FlexShopper(FPAY) - 2020 Q3 - Quarterly Report

Cautionary Statement About Forward-Looking Statements The report contains forward-looking statements based on current beliefs, expectations, and assumptions, which are subject to inherent uncertainties, risks, and changes in circumstances - The report contains forward-looking statements based on current beliefs, expectations, and assumptions, which are subject to inherent uncertainties, risks, and changes in circumstances[6][7] - Key factors that could cause actual results to differ materially include limited operating history, financing ability, management of the e-commerce platform, compliance with credit agreement covenants, dependence on third-party retail partners, regulatory compliance, data security, and the business and financial impact of the COVID-19 pandemic[7][9] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for FlexShopper, Inc., including the balance sheets, statements of operations, statements of changes in stockholders' equity, and statements of cash flows, along with accompanying notes detailing significant accounting policies, business operations, liquidity, and specific financial instrument details Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity as of specific dates Consolidated Balance Sheet Highlights (as of September 30, 2020 vs. December 31, 2019) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change ($) | Change (%) | | :------------------------- | :----------- | :----------- | :--------- | :--------- | | Total Assets | $51,694,221 | $52,214,892 | $(520,671) | (1.0%) | | Total Liabilities | $40,458,165 | $42,246,617 | $(1,788,452) | (4.2%) | | Total Stockholders' Equity | $11,236,056 | $9,968,275 | $1,267,781 | 12.7% | Consolidated Statements of Operations Details the company's revenues, expenses, and net income over specific reporting periods Consolidated Statements of Operations Highlights (Three Months Ended September 30) | Metric | 2020 | 2019 | Change ($) | Change (%) | | :--------------- | :----------- | :----------- | :----------- | :--------- | | Total Revenues | $24,570,064 | $22,932,335 | $1,637,729 | 7.1% | | Operating Income | $1,240,696 | $2,449,776 | $(1,209,080) | (49.4%) | | Net Income | $289,360 | $1,387,982 | $(1,098,622) | (79.2%) | | Basic and Diluted EPS | $(0.02) | $0.04 | $(0.06) | (150.0%) | Consolidated Statements of Operations Highlights (Nine Months Ended September 30) | Metric | 2020 | 2019 | Change ($) | Change (%) | | :--------------- | :----------- | :----------- | :----------- | :--------- | | Total Revenues | $73,942,941 | $66,328,072 | $7,614,869 | 11.5% | | Operating Income | $3,293,066 | $4,847,350 | $(1,554,284) | (32.1%) | | Net Income | $78,983 | $1,581,579 | $(1,502,596) | (95.0%) | | Basic and Diluted EPS | $(0.12) | $(0.01) | $(0.11) | (1100.0%) | Consolidated Statements of Changes in Stockholders' Equity Outlines the changes in equity components, including net income, stock issuances, and other comprehensive income - Total stockholders' equity increased from $9,968,275 at January 1, 2020, to $11,236,056 at September 30, 2020[17] - Changes in equity for the nine months ended September 30, 2020, included provisions for compensation expense related to stock options ($793,241), issuance of warrants ($259,040), exercise of warrants and stock options ($131,250 and $2,634 respectively), and a net loss attributable to common stockholders of $(2,463,446)[16][17] Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30) | Cash Flow Activity | 2020 | 2019 | Change ($) | Change (%) | | :------------------------- | :----------- | :----------- | :----------- | :--------- | | Operating Activities | $4,555,130 | $3,990,643 | $564,487 | 14.1% | | Investing Activities | $(2,099,654) | $(1,664,580) | $(435,074) | (26.1%) | | Financing Activities | $(2,573,929) | $(5,294,911) | $2,720,982 | 51.4% | | Decrease in Cash | $(118,453) | $(2,968,848) | $2,850,395 | 95.9% | | Cash, end of period | $6,750,019 | $3,172,362 | $3,577,657 | 112.8% | Notes To Consolidated Financial Statements Provides detailed explanations of accounting policies, business operations, and specific financial instrument disclosures 1. BASIS OF PRESENTATION Describes the accounting principles and standards used in preparing the financial statements - The interim financial statements are prepared in accordance with Form 10-Q and GAAP, reflecting all necessary adjustments for a fair statement of financial position, results of operations, and cash flows[22] 2. BUSINESS AND LIQUIDITY Outlines the company's core business model and its current financial capacity to meet short-term obligations - FlexShopper, Inc. is a holding corporation that provides durable goods to consumers on a lease-to-own (LTO) basis