UNITED STATES
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
For the fiscal year ended December 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-37945
FLEXSHOPPER, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other 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 No.)
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, par value $0.0001 per share
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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
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 $23,966,000 (based on the price at which the Registrant’s common stock
was last sold on June 30, 2020 of $1.74 per share).
The number of shares outstanding of the Registrant’s common stock, as of March 8, 2021, was 21,375,945.
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 2021 annual meeting of stockholders within 120 days after the end of the fiscal year ended December 31, 2020.
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, expectations 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 net losses attributable to common stockholders;
● 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;
● the failure to protect the integrity and security of customer and employee information; and
● the business and financial impact of the COVID-19 pandemic; 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.
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Item 1. Business.
Company Overview
PART I
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 effect these transactions by first approving consumers through our proprietary, risk analytics-
powered underwriting model. After receiving a signed consumer lease, we then fund the leased item by purchasing the item from our merchant partner and
leasing it to our customer. We then collect payments from consumers under the consumer lease. We hold several registered patents and patent applications
on aspects of our LTO system. For the year ended December 31, 2020, we generated approximately $97 million in net lease revenues and fees and realized
approximately $340,000 in net loss.
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 our merchant partners’ e-commerce sites and (iii) facilitating
LTO transactions with retailers in their physical locations both through their in-store terminals and FlexShopper applications accessed via the Internet. We
are rolling out an online loan product 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 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 or bi-weekly 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.
No long-term commitment. A customer may terminate a lease-purchase agreement at any time with no long-term obligation by becoming current on
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 52 weeks, or exercises early payment options.
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Key Trends Driving the Industry
Non-prime consumers represent the largest segment of the credit market. According to Experian’s 2020 Consumer Credit Review published on January
4, 2021, 31% of Americans had low credit scores and, according to a 2019 report by the Federal Reserve, 16% of American adults were underbanked. This
segment of consumers represents a significant and underserved market.
We believe that the current addressable market size for non-prime consumers is $25 billion (source) with a significant concentration among buyers of
consumer electronics. We believe that underwriting consumer electronics online is one of our competitive advantages since this is the majority of our
FlexShopper.com business and has not been a focus of our peers.
We also believe current 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.
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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 in which 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 more than 150,000 of the latest products shipped
directly to them by some 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 low 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.
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 do not 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.
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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. We
believe the following competitive strengths differentiate us:
Underwriting and Risk Management
Specialized technology and proprietary risk analytics optimized for the online 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 those of 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 experience. Additionally, all of our applications are processed instantly with
approvals and spending limits provided within seconds of submission.
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 many of the nation’s largest retailers, including Best Buy, Amazon, Walmart, Overstock and 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. We believe no
competitor has a LTO marketplace that provides retailers incremental sales with no acquisition cost. Additionally, 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.
Providing LTO consumers an “endless aisle” of products for lease-to-own. As illustrated by our B2C channels in the diagram above, we offer consumers
three ways to acquire products on a LTO basis. At FlexShopper.com, our customers can choose from more than 150,000 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 and 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 including declining sales, we have
been successful in addressing the LTO consumer through online channels as illustrated in the diagram above of our B2C and B2B sales channels.
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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 or the
personnel needed to operate them.
We achieve more operating leverage as our sales grow. Our model is primarily driven by a technology platform that does not require significant increases
in operating overhead to support sales growth.
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 that 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.
Our business is subject to laws relating to the collection, use, retention, security and transfer of personally identifiable information about our customers.
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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 “Risk Factors” below for more information with respect to governmental laws and regulations and their effect on our business.
Intellectual Property
FlexShopper has been granted U.S. Patent Nos. 10,089,682, 10,282,778 and 10,891,687 (see page 13 for additional disclosures) by the U.S. Patent and
Trademark Office (the “USPTO”) since 2018. These patents are for a range of systems, including one that enables e-commerce servers to complete LTO
transactions through their e-commerce websites and one that enables 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
assurance 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 “Risk Factors” below for more information on and risks associated with respect to our intellectual property.
Human Capital
In order to innovate, compete and succeed in our highly competitive market, it is crucial that we continue to attract and retain experienced employees. As
part of these efforts, we strive to offer competitive compensation and benefits program. In addition to their base salary, we also offer employees a wide
array of benefits such as life and health (medical, dental and vision) insurance, paid time off and retirement benefits. We also provide free emotional well-
being services as part of our employee assistance program.
As of December 31, 2020, we had 155 full-time employees, including 61 individuals in our corporate office and 94 individuals in operations center. 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 Organization and Information
FlexShopper was incorporated under the laws of the State of Delaware in 2006. FlexShopper is a holding corporation that conducts its lease-to-own
business through its wholly-owned subsidiary, FlexShopper, LLC, a limited liability company organized under the laws of North Carolina in 2013 and
conducts its lending business through its wholly-owned subsidiary, FlexLending, LLC, a limited liability company organized under the laws of Delaware in
2019. FlexShopper, LLC wholly owns, directly or indirectly, two Delaware subsidiaries, FlexShopper 1, LLC and FlexShopper 2, LLC.
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://www.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.
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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.
Risks Related to Our Business, Operations and Technology
Our business liquidity and capital resources are dependent upon our Credit Agreement with an institutional lender and our compliance with the terms
of that agreement. 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 $47,500,000 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 March 8, 2021, there was $200,843 in
additional availability under the Credit Agreement and the outstanding balance under the Credit Agreement was $39,580,000. On January 29, 2021,
pursuant to an amendment, the Commitment Termination Date of the Credit Agreement was extended to April 1, 2024, the Lender was granted a security
interest in certain leases as collateral under the Credit Agreement and the interest rate charged on amounts borrowed was set at 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.
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. 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 revenue 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.
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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 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 2% of leased merchandise for the year ended December 31, 2020.
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.
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.
8
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 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.
Our virtual LTO business differs in some potentially significant respects from the risks of a typical LTO brick-and-mortar store business, which implies
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.
9
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.
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 employment contracts with Richard House, Jr., our Chief Executive Officer 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.
10
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.
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, 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.
11
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.
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 risks 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.
12
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 and 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.
13
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.
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.
14
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.
Risks Relating to our Stock
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 and a seat on our Board, beneficially owns 21.3% of the voting power of our outstanding stock as of March 8,
2021. Our secured lender beneficially owns 5.9% of the voting power of our outstanding stock as of March 8, 2021. Also, our executive officers and other
directors beneficially own an additional 21.8% 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 has fluctuated significantly and is likely to continue to do so. During the fiscal year ended December 31, 2020, the
closing price for our common stock on the Nasdaq Capital Market ranged from $0.98 to $3.06 per share. 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.
15
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. We are additionally restricted under our Credit Agreement from declaring or making any dividends in
cash or stock, subject to certain limited permitted dividend payments assuming we have positive net income and there is no existing default or event of
default thereunder.
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
16
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. Our lease extends through June 30, 2028.
In August 2017, we entered 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 the Nasdaq Capital Market and deregistered under the Securities Exchange Act pending automatic conversion into shares of our common stock.
Holders of Record
As of March 8, 2021, there were 131 holders of record 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 Credit Agreement restricts our ability to declare or make, or agree to pay or
make, directly or indirectly, any dividends in cash or stock, or incur any obligation to do so, subject to certain limited permitted dividend payments
assuming we have positive net income and there is no existing default or event of default thereunder.
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, 2020, totaled approximately $10,832,073 (see Note 7 of Notes to Consolidated
Financial Statements).
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.
17
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. All references to our business operations refer to FlexShopper, LLC and its wholly-owned subsidiaries, unless the context indicates otherwise.
Overview
Since December 2013, we have developed a business that focuses on improving the quality of life of our customers by providing them the opportunity to
obtain ownership of high-quality durable products, such as consumer electronics, home appliances, computers (including tablets and wearables),
smartphones, tires, jewelry and furniture (including accessories), under affordable payment lease-to-own (“LTO”) purchase agreements with no long-term
obligation, 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 our LTO payment method at check-out on our partners’ e-commerce sites and (3) facilitating LTO transactions with retailers in their
physical locations both through their in store terminals and FlexShopper applications accessed via the Internet.
