FlexShopper, Inc.

Greetings. Welcome to Flex Shopper First Quarter Financial Results Conference 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 this conference is being recorded. I will now turn the conference over to Carlos Sanchez, Investor Relations. Thank you. You may begin.

Thank you, and good morning. Welcome to Flex Shopper's first quarter 2023 financial results conference call. With me today are Russ Heiser, our chief executive officer, and John Davis, our chief operating officer. We issued our earnings release on Thursday of last week and corresponding investor relations 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 and quarterly report 10-Q for the quarter ending March 31st, 2023. 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 rule. 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 earnings release, which is available on our investor 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 CEO, Russ Heiser.

Thanks, Carlos. Good morning. I appreciate everyone dialing in this morning. Today, I'll discuss a few highlights and some new initiatives before handing off to John Davis, our COO, so he can share further insights on the operational metrics. And then we will open the call to questions. First quarter, 2023 was off to a good start with net revenue of over $30 million, gross profit of $13 million, and EBITDA of over $6 million. Our substantial adjustments to our underwriting and risk management have resulted in solid improvements to loss rates. Additionally, we have seen a decline in early payoffs, which also increases the yield on the portfolio. We expect that with no other substantive changes to the macro environment, loss rates will continue to improve over the next two quarters as we cycle through the historical portfolio that was originated at the height of last year's inflationary increases before we had tightened underwriting to our current levels. With what we hope are the most negative consequences for our customers of this inflationary environment behind us, we are now focused on positioning ourselves to take advantage of opportunities. Additional upside should come from stronger credit profiles applying for lease to own as the more traditional providers of consumer credit continue to tighten their own underwriting. So far, we have yet to see a meaningful improvement in the risk profiles in new applicants. However, by making some adjustments to our pricing model, we hope to be a compelling source of liquidity for these types of customers going forward. On top of the contract extension with our largest partner mentioned on the last call, Our enterprise sales team has been progressing with a few large retail partners, and we are approaching the finish line. As a result, we expect a meaningful impact on the amount of new customer originations onboarded through retailers in the second half of this year. Furthermore, as many of our longtime investors are aware, that outside of a few select initiatives, we have yet to focus on small and medium businesses. Now that macro environment is showing some stabilization, we believe this is the time to launch a sales team focused on this segment that will complement our enterprise sales efforts as well as our FlexShopper.com marketplace. On the lending front, the Revolution Storefront platform will be onboarding its first new virtual locations with Liberty Tax franchisees this quarter. It took almost six months, longer than I expected to get to this point, but we now have the necessary infrastructure enhancements and regulatory framework to begin rolling out new locations. While it will take a while to grow the portfolio size at each new location, the magnitude of potential locations should provide lift as the rollouts speed up. Now I'll turn the call over to John to discuss our operations. Thanks, Russ.