through e-commerce sites, including third-party retailers[24] - The Company's liquidity is funded by common stock, warrants, preferred stock sales, and borrowing against its lease portfolio and promissory notes[25] - The Company faces significant refinancing risk with its Credit Agreement and Promissory Notes maturing in early 2021, with no assurance of favorable terms or availability for refinancing[26] 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Details the key accounting methods and estimates applied in preparing the financial statements - Revenue from lease purchase agreements is recognized on an accrual basis, with merchandise sales recognized upon exercise of purchase options[29] - Accounts receivable, net, decreased from $8,272,332 at December 31, 2019, to $7,855,320 at September 30, 2020, with a significant allowance for doubtful accounts due to collection efforts and continued accrual of charges[30] - Lease merchandise, net, decreased from $31,063,104 at December 31, 2019, to $30,658,104 at September 30, 2020, and is depreciated straight-line over the typical 12-month ownership period[32][33] 4. LEASES Discusses the company's lease commitments, right-of-use assets, and lease liabilities under ASC 842 - FlexShopper has lease commitments for retail store and office space, with total future minimum annual lease payments of $3,485,000 as of September 30, 2020[49] - The Company recognized operating lease assets of $1,706,695 and total lease liabilities of $2,145,730 as of September 30, 2020, following the adoption of ASC 842[53] Weighted-Average Lease Metrics (as of September 30, 2020) | Lease Type | Weighted Average Discount Rate | Weighted Average Remaining Lease Term (in years) | | :-------------- | :----------------------------- | :----------------------------------------------- | | Operating Leases | 13.07% | 8 | | Finance Leases | 13.30% | 4 | 5. PROPERTY AND EQUIPMENT Details the company's tangible assets, including their cost, accumulated depreciation, and amortization expenses Property and Equipment (as of September 30, 2020 vs. December 31, 2019) | Category | Sep 30, 2020 | Dec 31, 2019 | | :------------------------ | :----------- | :----------- | | Furniture, fixtures and vehicle | $111,052 | $95,671 | | Website and internal use software | $11,928,687 | $10,123,830 | | Computers and software | $876,358 | $596,946 | | Less: accumulated depreciation and amortization | $(9,088,367) | $(7,435,271) | | Right of use assets, net | $1,735,874 | $1,879,231 | | Total | $5,563,604 | $5,260,407 | - Depreciation and amortization expense for property and equipment increased to $1,653,099 for the nine months ended September 30, 2020, from $1,647,290 in the prior year period[61] 6. PROMISSORY NOTES-RELATED PARTIES Describes the company's outstanding promissory notes and associated interest expenses with related parties - FlexShopper, LLC has several subordinated promissory notes with related parties, including H. Russell Heiser Jr. and NRNS Capital Holdings LLC, bearing interest at 16.15% per annum as of September 30, 2020[62][65][66] - As of September 30, 2020, outstanding principal and accrued interest on these notes totaled $1,771,909 for NRNS's amended note, $1,012,517 for the January 2019 Note (extended to April 30, 2021), and $2,025,039 for the February 2019 Note (due June 30, 2021)[64][65][66] - Interest expense for these promissory notes was $593,738 for the nine months ended September 30, 2020, a decrease from $617,165 in the prior year period[68] 7. LOAN PAYABLE UNDER CREDIT AGREEMENT Details the company's credit facility, borrowing capacity, interest rates, and covenant compliance - FlexShopper has a Credit Agreement with Wells Fargo Bank and WE 2014-1, LLC, allowing borrowings up to $32,500,000, with an interest rate of LIBOR plus 11% (11.15% at September 30, 2020)[69] - The Commitment Termination Date was extended to February 28, 2021, with repayment due one year thereafter[69] Credit Agreement Covenant Compliance (as of September 30, 2020) | Covenant | Required Covenant | Actual Position | | :---------------------------------------- | :---------------- | :-------------- | | Equity Book Value not less than | $8,000,000 | $11,236,056 | | Unrestricted Cash greater than | $1,500,000 | $6,750,019 | | Consolidated Total Debt to Equity Book Value ratio not to exceed | 4.75 | 2.61 | 8. CAPITAL STRUCTURE Outlines the company's equity components, including preferred stock, common stock, and outstanding warrants - As of September 30, 2020, there were 170,332 shares of Series 1 Convertible Preferred Stock outstanding, convertible into 225,231 shares of common stock[73] - Series 2 Convertible Preferred Stock accrues dividends at 10% annually, with cumulative