FlexShopper, Inc.

Greetings and welcome to the Flex Shopper Inc. 2022 Fourth Quarter and Fiscal Year Financial Results Conference Call. At this time, all participants are on 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, Carlos Sanchez, Investor Relations. Thank you. Please go ahead.

Thank you, and good morning. Welcome to Flex Shopper's fourth quarter 2022 financial results conference call. With me today are Russ Heiser, our Chief Executive Officer, John Davis, our Chief Operating Officer, and Howard Dvorkin, the Chairman of the Board. We issued our earnings release last night and corresponding investor relation presentation this morning, and we'll be referencing these during the call today. Both can be found in our investor relations section of our website. We will be available for Q&A following today's prepared remarks. Before we begin, I would like to remind everyone that this call will contain forward-looking statements regarding future events and our financial performance, including statements regarding our market opportunity, the impact of our growth initiatives, and future financial performance. These should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC reports, including our annual report, Form 10-K, for the year ending December 31, 2022. These statements reflect management's current beliefs, assumptions, and expectations, and are subject to a number of factors that may cause actual results to differ materially from those statements. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events, or otherwise. During today's discussion of our financial performance, we will provide certain financial information that contains non-GAAP financial measures under SEC rules. These include measures such as EBITDA, net income, and adjusted net income. These non-GAAP financial measures should not be considered replacements and should be read together with our GAAP results. Reconciliation to GAAP measurements and certain additional information are also included in today's earning release. which is available on our investor relations section of our website. This call is being recorded and a webcast will be available for replay on our investor relations section of our website. I will now turn the call over to our chairman of the board, Howard Dvorkin.

Thanks, Carlos. Good morning, everyone, and thank you for joining us for the call. As investors know, I normally do not participate in these calls. However, I wanted to personally address the passing of our former Richard House. Rich was a visionary leader who played an instrumental role in shaping the strategic growth path of the company and setting the company for future success. Rich House was not only a leader of this company, but also a mentor and close friend to many of us at Flex Shopper. Rich certainly left Flex Shopper in a much better shape than when he found it upon joining us. Between the significant upgrade in the company's talent, as well as a defined strategic plan, that will likely be his legacy for years and will benefit our company for years to come. Rich will sorely be missed. On behalf of the entire Flex Shopper family, I want to extend my deepest and sincere condolences to his family and loved ones. As you know, upon the passing of Rich, the Board of Directors appointed Russ Heiser as our new Chief Executive Officer. Russ has been the Chief Financial Officer for Flex Shopper for longer than Even I have been involved in the company. In that role, he was exposed to every aspect of the company, not only leading the finance and accounting teams, but also the capital market activities. Clearly, I've always been impressed by his herb intellect, as well as his incredible work ethic. In addition, He led the recent acquisition, which we will speak about shortly. Most importantly, he worked extensively with Richard House as well as John Davis, our COO, learning from both of them, which is important. The board of directors, as well as myself, has the utmost confidence in Russ, frankly, here on the chance, and I am certain he will not disappoint any of us. As a significant equity investor, I am laser focused on driving earnings that will be translated into a higher stock price. Last year was a very difficult year and I was not particularly happy with the company's performance. In fact, I don't think anybody, mostly the management team was not happy, but this year is a different year. I am, however, very comfortable stating that this ship's course is set to produce future sustainable growth. Certainly, with the recent acquisition of Revolution, I am confident that FlexShopper is taking the right steps to broaden its distribution channel and offerings of financial products that will result in future earnings. I continue to have the utmost confidence in the company's business, but also the existing staff and management teams that are led by Russ and John Davis. Now let's move on to the earnings report for the quarter. As such, I will turn over the call to Russ.

