overall strategic objective of
delivering next-generation retail, online and mobile LTO terms that span the non-prime/near-prime credit spectrum. For example, we are evaluating products
with lower fees that would be more focused on the needs of more creditworthy subprime consumers that prefer a less expensive LTO option. In addition, we
are continually focused on improving our analytics to effectively underwrite and serve consumers within those segments of the non-prime credit spectrum that
we do not currently reach, including profitable deeper penetration of the sub-prime spectrum. We believe the current generation of our underwriting model is
performing well and will continue to improve over time as its data set expands.
Pursue additional strategic retail partnerships. We intend to continue targeting regional and national retailers to expand our B2B sales channels. As
illustrated in the diagram above, we believe we have the best omnichannel solution for retailers to “save the sale” with LTO options. In retail, the phrase “save
the sale” means offering consumers other finance options when they don’t qualify for traditional credit. We expect these partnerships to provide us with
access to a broad range of potential new customers, with low customer acquisition costs.
Expand our relationships with existing customers and retail partners. Customer acquisition costs represent one of the most significant expenses for us due
to our high percentage of online customers. In comparison, no acquisition cost is incurred for customers acquired through our retail partnerships. We will seek
to expand our strong relationships with existing customers by providing qualified customers with increased spending limits or offering other products and
services to them, as well as seek to grow our retail partnerships to reduce our overall acquisition cost.
Continue to optimize marketing across all channels. Since we began marketing our services to consumers in 2014, we have made significant progress in
targeting our customers and lowering our customer acquisition costs. This is across different media including direct response television and digital channels
such as social media, email, and search engines.
Competition and our Competitive Strengths
The LTO industry is highly competitive. Our operation competes with other national, regional and local LTO businesses, as well as with rental stores that do
not offer their customers a purchase option. Some of these companies have, or may develop, systems that enable consumers to obtain through online facilities
spending limits and payment terms and to enter into leases, in a manner similar to that provided by FlexShopper’s proprietary technology (see page 14 for
more information). We believe the following competitive strengths differentiate us:
Underwriting and Risk Management
Specialized technology and proprietary risk analytics optimized for the non-prime credit market. We have made substantial investments in our underwriting
technology and analytics platforms to support rapid scaling, innovation and regulatory compliance. Our team of data scientists and risk analysts uses our risk
infrastructure to build and test strategies across the entire underwriting process, using alternative credit data, device authentication, identity verification, and
many more data elements. We believe our real-time proprietary technology and risk analytics platform is better than our competitors’ in underwriting online
consumers and consumer electronics; most of our peers focus on in-store consumers that acquire furniture and appliances, which we believe are easier to
underwrite based on our own experiences. In addition, all our applications are processed instantly with approvals and spending limits provided within seconds
of submission.
4
LTO Products for Consumers and Retailers
Expansive online LTO marketplace. We have made substantial investments in our custom e-commerce platform to provide consumers the greatest selection
of popular brands delivered by certain of the nation’s largest retailers, including Best Buy, Amazon, Walmart, Overstock, Serta and many more. Our platform
is custom-built for online LTO transactions, which include underwriting our consumers, serving them LTO leases, syncing and communicating with our retail
partners to fulfill orders and all front- and back-end customer relationship management functions, including collections and billing. The result is a
comprehensive technology platform that manages all facets of our business and enables us to scale with hundreds of thousands of visitors and products.
Omnichannel “save the sale” product for retailers. In retail, the phrase “save the sale” means offering consumers other finance options when they do not
qualify for traditional credit. We believe that we have the best omnichannel solution for retailers to “save the sale” with LTO options. To our knowledge, no
competitor has a LTO marketplace that provides retailers incremental sales with no acquisition cost. In addition, compared to our peers, our product for
consumers requires no money down and typically fewer application fields. We believe this leads to more in-store and online sales. We also believe that we
have the best LTO payment technology at checkout for e-tailers, whereby consumers can seamlessly checkout on a third party’s e-commerce site with our
LTO payment plugin.
Providing LTO consumers an “endless aisle” of products for lease-to-own. As illustrated by our B2C channels in the above diagram, we offer consumers
three ways to acquire products on a LTO basis. At FlexShopper.com our customers can choose from over 135,000 of the latest products shipped by certain of
the nation’s largest retailers. If customers want products that are not available on our marketplace, they may use our “personal shopper” service and simply
complete a form with a link to the webpage of the desired durable good. We will then facilitate their purchase by providing an LTO arrangement. We also
offer consumers the ability to acquire durable goods with our FlexShopper Wallet smartphone application available on Apple and Android devices. With
FlexShopper Wallet, consumers may apply for a spending limit and take a picture of a qualifying item in any major retail store and we will fill the order for
them. With our B2C channels, we believe we are providing LTO consumers with a superior LTO experience and fulfilling our mission to help improve their
quality of life by shopping for what they want where they want.
Lean and Scalable Model
Compared to the brick-and-mortar LTO industry, which is suffering from the same challenges as traditional retail stores and declining sales, we have been
successful in addressing the LTO consumer through online channels as illustrated in the above diagram illustrating our B2C and B2B sales channels.
We believe our model is more efficient and scalable for the following reasons:
We have no inventory risk and are completely drop-ship. We do not have any of the costs associated with buying, storing and shipping inventory. Instead,
our suppliers ship goods directly to consumers.
We serve LTO consumers across the United States without brick-and-mortar stores. We do not have any of the costs associated with physical stores and the
personnel needed to operate them.
As our sales grow we achieve more operating leverage. Our model is primarily driven by a technology platform that does not require significant increases in
operating overhead to support sales growth.
5
Sales and Marketing
B2C Channels
We use a multi-channel, analytics-powered approach to marketing our products and services, with both broad-reach and highly targeted channels, including
television, digital, telemarketing and marketing affiliates. The goal of our marketing is to promote our brand and primarily to directly acquire new customers
at a targeted acquisition cost. Our marketing strategies include the following:
Direct response television advertising. We use television advertising supported by our internal analytics and media buys from a key agency to drive and
optimize website traffic and lease originations.
Digital acquisition. Our online marketing efforts include pay-per-click, keyword advertising, search engine optimization, marketing affiliate partnerships,
social media programs and mobile advertising integrated with our operating systems and technology from vendors that allow us to optimize customer
acquisition tactics within the daily operations cycle.
User experience and conversion. We measure and monitor website visitor usage metrics and regularly test website design strategies to improve customer
experience and conversion rates.
B2B Channels
We use internal business development personnel and outside consultants that focus on engaging retailers and e-tailers to use our services. This includes
promoting FlexShopper at key trade shows and conferences.
Information Systems
We use computer-based management information systems to facilitate our entire business model, including underwriting, processing transactions through our
sales channels, managing collections and monitoring leased inventory. In addition, we have a customer service and call center to facilitate inbound and
outbound calls. Through the use of our proprietary software developed in-house, each of our retail partners uses our online merchant portal that automates the
process of consumers receiving spending limits and entering into leases for durable goods generally to within seconds. The management information system
generates reports which enable us to meet our financial reporting requirements.
Government Regulations
The LTO industry is regulated by and subject to the requirements of various Federal, state and local laws and regulations, many of which are in place for
consumer protection. In general, such laws regulate, among other items, applications for leases, late fees, finance rates, disclosure statements, the substance
and sequence of required disclosures, the content of advertising materials and certain collection procedures. Violations of certain provisions of these laws and
regulations may result in penalties ranging from nominal amounts up to and including forfeiture of fees and other amounts due on leases. We are unable to
predict the nature or effect on our operations or earnings of unknown future legislation, regulations and judicial decisions or future interpretations of existing
and future legislation or regulations relating to our operations, and there can be no assurance that future laws, decisions or interpretations will not have a
material adverse effect on our operations and earnings. In 2016, we enhanced our compliance department by hiring a Chief Compliance Counsel followed by
a Compliance Manager in 2019.
Our business is subject to laws relating to the collection, use, retention, security and transfer of personally identifiable information about our customers.
Currently, nearly every state and the District of Columbia specifically regulate LTO transactions. At the present time, no federal law specifically regulates the
LTO industry, although federal legislation to regulate the industry has been proposed from time to time. Most of the states that regulate LTO transactions have
enacted disclosure laws that require LTO companies to disclose to their customers the total number of payments, the total amount and timing of all payments
to acquire ownership of any item, any other charges that may be imposed and miscellaneous other items. In addition, certain restrictive state lease purchase
laws limit the total amount that a customer may be charged for an item, or regulate the “cost-of-rental” amount that LTO companies may charge on LTO
transactions, generally defining “cost-of-rental” as lease fees paid in excess of the “retail” price of the goods. There has been increased legislative attention in
the United States, at both the Federal and state levels, on consumer debt transactions in general, which may result in an increase in legislative regulatory
efforts directed at the LTO industry.
See the section of this report captioned “Risk Factors” below for more information with respect to governmental laws and regulations and their effect on our
business.
6
Intellectual Property
FlexShopper was granted U.S. Patent Number 10,089,682 (see page 16 for additional disclosures) by the U.S. Patent and Trademark Office (the “USPTO”)
on October 2, 2018, for its system that enables e-commerce servers to complete LTO transactions through their e-commerce websites. Moreover, FlexShopper
has received a notice of allowance from the USPTO for additional systems that enable retailer devices to complete LTO transactions through their retailer web
pages, as well as systems that further enable consumer devices to modify received retailer web pages to indicate LTO payments in association with
transaction-eligible products as part of LTO transactions through the retailer web pages. FlexShopper may file additional patent applications in the future. We
can provide no assurances that FlexShopper will be granted any additional patents by the USPTO. We believe certain proprietary information, including our
underwriting model, and our patented and patent-pending systems are central to our business model and we believe they give us a key competitive advantage.
We also rely on trademark and copyright law, trade secret protection, and confidentiality, license and work product agreements with our employees,
customers, and others to protect our proprietary rights. See the section captioned “Risk Factors” below for more information on and risk associated with
respect to our intellectual property.
Employees
As of December 31, 2019, FlexShopper had 178 full-time employees and 2 part-time employees. As of that date, none of our employees were governed by
collective bargaining agreements or were members of a union. We consider our relations with our employees to be very good.
Corporate Information
Our executive offices are located at 901 Yamato Road, Suite 260, Boca Raton, Florida 33431, and our telephone number is (855) 353-9289. We maintain a
corporate website at https://flexshopper.com. Our Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and
amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on our
website, as soon as reasonably practicable after they have been filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). Our SEC
reports and other filings can be accessed through the investors section of our website, or through https://www.sec.gov. Information on our website does not
constitute part of this Annual Report or any other report we file or furnish with the SEC.
Investors and others should note that we use social media to communicate with our customers, retailer network and the public about our company, our
services, new product developments and other matters. Any information that we consider to be material to an investor’s evaluation of our company will be
included in filings accessible through the SEC website, and may also be disseminated using our investor relations website (https://flexshopper.com) and press
releases. However, we encourage investors, the media, and others interested in our company to also review our social media channels @flexshopper on
Twitter and flexshopper on Facebook. The information contained in these social media channels is not part of, and is not incorporated into or included in, this
Annual Report.
Item 1A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information presented in this Form 10-K, in evaluating us and our
business. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of
our securities to decline.
Our business liquidity and capital resources are dependent upon our credit agreement with an institutional lender and our compliance with the
terms thereof.
FlexShopper, through FlexShopper 2, LLC (the “Borrower”), is party to a credit agreement (as amended, the “Credit Agreement”) with Wells Fargo Bank,
National Association, various lenders from time to time party thereto and WE2014-1, LLC (the “Lender”). Under the terms of the Credit Agreement, subject
to the satisfaction of certain conditions, the Borrower may borrow up to $32,500,000 from the Lender, based on the Borrower’s cash on hand and Amortized
Order Value of its Eligible Leases (as such terms are defined in the Credit Agreement). As of February 28, 2020, there was $3,209,750 in additional
availability under the Credit Agreement and the outstanding balance under the Credit Agreement was $29,290,250.
On April 1, 2019, the Commitment Termination Date was extended to February 28, 2021. The Lender was granted a security interest in certain leases
as collateral under the Credit Agreement. The interest rate charged on amounts borrowed is LIBOR plus 11% per annum.
Failure to effectively manage our costs could have a material adverse effect on our profitability. Certain elements of our cost structure are largely
fixed in nature while consumer spending remains uncertain, which makes it challenging for us to maintain or increase our operating income. The
competitiveness in our industry and increasing price transparency mean that the need to achieve efficient operations is greater than ever. As a result, we must
continuously focus on managing our cost structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases,
charge-offs or indirect spending could materially adversely affect our profitability.
7
Our LTO business depends on the success of our third-party retail partners and our continued relationships with them. Our revenues depend in
part on the relationships we have with third-party retailers we work with to offer our LTO services. We have entered into a variety of such arrangements and
expect to seek additional such relationships in the future. However, for a variety of reasons we not be successful in these efforts. If our retail partners do not
satisfy their obligations to us, we are unable to meet our retail partners’ expectations and demands or we are unable to reach agreements with additional
suitable retail partners, we may fail to meet our business objectives. The terms of any additional retail partnerships or other strategic arrangements that we
establish may not be favorable to us. Our inability to successfully implement retail partnerships and strategic arrangements could adversely affect our
business, financial condition and results of operations. In addition, in most cases, our agreements with such third-party retailers may be terminated at the
retailer’s election. There can be no assurance that we will be able to continue our relationships with our retail partners on the same or more favorable terms in
future periods or that these relationships will continue beyond the terms of our existing contracts with our retail partners. The failure of our third-party retail
partners to maintain quality and consistency in their operations and their ability to continue to provide products and services, or the loss of the relationship
with any of these third-party retailers and an inability to replace them, could cause our business to lose customers, substantially decreasing our revenues and
earnings growth.
Our customer base presents significant risk of default for non-payment. We bear the risk of non-payment or late payments by our customers. The
nature of our customer base makes it sensitive to adverse economic conditions and, in the event of an economic downturn, less likely to meet our prevailing
underwriting standards, which may be more restrictive in an adverse economic environment. As a result, during such periods we may experience decreases in
the growth of new customers, and we may curtail spending limits to existing customers, which may adversely affect our net sales and potential profitability.
Our growth will depend on our ability to develop our brands, and these efforts may be costly. Our ability to develop the FlexShopper brand will be
critical to achieving widespread acceptance of our services and will require a continued focus on active marketing efforts. We will need to continue to spend
substantial amounts of money on, and devote substantial resources to, advertising, marketing, and other efforts to create and maintain brand loyalty among
our customers. If we fail to promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to do so, our business would be
harmed.
Our LTO business depends on the continued growth of online and mobile commerce. The business of selling goods over the internet and mobile
networks is dynamic and relatively new. Concerns about fraud, privacy and other problems or lack of access may discourage additional consumers from
adopting the internet or mobile devices as modes of commerce or may prompt consumers to offline channels. In order to expand our user base, we must
appeal to and acquire consumers who historically have used traditional means of commerce to purchase goods and may prefer internet analogues to such
traditional retail means, such as the retailer’s own website, to our offerings. If these consumers prove to be less active than we expect due to lower levels of
willingness or ability to use the internet or mobile devices for commerce for any reason, including lack of access to high-speed communications equipment,
traffic congestion on the internet or mobile network outages or delays, disruptions or other damage to users’ computers or mobile devices, and we are unable
to gain efficiencies in our operating costs, including our cost of acquiring new users, our business could be adversely impacted.
Failure to successfully manage and grow our FlexShopper.com e-commerce platform could materially adversely affect our business and future
prospects. Our FlexShopper.com e-commerce platform provides customers the ability to apply, shop, review our product offerings and prices and enter into
lease agreements as well as make payments on existing leases from the comfort of their homes and on their mobile devices. Our e-commerce platform is a
significant and essential component of our strategic plan and we believe will drive future growth of our business. In order to promote our products and
services and allow customers to transact online and reach new customers, we must effectively maintain, improve and grow our e-commerce platform. There
can be no assurance that we will be able to maintain, improve or grow our e-commerce platform in a profitable manner.
The success of our business is dependent on factors affecting consumer spending that are not under our control. Consumer spending is affected
by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing interest rates, consumer debt and
availability of credit, inflation, recession and fears of recession, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future
economic conditions and political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting
discretionary spending could reduce demand for our products and services, such as consumer electronics and residential furniture, resulting in lower revenue
and negatively impacting our business and its financial results.
Our customers can return merchandise without penalty. When our customers acquire merchandise through the FlexShopper LTO program, we
purchase the merchandise from the retailer and enter the lease-to-own relationship with the customer. Because our customers can return merchandise without
penalty, there is risk that we may end up owning a significant amount of merchandise that is difficult to monetize. While we have factored customer returns
into our business model, customer return volume may exceed the levels we expect, which could adversely impact our collections, revenues and our financial
performance. Returns totaled less than 4% of leased merchandise for the year ended December 31, 2019.
We rely on third-party credit/debit card and ACH (Automated Clearing House) processors to process collections from customers on a weekly
basis. Our ability to collect from customers could be impaired if these processors do not work with us. These third-party payment processors may consider
our business a high risk since our customer base has a high incidence of insufficient funds and rejected payments. This could cause a processor to discontinue
its services to us, and we may not be able to find a replacement processor. If this occurs, we would have to collect from our customers using less efficient
methods, which would adversely impact our collections, revenues and our financial performance.
