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FlexShopper, Inc. - Quarter Report: 2014 June (Form 10-Q)

form10q.htm

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act Of 1934

For The Quarterly Period Ended June 30, 2014

Commission File Number: 0-52589

LOGO
FLEXSHOPPER, INC.
(Exact name of registrant as specified in its charter)


 
Delaware 
20-5456087
(State of jurisdiction of Incorporation)
(I.R.S. Employer Identification No.)
   
 
2700 N. Military Trail  Suite 200
Boca Raton FL
   (Address of Principal Executive Offices)
 
 
33431
(Zip Code)
 
                  (561) 367-1504             
(Registrant's telephone number)

                                                      10801 Johnston Road, Suite 210, Charlotte, NC 28226                                                        
(Former name or former address, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit and post such files). Yes [ X ]      No [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [  ]
     
Accelerated filer [  ]
 
 Non-accelerated filer [  ]
 
(Do not check if a smaller reporting company)
 
Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]  No [X]
 
As of June 30, 2014, the Company had a total of 29,692,683 shares of Common Stock outstanding, excluding 376,387 outstanding shares of Series 1 Preferred Stock convertible into 2,145,406 shares of Common Stock.

 
 
1

 
 
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
 
 
This report contains certain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and are including this statement for purposes of these safe harbor provisions. "Forward-looking statements," which are based on certain assumptions and describe our future plans, strategies and expectations, may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward-looking statements, include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for commercial, mortgage, consumer and other loans, real estate values, competition, changes in accounting principles, policies or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect our financial results, is included in our other filings with the Securities and Exchange Commission.
 
 
2

 
 
FLEXSHOPPER, INC.

Form 10-Q Quarterly Report
Table of Contents

 
 
Page
   
PART I.  FINANCIAL INFORMATION
 
   
4
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
18
     
24
     
24
   
PART II.     OTHER INFORMATION
 
   
24
     
24
     
25
     
25
     
25
     
25
     
25
   
Signatures
26
   
Certifications  
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
FLEXSHOPPER, INC.
  CONSOLIDATED BALANCE SHEETS
 
 
ASSETS            
   
(Unaudited)
       
   
June 30,
   
December 31,
 
   
2014
   
2013
 
CURRENT ASSETS:
           
Cash
  $ 4,692,819     $ 960,032  
Accounts receivable, net of allowance for doubtful accounts of $141,523 in 2014
    19,394       119  
Prepaid expenses
    152,486       50,188  
Lease merchandise, net
    1,619,068       8,004  
Assets of discontinued operations
    140,412       5,363,728  
Total current assets
    6,624,179       6,382,071  
                 
PROPERTY AND EQUIPMENT, net
    132,076       58,079  
                 
OTHER ASSETS:
               
Intangible assets – patent costs
    30,760       30,760  
Security deposits
    57,253       9,485  
      88,013       40,245  
                 
    $ 6,844,268     $ 6,480,395  
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 389,357     $ 20,349  
Accrued payroll and related taxes
    117,000       68,140  
Accrued expenses
    116,644       3,693  
Liabilities of discontinued operations
    396,276       3,331,955  
Total current liabilities
    1,019,277       3,424,137  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY PREFERRED STOCK, net of issuance costs of
               
    1,209,383      671,409       671,409  
COMMON STOCK
    2,970       2,115  
ADDITIONAL PAID IN CAPITAL
    12,935,865       8,548,162  
ACCUMULATED DEFICIT
    (7,785,253 )     (6,165,428 )
      5,824,991       3,056,258  
                 
    $ 6,844,268     $ 6,480,395  
 
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
 
 
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
   
(Unaudited)
For the three months ended June 30,
   
(Unaudited)
For the six months ended June 30,
 
 
   
2014
   
2013
   
2014
   
2013
 
REVENUE:
                       
LEASE REVENUE AND FEES
  $ 689,329     $ -     $ 793,250     $ -  
                                 
COST OF REVENUE:
                               
COST OF LEASE REVENUE AND FEES
    396,720       -       444,846       -  
COST OF LEASE MERCHANDISE SOLD
    107,145               110,550          
      503,865       -       555,396       -  
                                 
GROSS PROFIT
    185,464       -       237,854       -  
                                 
GENERAL AND ADMINISTRATIVE EXPENSES
    1,429,533       -       2,683,298       -  
                                 
INCOME TAXES
    -       -       -       -  
                                 
LOSS FROM CONTINUING OPERATIONS
    (1,244,069 )     -       (2,445,444 )     -  
                                 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (including income
                               
from the sale of discontinued assets of $445,474 in 2014 ) (See note 3)
    570,973       (15,196 )     825,619       37,720  
                                 
NET (LOSS) INCOME
  $ (673,096 )   $ (15,196 )   $ (1,619,825 )   $ 37,720  
                                 
BASIC EARNINGS PER COMMON SHARE:
                               
LOSS FROM CONTINUING OPERATIONS
  $ (0.05 )   $ -     $ (0.11 )   $ -  
INCOME FROM DISCOUNTINUED OPERATIONS
    0.02               0.04          
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
  $ (0.03 )   $ -     $ (0.07 )   $ -  
                                 
DILUTED EARNINGS PERCOMMON SHARE:
                               
LOSS FROM CONTINUING OPERATIONS
  $ (0.05 )   $ -     $ (0.11 )   $ -  
INCOME FROM DISCOUNTINUED OPERATIONS
    0.02               0.04          
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
  $ (0.03 )   $ -     $ (0.07 )   $ -  
                                 
                                 
WEIGHTED AVERAGE SHARES
                               
  Basic
    24,676,348       18,634,369       22,912,605       18,634,369  
  Dilutive
    24,676,348       20,739,580       22,912,605       20,710,206  

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements
 
 
FLEXSHOPPER, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended June 30, 2014
 
 
   
Preferred
   
Common
   
Additional
   
Accumulated
       
   
Stock
   
Stock
   
Paid in Capital
   
Deficit
   
Total
 
Balance, December 31, 2013
  $ 671,409     $ 2,115     $ 8,548,162     $ (6,165,428 )   $ 3,056,258  
                                         
Provision for compensation expense related to issued stock options
    -       -       234,500       -       234,500  
                                         
Provision  for compensation expense related to issued warrants
    -       -       7,000       -       7,000  
                                         
Sale of common stock, net of issuance costs
    -       673       3,146,385       -       3,147,058  
                                         
Conversion of shareholders loans to common stock
    -       182       999,818       -       1,000,000  
                                         
Net loss
    -       -       -       (1,619,825 )     (1,619,825 )
                                         
Balance, June 30, 2014 (unaudited)
  $ 671,409     $ 2,970     $ 12,935,865     $ (7,785,253 )   $ 5,824,991  

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements
 
 
6

 
FLEXSHOPPER, INC.
For the six months ended June 30,
 
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
2014
   
2013
 
  Net (loss) income
  $ (1,619,825 )   $ 37,720  
  Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
               
