FlexShopper, Inc.

Greetings and welcome to the Flex Shopper LLC second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman of the Equity Group. Thank you, Jeremy. You may begin.

Thank you, operator. I'd like to remind everyone that we have posted an updated investor presentation within the IR section of the company website, www.flexshopper.com, and encourage everyone to review the forward-looking statement on page two of the presentation. With that, I would like to turn the call over to Flex Shopper CEO, Rich House. Please go ahead, Rich.

Thank you, Jeremy, and welcome everyone to our earnings call. Joining me today is our CFO, Russ Heiser. As always, Russ will be expanding on the key financial aspects for our quarterly results, and I'll cover our operational highlights. Our second quarter was one of steady growth in both our distribution channels. Overall, we had solid origination growth and also made solid progress in expanding our retail partner ecosystem. Starting with our direct-to-consumer FlexShopper.com website, we continue to invest in digital marketing programs as those are yielding customers at or below the necessary customer acquisition costs for us to achieve our return on capital hurdles. As we and many of our peers have noted, government stimulus programs have had and continue to have an impact on our customers. Historically, subprime shoppers behaved differently during tax return season when many received a relatively sizable amount of cash relative to their typical budget. This often in the past resulted in a bump in early lease payoffs and same as cash transactions. Pandemic-driven stimulus programs had a similar impact, and we are paying close attention to how the new child tax credit payments affect our customers and their shopping behavior. Overall, we see two early takeaways. First, there does appear to be some dampening of demand if customers choose to use those payments to purchase merchandise outright that they may have otherwise previously paid for over a longer period of time. Secondly, and favorably, we are also seeing some reduction in delinquencies. Turning to our retail relationships, we are pleased to report that our pilot program with a national diversified merchandise seller is set to more than double the number of storefronts prior to the holiday season. We expect to add one state with our partner, but that state accounts for an outsized portion of their stores. In our view, this is a strong testament to the value we bring to them. We also kicked off a four-state pilot with another national diversified retailer and expect to run that test through the end of the year. In both cases, the timing of our rollouts has been slightly impacted due to some degree by the recent COVID-19 resurgence rates. At this time, we remain cautiously optimistic that states will not be returning to the same shelter-in-place restrictions we saw in 2020. I'm now going to turn the call over to Russ to address specific items regarding our financial performance and corporate liquidity.

Thanks, Rich. I want to start with a reminder that we've posted an updated investor deck on our website. In that deck, we have a number of data points, including new and repeat lease volume by origination channel that are useful in monitoring our performance. In addition, we've broken out a number of operating financial metrics by year. I also want to remind everyone about a relatively new data point, pre-marketing EBITDA, which provides additional insight into how our business is performing. Marketing expense is our primary growth lever and largest variable cost and varies quite a bit during the year in response to both seasonal consumer activity along with external factors. Therefore, removing it from the EBITDA calculation is informative when looking at the business over time, especially as marketing expense would be expected to continue to increase. The investor deck, together with our press release in 10Q, provide significant insight into our second quarter operating performance. During the second quarter, our portfolio originations were up 29.9%. That was a function of both the lease count increasing by 13.5% year-over-year and average order value increasing to $516 from $452, or 14%. As I had mentioned previously, current period originations are highly predictive when it comes to forecasting revenues over the ensuing year, since we recognize the lease revenue over the term of the lease. As a reminder, the lease merchandise figure represents merchandise that has been leased by consumers, net of accumulated depreciation, and any impairments. This is a good proxy of the size of the performing lease portfolio, and as such is also highly correlated with forward 12 months revenue and gross profit. Our net lease merchandise balance as of the end of the second quarter was $37.6 million, which is up 44.3% from $26.1 million the prior year. Second quarter gross profit margin was 36% compared to 30% in the prior year. There are a number of items that play into that improvement, but the relative decrease in payment delinquencies is the most impactful. Our largest variable cost is marketing expense. Marketing is responsible for our growth in new customers and, over time, our repeat customers, and we will continue to spend as much as we can at the appropriate acquisition cost. marketing expenses $1.9 million in the second quarter, which is a significant increase versus the $0.9 million from the second quarter of 2020. For the quarter, our average customer acquisition cost was $102, which is higher than we have seen in the past, but is at a level at which we derive appropriate returns on our capital. Pre-marketing EBITDA was approximately $4 million this quarter versus the $2.9 million in the second quarter of 2020, as the company continues to grow. EBITDA was $2.1 million for the second quarter compared to $2 million in the second quarter of 2020. Income was $0.9 million, resulting in diluted earnings per share of one cent. With that, I'll hand the call back to Rich.

