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Leases

6 Months Ended

Jun. 30, 2020

4. LEASES

Lease Commitments

In August 2017, FlexShopper entered into a 12-month lease with two additional three-year options for retail store space in West Palm Beach, Florida. In April 2018, FlexShopper exercised its option to extend the term of the lease to September 30, 2021.

In January 2019, FlexShopper entered into a 108-month lease with an option for one additional five-year term for 21,622 square feet of office space in Boca Raton, FL to accommodate FlexShopper's business and its employees (the "January 2019 Lease"). The monthly rent for this space is approximately $31,500 with annual three percent increases throughout the initial 108-month lease term beginning on the anniversary of the commencement date.

The rental expense for the six months ended June 30, 2020 and 2019 was approximately $353,000 and $126,000, respectively. At June 30, 2020, the future minimum annual lease payments are approximately as follows:

2020	$	213,000
2021		426,000
2022		417,000
2023		427,000
2024		435,000
Thereafter		1,673,000
	$	3,591,000

Lessor Information - Refer to Note 3 to these condensed consolidated financial statements for further information about the Company's revenue generating activities as a lessor. All of the Company's customer agreements are considered operating leases, and the Company currently does not have any sales-type or direct financing leases.

Lessee Information - As a result of ASC 842, Leases, the Company in its position as a lessee has recognized all of its operating and financing leases on the balance sheet as right-to-use asset and lease liabilities. The Company has elected a package of optional practical expedients. As a lessee, the Company leases retail, call center and corporate space under operating leases expiring at various times through 2028. At January 1, 2019, the Company recognized $191,001 of operating lease assets and $191,001 of operating lease liabilities as a result of adopting Topic 842.

The Company determines if an arrangement is a lease at inception. The breakout of operating lease assets, and current and non-current operating lease liabilities at June 30, 2020, is shown in the table below.

Supplemental balance sheet information related to leases is as follows:

	Balance Sheet Classification	June 30, 2020		December 31, 2019
Assets
Operating Lease Asset	Property and Equipment, net	$	1,738,802	$	1,847,932
Finance Lease Asset	Property and Equipment, net		31,249		31,299
Total Lease Assets		$	1,770,051	$	1,879,231

Liabilities
Operating Lease Liability - current portion	Current Lease Liabilities	$	143,931	$	22,088
Finance Lease Liability - current portion	Current Lease Liabilities		7,215		5,638
Operating Lease Liability- net of current portion	Long Term Lease Liabilities		2,003,015		2,040,576
Finance Lease Liability - net of current portion	Long Term Lease Liabilities		25,837		26,608
Total Lease Liabilities		$	2,179,998	$	2,094,910

Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. The lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company generally uses the base, non-cancelable, lease term when determining the lease assets and liabilities. Under the short-term lease exception provided within ASC 842, the Company does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement.

Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for the Company's leases:

	Weighted Average Discount Rate			Weighted Average Remaining Lease Term (in years)
Operating Leases		13.08	%		8
Finance Leases		13.30	%		4

Upon adoption of Topic 842, discount rates for existing operating leases were established as of January 1, 2019. The discount rate for the new operating lease for space in 901 Yamato Road, Boca Raton, FL was established as of the commencement date of the lease.

Operating lease expense is recognized on a straight-line basis over the lease term within operating expenses in the Company's consolidated statements of operations. Finance lease expense is recognized over the lease term within interest expense and amortization in the Company's consolidated statements of operations. The Company's total operating and finance lease expense all relate to lease costs and amounted to $219,767 for the six months ended June 30, 2020.

Supplemental cash flow information related to operating leases is as follows:

	Six Months ended
	June 30,
	2020		2019
Cash payments for operating leases	$	14,454	$	133,200
Cash payments for finance leases		5,457		-
New operating lease asset obtained in exchange for lease liabilities		-	$	1,869,287
New finance lease asset obtained in exchange for lease liabilities		4,033		-

Below is a summary of undiscounted operating lease liabilities as of June 30, 2020. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the operating lease liabilities included in the consolidated balance sheet.

	Operating Leases
2020	$	206,979
2021		415,050
2022		405,443
2023		417,606
2024		430,134
2025 and thereafter		1,672,961
Total undiscounted cash flows		3,548,173
Less: interest		(1,401,227	)
Present value of lease liabilities	$	2,146,946

The Company entered into an office lease in January 2019. The lease commenced in June 2019, at which time the Company recognized the operating lease asset and liability. The Company pays a base monthly rent of $31,532 with payments increasing by 3% on each yearly anniversary of the commencement date. The initial lease term is for 9 years with the Company having a one-time option to extend for 5 years.

Below is a summary of undiscounted finance lease liabilities as of June 30, 2020. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance lease liabilities included in the consolidated balance sheet.

	Finance Leases
2020	$	5,592
2021		11,184
2022		11,184
2023		9,699
2024		4,781
Total undiscounted cash flows		42,440
Less: interest		(9,388	)
Present value of lease liabilities	$	33,052