8
We rely on internal models to manage risk, to provide accounting estimates and to make other business decisions. Our results could be adversely
affected if those models do not provide reliable estimates or predictions of future activity. The accurate modeling of risks is critical to our business,
particularly with respect to managing underwriting and spending limits for our customers. Our expectations regarding customer repayment levels, as well as
our allowances for doubtful accounts and other accounting estimates, are based in large part on internal modeling. We also rely heavily on internal models in
making a variety of other decisions crucial to the successful operation of our business. It is therefore important that our models are accurate, and any failure in
this regard could have a material adverse effect on our results. However, models are inherently imperfect predictors of actual results because they are based
on historical data available to us and our assumptions about factors such as demand, payment rates, default rates, delinquency rates and other factors that may
overstate or understate future experience. Our models could produce unreliable results for a number of reasons, including the limitations or lack of historical
data to predict results, invalid or incorrect underlying assumptions or data, the need for manual adjustments in response to rapid changes in economic
conditions, incorrect coding of the models or inappropriate application of a model to products or events outside of the model’s intended use. In particular,
models are less dependable when the economic environment is outside of historical experience, as has been the case recently. Due to the factors described
above, resulting unanticipated and excessive default and charge-off experience can adversely affect our profitability and financial condition, breach covenants
in our credit agreement, limit our ability to secure a future credit facility and adversely affect our ability to finance our business.
Our operations are regulated by and subject to the requirements of various Federal and state laws and regulations. These laws and regulations,
which may be amended or supplemented or interpreted by the courts from time to time, could expose us to significant compliance costs or burdens or
force us to change our business practices in a manner that may be materially adverse to our operations, prospects or financial condition. Currently,
nearly every state and the District of Columbia specifically regulate LTO transactions. At the present time, no federal law specifically regulates the LTO
industry, although federal legislation to regulate the industry has been proposed from time to time. Any adverse changes in existing laws, or the passage of
new adverse legislation by states or the Federal government could materially increase both our costs of complying with laws and the risk that we could be
sued or be subject to government sanctions if we are not in compliance. In addition, new burdensome legislation might force us to change our business model
and might reduce the economic potential of our sales and lease ownership operations. Most of the states that regulate LTO transactions have enacted
disclosure laws that require LTO companies to disclose to their customers the total number of payments, the total amount and timing of all payments to
acquire ownership of any item, any other charges that may be imposed and miscellaneous other items. In addition, certain restrictive state lease purchase laws
limit the total amount that a customer may be charged for an item, or regulate the “cost-of-rental” amount that LTO companies may charge on LTO
transactions, generally defining “cost-of-rental” as lease fees paid in excess of the “retail” price of the goods. There has been increased legislative attention in
the United States, at both the Federal and state levels, on consumer debt transactions in general, which may result in an increase in legislative regulatory
efforts directed at the LTO industry. We cannot guarantee that the Federal government or states will not enact additional or different legislation that would be
disadvantageous or otherwise materially adverse to us. In addition to the risk of lawsuits related to the laws that regulate LTO transactions, we could be
subject to lawsuits alleging violations of Federal and/or state laws and regulations relating to consumer tort law, including fraud, consumer protection,
information security and privacy. A large judgment against us could adversely affect our financial condition and results of operations. Moreover, an adverse
outcome from a lawsuit, even one against one of our competitors, could result in changes in the way we and others in the industry do business, possibly
leading to significant costs or decreased revenues or profitability.
9
Our virtual LTO business differs in some potentially significant respects from the risks of a typical LTO brick-and-mortar store business, which
implicates certain additional regulatory risks.
We offer LTO products directly to consumers through our e-commerce marketplace and through the stores and e-commerce sites of third-party
retailers. This novel business model implicates certain regulatory risk including, among others:
● possibly different regulatory risks than applicable to traditional brick-and-mortar LTO stores, whether arising from the offer by third-party
retailers of FlexShopper’s B2B solutions alongside traditional cash, check or credit payment options or otherwise, including the risk that
regulators may mistakenly treat virtual LTO transactions as some other type of transaction that would face different and more burdensome and
complex regulations;
● reliance on automatic bank account drafts for lease payments, which may become disfavored as a payment method for these transactions by
regulators;
● potential that regulators may target the virtual LTO transaction and/or adopt new regulations or legislation (or existing laws and regulations may
be interpreted in a manner) that negatively impact FlexShopper’s ability to offer virtual LTO programs through third-party retail partners;
● potential that regulators may attempt to force the application of laws and regulations on FlexShopper’s virtual LTO business in inconsistent and
unpredictable ways that could increase the compliance-related costs incurred by FlexShopper, and negatively impact FlexShopper’s financial
and operational performance; and
● indemnification obligations to FlexShopper retail partners and their service providers for losses stemming from FlexShopper’s failure to perform
with respect to its products and services.
Any of these risks could have a material adverse effect on FlexShopper’s business.
Changes in regulations or customer concerns, in particular as they relate to privacy and protection of customer data, could adversely affect our
business. Our business is subject to laws relating to the collection, use, retention, security and transfer of personally identifiable information about our
customers. The interpretation and application of privacy and customer data protection laws are in a state of flux and may vary from jurisdiction to jurisdiction.
These laws may be interpreted and applied inconsistently and our current data protection policies and practices may not be consistent with those
interpretations and applications. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business
practices in a manner adverse to our business. Any failure, or perceived failure, by us to comply with our own privacy policies or with any regulatory
requirements or orders or other privacy or consumer protection related laws and regulations could result in proceedings or actions against us by governmental
entities or others, subject us to significant penalties and negative publicity and adversely affect our operating results.
The transactions offered to consumers by our businesses may be negatively characterized by consumer advocacy groups, the media and certain
Federal, state and local government officials, and if those negative characterizations become increasingly accepted by consumers and/or FlexShopper’s
retail partners, demand for our goods and the transactions we offer could decrease and our business could be materially adversely affected. Certain
consumer advocacy groups, media reports and federal and state legislators have asserted that laws and regulations should be broader and more restrictive
regarding LTO transactions. The consumer advocacy groups and media reports generally focus on the total cost to a consumer to acquire an item, which is
often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories. This “cost-of-
rental” amount, which is generally defined as lease fees paid in excess of the “retail” price of the goods, is from time to time characterized by consumer
advocacy groups and media reports as predatory or abusive without discussing benefits associated with LTO programs or the lack of viable alternatives for
our customers’ needs. If the negative characterization of these types of LTO transactions becomes increasingly accepted by consumers or FlexShopper’s retail
and merchant partners, demand for our products and services could significantly decrease, which could have a material adverse effect on our business, results
of operations and financial condition. Additionally, if the negative characterization of these types of transactions is accepted by legislators and regulators, we
could become subject to more restrictive laws and regulations, which could have a material adverse effect on our business, results of operations and financial
condition. The vast expansion and reach of technology, including social media platforms, has increased the risk that our reputation could be significantly
impacted by these negative characterizations in a relatively short amount of time. If we are unable to quickly and effectively respond to such
characterizations, we may experience declines in customer loyalty and traffic and our relationships with our retail partners may suffer, which could have a
material adverse effect on our business, results of operations and financial condition.
10
The loss of any of our key personnel could harm our business. Our future financial performance will depend to a significant extent on our ability to
motivate and retain key management personnel. Competition for qualified management personnel is intense, and there can be no assurance that we will be
able to hire additional qualified management on terms satisfactory to us. Further, in the event we experience turnover in our senior management positions, we
cannot assure you that we will be able to recruit suitable replacements. We must also successfully integrate all new management and other key positions
within our organization to achieve our operating objectives. Even if we are successful, turnover in key management positions may temporarily harm our
financial performance and results of operations until new management becomes familiar with our business. At present, we do not maintain key-man life
insurance on any of our executive officers. Although we have entered into employment contracts with Richard House, Jr., our Chief Executive Officer, Brad
Bernstein, our President, and H. Russell Heiser, Jr., our Chief Financial Officer, we cannot guarantee that they will be available. Our Board of Directors is
responsible for approval of all future employment contracts with our executive officers. We can provide no assurances that said future employment contracts
and/or their current compensation is or will be on commercially reasonable terms to us in order to retain our key personnel. The loss of any of our key
personnel could harm our business.
We depend on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these
and our other employees, including wage and hour regulations. Our workforce is comprised primarily of employees who work on an hourly basis. To grow
our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of hourly associates, while at the same
time controlling labor costs. These positions have historically had high turnover rates, which can lead to increased training, retention and other costs. In
certain areas where we operate, there is significant competition for employees, including from retailers and the restaurant industries. The lack of availability
of an adequate number of hourly employees, or our inability to attract and retain them, or an increase in wages and benefits to current employees could
adversely affect our business, results of operations, cash flows and financial condition. We are subject to applicable rules and regulations relating to our
relationship with our employees, including wage and hour regulations, health benefits, unemployment and payroll taxes, overtime and working conditions and
immigration status. Accordingly, federal, state or local legislated increases in the minimum wage, as well as increases in additional labor cost components
such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, would increase our labor costs, which could have a
material adverse effect on our business, prospects, results of operations and financial condition.
Employee misconduct or misconduct by third parties acting on our behalf could harm us by subjecting us to monetary loss, significant legal
liability, regulatory scrutiny and reputational harm. Our reputation is critical to maintaining and developing relationships with our existing and potential
customers and third parties with whom we do business. There is a risk that our employees or the employees of a third-party retailer with whom we partner
could engage in misconduct that adversely affects our reputation and business. For example, if an employee or a third party associated with our business were
to engage in, or be accused of engaging in, illegal or suspicious activities including fraud or theft of our customers’ information, we could suffer direct losses
from the activity and, in addition, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, customer
relationships and ability to attract future customers. Employee or third-party misconduct could prompt regulators to allege or to determine based upon such
misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect violations of such
rules. The precautions that we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees or third-party
contractors, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business. Our operations are
subject to certain laws generally prohibiting companies and their intermediaries from making improper payments to government officials for the purpose of
obtaining or retaining business, such as the U.S. Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions. Our employees,
contractors or agents may violate the policies and procedures we have implemented to ensure compliance with these laws. Any such improper actions could
subject us to civil or criminal investigations, could lead to substantial civil and criminal, monetary and non-monetary penalties, and related shareholder
lawsuits, could cause us to incur significant legal fees, and could damage our reputation.
11
Competition in the LTO business is intense. The LTO industry is highly competitive. Our operation competes with other national, regional and local
LTO businesses, as well as with rental stores that do not offer their customers a purchase option. Some of these companies have, or may develop, systems that
enable consumers to obtain through online facilities spending limits and payment terms and to enter into leases in a manner similar to that provided by our
proprietary technology. Greater financial resources may allow our competitors to grow faster than us, including through acquisitions. This in turn may enable
them to enter new markets before we can, which may decrease our opportunities in those markets. Greater name recognition, or better public perception of a
competitor’s reputation, may help them divert market share away from us, even in our established markets. Some competitors may be willing to offer
competing products on an unprofitable basis in an effort to gain market share, which could compel us to match their pricing strategy or lose business. With
respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores. Competition is based primarily on store
location, product selection and availability, customer service and lease rates and terms. We believe we do not currently have significant competition for our
online LTO marketplace and patent-pending LTO payment method. However, such competition is likely to develop over time, and we may be unable to
successfully compete in our target markets. We can provide no assurances that we will be able to successfully compete in the LTO industry.
Continuation or worsening of current economic conditions faced by a portion of our customer base could result in decreased revenues. The
geographic concentration of our retail partners may magnify the impact of conditions in a particular region, including economic downturns and other
occurrences. Although we believe an economic downturn can result in increased business in the LTO market as consumers increasingly find it difficult to
purchase home furnishings, electronics and appliances from traditional retailers on store installment credit, it is possible that if the conditions continue for a
significant period of time, or get worse, consumers may curtail spending on all or some of the types of merchandise we offer, in which event our revenues
may suffer.
Much of our customer base continues to experience prolonged economic uncertainty and, in certain areas, unfavorable economic conditions. We
believe that the extended duration of that economic uncertainty and unfavorable economic conditions may be resulting in our customers curtailing purchases
of the types of merchandise we offer, or entering into agreements that generate smaller amounts of revenue for us (i.e., a 90-day same-as-cash option),
resulting in decreased revenues for us. Any increases in unemployment or underemployment within our customer base may result in increased defaults on
lease payments, resulting in increased merchandise return costs and merchandise losses. In addition, our retail partners as well as our online customer base are
subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornadoes, which have in the past
caused damage such as flooding and other damage to our retail partners and online customers.
We are subject to sales, income and other taxes, which can be difficult and complex to calculate due to the nature of our business. A failure to
correctly calculate and pay such taxes could result in substantial tax liabilities and a material adverse effect on our results of operations. The application
of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the LTO industry generally and our virtual LTO business more
specifically. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the LTO industry and e-
commerce and, therefore, in many cases it is not clear how existing statutes apply to our various businesses. In addition, governments are increasingly looking
for ways to increase revenues, which has resulted in discussions about tax reform and other legislative action to increase tax revenues, including through
indirect taxes. This also could result in other adverse changes in or interpretations of existing sales, income and other tax regulations. For example, from time
to time, some taxing authorities in the United States have notified us that they believe we owe them certain taxes imposed on transactions with our customers.
Although these notifications have not resulted in material tax liabilities to date, there is a risk that one or more jurisdictions may be successful in the future,
which could have a material adverse effect on our results of operations.
12
System interruption and the lack of integration and redundancy in our order entry and online systems may adversely affect our net sales.
Customer access to our customer service center and websites is key to the continued flow of new orders. Anything that would hamper or interrupt such access
could adversely affect our net sales, operating results and customer satisfaction. Examples of risks that could affect access include problems with the internet
or telecommunication infrastructure, limited web access by our customers, local or more systemic impairment of computer systems due to viruses or malware,
or impaired access due to breaches of internet security or denial of service attacks. Changes in the policies of service providers or others that increase the cost
of telephone or internet access could inhibit our ability to market our products or transact orders with customers. In addition, our ability to operate our
business from day-to-day largely depends on the efficient operation of our computer hardware and software systems and communications systems. Our
computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes,
acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins or denial of service attacks, improper operation by employees and
similar events or disruptions. Any of these events could cause system interruption, delays and loss of critical data and could prevent us from accepting and
fulfilling customer orders and providing services, which would impair our operations. Certain of our systems are not redundant, and we have not fully
implemented a disaster recovery plan. In addition, we may have inadequate insurance coverage to compensate us for any related losses. Interruptions to
customer ordering, particularly if prolonged, could damage our reputation and be expensive to remedy and have significant adverse effects on our financial
results.
We face risk related to the strength of our operational, technological and organizational infrastructure. We are exposed to operational risks that
can be manifested in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees,
contractors or third parties and exposure to external events. In addition, we are heavily dependent on the strength and capability of our technology systems
that we use to manage our internal financial, credit and other systems, interface with our customers and develop and implement effective marketing
campaigns. Our ability to operate our business to meet the needs of our existing customers and attract new ones and to run our business in compliance with
applicable laws and regulations depends on the functionality of our operational and technology systems. Any disruptions or failures of our operational and
technology systems, including those associated with improvements or modifications to such systems, could cause us to be unable to market and manage our
products and services and to report our financial results in a timely and accurate manner, all of which could have a negative impact on our results of
operations. In some cases, we outsource delivery, maintenance and development of our operational and technological functionality to third parties. These third
parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. Any increase in the amount of our
infrastructure that we outsource to third parties may increase our exposure to these risks.
If we do not respond to technological changes, our services could become obsolete, and we could lose customers. To remain competitive, we must
continue to enhance and improve the functionality and features of our e-commerce websites and other technologies. We may face material delays in
introducing new products and enhancements. If this happens, our customers may forego the use of our websites and use those of our competitors. The internet
and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry
standards and practices emerge, our existing websites and our proprietary technology and systems may become obsolete. Our failure to respond to
technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers’ orders and payments
could harm our business, prospects, financial condition and results of operations.
13
We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third
parties. We have been granted a patent for our system that enables e-commerce servers to complete LTO transactions through their e-commerce websites.
Moreover, we have been issued a notice of allowance for additional systems that enable retailer devices to complete LTO transactions through their retailer
web pages, as well as systems that further enable consumer devices to modify received retailer web pages to indicate LTO payments in association with
transaction-eligible products as part of LTO transactions through the retailer web pages. However, we can provide no assurances that we will be granted any
additional patents by the USPTO. We believe certain proprietary information, including but not limited to our underwriting model, and patented and patent-
pending systems are central to our business model, and we believe give us a key competitive advantage. We rely on trademark and copyright law, trade secret
protection, and confidentiality, license and work product agreements with our employees, customers and others to protect our proprietary rights. We may be
unable to prevent third parties from acquiring trademarks, service marks and domain names that are similar to, infringe upon, or diminish the value of our
trademarks and other proprietary rights. Failure to protect our domain names could affect adversely our reputation and brand, and make it more difficult for
users to find our website. We may be unable to discover or determine the extent of any unauthorized use of our proprietary rights. The protection of our
intellectual property may require the expenditure of significant financial and managerial resources. In addition, the steps we take to protect our intellectual
property may not adequately protect our rights or prevent parties from infringing or misappropriating our proprietary rights. We can be at risk that others will
independently develop or acquire equivalent or superior technology or other intellectual property rights. The use of our technology or similar technology by
others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business. We cannot be certain
that the intellectual property used in our business does not and will not infringe the intellectual property rights of others, and we are from time to time subject
to third party infringement claims. Due to recent changes in patent law, we face the risk of a temporary increase in patent litigation due to new restrictions on
including unrelated defendants in patent infringement lawsuits in the future particularly from entities that own patents but that do not make products or
services covered by the patents. Any third party infringement claims against us, whether or not meritorious, may result in the expenditure of significant
financial and managerial resources, injunctions against us or the payment of damages. Moreover, should we be found liable for infringement, we may be
required to seek to enter into licensing agreements, which may not be available on acceptable terms or at all.
In deciding whether to provide a spending limit to customers, we rely on the accuracy and completeness of information furnished to us by or on
behalf of our customers. If we and our systems are unable to detect any misrepresentations in this information, this could have a material adverse effect
on our results of operations and financial condition. In deciding whether to provide a customer with a spending amount, we rely heavily on information
furnished to us by or on behalf of our customers and our ability to validate such information through third-party services, including personal financial
information. If a significant percentage of our customers intentionally or negligently misrepresent any of this information, and we or our systems do not or did
not detect such misrepresentations, it could have a material adverse effect on our ability to effectively manage our risk, which could have a material adverse
effect on our results of operations and financial condition.
