FlexShopper(FPAY) - 2022 Q4 - Annual Report

Part I Business FlexShopper is a financial technology company offering lease-to-own and loan products to subprime consumers - The company's core business provides lease-purchase and loan solutions to consumers in the near-prime or subprime FICO score categories[13] - In late 2022, FlexShopper acquired the assets of Revolution Financial, Inc, enabling a direct loan origination model in 11 states[16] - The company operates through three main sales channels: its direct-to-consumer online marketplace, integration with merchant partners' e-commerce checkouts, and in-store LTO facilitation at retail locations[14] - As of December 31, 2022, the company had 118 full-time employees, none of whom were part of a collective bargaining agreement[55] 2022 Key Business Metrics | Metric | Value (USD) | | :--- | :--- | | Net Lease Revenues and Fees | ~$106 million | | Loan Participations Purchased | $31 million | | Interest Income Recognized | $15 million | Risk Factors The company faces significant liquidity, credit, regulatory, and stock delisting risks - The company's liquidity is heavily dependent on a Credit Agreement with an outstanding balance of $81.2 million as of December 31, 2022[60] - A significant portion of the customer base presents a high risk of default, which is sensitive to adverse economic conditions[65][70] - The business is subject to extensive regulation at federal and state levels for LTO and consumer finance transactions, which could expose the company to significant compliance costs or penalties[78][80] - The company's common stock is at risk of being delisted from The Nasdaq Capital Market for failing to maintain a minimum bid price of $1.00 per share[109][110] - There is a significant concentration of stock ownership, with one entity holding 21.0% of voting power and executives and directors holding an additional 26.6%[107] Properties The company leases its corporate headquarters in Florida and holds multiple storefront leases from an acquisition - The main corporate office in Boca Raton, FL is leased through June 30, 2028, with a monthly rent of approximately $31,500[118] - As part of the Revolution acquisition, the company assumed 19 storefront leases in Alabama, Michigan, Nevada, and Oklahoma[121] Legal Proceedings The company reports no material pending legal proceedings as of the reporting date - There are no material pending legal proceedings against the company[122] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, no dividends are paid, and significant preferred stock dividends have accrued - The company's common stock trades on The Nasdaq Capital Market with the ticker symbol "FPAY"[126] - No cash dividends have been paid on common stock, and future payments are not anticipated due to restrictions in its Credit Agreement[127] - Cumulative accrued dividends on the series 2 convertible preferred stock amounted to $19,084,376 as of December 31, 2022[128] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 saw decreased revenue and an operating loss, but a one-time gain boosted net income significantly - Net lease revenues decreased by 14.9% in 2022 due to a lower volume of lease originations, although the average origination value per lease increased[146] - Net loan revenues grew significantly by 672.8% to $7.1 million, driven by the expansion of the bank partner loan program[146][147] - The provision for doubtful accounts increased by 42.3% to $57.4 million, representing 37% of gross lease billings, up from 24% in 2021[146] - A gain on bargain purchase of $14.5 million was recognized from the acquisition of Revolution Financial, Inc, significantly boosting net income[157] - The company's liquidity is supported by its Credit Agreement, which was amended in October 2022 to increase the commitment amount to $110 million[168] Key Performance Metrics (2022 vs 2021) | Metric | 2022 (USD) | 2021 (USD) | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | 113,056,173 | 125,426,756 | (9.9%) | | Gross Profit | 37,115,729 | 46,248,870 | (19.7%) | | Net Income | 13,631,719 | 3,272,774 | 316.5% | | Adjusted EBITDA | (535,766) | 11,376,540 | (104.7%) | Financial Statements and Supplementary Data The financial statements show asset and liability growth, with net income boosted by a bargain purchase gain - The company acquired the assets of Revolution Financial, Inc on December 3, 2022, resulting in a bargain purchase gain of $14,461,274[358][359][360] - In Q2 2022, the company released its entire deferred tax asset valuation allowance, resulting in a tax benefit of approximately $12.5 million for the year[338][339] Consolidated Balance Sheet Summary (as of Dec 31) | Account | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Total Assets | 148,289,510 | 84,812,056 | | Total Liabilities | 117,254,837 | 68,668,437 | | Total Stockholders' Equity | 31,034,673 | 16,143,619 | Consolidated Statement of Operations Summary (Year Ended Dec 31) | Account | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Total Revenues | 113,056,173 | 125,426,756 | | Operating (Loss)/Income | (6,303,210) | 7,364,819 | | Net Income | 13,631,719 | 3,272,774 | | Basic EPS | $0.45 | $0.04 | Controls and Procedures Management identified a material weakness in internal controls related to a recent business combination - Management identified a material weakness in internal control over financial reporting as of December 31, 2022[375] - The weakness stemmed from a lack of effective controls over accounting judgments related to the complex business combination with Revolution Financial[376] - Despite the material weakness, management believes the financial statements are fairly presented in all material respects[377] Part III Directors, Executive Officers and Corporate Governance The company details its board composition, executive leadership, committee structure, and key governance policies - The Board of Directors is comprised of five members: Howard S Dvorkin (Chairman), James D Allen, Sean Hinze, Thomas O Katz, and T Scott King[385][386][387][390][391] - H Russell Heiser Jr was appointed CEO effective March 20, 2023, while also serving as CFO; John Davis serves as COO[393][394] - The Board has determined that four of its five directors are independent under Nasdaq standards[397] - The company has a clawback policy allowing the Board to recoup performance-based compensation from executives if financial results are restated[414] Executive Compensation This section outlines compensation for named executive officers and directors, including salaries, bonuses, and equity - Following the passing of former CEO Richard House Jr, his employment agreement was terminated, and his estate received accrued obligations with all equity awards vested[440] - Effective March 20, 2023, CEO H Russell Heiser Jr's new employment agreement includes a base salary of $460,000 and a target bonus of up to 50% of base salary[441][442] - Non-executive director compensation includes an annual retainer of $60,000 ($100,000 for the Chairman) and an annual stock option grant valued at $94,000 ($150,000 for the Chairman)[456] 2022 Summary Compensation Table | Name and Principal Position | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Richard House Jr (Former CEO) | 457,500 | 70,000 | 227,899 | 789,531 | | H Russell Heiser Jr (CEO & CFO) | 359,231 | - | 153,347 | 561,231 | | John Davis (COO) | 353,962 | 50,000 | 64,176 | 492,684 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership is highly concentrated among a few beneficial owners and the executive management group Security Ownership of Major Holders (as of March 31, 2023) | Name of Beneficial Owner | Percentage of Shares Beneficially Owned | | :--- | :--- | | B2 FIE V, LLC | 19.7% | | Waterfall Asset Management, LLC | 7.5% | | Perkins Capital Management, Inc | 5.9% | | Howard S Dvorkin (Chairman) | 25.2% | | All directors and executive officers as a group | 48.5% | Certain Relationships and Related Transactions, and Director Independence The company discloses significant related-party transactions, including credit facilities with major shareholders and executives - The company's primary Credit Agreement is with an affiliate of Waterfall Asset Management, LLC, a beneficial owner of over 5% of the company's stock; as of Dec 31, 2022, $81.2 million was outstanding[470][475] - A subordinated promissory note with an entity managed by Chairman Howard S Dvorkin had its credit commitment increased to $11 million in February 2022[476][477] - A $1 million subordinated promissory note is outstanding with an entity of which CEO/CFO H Russell Heiser, Jr is a member[478] Principal Accounting Fees and Services This section details the fees paid to the company's principal accountants for audit and tax services in 2022 and 2021 Principal Accountant Fees | Fee Category | 2022 (Grant Thornton LLP) | 2021 (EisnerAmper LLP) | | :--- | :--- | :--- | | Audit Fees | $495,000 | $370,290 | | Tax Fees | $25,000 | - | | Total | $520,000 | $370,290 | Part IV Exhibits and Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K, including material contracts - The financial statements are filed under Item 8 and incorporated by reference[490] - A detailed list of 57 exhibits is provided, including corporate governance documents, material contracts like the Credit Agreement and its 16 amendments, and executive compensation plans[491][492][493][494]