FLEXSHOPPER, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
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, 2021. 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, 2021should 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. At FlexShopper, our highest priority remains the safety, health and well-being of our employees, their families and our communities and we remain committed to serving the needs of our customers. The COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the full impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the residual impact of COVID-19 on our industry becomes clearer. Executive Overview The results of operations reflect the operations of FlexShopper, LLC(together with the Company and its direct and indirect wholly owned subsidiaries, "FlexShopper"), which provides certain types of durable goods to consumers on a lease-to-own ("LTO") basis and also provides LTO terms to consumers of third-party retailers and e-retailers. FlexShopperbegan generating revenues from this line of business in December 2013. Management believes that the introduction of FlexShopper'sLTO programs support broad untapped expansion opportunities within the U.S.consumer e-commerce and retail marketplaces. FlexShopperand 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-retailers and retailers that work with FlexShoppermay increase their sales by utilizing FlexShopper'sonline channels to connect with consumers that want to acquire products on an LTO basis. FlexShopper'ssales channels include (1) selling directly to consumers via the online FlexShopper.com, an LTO Marketplacefeaturing thousands of durable goods, (2) utilizing FlexShopper'spatent pending LTO payment method at check out on e-commerce sites and through in-store terminals and (3) facilitating LTO transactions with retailers that have not yet become part of the FlexShopper.com LTO marketplace. In 2021, we began a test to market an unsecured, consumer loan product for our bank partner that would augment our LTO solution. In 2022, based upon the success of this testing, the marketing of our bank partner's loans has become a strategic solution that we offer to many of our current customers and through our retailer partners.
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("GAAP"). 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, fair value of loans receivable 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.
Accounts Receivable and Allowance for Doubtful Accounts -
FlexShopperseeks to collect amounts owed under its leases from each customer on a weekly or biweekly basis by charging their bank accounts or credit cards. Accounts receivable are principally comprised of lease payments currently owed to FlexShopperwhich are past due as FlexShopperhas been unable to successfully collect in the manner described above. An allowance for doubtful accounts is estimated based upon revenues and historical experience of balances charged off as a percentage of revenues. The accounts receivable balances consisted of the following as of March 31, 2022and December 31, 2021: March 31, December 31, 2022 2021 Accounts receivable $ 51,988,768 $ 54,042,161
Allowance for doubtful accounts (22,450,828 ) (27,703,278 ) Accounts receivable, net
The allowance is a significant percentage of the balance because
FlexShopperdoes not charge off any customer account until it has exhausted all collection efforts with respect to each account, including attempts to repossess items. In addition, while collections are pursued, the same delinquent customers continue to accrue weekly charges until they are charged off. As the customer account ages, the greater the allowance attributable to that account to reflect the decreased likelihood of successful collection efforts. Accounts receivable balances charged off against the allowance were $17,083,567for three months ended March 31, 2022respectively and $7,036,164for three months ended March 31, 2021, respectively. 24
Loans receivable - The Company elected the fair value option on its entire loans receivable portfolio purchased from its bank partner. As such, loans receivable is carried at fair value in the condensed consolidated balance sheet with changes in fair value recorded in the condensed consolidated statement of operations. Accrued and unpaid interest and fees are included in loans receivable in the condensed consolidated balance sheets. Management believes the fair value option for its loans portfolio is a better measure of the asset for the Company given the high growth, short duration, quality and funding structure of the loans portfolio. Also, management believes the reporting of these receivables at fair value more closely approximates the true economics of the loans receivables. Interest and fees are discontinued when loans receivable become contractually 120 or more days past due. The Company charges-off loans at the earlier of when the loans are determined to be uncollectible or when the loans are 120 days contractually past due. Recoveries on loans receivables that were previously charge off are recognized when cash is received. Changes in the fair value of loans receivable include the impact of current period charge offs associated with these receivables. The Company estimates the fair value of the loans receivable using a discounted cash flow analysis at an individual loan level to more accurately predict future payments. The Company adjusts expected cash flows for estimated losses and servicing costs over the estimated duration of the underlying assets. These adjustments are determined using historical data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require. Model results may be adjusted by management if the Company does not believe the output reflects the fair value of the instrument, as defined under