Thanks, Russ. Like all of you listening, I'm sure we would like to see this pandemic solidly in the rearview mirror. Unfortunately, that is not yet the case. However, and as our Q2 results demonstrate, We've learned how to adapt to this environment. We've been able to continue to grow our business at a very strong rate despite the effects of the pandemic and the associated stimulus payments. This is highlighted by the strong year-over-year growth in net lease inventory Russ outlined a couple of moments ago. Another strategic initiative I want to comment on is our push to develop co-branded retail websites with retail partners. This initiative can be divided into two categories. The first category is a co-branded site with a partner who has a digital presence, but they require marketing expertise to maximize the sales volume associated with financially underserved customers. We have launched our first co-branded site with that retail partner this quarter, and we are pleased with the early results. The second category is focused on assisting our traditional retail partners who may not have a robust digital presence. We have extensive online and retail expertise honed from our direct consumer marketing through our operating FlexShopper.com, and we can leverage that experience to provide a fully operational retail website, which includes lease-to-own financing. By leveraging that experience, we're able to enable retail partners another way to reach their customers and increase sales. Coupled with our rent-to-own option being made available at checkout, both in store and online, We really feel we have a win-win proposition for everyone. We're actively working with our retail partners in the second category to create a co-branded solution. In conclusion, I want to emphasize our corporate strategy, which is to maximize the growth of the company while maintaining the appropriate return on capital. We are continuing to plow as much of the cash we collect as possible back into marketing to continue to grow our business to consumer channel through FlexShopper.com. While that depresses EBITDA in the short term, it provides the best path to long-term success for the company and shareholders based on the returns on invested capital we enjoy over time in this line of business. Additionally, we're constantly looking to expand our business with retail partners We have invested in increasing the size of our sales team. Although these sales and marketing investments depressed EBITDA in the short term, it is comforting to note that our EBITDA grew over the second quarter of 2020, but we still made these investments. And these investments provide a platform for long-term financial success. As always, we continue to emphasize our core priorities, which are underwriting, liquidity, and distribution. In good times and bad, those elements enable us to maximize our return on shareholders' capital. That concludes our prepared remarks, and we're happy to take any questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

One moment, please, while we poll for questions. Thank you.

Our first question comes from Scott Buck with HC Wainwright. Please proceed with your question. Hi. Good morning, guys.

Good morning. Can you just give us a little bit more color on the new pilot program that's set to launch here this month? Is this a business similar to some of the other B&Bs, B2Bs that you have, or is this a new space? How much education is required, et cetera?

It's a similar program to the one we most recently launched, and we're going to be able to leverage some of the investments we've made in sales and sales support to support both retail partners, and there's significant overlap in the expertise required to do that. Great.

Can you tell us what region of the country the first four states are?

We're primarily in the southeast and Texas. Great. Perfect. Thanks.

And then I'm curious, Russ, on the increased kind of marketing spend, I mean, how do you way, you know, the increased marketing versus, you know, it sounds like you're throwing everything you have at this point into marketing, but how long does that last? And when do you expect to see kind of a slow, slowing of the acceleration in, you know, lease origination volume from that increased marketing spend?

Right, of course, as we've mentioned in the past, as long as we were able to acquire customers at the right, new customers at the right acquisition cost, we wanted to continue to put dollars into that channel. As Rich touched on, there's been some decreased demand, I think, as a result of the additional stimulus dollars in the market, especially in our consumers' hands. So I think we have a pretty good runway to continue to spend on marketing, but But at some point, I suspect in the next 18 months to 24 months, we'll start seeing that growth, substantial growth, start to wane.

