FlexShopper(FPAY) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Financial statements show decreased assets and liabilities, with revenue growth and net income turnaround from debt extinguishment Consolidated Balance Sheets Total assets decreased to $62.9 million, driven by reduced cash and lease merchandise, while liabilities decreased and equity rose Consolidated Balance Sheet Data (unaudited) | | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $56,975,114 | $62,265,367 | | Total assets | $62,916,829 | $68,249,379 | | Total current liabilities | $12,051,891 | $17,067,745 | | Total liabilities | $49,767,891 | $57,095,333 | | Total stockholders' equity | $13,148,937 | $11,154,046 | Consolidated Statements of Operations Total revenues increased significantly for both three and six-month periods, resulting in net income from debt extinguishment gain Statement of Operations Highlights (unaudited) | | Three months ended June 30, | Six months ended June 30, | | :--- | :--- | :--- | | | 2021 | 2020 | 2021 | 2020 | | Total revenues | $30,688,553 | $24,530,130 | $63,472,223 | $49,372,877 | | Operating income | $1,211,013 | $789,058 | $2,611,247 | $2,052,370 | | Gain on extinguishment of debt | $1,931,825 | - | $1,931,825 | - | | Net income/(loss) | $942,194 | $(262,062) | $943,431 | $(210,377) | | Diluted EPS | $0.01 | $(0.04) | $(0.01) | $(0.10) | Consolidated Statements of Cash Flows Net cash used in operating activities significantly decreased, with cash also used in investing and financing, leading to cash reduction Cash Flow Summary (unaudited) | | For the six months ended June 30, | | :--- | :--- | :--- | | | 2021 | 2020 | | Net cash used in/provided by operating activities | $(34,366) | $5,794,941 | | Net cash used in investing activities | $(1,367,154) | $(1,399,360) | | Net cash used in financing activities | $(1,992,499) | $(1,413,044) | | Increase/(Decrease) in cash | $(3,394,019) | $2,982,537 | | Cash, end of period | $5,147,213 | $9,851,009 | Notes To Consolidated Financial Statements Notes detail LTO business, doubtful accounts, credit and related-party debt, capital structure, PPP loan forgiveness, and DFPI inquiry - The company operates a lease-to-own (LTO) model for durable goods, primarily through its e-commerce site, by approving consumers via a proprietary underwriting model[25] - The allowance for doubtful accounts is significant ($31.9M against $45.1M in receivables) because the company pursues all collection efforts before charging off accounts, during which time delinquent customers continue to accrue charges[29] - On June 21, 2021, the company's $1.9 million Paycheck Protection Program (PPP) loan was forgiven, resulting in a gain from debt extinguishment of $1,931,825[99] - In Q1 2021, the company received a subpoena from the California Department of Financial Protection and Innovation (DFPI) regarding compliance with state consumer protection laws[94] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue growth from lease originations improved gross profit margin, but operating expenses increased, with liquidity managed via credit facility Key Performance Metrics Gross profit and margin significantly improved for both Q2 and six-month periods, with modest Adjusted EBITDA growth on higher revenues Key Performance Metrics - Three Months Ended June 30 | | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Gross billings | $40,659,909 | $32,411,401 | 25.4% | | Net revenues | $30,688,553 | $24,530,130 | 25.1% | | Gross profit | $11,085,902 | $7,340,785 | 51.0% | | Gross profit margin | 36% | 30% | - | | Adjusted EBITDA | $2,132,891 | $2,002,075 | 6.5% | Key Performance Metrics - Six Months Ended June 30 | | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Gross billings | $82,276,928 | $64,937,075 | 26.7% | | Net revenues | $63,472,223 | $49,372,877 | 28.6% | | Gross profit | $21,342,619 | $15,355,802 | 39.0% | | Gross profit margin | 34% | 31% | - | | Adjusted EBITDA | $4,574,782 | $4,062,277 | 12.6% | Results of Operations Revenue growth driven by increased lease originations, but operating expenses, especially marketing, rose significantly for both periods - In Q2 2021, the company originated 38,531 gross leases, up from 33,941 in Q2 2020, with the average origination value increasing from $452 to $516[114] Operating Expense Changes (Q2 2021 vs Q2 2020) | Expense Category | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Marketing | $1,914,095 | $938,049 | 104.1% | | Salaries and benefits | $2,747,005 | $2,276,516 | 20.7% | | Other operating expenses | $5,213,789 | $3,337,162 | 56.2% | - For the six months ended June 30, 2021, the company originated 77,830 gross leases, an increase from 70,068 in the prior year period, with average origination value rising to $524 from $464[123] Liquidity and Capital Resources Liquidity is primarily managed through an extended credit agreement and related-party notes, with management confident in future needs - The company's credit agreement commitment termination date was extended to April 1, 2024, with a borrowing limit of $47.5 million. As of June 30, 2021, $988,192 was available[136][139] - Maturity dates for related-party subordinated promissory notes totaling $4.75 million were extended to April 1, 2022[140][141] - The company's $1.9 million PPP loan was forgiven in June 2021, resulting in a gain of $1,931,825[146] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the registrant - Not applicable[163] Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2021[164] - No material changes to internal controls over financial reporting occurred during the most recently completed fiscal quarter[165] PART II - OTHER INFORMATION Legal Proceedings The company is not currently a party to any pending legal proceedings expected to have a material adverse effect - The company is not currently a party to any pending legal proceedings that it believes will have a material adverse effect on its business[168] Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for 2020 - There have been no material changes to the risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2020[169] Unregistered Sales of Equity Securities and Use of Proceeds The company issued warrants for 120,000 common shares to XLR8 Capital Partners LLC, exempt from registration under Section 4(a)(2) - In the quarter ended June 30, 2021, the Company issued warrants for 120,000 shares of common stock to XLR8 Capital Partners LLC pursuant to a consulting agreement[170][171] Defaults Upon Senior Securities None reported - None[172] Mine Safety Disclosures Not applicable - Not applicable[173] Other Information None reported - None[174] Exhibits This section lists exhibits filed with Form 10-Q, including officer certifications and Inline XBRL documents