FlexShopper(FPAY) - 2023 Q1 - Quarterly Report

Cautionary Statement About Forward-Looking Statements This report contains forward-looking statements based on current beliefs, expectations, and assumptions, involving future plans, strategies, and financial conditions, subject to uncertainties and risks that may cause actual results to differ materially - Forward-looking statements are based on current beliefs, expectations, and assumptions regarding future plans, strategies, and financial conditions, but are subject to uncertainties, risks, and changing circumstances, which may cause actual results to differ materially[7][8] - The company undertakes no obligation to publicly update any forward-looking statements, unless required by federal securities laws[9] - Significant factors that could cause actual results to differ from forward-looking statements include macroeconomic conditions (inflation, rising interest rates), bank defaults affecting customer payment ability, financing capacity, compliance with credit agreement covenants, FlexShopper.com platform management and growth, industry competition, reliance on third-party retailers, relationships with bank partners, consumer protection regulation compliance, customer and employee information security, attracting and retaining key talent, COVID-19 impact, and Nasdaq listing standards[9] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements as of March 31, 2023, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with related notes Condensed Consolidated Balance Sheets As of March 31, 2023, total assets were $145 million, a slight decrease from $148 million on December 31, 2022, with changes in cash, restricted cash, and various receivables | ASSETS (in USD) | March 31, 2023 | December 31, 2022 | | :---------------- | :------------- | :---------------- | | Cash | $9,861,646 | $6,051,713 | | Restricted cash | $7,881 | $121,636 | | Lease receivables, net | $37,153,935 | $35,540,043 | | Loan receivables at fair value | $29,317,948 | $32,932,504 | | Lease merchandise, net | $26,908,105 | $31,550,441 | | Total assets | $144,971,229 | $148,289,510 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total liabilities | $113,744,838 | $117,254,837 | | Total stockholders' equity | $31,226,391 | $31,034,673 | - As of March 31, 2023, cash increased to $9,861,646, while restricted cash decreased to $7,881[12] - As of March 31, 2023, loan receivables at fair value were $29,317,948, a decrease from $32,932,504 on December 31, 2022[12] Condensed Consolidated Statements of Operations For the three months ended March 31, 2023, total revenues increased by 6.3% to $30.79 million, driven by significant growth in loan revenues, leading to a shift from operating loss to income and a 90.3% reduction in net loss | Revenues (in USD) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Change ($) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Lease revenues and fees, net | $24,714,158 | $27,766,312 | $(3,052,154) | (11.0)% | | Loan revenues and fees, net of changes in fair value | $6,071,617 | $1,188,924 | $4,882,693 | 410.7% | | Total revenues | $30,785,775 | $28,955,236 | $1,830,539 | 6.3% | | Operating income/ (loss) | $4,152,573 | $(1,282,647) | $5,435,220 | 423.8% | | Net loss | $(230,215) | $(2,380,935) | $2,150,720 | (90.3)% | | Basic and diluted loss per common share | $(0.06) | $(0.14) | $0.08 | (57.1)% | - Operating income shifted from a loss of $1,282,647 in the prior year period to a profit of $4,152,573 for the three months ended March 31, 2023[14] - Interest expense significantly increased by 131.4% to $4,531,327, primarily due to increased borrowings under the credit agreement[14] Condensed Consolidated Statements of Changes in Stockholders' Equity For the three months ended March 31, 2023, total stockholders' equity increased to $31.23 million, primarily influenced by stock-based compensation expense and stock option exercises, despite a net loss | Equity Component (in USD) | Balance, January 1, 2023 | Provision for compensation expense related to stock-based compensation | Exercise of stock options into common stock | Net loss | Balance, March 31, 2023 | | :------------------------ | :----------------------- | :--------------------------------------------------- | :---------------------------------------- | :------- | :---------------------- | | Series 1 Convertible Preferred Stock | $851,660 | - | - | - | $851,660 | | Series 2 Convertible Preferred Stock | $21,952,000 | - | - | - | $21,952,000 | | Common Stock | $2,176 | - | - | - | $2,176 | | Additional Paid in Capital | $39,819,420 | $420,748 | $1,185 | - | $40,241,353 | | Accumulated Deficit | $(31,590,583) | - | - | $(230,215) | $(31,820,798) | | Total | $31,034,673 | $420,748 | $1,185 | $(230,215) | $31,226,391 | - As of March 31, 2023, total stockholders' equity was $31,226,391, an increase from $31,034,673 at the beginning of the year[15] - Exercise of stock options resulted in an increase of 1,500 shares of common stock and $1,185 in additional paid-in capital[15] Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2023, operating cash flow turned into a net inflow of $5.60 million, while investing cash outflows increased and financing cash outflows significantly decreased, leading to a substantial increase in total cash and restricted cash | Cash Flow Activity (in USD) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by/ (used in) operating activities | $5,599,339 | $(7,940,659) | | Net cash used in investing activities | $(1,922,882) | $(1,553,810) | | Net cash provided by financing activities | $19,721 | $8,719,528 | | INCREASE / (DECREASE) IN CASH and RESTRICTED CASH | $3,696,178 | $(774,941) | | CASH and RESTRICTED CASH, end of period | $9,869,527 | $4,319,701 | - Net cash from operating activities shifted from a net outflow of $7,940,659 in the prior year period to a net inflow of $5,599,339 for the three months ended March 31, 2023[17] - Net cash used in investing activities increased to $1,922,882, primarily for property and equipment purchases and capitalized software costs[17] Notes To Condensed Consolidated Financial Statements This section provides detailed notes to the condensed consolidated financial statements, covering accounting policies, business description, specific balance sheet and income statement items, debt and equity structure, contingencies, and subsequent events 1. BASIS OF PRESENTATION The unaudited condensed consolidated interim financial statements are prepared in accordance with Form 10-Q instructions, Regulation S-X Article 8, and GAAP, not including all annual financial statement disclosures, and should be read with the 2022 Form 10-K - The unaudited condensed consolidated interim financial statements are prepared in accordance with Form 10-Q instructions, Regulation S-X Article 8, and U.S. Generally Accepted Accounting Principles (GAAP)[19] - These financial statements do not include all information and disclosures required for annual financial statements and should be read in conjunction with the company's Form 10-K annual report for the fiscal year ended December 31, 2022[19] 2. BUSINESS FlexShopper, Inc., a Delaware holding company, provides lease-to-own (LTO) durable goods services through FlexShopper, LLC, participates in consumer finance programs via FlexLending, LLC, and operates a direct loan origination model in 11 states through Flex Revolution, LLC - FlexShopper, Inc. is a Delaware holding company operating through its wholly-owned subsidiaries FlexShopper, LLC, FlexLending, LLC, and Flex Revolution, LLC[22] - FlexShopper, LLC offers lease-to-own (LTO) durable goods services to consumers by purchasing merchandise from merchant partners and leasing it to consumers[23] - FlexLending, LLC participates in consumer finance programs with third-party bank partners, purchasing participation interests in unsecured consumer loans originated by them[24] - Flex Revolution, LLC operates a direct loan origination model in 11 states, where loans are directly underwritten, approved, and originated by the company[25] 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the significant accounting policies followed in preparing the consolidated financial statements, including consolidation, estimates, segment information, cash, revenue recognition, receivables, leases, intangible assets, property, software, data, operating expenses, marketing, EPS, equity compensation, and fair value measurements - The company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents[30] Cash and Restricted Cash Reconciliation (in USD) | (in USD) | March 31, 2023 | December 31, 2022 | | :------- | :------------- | :---------------- | | Cash | $9,861,646 | $6,051,713 | | Restricted cash | $7,881 | $121,636 | | Total cash and restricted cash | $9,869,527 | $6,173,349 | Lease Receivables and Allowance for Doubtful Accounts (in USD) | (in USD) | March 31, 2023 | December 31, 2022 | | :------- | :------------- | :---------------- | | Lease receivables | $42,499,378 | $48,618,843 | | Allowance for doubtful accounts | $(5,345,443) | $(13,078,800) | | Lease receivables, net | $37,153,935 | $35,540,043 | - The company elected the fair value