FlexShopper, Inc. - Quarter Report: 2009 March (Form 10-Q)

 

 

 

Delaware	20-5456087
(State of jurisdiction of Incorporation)	(I.R.S. Employer Identification No.)

 

 

 

 

Large accelerated filer [  ]

Accelerated filer [  ]

 

Non-accelerated filer [  ]

(Do not check if a smaller reporting company)

Smaller reporting company [X]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising Costs – The Company charges advertising costs to expense as incurred.  Total advertising costs were approximately $87,000 and $151,400 for the quarters ending March 31, 2009 and 2008, respectively.

 

Earnings per Share – Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period.  Dilutive earnings per share includes the potential impact of dilutive securities, such as convertible preferred stock, stock options and stock 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.

Under the treasury stock method, options and warrants will have dilutive effect when the average price of common stock during the period exceeds the exercise price of the options and warrants.

Also when there is a year-to-date loss from continuing operations, potential common shares should not be included in the computation of diluted earnings per share.  For the quarters ending March 31, 2009 and 2008, there was a year-to-date loss from continuing operations.

Stock Based Compensation – The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) must be recognized as an expense in the financial statements as services are performed.

See Note 7 for the impact on the operating results for the quarters ended March 31, 2009 and 2008.

Fair Value of Financial Instruments – The carrying value of cash equivalents, retained interest in purchased accounts receivable, due from/to financial institution, accounts payable and accrued liabilities approximates their fair value.

Cash and cash equivalents – Cash and cash equivalents consist primarily of highly liquid cash investment funds with original maturities of three months or less when acquired.

Income Taxes – Income taxes are provided for the tax effects of transactions reported in the financial statements plus deferred income taxes related to the differences between financial statement and taxable income.

The primary differences between financial statement and taxable income for the Company are as follows:

·	Compensation costs related to the issuance of stock options

·	Use of the reserve method of accounting for bad debts

·	Differences in bases of property and equipment between financial and income tax reporting

·	Net operating loss carryforwards.

 

 

 

Retained interest in purchased accounts receivable consists of the following:

 

 

Total accounts receivable purchased were approximately $11,397,000 and $6,038,000 for the quarters ended March 31, 2009 and March 31, 2008, respectively.

Retained interest in purchased accounts receivable consists of United States companies in the following industries:

 

 

Property and equipment consist of the following:

 

 

 

 

 

 

 

 

In November 2008, the Company entered into an agreement with a financial institution to finance the factoring of receivables and to provide ongoing working capital.  The agreement is a revolving credit facility that allows the Company to borrow up to $15,000,000.  This agreement expires in November 2011.

Borrowings are made at the request of the Company.  The amount eligible to be borrowed is based on a borrowing base formula as defined in the agreement.  The interest on borrowings is paid monthly at LIBOR rate plus 4%.  In addition to interest, the Company pays the financial institution various monthly fees as defined in the agreement.

The agreement is collateralized by a first lien on all Company assets.  Borrowings on this agreement are partially guaranteed by the Company’s President and Chief Executive Officer.  The partial guarantee is $250,000 each.

The agreement, among other covenants, requires the Company to maintain certain financial ratios.  As of March 31, 2009 and December 31, 2008, the Company was in compliance with, or obtained waivers for, all provisions of this agreement.

The Company’s capital structure consists of preferred and common stock as described below:

Preferred Stock – The Company is authorized to issue 10,000,000 shares of $.001 par value preferred stock.  The Company’s Board of Directors determines the rights and preferences of its preferred stock.

On January 31, 2007, the Company filed a Certificate of Designation with the Secretary of State of Delaware.  Effective with this filing, 2,000,000 preferred shares became Series 1 Convertible Preferred Stock.  Series 1 Convertible Preferred Stock will rank senior to Common Stock.

Series 1 Convertible Preferred Stock is convertible into 5 shares of the Company’s Common Stock.  The holder of the Series 1 Convertible Preferred Stock has the option to convert the shares to Common Stock at any time.  Upon conversion all accumulated and unpaid dividends will be paid as additional shares of Common Stock.

The dividend rate on Series 1 Convertible Preferred Stock is 8%.  Dividends are paid annually on December 31st in the form of additional Series 1 Convertible Preferred Stock unless the Board of Directors approves a cash dividend.  Dividends on Series 1 Convertible Preferred Stock shall cease to accrue on the earlier of December 31, 2009, or on the date they are converted to Common Shares.  Thereafter, the holders of Series 1 Convertible Preferred Stock have the same dividend rights as holders of Common Stock, as if the Series 1 Convertible Preferred Stock had been converted to Common Stock.  Accrued dividends at March 31, 2009 and December 31, 2008 were $129,635 and $0 respectively.