U.S.GAAP. The models are updated at each measurement date to capture any changes in internal factors such as nature, term, volume, payment trends, remaining time to maturity, and portfolio mix, as well as changes in underwriting or observed trends expected to impact future performance. A third-party bank partner originates our credit product and initially provides all of the funding for the loans. The third-party retains 5% of the balance of all loans originated and sells a 95% loan participation to the Company. The Company services the loans and remits the corresponding portion to the third party. Loan revenues and fees is representative of the Company's portion of participation in the loans. Lease Merchandise - Until all payment obligations required for ownership are satisfied under the lease agreement, the Company maintains ownership of the lease merchandise. Lease merchandise consists primarily of residential furniture, consumer electronics, computers, appliances and household accessories and is recorded at cost net of accumulated depreciation. 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. Upon transfer of ownership of merchandise to customers resulting from satisfaction of their lease obligations, the related cost and accumulated depreciation are eliminated from lease merchandise. For lease merchandise returned or anticipated to be returned either voluntarily or through repossession, the Company provides an impairment reserve for the undepreciated balance of the merchandise net of any estimated salvage value with a corresponding charge to cost of lease revenue. The cost, accumulated depreciation and impairment reserve related to such merchandise are written off upon determination that no salvage value is obtainable. Stock-Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee and non-employee services (share-based payment transactions) is recognized as a compensation expense in the financial statements as services are performed.
Compensation expense for stock options is determined by reference to the fair value of an award at the grant date and is recognized on a straight-line basis over the vesting period. The Company has elected to use the Black-Scholes-Merton (BSM) valuation model to determine the fair value of all stock option awards.
Compensation expense for performance share units is recognized on an accelerated basis over the vesting period based on the Company's projected assessment of the level of performance that will be achieved and earned. The fair value of performance share units is based on the fair market value of the Company's common stock on the date of grant. 25 Key Performance Metrics We regularly review several metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Key performance metrics for the three months ended
March 31, 2022and 2021 are as follows: Three months ended March 31, 2022 2021 $ Change % Change Gross Profit:
Gross lease billings and fees
$ 39,597,429 $ 41,584,680 $ (1,987,251 )(4.8 ) Provision for doubtful accounts (11,831,117 ) (8,833,349 ) (2,997,768 ) 33.9 Net lease billing and fees $ 27,766,312 $ 32,751,331 $ (4,985,019 )(15.2 ) Loan revenues and fees 1,712,348 49,332 1,663,016 3,371.1 Net changes in the fair value of loans receivable (523,424 ) (16,993 ) (506,431 ) 2,980.2 Net loan revenues $ 1,188,924 $ 32,339 $ 1,156,5853,576.4 Total revenues $ 28,955,236 $ 32,783,670 $ (3,828,434 )(11.7 ) Cost of lease revenues, consisting of depreciation and impairment of lease merchandise (19,160,611 ) (22,463,556 ) 3,302,945 (14.7 ) Loans origination costs and fees (425,513 ) (63,397 ) (362,116 ) 571.2 Gross profit $ 9,369,112 $ 10,256,717 $ (887,605 )(8.7 ) Gross profit margin 32 % 31 % Three months ended March 31, 2022 2021 $ Change % Change Adjusted EBITDA: Net (loss)/income $ (2,380,935 ) $ 1,237 $ (2,382,172 )(192,576.6 ) Income taxes (859,780 ) - (859,780 ) -
Amortization of debt issuance costs 50,603 91,703 (41,100 ) (44.8 ) Other amortization and depreciation 937,062 651,396 285,666 43.9 Interest expense 1,907,465 1,307,294 600,171 45.9 Stock-based compensation 305,229 380,264 (75,035 ) (19.7 ) Product/ infrastructure expenses - 10,000
(10,000 ) - Adjusted EBITDA
$ (40,356 ) $ 2,441,894 $ (2,482,250 )(101.7 )
Management believes that Gross Profit and Adjusted EBITDA provide relevant and useful information which is widely used by analysts, investors and competitors in our industry in assessing performance. Adjusted EBITDA represents net income before interest, stock-based compensation, taxes, depreciation (other than depreciation of leased inventory), amortization, and one-time or non-recurring items. We believe that Adjusted EBITDA provides us with an understanding of one aspect of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA may be useful to an investor in evaluating our operating performance and liquidity because this measure:
? is widely used by investors to measure a company’s operational performance
without taking into account the elements excluded from the calculation of this measure, which
can vary significantly from company to company;
? is a financial measure used by rating agencies, lenders and other
parties to assess our creditworthiness; and
? is used by our management for various purposes, including as a measure of
performance and as a basis for strategic planning and forecasting.