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, 2020 and December 31, 2019:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
18
December 31,
2020
December 31,
2019
$
$
32,171,255 $
(22,138,541)
10,032,714 $
18,249,273
(9,976,941)
8,272,332
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, 2020 and
2019, 19,769,114 and $28,615,411 of accounts receivable balances, respectively, were charged off against the allowance.
Beginning balance
Provision for write-offs
Accounts written off
Ending balance
December 31,
2020
9,976,941 $
31,930,714
(19,769,114)
22,138,541 $
December 31,
2019
3,754,306
34,838,046
(28,615,411)
9,976,941
$
$
Lease Merchandise - Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease
merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is
recorded at cost net of accumulated depreciation. The Company depreciates leased merchandise using the straight-line method over the applicable
agreement period for a consumer to acquire ownership, generally twelve months with no salvage value. Upon transfer of ownership of merchandise to
customers resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For
lease merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company provides an impairment reserve for the
undepreciated balance of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated
depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable.
The net leased merchandise balances consisted of the following as of December 31, 2020 and December 31, 2019:
Lease merchandise at cost
Accumulated depreciation
Impairment reserve
Lease merchandise, net
December 31,
2020
December 31,
2019
$
$
64,335,971 $
(19,162,357)
(2,351,274)
42,822,340 $
46,807,570
(13,518,181)
(2,226,285)
31,063,104
Lease merchandise at cost represents the undepreciated cost of rental merchandise at the time of purchase.
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, 2020 and 2019 are
as follows:
Gross Profit
2020
2019
$ Change
% Change
Gross lease billings and fees
Lease merchandise sold
Gross billings
Provision for doubtful accounts
Net revenues
Cost of merchandise sold
Cost of lease revenues, consisting of depreciation and impairment of lease
merchandise
Gross profit
Gross profit margin
$ 128,870,481
5,144,747
134,015,228
$ 120,169,406
3,458,529
123,627,935
$
(31,930,714)
102,084,514
(3,424,880)
(34,838,046)
88,789,889
(2,282,036)
8,701,075
1,686,218
10,387,293
2,907,332
13,294,625
(1,142,844)
$
(63,308,210)
$
35,351,424
35%
(57,939,899)
$
28,567,954
32%
(5,368,311)
6,783,470
7.2
48.8
8.4
(8.3)
15.0
50.1
9.3
23.7
19
Adjusted EBITDA
2020
2019
$ Change
% Change
Net (loss) / income
Provision for income taxes
Amortization of debt costs
Other amortization and depreciation
Interest expense
Stock compensation
Product/ infrastructure expense
Warrants compensation- consulting agreement
Executive separation agreement
Adjusted EBITDA
$
$
(339,896) $
663,050
305,797
2,271,287
3,996,764
981,261
299,287
139,480
396,090
8,713,120 $
577,415 $
216,400
324,686
2,199,737
3,985,736
595,833
401,896
127,561
-
8,429,264 $
(917,311)
446,650
(18,889)
71,550
11,028
385,428
(102,609)
11,919
396,090
283,856
(158.9)
206.4
(5.8)
3.3
0.3
64.7
(25.5)
9.3
-
3.4
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.
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),
amortization and one-time or non-recurring items. 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.
Adjusted EBITDA is a supplemental measure of FlexShopper’s performance that is neither required by, nor presented in accordance with, GAAP. Adjusted
EBITDA should not be considered as substitutes for GAAP metrics such as operating income/ (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, 2020 and 2019.
Gross lease billings and fees
Provision for doubtful accounts
Net lease billings and fees
Lease merchandise sold
Total revenues
Cost of lease revenues and merchandise sold
Marketing
Salaries and benefits
Other operating expenses
Operating income
Interest expense
Provision for income taxes
Net (loss) / income
2020
2019
$ Change
% Change
128,870,481 $ 120,169,406 $
(34,838,046)
(31,930,714)
85,331,360
96,939,767
5,144,747
3,458,529
88,789,889
102,084,514
60,221,935
66,733,090
3,649,292
5,880,063
8,469,334
10,440,693
11,345,091
14,404,953
5,104,237
4,625,715
4,310,422
4,302,561
216,400
663,050
577,415 $
(339,896) $
8,701,075
2,907,332
11,608,407
1,686,218
13,294,625
6,511,155
2,230,771
1,971,359
3,059,862
(478,522)
(7,861)
446,650
(237,519)
7.2
(8.3)
13.6
48.8
15.0
10.8
61.1
23.3
27
(9.4)
(0.2)
206.4
41.1
20
Total lease revenues for the twelve months ended December 31, 2020 were $96,939,767 compared to $85,331,360 for the twelve months ended December
31, 2019, representing an increase of $11,608,407, or 13.6 %. 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, 2020 was $66,733,090 compared to $60,221,935 for the twelve
months ended December 31, 2019, representing an increase of $6,511,155 increase, or 10.8 %. Cost of lease revenue and merchandise sold for the twelve
months ended December 31, 2020 was comprised of depreciation expense and impairment of lease merchandise of $64,263,603, the net book value of
merchandise sold of $3,424,880 partially offset by merchant rebates of $955,393. Cost of lease revenue and merchandise sold for the twelve months ended
December 31, 2019 is comprised of depreciation expense on 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. As the Company’s lease revenues increase, the direct costs associated with them also increase.
Marketing expenses in the twelve months ended December 31, 2020 was $5,880,063 compared to $3,649,292 in the twelve months ended December 31,
2019, an increase of 2,230,771 or 61.1%. The Company strategically increased marketing expenditures in its digital channels where it is acquiring
customers efficiently at its targeted acquisition cost. Also, the amortization of direct acquisition cost increased due to more capitalized commission earned
based on lease originations.
Salaries and benefits in the twelve months ended December 31, 2020 was $10,440,693 compared to $8,469,334 in the twelve months ended December 31,
2019, an increase of $1,971,359, or 23.3%. The hire of certain key management and the increase in contractors that took place mainly in the fourth quarter
of 2020 to handle the volume increase of the holiday season were the drivers for the increase in salaries and benefits expenses.
Other operating expenses for the years ended December 31, 2020 and 2019 were $14,404,953 and $11,345,091 respectively.
Key operating expenses for the years ended December 31, 2020 and 2019 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
2020
2,271,287 $
1,849,641
1,932,287
1,879,978
981,261
2,791,114
2,699,385
14,404,953 $
2019
2,199,737
1,658,251
1,249,284
1,834,897
595,833
1,791,557
2,015,532
11,345,091
$
$
Legal and professional fees in the twelve months ended December 31, 2020 were $1,932,287 compared to $1,249,284 in the twelve months ended
December 31, 2019, an increase of $683,003, or 54.7%. This increase was due to legal and consulting fees related to underwriting, marketing, business
intelligence enhancements and new product initiatives.
21
Stock compensation expense in the twelve months ended December 31, 2020 was 981,261 compared to $595,833 in the twelve months ended December
31, 2019, an increase of $385,428, or 64.7%. The increase was due to the election of some of the Company’s directors to receive their quarterly fees in
stock options instead of cash and to the grant of stock options to key employees during the year ended on December 31, 2020.
Customer verification expense in the twelve months ended December 31, 2020 was $2,791,114 compared to $1,791,557 in the twelve months ended
December 31, 2019, an increase of $999,557, or 55.8%. The increase in marketing expenses was the main driver for more lease applications and therefore
for the increase in customer verification expenses.
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
loss of $399,896 for the year ended December 31, 2020 and a net income of $577,415 for the year ended December 31, 2019.
Operations
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
Patented LTO Payment Method
Direct to retailers/e-tailers
In-store LTO technology platform
Direct to retailers/e-tailers
Online affiliate networks
Direct response television campaigns
Direct mail
Partnerships with payment aggregators
Consultants & strategic relationships
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 “Liquidity and Capital Resources” below.
Liquidity and Capital Resources
As of December 31, 2020, the Company had cash of $8,541,232 compared to $6,868,472 as of December 31, 2019.
As of December 31, 2020, the Company had accounts receivables of $32,171,255 net of an allowance for doubtful accounts of $22,138,541 totaling
$10,032,714. 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 recently collected payments 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 currently borrow up to $47,500,000 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 January 29, 2021,
pursuant to an amendment to the Credit Agreement, the Commitment Termination Date was extended to April 1, 2024, the Lender was granted a security
interest in certain leases as collateral under the Credit Agreement and the interest rate charged on amounts borrowed was set at LIBOR plus 11% per
annum. On February 26, 2021 an amendment to the Credit Agreement was signed to extend the deadline to receive approval from a third party to enter into
a Backup Servicer Agreement.