If we fail to timely contact delinquent customers, then the number of delinquent customer receivables eventually being charged off could
increase. We contact customers with delinquent account balances soon after the account becomes delinquent. During periods of increased delinquencies, it is
important that we are proactive in dealing with these customers rather than simply allowing customer receivables to go to charge-off. During periods of
increased delinquencies, it becomes extremely important that we are properly staffed and trained to assist customers in bringing the delinquent balance
current and ultimately avoiding charge-off. If we do not properly staff and train our collections personnel, or if we incur any downtime or other issues with
our information systems that assist us with our collection efforts, then the number of accounts in a delinquent status or charged-off could increase. In addition,
managing a substantially higher volume of delinquent customer receivables typically increases our operational costs. A rise in delinquencies or charge-offs
could have a material adverse effect on our business, financial condition, liquidity and results of operations.
14
Our management information systems may not be adequate to meet our evolving business and emerging regulatory needs and the failure to
successfully implement them could negatively impact the business and its financial results. We are investing significant capital in new information
technology systems to support our growth plan. These investments include redundancies and acquiring new systems and hardware with updated functionality.
We are taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems, with minimal disruptions
to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel,
may cause disruptions to our systems and our business, and may not provide the anticipated benefits. The disruption in our information technology systems,
or our inability to improve, integrate or expand our systems to meet our evolving business and emerging regulatory requirements, could impair our ability to
achieve critical strategic initiatives and could adversely impact our sales, collections efforts, cash flows and financial condition.
If we do not maintain the privacy and security of customer, retail partner, employee or other confidential information, due to cybersecurity-
related “hacking” attacks, intrusions into our systems by unauthorized parties or otherwise, we could incur significant costs, litigation, regulatory
enforcement actions and damage to our reputation, any one of which could have a material adverse impact on our business, operating results and
financial condition. Our business involves the collection, processing, transmission and storage of customers’ personal and confidential information, including
dates of birth, banking information, credit and debit card information, data we receive from consumer reporting companies, including credit report
information, as well as confidential information about our retail partners and employees, among others. Much of this data constitutes confidential personally
identifiable information (“PII”) which, if unlawfully accessed, either through a “hacking” attack or otherwise, could subject us to significant liabilities as
further discussed below. Companies like us that possess significant amounts of PII and/or other confidential information have experienced a significant
increase in cyber security risks in recent years from increasingly aggressive and sophisticated cyberattacks, including hacking, computer viruses, malicious or
destructive code, ransomware, social engineering attacks (including phishing and impersonation), denial-of-service attacks and other attacks and similar
disruptions from the unauthorized use of or access to information technology (“IT”) systems. Our IT systems are subject to constant attempts to gain
unauthorized access in order to disrupt our business operations and capture, destroy or manipulate various types of information that we rely on, including PII
and/or other confidential information. In addition, various third parties, including employees, contractors or others with whom we do business may attempt to
circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. Any significant
compromise or breach of our data security, whether external or internal, or misuse of PII and/or other confidential information may result in significant costs,
litigation and regulatory enforcement actions and, therefore, may have a material adverse impact on our business, operating results and financial condition.
Further, if any such compromise, breach or misuse is not detected quickly, the effect could be compounded. While we have implemented network security
systems and processes to protect against unauthorized access to or use of secured data and to prevent data loss and theft, there is no guarantee that these
procedures are adequate to safeguard against all data security breaches or misuse of the data. We maintain private liability insurance intended to help mitigate
the financial risks of such incidents, but there can be no guarantee that insurance will be sufficient to cover all losses related to such incidents, and our
exposure resulting from any serious unauthorized access to, or use of, secured data, or serious data loss or theft, could far exceed the limits of our insurance
coverage for such events. Further, a significant compromise of PII and/or other confidential information could result in regulatory penalties and harm our
reputation with our customers, retail partners and others, potentially resulting in a material adverse impact on our business, operating results and financial
condition. The regulatory environment related to information security, data collection and use, and privacy is increasingly rigorous, with new and constantly
changing requirements applicable to our business, and compliance with those requirements could result in additional costs. We also believe successful data
breaches or cybersecurity incidents at other companies, whether or not we are involved, could lead to a general loss of customer confidence that could
negatively affect us, including harming the market perception of the effectiveness of our security measures or financial technology in general. We believe our
exposure to this risk will increase as we expand our use of financial technology to communicate with our customers and retail partners and as we increase the
number of retail partners with whom we work.
15
If we fail to maintain adequate systems and processes to detect and prevent fraudulent activity, our business could be adversely impacted.
Criminals are using increasingly sophisticated methods to engage in illegal activities such as paper instrument counterfeiting, fraudulent payment or refund
schemes and identity theft. As we make more of our services available over the internet and other media we subject ourselves to consumer fraud risk. We use
a variety of tools to protect against fraud; however, these tools may not always be successful.
Our failure to maintain an effective system of internal controls could result in inaccurate reporting of financial results and harm our business.
We are required to comply with a variety of reporting, accounting and other rules and regulations. As a public reporting company subject to the rules and
regulations established from time to time by the SEC and the Nasdaq Capital Market, we are required to, among other things, establish and periodically
evaluate procedures with respect to our disclosure controls and procedures. In addition, as a public company, we are required to document and test our
internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify, on an annual basis,
that our internal control over financial reporting is effective. As such, we maintain a system of internal control over financial reporting, but there are
limitations inherent in internal control systems. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be appropriate
relative to their costs. Furthermore, compliance with existing requirements is expensive and we may need to implement additional finance and accounting and
other systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined to be ineffective,
such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price of our common stock, subject us
to regulatory investigations and penalties, and adversely impact our business and financial condition.
Because of their significant stock ownership and ability to select a nominee to our Board of Directors, certain beneficial owners of our stock, as
well as our executive officers and directors, will be able to exert control over the Company and significant corporate decisions. B2 FIE V LLC (“B2
FIE”), a holder of Series 2 Convertible Preferred Stock, beneficially owns 20.9% of the voting power of our outstanding stock as of March 2, 2020. Our
secured lender beneficially owns 6.6% of the voting power of our outstanding stock as of March 2, 2020. Also, our executive officers and directors
beneficially own an additional 17.4% of the voting power of our outstanding stock as of the same date. In the event that they act in concert on future
stockholder matters, such persons may have the ability to affect the election of all of our directors and the outcome of all issues submitted to our stockholders.
Such concentration of ownership could limit the price that certain investors might be willing to pay in the future for shares of Common Stock and could have
the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Additionally,
pursuant to the Investor Rights Agreement entered into in connection with its investment in the Company, B2 FIE currently has the right to designate one
nominee on our Board of Directors. As a result, the presence of directors on our Board of Directors nominated by these investors enables such investors to
influence and impact future actions taken by our Board of Directors.
The price of our common stock may fluctuate significantly. During the fiscal year ended December 31, 2019, the closing price for our common
stock on the Nasdaq Capital Market ranged from $0.76 to $2.59. The market price for our common stock can fluctuate as a result of a variety of factors,
including the factors listed in this Risk Factors section, many of which are beyond our control. These factors include: actual or anticipated variations in
quarterly operating results; announcements of new services by our competitors or us; announcements relating to strategic relationships or acquisitions;
dilution caused by additional equity issuances; our ability to meet market expectations with respect to the growth and profitability of each of our operating
segments; quarterly variations in our competitors’ results of operations; state or federal legislative or regulatory proposals, initiatives, actions or changes that
are, or are perceived to be, adverse to our operations; changes in financial estimates or other statements by securities analysts; and other changes in general
economic conditions. Because of this, we may fail to meet or exceed the expectations of our stockholders or others, and the market price for our common
stock could fluctuate as a result. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our
common stock.
16
We have never declared or paid cash dividends on our Common Stock, and we do not anticipate paying any cash dividends on our Common
Stock in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. Any future
determination to pay cash dividends will be dependent upon our financial condition, operating results, capital requirements, applicable contractual restrictions
and other such factors as our Board of Directors may deem relevant.
Product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.
The products we lease are subject to regulation by the U.S. Consumer Product Safety Commission and similar state regulatory authorities. Such products
could be subject to recalls and other actions by these authorities. Product safety or quality concerns may require us to voluntarily remove selected products
from our e-commerce site, or from our customers’ homes. Such recalls and voluntary removal of products can result in, among other things, lost sales,
diverted resources, potential harm to our reputation and increased customer service costs, which could have a material adverse effect on our financial
condition. In addition, given the terms of our lease agreements with our customers, in the event of such a product quality or safety issue, our customers who
have leased the defective merchandise from us could terminate their lease agreements for that merchandise and/or not renew those lease arrangements, which
could have a material adverse effect on our financial condition if we are unable to recover those losses from the vendor who supplied us with the defective
merchandise.
Increased costs associated with corporate governance compliance may significantly impact our results of operations. Changing laws, regulations
and standards relating to corporate governance, public disclosure and compliance practices, including the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, the Sarbanes-Oxley Act of 2002, and new SEC regulations, may create difficulties for companies such as ours in understanding and
complying with these laws and regulations. As a result of these difficulties and other factors, devoting the necessary resources to comply with evolving
corporate governance and public disclosure standards has resulted in and may in the future result in increased general and administrative expenses and a
diversion of management time and attention to compliance activities. We also expect these developments to increase our legal compliance and financial
reporting costs. In addition, these developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and
we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Moreover, we may be unable to comply with these new
laws and regulations on a timely basis. These developments could make it more difficult for us to retain qualified members of our board of directors, or
qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional
costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.
If we sell shares of our common stock or securities convertible into our common stock in future financings, the ownership interest of existing
shareholders will be diluted and, as a result, our stock price may go down. We may from time to time issue additional shares of common stock, possibly at a
discount from the current trading price of our common stock, or securities convertible into our common stock. As a result, our existing shareholders will
experience immediate dilution upon the purchase of any shares of our Common Stock sold at a discount. If we issue common stock or securities convertible
into common stock, our shareholders will experience dilution and this dilution will be greater if we find it necessary to sell securities at a discount to
prevailing market prices.
Our certificate of incorporation allows for our Board of Directors to create new series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the holders of our common stock. Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock and to issue up to 500,000 shares of our preferred stock (of which 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) without further stockholder approval.
As a result, our Board of Directors could authorize the issuance of additional series of preferred stock that would grant to holders the preferred right to our
assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the
redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our Board of Directors could authorize the
issuance of additional series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which
could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. Although we have no present intention to
issue any additional shares of preferred stock or to create any additional series of preferred stock, we may decide to issue such shares in the future.
Item 1B. Unresolved Staff Comments
None
17
Item 2. Properties
Our principal executive office is located in Boca Raton, Florida, where we currently lease 21,622 square feet of office space to accommodate our
business and employees. The monthly rent for this space is approximately $31,500 with annual 3% increases throughout the lease term on the anniversary of
the commencement date throughout the initial 108-month term. As of December 31, 2019, our lease extends through June 30, 2028.
In August 2017, we entered into a 12-month lease with options for two additional three-year terms for storefront space in West Palm Beach, Florida to
accommodate our repossession retail sales operation. The monthly base rent including operating expenses is approximately $2,000 with annual 4% increases
throughout the lease term. In April 2018, we exercised our option to extend the term of the lease to September 30, 2021.
Item 3. Legal Proceedings
There are no material pending legal proceedings against our company. We may, however, be subject to various claims and legal actions arising in the
ordinary course of business from time to time.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on The Nasdaq Capital Market under the symbol “FPAY.”
On February 4, 2020, we completed an exchange offer relating to our outstanding public warrants, in which the holders of the public warrants were
offered 0.62 shares of common stock for each outstanding warrant tendered (the “Warrant Exchange Offer”). On February 19, 2020, “FPAYW” was removed
from listing on Nasdaq and deregistered under the Securities Exchange Act pending automatic conversion into shares of our common stock.
18
Holders of Record
As of February 28, 2020, there were 131 holders of record of shares of our common stock.
Dividend Policy
We have not paid or declared any cash dividends on our common stock. We currently intend to retain any earnings for future growth and, therefore, do
not expect to pay cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our
Board of Directors and will depend upon various factors, including our results of operations, financial condition, capital requirements, investment
opportunities and other factors that our Board of Directors deems relevant.
Our Series 2 Convertible Preferred Stock accrues dividends on its $1,000 stated value at an annual rate of 10% compounded annually. Cumulative
accrued dividends on our Series 2 Convertible Preferred Stock, as of December 31, 2019, totaled approximately $8,393,084 (see Note 7).
Item 6. Selected Financial Data
The information required by Item 6 is not required to be provided by issuers that satisfy the definition of “smaller reporting company” under SEC
rules.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this
Form 10-K.
Overview
FlexShopper, Inc. (“we,” “us,” “our,” “FlexShopper” or the “Company”) is a corporation organized under the laws of the State of Delaware in 2006 with its
common stock trading on The Nasdaq Capital Market under the symbol “FPAY”. All references to our business operations refer to FlexShopper, LLC and its
wholly-owned subsidiaries, unless the context indicates otherwise.
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,
including through an extensive online experience. Our customers can acquire well-known brands such as Samsung, Frigidaire, Hewlett-Packard, LG,
Whirlpool, Simmons, Philips, Ashley, Apple and more. 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 our “LTO Engine,” FlexShopper’s proprietary technology that automates the process of consumers receiving spending limits and entering into leases for
durable goods to within seconds. The LTO Engine is the basis for FlexShopper’s primary sales channels, which include business to consumer (“B2C”) and
business to business (“B2B”) channels, as described in further detail below. Concurrently, e-tailers and retailers that work with FlexShopper may increase
their sales by utilizing FlexShopper’s online channels to connect with consumers that want to acquire products on an LTO basis. FlexShopper’s sales channels
include (1) selling directly to consumers via the online FlexShopper.com LTO Marketplace featuring thousands of durable goods, (2) utilizing FlexShopper’s
patented LTO payment method at check out on e-commerce sites and through in-store terminals and (3) facilitating LTO transactions with retailers that have
not yet become part of the FlexShopper.com LTO marketplace.
19
Summary of Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, management
evaluates its estimates and judgments, including those related to credit provisions, intangible assets, contingencies, litigation and income taxes. Management
bases its estimates and judgments on historical experience as well as various other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among
others, reflect the more significant judgments and estimates used in the preparation of our financial statements.
Accounts Receivable and Allowance for Doubtful Accounts - FlexShopper seeks to collect amounts owed under its leases from each customer on a weekly
basis by charging their bank accounts or credit cards. Accounts receivable are principally comprised of lease payments currently owed to FlexShopper which
are past due as FlexShopper has been unable to successfully collect in the aforementioned manner. The accounts receivable balances consisted of the
following as of December 31, 2019 and December 31, 2018:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
December 31,
2019
December 31,
2018
$
$
18,249,273 $
(9,976,941)
8,272,332 $
10,130,269
(3,754,306)
6,375,963
The allowance for doubtful accounts is a significant percentage of the balance because FlexShopper does not charge off any customer account until it has
exhausted all collection efforts with respect to each account, including attempts to repossess items. In addition, while collections are pursued, the same
delinquent customers will continue to accrue weekly charges until all collection efforts are exhausted. During the years ended December 31, 2019 and 2018,
$28,615,411 and $21,624,648 of accounts receivable balances, respectively, were charged off against the allowance.
Beginning balance
Provision for write-offs
Accounts written off
Ending balance
December 31,
2019
3,754,306 $
34,838,046
(28,615,411)
9,976,941 $
December 31,
2018
2,139,765
23,239,189
(21,624,648)
3,754,306
$
$
Lease Merchandise - Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease
merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is
recorded at cost net of accumulated depreciation. The Company depreciates leased merchandise using the straight-line method over the applicable agreement
period for a consumer to acquire ownership, generally twelve months with no salvage value. Upon transfer of ownership of merchandise to customers
resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For lease
merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company provides an impairment reserve for the
undepreciated balance of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated
depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable.
The net leased merchandise balances consisted of the following as of December 31, 2019 and December 31, 2018:
Lease merchandise at cost
Accumulated depreciation
Impairment reserve
Lease merchandise, net
Lease merchandise at cost represents the undepreciated cost of rental merchandise at the time of purchase.
20
December 31,
2019
December 31,
2018
$
$
46,807,570 $
(13,518,181)
(2,226,285)
31,063,104 $
48,893,012
(14,338,295)
(2,190,020)
32,364,697
Stock Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based
payment transactions) is recognized as an expense in the financial statements as services are performed. Compensation expense is determined by reference to
the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black Scholes
pricing model (BSM) to determine the fair value of all stock option awards.
Key Performance Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting
our business, formulate financial projections and make strategic decisions. Key performance metrics for the years ended December 31, 2019 and 2018 are as
follows:
Gross Profit
2019
2018
$ Change
% Change
Lease revenues and fees
Lease merchandise sold
Cost of merchandise sold
Provision for doubtful accounts
Net revenues
Cost of lease revenues, consisting of depreciation and impairment of lease
merchandise
Gross profit
Gross profit margin
Adjusted EBITDA
Net income/(loss)
Provision for income taxes
Amortization of debt costs
Other amortization and depreciation
Interest expense, excluding amortization of debt costs
Loss on debt extinguishment
Stock compensation
Non-recurring product/infrastructure expense
Adjusted EBITDA
* Represents loss
$
$ 120,169,406
3,458,529
(2,282,036)
(34,838,046)
86,507,853
$
82,458,661
2,269,708
(1,423,526)
(23,239,189)
60,065,654
37,710,745
1,188,821
(858,510)
(11,598,857)
26,442,199
$
(57,939,899)
$
28,567,954
33%
(40,639,232)
$
19,426,422
32%
(17,300,667)
9,141,532
45.7
52.4
60.3
49.9
44.0
42.6
47.1
2019
2018
$ Change
% Change
$
$
577,415 $
216,400
324,686
2,199,737
3,985,736
-
595,833
401,896
8,301,703 $
(9,461,262) $
-
511,085
1,914,084
3,645,339
126,622
133,428
-
(3,130,704)* $
10,038,677
216,400
(186,399)
285,653
340,397
(126,622)
462,405
401,896
11,432,407
-
-
(36.5)
14.9
9.3
-
346.6
-
-
We refer to Gross Profit and Adjusted EBITDA in the above tables as we use these measures to evaluate our operating performance and make strategic
decisions about the Company. Management believes that Gross Profit and Adjusted EBITDA provide relevant and useful information which is widely used by
analysts, investors and competitors in our industry in assessing performance.