Adjusted EBITDA is a supplemental measure of
FlexShopper'sperformance that is neither required by, nor presented in accordance with, GAAP. Adjusted EBITDA should not be considered as a substitute for GAAP metrics such as operating income/(loss), net income or any other performance measures derived in accordance with GAAP. 26 Results of Operations
Three months completed
The following table details operating results for the three months ended
March 31, 2022and 2021: 2022 2021 $ Change % Change
Gross lease billings and fees
$ 39,597,429 $ 41,584,680 $ (1,987,251 )(4.8 ) Provision for doubtful accounts (11,831,117 ) (8,833,349 ) (2,997,768 ) 33.9 Net lease billing and fees $ 27,766,312 $ 32,751,331 $ (4,985,019 )(15.2 ) Loan revenues and fees 1,712,348 49,332 1,663,016 3,371.1 Net changes in the fair value of loans receivable (523,424 ) (16,993 ) (506,431 ) 2,980.2 Net loan revenues $ 1,188,924 $ 32,339 $ 1,156,5853,576.4 Total revenues $ 28,955,236 $ 32,783,670 $ (3,828,434 )(11.7 ) Cost of lease revenue and merchandise sold (19,160,611 ) (22,463,556 ) 3,302,945 (14.7 ) Loans origination costs and fees (425,513 ) (63,397
) (362,116 ) 571.2 Marketing (2,014,115 ) (1,832,740 ) (181,375 ) 9.9 Salaries and benefits (2,964,442 ) (2,909,319 ) (55,123 ) 1.9 Other operating expenses (5,673,202 ) (4,114,424 ) (1,558,778 ) 37.9 Operating (loss)/income (1,282,647 ) 1,400,234 (2,682,881 ) (191.6 ) Interest expense (1,958,068 ) (1,398,997 ) (559,071 ) 40.0 Income taxes 859,780 - 859,780 - Net (loss)/income
$ (2,380,935 ) $ 1,237
$ (2,382,172 )(192,576.6 )
FlexShopperoriginated 30,611 gross leases less same day modifications and cancellations with an average origination value of $532for the three months ended March 31, 2022compared to 39,299 gross leases less same day modifications and cancellations with an average origination value of $532for the comparable period last year. Net lease revenues for the three months ended March 31, 2022were $27,766,312compared to $32,751,331for the three months ended March 31, 2021, representing a decrease of $4,985,019or 15.2%. In 2022, the average origination value per lease was comparable to the same period last year but volume has decreased due to tightening of approval rates. The provision for doubtful accounts relative to gross lease billings and fees were 30% and 21% for the three months ending March 31, 2022and 2021, respectively. Net loan revenues for the three months ended March 31, 2022were $1,188,924compared to $32,339for the three months ended March 31, 2021, representing an increase of $1,156,585or 3,576.4%. In 2021, we began a test for an unsecured consumer loan product with our bank partner. Our bank partner originated 3,848 loans at an average loan value of $1,282for the three months ended March 31, 2022compared to 108 loans at an average loan value of $902for the three months ended March 31, 2021. Our bank partner sold to the Company a 95% participation interest for each loan originated in those periods. In 2022, based upon the success of this testing, we expanded the program mainly in our direct-to-consumer channel. Cost of lease revenue and merchandise sold for the three months ended March 31, 2022was $19,160,611compared to $22,463,556for the three months ended March 31, 2021, representing an decrease of $3,302,945or 14.7%. As the Company's lease portfolio and revenues decrease, the depreciation and related costs associated with the larger portfolio also decrease. Asset level performance within the portfolio, as well as the mix of early paid off leases, will alter the average depreciable term of the leases within the portfolio and result in increases or decreases in cost of lease revenue and merchandise sold relative to lease revenue.