22
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 cash and liquidity 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 may refinance the debt under the Credit Agreement, subject to the payment of an early termination fee.
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.
Financing Activity
On January 25, 2019, FlexShopper, LLC (the “Borrower) entered into a subordinated debt financing letter agreement with 122 Partners, LLC, as lender,
pursuant to which FlexShopper, LLC issued a subordinated promissory note to 122 Partners, LLC (the “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 the principal amount and accrued
interest under the January Note was due and payable by the borrower on April 30, 2020 and the borrower can prepay principal and interest at any time
without penalty. Amounts outstanding under the January Note bear interest at a rate equal to 5.00% per annum in excess of the non-default rate of interest
from time to time in effect under the Credit Agreement. Obligations under the 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 substantially all of the
Borrower’s assets, subject to the senior rights of the lenders under the Credit Agreement. On April 30, 2020, pursuant to an amendment to the subordinated
debt financing letter agreement, the Borrower and 122 Partners, LLC agreed to extend the maturity date of the January Note to April 30, 2021.
On February 19, 2019, the Borrower 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 the Borrower 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 the Borrower on June 30, 2021
and the Borrower can prepay principal and interest at any time without penalty. Amounts outstanding under the February Note bear interest at a rate equal
to 5.00% per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement. Obligations under the 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, the Borrower may be required to repay all amounts outstanding under the February Note.
Obligations under the February Note are secured by substantially all of the Borrower’s assets, subject to rights of the lenders under the Credit Agreement.
The Company is pursuing a refinancing of both related party subordinated notes with a non-related party note with a term that is similar to the Credit
Agreement. Besides extending the maturity date, no material changes are expected in the terms of the interest rate of the new subordinated facility. If the
Company is unsuccessful refinancing the related party notes, then the Company does not foresee any difficulty in extending the maturity of the current
related party subordinated notes
The Company applied for and received a loan (the “Loan”) on May 4, 2020, from Customers Bank (the “PPP Lender”) in the principal amount of
$1,914,100, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
which was enacted March 27, 2020, and administered through the U.S. Small Business Administration (the “SBA”).
23
The Loan is evidenced by a promissory note (the “Note”), dated April 30, 2020, issued by the Borrower to the PPP Lender. The Note matures on April 30,
2022, and bears interest at the rate of 1.00% per annum, payable monthly commencing the later of on November 30, 2020 or the SBA review of the
forgiveness application. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalty. Proceeds from the Loan were
available to the Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in
accordance with the PPP. Under the terms of the PPP, up to the entire sum of the principal amount and accrued interest may be forgiven to the extent the
Loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business
Administration under the PPP. The Company believes that it used the entire Loan amount for designated qualifying expenses and has submitted a loan
forgiveness application to the PPP Lender that is pending review.
Cash Flow Summary
Cash Flows from Operating Activities
Net cash used by operating activities was $5,207,547 for the year ended December 31, 2020 and was primarily due to the purchases of leased merchandise
and the add back of provision for doubtful accounts, partially offset by the change in accounts receivable and the add back of depreciation and impairment
on leased merchandise.
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.
Cash Flows from Investing Activities
For the year ended December 31, 2020, net cash used in investing activities was $3,098,194 comprised of $732,582 for the purchase of property and
equipment and $2,365,612 for capitalized software costs.
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.
Cash Flows from Financing Activities
Net cash provided by financing activities was $9,978,501 for the year ended December 31, 2020 primarily due to the funds drawn on the Credit Agreement
of $15,033,000 and $1,914,100 of proceeds received under the Paycheck Protection Program, offset by repayments of amounts borrowed under the Credit
Agreement of $7,023,250.
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.
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.
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.
Financial Impact of COVID-19 Pandemic
COVID-19 has had an impact on the Company. The primary impacts have included a transition to a significant amount of remote workers as well as
changes to customer origination sources. Fortunately, regarding tele-work, our South Florida location required a thorough Hurricane Impact plan that
enabled all our employees to work remotely if required. Early in the second quarter of 2020, FlexShopper pivoted that Hurricane Plan to a COVID-19 plan
in order to allow employees to work outside of the office. As of the end of December 2020, approximately 85% of our employees are working
remotely. All employees, via specially configured laptops, are able to access the same data and have the same functionality as if they were in the
office. FlexShopper continues to explore options to bring employees back into the workplace on a rotational basis.
24
The other primary impact has been on customer origination sources. Pre-COVID-19, approximately 40% of new customers were obtained through brick
and mortar or B2B retailers. The pandemic-related closing and limited operations of retailers, as well as shelter in place orders, limited our new customers
from this channel over the second quarter and first half of the third quarter and will continue to have a limited impact while COVID-19 mandates limit
operations of retailers. Same-store origination amounts in these channels have recovered to their pre-pandemic levels. However, it is still unclear when our
retailer partners will allow our sales support staff to resume training in many of these store locations due to COVID-19 restrictions. Additionally, in mid-
March, both in the B2C and B2B verticals, FlexShopper reduced approval rates in order to add only new customers that would exhibit exceptional payment
performance given the unknown time and breadth of the COVID-19 pandemic. In August, the Company reverted to approval rates in line with pre-Covid-
19 results. Finally, the COVID-19 environment delayed the rollout of some B2B initiatives, although since June the Company has partnered with additional
retailers and launched a new pilot.
Areas of the business that have not been negatively impacted by COVID-19, but potentially positively impacted, include the payment rate of the portfolio
from April until August. The percentage of delinquent consumers has decreased during the government stimulus period. That has resulted in better
portfolio performance than was observed prior to COVID-19. While a portion of this is related to modification to underwriting that started in the fourth
quarter of 2019, there is also an unknown portion of this improved performance attributable to the government stimulus. Moreover, the improved
performance coupled with participation in the CARES Act programs has enabled FlexShopper to increase cash. COVID-19 has not jeopardized
FlexShopper’s ability to satisfy the covenants contained in its Credit Agreement.
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.
25
YEARS ENDED DECEMBER 31, 2020 AND 2019
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-4
F-5
F-6
F-7
F-8
The Board of Directors and Stockholders of
FlexShopper, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of FlexShopper, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019,
and 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, 2020 and 2019, 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.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-2
Impairment of Leased Merchandise
As discussed in Note 2 to the consolidated financial statements, the Company had $42,822,340 of lease merchandise at December 31, 2020. The Company
evaluates lease merchandise for impairment based upon the payment history of the individual customer. When a customer falls within certain thresholds of
payment performance, the Company will record an impairment charge against the corresponding lease merchandise. Historical trends and current
conditions are considered when determining the appropriate time to record an impairment of lease merchandise.
We identified management’s leased merchandise impairment assessment as a critical audit matter due to the significant amount of judgment required by
management in determining the timing and estimated amount of impairment. This in turn resulted in significant effort and a high degree of subjectivity in
performing our audit procedures and in evaluating audit evidence relating to the impairment of lease merchandise made by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. Our procedures included, among others, (i) obtaining an understanding of management’s process and evaluating the design of
controls related to the impairment assessment; (ii) verifying that the Company appropriately impaired assets in accordance with its policies; (iii) testing a
sample of leases to ensure that an impairment charge was recorded when appropriate; and (iv) evaluating the Company’s thresholds for determining
impairment.
Collectability of Accounts Receivable
As discussed in Note 2 to the consolidated financial statements, the Company recognized $31,930,714 of bad debt expense during the year ended
December 31, 2020 with a corresponding reduction to lease revenue and fees. At December 31, 2020, the Company had an allowance for doubtful accounts
of $22,138,541. The Company determines the amount of allowance for doubtful accounts to recognize as a portion of its regular customer billings based
upon historical and current payment trends, as well as taking into consideration the status of the related lease.