Thanks, Howard. Good morning. I appreciate everyone dialing in to join us. Dale covered 22 results in 2023 highlights before handing the call to John Davis, our COO, so he can share further insights. the operational metrics before opening the call to questions. But first I'd like to thank the team members for their hard work over the past year, especially their dedication during what has been a turbulent year. Macroeconomic conditions in 2022 disproportionately impacted less affluent households, which are a large part of our customer base. Declining bank balances in an inflationary environment, not seen in over 40 years, created a headwind to portfolio performance. This resulted in significant tightening of our approval rates, led to a decline in originations that put pressure on the company's financial performance in the second half of 2022. Fundings decreased 8.7% to $27.4 million from $30 million for the fourth quarter. Increased 23.1% to $107.5 million from $87.3 million for the whole year compared to 2021. Total revenue for the fourth quarter of 2022 was 21.4 million, which was down 31.1% year over year. Revenue for full year 2022 came in at 107.5 million, which is an increase of 23.1% compared to 87.3 million for 2021. Gross profit was 3.8 million or down 68.5% in the fourth quarter versus the same quarter last year. Gross profit for the year was 37.1 million or 19.7% lower than the prior year. We reported an EBITDA loss of $4 million for the quarter and an EBITDA loss of half a million dollars for the full year. On top of this disappointing financial performance, our acquisition in the last month of 2022, coupled with the recent passing of our CEO, was a perfect storm of events which led to a delayed filing. We don't expect this to reoccur. On a positive note, the income was $7.9 million for the fourth quarter and $13.6 million for the whole year, compared to $3.3 million for the prior year. This pressure on our business in the second half of 2022 drove a renewed focus on sustainable fundamentals and resulted in the company streamlining operational costs across the business, including optimizing underwriting and personnel that have positioned the company for success in 2023 and going forward. We are already seeing improvements to gross profit and EBITDA over the last several months. This pressure also spurred us to look for opportunities to broaden our reach and increase the effective yield on our portfolio given the current environment. As a result, we acquired the assets of Revolution Financial in early December, which added 100 brick and mortar locations with the potential for over 1,000 productive locations within the Liberty Tax Franchisee Network. This transaction accelerated our expansion into state-licensed lending resulted in a significant increase in our net income for 2022. This acquisition will continue to be a key part of growing EBITDA and net income going forward. In addition, we are pleased with where we sit at the moment with five months of season lease performance data. With our underwriting at the correct spot, the company can begin growing high-quality originations. To that end, we signed a five-year agreement extension in March that will provide for significant expansion with our largest retail partner. This agreement will provide expansion along a key vertical for Flex Shopper and provide further differentiation to our customer acquisition channels. I'll now turn the call over to John to discuss our operations in more detail.