Marketing expenses in the three months ended
March 31, 2022were $2,014,115compared to $1,832,740in the three months ended March 31, 2021, an increase of $181,375or 9.9%. Marketing expenses related to loans in the three months ended March 31, 2022were $465,123compared to $16,000in the three months ended March 31, 2021, an increase of $449,123or 2,807.0%. The increase is related to the marketing of direct-to-consumer loans which mainly involves direct mailing campaigns. Marketing expenses related to leases in the three months ended March 31, 2022were $1,548,992compared to $1,816,740in the three months ended March 31, 2021, a decrease of $267,748or 14.7%. The decrease is related to allocating marketing spend to loan originations. 27
Other operating expenses for the three months ended
Amortization and depreciation
IT and Internet expenses 1,168,847 668,892 Legal and professional fees 1,344,715 502,038 Merchant banking fees
492,115 440,346 Customer verification expenses 142,757 857,825 Stock-based compensation expense 305,229 380,264 Insurance expense 155,182 95,652 Office and telephone expense 356,434 197,061 Rent expense 179,279 166,473 Travel expense 228,179 58,286 Other 363,403 96,191 Total
$ 5,673,202 $ 4,114,424Computer and internet expenses in the three months ended March 31, 2022were $1,168,847compared to $668,892in the three months ended March 31, 2021, representing an increase of $499,955or 74.7%. A significant portion of computer and internet expense is related to scaling both the consumer facing website and the Company's back end billing and collection systems. Also, some of these expenses are related to the preparation for new products offered by the company. Legal and professional fees expenses in the three months ended March 31, 2022were $1,344,715compared to $502,038in the three months ended March 31, 2021, representing an increase of $842,677or 167.9%. During the second quarter of 2021, the Company onboarded two off-shore servicing and collections options to improve flexibility around seasonal call center traffic and improve operational metrics.
Merchant banking fees during the three months ended
Travel expenses in the three months ended
March 31, 2022were $228,179compared to $58,286in the three months ended March 31, 2021, representing an increase of $169,893or 291.5%. The increase in travel expense in the first quarter of 2022 is related to the expansion of retail partner rollouts. Customer verification expenses in the three months ended March 31, 2022were $142,757compared to $857,825in the three months ended March 31, 2021, representing an decrease of $715,068or 83.4%. Customer verification expense is primarily the cost of data used for underwriting new lease and loan applicants. During the third quarter of 2021, several changes including the implementation of a more disciplined process around data procurement and storage were made by the Company. Those improvements triggered a change in the estimate of the probability of future economic benefit of a portion of the data cost. As a result of this change in the estimate regarding the portion of data costs incurred that are not directly used in underwriting decisions and that are probable that they will provide future economic benefit, the Company capitalized $293,054of data costs in the quarter ended March 31, 2022. Also, the reduction in the marketing expense for leases for the quarter ended March 31, 2022contributed to the decrease in customer verification expenses. The underwriting and data science team continues to optimize the costs related to underwriting lease and loan applications. 28 Operations
We promote our
FlexShopperproducts and services across all sales channels through strategic partnerships, direct response marketing, and affiliate and internet marketing, all of which are designed to increase our lease transactions. Our advertisements emphasize such features as instant spending limits and affordable weekly payments. We believe that as the FlexShoppername 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 of our sales channels,
Search engine optimization;
pay-per click Direct to retailers/e-retailers
Directly to retailers/e-merchants
Online affiliate networks Partnerships with payment aggregators Consultants and strategic relationships
Direct response television campaigns Consultants & strategic relationships Direct mail
The Company believes it has a competitive advantage over competitors in the LTO industry by providing all three channels as a bundled package to retailers and e-retailers. Management is anticipating a rapid development of the
FlexShopperbusiness as we are able to penetrate each of our sales channels. In 2021, we began a test to market an unsecured, consumer loan product for our bank partner that would augment our LTO solution. In 2022, based upon the success of this testing, the marketing of our bank partner's loans has become a strategic solution that we offer to many of our current customers and through our retailer partners. To support our anticipated growth, FlexShopperwill need the availability of substantial capital resources. See the section captioned "Liquidity and Capital Resources" below.