Okay, perfect. And last one for me. I think you kind of touched on it there a little bit. But, you know, we're kind of in the back-to-school period now. I'm curious whether or not the, you know, at-home schooling that a lot of us dealt with last year has resulted in a less demand for some of the computers or that kind of school-related electronics here in July and August?

You know, really what we're seeing on the demand curve side is we're not seeing a lower demand for purchases. We're seeing a lower demand for extended leases, if you will. So we continue to get a nice sales volume, but people who would normally maybe pay us off over, you know, several months, like 12 months or, you know, an extended period of time, tend to be paying earlier. So when we talk about demand, it's really not a demand at the retail level as much as it is a demand for the extended period of, you know, of a non-prime, you know, liquidity solution. Right.

Okay. That makes sense.

I think as I've read some of the transcripts and talked to some of my friends recently, in the industry, both in lease to own as well as in credit card business. I think many of us are seeing the same phenomenon, which we all, we don't know for sure what's happening, but we all are attributing that to, you know, an unprecedented level of government stimulus to this customer base.

I appreciate the extra color there, Rich. Thank you.

Thank you. Our next question comes from Michael Diana with Maxim Group. Please proceed with your question.

Thank you. I know in the press release you mentioned that about half of your regulations are from existing customers. How do you see that trending going forward?

I think that over time, as our customer base continues to grow and some of the opportunities to acquire new customers that the appropriate acquisition costs slow down, that we'll see that number continue to grow over time.

And that's favorable for us. And as we've talked about in the past, the margins associated with repeat customers are more favorable because we don't have to spend money to acquire those customers. and they've already demonstrated an ability and a willingness to pay us. And so the nature of this business is where we're at right now as a strategy and what I was trying to allude to in my prepared comments is we'll continue to invest as much as we can right now to build a big customer book, knowing that that will manifest itself in an excellent customer return business and continue to support high margin efforts for us as we move forward.

Okay, great.

Thank you. Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. Our next question comes from Ed Wu with Ascendant Capital. Please proceed with your question.

Yeah, have you seen any shortages in terms of inventory at some of your key retail partners?

With some of our retail partners, the nature of their business is that, yes, they've had some inventory issues, which has affected their aggregate demand. I mean the aggregate demand for our financing. So that is a real event that's out there.

What is your outlook for the holiday season? Do you think it's going to get worse? Do you think it's going to temper your results because of the fact that the consumers don't have as much product out there to buy? Or do you think by that time things will ease up a little bit?

I will put that into two categories, if you don't mind. On our FlexShopper.com, which is direct-to-consumer, I doubt if we'll have any inventory issues whatsoever. We have not gotten any indication from our major retail partners that they have inventory issues, so I don't expect that'll be a problem. On some of our retail partners, like tire partners, I don't expect any problems there. Some of our newer partners, it's really going to depend on, to some extent, COVID and how busy their stores will be, and that will also impact inventory. So it's very difficult to project how those retail partners will do in a holiday period. But as we sit here today, much of our business is based through our direct-to-consumer, and we have no indication from any of those retailers that they're having any inventory problems.

Great. And then my last question is you mentioned that obviously the stimulus has increased people's ability to buy it, you know, with cash. But in certain regions where the stimulus, the extra, you know, federal unemployment assistance, have you seen in areas where it expired, have you seen an increase back to more demand for, you know, for your leasing products?

Not yet. We have not. we've, like I said, once again, we've seen, continued to see a fair amount of activity with people getting leases. They just tend to be paying them off earlier than they have in the past. I suppose over time we would expect, one would expect that as these stimulus packages, you know, run out that that would move back to the norm, right? I guess generally things will regress to the mean over time. We just don't know how long that'll be and that's why I mentioned in the prepared comments that since we've never seen this before, it's unclear to us how this child care tax credit will impact things. But we continue to monitor it. We just haven't seen any dramatic shift yet, but it's something we look at all the time.

Great. Well, thank you for answering my question. Sure.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Very fine. Well, thank you for joining us today. We look forward to speaking with each of you again on our third quarter earnings call. Thanks again.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.