    Income from discontinued operation
    (825,619 )     (37,720 )
    Depreciation and amortization
    33,396       -  
    Depreciation of lease merchandise
    341,846          
    Impairment of lease merchandise
    103,000          
    Compensation expense related to issuance of stock options
    234,500       -  
    Compensation expense related to issuance of warrants
    7,000       -  
    Allowance for uncollectible accounts
    141,523       -  
Changes in operating assets and liabilities:
               
    (Increase) in accounts receivable
    (160,798 )     -  
    (Increase) in prepaid expenses and other
    (102,299 )     -  
    (Increase) in lease merchandise
    (2,055,910 )     -  
    (Increase) in security deposits
    (47,768 )     -  
    Increase in accounts payable
    369,008       -  
    Increase in accrued payroll and related taxes
    48,860       -  
    Increase in accrued expenses
    112,951       -  
      Net cash used by operating activities - continuing operations
    (3,420,135 )     -  
      Net cash provided (used) by operating activities - discontinued operations
    6,072,337       (278,089 )
      Net cash provided by (used in) operating activities
    2,652,202       (278,089 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Purchases of property and equipment
    (107,393 )     -  
     Net cash used in investing activities – continuing operations
    (107,393 )     -  
     Net cash used in investing activities- discontinued operations
    -       (33,584 )
     Net cash used in investing activities
    (107,393 )     (33,584 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
   Loans from shareholders
    1,000,000       -  
   Proceeds from sale of common stock
    3,186,058       -  
   Payment of costs related to issuance of common stock
    (39,000 )     -  
     Net cash provided by financing operations – continuing operations
    4,147,058       -  
     Net cash used by financing operations - discontinued operations
    (2,959,080 )     446,856  
     Net cash provided by financing activities
    1,187,978       446,856  
                 
INCREASE IN CASH
    3,732,787       135,183  
                 
CASH, beginning of period
    960,032       610,439  
                 
CASH, end of period
  $ 4,692,819     $ 745,622  
                 
                 
   

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
 

           FLEXSHOPPER, INC.
Notes To Consolidated Financial Statements
For the Three and Six months ended June 30, 2014 and 2013

(Unaudited)

The Consolidated Balance Sheet as of June 30, 2014, the Consolidated Statements of Operations for the three and six months ended June 30, 2014 and June 30, 2013 and Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2014, and the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 have been prepared by us without audit. In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly in all material respects our financial position as of June 30, 2014, results of operations for the three and six month periods ended June 30, 2014 and 2013 and cash flows for the six month periods ended June 30, 2014 and 2013, and are not necessarily indicative of the results to be expected for the full year.

This report should be read in conjunction with our Form 10-K for our fiscal year ended December 31, 2013.

1.  BACKGROUND AND DESCRIPTION OF BUSINESS:

The consolidated financial statements include the accounts of FlexShopper, Inc. (formerly Anchor Funding Services, Inc. the “Company”) and its wholly owned subsidiary, FlexShopper, LLC (“FlexShopper”). FlexShopper, Inc. is a Delaware holding corporation.  FlexShopper, Inc. has no operations; substantially all operations of the Company are the responsibility of FlexShopper.

FlexShopper is a North Carolina Limited Liability Company formed in June 2013 that provides certain types of durable goods to consumers on a lease-to-own basis and also provides lease-to-own terms to consumers of third party retailers and e-tailers.  The Company has been generating revenues from this new line of business since December 2013. Management believes that the introduction of FlexShopper's lease-to-own (LTO) programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces.    FlexShopper  and  its online  LTO  products  provide  consumers the ability  to acquire  durable  goods,   including  electronics,   computers  and  furniture on  an  affordable  payment,  lease  basis. Concurrently,  e-tailers  and  retailers  that  work  with  FlexShopper  may  increase   their  sales  by   utilizing FlexShopper's online channels to connect with consumers that want to acquire products on an LTO basis. The Company  anticipates additional  expenses  of approximately  $450,000 per month or potentially  higher as FlexShopper  implements  its programs  and  continues to build an infrastructure  to support  its revenues and business objectives.  These expenses are funded by the sale of Anchor and a sale of the Company’s restricted stock. FlexShopper incurred a net loss from continuing operations of approximately $2,445,000 which is reflected in the statements of operations for the six months ended June 30, 2014.

Anchor is a North Carolina limited liability company. Anchor was formed for the purpose of providing factoring and back office services to businesses located throughout the United States of America.
 
During 2013, the Company decided to concentrate its efforts on the operations of FlexShopper and subsequently on March 6, 2014 the Company signed a non-binding letter of intent with a financial institution to sell substantially all of the operating assets of its wholly owned subsidiary, Anchor Funding Services, LLC (“Anchor”). The sale was finalized in May 2014 (See Note 3). The consolidated statements of operations for the three and six months ended June 30, 2014 and the consolidated statements of cash flows for the six months ended June 30, 2014 and 2013 reflect the historical operations of Anchor as discontinued operations. The 2014 consolidated balance sheet contains amounts attributable to Anchor and are classified as discontinued. Accordingly, we have generally presented the notes to our consolidated financial statements on the basis of continuing operations. In addition, unless stated otherwise, any reference to statement of operations items in these financial statements refers to results from continuing operations.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of FlexShopper, Inc. and, its wholly owned subsidiary FlexShopper, LLC.  The company’s wholly owned subsidiary, Anchor Funding Services, LLC (“Anchor”) is reflected in the consolidated statements of operations and the consolidated statements of cash flows as discontinued operations for the three and six months ended June 30, 2014 and 2013.

Estimates – The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 

The Lease Purchase Transaction -The lease purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise with no long-term obligation. Key features of the lease purchase transaction in our program include:

Brand name merchandise. We offer the ability to acquire on-line or in participating retailers well-known brands of home electronics, appliances, computers and/or tablets; and furniture.

Convenient payment drafting. We charge our customers’ bank account or debit card primarily on a weekly basis and will accommodate bi-weekly requests.  Lease payments together with applicable fees, constitute our primary revenue source.

Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has completed the payments required in the lease purchase agreement to own the merchandise, generally 52 weeks, or exercises the 90 day same as cash early purchase option. Under this option, if within 90 days of the lease the customer pays the cash price inclusive of a nominal processing fee, ownership transfers to the customer.

Revenue Recognition - Merchandise is leased to customers pursuant to lease purchase agreements which provide for weekly and bi-weekly lease terms with non-refundable lease payments. Generally the customer has the right to acquire title either through a 90 day same as cash option or through payments of all required lease payments for ownership. Lease revenues  are recognized  in the month they are due on the accrual  basis of accounting. For  internal  management reporting purposes, lease revenues from sales and lease ownership agreements are recognized as revenue in the month the cash is collected. On a monthly basis, we record an accrual for lease revenues due but not yet received, net of allowances, and a deferral of revenue for lease payments received prior to their  due date. Our revenue recognition accounting policy matches the lease revenue  with the corresponding costs, mainly depreciation associated with the leased merchandise.

Lease Merchandise – Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is recorded at cost. The Company depreciates leased merchandise using the straight line method over the applicable agreement period for a consumer to acquire ownership generally twelve months with no salvage value. When indicators of impairment exist the Company records an impairment reserve against the carrying value of the leased merchandise. The Company is developing historical charge off information to assess recoverability and estimate of the impairment reserve.  The net leased merchandise balances consisted of the following as of June 30, 2014.