We identified management’s estimate of the allowance for doubtful accounts as a critical audit matter due to the significant amount of judgment required by
management in determining its estimates for bad debt expense. This in turn resulted in significant effort and a high degree of subjectivity, in performing our
audit procedures and in evaluating audit evidence relating to the collectability of accounts receivable made by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. Our procedures included, among others, (i) obtaining an understanding of management’s process and evaluating the design of
controls related to the allowance for doubtful accounts; (ii) verifying that for a sample of leases, the Company had correctly applied payments to the
appropriate lease; and (iii) independently recalculating the Company’s analysis of bad debt for its lease portfolio on a historical and current basis including
a review of payment trends subsequent to December 31, 2020 and comparing that result against the Company’s calculations for reasonableness.
/s/ EisnerAmper LLP
We have served as the Company’s auditor since 2014.
EISNERAMPER LLP
New York, New York
March 8, 2021
F-3
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
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued payroll and related taxes
Current portion of promissory notes to related parties, net of $8,276 at 2020 and $5,333 at 2019 of unamortized
issuance costs, including accrued interest
Current portion of promissory note – Paycheck Protection Program
Accrued expenses
Lease liability - current portion
Total current liabilities
Loan payable under credit agreement to beneficial shareholder, net of $61,617 at 2020 and $281,138 at 2019 of
unamortized issuance costs and current portion
Promissory notes to related parties, net of $24,828 at 2019 of unamortized issuance costs and current portion
Promissory note – Paycheck Protection Program, net of current portion
Accrued payroll and related taxes net of current portion
Lease liabilities less current portion
Total liabilities
STOCKHOLDERS’ EQUITY
Series 1 Convertible Preferred Stock, $0.001 par value - designated 250,000 shares, issued and outstanding 170,332
shares at 2020 and 171,191 shares at 2019 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 21,359,945 shares at 2020
and 17,783,960 shares at 2019
Additional paid in capital
Accumulated deficit
Total stockholders’ equity
December 31, December 31,
2020
2019
$
$
$
8,541,232 $
10,032,714
869,081
42,822,340
62,265,367
6,868,472
8,272,332
672,242
31,063,104
46,876,150
5,911,696
5,260,407
72,316
68,249,379 $
78,335
52,214,892
7,907,619 $
352,102
4,567,889
513,267
4,815,546
1,184,952
2,646,800
160,726
17,067,745
1,067,740
-
1,372,901
27,726
7,549,523
37,134,009
-
741,787
204,437
1,947,355
57,095,333
28,904,738
3,725,172
-
-
2,067,184
42,246,617
851,660
855,955
21,952,000
21,952,000
2,136
36,843,326
(48,495,076)
11,154,046
68,249,379 $
1,779
35,313,721
(48,155,180)
9,968,275
52,214,892
$
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4
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
Interest expense including amortization of debt issuance costs
Income before income taxes
Provision for income taxes
Net (loss) / income
Deemed dividend from exchange offer of warrants
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,
2020
2019
$
96,939,767
5,144,747
102,084,514
85,331,360
3,458,529
88,789,889
63,308,210
3,424,880
5,880,063
10,440,693
14,404,953
97,458,799
57,939,899
2,282,036
3,649,292
8,469,334
11,345,091
83,685,652
4,625,715
5,104,237
4,302,561
323,154
663,050
(339,896)
4,310,422
793,815
216,400
577,415
713,212
2,438,988
(3,492,096) $
-
2,437,884
(1,860,469)
(0.17) $
(0.11)
20,995,349
17,672,156
$
$
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2020 and 2019
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
239,405 $ 1,197,025 21,952 $ 21,952,000 17,294,870 $
1,758 $ 30,074,488 $ (48,732,595) $ 8,492,676
-
-
-
-
-
-
-
-
-
-
-
595,833
-
595,833
-
61,509
61,509
(68,214)
(341,070)
-
-
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
171,191
855,955 21,952 21,952,000 17,783,960
1,779 35,313,721 (48,155,180) $ 9,968,275
Balance, January 1,
2019
Provision for
compensation expense
related to stock
options
Refund of cost related to
equity raise
Conversion of preferred
stock to common
stock
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,
2019
Provision for
compensation expense
related to stock
options
Issuance of warrants in
connection with
consulting agreements
Exercise of stock
options into common
stock
Conversion of preferred
stock to common
stock
Exercise of warrants
into common stock
Exchange offer of
warrants
Net loss
Balance, December 31,
-
-
-
-
-
-
-
-
-
-
981,261
-
981,261
-
-
407,494
-
407,494
(859)
(4,295)
-
-
-
-
-
-
-
-
-
-
-
-
7,166 $
1
5,661
-
5,662
-
1,136 $
-
4,295
-
-
-
105,000 $
10
131,240
-
131,250
- 3,462,683 $
-
-
346
-
(346)
-
-
(339,896)
-
(339,896)
2020
170,332 $ 851,660 21,952 $ 21,952,000 21,359,945 $
2,136 $ 36,843,326 $ (48,495,076) $ 11,154,046
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2020 and 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/ income
Adjustments to reconcile net (loss)/ income 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
Interest in kind added to promissory notes balance
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
Lease liabilities
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
Proceeds from loan payable under credit agreement
Repayment of loan payable under credit agreement
Proceeds from promissory notes to related parties, net of fees
Proceeds from promissory notes- Paycheck Protection Program, net of fees
Repayment of promissory note
Principal payment under finance lease obligation
Refund of equity issuance related costs
Proceeds from exercise of warrants
Proceeds from exercise of stock options
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
Deemed dividend from exchange offer of warrants
Conversion of preferred stock to common stock
2020
2019
$
(339,896) $
577,415
2,577,084
1,388,755
63,308,210 58,253,095
2,524,422
723,394
(31,930,714) 34,838,046
-
73,073
170,550
13,388
-
-
(195,104)
30,170,332 (36,734,415)
(352,710)
(75,067,446) (56,951,502)
9,210
(3,814,098)
(124,319)
120,172
218,206
(469,461)
2,943
3,339,730
198,528
43,271
1,283,372
(5,207,547)
(3,098,194)
(3,098,194)
(2,241,172)
(2,241,172)
15,033,000 12,396,078
(7,023,250) (11,815,488)
3,440,000
-
(500,000)
(2,527)
61,509
43,875
69,406
(11,208)
(243,750)
3,437,895
-
1,914,100
-
(6,664)
-
131,250
5,662
(11,207)
(64,390)
9,978,501
1,672,760
727,262
6,868,472
6,141,210
$ 8,541,232 $ 6,868,472
$ 3,973,374 $ 3,606,328
-
$
341,070
$
713,212 $
4,295 $
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-7
FlexShopper Inc.
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
1. BUSINESS
FlexShopper, Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware in 2006. The Company owns 100% of FlexShopper,
LLC, a North Carolina limited liability company and owns 100% of FlexLending, LLC, a Delaware limited liability company. The Company is a holding
corporation with no operations except for those conducted by FlexShopper LLC and FlexLending, LLC.
In January 2015, in connection with the Credit Agreement entered in March 2015 (see Note 6), FlexShopper 1 LLC and FlexShopper 2 LLC were
organized as wholly owned Delaware subsidiaries of FlexShopper LLC to conduct operations. FlexShopper LLC, together with its subsidiaries, are
hereafter referred to as “FlexShopper.”
FlexShopper provides through e-commerce sites, certain types of durable goods to consumers on a lease-to-own basis (“LTO”) including consumers of
third-party retailers and e-tailers. We effect these transactions by first approving consumers through our proprietary, risk analytics-powered underwriting
model. After receiving a signed consumer lease, we then fund the leased item by purchasing the item from our merchant partner and leasing it to our
customer. We then collect payments from consumers under the consumer lease.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries after elimination of intercompany balances and transactions.
Estimates - The preparation of consolidated financial statements in conformity with 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, 2020 and 2019:
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
F-8
December 31,
2020
December 31,
2019
$
$
32,171,255 $
(22,138,541)
10,032,714 $
18,249,273
(9,976,941)
8,272,332
The allowance is a significant percentage of the net accounts receivable 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, 2020 and 2019, $19,769,114
and $28,615,411 of accounts receivable balances, respectively, were charged off against the allowance. During the years ended December 31, 2020 and
2019, the provision for bad debts was $31,930,714 and $34,838,046, respectively. The following table shows the activity in the allowance for doubtful
accounts:
Beginning balance
Provision
Accounts written off
Ending balance
December 31,
2020
December 31,
2019
$
$
9,976,941 $
31,930,714
(19,769,114)
22,138,541 $
3,754,306
34,838,046
(28,615,411)
9,976,941
Lease Merchandise - Until all payment obligations for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease
merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is
recorded at cost net of accumulated depreciation. The Company depreciates leased merchandise using the straight-line method over the applicable
agreement period for a consumer to acquire ownership, generally twelve months with no salvage value. Upon transfer of ownership of merchandise to
customers resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For
lease merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company provides an impairment reserve for the
undepreciated balance of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated
depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable.