Cash and capital resources
March 31, 2022, the Company had cash of $4,319,701compared to $6,315,815at the same date in 2021. As of December 31, 2021, the Company had cash of $5,094,642. The decrease in cash from December 31, 2021, was primarily due to the increase in accounts receivable and lease merchandise acquired. As of March 31, 2022, the Company had accounts receivable of $51,988,768offset by an allowance for doubtful accounts of $22,450,828, resulting in net accounts receivable of $29,537,940. Accounts receivable is principally comprised of past due lease payments owed to the Company. An allowance for doubtful accounts is estimated based upon historical collection and delinquency percentages. As of March 31, 2022, the Company had loans receivable of $7,137,503which is measured at fair value. The company primarily estimates the fair value of its loans receivable using a discounted cash flow models that have been internally developed. Credit Agreement On March 6, 2015, FlexShopper, through a wholly-owned subsidiary (the "Borrower"), entered into a credit agreement (as amended from time to time and including the Fee Letter (as defined therein), the "Credit Agreement") with Wells Fargo Bank, National Associationas paying agent, various lenders from time to time party thereto and WE 2014-1, LLC, an affiliate of Waterfall Asset Management, LLC, as administrative agent and lender (the "Lender"). The Borrower is permitted to borrow funds under the Credit Agreement based on FlexShopper'srecently collected payments and the Amortized Order Value of its Eligible Leases (as such terms are defined in the Credit Agreement) less certain deductions described in the Credit Agreement. Under the terms of the Credit Agreement, subject to the satisfaction of certain conditions, the Borrower may currently borrow up to $82,500,000from the Lender until the Commitment Termination Date and must repay all borrowed amounts one year thereafter, on the date that is 12 months following the Commitment Termination Date (unless such amounts become due or payable on an earlier date pursuant to the terms of the Credit Agreement). On January 29, 2021, pursuant to an amendment to the Credit Agreement, the Commitment Termination Date was extended to April 1, 2024, the Lender was granted a security interest in certain leases as collateral under the Credit Agreement and the interest rate charged on amounts borrowed was set at LIBOR plus 11% per annum. 29 The Credit Agreement provides that FlexShoppermay not incur additional indebtedness (other than expressly permitted indebtedness) without the permission of the Lender and also prohibits dividends on common stock. Additionally, the Credit Agreement includes covenants requiring FlexShopperto maintain a minimum amount of Equity Book Value, maintain a minimum amount of cash and liquidity and maintain a certain ratio of Consolidated Total Debt to Equity Book Value (each capitalized term, as defined in the Credit Agreement). Upon a Permitted Change of Control (as defined in the Credit Agreement), FlexShoppermay refinance the debt under the Credit Agreement, subject to the payment of an early termination fee. In addition, the Lender and its affiliates have a right of first refusal on certain FlexShoppertransactions involving leases or other financial products. The Credit Agreement includes customary events of default, including, among others, failures to make payment of principal and interest, breaches or defaults under the terms of the Credit Agreement and related agreements entered into with the Lender, breaches of representations, warranties or certifications made by or on behalf of the Borrower in the Credit Agreement and related documents (including certain financial and expense covenants), deficiencies in the borrowing base, certain judgments against the Borrower and bankruptcy events.