Leased merchandise – gross
  $ 2,064,037  
Accumulated depreciation
    (341,969 )
Impairment reserve
    (103,000 )
Leased merchandise – net
  $ 1,619,068  
 
Intangible Assets - Intangible assets, primarily patent costs, are stated at cost less any accumulated amortization and any provision for impairment. Patent costs are amortized by using the straight line method over the shorter of their legal (20 years) or useful lives from the time they are first available for use.

Cost of Lease Merchandise Sold – Cost of merchandise sold represents the net book value of rental merchandise at the time of sale.

General and Administrative Expenses – General and Administrative expenses include all corporate overhead expenses such as salaries, payroll taxes and benefits, stock based compensation, occupancy, administrative, bad debts and other expenses.

Advertising Costs – The Company charges advertising costs to expense as incurred. Total advertising costs were approximately  $153,200 and $188,200 for the three months and six months ended June 30, 2014. Prior year advertising costs are included in discontinued operations.

Earnings per Share (EPS) – 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 include 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 a dilutive effect when the average price of common stock during the period exceeds the exercise price of options or warrants. 
 
Also  when  there  is  a  year-to date loss from operations, potential common shares are not included in the computation of diluted earnings per share, since they have an anti-dilutive effect. For the three and six months ending June 30, 2014 there was a net loss. There was a net loss for the three months ended June 30, 2013.
 

    2014     2013  
         
(Denominator)
               
(Denominator)
       
         
Weighted-
   
Per
         
Weighted-
   
Per
 
   
(Numerator)
   
Average
   
Share
   
(Numerator)
   
Average
   
Share
 
   
Net Loss
   
Shares
   
Amount
   
Net Income
   
Shares
   
Amount
 
Three Months  Ended June 30,
                                   
Basic EPS
  $ (673,096 )     24,676,348     $ (0.03 )   $ (15,196 )     18,634,369     $  
Effect of Dilutive Securities – Options and
                                               
  Convertible Preferred Stock
    -       -       -       -       2,105,211        
Diluted EPS
  $ (673,096 )     24,676,348     $ (0.03 )   $ (15,196 )     20,739,580     $  
                                                 
Six Months  Ended June 30,
                                               
Basic EPS
  $ (1,619,825 )     22,912,605     $ (0.07 )   $ 37,720       18,634,369     $  
Effect of Dilutive Securities – Options and
                                               
  Convertible Preferred Stock
    -       -       -       -       2,075,837        
Diluted EPS
  $ (1,619,825 )     22,912,605     $ (0.07 )   $ 37,720       20,710,206     $  
  
Stock Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.

Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards.

See Note 8 to our financial statements for the impact on the operating results for the three and six months ended June 30, 2014 and 2013.

Fair Value of Financial Instruments – The carrying value of cash equivalents, accounts payable and accrued liabilities and loan payable officer due to their short term nature approximate 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 – The Company is a “C” corporation for income tax purposes.  In a “C” corporation 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:

· Expense related to the issuance of equity instruments
· Use of the reserve method of accounting for bad debts
· Net operating loss carryforwards.

The deferred tax asset represents the future tax return consequences of utilizing these items.   Deferred tax assets are reduced by a valuation reserve, when management is uncertain if the net deferred tax assets will ever be realized.

The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. The Company applied this guidance to all its tax positions, including tax positions taken and those expected to be taken, under the transition provision of the interpretation.   For the six months ended June 30, 2014 and 2013, the Company concluded that it had no material uncertain tax positions.
 

The Company classifies interest accrued on unrecognized tax benefits with interest expense.  Penalties accrued on unrecognized tax benefits are classified with operating expenses.
 
Recent Accounting Pronouncements –

The FASB amended the Comprehensive Income topic of the ASC in February 2013 with ASU No. 2013-02. The amendment addresses reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendment does not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the amendment does require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The guidance became effective for the Company in the first quarter of fiscal year 2014.  This amendment did not have a material effect on the Company’s financial statements.

In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a  Similar Tax  Loss, or  a Tax Credit Carryforward Exists, "  which among other  things,  require an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial  statements as a reduction  to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as denoted within the ASU. The guidance became effective for the Company in the first quarter of fiscal year 2014.  The guidance did not have a material effect on the Company’s financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU No. 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. ASU No. 2014-08 is effective prospectively for fiscal years beginning after December 15, 2014. The Company has early adopted this update in the second quarter of 2014.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of the provisions of this new standard on its financial position and results of operations.

In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the potential impacts of the new standard on its existing stock-based compensation plans.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact in the Company’s financial position, results of operations or cash flows.
 
3.  DISCONTINUED OPERATIONS:

During 2013, the Company decided to concentrate its efforts on the operations of FlexShopper and subsequently on April 30, 2014, Anchor entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with a Bank, pursuant to which Anchor sold to the Bank substantially all of its assets (the “Anchor Assets”), consisting primarily of its factoring portfolio (the “Portfolio Accounts”). The purchase price for the Anchor Assets was equal to (1) 110% of the total funds outstanding associated with the Portfolio Accounts plus (2) an amount equal to 50% of the factoring fee and interest income earned by the Portfolio Accounts during the 12 month period following acquisition (“Earnout Payments”).  The sale of the Anchor Assets was made in a series of closings through June 16, 2014.  In connection with each closing, Anchor used the proceeds thereof to pay to Bank all amounts due for factor advances associated with the Portfolio Accounts acquired pursuant to such closing under Anchor’s Rediscount Facility Agreement with the Bank entered into as of November 30, 2011 (the “Rediscount Facility Agreement”).  In accordance with the Purchase Agreement, following the final closing thereunder all obligations of Anchor under the Rediscount Facility Agreement (and the associated Validity Warranty) were paid and satisfied in full and the agreement was terminated to have no further force and effect. Anchor recorded a gain of $445,474 on the sale of these assets for the six months ended June 30, 2014 which is included in income from discontinued operations.
 

 The assets, other assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued operations,” “Non-current assets of discontinued operations” and “Liabilities of discontinued operations” in the accompanying Balance Sheets at June 30, 2014 and December 31, 2013 and consist of the following:

   
June 30, 2014
   
December 31, 2013
 
Assets of discontinued operations:
           
 Retained interest in purchased accounts receivable
  $ 38,716     $ 4,966,338  
 Earned but uncollected fees
    1,805       141,077  
 Due from client
    99,891       256,313  
    $ 140,412     $ 5,363,728  
                 
Liabilities of discontinued operations:
               
Accounts payable
  $ 94,858     $ 26,966  
Accrued expenses
    3,694       51,719  
Due to financial institution
    281,861       3,240,942  
Deferred revenue
    15,863       12,328  
    $ 396,276     $ 3,331,955  
 
Major classes of income and expenses shown as income from discontinued operations in the Consolidated Statement of Operations are as follows:
 