option for its entire portfolio of loan and loan participation receivables, with changes in fair value recognized in the consolidated statements of operations[36] Lease Revenues and Fees Breakdown (in USD) | (in USD) | Three Months ended March 31, 2023 | Three Months ended March 31, 2022 | | :------- | :-------------------------------- | :-------------------------------- | | Lease billings and accruals | $34,255,083 | $39,597,429 | | Provision for doubtful accounts | $(11,238,415) | $(11,831,117) | | Gain on sale of lease receivables | $1,697,490 | - | | Lease revenues and fees | $24,714,158 | $27,766,312 | Fair Value Measurements (Level 3 Assets) (in USD) | (in USD) | March 31, 2023 | December 31, 2022 | | :------- | :------------- | :---------------- | | Loan receivables at fair value | $29,317,948 | $32,932,504 | | Promissory note related to acquisition | $3,063,771 | $3,158,471 | Quantitative Information for Level 3 Assets Fair Value Measurements | Input | March 31, 2023 (Weighted Average) | December 31, 2022 (Weighted Average) | | :---- | :-------------------------------- | :----------------------------------- | | Estimated losses | 45.7% | 40.8% | | Servicing costs | 4.5% | 4.5% | | Discount rate | 20.1% | 21.0% | 4. LEASES The company accounts for leases under ASC Topic 842, treating all customer agreements as operating leases, with $1.37 million in lease assets and $1.73 million in lease liabilities as of March 31, 2023, covering office and store locations - All customer agreements are accounted for as operating leases, with no sales-type or direct financing leases currently[72] Lease-Related Balance Sheet Information (in USD) | (in USD) | March 31, 2023 | December 31, 2022 | | :------- | :------------- | :---------------- | | Total Lease Assets | $1,366,235 | $1,406,270 | | Total Lease Liabilities | $1,726,030 | $1,774,623 | Lease Weighted Average Discount Rate and Remaining Lease Term | Lease Type | Weighted Average Discount Rate | Weighted Average Remaining Lease Term (in years) | | :--------- | :----------------------------- | :----------------------------------------------- | | Operating Leases | 13.03% | 5 | | Finance Leases | 13.39% | 1 | - As of March 31, 2023, the company has 19 storefront lease agreements in Alabama, Michigan, Nevada, and Oklahoma, with an average monthly rent of approximately $1,700[75] 5. PROPERTY AND EQUIPMENT As of March 31, 2023, net property and equipment totaled $8.68 million, primarily comprising website and internal use software, computers, and software, with increased depreciation and amortization expense for the quarter Property and Equipment Composition (in USD) | (in USD) | March 31, 2023 | December 31, 2022 | | :------- | :------------- | :---------------- | | Furniture, fixtures and vehicle | $395,468 | $395,468 | | Website and internal use software | $21,838,271 | $20,542,457 | | Computers and software | $4,130,089 | $3,672,103 | | Less: accumulated depreciation and amortization | $(17,686,514) | $(16,523,166) | | Total, net | $8,677,314 | $8,086,862 | - Depreciation and amortization expense for property and equipment was $1,163,349 for the three months ended March 31, 2023, compared to $847,574 for the same period in 2022[84] 6. INTANGIBLE ASSETS As of March 31, 2023, net intangible assets were $14.72 million, mainly including franchisee contract agreements, the Liberty Loan brand, non-contractual customer relationships, and customer lists, with significantly increased amortization expense for the quarter Intangible Assets Summary (in USD) | Intangible Asset | Estimated Useful Life | Gross Carrying Amount (March 31, 2023) | Accumulated Amortization (March 31, 2023) | Net Carrying Amount (March 31, 2023) | | :--------------- | :-------------------- | :------------------------------------- | :---------------------------------------- | :----------------------------------- | | Patent | 10 years | $30,760 | $(29,645) | $1,115 | | Franchisee contract-based agreements | 10 years | $12,744,367 | $(424,811) | $12,319,556 | | Liberty Loan brand | 10 years | $340,218 | $(11,340) | $328,878 | | Non-compete agreements | 10 years | $86,113 | $(2,872) | $83,241 | | Non contractual customer relationships | 5 years | $1,952,371 | $(130,160) | $1,822,211 | | Customer list | 3 years | $184,825 | $(20,536) | $164,289 | | Total | | $15,338,654 | $(619,364) | $14,719,290 | - Amortization expense for intangible assets was $443,059 for the three months ended March 31, 2023, compared to $0 for the same period in 2022, primarily due to intangible assets acquired in the Revolution transaction[85] Estimated