21
Gross Profit represents GAAP revenue less the provision for doubtful accounts and cost of leased inventory and inventory sold as a percentage of cost of
these revenues. Gross Profit provides us with an understanding of the results from the primary operations of our business. We use Gross Profit to evaluate our
period-over-period operating performance. This measure may be useful to an investor in evaluating the underlying operating performance of our business.
Adjusted EBITDA represents net income before interest, stock-based compensation, taxes, depreciation (other than depreciation of leased inventory) and
amortization. We believe that Adjusted EBITDA provides us with an understanding of one aspect of earnings before the impact of investing and financing
charges and income taxes. Adjusted EBITDA may be useful to an investor in evaluating our operating performance and liquidity because this measure:
● is widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such
measure, which can vary substantially from company to company.
● is a financial measurement that is used by rating agencies, lenders and other parties to evaluate our credit worthiness; and
● is used by our management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting.
Gross Profit and Adjusted EBITDA are supplemental measures of FlexShopper’s performance that are neither required by, nor presented in accordance with,
GAAP. Gross Profit and Adjusted EBITDA should not be considered as substitutes for GAAP metrics such as operating loss, net income or any other
performance measures derived in accordance with GAAP.
Results of Operations
The following table details the operating results from operations for the years ended December 31, 2019 and 2018.
Gross lease revenues and fees
Provision for doubtful accounts
Lease revenues and fees, net of bad debt expense
Lease merchandise sold
Total revenues
Cost of lease revenue and merchandise sold
Marketing
Salaries and benefits
Other operating expenses
Operating income/(loss)
Loss on extinguishment of debt
Interest expense
Provision for income taxes
Net income/(loss)
2019
2018
$ Change
% Change
$ 120,169,406 $
(34,838,046)
85,331,360
3,458,529
88,789,889
60,221,935
3,649,292
8,469,334
11,345,091
5,104,237
-
4,310,422
216,400
577,415 $
$
82,458,661 $
(23,239,189)
59,219,472
2,269,708
61,489,180
42,062,758
7,046,812
8,796,011
8,761,815
(5,178,216)
126,622
4,156,424
-
(9,461,262) $
37,710,745
(11,598,857)
26,111,888
1,188,821
27,300,709
18,159,177
(3,397,520)
(326,677)
2,583,276
10,282,453
(126,622)
153,998
216,400
10,038,677
45.7
49.9
44.1
52.4
44.4
43.2
(48.2)
(3.7)
29.5
-
-
3.7
-
-
22
Total lease revenues for the twelve months ended December 31, 2019 were $85,331,360 compared to $59,219,472 for the twelve months ended December 31,
2018, representing an increase of $26,111,888, or 44.1%. Continued growth in repeat customers coupled with acquiring new customers and more efficient
marketing spend is primarily responsible for the increase in leases and related revenue.
Cost of lease revenue and merchandise sold for the twelve months ended December 31, 2019 was $60,221,935 compared to $42,062,758 for the twelve
months ended December 31, 2018, representing an increase of $18,159,177, or 43.2%. Cost of lease revenue and merchandise sold for the twelve months
ended December 31, 2019 is comprised of depreciation expense and impairment of lease merchandise of $58,253,095, the net book value of merchandise sold
of $2,282,036 partially offset by merchant rebates of $313,196. Cost of lease revenue and merchandise sold for the twelve months ended December 31, 2018
is comprised of depreciation expense on lease merchandise of $40,639,232 and the net book value of merchandise sold of $1,423,526. As the Company’s
lease revenues increase, the direct costs associated with them also increase.
Marketing expenses in the twelve months ended December 31, 2019 was $3,649,292 compared to $7,046,812 in the twelve months ended December 31,
2018, a decrease of $3,397,520, or 48.2%. The Company strategically curtailed marketing expenditures in its digital and TV channels in an effort to reduce
customer acquisition cost.
Salaries and benefits in the twelve months ended December 31, 2019 was $8,469,334 compared to $8,796,011 in the twelve months ended December 31,
2018, a decrease of $326,677, or 3.7%. Corporate head count reduction that took place in the fourth quarter of 2018 and further development of internally
developed software are the drivers for the decrease in salaries and benefits expenses.
Other operating expenses for the years ended December 31, 2019 and 2018 were $11,345,091 and $8,761,815 respectively.
Key operating expenses for the years ended December 31, 2019 and 2018 included the following:
Amortization and depreciation
Computer and internet expenses
Legal and professional fees
Merchant bank fees
Stock compensation expense
Customer verification expense
Other
Total
2019
2,199,737 $
1,658,251
1,249,284
1,834,897
595,833
1,791,557
2,015,532
11,345,091 $
$
$
2018
1,914,084
1,350,858
859,533
1,316,978
133,428
1,411,657
1,775,277
8,761,815
Legal and professional fees in the twelve months ended December 31, 2019 were $1,249,284 compared to $859,533 in the twelve months ended December
31, 2018, an increase of $389,751, or 31.2%. The increase was primarily due to legal fees associated with new product development and the Consulting
Agreement with XLR8 Capital Partners that was entered into in February 2019.
Merchant bank fees in the twelve months ended December 31, 2019 were $1,834,897 compared to $1,316,978 in the twelve months ended December 31,
2018, an increase of $517,919, or 39.3%. As the Company’s lease revenues increase, the merchant processing fees increase at a similar rate.
Stock compensation expense in the twelve months ended December 31, 2019 was $595,833 compared to $133,428 in the twelve months ended December 31,
2018, an increase of $462,405, or 346.6%. The Company’s directors who act as chairman for at least one of the committees elected to receive their quarterly
fees in stock options instead of cash. The Company’s executive officers elected to receive their 2019 and 2020 bonuses in stock options instead of cash.
23
The increased revenues were offset by the increase in expenses to enhance and scale the Company’s LTO channels and support its growth resulting in net
income of $577,415 for the year ended December 31, 2019 and a net loss of $9,461,262 for the year ended December 31, 2018.
Operational Strategy
We promote our FlexShopper products and services across all sales channels through strategic partnerships, direct response marketing, and affiliate and
internet marketing, all of which are designed to increase our lease transactions and name recognition. Our advertisements emphasize such features as instant
spending limits, and affordable weekly payments. We believe that as the FlexShopper name gains familiarity and national recognition through our advertising
efforts, we will continue to educate our customers and potential customers about the LTO payment alternative as well as solidify our reputation as a leading
provider of high-quality branded merchandise and services.
For each of our sales channels, FlexShopper has a multichannel, analytics-powered marketing strategy that includes the following:
Online LTO Marketplace
Search engine optimization; pay-per click
Online affiliate networks
Direct response television campaigns
Direct mail
Patented LTO Payment Method
Direct to retailers/e-tailers
Partnerships with payment aggregators
Consultants & strategic relationships
In-store LTO technology platform
Direct to retailers/e-tailers
Consultants & strategic relationships
The Company believes it has a competitive advantage over competitors in the LTO industry by providing all three channels as a bundled package to retailers
and e-tailers. Management is anticipating a rapid development of the FlexShopper business as we are able to penetrate each of our sales channels. To support
our anticipated growth, FlexShopper will need the availability of substantial capital resources. See the section captioned “Liquidity and Capital Resources”
below.
Liquidity and Capital Resources
As of December 31, 2019, the Company had cash of $6,868,472 compared to $6,141,210 as of December 31, 2018.
As of December 31, 2019, the Company had accounts receivables of $18,249,273 net of an allowance for doubtful accounts of $9,976,941 totaling
$8,272,332. Accounts receivable are principally comprised of lease payments owed to the Company. An allowance for doubtful accounts is estimated based
upon historical collection and delinquency percentages.
Credit Agreement
On March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as amended from time-to-time and
including the Fee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo Bank, National Association as paying agent, various lenders from
time to time party thereto and WE 2014-1, LLC, an affiliate of Waterfall Asset Management, LLC, as administrative agent and lender (the “Lender”). The
Borrower is permitted to borrow funds under the Credit Agreement based on FlexShopper’s cash on hand and the Amortized Order Value of its Eligible
Leases (as such terms are defined in the Credit Agreement) less certain deductions described in the Credit Agreement. Under the terms of the Credit
Agreement, subject to the satisfaction of certain conditions, the Borrower may borrow up to $32,500,000 from the Lender until the Commitment Termination
Date and must repay all borrowed amounts one year thereafter, on the date that is 12 months following the Commitment Termination Date (unless such
amounts become due or payable on an earlier date pursuant to the terms of the Credit Agreement). On April 1, 2019, the Commitment Termination Date was
extended to February 28, 2021. The Lender was granted a security interest in certain leases as collateral under the Credit Agreement. The interest rate charged
on amounts borrowed is LIBOR plus 11% per annum.
The Credit Agreement provides that FlexShopper may not incur additional indebtedness (other than expressly permitted indebtedness) without the permission
of the Lender and also prohibits dividends on common stock. Additionally, the Credit Agreement includes covenants requiring FlexShopper to maintain a
minimum amount of Equity Book Value, maintain a minimum amount of Unrestricted Cash (including a reserve upon which the Lender may draw to satisfy
unpaid amounts under the Credit Agreement) and maintain a certain ratio of Consolidated Total Debt to Equity Book Value (each capitalized term, as defined
in the Credit Agreement). Upon a Permitted Change of Control (as defined in the Credit Agreement), FlexShopper must refinance the debt under the Credit
Agreement, subject to the payment of an early termination fee.
24
Pursuant to the Credit Agreement, the Borrower must maintain a reserve amount of $1,000,000, which amount may be withdrawn by the Administrative
Agent to pay any amounts not paid by the Borrower when due under the Credit Agreement or, in the discretion of the Administrative Agent, to pay any other
commercially reasonable costs or expenses of the Borrower. If any portion of the reserve amount is used in such manner, such reserve will be replenished up
to $1,000,000 in connection with the monthly applications of proceeds under the Credit Agreement. The Lender holds security interests in certain leases as
collateral under the Credit Agreement. For the term of the Credit Agreement, FlexShopper and its subsidiaries may not incur additional indebtedness (subject
to certain exceptions) without the permission of the Lender. In addition, the Lender and its affiliates have a right of first refusal on certain FlexShopper
transactions involving leases or other financial products. 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 the Borrower in the Credit Agreement and related documents (including
certain financial and expense covenants), deficiencies in the borrowing base, certain judgments against the Borrower and bankruptcy events.
Recent Financings
On September 28, 2018, the Company completed an offering of 10,000,000 units (the “Offering”) issued at a price of $1.00 per unit, each unit consisting of
one share of the Company’s common stock and one-half (1/2) of one warrant, each whole warrant exercisable for one share of common stock at an exercise
price of $1.25 per warrant. In addition, in connection with the closing of the Offering, the underwriter in the Offering partially exercised its over-allotment
option under the underwriting agreement relating to the Offering by electing to purchase warrants exercisable for 750,000 shares of common stock having the
same terms as the warrants sold in the Offering. The common stock and warrants included in the units sold in the Offering were immediately separable and
issued separately. Net proceeds for the Offering were approximately $9.2 million, after deducting underwriting discounts and commissions and other offering
expenses, of which amount the Company used approximately $2.7 million to repay indebtedness owing under the Credit Agreement.
Pursuant to amendments to the Credit Agreement entered into prior to the Offering, upon consummation of the Offering, the Commitment Termination Date
(as defined in the Credit Agreement) was extended to June 30, 2019, which date was subsequently extended to February 28, 2021.
On January 25, 2019, FlexShopper, LLC entered into a letter agreement with 122 Partners, LLC (the lender), pursuant to which FlexShopper, LLC issued a
subordinated promissory note to 122 Partners, LLC (the “January Note”) in the principal amount of $1,000,000. H. Russell Heiser, Jr., FlexShopper’s Chief
Financial Officer, is a member of 122 Partners, LLC. Payment of principal and accrued interest under the January Note is due and payable by FlexShopper,
LLC on April 30, 2020 and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding under the January Note
bear interest at a rate equal to five percent (5.00%) per annum in excess of the non-default rate of interest from time to time in effect under the Credit
Agreement. Obligations under the January Note are subordinated to obligations under the Credit Agreement. The January Note is subject to customary
representations and warranties and events of default. If an event of default occurs and is continuing, the Borrower may be required to repay all amounts
outstanding under the January Note. Obligations under the January Note are secured by essentially all of FlexShopper, LLC’s assets, subject to rights of the
lenders under the Credit Agreement.
On February 19, 2019, FlexShopper, LLC entered into a letter agreement with NRNS Capital Holdings LLC (“NRNS”), the manager of which is the
Chairman of the Company’s Board of Directors, pursuant to which FlexShopper, LLC issued a subordinated promissory note to NRNS (the “February Note”)
in the principal amount of $2,000,000. Payment of principal and accrued interest under the February Note is due and payable by FlexShopper, LLC on June
30, 2021 and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding under the February Note bear interest at a
rate equal to five percent (5.00%) per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement. Obligations
under the February Note are subordinated to obligations under the Credit Agreement. The February Note is subject to customary representations and
warranties and events of default. If an event of default occurs and is continuing, FlexShopper, LLC may be required to repay all amounts outstanding under
the February Note. Obligations under the February Note are secured by essentially all of FlexShopper, LLC’s assets, subject to rights of the lenders under the
Credit Agreement.
25
Cash Flow Summary
Cash Flows from Operating Activities
Net cash used by operating activities was $469,461 for the year ended December 31, 2019 and was primarily due to the purchases of leased merchandise and
the change in accounts receivable partially offset by net income and the add back of depreciation and impairment on leased merchandise and provision for
doubtful accounts.
Net cash used by operating activities was $18,160,258 for the year ended December 31, 2018 and was primarily due to the net loss for the period combined
with cash used for the purchases of leased merchandise.
Cash Flows from Investing Activities
For the year ended December 31, 2019, net cash used in investing activities was $2,241,172 comprised of $110,249 for the purchase of property and
equipment and $2,130,923 for capitalized software costs.
For the year ended December 31, 2018, net cash used in investing activities was $2,284,876 comprised of $14,164 for the purchase of property and equipment
and $2,270,712 for capitalized software costs.
Cash Flows from Financing Activities
Net cash provided by financing activities was $3,437,895 for the year ended December 31, 2019 primarily due to the funds drawn on the Credit Agreement of
$12,396,078 and $2,940,000 of net funds drawn on promissory notes, offset by repayments of amounts borrowed under the Credit Agreement of $11,815,488.
Net cash provided by financing activities was $21,617,429 for the year ended December 31, 2018 primarily due to the funds drawn on the Credit Agreement
of $19,366,359, $3,465,000 of funds drawn on promissory notes and $8,884,081 of net proceeds from the public offering of units, offset by repayments of
amounts borrowed under the Credit Agreement of $9,959,607.
Capital Resources and Financial Condition
To date, funds derived from the sale of FlexShopper’s common stock, warrants and Series 2 Convertible Preferred Stock and the Company’s ability to borrow
funds against the lease portfolio have provided the liquidity and capital resources necessary to fund its operations.
The Company must maintain $1.5 million in Unrestricted Cash at all times under the Credit Agreement covenants (see Note 5).
Impact of Inflation and Changing Prices
During the two most recent fiscal years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or
changing prices will materially affect our business in the foreseeable future.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information required by Item 7A is not required to be provided by issuers that satisfy the definition of “smaller reporting company” under SEC rules.
Item 8. Financial Statements and Supplementary Data.
Consolidated Financial Statements
The reports of the Independent Registered Public Accounting Firm, Consolidated Financial Statements and Schedules are set forth beginning on the following
page.
26
YEARS ENDED DECEMBER 31, 2019 AND 2018
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
FLEXSHOPPER, INC.
CONTENTS
F-1
PAGE
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
FlexShopper, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FlexShopper, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018,
the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EisnerAmper LLP
We have served as the Company’s auditor since 2014.