accrued dividends of approximately $10,222,301 as of September 30, 2020, and each share convertible into approximately 266 shares of common stock[73] - The Company has various outstanding warrants, including Public Warrants, warrants issued to related parties, and warrants issued under a consulting agreement, with exercise prices ranging from $1.25 to $2.93 for common stock and $1,250 for Series 2 Preferred Stock[74][75][76][79][82] 9. STOCK OPTIONS Details the company's equity compensation plan, stock option activity, and related compensation expenses - The 2018 Omnibus Equity Compensation Plan was amended to increase available shares by 1,000,000, with options vesting over periods up to three years and expiring in ten years[85][86] Stock Option Activity (Nine Months Ended September 30, 2020) | Metric | Number of Options | | :------------------------- | :---------------- | | Outstanding at January 1, 2020 | 2,004,318 | | Granted | 691,046 | | Forfeited | (65,829) | | Exercised | (6,666) | | Outstanding at September 30, 2020 | 2,622,869 | | Vested and exercisable at September 30, 2020 | 1,676,871 | - Compensation expense for stock options was $793,241 for the nine months ended September 30, 2020, with approximately $707,000 in unrecognized compensation cost remaining[89] 10. INCOME TAXES Discusses the company's deferred tax assets, net operating loss carryforwards, and valuation allowances - As of September 30, 2020, the Company had federal net operating loss carryforwards (NOLs) of approximately $66,900,000 and state NOLs of $6,000,000[90] - A full valuation allowance has been recorded against deferred tax assets, as management believes it is not more likely than not that such assets will be recognized[91] 11. EXCHANGE OFFER OF WARRANTS Describes the company's warrant exchange offer, resulting in common stock issuance and a deemed dividend - In February 2020, FlexShopper completed a warrant exchange offer, exchanging 5,351,290 public warrants for 3,317,812 shares of common stock[92] - An additional 258,610 warrants were mandatorily converted into 144,871 shares of common stock[93] - The transaction resulted in a recognized deemed dividend of $713,212[94] 12. CONTINGENCIES AND OTHER UNCERTAINTIES Addresses potential future events, such as the impact of the COVID-19 pandemic, that could affect financial results - The extent of the impact of the COVID-19 pandemic on operations and financial performance is highly uncertain and cannot be predicted, potentially materially adversely affecting results if demand is impacted for an extended period[95] 13. COMMITMENTS Details the company's contractual obligations, primarily related to real property leases - The Company's only commitments are related to real property leases[96] 14. PROMISSORY NOTE- PAYCHECK PROTECTION PROGRAM Describes the company's loan received under the Paycheck Protection Program and its forgiveness status - FlexShopper, LLC received a $1,914,100 loan under the Paycheck Protection Program (PPP) on May 4, 2020, bearing 1.00% interest and maturing on April 30, 2022[97][98] - The entire loan amount was used for qualifying expenses, and a loan forgiveness application has been submitted and is pending review[98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on FlexShopper's financial condition and results of operations, including an executive overview of its lease-to-own business model, critical accounting policies, key performance metrics, and a detailed comparison of operating results for the three and nine months ended September 30, 2020 and 2019. It also discusses liquidity, capital resources, and the financial impact of the COVID-19 pandemic Executive Overview Provides a high-level summary of the company's business model, strategic objectives, and operational highlights - FlexShopper provides durable goods to consumers on a lease-to-own (LTO) basis through e-commerce sites and third-party retailers, aiming for broad expansion in the U.S. consumer e-commerce and retail marketplaces[101] - Sales channels include the FlexShopper.com LTO Marketplace, a patent-pending LTO payment method at checkout, and facilitating LTO transactions with retailers[101] Summary of Critical Accounting Policies Highlights the significant accounting policies and estimates that require management's judgment and impact financial reporting - Management's financial statements rely on estimates and assumptions, particularly for credit provisions, intangible assets, contingencies, litigation, and income taxes[102] - Accounts receivable, net, was $7,855,320 as of September 30, 2020, with an allowance for doubtful accounts of $16,790,115, reflecting ongoing collection efforts for past-due lease payments[103] - Lease merchandise is recorded