The net leased merchandise balances consisted of the following as of December 31, 2020 and December 31, 2019:
Lease merchandise at cost
Accumulated depreciation
Impairment reserve
Lease merchandise, net
December 31,
2020
December 31,
2019
$
$
64,335,971 $
(19,162,357)
(2,351,274)
42,822,340 $
46,807,570
(13,518,181)
(2,226,285)
31,063,104
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 6) are
offset against the outstanding balance of the loan payable and are amortized using the straight-line method over the remaining term of the related debt,
which approximates the effective interest method. Amortization which is included in interest expense was $283,912 and $294,847 for the years ended
December 31, 2020 and 2019, respectively.
Debt issuance costs of $60,000 incurred in conjunction with the subordinated Promissory Notes entered on January 25, 2019 and February 19, 2019 (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 $21,885 and 29,839 for the years
ended December 31, 2020 and 2019, respectively.
Software Costs - Costs related to developing or obtaining internal-use software incurred during the preliminary project and post-implementation stages of
an internal use software project are expensed as incurred and certain costs incurred in the project’s application development stage are capitalized as
property and equipment. The Company expenses costs related to the planning and operating stages of a website. Costs associated with minor
enhancements and maintenance for the website are included in expenses as incurred. Direct costs incurred in the website’s development stage are
capitalized as property and equipment. Capitalized software costs amounted to $2,365,612 and $2,130,922 for the years ended December 31, 2020 and
2019, respectively. The Company wrote off $105,575 of capitalized development costs in 2019. Capitalized software amortization expense was $2,102,983
and $2,126,343 for the years ended December 31, 2020 and 2019, respectively.
Operating Expenses - Operating expenses include corporate overhead expenses such as, stock-based compensation, insurance, occupancy, and other
administrative expenses.
F-9
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 7). Under such method income available to common shareholders is computed by deducting both dividends declared
or, if not declared, accumulated on Series 2 Convertible Preferred Stock from income from continuing operations and from net income. Loss attributable to
common shareholders is computed by increasing loss from continuing operations and net loss by such dividends. Where the Company has undistributed net
income available to common shareholders, basic earnings per common share is computed based on the total of any dividends paid or declared per common
share plus undistributed income per common share determined by dividing net income available to common shareholders reduced by any dividends paid or
declared on common and participating Series 1 Convertible Preferred Stock by the total of the weighted average number of common shares outstanding
plus the weighted average number of common shares issuable upon conversion of outstanding participating Series 1 Convertible Preferred Stock during the
period. Where the Company has a net loss, basic per share data (including income from continuing operations) is computed based solely on the weighted
average number of common shares outstanding during the period. As the participating Series 1 Convertible Preferred Stock has no contractual obligation to
share in the losses of the Company, common shares issuable upon conversion of such preferred stock are not included in such computations.
Diluted earnings per share is based on the more dilutive of the if-converted method (which assumes conversion of the participating Series 1 Convertible
Preferred Stock as of the beginning of the period) or the two-class method (which assumes that the participating Series 1 Convertible Preferred Stock is not
converted) plus the potential impact of dilutive non-participating Series 2 Convertible Preferred Stock, options and warrants. The dilutive effect of stock
options and warrants is computed using the treasury stock method, which assumes the repurchase of common shares at the average market price during the
period. Under the treasury stock method, options and warrants will have a dilutive effect when the average price of common stock during the period
exceeds the exercise price of options or warrants. When there is a loss from continuing operations, potential common shares are not included in the
computation of diluted loss per share, since they have an anti-dilutive effect.
In computing diluted 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
Year ended
December 31,
2020
225,231
5,845,695
116,903
2,595,700
2,112,488
10,896,017
2019
218,104
5,679,615
113,582
2,004,318
7,347,388
15,363,007
The following table sets forth the computation of basic and diluted earnings per share as of December 31, 2020 and December 31, 2019:
Numerator
Net (loss)/ income
Convertible Series 2 Preferred Share dividends
Deemed dividend from exchange offer of warrants (See Note 11)
Numerator for basic and diluted EPS
Denominator
Denominator for basic and diluted EPS - weighted average shares
Basic EPS
Diluted EPS
December 31, December 31,
2020
2019
$
$
$
$
(339,896) $
(2,438,988)
(713,212)
(3,492,096) $
577,415
(2,437,884)
-
(1,860,469)
20,995,349
(0.17) $
(0.17) $
17,672,156
(0.11)
(0.11)
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 6) 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.
F-10
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, 2020, and
2019, 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 June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” ("ASU 2016-13"). ASU
2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU
2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.
In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases
(Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the
SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard
in the first quarter of fiscal 2023.The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its
Consolidated Financial Statements, particularly its recognition of allowances for accounts receivable.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions
for performing intraperiod tax allocations, recognizing deferred taxes for investments, and calculating income taxes in interim periods. The guidance also
simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws
or rates in interim periods. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. While the
Company is continuing to assess the potential impacts of ASU 2019-12, it does not expect ASU 2019-12 to have a material effect, if any, on its financial
statements.
In March 2020, the FASB issued guidance codified in ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting,” which provides optional expedients for a limited period of time to ease the potential burden in accounting for (or
recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to
contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective for the
Company as of March 12, 2020 through December 31, 2022. An entity can elect to apply the amendments as of any date from the beginning of an interim
period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12,
2020, up to that date that the financial statements are available to be issued. The Company is currently evaluating the optional expedients and exceptions
provided by ASU 2020-04 to determine the impact on its consolidated financial statements.
3. LEASES
Lessor accounting
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:
Year ended
December 31,
2020
2019
Gross lease billings and fees
Provision for doubtful accounts
Lease revenues and fees, net
$ 128,870,481 $ 120,169,406
34,838,046
85,331,360
(31,930,714)
96,939,767 $
$
The new standard also impacted the Company as a lessee by requiring all 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 prior to January 1, 2019. The Company adopted this new guidance on January 1, 2019.
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 the Company’s customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct
financing leases.
F-11
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 first option to extend the term of the lease to September 30, 2021. The monthly rent for this space is approximately
$2,300 per month.
In January 2019, FlexShopper entered into a 108-month lease with an option for one additional five-year term for 21,622 square feet of office space in
Boca Raton, FL to accommodate FlexShopper’s business and its employees (the “January 2019 Lease”). The monthly rent for this space is approximately
$31,500 with annual three percent increases throughout the initial 108-month lease term beginning on the anniversary of the commencement date.
The rental expense for the years ended December 31, 2020 and 2019 was approximately $688,400 and $520,700, respectively. At December 31, 2020, the
future minimum annual lease payments are approximately as follows:
2021
2022
2023
2024
2025
2026 and thereafter
$
$
426,233
416,627
427,305
434,916
443,038
1,229,924
3,378,043
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,
2020, is shown in the table below.
Supplemental balance sheet information related to leases is as follows:
Balance Sheet Classification
December 30,
2020
December 31,
2019
Assets
Operating Lease Asset
Finance Lease Asset
Total Lease Assets
Property and Equipment, net
Property and Equipment, net
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
Current Lease Liabilities
Current Lease Liabilities
Long Term Lease Liabilities
Long Term Lease Liabilities
$
$
$
$
1,673,432 $
27,106
1,700,538 $
1,847,932
31,299
1,879,231
153,019 $
7,707
1,925,498
21,857
2,108,081 $
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-12
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)
13.06%
13.31%
8
3
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 the commencement date of the lease.
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 amounted to $433,654 and $395,455 for the years ended December 31, 2020
and 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, December 31,
$
2020
221,433 $
11,049
-
4,033
2019
164,664
4,782
2,060,288
34,772
Below is a summary of undiscounted operating lease liabilities as of December 31, 2020. The table also includes a reconciliation of the future undiscounted
cash flows to the present value of the operating lease liabilities included in the consolidated balance sheet.