EISNERAMPER LLP
New York, New York
March 2, 2020
F-2
FLEXSHOPPER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS:
Cash
Accounts receivable, net
Prepaid expenses
Lease merchandise, net
Total current assets
PROPERTY AND EQUIPMENT, net
OTHER ASSETS, net
CURRENT LIABILITIES:
Current portion of loan payable under credit agreement to beneficial shareholder, net of $0 at 2019 and $167,483 at
LIABILITIES AND STOCKHOLDERS’ EQUITY
2018 of unamortized issuance costs
Accounts payable
Accrued payroll and related taxes
Promissory notes to related parties, net of $5,333 at 2019 and $0 at 2018 of unamortized issuance costs, including
accrued interest
Accrued expenses
Lease liability - current portion
Total current liabilities
Loan payable under credit agreement to beneficial shareholder, net of $281,138 at 2019 and $164,752 at 2018 of
unamortized issuance costs and current portion
Promissory notes to related parties, net of $24,828 at 2019 and $0 at 2018 of unamortized issuance costs and current
portion
Lease liabilities less current portion
Total liabilities
STOCKHOLDERS’ EQUITY
Preferred Stock authorized 500,000 shares, $0.001 par value
Series 1 Convertible Preferred Stock, $0.001 par value - designated 250,000 shares, issued and outstanding 171,191
shares at 2019 and 239,405 shares at 2018 at $5.00 stated value
Series 2 Convertible Preferred Stock, $0.001 par value - designated 25,000 shares, issued and outstanding 21,952 shares
at $1,000 stated value
Common stock, $0.0001 par value- authorized 40,000,000 shares, issued and outstanding 17,783,960 shares at 2019 and
17,579,870 shares at 2018
Additional paid in capital
Accumulated deficit
Total stockholders’ equity
December 31, December 31,
2019
2018
$
6,868,472 $
8,272,332
672,242
31,063,104
46,876,150
6,141,210
6,375,963
317,160
32,364,697
45,199,030
5,260,407
3,336,664
78,335
52,214,892 $
90,621
48,626,315
$
$
- $
4,567,889
513,267
14,252,717
8,317,216
393,095
1,067,740
1,372,901
27,726
7,549,523
1,814,771
1,335,505
-
26,113,304
28,904,738
14,020,335
3,725,172
2,067,184
42,246,617
-
-
40,133,639
855,955
1,197,025
21,952,000
21,952,000
1,779
35,313,721
(48,155,180)
9,968,275
52,214,892 $
1,758
34,074,488
(48,732,595)
8,492,676
48,626,315
$
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-3
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Lease revenues and fees, net
Lease merchandise sold
Total revenues
Costs and expenses:
Cost of lease revenues, consisting of depreciation and impairment of lease merchandise
Cost of lease merchandise sold
Marketing
Salaries and benefits
Operating expenses
Total costs and expenses
Operating income/(loss)
Loss on extinguishment of debt
Interest expense including amortization of debt issuance costs
Income/(loss) before income taxes
Provision for income taxes
Net income/(loss)
Dividends on Series 2 Convertible Preferred Shares
Net loss attributable to common shareholders
Basic and diluted (loss) per common share:
Basic and diluted
WEIGHTED AVERAGE COMMON SHARES:
Basic and diluted
For the years ended
December 31,
2019
2018
$
85,331,360 $
3,458,529
88,789,889
59,219,472
2,269,708
61,489,180
57,939,899
2,282,036
3,649,292
8,469,334
11,345,091
83,685,652
40,639,232
1,423,526
7,046,812
8,796,011
8,761,815
66,667,396
5,104,237
(5,178,216)
-
4,310,422
793,815
216,400
577,415
126,622
4,156,424
(9,461,262)
-
(9,461,262)
2,437,884
(1,860,469) $
2,426,840
(11,888,102)
(0.11) $
(1.39)
17,672,156
8,574,569
$
$
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2019 and 2018
Series 1
Convertible Preferred
Stock
Series 2
Convertible Preferred
Stock
Common Stock
Additional
Paid in
Shares Amount
Shares Amount
Shares
Amount
Capital
Accumulated
Deficit
Total
Balance, January 1, 2018 239,405 $ 1,197,025
Provision for
21,952 $ 21,952,000 5,294,501 $
529 $ 22,445,691 $ (39,271,333) $ 6,323,912
compensation expense
related to stock options
Warrants issued in
connection with
amended credit
agreement and
subsequent issuance of
common stock upon
exercise of the warrants
-
-
-
-
-
-
133,428
-
133,428
-
-
-
-
175,000
18
523,233
-
523,251
Issuance of shares and
warrants in connection
with equity raise
Offering costs related to
equity raise
Conversion of debt and
accrued interest to
common shares and
warrants
Net loss
Balance, December 31,
2018
Provision for
-
-
-
-
-
-
-
-
-
-
-
-
- 10,000,000
1,000 10,006,500
- 10,007,500
-
-
- (1,123,419)
- (1,123,419)
- 2,110,369
-
-
211 2,089,055
-
-
- 2,089,266
(9,461,262) (9,461,262)
239,405 1,197,025
21,952 21,952,000 17,579,870
1,758 34,074,488 (48,732,595) 8,492,676
compensation expense
related to stock options
Refund of costs related to
equity raise
Conversion of preferred
-
-
-
-
stock to common stock
(68,214)
(341,070)
Issuance of warrants in
connection with
consulting agreement
Exercise of stock options
into common stock
Exercise of warrants into
common stock
Net income
Balance, December 31,
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
595,833
-
595,833
-
61,509
-
61,509
-
86,323
9
341,061
-
-
-
-
-
127,561
-
127,561
-
82,667
8
69,398
-
69,406
-
-
35,100
-
4
-
43,871
-
-
577,415
43,875
577,415
2019
171,191 $ 855,955
21,952 $ 21,952,000 17,783,960 $
1,779 $ 35,313,721 $ (48,155,180) $ 9,968,275
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2019 and 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
Depreciation and impairment of lease merchandise
Other depreciation and amortization
Compensation expense related to issuance of stock options and warrants
Provision for doubtful accounts
Loss on debt extinguishment
Payment of interest in kind under promissory notes
Payment of interest in kind under credit agreement
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other
Lease merchandise
Security deposits
Accounts payable
Accrued payroll and related taxes
Accrued expenses
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, including capitalized software costs
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payment under finance lease obligation
Refund of equity issuance related costs
Proceeds from exercise of warrants
Proceeds from exercise of stock options
Proceeds from public offering
Equity issuance related costs
Proceeds from promissory notes, net of fees
Repayment of promissory note
Proceeds from loan payable under credit agreement
Repayment of loan payable under credit agreement
Repayment of installment loan
Debt issuance related costs
Net cash provided by financing activities
INCREASE IN CASH
CASH, beginning of period
CASH, end of period
Supplemental cash flow information:
Interest paid
Non-cash financing activities:
Issuance of common stock and warrants to extinguishment debt and accrued interest
Warrants issued for debt issuance costs
Conversion of preferred stock to common stock
2019
2018
$
577,415 $
(9,461,262)
58,253,095
2,524,422
723,394
34,838,046
-
73,073
170,550
(36,734,415)
(352,710)
(56,951,502)
9,210
(3,814,098)
120,172
93,887
(469,461)
40,639,232
2,410,537
133,428
23,239,189
126,622
64,771
248,535
(25,355,684)
6,844
(51,588,607)
2,025
827,715
(11,251)
557,648
(18,160,258)
(2,241,172)
(2,241,172)
(2,284,876)
(2,284,876)
(2,527)
61,509
43,875
69,406
-
-
3,440,000
(500,000)
12,396,078
(11,815,488)
(11,208)
(243,750)
3,437,895
-
-
1,750
-
10,007,500
(1,123,419)
3,465,000
-
19,366,359
(9,959,607)
(11,208)
(128,946)
21,617,429
727,262
1,172,295
6,141,210
4,968,915
$
6,868,472 $
6,141,210
$
3,606,328 $
2,806,285
- $
- $
341,070
2,089,266
523,251
-
$
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
FlexShopper Inc.
Notes To Consolidated Financial Statements
December 31, 2019 and 2018
1. BUSINESS:
FlexShopper, Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware on August 16, 2006. The Company owns 100% of
FlexShopper, LLC, a limited liability company incorporated under the laws of North Carolina on June 24, 2013. The Company is a holding corporation with
no operations except for those conducted by FlexShopper LLC. FlexShopper LLC provides through e-commerce sites, certain types of durable goods to
consumers on a lease-to-own basis (“LTO”) including consumers of third-party retailers and e-tailers.
In January 2015, in connection with the credit agreement entered into in March 2015 (see Note 5), FlexShopper 1 LLC and FlexShopper 2 LLC were
organized as wholly owned Delaware subsidiaries of FlexShopper LLC to conduct operations. FlexShopper LLC, together with its subsidiaries, are hereafter
referred to as “FlexShopper.”
FlexShopper, through FlexShopper 2, LLC (the “Borrower”), is party to a credit agreement (as amended, the “Credit Agreement”) with WE2014-1, LLC (the
“Lender”) (see Note 5). Upon the Commitment Termination Date, as determined by the lender to be February 28, 2021, the Lender will no longer be obligated
to lend money to the Borrower for new leases and all amounts outstanding under the Credit Agreement will be due by the twelve-month anniversary thereof.
FlexShopper will have, in the earliest Commitment Termination Date scenario, at least 90 days from the date of notice to the Commitment Termination Date
to arrange for a new senior lending facility if an extension to this agreement is not obtained. If necessary, the Company would curtail marketing expenditures
and new lease originations to optimize operating cash flow until a new facility is obtained or the old facility is retired.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries
after elimination of intercompany balances and transactions.
Estimates - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition - Merchandise is leased to customers pursuant to lease purchase agreements which provide for weekly lease terms with non-refundable
lease payments. Generally, the customer has the right to acquire title either through a 90-day same as cash option, an early purchase option, or through
payments of all required lease payments, generally 52 weeks, for ownership. On any current lease, customers have the option to cancel the agreement in
accordance with lease terms and return the merchandise. Accordingly, customer agreements are accounted for as operating leases with lease revenues
recognized in the month they are due on the accrual basis of accounting. Merchandise sales revenue is recognized when the customer exercises the purchase
option and pays the purchase price. Revenue for lease payments received prior to their due date is deferred and recognized as revenue in the period to which
the payments relate. Revenues from leases and sales are reported net of sales taxes.
Accounts Receivable and Allowance for Doubtful Accounts - FlexShopper seeks to collect amounts owed under its leases from each customer on a weekly
or monthly basis by charging their bank accounts or credit cards. Accounts receivable are principally comprised of lease payments currently owed to
FlexShopper which are past due, as FlexShopper has been unable to successfully collect in the manner described above. The allowance for doubtful accounts
is based upon revenues and historical experience of balances charged off as a percentage of revenues. The accounts receivable balances consisted of the
following as of December 31, 2019 and 2018:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
F-7
December 31,
2019
December 31,
2018
$
$
18,249,273 $
(9,976,941)
8,272,332 $
10,130,269
(3,754,306)
6,375,963
The allowance is a significant percentage of the balance because FlexShopper does not charge off any customer account until it has exhausted all collection
efforts with respect to each account including attempts to repossess items. In addition, while collections are pursued, the same delinquent customers will
continue to accrue weekly charges until they are charged off. During the years ended December 31, 2019 and 2018, $28,615,411 and $21,624,648 of accounts
receivable balances, respectively, were charged off against the allowance. During the years ended December 31, 2019 and 2018, the provision for bad debts
was $34,838,046 and $23,239,189, respectively. The following table shows the activity in the allowance for doubtful accounts:
Beginning balance
Provision
Accounts written off
Ending balance
December 31,
2019
December 31,
2018
$
$
3,754,306 $
34,838,046
(28,615,411)
9,976,941 $
2,139,765
23,239,189
(21,624,648)
3,754,306
Lease Merchandise - Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease
merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is
recorded at cost net of accumulated depreciation. The Company depreciates leased merchandise using the straight-line method over the applicable agreement
period for a consumer to acquire ownership, generally twelve months with no salvage value. Upon transfer of ownership of merchandise to customers
resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For lease
merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company provides an impairment reserve for the
undepreciated balance of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated
depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable.
The net leased merchandise balances consisted of the following as of December 31, 2019 and December 31, 2018:
Lease merchandise at cost
Accumulated depreciation
Impairment reserve
Lease merchandise, net
December 31,
2019
December 31,
2018
$
$
46,807,570 $
(13,518,181)
(2,226,285)
31,063,104 $
48,893,012
(14,338,295)
(2,190,020)
32,364,697
Cost of lease merchandise sold represents the undepreciated cost of rental merchandise at the time of sale.
Deferred Debt Issuance Costs - Debt issuance costs incurred in conjunction with the Credit Agreement entered into on March 6, 2015 (see Note 5) are offset
against the outstanding balance of the loan payable and are amortized using the straight-line method over the remaining term of the related debt, which
approximates the effective interest method. Amortization which is included in interest expense was $294,847 and $476,085 for the years ended December 31,
2019 and 2018, respectively.
Debt issuance costs of $35,000 incurred in conjunction with the subordinated Promissory Notes entered into on January 29, 2018 and January 30, 2018 (see
Note 4) are offset against the outstanding balance of the loan payable and are amortized using the straight-line method over the remaining term of the related
debt, which approximates the effective interest method. Amortization, which is included in interest expense, was $35,000 for the year ended December 31,
2018.
Debt issuance costs of $60,000 incurred in conjunction with the subordinated Promissory Notes entered into on January 25, 2019 and February 19, 2019 (see
Note 4) are offset against the outstanding balance of the loan payable and are amortized using the straight-line method over the remaining term of the related
debt, which approximates the effective interest method. Amortization, which is included in interest expense, was $29,839 for the year ended December 31,
2019.
Software Costs - Costs related to developing or obtaining internal-use software incurred during the preliminary project and post-implementation stages of an
internal use software project are expensed as incurred and certain costs incurred in the project’s application development stage are capitalized as property and
equipment. The Company expenses costs related to the planning and operating stages of a website. Costs associated with minor enhancements and
maintenance for the website are included in expenses as incurred. Direct costs incurred in the website’s development stage are capitalized as property and
equipment. Capitalized software costs amounted to $2,130,922 and $2,270,712 for the years ended December 31, 2019 and 2018, respectively. The Company
wrote off $105,575 of capitalized development costs in 2019.
Operating Expenses - Operating expenses include corporate overhead expenses such as, stock-based compensation, insurance, occupancy, and other
administrative expenses.
F-8
Marketing - Marketing costs, primarily consisting of advertising, are charged to expense as incurred. Direct acquisition costs, primarily consisting of
commissions earned based on lease originations, are capitalized and amortized over the life of the lease.
Per Share Data - Per share data is computed by use of the two-class method as a result of outstanding Series 1 Convertible Preferred Stock, which
participates in dividends with the common stock and accordingly has participation rights in undistributed earnings as if all such earnings had been distributed
during the period (see Note 8). Under such method income available to common shareholders is computed by deducting both dividends declared or, if not
declared, accumulated on Series 2 Convertible Preferred Stock from income from continuing operations and from net income. Loss attributable to common
shareholders is computed by increasing loss from continuing operations and net loss by such dividends. Where the Company has undistributed net income
available to common shareholders, basic earnings per common share is computed based on the total of any dividends paid or declared per common share plus
undistributed income per common share determined by dividing net income available to common shareholders reduced by any dividends paid or declared on
common and participating Series 1 Convertible Preferred Stock by the total of the weighted average number of common shares outstanding plus the weighted
average number of common shares issuable upon conversion of outstanding participating Series 1 Convertible Preferred Stock during the period. Where the
Company has a net loss, basic per share data (including income from continuing operations) is computed based solely on the weighted average number of
common shares outstanding during the period. As the participating Series 1 Convertible Preferred Stock has no contractual obligation to share in the losses of
the Company, common shares issuable upon conversion of such preferred stock are not included in such computations.
Diluted earnings per share is based on the more dilutive of the if-converted method (which assumes conversion of the participating Series 1 Convertible
Preferred Stock as of the beginning of the period) or the two-class method (which assumes that the participating Series 1 Convertible Preferred Stock is not
converted) plus the potential impact of dilutive non-participating Series 2 Convertible Preferred Stock, options and warrants. The dilutive effect of stock
options and warrants is computed using the treasury stock method, which assumes the repurchase of common shares at the average market price during the
period. Under the treasury stock method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds
the exercise price of options or warrants. When there is a loss from continuing operations, potential common shares are not included in the computation of
diluted loss per share, since they have an anti-dilutive effect.
In computing diluted loss per share, no effect has been given to the issuance of common stock upon conversion or exercise of the following securities as their
effect is anti-dilutive:
Series 1 Convertible Preferred Stock
Series 2 Convertible Preferred Stock
Series 2 Convertible Preferred Stock issuable upon exercise of warrants
Common Stock Options
Common Stock Warrants
F-9
Year ended
December 31,
2019
218,104
5,679,615
113,582
2,004,318
7,347,388
15,363,007
2018
302,960
5,639,745
112,785
620,900
7,182,488
13,858,878
Stock Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee and non-employee
services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.
Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting
period. The Company has elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards (see Note 8).
Fair Value of Financial Instruments - The carrying value of certain financial instruments such as cash, accounts receivable, and accounts payable
approximate their fair value due to their short-term nature. The carrying value of loans payable under the Credit Agreement increased by unamortized
issuance costs (see Note 5) approximates fair value. The carrying value of promissory notes to related parties approximates fair value based upon their
interest rates, which approximate current market interest rates.
Income Taxes - Deferred tax assets and liabilities are determined based on the estimated future tax effects of net operating loss carryforwards and temporary
differences between the tax bases of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The
Company records a valuation allowance for its deferred tax assets when management concludes that it is not more likely than not that such assets will be
recognized.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position
are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of December 31, 2019, and
2018, the Company has not recorded any unrecognized tax benefits.
Interest and penalties related to liabilities for uncertain tax positions will be charged to interest and operating expenses, respectively.
Recent Accounting Pronouncements - In February 2016, the FASB issued ASU No. 2016-02, Leases as amended (“Topic 842”), which is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2018. Under Topic 842, lessees are required to recognize for all leases at the
commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-
to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. The Company has determined
that the new standard will not materially impact the timing of revenue recognition. The new standard resulted in the Company classifying bad debt expense
incurred as a reduction of lease revenue and fees within the consolidated statement of operations including retrospective presentation of prior year financial
information. As a result of the change in presentation, the breakout of lease revenues and fees, net of lessor bad debt expense, that ties the consolidated
statements of operations is shown below:
Lease billings and accruals
Provision for doubtful accounts
Lease revenues and fees
Year ended
December 31,
2019
$ 120,169,406 $
34,838,046
85,331,360 $
$
2018
82,458,661
23,239,189
59,219,472
The new standard also impacted the Company as a lessee by requiring all of its operating leases to be recognized on the balance sheet as a right-to-use asset
and lease liability. The Company has elected a package of optional practical expedients which includes the option to retain the current classification of leases
entered into prior to January 1, 2019. The Company adopted this new guidance on January 1, 2019.