   
Three months ended
   
Six months ended
 
   
June 30, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
                         
 Finance revenues
  $ 246,025     $ 703,602     $ 709,867     $ 1,306,209  
 Interest expense-financial institution
    (38,732 )     (108,032 )     (109,346 )     (210,413 )
 Provision for credit losses
    25,768       (105,000 )     24,904       (105,000 )
 Net finance revenues
    233,061       490,570       625,425       990,796  
 Operating expenses
    (107,562 )     (497,271 )     (245,280 )     (940,418 )
 Gain on sale of discontinued assets
    445,474       -       445,474       -  
 Depreciation
    -       (8,495 )     -       (12,658 )
 Net income (loss) from discontinued operations
  $ 570,973     $ (15,196 )   $ 825,619     $ 37,720  

4.  PROPERTY AND EQUIPMENT:
 
Property and equipment consisted of the following:
 
 
Estimated
           
 
Useful Lives
 
June 30, 2014
   
December 31, 2013
 
Furniture and fixtures
2-5 years
  $ 99,982     $ 64,945  
Computers and software
3-7 years
    323,881       251,525  
        423,863       316,470  
Less: accumulated depreciation
      (291,787 )     (258,391 )
      $ 132,076     $ 58,079  

Depreciation expense was $18,408 and $8,495 for the quarters ended June 30, 2014 and 2013, respectively and $33,396 and $12,658 for the six months ended June 30, 2014 and 2013, respectively.


5.  LOANS PAYABLE SHAREHOLDERS:

On March 19, 2014 upon approval of the Board of Directors, FlexShopper entered into two Promissory Notes totaling $1,000,000, one with CEO Morry Rubin and the other with a major shareholder and Director of the company. Each demand Promissory Note is for $500,000 and earns interest (payable monthly) at 10% per annum. The Promissory Notes were to assist FlexShopper in purchasing merchandise for lease to support FlexShopper’s growth.  In June 2014 these loans were converted into shares of the Company’s Common Stock. (See Note 6).

6.  CAPITAL STRUCTURE:

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 was convertible into 5.1 shares of the Company’s Common Stock, subject to certain anti-dilution rights. As a result of the Common Stock offering described below and the sale of Common Stock to officers and/or directors as set forth under Note 7, each share of Series 1 Preferred Stock is currently convertible into 5.7 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 was 8%.  Dividends were paid between 2007 and 2009 annually on December 31st in the form of additional Series 1 Convertible Preferred Stock unless the Board of Directors approved a cash dividend.  Dividends on Series 1 Convertible Preferred Stock ceased to accrue on the earlier of December 31, 2009, or on the date they were 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.

As of June 30, 2014 there were 376,387 shares of Series 1 Convertible Preferred Stock outstanding.

Common Stock – The Company is authorized to issue 65,000,000 shares of $.0001 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.

During the fourth quarter of 2013, the Company raised $1,000,000 from the sale of its restricted Common Stock at $.40 per share. An aggregate of 2,500,000 shares of Common Stock were sold under Rule 506 and/or Section 4(2) of the Securities Act of 1933 as amended.  The Company also issued 14,493 shares to consultants for services rendered.

During the second quarter of 2014, the Company received net proceeds of $3,186,058 from the sale of 6,725,589 shares of its Common Stock under Rule 506 and/or Section 4(2) of the Securities Act of 1933 as amended.  The foregoing excludes the issuance at the final closing date of seven year warrants to purchase 15% of the number of shares sold in the offering, which warrants are being issued to the placement agents. As of June 30, 2014, the placement agents have earned warrants to purchase 1,008,846 shares.

In addition, pursuant to the terms of the private placement offering, George Rubin and Morry F. Rubin, officers, directors and founders of the Company, each completed the funding of their $500,000 loan to the Company and converted these loans into shares of the Company’s Common Stock at the same offering price per share as that paid by investors in the offering. An aggregate of 1,818,182 shares of the Company’s Common Stock were issued to the Rubins from the conversion of the $1,000,000 total of their notes plus any accrued interest.

7.  RELATED PARTY TRANSACTIONS:

Options granted to officers and directors.

On March 20, 2012, M. Rubin and B. Bernstein were each granted 10 year options to purchase 250,000 shares of common stock each for a total of 500,000 shares. These options were fully vested in 2013. See Note 8.
 

On March 24, 2014, B. Bernstein was granted 10 year options to purchase 250,000 shares of common stock. These options vested on the date of grant.

On March 19, 2014 upon approval of the Board of Directors, FlexShopper entered into two Promissory Notes totaling $1,000,000, one with CEO Morry Rubin and the other with a major shareholder and Director of the company. Each demand Promissory Note was for $500,000 and earned interest (payable monthly) at 10% per annum. The Promissory Notes were to assist FlexShopper in purchasing merchandise for lease to support FlexShopper’s growth. The Notes were converted into 1,818,182 shares of the Company’s Common Stock.

8. EMPLOYMENT AND STOCK OPTION AGREEMENTS:

On January 31, 2007, the Board adopted our 2007 Omnibus Equity Compensation Plan (the “Plan”), with 2,100,000 common shares authorized for issuance under the Plan.  In October 2009, the Company's stockholders approved an increase in the number of shares covered by the Plan to 4,200,000 shares.

The general purpose of the plan is to provide an incentive to the Company’s employees, directors and consultants by enabling them to share in the future growth of the business.

At closing of the exchange transaction described above, M. Rubin and Brad Bernstein (“B. Bernstein”), the President of the Company, entered into employment contracts and stock option agreements.  Additionally, at closing two non-employee directors entered into stock option agreements.
 
The following summarizes M. Rubin’s employment agreement and stock options:
 
The employment agreement with M. Rubin currently retains his services as Co-chairman and Chief Executive Officer through January 31, 2015.
   
On August 8, 2013, the Board agreed to modify M. Rubin’s employment agreement and approved an annual salary of $125,000. Previously, M. Rubin received an annual salary of $1.00. M. Rubin is eligible to receive periodic review of his base salary and 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 Plan. All of the aforementioned options are fully vested.
 
The following summarizes B. Bernstein’s employment agreement and stock options:
 
The employment agreement with B. Bernstein currently retains his services as President through January 31, 2015.
   
An annual salary of $240,000.  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.
   
The Board approved an annual bonus program for Mr. Bernstein commencing with the 2011 fiscal year and ending with the 2013 fiscal year. The annual bonus was equal to 5% of annual net income provided net income is equal to or greater than $200,000. The bonus was calculated on the Company’s audited GAAP financial statements.  For fiscal 2011, 2012 and 2013, B. Bernstein received a bonus of $14,486, $20,021 and $-0-, respectively. B. Bernstein is 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 Plan. All of the aforementioned options are fully vested.
   