Thanks, Russ. As we observe the economic conditions, you're happy to see the rate of inflation diminishing in recent economic reports. The Flex Shopper customer is particularly vulnerable to the impacts of inflation. and we saw that in our payment performance in 2022. This financial stress has resulted in a significant year-over-year reduction in approval rates due to our credit tightening, which has suppressed our origination volumes. With inflation moderating, we are seeing stability returning to our customers' financial situation, which is resulting in improving customer payment performance at the end of Q4 and into Q1 of 2023. Approval rates were down 38% year-over-year for Q4, as we remained conservative in our credit standards. However, we will start to see year-over-year approval rate variances narrow as we lap changes that occurred last year. Even with this approval rate headwind, our lease revenue was only down 4% year-over-year in Q4. This outperformance versus the approval rate comparison is occurring due to a few factors. First, total application volume was up 21% year-over-year, with our marketplace driving much of this demand. We saw a spike in demand towards the end of the holiday shopping season, which resulted in increased application flow and a 12% positive year-over-year comparison in marketplace originations for the month of December. Secondly, our average order value on funded leases was up 16% year-over-year. Third, we have seen higher conversion rates on customers we do approve. Our marketing team has continued to make good progress in improving our on-site user experience and retargeting campaigns to increase the number of customers who purchase after receiving an approval, as well as targeted product recommendations to increase utilization of approved spending limits. Our bricks and mortar lease originations were down 21% year over year. This was due to one of our strategic partners within our pond lease vertical moving off of our leasing program in August of 2022 that generated significant volume in Q4 2021. Offsetting this drop of volume was growth within our tire lease vertical, as well as the additions of new pond partners that launched in the beginning of 2022. As of the end of 2022, Flex Shopper had 2004 retail partner door fronts that provided our financial products. We expect this to grow significantly in 2023 as we ramp up new brands within our existing partnerships. Moving on for lending initiatives, But Shopper acquired the assets of Revolution Financial Inc. in December of 2022. This business makes cash loans within 22 physical locations and 78 virtual locations within Liberty Tax Stores using state lending licenses. This diversifies our lending channel to include bricks and mortar distribution, which has different competitive and yield dynamics versus our current bank partnership program. In addition to the lending services currently provided, there's an opportunity to cross-sell marketplace leasing business to these new customers. We feel that this business can provide a strong growth channel for us in the future as we work to increase the doorfronts within our lending vertical. As I mentioned earlier, we continue to remain prudent in our underwriting standards to counteract macroeconomic impacts, even though we are starting to see some stabilization. Customer payment rates are improving sequentially And we're seeing an acceleration of this improvement in Q1 of this year. Also, our decision science team continues to implement new underwriting tools to improve short and long-term payment performance. Our bad debt reserve methodology for our lease book has a lag versus observed early payment improvements. And as we continue to see this trend continue, we expect to see our bad debt reserve percentage improve from current levels into 2023. continues to be dependent on current macroeconomic stabilization to continue, but we are optimistic of early 2023 performance. I also want to touch on our retail margin expansion efforts. As we have mentioned in previous calls, we have introduced products sourced from distributors and manufacturers to enhance customer profitability via a retail margin in addition to revenue from our lending and leasing efforts. These products are complementary to products offered by our marketplace partner selections. Our balance of sale increased from 5% in Q3 to 9% in Q4, with double digit balance of sale in December. As a reminder, these sales generally have a blended retail margin over 30%, which adds a good bit of positive unit economics to our marketplace channel. Since these products are sold via a lease, Full realization of this margin is recognized over 12 months. The P&L impact from this effort will grow into 2023. Lastly, I want to thank our team members for their hard work, especially in light of the passing of our CEO, Rich House. This was very shocking to all of us here, especially for team members, including myself, that have known and worked with Rich with different companies throughout our careers. He will be missed, as his experience within this space was significant and provided a true differentiator for Flex Shopper. However, Rich built a very strong team during his tenure at Flex Shopper, so I am confident that the company will prosper with this team in place under Russ's leadership. With that, let me turn the call back to Russ.

Thanks, John. In conclusion, as we look ahead to the rest of the year, we remain confident that Flex Shopper's position to grow through the turbulent environment The leadership team and the entire company is focused on pursuing the path that will drive our next phase of growth. For investors, we're confident that our changes will result in meaningful EBITDA improvements versus last year. With that, we'll take any questions you might have.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question today is coming from Scott Buck of HC Wainwright. Please go ahead.

Hi. Good morning, Russ. Thanks for taking my questions. First, you know, congrats on the promotion into the CEO role. I'm curious, should investors expect any kind of meaningful change in strategic direction, or is there anything in the business that you think needs maybe a closer look at now that you're in this position?

Sure, Scott. Thanks for the question. We are taking a deeper dive, as I mentioned, into the lease side of the business. I think one of the advantages of having a direct-to-consumer marketplace is that you do have this customer capture as opposed to when they go into a brick-and-mortar or online situation with their multiple lease-to-own opportunities they might be able to choose from. So with that advantage in pricing, I think that they're – certainly some more room to make changes on our marketplace side to capture additional return there. So I think there will be a renewed focus on that side of the business trying to fix returns so that we get the appropriate return on capital and ability to bump up gross profit in that channel.

Great. That's helpful, Russ. And then the retail door fronts, I'm curious what the cadence of new door is doors will be through 2023? I mean, is this kind of a relatively even flow throughout the year of adding doors, or is it, you know, more chunky?