F-10
3. LEASES
Lease Commitments
In August 2017, FlexShopper entered into a 12-month lease with two additional three-year options for retail store space in West Palm Beach, Florida. In April
2018, FlexShopper exercised its option to extend the term of the lease to September 30, 2021.
In January 2019, FlexShopper entered into a 108-month lease with an option for one additional five-year term for 21,622 square feet of office space in Boca
Raton, FL to accommodate FlexShopper’s business and its employees (the “January 2019 Lease”). The monthly rent for this space is approximately $31,500
with annual three percent increases throughout the initial 108-month lease term beginning on the anniversary of the commencement date.
The rental expense for the years ended December 31, 2019 and 2018 was approximately $520,700 and $389,900, respectively. At December 31, 2019, the
future minimum annual lease payments are approximately as follows:
2020
2021
2022
2023
2024
Thereafter
$
$
313,000
427,000
417,000
429,000
437,000
1,616,000
3,639,000
Lessor Information - Refer to Note 2 to these consolidated financial statements for further information about the Company’s revenue generating activities as
a lessor. All of the Company’s customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct
financing leases.
Lessee Information - As a lessee, the Company leases retail, call center and corporate space under operating leases expiring at various times through 2028.
At January 1, 2019, the Company recognized $191,001 of operating lease assets and $191,001 of operating lease liabilities as a result of adopting Topic 842.
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in the Company’s consolidated balance
sheet beginning January 1, 2019. The breakout of operating lease assets, and current and non-current operating lease liabilities at December 31, 2019, is
shown in the table below.
Supplemental balance sheet information related to leases is as follows:
Assets
Operating Lease Asset
Finance Lease Asset
Total Lease Assets
Liabilities
Operating Lease Liability - current portion
Finance Lease Liability - current portion
Operating Lease Liability- net of current portion
Finance Lease Liability - net of current portion
Total Lease Liabilities
Balance Sheet Classification
Property and Equipment, net
Property and Equipment, net
Current Lease Liabilities
Current Lease Liabilities
Long Term Lease Liabilities
Long Term Lease Liabilities
December 31,
2019
$
$
$
$
1,847,932
31,299
1,879,231
22,088
5,638
2,040,576
26,608
2,094,910
Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Company uses its
incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. The incremental borrowing rate is
estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is
located. Operating lease assets also include any prepaid lease payments and lease incentives. The lease terms include periods under options to extend or
terminate the lease when it is reasonably certain that the Company will exercise the option. The Company generally uses the base, non-cancelable, lease term
when determining the lease assets and liabilities. Under the short-term lease exception provided within Topic 842, the Company does not record a lease
liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement.
F-11
Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company’s operating leases:
Operating Leases
Finance Leases
Weighted
Average
Discount
Rate
Weighted
Average
Remaining
Lease Term
(in years)
13.50%
13.40%
8
5
Upon adoption of Topic 842, discount rates for existing operating leases were established as of January 1, 2019. The discount rate for the new operating lease
related to 901 Yamato Road, Boca Raton, FL was established as of June 1, 2019.
Operating lease expense is recognized on a straight-line basis over the lease term within operating expenses in the Company’s consolidated statements of
operations. Finance lease expense is recognized over the lease term within interest expense in the Company’s consolidated statements of operations. The
Company’s total operating and finance lease expense all relate to lease costs and amounted to $395,455 for the period ended December 31, 2019, respectively.
Supplemental cash flow information related to operating leases is as follows:
Cash payments for operating leases
Cash payments for finance leases
New operating lease asset obtained in exchange for lease liabilities
New finance lease asset obtained in exchange for lease liabilities
December 31,
2019
$
164,664
4,782
2,060,288
34,772
The new operating lease asset obtained in exchange for operating lease liabilities, as shown above, does not include the $14,900 of direct costs associated
with the new operating lease capitalized as part of the right-of-use asset.
Below is a summary of undiscounted operating lease liabilities as of December 31, 2019. The table also includes a reconciliation of the future undiscounted
cash flows to the present value of the operating lease liabilities included in the consolidated balance sheet.
2020
2021
2022
2023
2024 and thereafter
Total undiscounted cash flows
Less: interest
Present value of lease liabilities
Operating
Leases
303,681
416,998
407,450
419,674
2,048,091
3,595,894
(1,533,230)
2,062,664
$
$
The Company entered into an office lease in January 2019. The lease commenced in June 2019, at which time the Company recognized the operating lease
asset and liability. The Company pays a base monthly rent of $31,532 with payments increasing by 3% on each yearly anniversary of the commencement
date. The initial lease term is for nine years with the Company having a one-time option to extend for five years.
F-12
Below is a summary of undiscounted finance lease liabilities as of December 31, 2019. The table also includes a reconciliation of the future undiscounted
cash flows to the present value of the finance lease liabilities included in the consolidated balance sheet.
2020
2021
2022
2023
2024 and thereafter
Total undiscounted cash flows
Less: interest
Present value of lease liabilities
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Furniture, fixtures and vehicle
Website and internal use software
Computers and software
Less: accumulated depreciation and amortization
Right of use assets, net
Finance
Leases
9,564
9,564
9,564
9,564
4,832
43,088
(10,842)
32,246
$
$
Estimated
Useful Lives
2-5 years
3 years
3-7 years
December 31,
2019
December 31,
2018
$
$
95,671 $
10,123,830
596,946
10,816,447
(7,435,271)
1,879,231
5,260,407 $
155,165
8,098,483
704,407
8,958,055
(5,621,391)
-
3,336,664
Depreciation and amortization expense was $2,199,737 and $1,914,084 for the years ended December 31, 2019 and 2018, respectively.
5. LOANS PAYABLE TO RELATED PARTIES:
January 2018 Notes - In January 2018, FlexShopper, LLC entered into letter agreements with Russ Heiser, FlexShopper’s Chief Financial Officer, and
NRNS Capital Holdings LLC (“NRNS”), the manager of which is the Chairman of the Company’s Board of Directors, respectively (such letter agreements,
together, the “Commitment Letters”), pursuant to which FlexShopper, LLC issued a subordinated promissory note to each of Mr. Heiser and NRNS (together,
the “Notes”). The Commitment Letters provided that Mr. Heiser and NRNS would each make advances to FlexShopper, LLC under the applicable Note in
aggregate amounts up to $1,000,000 and $2,500,000, respectively. Payments of principal and accrued interest are due and payable by FlexShopper, LLC upon
30 days’ prior written notice from the applicable noteholder and the Company can prepay principal and interest at any time without penalty. However,
repayment is not permitted without the consent of the Credit Agreement lender. The Notes bear interest at a rate equal to five (5%) per annum in excess of the
non-default rate of interest from time to time in effect under the Credit Agreement entered into on March 6, 2015 (see Note 6) computed on the basis of a
360-day year, which equaled 17.74% at December 31, 2019.
Upon issuance of the Notes, FlexShopper, LLC drew $500,000 and a subsequent $500,000 on February 20, 2018 on the Note held by Mr. Heiser and
$2,500,000 on the Note held by NRNS. On August 29, 2018, FlexShopper, LLC issued amended and restated Notes to Mr. Heiser and NRNS under which (1)
the maturity date for such Notes was set at June 30, 2019 and (2) in connection with the completion of an Equity Financing (as defined in the Notes), the
holders of such Notes were granted the option to convert up to 50% of the outstanding principal of the Notes plus accrued and unpaid interest thereon into the
securities issued in the Equity Financing at a conversion price equal to the price paid to the Company by the underwriters for such securities, net of the
underwriting discount. In connection with the offering of units in September 2018, Mr. Heiser and NRNS elected to convert the convertible portion of the
Notes, resulting in the issuance by the Company of 602,974 shares of common stock and 301,487 warrants to Mr. Heiser and 1,507,395 shares of common
stock and 753,697 warrants to NRNS.
Prior to Mr. Heiser’s Note maturity date, the Company paid down the entire principal and interest balance on June 28, 2019 in the amount of $507,339. NRNS
amended and restated the NRNS Note such that the maturity date of the revised Note was set at June 30, 2021. In addition, the Company drew $500,000 on
the Note held by NRNS on June 28, 2019. As of December 31, 2019, $1,776,923 of principal and accrued and unpaid interest was outstanding on NRNS’s
Note.
F-13
January 2019 Note - On January 25, 2019, FlexShopper, LLC entered into a letter agreement with 122 Partners, LLC (the lender), pursuant to which
FlexShopper, LLC issued a subordinated promissory note to 122 Partners, LLC (the “January Note”) in the principal amount of $1,000,000. H. Russell
Heiser, Jr., FlexShopper’s Chief Financial Officer, is a member of 122 Partners, LLC. The Company paid a commitment fee of 2% to the lender totaling
$20,000. Payment of principal and accrued interest under the January Note is due and payable by FlexShopper, LLC on April 30, 2020 and FlexShopper, LLC
can prepay principal and interest at any time without penalty. Amounts outstanding under the January Note bear interest at a rate equal to five percent (5.00%)
per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement, which equaled 17.74% at December 31, 2019.
Obligations under the January Note are subordinated to obligations under the Credit Agreement. The January Note is subject to customary representations and
warranties and events of default. If an event of default occurs and is continuing, FlexShopper, LLC may be required to repay all amounts outstanding under
the January Note. Obligations under the January Note are secured by essentially all of FlexShopper, LLC’s assets, subject to rights of the lenders under the
Credit Agreement. As of December 31, 2019, $1,015,381 of principal and accrued and unpaid interest was outstanding on the January Note.
February 2019 Note - On February 19, 2019, FlexShopper, LLC entered into a letter agreement with NRNS, the manager of which is the Chairman of the
Company’s Board of Directors, pursuant to which FlexShopper, LLC issued a subordinated promissory note to NRNS (the “February Note”) in the principal
amount of $2,000,000. The Company paid a commitment fee of 2% to the lender totaling $40,000. Payment of principal and accrued interest under the
February Note is due and payable by FlexShopper, LLC on June 30, 2021 and FlexShopper, LLC can prepay principal and interest at any time without
penalty. Amounts outstanding under the February Note bear interest at a rate equal to five percent (5.00%) per annum in excess of the non-default rate of
interest from time to time in effect under the Credit Agreement, which equaled 17.74% at December 31, 2019. Obligations under the February Note are
subordinated to obligations under the Credit Agreement. The February Note is subject to customary representations and warranties and events of default. If an
event of default occurs and is continuing, FlexShopper, LLC may be required to repay all amounts outstanding under the February Note. Obligations under
the February Note are secured by essentially all of FlexShopper, LLC’s assets, subject to rights of the lenders under the Credit Agreement. As of December
31, 2019, $2,030,769 of principal and accrued and unpaid interest was outstanding on the February Note.
2019
2020
2021
Debt Principal
$
$
$
- $
1,000,000 $
3,750,000 $
Interest
73,073
-
-
F-14
6. LOAN PAYABLE UNDER CREDIT AGREEMENT
On March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the “Borrower”), entered into a credit agreement (as amended from time-to-time and
including the Fee Letter (as defined therein), the “Credit Agreement”) with Wells Fargo Bank, National Association as paying agent, various lenders from
time to time party thereto and WE 2014-1, LLC, an affiliate of Waterfall Asset Management, LLC, as administrative agent and lender (the “Lender”). The
Borrower is permitted to borrow funds under the Credit Agreement based on FlexShopper’s cash on hand and the Amortized Order Value of its Eligible
Leases (as such terms are defined in the Credit Agreement) less certain deductions described in the Credit Agreement. Under the terms of the Credit
Agreement, subject to the satisfaction of certain conditions, the Borrower may borrow up to $32,500,000 from the Lender until the Commitment Termination
Date and must repay all borrowed amounts one year thereafter, on the date that is 12 months following the Commitment Termination Date (unless such
amounts become due or payable on an earlier date pursuant to the terms of the Credit Agreement). On April 1, 2019, the Commitment Termination Date was
extended to February 28, 2021. The Lender was granted a security interest in certain leases as collateral under the Credit Agreement. The interest rate charged
on amounts borrowed is LIBOR plus 11% per annum. At December 31, 2019, amounts borrowed bear interest at 12.74%. The Company had $3,314,124
available under the Credit Agreement as of December 31, 2019.
The Credit Agreement provides that FlexShopper may not incur additional indebtedness (other than expressly permitted indebtedness) without the permission
of the Lender and also prohibits dividends on common stock. Additionally, the Credit Agreement includes covenants requiring FlexShopper to maintain a
minimum amount of Equity Book Value, maintain a minimum amount of Unrestricted Cash (including a reserve upon which the Lender may draw to satisfy
unpaid amounts under the Credit Agreement) and maintain a certain ratio of Consolidated Total Debt to Equity Book Value (each capitalized term, as defined
in the Credit Agreement). Upon a Permitted Change of Control (as defined in the Credit Agreement), FlexShopper must refinance the debt under the Credit
Agreement, subject to the payment of an early termination fee. A summary of the covenant requirements, and FlexShopper’s actual results at December 31,
2019, follows:
Equity Book Value not less than
Unrestricted Cash greater than
Consolidated Total Debt to Equity Book Value ratio not to exceed
December 31,
2019
Required
Covenant
Actual Position
$
8,000,000 $
1,500,000
4.75
9,968,275
6,868,472
3.38
The Credit Agreement includes customary events of default, including, among others, failures to make payment of principal and interest, breaches or defaults
under the terms of the Credit Agreement and related agreements entered into with the Lender, breaches of representations, warranties or certifications made
by or on behalf of FlexShopper in the Credit Agreement and related documents (including certain financial and expense covenants), deficiencies in the
borrowing base, certain judgments against FlexShopper and bankruptcy events.
Availability under the Credit Agreement is subject to a borrowing base which is redetermined from time to time and based on specific advance rates on
eligible current assets. Interest expense incurred under the Credit Agreement amounted to $3,146,002 for the year ended December 31, 2019, and $3,067,569
for the year ended December 31, 2018, respectively. As of December 31, 2019, the outstanding balance under the Credit Agreement was $29,185,876. Such
amount is presented in the consolidated balance sheet net of unamortized issuance costs of $281,138. Interest is payable monthly on the outstanding balance
of the amounts borrowed. No principal is expected to be repaid in the next twelve months due to the Commitment Termination Date having been extended to
February 28, 2021, or from reductions in the borrowing base. Accordingly, all principal is shown as a non-current liability at December 31, 2019.
F-15
7. CAPITAL STRUCTURE:
The Company’s capital structure consists of preferred and common stock as described below:
Preferred Stock
The Company is authorized to issue 500,000 shares of $0.001 par value preferred stock. Of this amount, 250,000 shares have been designated as Series 1
Convertible Preferred Stock and 25,000 shares have been designated as Series 2 Convertible Preferred Stock. The Company’s Board of Directors determines
the rights and preferences of the Company’s preferred stock.
●
Series 1 Convertible Preferred Stock - Series 1 Convertible Preferred Stock ranks senior to common stock.
As of December 31, 2019, each share of Series 1 Convertible Preferred Stock was convertible into 1.27404 shares of the Company’s common stock,
subject to certain anti-dilution rights. The holders of the Series 1 Convertible Preferred Stock have the option to convert the shares to common stock
at any time. Upon conversion, all accumulated and unpaid dividends, if any, will be paid as additional shares of common stock. The holders of Series
1 Convertible Preferred Stock have the same dividend rights as holders of common stock, as if the Series 1 Convertible Preferred Stock had been
converted to common stock.
As of December 31, 2018, there were 239,405 shares of Series 1 Convertible Preferred Stock outstanding, which were convertible at a conversion
rate of 1.26547 into 302,960 shares of common stock. In the twelve months ended December 31, 2019, 68,214 shares of Series 1 Convertible
Preferred Stock were converted into 86,323 shares of common stock. As of December 31, 2019, there were 171,191 shares of Series 1 Convertible
Preferred Stock outstanding, which are convertible at a conversion rate of 1.27404 into 218,104 shares of common stock. The increase in the
conversion price from 2018 to 2019 is due to the Series 1 Convertible Preferred Stock anti-dilution adjustment as a result of FPAYW warrants and
stock options exercised for common stock.
●
Series 2 Convertible Preferred Stock - On June 10, 2016, the Company entered into a Subscription Agreement with B2 FIE V LLC (the “Investor”),
an entity affiliated with Pacific Investment Management Company LLC, providing for the issuance and sale of 20,000 shares of Series 2
Convertible Preferred Stock “Series 2 Preferred Stock” for gross proceeds of $20.0 million. The Company sold an additional 1,952 shares of Series
2 Convertible Preferred Stock to a different investor for gross proceeds of $1.95 million at a subsequent closing.
The Series 2 Preferred Shares were sold for $1,000 per share (the “Stated Value”) and accrue dividends on the Stated Value at an annual rate of 10%
compounded annually. Cumulative accrued dividends as of December 31, 2019 totaled approximately $8,393,084. As of December 31, 2018, each
Series 2 Preferred Share was convertible into approximately 257 shares. As of December 31, 2019, each Series 2 Preferred Share was convertible
into approximately 259 shares of common stock; provided, the conversion rate is subject to further increase pursuant to a weighted average anti-
dilution provision. The increase in the convertible shares from 2018 to 2019 is due to the Series 2 Convertible Preferred Stock anti-dilution
adjustment as a result of the of FPAYW warrants and stock options being exercised for common stock. The holders of the Series 2 Preferred Shares
have the option to convert such shares into shares of common stock and have the right to vote with holders of common stock on an as-converted
basis. If the average closing price during any 45-day consecutive trading day period or change of control transaction values the common stock at a
price equal to or greater than $23.00 per share, then conversion shall be automatic. Upon a Liquidation Event or Deemed Liquidation Event (each as
defined in the Certificate of Designations for the Series 2 Preferred Stock), holders of Series 2 Preferred Shares shall be entitled to receive out of the
assets of the Company prior to and in preference to the common stock and Series 1 Convertible Preferred Stock an amount equal to the greater of (1)
the Stated Value, plus any accrued and unpaid dividends thereon, and (2) the amount per share as would have been payable had all Series 2 Preferred
Shares been converted to common stock immediately before the Liquidation Event or Deemed Liquidation Event.