at cost net of accumulated depreciation and impairment, with ownership maintained by FlexShopper until all payment obligations are satisfied[105] Key Performance Metrics Presents non-GAAP financial measures and operational indicators used to evaluate the company's performance Gross Profit and Adjusted EBITDA (Three Months Ended September 30) | Metric | 2020 | 2019 | $ Change | % Change | | :---------------- | :----------- | :----------- | :----------- | :------- | | Gross Profit | $8,919,538 | $8,225,967 | $693,571 | 8.4% | | Gross Profit Margin | 36% | 37% | - | - | | Adjusted EBITDA | $2,100,746 | $3,177,471 | $(1,076,725) | (33.9%) | Gross Profit and Adjusted EBITDA (Nine Months Ended September 30) | Metric | 2020 | 2019 | $ Change | % Change | | :---------------- | :----------- | :----------- | :----------- | :------- | | Gross Profit | $24,275,341 | $21,019,612 | $3,255,729 | 15.5% | | Gross Profit Margin | 33% | 32% | - | - | | Adjusted EBITDA | $6,163,023 | $7,292,436 | $(1,129,413) | (15.0%) | - Adjusted EBITDA is a non-GAAP measure used by management and investors to assess operating performance and liquidity, excluding interest, stock-based compensation, taxes, depreciation (other than leased inventory), amortization, and one-time items[110][111] Results of Operations Analyzes the company's financial performance by comparing revenues, expenses, and profitability across periods Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Compares the company's financial performance for the three-month periods, highlighting key changes and drivers Operating Results (Three Months Ended September 30) | Metric | 2020 | 2019 | $ Change | % Change | | :------------------------- | :----------- | :----------- | :----------- | :------- | | Total revenues | $24,570,064 | $22,932,335 | $1,637,729 | 7.1% | | Cost of lease revenue and merchandise sold | $15,650,526 | $14,706,368 | $944,158 | 6.4% | | Marketing | $1,650,717 | $868,452 | $782,265 | 90.1% | | Salaries and benefits | $2,499,235 | $2,189,629 | $309,606 | 14.1% | | Operating income | $1,240,696 | $2,449,776 | $(1,209,080) | (49.4%) | | Net income | $289,360 | $1,387,982 | $(1,098,622) | (79.2%) | - Lease originations increased to 47,317 gross leases in Q3 2020 from 36,531 in Q3 2019, driven by growth in repeat customers and efficient new customer acquisition[113] - Marketing expenses significantly increased by 90.1% due to strategic digital channel investments and higher capitalized commission amortization[115] Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Compares the company's financial performance for the nine-month periods, detailing significant trends and variances Operating Results (Nine Months Ended September 30) | Metric | 2020 | 2019 | $ Change | % Change | | :------------------------- | :----------- | :----------- | :----------- | :------- | | Total revenues | $73,942,941 | $66,328,072 | $7,614,869 | 11.5% | | Cost of lease revenue and merchandise sold | $49,667,601 | $45,308,460 | $4,359,141 | 9.6% | | Marketing | $3,619,911 | $2,031,227 | $1,588,684 | 78.2% | | Salaries and benefits | $7,324,620 | $5,984,797 | $1,339,823 | 22.4% | | Operating income | $3,293,066 | $4,847,350 | $(1,554,284) | (32.1%) | | Net income | $78,983 | $1,581,579 | $(1,502,596) | (95.0%) | - Lease originations increased to 117,294 gross leases in the nine months ended September 30, 2020, from 95,731 in the prior year, contributing to the 9.4% increase in total lease revenues[119] - Salaries and benefits increased by 22.4% due to headcount increases in Q4 2019 for holiday season volume and the hiring of key management[122] Operations Describes the company's business activities, sales channels, and competitive advantages in its market - FlexShopper promotes its products and services through strategic partnerships, direct response marketing, and affiliate/internet marketing across online LTO marketplace, patent-pending LTO payment method, and in-store LTO technology platforms[124][125] - The Company believes its competitive advantage lies in providing all three sales channels as a bundled package to retailers and e-retailers, anticipating rapid business development[125] Liquidity and Capital Resources Assesses the company's ability to generate and manage cash, fund operations, and meet financial obligations - Cash balance at September 30, 2020, was $6,750,019, an increase from $3,172,362 at the same date in 2019, primarily due to proceeds from the Paycheck Protection Program[126] - The Company's liquidity is supported by sales of common and preferred stock, warrants, and borrowings against its lease portfolio[137] - Significant refinancing risk exists for the Credit Agreement (due February 28, 2021) and Promissory Notes (due June 30, 