The following table summarizes information about stock options as of June 30, 2014:
 
Exercise
Number
Remaining
Number
Price
Outstanding
Contractual Life
Exercisable
       
$1.25
       1,605,000
4  years
         1,605,000
$1.00
            45,000
6  years
              45,000
$0.62
          500,000
6  years
            500,000
$0.17
500,000
9  years
500,000
$0.80
550,000
10 years
550,000
$0.25
120,000
10 years
120,000
$0.35
33,333
10 years
33,333
$0.30
50,000
10 years
16,667
$0.45
25,000
10 years
8,333
$0.75
55,000
10 years
-
$0.82
10,000
10 years
-
$0.90
30,000
10 years
-
$0.55
20,000
10 years
-
 
       3,543,333
 
         3,378,333
 
 
·
The Company measured the fair value of each option award on the date of grant using the Black Scholes option pricing model (BSM) with the following assumptions:
 
Exercise price
  $ .17 to $1.25  
Term
 
10 years
 
Volatility
 
0.37 to 2.50
 
Dividends
    0 %
Discount rate
 
0.02% to 4.75%
 
 
·
The fair value amounts recorded for these options in the statements of operations was $3,500 and $2,226 for the three months ended June 30, 2014 and 2013, respectively and $234,500 and $47,373 for the six months ended June 30, 2014 and 2013, respectively.
 

9. WARRANTS:

The Company has outstanding warrants to purchase 1,342,500 shares of the Company’s common stock, which warrants were due to expire on January 31, 2014 but were extended by the Company through January 31, 2018. These warrants are now exercisable at $1.10 per share. The following information was input into BSM to compute a per warrant price of $.104:
 
Exercise price
  $ 1.10  
Term
4 years
Volatility
    37 %
Dividends
    0 %
Discount rate
    .09 %

For the three and six months ended June 30, 2014 and 2013, the Company recorded compensation expense of $4,200 and $1,916 and $7,000 and $1,916 respectively, related to the issuance of these warrants.
 
On December 7, 2009, the Company received gross proceeds of $500,002 from the sale of 500,002 shares of common stock and ten year warrants to purchase 2,000,004 shares of common stock exercisable at $1.00 per share. The Black Scholes option pricing model was used to compute the fair value of the warrants.
 
The following table summarizes information about stock warrants as of June 30, 2014:
 
       
Weighted Average
   
Exercise
 
Number
 
Remaining
 
Number
Price
 
Outstanding
 
Contractual Life
 
Exercisable
             
$1.10
 
1,342,500
 
4 years
 
1,342,500
$1.00
 
      2,000,004
 
 7 years
 
   2,000,004


10.  SUPPLEMENTAL DISCLOSURES OF CASH FLOW:

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

For the three and six months ending June 30, 2014

Conversion of shareholders’ loans to common stock   -   $1,000,000
 


For the three and six months ending June 30, 2013
 
None

11.  INCOME TAXES:

As of June 30, 2014, the Company had approximately $4.3 million of net operating loss carryforwards (“NOL”) for income tax purposes.   The NOL’s expire in various years from 2022 through 2025.  The Company’s use of operating loss carryforwards is subject to limitations imposed by the Internal Revenue Code.  Management believes that the deferred tax assets as of June 30, 2014 do not satisfy the realization criteria and has recorded a valuation allowance for the entire net tax asset.  By recording a valuation allowance for the entire amount of future tax benefits, the Company has not recognized a deferred tax benefit for income taxes in its statements of operations.

12. COMMITMENTS AND CONTINGENCIES:

Lease Commitments

The Company has lease agreements for office space in Charlotte, NC, and Boca Raton, FL. All lease agreements are with unrelated parties.

The Company has two Charlotte leases for adjoining space that expired May 31, 2014.  The monthly rent for the combined space is approximately $2,340. The Company renewed the leases for an additional year at the same terms.

On August 1, 2013, FlexShopper entered into a 39 month lease for office space in Boca Raton, FL to accommodate the FlexShopper business and its additional employees. The monthly rent was approximately $6,800. This lease agreement was amended in January 2014 to reflect a 63 month term for a larger suite in an adjoining building. Upon commencement the monthly base rent including operating expenses for the first year will be approximately $15,800 with annual three percent increases throughout the lease term.

Anchor had a lease for office space in Medley, FL, which was to expire on May 12, 2014. Anchor terminated this lease in 2013 and forfeited its security deposit.

The rental expense for the six months ended June 30, 2014 and 2013 was approximately $84,000 and $29,000, respectively.  The future minimum annual lease payments are approximately as follows:

       
2015
  $ 132,300  
2016
    119,700  
2017
    123,400  
2018
    127,200  
2019
    130,900  
Thereafter
    11,200  
    $ 644,700  

 

Contingencies

We are not a party to any pending material legal proceedings except as described below. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.

On October 22, 2010, Anchor filed a complaint in the Superior Court of Stamford/Norwalk, Connecticut against the Administrators of the Estate of David Harvey (“Harvey”) to recoup a credit loss incurred by the Company’s former subsidiary, Brookridge Funding Services, LLC.  Harvey was the owner of a Company that caused the credit loss and the Company is pursuing its rights under the personal guarantee that Harvey provided.  The Complaint is demanding principal of approximately $485,000 plus interest and damages.

13. SUBSEQUENT EVENTS

In  July 2014, the Company received gross proceeds of $991,750 from the sale of 1,803,182 shares of the Company’s Common Stock. As of July 31, 2014, the offering has resulted in gross proceeds of $4,690,850 and the offering is ongoing with a maximum offering of $8,030,000, subject to the right to increase the offering at the placement agents’ discretion to a maximum of $9,625,000. Exemption from registration is claimed under Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended.

On August 8, 2014, the Company closed its Charlotte office which performed certain accounting and merchant support functions and consolidated these operations into the Company’s Headquarters location in Boca Raton, Florida.




 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing at the end of our Form 10-K for the fiscal year ended December 31, 2013. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The “Risk Factors” section of our Form 10-K for the fiscal year ended December 31, 2013 should be read for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Executive Overview

The results of operations below principally reflect the operations of FlexShopper, LLC which provides certain types of durable goods to consumers on a lease-to-own basis and also provides lease-to-own terms to consumers of third party retailers and e-tailers.  The Company began generating revenues from this new line of business in December 2013.   Management   believes   that the introduction of FlexShopper's Lease-to-own (LTO) programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces.    FlexShopper  and  its online  LTO  platforms  provide  consumers the ability  to acquire  durable  goods,   including  electronics,   computers  and  furniture on  an  affordable  payment,  lease  basis. Concurrently,  e-tailers  and  retailers  that  work  with  FlexShopper  may  increase   their  sales  by   utilizing FlexShopper's online channels to connect with consumers that want to acquire products on an LTO basis. FlexShopper’s sales channels include 1) serving as the financial and technology partner for durable goods retailers and etailers 2) selling directly to consumers via the online FlexShopper LTO Marketplace featuring thousands of durable goods and 3) utilizing FlexShopper’s , patent pending LTO payment method at check out on e-commerce sites.

During 2013, the Company decided to concentrate its efforts on the operations of FlexShopper and subsequently on April 30, 2014, Anchor entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with a Bank, pursuant to which Anchor sold to the Bank substantially all of its assets (the “Anchor Assets”), consisting primarily of its factoring portfolio (the “Portfolio Accounts”). The purchase price for the Anchor Assets was equal to (1) 110% of the total funds outstanding associated with the Portfolio Accounts plus (2) an amount equal to 50% of the factoring fee and interest income earned by the Portfolio Accounts during the 12 month period following acquisition (“Earnout Payments”).  The sale of the Anchor Assets was made in a series of closings through June 16, 2014.  In connection with each closing, Anchor used the proceeds thereof to pay to Bank all amounts due for factor advances associated with the Portfolio Accounts acquired pursuant to such closing under Anchor’s Rediscount Facility Agreement with the Bank entered into as of November 30, 2011 (the “Rediscount Facility Agreement”).  In accordance with the Purchase Agreement, following the final closing thereunder all obligations of Anchor under the Rediscount Facility Agreement (and the associated Validity Warranty) were paid and satisfied in full and the agreement was terminated to have no further force and effect.
 