Common Stock
The Company is authorized to issue 40,000,000 shares of $0.0001 par value common stock. Each share of common stock entitles the holder to one vote at all
stockholder meetings.
In September 2018, the Company completed an offering of 10,000,000 units (the “Offering”) issued at a price of $1.00 per unit, each unit consisting of one
share of the Company’s common stock and one-half (1/2) of one warrant, each whole warrant exercisable for one share of common stock at an exercise price
$1.25 per warrant. The common stock and warrants included in the units sold in the Offering were immediately separable and issued separately. The
Company raised gross proceeds of $10,007,500, less underwriting fees and commissions of 7%, or approximately $0.7 million, and incurred other offering
expenses of approximately $0.4 million paid from the proceeds of the offering, resulting in net proceeds of $8.9 million. In connection with the closing of the
Offering, the underwriters exercised their over-allotment option to purchase an additional 750,000 warrants for $7,500 with an exercise price of $1.25 per
share (see Note 9).
On September 28, 2018, both Mr. Heiser and NRNS elected to convert 50% of the outstanding principal and accrued interest on their promissory notes into
equity interests issued in the Offering (see Note 5). As a result, the Company issued 602,974 shares of common stock and 301,487 warrants to Mr. Heiser and
1,507,395 shares of common stock and 753,697 warrants to NRNS.
F-16
8. STOCK OPTIONS
On April 26, 2018 at the Company’s annual meeting, the Company’s stockholders approved the FlexShopper, Inc. 2018 Omnibus Equity Compensation Plan
(the “2018 Plan”). Upon the 2018 Plan’s approval, approximately 1,057,000 shares of Company common stock were available for issuance thereunder,
consisting of 750,000 shares authorized for issuance under the 2018 Plan and an aggregate 307,000 shares then remaining available for issuance under the
Company’s 2007 Omnibus Equity Compensation Plan (the “2007 Plan”) and 2015 Omnibus Equity Compensation Plan (the “2015 Plan”, and together with
the 2007 Plan, the “Prior Plans”). The 2018 Plan replaced the Prior Plans. No new awards will be granted under the Prior Plans; however, awards outstanding
under the Prior Plans upon approval of the 2018 Plan remain subject to and will be paid under the applicable Prior Plan.
On February 21, 2019, the Company’s Board of Directors approved Amendment No. 1 to the 2018 Plan, subject to stockholder approval. On May 2, 2019, the
Company’s stockholders approved the 2018 Plan Amendment that increased (a) the total number of shares available for issuance under the 2018 Plan by
1,000,000 shares and (b) the number of shares available for issuance as “incentive stock options” within the meaning of Internal Revenue Code Section 422
by 1,000,000 shares.
Grants under the 2018 Plan and the Prior Plans consist of incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, stock
unit awards, dividend equivalents and other stock-based awards. Employees, directors and consultants and other service providers are eligible to participate in
the 2018 Plan and the Prior Plans. Options granted under the 2018 Plan and the Prior Plans vest over periods ranging from immediately upon grant to a three-
year period and expire ten years from date of grant. The Company had 514,815 options available under the 2018 Plan at December 31, 2019.
On October 7, 2019, the Companny’s CEO, Richard House, Jr., was awarded 350,000 stock options as an inducement to enter into his employment
agreement. The vesting of the inducement award is in five equal annual increments commencing December 31, 2020. The inducement award does not count
towards the options available under the 2018 Plan or Prior Plans.
Activity in stock options for the year ended December 31, 2018 and 2019 is as follows:
Outstanding at January 1, 2018
Granted
Forfeited
Outstanding at December 31, 2018
Granted
Forfeited
Expired
Exercised
Outstanding at December 31, 2019
Vested and exercisable at December 31, 2019
Weighted
average
exercise price
Weighted
average
contractual
term (years)
Aggregate
intrinsic
value
Number of
options
335,900 $
308,000
(23,000)
620,900 $
1,694,851
(203,766)
(25,000)
(82,667)
2,004,318 $
804,651 $
5.61
1.80
4.99
3.75
1.00
1.71
6.20
0.84
1.72
2.53
104,868
67,911
2,542,361
873,997
8.79
7.98 $
The weighted average grant date fair value of options granted during the twelve-month period ending December 31, 2019 and 2018 was $0.61 and $0.69 per
share. The Company measured the fair value of each option award on the date of grant using the Black-Scholes-Merton pricing model with the following
assumptions:
Exercise price
Expected life
Expected volatility
Dividend yield
Risk-free interest rate
2019
$0.83 to $1.80
6.8 years
64%
0%
1.43% to 2.55%
2018
$0.79 to $4.35
6.0 years
38%
0%
2.27% to 2.99%
The expected dividend yield is based on the Company’s historical dividend yield. The expected volatility is based on the historical volatility of the Company’s
common stock. The expected life is based on the simplified expected term calculation permitted by the Securities and Exchange Commission (the “SEC”),
which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The risk-
free interest rate is based on the annual yield on the grant date of a zero-coupon U.S. Treasury bond the maturity of which equals the option’s expected life.
The value of stock options is recognized as compensation expense by the straight-line method over the vesting period. Compensation expense recorded was
$595,833 and $133,428 for the year ended December 31, 2019 and December 31, 2018, respectively. Unrecognized compensation cost related to non-vested
options at December 31, 2019 amounted to approximately $497,000, which is expected to be recognized over a weighted average period of 3.5 years.
F-17
9. WARRANTS:
In September 2018, the Company issued warrants exercisable for 5,750,000 shares of common stock at an exercise price of $1.25 per share. The warrants
were immediately exercisable and expire five years from the date of issuance. The warrants were listed on the Nasdaq Capital Market under the symbol
“FPAYW.” During the year ended December 31, 2019, 35,100 warrants were exercised resulting in gross proceeds of $43,875. On February 4, 2020, we
completed the Warrant Exchange Offer. As a result of these transactions, there were no public warrants outstanding as of February 19, 2020.
The Company also issued additional warrants exercisable for an aggregate 1,055,184 shares of common stock at an exercise price of $1.25 per warrant to Mr.
Heiser and NRNS in connection with partial conversions of their promissory notes (see Note 6). The warrants are exercisable at $1.25 per share of common
stock and expire on September 28, 2023.
In connection with the issuance of Series 2 Convertible Preferred Stock in June 2016, the Company issued to the placement agent in such offering warrants
exercisable for 439 shares of Series 2 Convertible Preferred Stock at an initial exercise price of $1,250 per share, which expire seven years after the date of
issuance.
As part of a consulting agreement with XLR8 Capital Partners LLC (the “Consultant”), an entity of which the Company’s Chairman is manager, the Company
agreed to issue 40,000 warrants to the Consultant monthly for 12 months beginning on March 1, 2019 at an exercise price of $1.25 per share or, if the closing
share price on the last day of the month exceeds $1.25, then such exercise price will be 110% of the closing share price. The warrants are immediately
exercisable and expire following the close of business on June 30, 2023. As of December 31, 2019, the Company recorded an expense of $127,561 based on a
weighted average valuation of $0.32 per warrant as determined by the fair market value of the Company’s warrants that are actively traded and listed on the
Nasdaq Capital Market under the symbol “FPAYW”.
Grant
Date
March 31, 2019
April 30, 2019
May 31, 2019
June 30, 2019
July 31, 2019
August 31, 2019
September 30, 2019
October 31, 2019
November 30, 2019
December 31, 2019
Warrants
Granted
Expense
Recorded
Valuation
Per Warrant
40,000 $
40,000 $
40,000 $
40,000 $
40,000 $
40,000 $
40,000 $
40,000 $
40,000 $
40,000 $
400,000 $
11,200 $
10,000 $
10,000 $
12,000 $
14,904 $
14,883 $
11,831 $
10,630 $
13,612 $
18,501 $
127,561 $
0.28
0.25
0.25
0.30
0.37
0.37
0.30
0.27
0.34
0.46
0.32
The following table summarizes information about outstanding stock warrants as of December 31, 2019, all of which are exercisable:
Exercise
Price
Common
Stock Warrants
Outstanding
Series 2 Preferred
Stock Warrants
Outstanding
$
$
$
$
$
$
$
$
$
5.50
1.25
1.76
2.00
1.69
1.54
2.01
2.78
1,250
177,304
6,930,084
40,000
40,000
40,000
40,000
40,000
40,000
-
7,347,388
F-18
Weighted Average
Remaining
Contractual Life
2 years
3.5 years
3.5 years
3.5 years
3.5 years
3.5 years
3.5 years
3.5 years
3.5 years
439
439
10. INCOME TAXES:
Reconciliation of the benefit for income taxes from continuing operations recorded in the consolidated statements of operations with the amounts computed at
the statutory federal tax rates for each year:
Federal tax expense (benefit) at statutory rate
State tax expense (benefit), net of federal tax
Permanent differences
Change in statutory rate
Change in valuation allowance
Other
Expense for income taxes
2019
2018
$
$
167,000 $
65,000
92,000
(197,000)
(10,000)
99,000
216,000 $
(2,080,000)
(207,000)
66,000
7,000
2,545,000
(331,000
-
Tax affected components of deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 were as follows:
Deferred tax assets (liabilities):
Equity based compensation
Allowance for doubtful accounts
Fixed assets
Lease impairment
Deferred rent
Lease Liability
Right of use asset
Accrued expenses
Interest expense carryforward
Tax credit carryforward
Federal loss carry-forwards
State loss carry forward
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
$
2019
2018
240,000 $
2,478,000
(6,476,000)
553,000
-
520,000
(466,000)
-
-
32,000
14,047,000
353,000
177,000
870,000
(7,034,000)
507,000
1,000
-
12,000
88,000
32,000
15,823,000
816,000
11,281,000
(11,281,000)
- $
11,292,000
(11,292,000)
-
$
Based on consideration of the available evidence including historical losses a valuation allowance has been recognized to offset certain deferred tax assets, as
management was unable to conclude that realization of deferred tax assets were more likely than not.
As of December 31, 2019, the Company has federal net operating loss carryforwards of approximately $66,900,000 and state net operating loss carryforwards
of approximately $6,000,000 available to offset future taxable income. Federal loss carryforwards incurred prior to January 1, 2018, expire from 2024 to
2037. Federal loss carryforwards incurred after January 1, 2018 do not expire. State loss carryforwards expire from 2024 to 2039. Federal and state loss
carryforwards are subject to an annual limitation on utilization under Section 382 of the Internal Revenue Code.
Section 382 of the Internal Revenue Code imposes a limitation on a corporation’s ability to utilize net operating loss carryforwards (“NOLs”) if it experiences
an “ownership change.” In general, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year period. If such a change were to occur, certain NOLs available to be used could be
disallowed and an annual limitation on utilization of other NOLs would occur.
The components of income tax expense (benefits) for the years ended December 31, 2019 and 2018 were as follows:
Current Income Tax:
Federal
State
Deferred Income Tax:
Federal
Sate
2019
2018
$
$
-
216,400
-
-
216,400 $
-
-
-
-
-
The Company’s effective tax rate for the year ended December 31, 2019 and 2018 differs from the statutory rate of 21% primarily due to a valuation
allowance applied against the company’s net deferred tax assets. State taxes and permanent differences also impacted the effective tax rate. The Company
accrued a $216,400 current state income tax expense for the year ended December 31, 2019 for certain states in which taxable income exceeded available net
operating loss carryforwards.
F-19
The Company files tax returns in the U.S. federal jurisdiction and various states. At December 31, 2019, federal tax returns remained open for Internal
Revenue Service review for tax years after 2016, while state tax returns remain open for review by state taxing authorities for tax years after 2015. The IRS
completed an examination of the Company’s 2016 tax return during 2018, resulting in a reduction to the net operating loss carryforward of approximately
$50,000. During 2019, the Company was notified that its 2017 federal income tax return was selected for examination, and that exam remains open as of
December 31, 2019. There were no other federal or state income tax audits being conducted as of December 31, 2019.
The Company completed its analysis and review of all tax positions taken through December 31, 2019 and does not believe that there are any unrecognized
tax benefits related to tax positions taken on its income tax returns.
11. COMMITMENTS:
The company does not have any commitments other than real property leases (see Note 3).
12. SUBSEQUENT EVENTS:
On February 4, 2020, we completed an exchange offer relating to our outstanding public warrants, in which the holders of the public warrants were offered
0.62 shares of common stock for each outstanding warrant tendered (the “Warrant Exchange Offer”). On February 19, 2020, “FPAYW” was removed from
listing on Nasdaq and deregistered under the Securities Exchange Act pending automatic conversion into shares of our common stock.
F-20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9.A Controls and Procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal
executive officer and principal financial officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our principal executive officer and
principal financial officer have concluded that these disclosure controls and procedures were effective as of December 31, 2019 to provide reasonable
assurance that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized, and reported,
within the time periods specified in Securities and Exchange Commission rules and forms and that material information relating to the Company is
accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely
decisions regarding required disclosures.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) of the
Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s management and board of
directors regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United
States of America. Internal control over financial reporting includes those policies and procedures that: maintain records that in reasonable detail accurately
and fairly reflect our transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary for preparation of our
consolidated financial statements in accordance with generally accepted accounting principles; provide reasonable assurance that our receipts and
expenditures are made only in accordance with authorizations of management and directors of the Company; and provide reasonable assurance that
unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected
on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement
of our consolidated financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation
and presentation.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019. There were no changes in our internal control
over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Our independent auditors have not audited and are not required to audit this assessment of our internal control over financial reporting for the fiscal year
ended December 31, 2019.
Item 9.B. Other Information.
On February 4, 2020, we completed an exchange offer relating to our outstanding public warrants, in which the holders of the public warrants were offered
0.62 shares of common stock for each outstanding warrant tendered (the “Warrant Exchange Offer”). On February 19, 2020, “FPAYW” was removed from
listing on Nasdaq and deregistered under the Securities Exchange Act pending automatic conversion into shares of our common stock.
27
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required under this item is incorporated by reference to the following sections of our proxy statement for our 2020 Annual Meeting of
Stockholders: “Information Concerning Directors and Nominees for Director,” “Information Concerning Executive Officers,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Corporate Governance Principles and Board Matters,” and “The Board of Directors and Its Committees.”
Item 11. Executive Compensation.
The information required under this item is incorporated by reference to the following sections of our proxy statement for our 2020 Annual Meeting of
Stockholders: “Compensation and Other Information Concerning Directors and Officers” and “The Board of Directors and Its Committees.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required under this item is incorporated by reference to the following sections of our proxy statement for our 2020 Annual Meeting of
Stockholders: “Equity Compensation Plan Table” and “Securities Ownership of Certain Beneficial Owners and Management.”
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required under this item is incorporated by reference to the following sections of our proxy statement for our 2020 Annual Meeting of
Stockholders: “Certain Relationships and Related Transactions” and “Corporate Governance Principles and Board Matters.”
Item 14. Principal Accounting Fees and Services.
The information required under this item is incorporated by reference to the following sections of our proxy statement for our 2020 Annual Meeting of
Stockholders: “Proposal 4−Ratification of Appointment of Independent Registered Public Accounting Firm.”
28
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Form 10-K:
PART IV
(1) Financial Statements: see “Consolidated Financial Statements” at Item 8 and incorporated herein by reference.
(2) Financial Statement Schedules: Schedules to the Financial Statements have been omitted because the information required to be set forth therein is
not applicable or is shown in the accompanying Financial Statements or notes thereto.