March 5, 2021, the applicable regulators announced that LIBOR will cease to be provided and will no longer be representative (i) immediately after December 31, 2021for all sterling, euro, Swiss franc and Japanese yen settings, and the one-week and two-month U.S.dollar settings and (ii) immediately after June 30,2023for the remaining U.S.dollar settings. The Company's debt bears interest based on the one-month LIBOR rate. If there is a LIBOR Disruption Event as defined in the Credit Agreement, LIBOR will be replaced with the Prime Rate. Financing Activity On January 25, 2019, FlexShopper, LLC(the "Borrower") entered into a subordinated debt financing letter agreement with 122 Partners, LLC, as lender, pursuant to which FlexShopper, LLCissued a subordinated promissory note to 122 Partners, LLC(the "122 Partners Note") in the principal amount of $1,000,000. H. Russell Heiser, Jr., FlexShopper'sChief Financial Officer, is a member of 122 Partners, LLC. Payment of the principal amount and accrued interest under the 122 Partners Note was due and payable by the borrower on April 30, 2020and the borrower can prepay principal and interest at any time without penalty. Amounts outstanding under the 122 Partners Note bear interest at a rate equal to 5.00% per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement. Obligations under the 122 Partners Note are subordinated to obligations under the Credit Agreement. The 122 Partners Note is subject to customary representations and warranties and events of default. If an event of default occurs and is continuing, the Borrower may be required to repay all amounts outstanding under the 122 Partners Note. Obligations under the 122 Partners Note are secured by substantially all of the Borrower's assets, subject to the senior rights of the lenders under the Credit Agreement. On April 30, 2020, pursuant to an amendment to the subordinated debt financing letter agreement, the Borrower and 122 Partners, LLCagreed to extend the maturity date of the 122 Partners Note to April 30, 2021. On March 22, 2021, FlexShopper, LLCexecuted a second amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2022. On March 31, 2022, FlexShopper, LLCexecuted a third amendment to the 122 Partners Note such that the maturity date of the 122 Partners Note was extended to April 1, 2023. No other changes were made to such Note. As of March 31, 2022, $1,041,252of principal and accrued and unpaid interest was outstanding on
the 122 Partners Note. The Borrower previously entered into letter agreements with
NRNS Capital Holdings LLC("NRNS"), the manager of which is the Chairman of the Company's Board of Directors, pursuant to which the Borrower issued subordinated promissory notes to NRNS (the "NRNS Note") in the total principal amount of $3,750,000. Payment of principal and accrued interest under the NRNS Note was due and payable by the Borrower on June 30, 2021and FlexShopper, LLCcan prepay principal and interest at any time without penalty. Amounts outstanding under the NRNS Note bear interest at a rate equal to 5.00% per annum in excess of the non-default rate of interest from time to time in effect under the Credit Agreement. Obligations under the NRNS Note are subordinated to obligations under the Credit Agreement. The NRNS Note is subject to customary representations and warranties and events of default. If an event of default occurs and is continuing, the Borrower may be required to repay all amounts outstanding under the NRNS Note. Obligations under the NRNS Note is secured by substantially all of the Borrower's assets, subject to rights of the lenders under the Credit Agreement. On March 22, 2021, FlexShopper, LLCexecuted an amendment to the NRNS Note such that the maturity date was extended to April 1, 2022. On February 2, 2022, FlexShopper LLCexecuted another amendment to the NRNS Note. This last amendment extended the maturity date from April 1, 2022to July 1, 2024and increased the credit commitment from $3,750,000to $11,000,000. No other changes were made to such Note. As of March 31, 2022, $6,933,875of principal and accrued and unpaid interest was outstanding on the NRNS Note. 30 The Company applied for and received a loan (the "Loan") on May 4, 2020, from Customers Bank (the "PPP Lender") in the principal amount of $1,914,100, pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was enacted March 27, 2020, and administered through the U.S. Small Business Administration(the "SBA"). The Loan was evidenced by a promissory note (the "Note"), dated April 30, 2020, issued by the Borrower to the PPP Lender. The Note matured on April 30, 2022and bore interest at the rate of 1.00% per annum, payable monthly commencing the later of on November 30, 2020or the SBA review of the forgiveness application. The Note might be prepaid by the Borrower at any time prior to maturity with no prepayment penalty. Proceeds from the Loan were available to the Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire sum of the principal amount and accrued interest might be forgiven to the extent the Loan proceeds were used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administrationunder the PPP. On June 21, 2021we were notified that effective April 7, 2021, the U.S. Small Business Administrationconfirmed the waiver of FlexShopper'srepayment of a $1,914,000Paycheck Protection Program promissory note issued to the Company on May 4, 2020. As a result of the PPP promissory note forgiveness, the Company recognized a gain from the extinguishment of the loan, including accrued interest, of $1,931,825. Cash Flow Summary
Cash flow from operating activities
Net cash used in operating activities was
$7,940,659for the three months ended March 31, 2022primarily due to the purchases of leased merchandise and the change in accounts receivable and accounts payable partially offset by the add back of depreciation and impairment on leased merchandise and provision for doubtful accounts. Net cash used in operating activities was $563,007for the three months ended March 31, 2021primarily due to the add back of depreciation and impairment on leased merchandise and provision for doubtful accounts partially offset by the purchases of leased merchandise and the change in accounts receivable and accounts payable.