Common Stock – The Company is authorized to issue 40,000,000 shares of $.001 par value Common Stock.  Each share of Common Stock entitles the holder to one vote at all stockholder meetings.  Dividends on Common Stock will be determined annually by the Company’s Board of Directors.

The shares issued in Series 1 Convertible Preferred Stock and Common Stock as of March 31, 2009 and December 31, 2008 is summarized as follows:

 

 

 

Employee/Directors

The Company has employment and stock option agreements with its Chief Executive Officer, Morry Rubin (“M. Rubin”) and its President, Brad Bernstein (“B. Bernstein”)

The following summarizes M. Rubin’s employment agreement and stock options:

·	The employment agreement (dated January 31, 2007) with M. Rubin retains his services as Co-chairman and Chief Executive Officer for a three-year period.

·

An annual salary of $1 until, the first day of the first month following such time as the Company shall have, within any period beginning on January 1 and ending not more than 12 months thereafter, earned pre-tax net income exceeding $1,000,000, M. Rubin’s base salary shall be adjusted to an amount, to be mutually agreed upon between M. Rubin and the Company, reflecting the fair value of the services provided, and to be provided, by M. Rubin taking into account (i) his position, responsibilities and performance, (ii) the Company’s industry, size and performance, and (iii) other relevant factors. M. Rubin is eligible to receive annual bonuses as determined by the Company’s compensation committee.  M. Rubin shall be entitled to a monthly automobile allowance of $1,500.

·	10-year options to purchase 650,000 shares exercisable at $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan. Vesting of the options was one-third immediately, one-third on February 29, 2008 and one-third on February 28, 2009.

·

10-year options to purchase 250,000 shares exercisable at $.62 per share, pursuant to agreements entered into in March 2009.  These options were issued in March 2009 in connection with a personal guarantee provided to a financial institution (see Note 5).  These options were recorded as deferred financing costs and will be amortized to operations over the remaining life of the line of credit agreement.

The following summarizes B. Bernstein’s employment agreement and stock options:

·	The employment agreement (dated January 31, 2007) with B. Bernstein retains his services as President for a three-year period.

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An annual salary of $205,000 during the first year, $220,000 during the second year and $240,000 during the third year and any additional year of employment.  The Board may periodically review B. Bernstein’s base salary and may determine to increase (but not decrease) the base salary in accordance with such policies as the Company may hereafter adopt from time to time.  B. Bernstein is eligible to receive annual bonuses as determined by the Company’s compensation committee.  B. Bernstein shall be entitled to a monthly automobile allowance of $1,000.

·	10-year options to purchase 950,000 shares exercisable at $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan. Vesting of the options is one-third immediately, one-third on February 29, 2008 and one-third on February 28, 2009.

·

10-year options to purchase 250,000 shares exercisable at $.62 per share, pursuant to agreements entered into in March 2009.  These options were issued in March 2009 in connection with a personal guarantee provided to a financial institution (see Note 5).  These options were recorded as deferred financing costs and will be amortized to operations over the remaining life of the line of credit agreement.

Outside Directors

The Company entered into stock option agreements with outside directors.  The following summarizes stock option agreements entered into with these directors:

 

 

 

 

 

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As of March 31, 2008, there were 460,000 shares exercisable at $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan.  The exercise period for these options is 10 years.  Vesting of the options was one-third immediately, one-third from the grant date and the remainder two years from grant date.  If any director ceases serving the Company for any reason, all unvested options shall terminate immediately and all vested options must be exercised within 90 days after the director ceases serving as a director.  In December 2008, one of these directors resigned.  As of March 31, 2009, all options granted to this director expired.

Managerial Employees

The following summarizes stock option agreements entered into with five managerial employees:

 

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10-year options to purchase 69,000 shares exercisable at $1.00 to $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan. The grant dates vary from September 2007 to March 2009.  Vesting periods range from one to four years.  If any employee ceases being employed by the Company for any reason, all vested and unvested options shall terminate immediately.

 

The pre-tax fair value recorded for these options in the statement of operations for the quarters ending March 31, 2009 and 2008 was as follows:

 

 

 

 

 

Revenues – During the quarters ending March 31, 2009 and March 31, 2008, the Company recorded revenues from United States companies in the following industries:

 

 

 

 

Cash – The Company places its cash and cash equivalents on deposit with a North Carolina financial institution. In October and November, 2008 the Federal Deposit Insurance Corporation (FDIC) temporarily increased coverage to $250,000 for substantially all depository accounts and temporarily provides unlimited coverage for certain qualifying and participating non-interest bearing transaction accounts.  The increased coverage is scheduled to expire on December 31, 2009, at which time it is anticipated amounts insured by the FDIC will return to $100,000.  During the year, the Company from time to time may have had amounts on deposit in excess of the insured limits.