2021
2022
2023
2024
2025
2026 and thereafter
Total undiscounted cash flows
Less: interest
Present value of lease liabilities
Operating
Leases
415,050
405,443
417,606
430,134
443,038
1,229,924
3,341,195
(1,262,678)
2,078,517
$
$
The January 2019 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 approximately $31,500 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-13
Below is a summary of undiscounted finance lease liabilities as of December 31, 2020. The table also includes a reconciliation of the future undiscounted
cash flows to the present value of the finance lease liabilities included in the consolidated balance sheet.
2021
2022
2023
2024
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
11,184
11,184
9,699
4,782
36,849
(7,284)
29,565
$
$
Estimated
Useful Lives
2-5 years
3 years
3-7 years
December 31,
2020
December 31,
2019
$
$
303,285 $
12,489,441
1,121,914
13,914,640
(9,703,482)
1,700,538
5,911,696 $
95,671
10,123,830
596,946
10,816,447
(7,435,271)
1,879,231
5,260,407
Depreciation and amortization expense were $2,268,211 and $2,196,661 for the years ended December 31, 2020 and 2019, respectively.
5. PROMISSORY NOTES-RELATED PARTIES
January 2018 Notes - In January 2018, FlexShopper, LLC entered into letter agreements with H. Russell Heiser Jr., 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, (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 5.00% per annum in excess of the non-default rate
of interest from time to time in effect under the Credit Agreement entered into on March 6, 2015, computed on the basis of a 360-day year, which equaled
16.16% at December 31, 2020.
Upon issuance of the Notes, FlexShopper, LLC borrowed $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 warrants to purchase 301,487 shares to Mr. Heiser, and
1,507,395 shares of common stock and warrants to purchase 753,697 shares to NRNS.
F-14
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 borrowed
$500,000 on the Note held by NRNS on June 28, 2019. As of December 31, 2020, $1,777,212 of principal and accrued, unpaid interest was outstanding on
NRNS’s Note.
January 2019 Note - On January 25, 2019, FlexShopper, LLC entered into a subordinated debt financing letter agreement with 122 Partners, LLC, as
lender, pursuant to which FlexShopper, LLC issued a subordinated promissory note to 122 Partners, LLC (the “January 2019 Note”) in the principal
amount of $1,000,000. Mr. Heiser, FlexShopper’s Chief Financial Officer, is a member of 122 Partners, LLC. The Company paid a commitment fee of 2%
to the lender totaling $20,000. Payment of the principal amount and accrued interest under the January 2019 Note was due and payable by FlexShopper,
LLC on April 30, 2020 and FlexShopper, LLC can prepay principal and interest at any time without penalty. Amounts outstanding under the January 2019
Note bear interest at a rate equal to 5.00% per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement,
which equaled 16.16% at December 31, 2020. Obligations under the January 2019 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 2019 Note are secured by substantially all of
FlexShopper, LLC’s assets, subject to rights of the lenders under the Credit Agreement. As of December 31, 2020, $1,015,510 of principal and accrued,
unpaid interest was outstanding on the January 2019 Note. On April 30, 2020, pursuant to an amendment to the subordinated debt financing letter
agreement, FlexShopper, LLC and 122 Partners, LLC agreed to extend the maturity date of the January 2019 Note to April 30, 2021.
February 2019 Note - On February 19, 2019, FlexShopper, LLC entered into a letter agreement with NRNS, the manager of which is the Chairman of the
Company’s Board of Directors, pursuant to which FlexShopper, LLC issued a subordinated promissory note to NRNS (the “February 2019 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 2019 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 2019 Note bear interest at a rate equal to 5.00% per annum in excess of the non-default rate
of interest from time to time in effect under the Credit Agreement, which equaled 16.16% at December 31, 2020. Obligations under the February 2019
Note are subordinated to obligations under the Credit Agreement. The February 2019 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 2019 Note are secured by substantially all of FlexShopper, LLC’s assets, subject to rights of the lenders under the
Credit Agreement. As of December 31, 2020, $2,031,100 of principal and accrued, unpaid interest was outstanding on the February 2019 Note.
The Company is pursuing a refinancing of both related party subordinated notes with a non-related party note with a term that is similar to the Credit
Agreement. Besides extending the maturity date, no material changes are expected in the terms of the interest rate of the new subordinated facility. If the
Company is unsuccessful refinancing the related party notes, then the Company doesn’t not foresee any difficulty in extending the maturity of the current
related party subordinated notes.
Amounts payable under the promissory notes are as follows:
2021
6. LOAN PAYABLE UNDER CREDIT AGREEMENT
Debt
Principal
Interest
$
4,750,000 $
73,822
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 $47,500,000 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, 2020, amounts borrowed bear interest at 11.16%. The Company had $9,217,592 available under the Credit Agreement as of December
31, 2020.
F-15
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, 2020, follows:
Equity Book Value not less than
Unrestricted Cash greater than
Consolidated Total Debt to Equity Book Value ratio not to exceed
December 31,
2020
Required
Covenant
Actual
Position
$
8,000,000 $
1,500,000
4.75
11,154,046
8,541,232
3.93
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 $ 3,192,019 for the year ended December 31, 2020, and
$3,146,002 for the year ended December 31, 2019, respectively. As of December 31, 2020, the outstanding balance under the Credit Agreement was
$37,195,626. Such amount is presented in the consolidated balance sheet net of unamortized issuance costs of $61,617. Interest is payable monthly on the
outstanding balance of the amounts borrowed. No principal is expected to be repaid in the next twelve months due to the Commitment Termination Date
having been extended to April 1, 2024 (See Note 14), or from reductions in the borrowing base. Accordingly, all principal is shown as a non-current
liability at December 31, 2019.
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 number of shares, 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 (“Series 1 Preferred Stock”) ranks senior to common stock upon
liquidation and has a stated value of $5.00 per share.
As of December 31, 2020, each share of Series 1 Preferred Stock was convertible into 1.32230 shares of the Company’s common stock, subject to certain
anti-dilution rights. The holders of the Series 1 Preferred Stock have the option to convert the shares into 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 Preferred Stock have the same
dividend rights as holders of common stock, as if the Series 1 Preferred Stock had been converted to common stock. The Series 1 Preferred Stockholders
vote with holders of common stock and are entitled to a number of votes equal to a fraction, the numerator is 7,700,000 and the denominator is the number
of shares of Series 1 Preferred Stock issued.
F-16
859 shares of Series 1 Convertible Preferred Stock were converted into 1,136 shares of common stock during the year ended December 31, 2020.
As of December 31, 2020, there were 170,332 shares of Series 1 Convertible Preferred Stock outstanding, which were convertible into 225,231 shares of
common stock.
● Series 2 Convertible Preferred Stock - The Company sold to B2 FIE V LLC (the “Investor”), an entity affiliated with Pacific Investment Management
Company LLC, 20,000 shares of Series 2 Convertible Preferred Stock (“Series 2 Preferred Stock”) for gross proceeds of $20.0 million. The Company
sold an additional 1,952 shares of Series 2 Preferred Stock to a different investor for gross proceeds of $1.95 million at a subsequent closing.
The shares of Series 2 Preferred Stock 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 and unpaid dividends as of December 31, 2020 totaled approximately $10,832,073. As of December 31,
2020, each share of Series 2 Preferred Stock was convertible into approximately 266 shares of common stock; however, the conversion rate is subject to
further increase pursuant to a weighted average anti-dilution provision. The holders of the Series 2 Preferred Stock have the option to convert such shares
into shares of common stock and have the right to vote with holders of common stock on an as-converted basis. If the average closing price during any 45-
day consecutive trading day period or change of control transaction values the common stock at a price equal to or greater than $23.00 per share, then
conversion to common stock is automatic. Upon a Liquidation Event or Deemed Liquidation Event (each as defined), holders of Series 2 Preferred Stock
will 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, unpaid dividends thereon, and (2) the amount per share as would have been payable
had all shares of Series 2 Preferred Stock been converted to common stock immediately before the Liquidation Event or Deemed Liquidation Event.
Common Stock
The Company is authorized to issue 40,000,000 shares of common stock, par value $0.0001 per share. Each share of common stock entitles the holder to
one vote at all stockholder meetings. The common stock is traded on the Nasdaq Capital Market under the symbol “FPAY.”