Intangible Asset Amortization Expense for the Next Five Years (in USD) | Year | Amortization Expense (in USD) | | :--- | :---------------------------- | | 2023 (nine months remaining) | $1,327,980 | | 2024 | $1,769,152 | | 2025 | $1,748,616 | | 2026 | $1,707,544 | | 2027 | $1,675,004 | | Total | $8,228,296 | 7. PROMISSORY NOTES-RELATED PARTIES The company with related parties 122 Partners, LLC and NRNS Capital Holdings LLC has subordinated promissory notes. As of March 31, 2023, the 122 Partners Note totaled $1.02 million and the NRNS Note totaled $10.94 million, both bearing 20.94% interest and having extended maturity dates - The maturity date of the 122 Partners Note has been extended from April 1, 2023, to October 1, 2023[88] - The maturity date of the NRNS Note has been extended from April 1, 2022, to July 1, 2024, and the credit commitment increased from $3,750,000 to $11,000,000[90] Outstanding Related-Party Promissory Notes (in USD) | (in USD) | March 31, 2023 | December 31, 2022 | | :------- | :------------- | :---------------- | | 122 Partners Note (Principal and accrued interest) | $1,017,941 | $1,017,826 | | NRNS Note (Principal and accrued interest) | $10,942,865 | $10,941,629 | - Both promissory notes bear an interest rate of 20.94%[88][90] 8. LOAN PAYABLE UNDER CREDIT AGREEMENT The company has a credit agreement allowing borrowings up to $110 million, with an outstanding balance of $81.38 million as of March 31, 2023, an extended commitment termination date to April 1, 2024, and an interest rate of SOFR plus 11% - The credit agreement's commitment amount has been increased to $110 million, with the commitment termination date extended to April 1, 2024[97][95] - As of March 31, 2023, the outstanding balance under the credit agreement was $81,375,000, with an interest rate of SOFR plus 11% (which was 15.94% as of March 31, 2023)[100][95][97] Credit Agreement Financial Covenant Compliance (as of March 31, 2023) | Covenant Requirement | Required Position | Actual Position | | :------------------- | :---------------- | :-------------- | | Equity Book Value not less than | $16,452,246 | $31,226,391 | | Liquidity greater than | $1,500,000 | $9,861,646 | | Cash greater than | $500,000 | $9,869,527 | | Consolidated Total Debt to Equity Book Value ratio not to exceed | 5.25 | 3.12 | - The company entered into an interest rate cap agreement with AXOS Bank to limit the floating rate portion (one-month SOFR) of the credit agreement to 4%, mitigating interest rate risk[102] 9. CAPITAL STRUCTURE The company's capital structure includes Series 1 and Series 2 convertible preferred stock, both with dividend rights and convertibility features, alongside various outstanding warrants, including public and related-party warrants - As of March 31, 2023, 170,332 shares of Series 1 convertible preferred stock were outstanding, convertible into 225,231 shares of common stock[104] - Series 2 convertible preferred stock was sold at a stated value of $1,000 per share and accrues dividends at an annual rate of 10%, with accumulated accrued dividends totaling $20,056,609 as of March 31, 2023[104] - Series 2 convertible preferred stock is automatically convertible into common stock under certain conditions, at a conversion rate of approximately 266 shares of common stock per share[104] Summary of Outstanding Warrants (as of March 31, 2023) | Exercise Price | Common Stock Warrants Outstanding | Series 2 Preferred Stock Warrants Outstanding | | :------------- | :-------------------------------- | :-------------------------------------------- | | $1.25 | 1,055,184 | - | | $1,250 | - | 439 | | Total | 2,255,184 | 439 | 10. EQUITY COMPENSATION PLANS The company grants stock options and performance share units (PSUs) under its 2018 equity incentive plan, with $439,321 in unrecognized stock-based compensation cost as of March 31, 2023, and increased expense this quarter partly due to immediate vesting for a former CEO - As of March 31, 2023, approximately 495,000 shares were available for issuance under the 2018 plan[113] Stock-Based Compensation Expense (in USD) | (in USD) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------- | :-------------------------------- | :-------------------------------- | | Stock options | $420,748 | $291,283 | | Performance share units ("PSU") | - | $13,946 | | Total stock-based compensation | $420,748 | $305,229 | - As of March 31, 2023, unrecognized compensation cost related to unvested options and PSUs was $439,321, expected to be recognized over a weighted-average period of 2.12 years[114] - Due to the passing of former