 

The income tax benefit for the quarters ending March 31, 2009 and 2008 consists of the following:

 

 

 

The net operating loss carryforward generated in the quarters ending March 31, 2009 and 2008 was approximately $323,000 and $421,000, respectively.  The deferred tax assets related to these net operating loss carryforwards was approximately $121,000 and $166,000 as March 31, 2009 and 2008, respectively.  These deferred tax assets have been reduced by valuation allowances.  Management is uncertain if this net operating loss will ever be utilized, therefore it has been fully reserved.

 

In May 2007, the Company executed lease agreements for office space in Charlotte, NC and Boca Raton, FL.  Both lease agreements are with unrelated parties.

The Charlotte lease is effective on August 15, 2007, is for a twenty-four month term and includes an option to renew for an additional three year term at substantially the same terms.  On November 1, 2007, the Company entered into a lease for additional space adjoining its Charlotte office.  The lease is for 19 months and includes a two year renewal option at substantially the same terms.  The monthly rental for the combined space is approximately $2,250.

The Boca Raton lease was effective on August 20, 2007 and is for a sixty-one month term.  The monthly rental is approximately $8,300.

The rental expense for the quarters ending March 31, 2009 and 2008, was approximately $34,800 and $34,300, respectively.

Cash paid for interest for the quarters ended March 31, 2009 and 2008 was $12,900 and $0, respectively.

Non-cash financing and investing activities consisted of the following:

 

For the quarter ending March 31, 2009-

 

None

 

For the quarter ending March 31, 2008-

 

94,685 preferred shares issued in satisfaction of the accrued dividend obligation as of December 31, 2007.

 

Exchange of 120,000 preferred shares for 606,690 of common shares.

 

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Revenue Recognition – The Company charges fees to its customers in one of two ways as follows:

 

1)	Fixed Transaction Fee -  Fixed transaction fees are derived from a fixed percentage of the purchased invoice.  This percentage does not change from the date the purchased invoice is funded until the date the purchased invoice is collected.

 

2)

Variable Transaction Fee -  Variable transaction fees vary based on the length of time the purchased invoice is outstanding.   As specified in its contract with the client, the Company charges variable increasing percentages of the purchased invoice as time elapses from the purchase date to the collection date.

 

For both fixed and variable transaction fees, the Company recognizes revenue by using one of two methods depending on the type of customer.  For new customers the Company recognizes revenue using the cost recovery method.  For established customers the Company recognizes revenue using the accrual method.

Under the cost recovery method, all revenue is recognized upon collection of the entire amount of purchased accounts receivable.

The Company considers new customers to be accounts whose initial funding has been within the last three months or less.  Management believes it needs three months of history to reasonably estimate a customer’s collection period and accrued revenues.  If three months of history has a limited number of transactions, the cost recovery method will continue to be used until a reasonable revenue estimate can be made based on additional history.  Once the Company obtains sufficient historical experience, it will begin using the accrual method to recognize revenue.

For established customers the Company uses the accrual method of accounting.  The Company applies this method by multiplying the historical yield, for each customer, times the amount advanced on each purchased invoice outstanding for that customer, times the portion of a year that the advance is outstanding.  The customers’ historical yield is based on the Company’s last six months of experience with the customer along with the Company’s experience in the customer’s industry, if applicable.

The amounts recorded as revenue under the accrual method described above are estimates.  As purchased invoices are collected, the Company records the appropriate adjustments to record the actual revenue earned on each purchased invoice. These adjustments from the estimated revenue to the actual revenue have not been material.

Retained Interest in Purchased Accounts Receivable – Retained interest in purchased accounts receivable represents the gross amount of invoices purchased from factoring customers less amounts maintained in a reserve account.  The Company purchases a customer’s accounts receivable and advances them a percentage of the invoice total.  The difference between the purchase price and amount advanced is maintained in a reserve account.  The reserve account is used to offset any potential losses the Company may have related to the purchased accounts receivable.  Upon collection, the retained interest is refunded back to the client.

Management believes the fair value of the retained interest in purchased accounts receivable approximates its recorded value because of the relatively short term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected.

 

 

 

Property and Equipment – Property and equipment, consisting of furniture and fixtures and computers and software, are stated at cost.  Depreciation is provided over the estimated useful lives of the depreciable assets using the straight-line method.  Estimated useful lives range from 2 to 7 years.

Property and Equipment – Property and equipment, consisting of furniture and fixtures and computers and software, are stated at cost.  Depreciation is provided over the estimated useful lives of the depreciable assets using the straight-line method.  Estimated useful lives range from 2 to 7 years.

Deferred Financing Costs – Costs incurred to obtain financing are capitalized and amortized over the term of the debt using the straight-line method, which approximates the effective interest method.

As of March 31, 2009 and December 31, 2008, the total amount capitalized and accumulated amortization is as follows: