FlexShopper, Inc.

Greetings and welcome to the Flex Shopper fourth quarter and fiscal year 2021 earnings call. At this time, all participants are in a listen-only mode. A 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. Please note that this conference is being recorded. I will now turn the conference over to our host, Jeremy Hellman of the Equity Group. Thank you. You may begin.

Thank you, operator. I would 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. If you've joined us before, as always, Russ will be expanding on the key financial aspects of our quarterly results, and I'll cover some operational highlights. Our fourth quarter was solid with growth in net revenue and a nice increase in bottom line profitability. Importantly, we are happy to note that we increase the year-over-year EBITDA by over 30%. And as we have a better view of how the COVID pandemic is affecting customers, we believe we can grow at a similar or higher rate in 2022. Throughout the pandemic, our direct-to-consumer FlexShopper.com website has proven to be a key asset and a driver of our lease originations. In the first half of the year, stimulus programs put subprime consumers in a stronger liquidity position and apparently dampen demand across the rent-to-own industry based on the earning reports of our peers. We believe that dynamic has lessened considerably in the fourth quarter as COVID-driven stimulus programs wound down. Our data suggests recent payment activity, especially early payoffs, continue to revert to historical patterns. Our retail partner ecosystem accounted for about 34% of our leases this year. And as COVID-19 surge occurred throughout the winter, we receded. We've seen a noticeable pickup in leasing activity in this channel. Additionally, as noted in our earnings release yesterday, we expect to see a retail footprint expand during the first half of this year through a mix of new pilot programs and full rollouts. These rollouts have a substantial amount of investment in sales support. However, we believe that these are great investments. I'm going to turn it over to Russ now to address specific items regarding our financial performance. performance. And I'll come back later to wrap up.

Thanks, Rich. As a reminder, the investor deck posted on our website, together with our press release and 10K, provides significant insight into our fourth quarter and full year operating performance. So I'll cover just a few of the highlights. During the fourth quarter, our revenues and fees were up 10.5%, reaching $31.1 million. However, our fourth quarter lease origination dollars were down 18% versus the prior year. However, I want to point out when we include a loan product that we've launched, our overall originations were down less than 10%. The fourth quarter gross profit increased 10.3% to $12.2 million versus the prior fourth quarter. Adjusted EBITDA decreased slightly to $2.0 million versus $2.6 million during the fourth quarter of 2020. That was primarily driven by marketing increasing by $1.3 million in 2021. versus the prior year quarter. For the full year, our revenue and fees were up 22.9% to $125.4 million. Our gross profit expanded 30.8% to $46.2 million from $35.4 million. Full year EBITDA expanded 31% to $11.4 million versus $8.7 million. As a follow-up to some of Rich's comments, the company will achieve next year's results by significant spending in the first half of the year in order to support those new retail rollouts. But those investments will enable us to deliver EBITDA growth for the full year of 22 as at least equivalent to the 31% achieved this past year. In order to support that growth, we've increased our capital commitment from our senior lending facility by almost 60% to $82.5 million. I'll now pass the call back over to Rich.

Thanks, Ross. Overall, we had a solid quarter in a year and fared well despite the headwinds we faced in particular. I'm happy with the level of the bottom line profitability and EBITDA growth we were able to report. Looking ahead to the start of 2022, our conditions in our industry appear to begin normalizing, and that bodes well for our growth outlook for 2022. Before opening the call to your questions, I want to close with some comments on how we think our business is differentiated from our peers in the rent-to-own or lease-to-own industry. First and foremost is our FlexShopper.com website. Our peers do not seem to have a consumer-facing experience as robust as ours or with the extent of its operational and underwriting history. Operating our own website like this means we are 100% of charge of our originations in this space. And we're not dependent on anyone else's traffic. While stimulus programs reduce demand for alternative financing across the industry, we were nevertheless able to grow and importantly did so while maintaining our underwriting standards. And as all of you have heard me say repeatedly over the last several quarters, Proper underwriting is paramount in our business, and we will not sacrifice that to chase consumers that we ultimately expect will become delinquent. While our customer-facing website is central to what we are and what we do, we've obviously made the expansion of our retail partner channel an important part of what we do as well. 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 returns on shareholders' capital. As Russ was suggesting, some of our retail partners and potential retail partners have wanted us to include lending as well as leasing into the product mix for their point of sale experience. Over the past year, we've been testing unsecured term loans and analyzing the credit risk. Fortunately, our chief operating officer, John Davis, and I have a long history of making these types of unsecured loans, and we've done the testing and the data supports this strategy is going to work, and we should extend the strategy, which we believe will add to our growth moving forward in 2022. That concludes our prepared remarks, and we're happy to take any questions.

Thank you. And at this time, we'll conduct our question and answer session. If you would 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 the star key followed by the number 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 keys. Once again, to ask a question, press star 1 on your telephone keypad. Our first question comes from Scott Buck with HC Wainwright. Please state your question.

Hi, Rich and Russ. Thank you for taking my questions. First, Rich, I was hoping maybe you could give us just a little bit more color on this new lending product. I know you caught the example of tire realignments or wheel realignments in the press release. But, you know, where else could this be used? What size loans are we talking about? And, you know, maybe some of the other mechanics of this lending product would be great.

Yeah, I think that we're comfortable going up to, with 52-week, you know, lending, we're comfortable going up to $2,500. but I think the average is going to be about $1,200, and that would be my guess. But they're unsecured loans, right? But that's what we're looking at, and it's issued through a national bank or a Utah bank, and so we can do it across the nation. So that's one of our growth channels that we have. that we're very comfortable with. So.

Okay. I appreciate that. Uh, and then on the, the 500, uh, retail store rollout on the brick and mortar side, you know, were those all conversations that were taking place pre COVID or, or, you know, at the beginning of COVID or, or how many of those are, you know, more recent, uh, conversations that have turned to pilot programs, you know, stuff over the last six or nine months.

It's, um, More recent, during COVID, I guess we're still in COVID, I guess, but we really began rolling it out in January. So it's something that we have two additional partners, you know, and two additional retail partners, and that's what we're growing right now.

But to your point, I mean, a lot of these were conversations that – you know, started and stopped as, as COVID sort of, you know, surged and stepped back. And, uh, you know, they, they, the conversations did start occurring, uh, longer ago than you would expect to given that we're just, you know, having opportunity to roll out now, and this is all just due to, you know, COVID slow ups, et cetera.

Okay. That's helpful. And then Russ, uh, you know, marketing spend was up meaningfully, um, in the quarter. But originations were down. I'm just trying to understand maybe what's the marketing effort look like, and should we get hung up on one quarter of originations, or are those marketing dollars going to be driving revenue over the first and second quarter of 22 as well? Yeah.

A lot of what's falling into marketing expense isn't always – as we do some of these rollouts, isn't always the direct marketing expense that you're used to seeing in the past. And so some of these dollars are going out into sales support staff, educating the stores, getting materials for the stores, all essentially sort of preloading originations, if you would, for the next – couple quarters.

Yeah. I think that's something to note is like we, as we have made these agreements to grow, to roll out these 500 stores, we've had to hire people and sales materials, et cetera. Um, and, and some, you know, online marketing to grow these stores. So, uh, it'll, it'll suppress Q1, but it, which we believe, um, it will substantially increase our EBITDA for the rest of the year.

Okay, got you. That makes sense. And then the last one for me, average size of an origination was up nicely year over year. Is that stemming from kind of a return to some of the brick and mortar, or what's driving that increase, and how much more room do we have to take that higher?

It's more of an optimization exercise we're using online to figure out how to entice customers to get the highest product, highest price product. There is some retail element to it as well. But, you know, there's – that's – You know, you always want that effort to happen because, right, you always want the highest average order value you can have. But there's no magic to it. It's just what we've been doing.

Okay. I appreciate all the extra color, guys. Thanks a lot. Yep.

Thank you. And just a reminder to ask a question, press star 1 on your telephone keypad. We'll pause for a moment while we pull up the questions. Thank you. Thank you, and we do have another question from the line of Scott Buck with H.T. Wainwright. Please go ahead.

Hey, sorry, guys. I figured I'd throw another one in there. Just generally, Russ and Rich, if you could speak about credit trends, what you're seeing, and maybe what the expectations are for 2022. We talk about normalized volumes and demand, but is credit normalizing as well?

We generally have not seen any total deterioration in credit. what we have seen is in the past year some of our better customers may have been picked off a little bit by you know the divide out pay laters or credit card companies which is fine but we're seeing that normalized now so that's why you know, we, we feel good about the credit trends, but we're, we're very disciplined about that. Right. So, um, we, we don't, we haven't seen any deterioration in credit by a score ranges.

Rich, is there an opportunity for you guys to get more aggressive there?

Uh, there is, there, there's an, there's an opportunity to do that. Um, and we're looking at it and that, that's one of the things that we're exploring. Um, as we look at, um, the lending and leasing opportunities.

All right. Thanks a lot, guys. Appreciate it.

There are no further questions at this time. I'll turn the floor back to management for closing remarks.

I don't think we have any closing remarks other than, you know, we're going to continue to grow. We feel good about our growth this year, and we'll look forward to talking to you guys next quarter. Thank you. This concludes today's conference. All parties may disconnect. Have a great day.