Warrants
In September 2018, the Company issued warrants exercisable for 5,750,000 shares of common stock at an exercise price of $1.25 per share (the “Public
Warrants”). The warrants were immediately exercisable for five years from the date of issuance. The warrants were listed on the Nasdaq Capital Market
under the symbol “FPAYW” (See Note 11).
The Company also issued additional warrants exercisable for an aggregate of 1,055,184 shares of common stock at an exercise price of $1.25 per warrant to
Mr. Heiser and NRNS in connection with partial conversions of their promissory notes. The warrants are exercisable at $1.25 per share of common stock
and expire on September 28, 2023.
In connection with the issuance of Series 2 Preferred Stock in June 2016, the Company issued to the placement agent in such offering warrants exercisable
for 439 shares of Series 2 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 the manager, the
Company agreed to issue 40,000 warrants to the Consultant monthly for 12 months beginning on March 1, 2019 at an exercise price of $1.25 per share or,
if the closing share price on the last day of the month exceeds $1.25, then such exercise price will be 110% of the closing share price. The warrants are
immediately exercisable and expire following the close of business on June 30, 2023. In February 2020, this agreement was extended for an additional six
months through August 31, 2020.
F-17
On August 30, 2020, the parties entered into an amendment to the Consulting Agreement to further extend the term for another six-month period through
February 28, 2021. The Consulting Agreement was automatically renewed for one successive six-month period, therefore the new termination date is July
31, 2021.
This amendment also changed the alternative minimum exercise price of the monthly warrant consideration issuable to the Consultant to $1.60 per share,
and the expiration date of the warrants to the date that is four years following the last trading day of the calendar month relating to the applicable monthly
warrant issuance.
During the year ended December 31, 2020, the Company recorded an expense of $407,495 based on a weighted average valuation of $0.85 per warrant.
Grant Date
January 31, 2020
February 29, 2020
March 31, 2020
April 30, 2020
May 31, 2020
June 30, 2020
July 31, 2020
August 31, 2020
September 30, 2020
October 31,2020
November 30, 2020
December 31, 2020
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 $
40,000 $
40,000 $
480,000 $
16,503 $
18,727 $
8,769 $
25,412 $
33,388 $
36,681 $
29,587 $
46,744 $
43,229 $
37,414 $
45,883 $
65,157 $
407,494 $
0.41
0.47
0.22
0.64
0.83
0.92
0.74
1.17
1.08
0.94
1.15
1.63
0.85
The following table summarizes information about outstanding warrants as of December 31, 2020, all of which are exercisable:
Exercise
Price
Common
Stock Warrants
Outstanding
Series 2 Preferred
Stock Warrants
Outstanding
Weighted Average
Remaining
Contractual Life
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.25
1.34
1.40
1.54
1.62
1.68
1.69
1.74
1.76
1.91
1.95
2.00
2.01
2.08
2.45
2.53
2.57
2.78
2.93
5.50
1,250
1,215,184
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
177,304
-
2,112,488
* At December 31, 2020, the above warrants were convertible into 116,903 shares of common stock
F-18
3 years
3 years
3 years
3 years
3 years
4 years
3 years
3 years
3 years
3 years
4 years
3 years
3 years
4 years
3 years
3 years
4 years
3 years
3 years
2 years
3 years
439*
439
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.
On April 24, 2020, the Company’s Board of Directors approved an Amendment to the 2018 Plan, subject to stockholder approval. On June 10, 2020, the
Company’s stockholders approved the 2018 Plan Amendment that increased (a) the total number of shares available for issuance under the 2018 Plan by
1,000,000 shares and (b) the number of shares available for issuance as “incentive stock options” within the meaning of Internal Revenue Code Section 422
by 1,000,000 shares.
Grants under the 2018 Plan and the Prior Plans consist of incentive stock options, non-qualified stock options, stock appreciation rights, stock awards,
stock unit awards, dividend equivalents and other stock-based awards. Employees, directors and consultants and other service providers are eligible to
participate in the 2018 Plan and the Prior Plans. Options granted under the 2018 Plan and the Prior Plans vest over periods ranging from immediately upon
grant to a three-year period and expire ten years from date of grant.
Activity in stock options for the year ended December 31, 2020 and 2019 is as follows:
Weighted
average
exercise
price
Weighted
average
contractual
term
(years)
Outstanding at January 1, 2020
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Vested and exercisable at December 31, 2020
Outstanding at January 1, 2019
Granted
Forfeited
Expired
Exercised
Outstanding at December 31, 2019
Number of
options
2,004,318 $
860,465
(7,166)
(261,917)
2,595,700 $
1,730,198
620,900 $
1,694,851
(203,766)
(25,000)
(82,667)
2,004,318 $
1.72
2.38
0.79
1.90
1.92
1.90
3.75
1.00
1.71
6.20
0.84
1.72
Aggregate
intrinsic
value
2,542,361
$
7.60
7.82
6,523
134,070
2,491,026
1.967,071
104,868
67,911
2,542,361
The weighted average grant date fair value of options granted during the twelve-month period ended December 31, 2020 and 2019 was $1.47 and $0.61 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
2020
1.47
5.3 years
2019
$0.83 to $1.80
6.8 years
76.0%
0%
64%
0%
0.28% to 1.72%
1.43% to 2.55%
F-19
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
$981,261 and $595,833 for the year ended December 31, 2020 and December 31, 2019, respectively. Unrecognized compensation cost related to non-
vested options at December 31, 2020 amounted to approximately $743,726, which is expected to be recognized over a weighted average period of 3.6
years.
9. INCOME TAXES
Reconciliation of the benefit for income taxes from continuing operations recorded in the consolidated statements of operations with the amounts computed
at the statutory federal tax rates for each year:
Federal tax at statutory rate
State tax, net of federal tax
Permanent differences
Change in statutory rate
Change in valuation allowance
Other
Expense for income taxes
2020
2019
$
$
67,862 $
29,866
126,301
(69,835)
522,738
(13,882)
663,050 $
167,000
65,000
92,000
(197,000)
(10,000)
99,000
216,000
Tax affected components of deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 were as follows:
Deferred tax assets (liabilities):
Equity based compensation
Allowance for doubtful accounts
Fixed assets
Lease impairment
Lease Liability
Right of use asset
Tax credit carryforward
Federal loss carry-forwards
State loss carry forward
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
$
2020
2019
368,000 $
5,527,000
256,000
587,000
526,000
(425,000)
32,000
4,779,000
161,000
(6,000)
240,000
2,478,000
(6,476,000)
553,000
520,000
(466,000)
32,000
14,047,000
353,000
-
11,805,000
(11,805,000)
- $
11,281,000
(11,281,000)
-
$
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, 2020, the Company has federal net operating loss carryforwards of approximately $22,755,000 and state net operating loss
carryforwards of approximately $2,857,000 available to offset future taxable income. Federal loss carryforwards incurred prior to January 1, 2018, expire
in 2037. Federal loss carryforwards incurred after January 1, 2018 do not expire. State loss carryforwards expire in 2037 and 2038. Federal and state loss
carryforwards are subject to an annual limitation on utilization under Section 382 of the Internal Revenue Code.
F-20
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, 2020 and 2019 were as follows:
Current Income Tax:
Federal
State
Deferred Income Tax:
Federal
Sate
2020
2019
$
$
-
663,050
-
-
663,050 $
-
216,400
-
-
216,400
The Company’s effective tax rate for the year ended December 31, 2020 and 2019 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 $663,050 current state income tax expense for the year ended December 31, 2020 for certain states in which taxable income exceeded available
net operating loss carryforwards.
The Company files tax returns in the U.S. federal jurisdiction and various states. At December 31, 2020, federal tax returns remained open for Internal
Revenue Service review for tax years after 2017, while state tax returns remain open for review by state taxing authorities for tax years after 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 2020, the Company was notified that its 2017 federal income tax return was selected for examination, and that exam remains open as of
December 31, 2020. There were no other federal or state income tax audits being conducted as of December 31, 2020.
The Company completed its analysis and review of all tax positions taken through December 31, 2020 and does not believe that there are any unrecognized
tax benefits related to tax positions taken on its income tax returns.
10. COMMITMENTS
The Company does not have any commitments other than real property leases (see Note 3).