CEO Richard House, Jr. on March 16, 2023, the company immediately vested all his unexercised stock options per his employment agreement, contributing to an increase in stock-based compensation expense this quarter[181] - As of March 31, 2023, the company determined that the minimum performance criteria for performance share units were not probable of being achieved, thus no related expense was recognized this quarter[120] 11. INCOME TAXES For the three months ended March 31, 2023, the effective income tax rate was 39%, higher than the expected 21% federal income tax rate, primarily due to non-deductible equity compensation and state income taxes, with the valuation allowance on deferred tax assets released in Q2 2022 - For the three months ended March 31, 2023, the company's effective income tax rate was approximately 39%, higher than the expected 21% federal income tax rate[123] - The tax rate difference is primarily due to non-deductible equity compensation and state income taxes[123] - The company released the valuation allowance on its deferred tax assets in the second quarter of 2022, based on the likelihood of realizing these assets through projected taxable income[124] 12. CONTINGENCIES AND OTHER UNCERTAINTIES The company faces a regulatory inquiry from the California Department of Financial Protection and Innovation (DFPI) regarding consumer protection law compliance, potentially leading to enforcement actions and costs, while maintaining insurance and managing executive employment agreements - The company received a subpoena from the California Department of Financial Protection and Innovation (DFPI) requesting documents and information regarding compliance with consumer protection laws, which could lead to enforcement actions and associated costs[125] - The company currently has no material pending litigation and intends to vigorously defend itself, while maintaining adequate insurance coverage for potential losses[126] - The company has employment agreements with its executives, outlining compensation, bonuses, equity awards, and severance benefits under specific termination conditions[127] - The company's business may be impacted by COVID-19 or similar health crises, which could affect future operating results, financial condition, or cash flows[128] 13. COMMITMENTS The company has no commitments other than real estate leases, as detailed in Note 4 - The company has no commitments other than real estate leases[129] 14. REVOLUTION TRANSACTION In December 2022, Flex Revolution, LLC acquired Revolution Financial, Inc.'s business, including its consumer loan portfolio, generating a bargain purchase gain of $14.46 million due to the seller's urgency for a non-competitive year-end transaction - On December 3, 2022, Flex Revolution, LLC acquired substantially all the net assets of Revolution Financial, Inc., including its consumer loan portfolio, related cash, and credit facility[130][132] - The company issued an adjustable promissory note ("Seller Note") with an initial principal of $5,000,000, maturing on December 1, 2027, bearing an 8% annual interest rate, and subject to adjustment based on the acquired business's pre-tax net income for 2023[131] - The company recorded a bargain purchase gain of $14,461,274 because the fair value of the net assets acquired exceeded the fair value of the purchase consideration[137] - The primary reason for the bargain purchase was the seller's urgency to complete the transaction by year-end, resulting in a non-competitive sale, partly due to potential credit facility covenant issues and accelerating operating losses following recent regulatory changes[137] 15. EMPLOYEE BENEFIT PLAN The company sponsors a Section 401(k) employee retirement savings plan, providing a 4% non-discretionary safe harbor contribution to eligible participants, with total contributions of $50,161 for the three months ended March 31, 2023 - The company sponsors an employee retirement savings plan that qualifies under Section 401(k)[138] - The company provides a 4% non-discretionary safe harbor contribution to participants who meet the plan's eligibility requirements[138] - Total plan contributions for the three months ended March 31, 2023, were $50,161, compared to $50,617 for the same period in 2022[138] 16. SUBSEQUENT EVENTS The company received and resolved a Nasdaq non-compliance notice for late 10-K filing, received another for its stock price falling below $1.00, and revised its CEO's employment agreement in April 2023, extending his term and adjusting compensation - On April 19, 2023, the company received a