(3) Exhibits: The following is a list of exhibits filed as a part of this Annual Report:
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8*
10.1
10.2
10.3
Description
Restated Certificate of Incorporation of FlexShopper, Inc. (previously filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K
filed on March 8, 2018 and incorporated herein by reference)
Amended and Restated Bylaws (previously filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed on March 11, 2019 and
incorporated herein by reference)
Certificate of Amendment to the Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Company’s Current
Report on Form 8-K filed on September 21, 2018 and incorporated herein by reference)
Certificate of Amendment to the Certificate of Incorporation of the Company (previously filed as Exhibit 3.4 to the Company’s Quarterly
Report on Form 10-Q filed on November 5, 2018 and incorporated herein by reference)
Certificate of Designations of Series 1 Convertible Preferred Stock (previously filed as Exhibit 3.4 to the Company’s General Form of
Registration on Form 10-SB filed on April 30, 2007 and incorporated herein by reference)
Certificate of Decrease of the Number of Authorized Shares of Preferred Stock of FlexShopper, Inc. Designated as Series 1 Preferred Stock
(previously filed as Exhibit 4.6 to the Company’s Quarterly Report on Form 10-Qfiled on November 14, 2017 and incorporated herein by
reference)
Certificate of Designations for Series 2 Convertible Preferred Stock (previously filed as Exhibit 4.1 to the Company’s Current Report on Form
8-K filed on June 13, 2016 and incorporated herein by reference)
Common Stock Purchase Warrant, dated October 9, 2014, issued by FlexShopper, Inc. to Fordham Financial Management, Inc. (previously
filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (File No. 333-201644) and incorporated herein by reference)
Common Stock Purchase Warrant, dated October 9, 2014, issued by FlexShopper, Inc. to Paulson Investment Company, Inc. (previously filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-201644) and incorporated herein by reference)
Common Stock Purchase Warrant, dated October 9, 2014, issued by FlexShopper, Inc. to Spartan Capital Securities, LLC (previously filed as
Exhibit 4.3 to the Company’s Registration Statement on Form S-1 (File No. 333-201644) and incorporated herein by reference)
Amendment No. 1 to Warrant Agent Agreement, dated as of December 30, 2019, between FlexShopper, Inc. and Continental Stock Transfer
& Trust Company (previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 30, 2019 and
incorporated herein by reference)
Description of the FlexShopper, Inc. Securities Registered under Section 12 of the Securities Exchange Act
Office Lease, dated August 7, 2013, by and between Fountain Square Acquisition Company LLC and FlexShopper, LLC (previously filed as
Exhibit 10.1 to the Company’s Annual Report on Form 10-K filed on March 8, 2018 and incorporated herein by reference)
First Amendment to Lease Agreement, dated January 24, 2014, by and between Fountain Square Acquisition Company LLC and
FlexShopper, LLC (previously filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014
and incorporated herein by reference)
Second Amendment to Lease Agreement, dated March 14, 2017, by and between Fountain Square Acquisition Company LLC and
FlexShopper, LLC (previously filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed on March 8, 2018 and incorporated
herein by reference)
10.4
Agreement of Lease, dated September 1, 2015, by and between the Oakland Commerce Center, LLC and FlexShopper, LLC (previously filed
as Exhibit 10.02 to the Company’s Annual Report on Form 10-K filed on March 30, 2016 and incorporated herein by reference)
10.5
Standard Retail Space Lease, dated August 25, 2017, by and between FlexShopper LLC and 1014 Pepper, Inc. (previously filed as Exhibit
10.5 to the Company’s Annual Report on Form 10-K filed on March 8, 2018 and incorporated herein by reference)
10.6+
Executive Employment Agreement, dated January 31, 2007, by and between the Company and Brad Bernstein (previously filed as Exhibit
10.3 to the Company’s General Form of Registration on Form 10-SB filed on April 30, 2007 and incorporated herein by reference)
10.7
Credit Agreement, dated as of March 6, 2015, by and among FlexShopper 2, LLC, Wells Fargo Bank, N.A., various Lenders from time to
time party thereto and WE 2014-1, LLC (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 12,
2015 and incorporated herein by reference)
29
Exhibit
Number
10.8
Description
Investor Rights Agreement, dated as of March 6, 2015, by and among the Company, the Management Stockholders and affiliates of Waterfall
(previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 12, 2015 and incorporated herein by
reference)
10.9
Form of Investor Rights Agreement, dated as of March 6, 2015, by and among the Company and the Investors party thereto (previously filed
as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 12,2015 and incorporated herein by reference)
10.10
Amendment No. 1 to the Credit Agreement, dated November 6, 2015, by and among FlexShopper 2, LLC and WE2014-1, LLC (previously
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2015 and incorporated herein by reference)
10.11
Amendment No. 2 to the Credit Agreement, dated November 6, 2015, by and among FlexShopper 2, LLC and WE2014-1, LLC (previously
filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 12, 2015 and incorporated herein by reference)
10.12+
Executive Employment Agreement, dated December 1, 2015, by and between the Company and Russ Heiser (previously filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on December 7, 2015 and incorporated herein by reference)
10.13
Amendment No. 3 to the Credit Agreement, Consent and Temporary Waiver, dated February 11, 2016, by and among FlexShopper 2, LLC
and WE-2014-1, LLC (previously filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed on March 30, 2016 and
incorporated herein by reference)
10.14+
2007 Omnibus Equity Compensation Plan (previously filed as Exhibit 99.1 to the Company’s General Form of Registration on Form 10-SB
filed on April 30, 2007 and incorporated herein by reference)
10.15+
Form of Non-Qualified Stock Option Grant issuable under 2007 Omnibus Equity Compensation Plan (previously filed as Exhibit 99.2 to the
Company’s General Form of Registration on Form 10-SB filed on April 30, 2007and incorporated herein by reference)
10.16+
Amendment to 2007 Omnibus Equity Compensation Plan (previously filed as Exhibit 99.3 to the Company’s Annual Report on Form 10-K
filed on March 29, 2012 and incorporated herein by reference)
10.17+
2015 Omnibus Equity Compensation Plan (previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on September
21, 2015 and incorporated herein by reference)
10.18+
Form of Stock Option Agreement issuable under 2015 Omnibus Equity Compensation Plan (previously filed as Exhibit 10.18 to the
Company’s Annual Report on Form 10-K filed on March 30, 2016 and incorporated herein by reference)
10.19
10.20
10.21
Amendment No. 4 to the Credit Agreement and Waiver, dated March 29, 2016, by and among FlexShopper 2, LLC and WE-2014-1, LLC
(previously filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed on March 30, 2016 and incorporated herein by
reference)
Investor Rights Agreement, dated as of June 10, 2016, by and among FlexShopper, Inc., B2 FIE V LLC and the other parties thereto
(previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 13, 2016 and incorporated herein by reference).
Omnibus Amendment, dated January 27, 2017, by and among FlexShopper 2, LLC, FlexShopper, LLC and WE2014-1, LLC (previously filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 31, 2017 and incorporated herein by reference)
10.22+
Non-Employee Director Compensation Policy (previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on
August 11, 2017 and incorporated herein by reference)
10.23
Letter Agreement, dated January 9, 2018, by and between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 12, 2018 and incorporated herein by reference)
10.24
Form of Commitment Letter and Subordinated Promissory Note issued by FlexShopper, LLC to each of Russ Heiser and NRNS Capital
Holdings LLC (previously filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed on March 8, 2018 and incorporated
herein by reference)
10.25+
2018 Omnibus Equity Compensation Plan (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 30,
2018)
10.26
Amendment No. 6 to Credit Agreement, dated April 3, 2018, between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed April 6, 2018 and incorporated herein by reference)
10.27
Amendment No. 1 to Investor Rights Agreement, dated April 3, 2018, by and among the Company, the Management Stockholders and
affiliates of Waterfall (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 6, 2018 and incorporated
herein by reference)
30
Exhibit
Number
10.29
Description
Amendment No. 7 to Credit Agreement, dated July 31, 2018, between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as Exhibit
10.4 to the Company’s Quarterly Report on Form 10-Q filed August 6, 2018 and incorporated herein by reference)
10.30
Amendment No. 8 to Credit Agreement, dated August 29, 2018, between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 31, 2018 and incorporated herein by reference)
10.31
10.32
Amendment No. 2 to Investor Rights Agreement, dated August 27, 2018, by and among the Company, B2 FIE V LLC and the other parties
thereto (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed August 31, 2018 and incorporated herein by
reference)
Form of Amended and Restated Subordinated Promissory Note issued by FlexShopper, LLC to each of Russ Heiser and NRNS Capital
Holdings LLC (previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed August 31, 2018 and incorporated herein
by reference)
10.33
Amendment No. 9 to Credit Agreement, dated September 22, 2018, between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 24, 2018 and incorporated herein by reference)
10.34
Amendment No. 10 to Credit Agreement, dated September 24, 2018, between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 1, 2018 and incorporated herein by reference)
10.35
Amendment No. 11 to Credit Agreement, dated September 24, 2018, between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as
an exhibit to the Company’s Annual Report on Form 10-K filed March 11, 2019 and incorporated herein by reference)
10.36
10.37
[Left intentionally blank]
Form of Commitment Letter and Subordinated Promissory Note, dated January 25, 2019, issued by FlexShopper, LLC to 122 Partners, LLC
(previously filed as an exhibit to the Company’s Annual Report on Form 10-K filed March 11, 2019 and incorporated herein by reference)
10.38
Office Lease, dated January 29, 2019, between FlexShopper, LLC and Mainstreet CV North 40, LLC (previously filed as an exhibit to the
Company’s Annual Report on Form 10-K filed March 11, 2019 and incorporated herein by reference)
10.39
Consulting Agreement, dated as of February 19, 2019, between the Company and XLR8 Capital Partners LLC (previously filed as an exhibit
to the Company’s Annual Report on Form 10-K filed March 11, 2019 and incorporated herein by reference)
10.40
Form of Commitment Letter and Subordinated Promissory Note, dated February 19, 2019, issued by FlexShopper, LLC to NRNS Capital
Holdings LLC (previously filed as an exhibit to the Company’s Annual Report on Form 10-K filed March 11, 2019 and incorporated herein
by reference)
10.41
Amendment No. 1 to 2018 Omnibus Equity Compensation Plan (incorporated by reference to Appendix A of the Company’s definitive proxy
statement for its 2019 Annual Meeting of Stockholders, filed March 25, 2019)
10.42
Form of Amended and Restated Subordinated Promissory Note issued by FlexShopper, LLC to NRNS Capital Holdings LLC (previously
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 28, 2019 and incorporated herein by reference)
10.43+
Employment Agreement, dated September 20, 2019, between FlexShopper, Inc. and Richard House, Jr. (previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed September 23, 2019 and incorporated herein by reference)
10.44
Form of Warrant Amendment and Exchange Agreement, dated as of December 30, 2019, amount FlexShopper, Inc. and the Holders signatory
thereto (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 30, 2019 and incorporated herein by
reference)
10.45
Employment Agreement, dated January 1, 2020, by and between the Company and Harold Russell Heiser, Jr. (previously filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed January 6, 2020 and incorporated herein by reference)
14.1
Code of Ethics for Senior Financial Officers (previously filed as Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2014 and incorporated herein by reference)
Subsidiaries of the Company*
Consent of EisnerAmper LLP*
Rule 13a-14(a) Certification - Principal Executive Officer*
Rule 13a-14(a) Certification - Principal Financial Officer*
Section 1350 Certification - Principal Executive Officer*
Section 1350 Certification - Principal Financial Officer*
XBRL Instance Document,XBRL Taxonomy Extension Schema*
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH Document, XBRL Taxonomy Extension*
101.CAL Calculation Linkbase, XBRL Taxonomy Extension Definition*
101.DEF Linkbase, XBRL Taxonomy Extension Labels*
101.LAB Linkbase, XBRL Taxonomy Extension*
101.PRE Presentation Linkbase*
+
*
Indicates a management contract or any compensatory plan contract or arrangement.
Filed herewith.
Item 16. Form 10-K Summary
Not applicable
31
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 2, 2020
FLEXSHOPPER, INC.
By:
/s/ Richard House, Jr.
Richard House, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
Signatures
Title
/s/ Richard House, Jr.
Richard House, Jr.
/s/ Russ Heiser
Russ Heiser
/s/ James D. Allen
James D. Allen
/s/ Brad Bernstein
Brad Bernstein
/s/ Howard S. Dvorkin
Howard S. Dvorkin
/s/ Sean Hinze
Sean Hinze
/s/ T. Scott King
T. Scott King
/s/ Carl Pradelli
Carl Pradelli
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Director
Director
Date
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
Chairman of the Board of Directors
March 2, 2020
Director
Director
Director
32
March 2, 2020
March 2, 2020
March 2, 2020
FLEXSHOPPER, INC.
Description of the Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934
Exhibit 4.8
The following description is a summary of the terms of our common stock, is qualified in its entirety by reference to our Restated Certificate of
Incorporation, as amended (“Certificate of Incorporation”) and Amended and Restated Bylaws (“Bylaws”), each of which is incorporated by reference as an
exhibit to this Annual Report on Form 10-K, and certain applicable provisions of Delaware law.
Authorized Capitalization
We have 40,500,000 shares of capital stock authorized under our Certificate of Incorporation, consisting of 40,000,000 shares of common stock, par
value $0.0001 per share, and 500,000 shares of preferred stock, par value $0.001 per share, of which 250,000 shares of preferred stock have been designated
as Series 1 Convertible Preferred Stock and 25,000 shares of preferred stock have been designated as Series 2 Convertible Preferred Stock.
As of February 28, 2020, we had 21,351,594 shares of common stock outstanding held of record by 131 stockholders, and 171,191 shares of Series 1
Convertible Preferred Stock outstanding (currently convertible into 218,104 shares of common stock) and 21,952 shares of Series 2 Convertible Preferred
Stock outstanding (currently convertible into 5,679,615 shares of common stock).
Common Stock
Holders of our common stock are entitled to such dividends as may be declared by our board of directors out of funds legally available for such
purpose. The shares of common stock are neither redeemable nor convertible. Holders of common stock have no preemptive or subscription rights to
purchase any of our securities.
Each holder of our common stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled
to cumulate votes in voting for directors.
In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive pro rata our assets, which are
legally available for distribution, after payments of all debts and other liabilities. All of the outstanding shares of our common stock are fully paid and non-
assessable. The shares of common stock offered by this prospectus will also be fully paid and non-assessable.
Our shares of common stock are traded on The Nasdaq Capital Market under the symbol “FPAY.”
Blank Check Preferred Stock
Our board of directors has the authority, without further action by the stockholders, to issue up to 500,000 shares of preferred stock from time to time
in one or more series, including the Series 1 Convertible Preferred Stock and Series 2 Convertible Preferred Stock described below. The board of directors
also has the authority to fix the designations, voting powers, preferences, privileges and relative rights and the limitations of any series of preferred stock,
including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights
of the common stock. The board of directors, without stockholder approval, can issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms that could delay or
prevent a change of control of us or make removal of management more difficult. Additionally, the issuance of preferred stock may decrease the market price
of the common stock and may adversely affect the voting, economic and other rights of the holders of common stock.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Charter Documents
The following is a summary of certain provisions of Delaware law, our Certificate of Incorporation and our Bylaws. This summary does not purport
to be complete and is qualified in its entirety by reference to the corporate law of Delaware and our Certificate of Incorporation and Bylaws.
Effect of Delaware Anti-Takeover Statute. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general,
Section 203 prohibits a Delaware corporation from engaging in any business combination (as defined below) with any interested stockholder (as defined
below) for a period of three years following the date that the stockholder became an interested stockholder, unless:
● prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
● upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the
number of shares of voting stock outstanding (but not the voting stock owned by the interested stockholder) those shares owned by persons who
are directors and officers and by excluding employee stock plans in which employee participants do not have the right to determine whether
shares held subject to the plan will be tendered in a tender or exchange offer; or
● on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not
owned by the interested stockholder.
2
Section 203 defines “business combination” to include the following:
● any merger or consolidation involving the corporation and the interested stockholder;
● any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
● subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder;
● subject to limited exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of
any class or series of the corporation beneficially owned by the interested stockholder; or
● the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of
the corporation, or who beneficially owns 15% or more of the outstanding voting stock of the corporation at any time within a three-year period immediately
prior to the date of determining whether such person is an interested stockholder, and any entity or person affiliated with or controlling or controlled by any of
these entities or persons.
Our Charter Documents. Our charter documents include provisions that may have the effect of discouraging, delaying or preventing a change in
control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium
over the market price for the shares held by our stockholders. Certain of these provisions are summarized in the following paragraphs.
Effects of Authorized but Unissued Common Stock. One of the effects of the existence of authorized but unissued common stock may be to enable
our board of directors to make more difficult or to discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest
or otherwise, and thereby to protect the continuity of management. If, in the due exercise of its fiduciary obligations, the board of directors were to determine
that a takeover proposal was not in our best interest, such shares could be issued by the board of directors without stockholder approval in one or more
transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the
proposed acquirer or insurgent stockholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the
position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.
Cumulative Voting. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors, which would allow holders of
less than a majority of the stock to elect some directors.
Vacancies. Our Bylaws provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a
quorum.
Special Meeting of Stockholders. Our Bylaws provide that special meetings of our stockholders may be called by the chairman of the board of
directors, the chief executive officer, or the president (in the absence of the chief executive officer) or by resolution of the board of directors or by the
secretary at the request in writing of stockholders owning a majority of the voting power of the outstanding voting stock.
Requirements for Advance Notification of Stockholder Nominations and Proposals. Our Bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors
or a committee thereof.
Amendment of Bylaws. Our directors are expressly authorized to amend our Bylaws.
3
FlexShopper, LLC is a limited liability company formed under the laws of the State of Delaware in June 2013.
Subsidiaries of Registrant
Anchor Funding Services, LLC is a limited liability company formed originally in South Carolina in January 2003 and later reincorporated in North Carolina
in August 2005. The operations of Anchor are shown as discontinued operations.
FlexShopper 1, LLC and FlexShopper 2, LLC are wholly-owned subsidiaries formed under the laws of the State of Delaware in the first quarter of 2015.
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of FlexShopper, Inc. on Form S-3 (No. 333-226823) and Form S-8 (Nos. 333-
203509, 333-210487, and 333-225222) of our report dated March 2, 2020, on our audits of the consolidated financial statements as of December 31, 2019 and
2018, and for each of the years then ended, which report is included in this Annual Report on Form 10-K to be filed on or about March 2, 2020.
Exhibit 23.1
/s/ EisnerAmper LLP
EISNERAMPER LLP
New York, New York
March 2, 2020
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.1
I, Richard House, Jr., certify that:
1.
I have reviewed this annual report on Form 10-K of FlexShopper, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 2, 2020
/s/ Richard House, Jr.
Richard House, Jr.
Principal Executive Officer
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.2
I, Russ Heiser, certify that:
1.
I have reviewed this annual report on Form 10-K of FlexShopper, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 2, 2020
/s/ Russ Heiser
Russ Heiser
Principal Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Exhibit 32.1
In connection with the Annual Report of FlexShopper Inc. (the “registrant”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities
and Exchange Commission on the date hereof (the “report”), I, Richard House, Jr., Chief Executive Officer of the registrant, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
March 2, 2020
/s/ Richard House, Jr.
Richard House, Jr.Principal Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Exhibit 32.2
In connection with the Annual Report of FlexShopper Inc. (the “registrant”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities
and Exchange Commission on the date hereof (the “report”), I, Russ Heiser, Chief Financial Officer of the registrant, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
March 2, 2020
/s/ Russ Heiser
Russ Heiser
Principal Financial Officer