11. EXCHANGE OFFER OF WARRANTS
On February 4, 2020, the Company completed an exchange offer relating to its outstanding public warrants, in which the holders of the public warrants
were offered 0.62 shares of common stock for each outstanding warrant tendered (the “Warrant Exchange Offer”). In total, 5,351,290 warrants were
exchanged for 3,317,812 shares of common stock in accordance with the Warrant Exchange Offer.
On February 19, 2020, the Company exchanged all remaining untendered public warrants for common stock at a rate of 0.56 shares per public warrant in
accordance with the terms of the Warrant Agreement (the “Mandatory Conversion of Warrants”). In total 258,610 warrants were exchanged for 144,871
shares in this transaction.
As a result of these transactions, the Company recognized a deemed dividend of $713,212 resulting from the excess of the fair value of the common stock
over the intrinsic value of the warrants.
F-21
12. CONTINGENCIES AND OTHER UNCERTAINTIES
Regulatory inquiries
In the first quarter of 2021, FlexShopper, along with a number of other lease-to-own companies, received a subpoena from the California Department of
Financial Protection and Innovation (the "DFPI") requesting the production of documents and information regarding the Company’s compliance with state
consumer protection laws. The Company is cooperatively engaging with the DFPI in response to its inquiry. Although the Company believes it is in
compliance with all applicable consumer protection laws and regulations in California, this inquiry ultimately could lead to an enforcement action and/or a
consent order, and substantial costs, including legal fees, fines, penalties, and remediation expenses.
COVID-19
The extent of the impact and effects of the recent outbreak of the coronavirus (COVID-19) on the operation and financial performance of our business will
depend on future developments, including the duration and spread of the outbreak, the recovery time of the disrupted supply chains, or the uncertainty with
respect to the accessibility of additional liquidity or capital markets, all of which are highly uncertain and cannot be predicted. If the demand for the
Company’s leases are impacted by this outbreak for an extended period, our results of operations may be materially adversely affected.
13. PROMISSORY NOTE- PAYCHECK PROTECTION PROGRAM
FlexShopper, LLC (the “Borrower”) applied for and received a loan (the “Loan”) on May 4, 2020, from Customers Bank (the “PPP Lender”) in the
principal amount of $1,914,100, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”), which was enacted March 27, 2020, and administered through the U.S. Small Business Administration (the “SBA”).
The Loan is evidenced by a promissory note (the “Note”), dated April 30, 2020, issued by the Borrower to the PPP Lender. The Note matures on April 30,
2022, and bears interest at the rate of 1.00% per annum, payable monthly commencing the later of on November 30, 2020 or the SBA review of the
forgiveness application. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalty. Proceeds from the Loan will
be available to the Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in
accordance with the PPP. Under the terms of the PPP, up to the entire sum of the principal amount and accrued interest may be forgiven to the extent the
Loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business
Administration under the PPP. The Company believes that it used the entire Loan amount for designated qualifying expenses and has submitted a loan
forgiveness application to the PPP Lender that is pending review.
14. SUBSEQUENT EVENTS
On January 29, 2021, the Company and the Lender signed an Omnibus Amendment to the Credit Agreement (See Note 6). This Amendment extended the
Commitment Termination Date to April 1, 2024, improved other covenant requirements, partially removed indebtedness covenants and improved eligibility
rules. The interest rate charged on amounts borrowed remains LIBOR plus 11% per annum.
F-22
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, 2020 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, 2020. There were no changes in our internal
control over financial reporting during the quarter ended December 31, 2020 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, 2020.
Item 9B. Other Information.
None
26
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 2021 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 2021 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 2021 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 2021 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 2021 Annual Meeting of
Stockholders: “Proposal 4−Ratification of Appointment of Independent Registered Public Accounting Firm.”
27
Item 15. Exhibits and 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
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-Q filed 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)
4.8
Description of the FlexShopper, Inc. Securities Registered under Section 12 of the Securities Exchange Act (previously filed as Exhibit
4.8 to the Company’s Annual Report on Form 10-K filed on March 3, 2020 and incorporated herein by reference)
28
10.1
Standard Retail Space Lease, dated August 25, 2017, by and between FlexShopper LLC and 1014 Pepper, Inc. (previously filed as
10.2+
10.3
10.4
Exhibit 10.5 to the Company’s Annual Report on Form 10-K filed on March 8, 2018 and incorporated herein by reference)
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)
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)
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)
10.5
Form of Investor Rights Agreement, dated as of March 6, 2015, by and among the Company and the Investors party thereto (previously
10.6
10.7
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)
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)
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)
10.8+
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)
10.9
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)
10.10+
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)
10.11+
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, 2007 and incorporated herein by reference)
10.12+
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)
10.13+
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)
10.14+
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)
10.15
10.16
10.17
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)
29
10.18+
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)
10.19
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)
10.20
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)
10.21+
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)
10.22
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)
10.23
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)
10.24
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)
10.25
Amendment No. 8 to Credit Agreement, dated August 29, 2018, between FlexShopper 2, LLC and WE 2014-1, LLC (previously filed as
10.26
10.27
10.28
10.29
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 31, 2018 and incorporated herein by reference)
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)
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)
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)
10.30
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)
10.31
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)
10.32
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)
10.33
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)
10.34
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)
10.35
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)
10.36
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)
30
10.37+
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)
10.38
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)
10.39
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)
10.40
Amendment to Consulting Agreement, dated February 19, 2019, between the Company and XLR8 Capital Partners LLC. (previously
filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2020 and incorporated herein by reference).
10.41
Form of Commitment Letter and Promissory Note between FlexShopper, LLC and Customer Bank. (previously filed as Exhibit 10.3 to
the Company’s Quarterly Report on Form 10-Q filed on May 6, 2020 and incorporated herein by reference).
10.42
Amendment to Subordinated Debt Financing Letter Agreement issued by FlexShopper, LLC to 122 Partners, LLC. (previously filed as
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2020 and incorporated herein by reference).
10.43
Amendment to the FlexShopper, Inc. 2018 Omnibus Equity Compensation Plan (previously filed as Appendix A to the Company’s
Definitive Proxy Statement filed on April 29, 2020 and incorporated herein by reference).+
10.44
10.45
Amendment of Consulting Agreement, dated August 30, 2020, between FlexShopper, Inc. and XLR8 Capital Partners, LLC. (previously
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 1, 2020 and incorporated herein by reference).
Credit Agreement, dated as of March 6, 2015, among FlexShopper 2, LLC, as company, Wells Fargo Bank, National Association, as
paying agent, various lenders from time to time party thereto, and WE 2014-1, LLC, as administrative agent, as conformed through
Omnibus Amendment dated January 29, 2021. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
February 4, 2021 and incorporated herein by reference).
10.46
Amendment No. 13 to Credit Agreement, dated February 26, 2020, 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 March 3, 2021 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
101.DEF
101.LAB Linkbase, XBRL Taxonomy Extension*
101.PRE
Calculation Linkbase, XBRL Taxonomy Extension Definition*
Linkbase, XBRL Taxonomy Extension Labels*
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 duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 8, 2021
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/ H. Russell Heiser, Jr.
H. Russell Heiser, Jr.
/s/ James D. Allen
James D. Allen
/s/ Howard S. Dvorkin
Howard S. Dvorkin
/s/ Sean Hinze
Sean Hinze
/s/ T. Scott King
T. Scott King
/s/ Thomas O. Katz
Thomas O. Katz
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Date
March 8, 2021
March 8, 2021
March 8, 2021
Chairman of the Board of Directors
March 8, 2021
Director
Director
Director
32
March 8, 2021
March 8, 2021
March 8, 2021
Subsidiaries of Registrant
FlexShopper, LLC is a limited liability company formed under the laws of the State of Delaware in June 2013.
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.
FlexLending, LLC, is a limited liability company organized under the laws of Delaware in 2019.
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement 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 8, 2021, on our audits of the consolidated financial statements as of December 31, 2020
and 2019, 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 8, 2021.
Exhibit 23.1
/s/ Eisneramper LLP
EISNERAMPER LLP
New York, New York
March 8, 2021
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 8, 2021
/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 8, 2021
/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, 2020 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 8, 2021
/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, 2020 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 8, 2021
/s/ Russ Heiser
Russ Heiser
Principal Financial Officer