It's definitely more chunky, and I think this is really just having to work through the retailer dynamics. You know, just as we mentioned, this environment is turbulent for our customers. It's certainly a bit turbulent for these retailers, and for them to focus on second look and third look financing in their stores isn't at the top of their list sometimes. The one extension and expansion that I mentioned, that will certainly come on fairly quickly. There are a few technological enhancements that are going into place that I think will increase the throughput from a customer standpoint. So we should see a good rise there. I think in terms of other doors, we do have... additional channels that are bringing them on. There is going to be something that's a little bit different from what FlexShopper has done in the past. There is going to be a focus on more of the smaller retailers. In the past, we've tended to focus on the enterprise customers, the very large chains, et cetera, so that we could roll out all at once. We had mentioned before our relationship with a third-party company technology partner, and that will allow us to go after the smaller retailers. And we do plan on pursuing that this year. And I think that you'll see more in the third quarter, a cadence of adding new locations that is more regular and less chunky, which is what we see when we focus on just the enterprise customers.

Okay, perfect. That's helpful. And then last one for me, The revolution business at Liberty Tax, I'm assuming that's first quarter origination heavy just given when those storefronts are active. Is that accurate or is there a more steady flow through the year for originations there?

When it comes to the typical loans that these companies, Liberty Tax customers may be taking, they tend to be advances on their income tax returns, and that's part of the business that we're not involved in, and that's where you would see the chunkiness in the beginning of the year or in tax season, tax refund season. From our perspective, these locations are open year-round, and our plan is to be active in supporting their loan originations year-round. So we expect it to not be all centered on the first quarter of the year.

All right, that's great. I appreciate the additional color, guys. Thank you. Thank you. Thank you.

Thank you. The next question is coming from Michael Diana of Maxim Group. Please go ahead.

Thank you. Hi, Russ. Could you give us a little more detail on the customer profile of a Revolution borrower, how that fits in with the customer profile? of your, your other businesses, any, any more information you can give us about what, what those loans look like, you know, duration rate, whatever. And then finally on the revolution business, sort of what was just asked, but should, should we see a contribution from that in the, in the first quarter, or is that going to come on more in the second quarter?

Sure. Let me take the second piece first, and then I'll hand off the first question to John David. From a contribution perspective, this was a business that was active and running in these 100 locations, so that'll continue to be reflected in the first quarter. There are some improvements in terms of underwriting and marketing that I think should do two things. It should essentially grow that portfolio within those 100 locations and then also result in improved performance. I think when it comes to rapid growth in that business, it's all about expanding into additional storefronts. So while there's some ability to increase the portfolio size within those 100 locations, it's really going to be the expansion into additional stores. There are a few infrastructure improvements that need to take place in order for it to scale easily. And we're working on those now. So certainly in the third quarter, you should start to see growth just from having that door count increase. And that's how you should think about it. So the numbers are included in one queue, will be included in one queue and going forward, but the rapid growth will be the expansion to beyond those 100 stores. Okay, great.

To answer your question on the customer profile, compared to the Flex Shopper lease customer, there is some overlap. The customers who generally take out loans with Revolution are probably on the bottom half of our credit profile in comparison to our lease customer. But there are similarities and overlap, which we think provides opportunity for cross-sell into our lease products. The kinds of loans that the customers take vary by state. All of the states that we operate in have state licenses and are specific to that jurisdiction, but they'll vary from single payment cash advances to installment loans unsecured as well as secured title loans. Interest rates are generally around the same effective yield that the lease would charge if it was a lending product. But, again, it's all based on the state. And as we look for opportunities to expand in the Liberty Network, a similar situation will occur where we look for geographies that have the right pricing for the risk that we take on.

Okay, great. Thank you very much.

Thank you. At this time, I'd like to turn the floor back over to Mr. Heizer for closing comments.

Thanks again for all of you that joined our call this morning. Feel free to reach out with any additional questions you might have, and we look forward to catching up with you shortly for the 1Q2023 presentation.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.