I continue to be cautiously optimistic about the trends of the economy relating to the typical Flex Shopper customer. With the rise of inflation observed last year, our typical customer experienced their own personal recession. their take-home pay reduced by increases in core expenses such as food, transportation, and housing. With the year-over-year inflation rate dropping for the 10th consecutive month in last week's government report, our customer is getting some stability in their monthly expenses, which leads to more predictable payment rates on their obligations with FlexShopper. Total funded originations increased 29% year-over-year. Gross profit dollars increased by approximately $4.2 million year-over-year, and our gross profit margin improved by approximately 1,200 basis points from Q1 last year. Gross profit from loans increased by a net $3.5 million, and gross profits from leases increased by $800,000 year-over-year. For our lease channel, our underwriting standards remain significantly tighter year-over-year, with a 24% lower approval rate on submitted lease applications and a 19% year-over-year reduction in lease origination dollars. We are beginning to lap underwriting changes made last year in Q2 with a further lapping in Q3. Also, increases that we have observed in approval conversion and higher average order value should start to result in positive year-over-year lease origination growth as we move through the rest of 2023. Also, continuing rollouts of existing bricks-and-mortar partnerships should provide significant volume increases from current levels. With a combination of a stabilizing inflationary environment and the results of our underwriting and collection strategies, I am pleased to see that our least bad debt percentage has improved with an over 800 basis point improvement from Q4 2022. Absent a relapse in unfavorable economic conditions, I expect our least bad debt percentage to continue to be a tailwind to Flex Shopper profitability this year. Lease net billing and fees were approximately $3 million lower year-over-year this quarter due to lower origination levels from our proactive credit tightening over the past few quarters. Offsetting this was a $3.8 million lower depreciation and impairment of lease merchandise expense. The depreciation as a percentage of gross lease billing and fees for Q1 was 44.8% versus 48.4% in Q1 of last year, for approximately a 360 basis point improvement. This is in part due to the seasoning of our retail margin expansion efforts. As leases mature with this additional retail margin included, our lease depreciation costs decrease as a percentage of gross billings. The net result of the bad debt moderation and retail margin seasoning was an $800 increase in lease gross profit year-over-year, even with the significant drop in approval rates year-over-year. As we let credit tightening and roll out new storefront doors, improved unit profitability should provide tailwind to overall results. On our lending front, we originated $14 million in Q1 through our revolution finance platform. As a reminder, we issue consumer loans with approximately 100 storefronts consisting of own physical locations and virtual locations within Liberty Tax Stores using state lending licenses. These originations represented over one-half of our total originations for Q1 and has immediately become an important part of our business. We are happy with the credit quality of the loans we are originating, and the team is looking to expand both same-store loan volumes through marketing initiatives as well as looking to expand into new virtual locations within the Liberty Tax Network. As I mentioned earlier, this channel provided approximately $3.5 million in higher gross profit versus Q1 of 2022. We are also operating the business more efficiently versus last year. Salary and benefit expense and operating expenses were $283,000 lower year-over-year while growing revenue by 6%. Also, lease market expense was significantly lower year-over-year, offset by higher loan origination costs from the introduction of revolution volume. Excluding depreciation impairment of lease merchandise, the operating expense ratio improved by 160 basis points year-over-year. As we grow, we will continue to be mindful of expense discipline and leverage our existing platform to achieve growth as efficiently as possible. As a summary, we continue to develop a diverse revenue stream between our proprietary lease marketplace, our bricks and mortar lease and loan partnerships, and our revolution loan platform, which will provide profitable growth for Flex Shopper. I'm excited about the opportunities that we have in front of us. I also want to personally thank our team members and our partners who contribute so much to the results we are achieving. With that, let me turn the call back over to Russ.

Thanks, John. It has demonstrated this quarter the team at Flex Shopper is well on its way to surpassing previous revenue and EBITDA benchmarks. As John mentioned, the team continues to achieve significant results on an accelerated timeframe. We're pleased with all of what's taking place. With that, we'll take any questions you might have.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Scott Buck with HC Wainwright. Please proceed.

Good morning, guys. Thanks for taking my questions. Uh, Russ, you mentioned, um, you're making some changes in the pricing model, uh, to attract some new customers. Could you give a little bit more color on what you guys are doing there?

Sure. I think as we, uh, continue to see new customers come in and potentially come in as a result of tightening above us, I think there's probably a spot where they can fill in that necessarily isn't necessarily a 2.4 markup. Okay. Sorry, go ahead. No, no, I was just going to, as you know, that there's a lot of room between potentially where these customers are being denied for additional liquidity and a 2.4 markup. And we just want to make sure we can bring those customers in and be attractive to them. Nope, that makes sense.

And then on marketing, it looks like you were down pretty meaningfully, both sequentially and year over year. Are you guys seeing some improved efficiency in the way you market to folks, or is that just a factor of seasonality plus just a little bit of internal tightening?

Yeah, hi, this is John. There's a combination of the two, really. We are certainly seeing more efficiency. in our marketing. Our conversion rates on approved customers are significantly higher. A lot of effort has been put in to improve that. There's also certainly a seasonality factor in play. Q1 is usually less, there's less demand because of tax returns and customers have more liquidity than certainly during a holiday season. And then I think third, we're always mindful of what we spend on marketing with low approval rates. You know, the marketing cost is a function of the cost to bring an application in and the approval rate. But as we start to lap approval rate changes and actually expect to see higher approval rates going to Q2 and forward, we actually expect to spend more money because the unit cost required will be improving.

That's helpful, John. And then last one for me, the early prepayments, are we just talking that up to tax refunds in the quarter, or is there something else going on?

The decline in prepayments we think is really a function of customers having less available liquidity, disposable income, and thus not paying off as frequently as they paid off in the past. There's also been some changes into how frequently we market the 90-day same-as-cash on our online platform, and that's also resulted in a decrease.

Got it, Russ. So it was a decline that I must admit. Sorry. Thank you very much for the time, guys. I appreciate it. Thanks. Thanks.

You have reached the end of our question and answer session. I would like to turn the conference back over to Russ 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 for the 2Q 2023 presentation.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.