The consolidated statements of operations for the three and six months ended June 30. 2014 and the consolidated statements of cash flows for the six months ended June 30, 2014 and 2013 reflect the historical operations of Anchor as discontinued operations.. The 2014 consolidated balance sheet contains amounts attributable to Anchor and are classified as discontinued. Accordingly, we have generally presented the notes to our consolidated financial statements on the basis of continuing operations. In addition, unless stated otherwise, any reference to income statement items in these financial statements refers to results from continuing operations.  (See Note 3)

We have moved our principal executive operations to Boca Raton, Florida, which also includes our sales and marketing functions.
 
Summary of Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  On an on-going basis, management evaluates its estimates and judgments, including those related to credit provisions, intangible assets, contingencies, litigation and income taxes.  Management bases its estimates and judgments on historical experience as well as various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, reflect the more significant judgments and estimates used in the preparation of our financial statements.
 

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of FlexShopper, Inc. and, its wholly owned subsidiary FlexShopper, LLC .  The company’s wholly owned subsidiary, Anchor Funding Services, LLC (“Anchor”) is reflected in the consolidated statements of operations and the consolidated statements of cash flows as discontinued operations for the three and six months ended June 30, 2014 and 2013.

Estimates – The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 
The Lease Purchase Transaction -The lease purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise with no long-term obligation. Key features of the lease purchase transaction in our program include:

Brand name merchandise. We offer the ability to acquire on line or in participating retailers well-known brands of home electronics, appliances, computers and/or tablets; and furniture.

Convenient payment drafting. We charge our customers’ bank account or debit card primarily on a weekly basis and will accommodate bi-weekly requests.  Lease payments, together with applicable fees, constitute our primary revenue source.

Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has completed the payments required in the lease purchase agreement, generally 52 weeks, or exercises the 90 day same as cash early purchase option. Under this option, if within 90 days of the lease the customer pays the cash price inclusive of a nominal processing fee, ownership transfers to the customer.
 
Revenue Recognition - Merchandise is leased to customers pursuant to lease purchase agreements which provide for weekly lease terms with non-refundable lease payments. Generally the customer has the right to acquire title either through a 90 day same as cash plus a nominal fee option or through payments of all required lease payments for ownership in accordance with the lease agreement. Lease revenues  are recognized  in the month they are due on the accrual  basis of accounting. For  internal  management reporting purposes, lease revenues from sales and lease ownership agreements are recognized as revenue in the month the cash is collected. On a monthly basis, we record an accrual for lease revenues due but not yet received, net of allowances, and a deferral of revenue for lease payments received prior to the period due. Our revenue recognition accounting policy matches the lease revenue  with the corresponding costs, mainly depreciation, associated with the leased merchandise.

Lease Merchandise – Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is recorded at cost. The Company depreciates leased merchandise using the straight line method over the applicable agreement period for a consumer to acquire ownership, generally twelve months with no salvage value. When indicators of impairment exist the Company records an impairment reserve against the carrying value of the leased merchandise. The Company is developing historical charge off information to assess recoverability and estimate of the impairment reserve. The net leased merchandise balances consisted of the following as of June 30, 2014.

Leased merchandise – gross
  $ 2,064,037  
Accumulated depreciation
    (341,969 )
Impairment reserve
    (103,000 )
Leased merchandise – net
  $ 1,619,068  


Intangible Assets - Intangible assets, primarily patent costs, are stated at cost less any accumulated amortization and any provision for impairment. Patent costs are amortized by using the straight line method over the shorter of their legal (20 years) or useful lives from the time they are first available for use.

Cost of Lease Merchandise Sold – Cost of merchandise sold represents the net book value of lease merchandise at the time of sale.

General and Administrative Expenses – General and Administrative expenses include all corporate overhead expenses such as salaries, payroll taxes and benefits, stock based compensation, occupancy, administrative, bad debts and other expenses.
 

Advertising Costs – The Company charges advertising costs to expense as incurred.  Total advertising costs were approximately  $153,200 and $188,200 for the three months and six months ended June 30, 2014. Prior year advertising costs are included in discontinued operations.

Earnings per Share (EPS) – 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 include 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 a dilutive effect when the average price of common stock during the period exceeds the exercise price of options or warrants.  

Also  when  there  is  a  year-to-date  loss  from  operations,  potential  common  shares  are  not included  in  the computation of diluted earnings per share, since they have an anti-dilutive effect.  For the three and six months ending June 30, 2014 there was a net loss. There was a net loss for the three months ended June 30, 2013.

    2014     2013  
         
(Denominator)
               
(Denominator)
       
         
Weighted-
   
Per
         
Weighted-
   
Per
 
   
(Numerator)
   
Average
   
Share
   
(Numerator)
   
Average
   
Share
 
   
Net Loss
   
Shares
   
Amount
   
Net Income
   
Shares
   
Amount
 
Three Months  Ended June 30,
                                   
Basic EPS
  $ (673,096 )     24,676,348     $ (0.03 )   $ (15,196 )     18,634,369     $  
Effect of Dilutive Securities – Options and
                                               
  Convertible Preferred Stock
    -       -       -       -       2,105,211        
Diluted EPS
  $ (673,096 )     24,676,348     $ ( 0.03 )   $ (15,196 )     20,739,580     $  
                                                 
                                                 
Six Months  Ended June 30,
                                               
Basic EPS
  $ (1,619,825 )     22,912,605     $ (0.07 )   $ 37,720       18,634,369     $  
Effect of Dilutive Securities – Options and
                                               
  Convertible Preferred Stock
    -       -       -       -       2,075,837        
Diluted EPS
  $ (1,619,825 )     22,912,605     $ ( 0.07 )   $ 37,720       20,710,206     $  
  
Stock Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.

Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards.

See Note 8 to our financial statements for the impact on the operating results for the three and six months ended June 30, 2014 and 2013.

Fair Value of Financial Instruments – The carrying value of cash equivalents, retained interest in purchased accounts receivable, due 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 – The Company is a “C” corporation for income tax purposes.  In a “C” corporation 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:

· Expense related to the issuance of equity instruments
· Use of the reserve method of accounting for bad debts
· Net operating loss carryforwards.

The deferred tax asset represents the future tax return consequences of utilizing these items. Deferred tax assets are reduced by a valuation reserve, when management is uncertain if the net deferred tax assets will ever be realized.

The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. The Company applied this guidance to all its tax positions, including tax positions taken and those expected to be taken, under the transition provision of the interpretation.   For the six months ended June 30, 2014 and 2013, the Company concluded that it had no material uncertain tax positions.

The Company classifies interest accrued on unrecognized tax benefits with interest expense.  Penalties accrued on unrecognized tax benefits are classified with operating expenses.

Results of Operations

FlexShopper did not have continuing operations for the three and six months ended June 30, 2013.

The following table details the operating results from continuing operations for the three and six months ended June 30, 2014.
 
   
Three months ended
   
Six months ended
 
   
June 30, 2014
   
June 30, 2014
 
Revenues
  $ 689,329     $ 793,250  
Cost of sales
    503,865       555,396  
Gross profit
    185,464       237,854  
Operating expenses
    (1,429,533 )     (2,683,298 )
Loss from continuing operations before income taxes
    (1,244,069 )     (2,455,444 )
Income tax (provision) benefit
    -       -  
Net loss from continuing operations
  $ (1,244,069 )   $ (2,455,444 )


Lease revenues for the three and six months ended June 30, 2014 were $689,329 and $793,250. FlexShopper began originating leases in late December 2013 and therefore had no revenues for the three and six months ended June 30, 2013. The Company originated 2,097 and 2,862 leases in the three and six months ended June 30, 2014, its first periods of meaningful operations.

Cost of sales for the three and six months ended June 30, 2014 was comprised of depreciation expense on lease merchandise of $293,720 and $341,846 respectively, the net book value of merchandise sold of $107,145 and $110,550 respectively and a reserve for inventory impairment of $103,000 for both periods. FlexShopper had no continuing operations for the three and six months ended June 30, 2014.
 
 
Operating expenses for the three and six months ended June 30, 2014 were $1,429,533 and $2,683,298 respectively.    Key operating expenses for the three and six months ended June 30, 2014 included the following:
 
   
Three months ended
   
Six months ended
 
   
June 30, 2014
   
June 30, 2014
 
Payroll, benefits and contract labor
  $ 760,001     $ 1,381,949  
Legal and professional fees
    71,739       242,904  
Stock compensation expense
    7,700       241,500  
Bad debts
    141,523       141,523  
Advertising
    153,305       188,179  
Total
  $ 1,134,268     $ 2,196,055  

The Company had a net loss from continuing operations of $1,244,069 and $2,445,444 for the three and six months ended June 30, 2014. The net loss is the result of operating expenses associated with starting and operating the new FlexShopper business.
 
Sale of Anchor

On April 30, 2014, Anchor entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with a Bank, pursuant to which Anchor agreed to sell to the Bank substantially all of its assets consisting primarily of its factoring portfolio. The sale of the Anchor Assets was made in a series of closings through June 16, 2014.

Plan of Operation

We plan to promote our FlexShopper products and services through print advertisements, internet sites, direct response marketing and a sales team, all of which are designed to increase our lease transactions and name recognition. Our advertisements emphasize such features as instant spending limit, affordable weekly payments and free delivery. We believe that as the FlexShopper name gains familiarity and national recognition through our advertising efforts, we will continue to educate our customers and potential customers about the lease-to-own payment alternative as well as solidify our reputation as a leading provider of high quality branded merchandise and services.

For each sales channel FlexShopper has a marketing strategy that includes but is not limited to the following:

Online LTO Marketplace targeting consumers:
 
·
Direct mail
·
Search engine optimization; pay-per click
·
Online affiliate networks
·
Radio and television campaigns

Patent pending LTO Payment Method targeting durable goods e-tailers:
 
·
Direct to e-tailers of durable goods
·
Partnerships with e-commerce payment aggregators

Technology and LTO Funding Source targeting durable goods retailers:
 
·
Telemarketing to independent, regional and national retailers
·
Outside sales representatives canvassing key metropolitan markets and soliciting independent regional and national retailers

Management is anticipating a rapid development of our FlexShopper business over the next two years as we are able to penetrate each of our sales channels. To support our anticipated growth, the Company will need the availability of substantial capital resources on terms satisfactory to the Company. As of the filing date of this Form 10-Q, the Company has completed or is seeking to complete the following transactions, each of which has provided or is expected to provide immediate liquidity and cash resources to the Company.

1.  
A private placement offering of up to an estimated $8 million through the sale of its restricted Common Stock. Pursuant to the terms of the Offering, the Company has the right to increase the maximum offering to an estimated $9.6 million. A total of $4,690,850 was raised through July 31, 2014.

2.  
The sale of certain assets of Anchor Funding Services through an Asset Purchase Agreement. This transaction was completed in a series of closings through June 16, 2014.

3.  
The receipt of $1 million in funding from George Rubin and Morry F. Rubin through the funding of promissory notes in like principal amount and the conversion of these notes into shares of the Company’s Common Stock at $.55 per share.

The funds derived from the sale of the Company’s Common Stock in the transactions described above and from the sale of Anchor’s factoring operations will provide substantial liquidity and capital resources for the Company to purchase durable goods pursuant to lease-to-own transactions and to support the Company’s current general working capital needs. However, as the FlexShopper business grows, the Company will need to obtain additional financing from the sale of its equity or debt securities to support its growth over the next 12 – 15 months.

Liquidity

Cash Flow Summary
 

Cash Flows from Operating Activities

Net cash used by continuing activities was $3,420,135 for the six months ended June 30, 2014 and was primarily due to our net loss for the period combined with cash used for the purchases of leased merchandise.   Net cash provided by discontinued operations from our Anchor operations was $6,072,337, resulting in net cash provided by operations of $2,652,202.

Net cash used by discontinued operations for the six months ended June 30, 2013 was $278,089 and was primarily due to net income for the period, an increase in the allowance for uncollectible accounts, and increases in purchased accounts receivable and due from client.

Cash Flows from Investing Activities

For the six months ended June 30, 2014 net cash used in investing activities was $107,393 used for the purchase of property and equipment.
 
For the six months ended June 30, 2013, net cash used in discontinued investing activities was $33,584 for the purchase of property and equipment and patent filings.
 
Cash Flows from Financing Activities
 
Net cash provided by financing activities was $1,187,978 for the six months ended June 30, 2014, and was primarily due to a $1,000,000 promissory note with the certain shareholders, proceeds from the issuance of the Company’s common stock of $3,186,058 from continuing operations offset by $2,959,080 of cash used by financing activities of discontinued operations.

Net cash provided by discontinued financing activities was $446,856 for the six months ended June 30, 2013, and was primarily due to proceeds from a financial institution.

Capital Resources

On March 19, 2014 upon approval of the Board of Directors, FlexShopper entered into two Promissory Notes totaling $1,000,000, one with CEO Morry Rubin and the other with a major shareholder and Director of the company. Each demand Promissory Note was for $500,000 and earned interest (payable monthly) at 10% per annum. The Promissory Notes were to assist FlexShopper in purchasing merchandise for lease to support FlexShopper’s growth. The Notes were converted into 1,818,182 shares of the Company’s Common Stock.

During the second quarter of 2014, the Company received net proceeds of $3,186,058 from the sale of 6,725,639 shares of its Common Stock under Rule 506 and/or Section 4(2) of the Securities Act of 1933 as amended.




QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.

CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at the end of our most recent quarter. There have been no changes in the Company's disclosure controls and procedures or in other factors that could affect the disclosure controls subsequent to the date the Company completed its evaluation. Therefore, no corrective actions were taken.