Nasdaq notification for non-compliance with listing rule 5250(c)(1) due to the untimely filing of its 2022 annual report on Form 10-K[139] - On April 25, 2023, Nasdaq confirmed the company regained compliance after filing its Form 10-K[141] - On April 21, 2023, the company received a Nasdaq notification for non-compliance with the minimum bid price requirement, as its stock price fell below $1.00 for 30 consecutive business days, granting a 180-day compliance period until October 18, 2023[142][143] - The employment agreement for H. Russell Heiser, Jr., the company's Chief Executive Officer, was amended on April 21, 2023, extending his term until December 31, 2027, with an annual base salary of $460,000[146] - H. Russell Heiser, Jr. was granted stock options valued at $345,000 and performance share units (PSUs) valued at $690,000, both subject to performance and time-based vesting conditions[147] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and operating results for the three months ended March 31, 2023, highlighting business model, key accounting policies, performance metrics, operational results, marketing strategies, and liquidity and capital resources Executive Overview The company enhances customer quality of life through lease-to-own (LTO) and consumer loan products, leveraging proprietary technology for LTO transactions via B2C and B2B channels, and expanding unsecured consumer loans through bank partners and direct origination - The company offers durable goods, such as consumer electronics, appliances, computers, smartphones, tires, jewelry, and furniture, through lease-to-own (LTO) purchase agreements[152] - FlexShopper's LTO sales channels include its online FlexShopper.com marketplace, LTO payment options on partner e-commerce websites, and an in-store LTO technology platform[152] - The company began marketing unsecured consumer loan products from bank partners in 2021 and, in late 2022, acquired assets of Revolution Financial, Inc. to establish a direct loan origination model in 11 states[153][154] - For the three months ended March 31, 2023, FlexShopper purchased $184,807 in loan participation interests and recognized $1.6 million in interest income[153] Summary of Critical Accounting Policies This section reiterates critical accounting policies and estimates used in financial statement preparation, particularly for credit reserves, intangible assets, contingencies, litigation, fair value of loan receivables, and income taxes, with ongoing management evaluation for reasonableness - Management is required to make estimates and assumptions when preparing financial statements, particularly concerning credit reserves, intangible assets, contingencies, litigation, fair value of loan receivables, and income taxes[155] Lease Receivables and Allowance for Doubtful Accounts (as of March 31, 2023) (in USD) | (in USD) | March 31, 2023 | December 31, 2022 | | :------- | :------------- | :---------------- | | Lease receivables | $42,499,378 | $48,618,843 | | Allowance for doubtful accounts | $(5,345,443) | $(13,078,800) | | Lease receivables, net | $37,153,935 | $35,540,043 | - The company elected the fair value option for its entire portfolio of loan receivables, with changes in fair value recognized in the consolidated statements of operations to more accurately reflect the true economic condition of the loans[157] - The fair value of loan receivables is estimated using discounted cash flow analysis, with projected losses and servicing costs adjusted based on historical data, recent trends, and expected future performance[159] Key Performance Metrics The company regularly reviews key metrics like gross profit and Adjusted EBITDA to assess business performance, identify trends, and make strategic decisions, reporting a 45.2% increase in gross profit to $13.61 million and a significant positive Adjusted EBITDA of $6.40 million for the quarter Key Performance Metrics (for the three months ended March 31, 2023) (in USD) | Metric | March 31, 2023 | March 31, 2022 | $ Change | % Change | | :----- | :------------- | :------------- | :------- | :------- | | Gross Profit | $13,606,360 | $9,369,112 | $4,237,248 | 45.2% | | Gross profit margin | 44% | 32% | | | | Adjusted EBITDA | $6,399,478 | $(40,356) | $6,439,834 | (15,957.6)% | - Gross profit is defined as GAAP revenues less depreciation and impairment of lease merchandise and loan origination costs and fees[164] - Adjusted EBITDA is defined as net income before interest, stock-based compensation, taxes, depreciation (excluding depreciation of lease merchandise), amortization, and one-time or non-recurring items[165] Results of Operations For the three months ended March 31, 2023, total revenues increased by 6.3% to $30.79 million, with an 11.0% decrease in net lease revenues offset by a 410.7% surge in loan revenues and fees, resulting in a shift from operating loss to a $4.15 million profit Operating Results Comparison (for the three months ended March 31, 2023) (in USD) | Metric | 2023 (in USD) | 2022 (in USD) | $ Change | % Change | | :----- | :------------ | :------------ | :------- | :------- | | Net lease billing and fees | $24,714,158 | $27,766,312 | $(3,052,154) | (11.0)% | | Net loan revenues | $6,071,617 | $1,188,924 | $4,882,693 | 410.7% | | Total revenues | $30,785,775 | $28,955,236 | $1,830,539 | 6.3% | | Operating income/(loss) | $4,152,573 | $(1,282,647) | $5,435,220 | 423.8% | | Net loss | $(230,215) | $(2,380,935) | $2,150,720 | (90.3)% | - Lease originations decreased, but the average origination value increased from $532 to $670, and the allowance for doubtful accounts as a percentage of total lease billings and fees increased from 30% to 33%[168] - Net loan revenues from the bank partner loan model increased by 224.4% to $3,856,306, while net loan revenues from the state-licensed loan model were $2,215,311 (no comparable revenue in 2022)[169][170] - Loan origination costs and fees significantly increased by 330.9% to $1,833,627, primarily related to the volume and amount of loan products and net revenue sharing with franchisees[172] - Marketing expenses decreased by 45.4% to $1,099,189, and salaries and benefits decreased by 8.0% to $2,726,890, mainly due to macroeconomic conditions and tighter approval rates[173][174] - Amortization and depreciation expense increased by 94.9% to $1,826,157, primarily due to amortization of capitalized software costs for new product preparation and intangible assets acquired in the Revolution transaction[176] Operations The company promotes FlexShopper products and services through strategic partnerships, direct marketing, affiliates, and internet marketing to increase lease transactions, offering an online LTO marketplace, a patented LTO payment method, and an in-store LTO technology platform, while also marketing bank partner consumer loan products and operating a direct origination model - The company promotes FlexShopper products and services through various channels, including strategic partnerships, direct marketing, affiliates, and internet marketing, aiming to increase lease transactions[183] Marketing Strategies | Online LTO Marketplace | Patent pending LTO Payment Method | In-store LTO technology platform | | :--------------------- | :-------------------------------- | :------------------------------- | | Search engine optimization; pay-per click | Direct to retailers/e-retailers | Direct to retailers/e-retailers | | Online affiliate networks | Partnerships with payment aggregators | Consultants & strategic relationships | | Direct response television campaigns | Consultants & strategic relationships | | | Direct mail | | | - The company believes it has a competitive advantage in the LTO industry by offering all three channels as a bundled package to retailers and e-retailers[184] - The company began marketing unsecured consumer loan products from bank partners in 2021 and, in late 2022, established a direct origination model in 11 states through the acquisition of Revolution Financial, Inc.'s assets[185][186] Liquidity and Capital Resources As of March 31, 2023, cash and restricted cash increased to $9.87 million, driven by portfolio cash generation and reduced originations, with funding secured through a credit agreement, related-party notes, and equity financing, and future liquidity needs expected to be met by operating cash flow or additional credit line borrowings - As of March 31, 2023, cash and restricted cash totaled $9,869,527, an increase from $6,173,349 on December 31, 2022, primarily due to cash generated from the portfolio and reduced originations[187] - As of March 31, 2023, net lease receivables were $37,153,935, and loan receivables at fair value were $29,317,948[188][189] - The credit agreement's commitment amount has been increased to $110 million, with the commitment termination date extended to April 1, 2024, and an interest rate of SOFR plus 11%[194][190] - The company has entered into an interest rate cap agreement to limit the floating rate portion (one-month SOFR) of the credit agreement to 4%, mitigating interest rate risk[196] - The company anticipates that its liquidity needs for the next 12 months will be met through cash generated from operations and/or additional borrowings under its credit agreement[205] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company has not provided quantitative and qualitative disclosures about market risk - This section is not applicable as the company has not provided quantitative and qualitative disclosures about market risk[209] Item 4. Controls and Procedures The company maintains disclosure controls and procedures to ensure timely reporting, having remediated a material internal control weakness related to business combination accounting by March 31, 2023, and its CEO/CFO attests to the effectiveness of these controls at a reasonable assurance level - The company maintains disclosure controls and procedures designed to ensure that required information is recorded, processed, summarized, and reported on a timely basis[210] - A material weakness in internal control over financial reporting related to business combination accounting, identified in the December 31, 2022 financial statements, was remediated as of March 31, 2023, through increased use of external consultants[211][212] - H. Russell Heiser, Jr., the company's Chief Executive Officer and Chief Financial Officer, concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[212] - Following the passing of former CEO Richard House, Jr. on March 16, 2023, H. Russell Heiser, Jr. was appointed Chief Executive Officer on March 20, 2023, and is also serving as interim Chief Financial and Accounting Officer[213] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business, financial condition, or operating results, though it may face routine claims and intends to defend them vigorously - The company is not currently a party to any pending legal proceedings that are expected to have a material adverse effect on its business, financial condition, or results of operations[216] - The company may, from time to time, be subject to various claims and legal actions arising in the ordinary course of business and intends to defend itself vigorously[216] Item 1A. Risk Factors Investors should carefully consider the risk factors disclosed in the company's Form 10-K, which could materially adversely affect its business, financial condition, liquidity, operating results, and capital position, specifically noting the risk of Nasdaq non-compliance for minimum bid price - Investors should carefully consider the risk factors disclosed in the company's annual report on Form 10-K, which could materially adversely affect its business, financial condition, liquidity, operating results, and capital position[217] - The company faces the risk of non-compliance with Nasdaq Capital Market continued listing standards, including the minimum $1.00 bid price requirement, which could lead to delisting of its common stock[218][219] - The company received a Nasdaq notification for its stock price falling below $1.00 for 30 consecutive business days, granting a 180-day compliance period, and will actively monitor its stock price and consider options to regain compliance[219] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During this reporting period, the company had no unregistered sales of equity securities or use of proceeds - During this reporting period, the company had no unregistered sales of equity securities or use of proceeds[221] Item 3. Defaults Upon Senior Securities During this reporting period, the company had no defaults upon senior securities - During this reporting period, the company had no defaults upon senior securities[222] Item 4. Mine Safety Disclosures This section is not applicable - This section is not applicable[223] Item 5. Other Information During this reporting period, the company had no other information requiring disclosure - During this reporting period, the company had no other information requiring disclosure[224] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q report, including company articles of incorporation, employment agreement amendments, and XBRL documents, providing supporting legal and financial documentation referenced in the report - Exhibits include the company's articles of incorporation, employment agreement amendments, Rule 13a-14(a) certifications, Section 1350 certifications, and Inline XBRL documents[225] Signatures This report was duly signed by H. Russell Heiser, Jr., the company's Chief Executive Officer (and Chief Financial and Accounting Officer), on May 11, 2023 - This report was signed by H. Russell Heiser, Jr., the company's Chief Executive Officer (and Chief Financial and Accounting Officer), on May 11, 2023[230]