2021 and April 30, 2021), with no guarantee of favorable terms or availability[138] Cash Flow Summary Summarizes the sources and uses of cash from operating, investing, and financing activities - Net cash provided by operating activities was $4,555,130 for the nine months ended September 30, 2020, driven by depreciation, impairment, and provision for doubtful accounts, partially offset by lease merchandise purchases and changes in accounts receivable[132] - Net cash used in investing activities was $2,099,654, primarily for capitalized software costs and property and equipment purchases[134] - Net cash used in financing activities was $2,573,929, mainly due to Credit Agreement repayments partially offset by new borrowings and PPP loan proceeds[135] Financial Impact of COVID-19 Pandemic Discusses the effects of the COVID-19 pandemic on the company's operations, customer behavior, and financial performance - COVID-19 led to a significant transition to remote work (85% of employees) and changes in customer origination sources, with brick-and-mortar/B2B channels impacted by closures and limited operations[140][141] - Approval rates were reduced in mid-March to acquire customers with exceptional payment performance but reverted to pre-COVID-19 levels in August[141] - The pandemic potentially positively impacted portfolio payment rates from April to August, with a decrease in delinquent consumers, partly due to government stimulus, and enabled FlexShopper to increase cash and satisfy Credit Agreement covenants[142] Off-Balance Sheet Arrangements States whether the company has any unrecorded financial arrangements that could impact its financial condition - The Company does not have any off-balance sheet arrangements[143] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - Not applicable[144] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures, concluding they were effective at a reasonable assurance level as of September 30, 2020. No material changes in internal controls over financial reporting occurred during the quarter - Disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020[145] - No material changes in internal controls over financial reporting occurred during the most recently completed fiscal quarter[146] PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently a party to any legal proceedings believed to have a material adverse effect on its business, financial condition, or results of operations, though it may face claims in the ordinary course of business - The Company is not currently involved in any legal proceedings expected to have a material adverse effect on its business, financial condition, or results of operations[148] Item 1A. Risk Factors This section refers readers to the "Risk Factors" in the Annual Report on Form 10-K for the year ended December 31, 2019, and highlights the potential material adverse impact of the COVID-19 pandemic on the business, operations, and financial results, citing various uncertain factors - Readers should consider risk factors from the 2019 Form 10-K[149] - The COVID-19 pandemic's impact on business, operations, and financial results is uncertain and could be materially adverse, depending on factors like duration, governmental actions, economic activity, employment levels, customer demand, business failures, and the Company's ability to provide services[150][151] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company issued 760,000 warrants to XLR8 Capital Partners LLC under a consulting agreement, exercisable at a weighted average price of $1.82 per share, relying on a Section 4(a)(2) exemption from registration - The Company issued 760,000 warrants to XLR8 Capital Partners LLC under a consulting agreement[152] - Warrants are exercisable at a weighted average price of $1.82 per share, with an exercise price range from $1.25 to $2.93[152] - The issuance relied on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933[152] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - None[154] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[155] Item 5. Other Information The Company reported no other information - None[156] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, amendments to consulting agreements, and certifications - Exhibits include Restated Certificate of Incorporation, Amended and Restated Bylaws, Certificates of Amendment, Amendment of Consulting Agreement, and various certifications (Rule 13a-14(a), Section 1350, XBRL documents)[158] Signatures Confirms the official signing of the report by the Chief Executive Officer and Chief Financial Officer - The report was signed by Richard House Jr., Chief Executive Officer, and H. Russell Heiser, Jr., Chief Financial Officer, on November 9, 2020[164]