There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION
 
LEGAL PROCEEDINGS:
 
We are not a party to any pending material legal proceedings except as described in Note 12 of the financial statements. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.

On October 22, 2010, Anchor filed a complaint in the Superior Court of Stamford/Norwalk, Connecticut against the Administrators of the Estate of David Harvey (“Harvey”) to recoup a credit loss incurred by the Company’s former subsidiary, Brookridge Funding Services, LLC.  Harvey was the owner of a Company that caused the credit loss and the Company is pursuing its rights under the personal guarantee that Harvey provided.  The Complaint is demanding principal of approximately $485,000 plus interest and damages. During the six months ended June 30, 2014, there were no current developments involving the current legal proceeding.

As of June 30, 2014, Anchor was owed $100,000 from a Food Service Company from whom Anchor had purchased invoices. In July 2013, Anchor determined that the Food Service Company had misdirected certain payments due to Anchor, and Anchor ceased funding this client. On August 8, 2013, the Food Service Company filed Chapter 11 Bankruptcy. At the time of the bankruptcy filing, Anchor's total funding employed to the Food Service Company was approximately $1,450,000. Under a Court Order approved settlement with the Food Service Company, Anchor collected approximately $1,153,000 of the Food Service Company’s accounts receivable through December 31, 2013, leaving a remaining balance of $503,500.  Anchor was paid an additional $203,500 in the last quarter of 2013 and by Court Order, the final balance of $300,000 was to be paid to Anchor in twelve monthly installments of $25,000 beginning November 8, 2013. As of June 30, 2014, the Food Service Company was current with the payments.
 
RISK FACTORS:
 
As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 1A. See the Company’s risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
 
(a)  
 The following sales of unregistered securities took place during the three months ended June 30, 2014.

Date of Sale
Title of Security
 
Number Sold
   
Consideration Received
 
Purchasers
Exemption from Registration Claimed
                   
                   
May
2014
Common Stock
    4,657,456     $ 2,199,312  
Accredited Investors
Section 4(2) of the Securities Act of 1933 and/or Rule 506 promulgated
thereunder
                       
June
2014
Common Stock
    2,068,133     $ 986,745  
Accredited Investors
Section 4(2) of the Securities Act of 1933 and/or Rule 506 promulgated
thereunder
 
DEFAULTS UPON SENIOR SECURITIES:
 
Not applicable.
 
ITEM 4.                  MINE SAFETY DISCLOSURES.
 
Not applicable.
OTHER INFORMATION:
 
Not applicable.

ITEM 6.                  EXHIBITS:

The following exhibits are all previously filed in connection with our Form 10-SB, as amended, unless otherwise noted.

2.1
Exchange Agreement
3.1
Certificate of Incorporation-BTHC,INC.
3.2
Certificate of Merger of BTHC XI, LLC into BTHC XI, Inc.
3.3
Certificate of Amendment
3.4
Designation of Rights and Preferences-Series 1 Convertible Preferred Stock
3.5
Certificate of Amendment dated October 16, 2013(11)
3.6
Amended and Restated By-laws
4.1
Form of Placement Agent Warrant issued to Fordham Financial Management
10.1
Directors’ Compensation Agreement-George Rubin
10.2
Employment Contract-Morry F. Rubin
10.3
Employment Contract-Brad Bernstein
10.4
Agreement-Line of Credit
10.5
Fordham Financial Management-Consulting Agreement
10.6
Facilities Lease – Florida
10.7
Facilities Lease – North Carolina
10.8
Loan and Security Agreement (1)
10.9
Revolving Note (1)
10.10
Debt Subordination Agreement (1)
10.11
Guaranty Agreement (Morry Rubin) (1)
10.12
Guaranty Agreement (Brad Bernstein)(1)
10.13
Continuing Guaranty Agreement (1)
10.14
Pledge Agreement (1)
 
 
10.16
Asset Purchase Agreement between Anchor and Brookridge Funding LLC (2)
10.17
Senior Credit Facility between Anchor and MGM Funding LLC (2)
10.18
Senior Credit Facility Guarantee - Michael P. Hilton and John A. McNiff III (4)
10.19
Employment Agreement - Michael P. Hilton (4)
10.20
Employment Agreement - John A. McNiff (4)
10.21
Accounts Receivable Credit Facility with Greystone Commercial Services LP (3)
10.22
Memorandum of Understanding - Re: Rescission Agreement*
10.23
Rescission Agreement and Exhibits Thereto (5)
10.24
Termination Agreement by and between Brookridge Funding Services LLC and MGM Funding LLC.(5)
10.25
First Amendment to Factoring Agreement (6)
10.26
Promissory Note dated April 26, 2011 between Anchor Funding Services, Inc. and MGM Funding, LLC (7)
10.27
Rediscount Facility Agreement with TAB Bank (8)
10.28
Form of Validity Warranty to TAB Bank (8)
10.29 Amendment to Employment Agreement of Morry F. Rubin (10)
10.30
Asset Purchase Agreement dated April 30, 2014 (12)
21.21
Subsidiaries of Registrant listing state of incorporation *
99.1
2007 Omnibus Equity Compensation Plan
99.2
Form of Non-Qualified Option under 2007 Omnibus Equity Compensation Plan
99.3
Amendment to 2007 Omnibus Equity Compensation Plan increasing the Plan to 4,200,000 shares (9)
101.INS
XBRL Instance Document,XBRL Taxonomy Extension Schema *
101.SCH
Document, XBRL Taxonomy Extension *
101.CAL
Calculation Linkbase, XBRL Taxonomy Extension Definition *
101.DEF
Linkbase,XBRL Taxonomy Extension Labels *
101.LAB
Linkbase, XBRL Taxonomy Extension *
101.PRE
Presentation Linkbase *
 
___________________
 
* Filed herewith.
 
(1) Incorporated by reference to the Registrant’s Form 8-K filed November 24, 2008 (date of earliest event November 21, 22008).
(2) Incorporated by reference to the Registrant's Form 8-K filed December 8, 2009 (date of earliest event - December 4, 2009).
(3) Incorporated by reference to the Registrant's Form 8-K filed December 2, 2009 (date of earliest event - November 30, 2009).
(4) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2009.
(5) Incorporated by reference to the Registrant's Form 8-K filed October 12, 2010 (date of earliest event - October 6, 2010).
(6) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2010.
(7) Incorporated by reference to the Registrant's Form 8-K filed April 28, 2011 (date of earliest event - April 26, 2011).
(8) Incorporated by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2011.
(9) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2011.
(10) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2012.
(11) Incorporated by reference to the Registrant’s Form 8-K dated October 16, 2013.
(12) Incorporated by reference to the Registrant’s Form 8-K dated April 30, 2014.

 


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
FLEXSHOPPER, INC.
 
       
Date:  August 14, 2014
   By:
/s/ Morry F. Rubin   
 
   
Morry F. Rubin
 
   
Chief Executive Officer
 
       

       
Date: August 14, 2014
By:
/s/ Brad Bernstein 
 
   
Brad Bernstein
 
   
President and Chief Financial Officer
 
       
 
 
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