Cash flow from investing activities
For the three months ended
March 31, 2022, net cash used in investing activities was $1,553,810comprised of $568,816for the purchase of property and equipment and $984,994for capitalized software costs. For the three months ended March 31, 2021, net cash used in investing activities was $734,122comprised of $145,130for the purchase of property and equipment and $588,992for capitalized software costs.
Cash flow from financing activities
Net cash provided by financing activities was
$8,719,528for the three months ended March 31, 2022due to $6,800,000of funds drawn on the Credit Agreement as well as $3,000,000of funds drawn on the Promissory Notes offset by loan repayments on the Credit Agreement of $1,125,000. 31
Net cash used in financing activities was
partially offset by
Capital Resources To date, funds derived from the sale of
FlexShopper'scommon stock, warrants, Series 1 Convertible Preferred Stock and Series 2 Convertible Preferred Stock and the Company's ability to borrow funds against the lease portfolio have provided the liquidity and capital resources necessary to fund its operations. Management believes that liquidity needs for future growth through at least the next 12 months can be met by cash flow from operations generated by the existing portfolio and/or additional borrowings against the Credit Agreement (see Note 7).
Financial impact of the COVID-19 pandemic
The COVID-19 Pandemic and the related stimulus programs had an impact on the Company. The immediate impact early in the second quarter of 2020 was a transition to a significant percentage of the Company's employees working remotely. Fortunately, our
South Floridalocation requires a thorough Hurricane Impact plan enabling all our employees to work remotely, if necessary. All employees, via specially configured laptops, are able to access the same data and have the same functionality as if they were in the office. Throughout the pandemic, FlexShopperrotated select groups of employees into the office in order to adjust to the other business impacts on the business. As of the end of March 2022, approximately 10% of our employees are working remotely. The other impacts of the business can be broken into three categories. The first is the decrease is the availability of our lease financing product. Pre-COVID-19, approximately 40% of new customers were obtained through brick and mortar or B2B retailers. The pandemic-related closing and limited operations of retailers, as well as shelter in place orders, limited our new customers from this channel substantially over the second quarter and third quarter of 2020. Through the first half of the second quarter of 2021 there was diminished demand from our B2B retailers resulting from pandemic related issues. Moreover, since the crisis began, a number of our brick and mortar rollouts and pilots have been delayed or put on hold as our retailer partners attempt to return to a more stable operational environment. Fortunately, by the end of 2021, the percentage of new customers obtained from brick and mortar locations exceeded pre-pandemic levels. The second impact was a Company reaction in the second quarter of 2020 to the uniqueness of the pandemic. Not knowing what the potential impact to consumer payment patterns would be, the Company significantly tightened approval rates. It was not until the end of the third quarter of 2020, that approval rates returned to the pre-pandemic levels. This decreased approval rate, both online and in third party stores, coupled with the retailer closures mentioned above, significantly reduced new lease originations. In 2021, the uniqueness of the pandemic had resulted in significant growth in BNPL (buy now pay later) options that were offered to our consumer segment. Despite a return to near pre-pandemic approval rates, the Company still experienced reduced demand for its product in 2021. The third impact was on consumer behavior and payment patterns. The combination of stimulus payments and enhanced unemployment benefits measures provided by the Federal and/ or State Government throughout 2020 and early 2021 were especially impactful to our typical customer. As a result of enhanced income, the demand for our products was reduced, the likelihood of consumers choosing early payoff options increased substantially and, on a positive note, the asset level performance of our full-term customer, relative to their expected performance, increased substantially. The first sign of the return to more normal payment patterns was a reduction in the elevated amount of early pay offs experienced by the Company which occurred in the middle of 2021.
Despite the availability of COVID-19 vaccines in 2021, the number of COVID-19 cases has increased at various times throughout 2021 due to the emergence of new variants.
As of the end of 2021, the reduced demand was evident in our digital marketing channels through the conversion rate of new applicants. However, the enhanced payment performance, versus our expected performance, began to wane which would seem to be a potential initial indicator of a return to the Pre-COVID-19 environment. Finally, throughout the pandemic, the Company has been able to grow the overall size of the lease portfolio, net of early payoffs, despite the items mentioned previously. At no point, have there been liquidity concerns or covenant complications. In fact, our credit facility was upsized, our product breadth increased and our covenants reduced in 2021. 32
Off-balance sheet arrangements
The Company has no off-balance sheet arrangements.
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