FlexShopper, Inc.

Greetings. Welcome to the Flex Shopper third quarter financial results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the former 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'll now turn the conference over to your host, Carlos Sanchez of Investor Relations. You may begin.

Thank you, and good morning. Welcome to Flex Shopper's third 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 yesterday 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 quarterly report, 10Q, for the quarter ending September 30th, 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 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 the 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, everyone. Thank you for joining us. Yesterday, we reported Q3 financial results that are, on the whole, a good bit better than prior quarter and the same quarter last year. EBITDA increased over 11 million versus the same quarter last year. and net income was up over $7 million versus the same quarter last year. We continue to be in a difficult operating environment, with inflation continuing to significantly impact our customer base, but balanced by an economy that still hasn't experienced meaningful job loss in the non-prime sector. Out of an abundance of caution, we continue to be selective in our underwriting and are very active in monitoring and managing our portfolio to provide significant cushion in case the environment and customer payment behavior does start to move away from us. While historically our customers have demonstrated resilience in a recessionary environment, we face uncertain times and want to be positioned for any negative shifts, whether from the resumption of student loan payments or continued deterioration of the economy. FlexShopper has continued to evolve its direction over the last several months. We are leaning into the direct-to-consumer marketplace as our primary growth engine going forward. We have worked diligently over the last two quarters to evolve from utilizing our website solely as a method of generating leases. We are transitioning to a more fulsome e-commerce site that focuses on merchandising efforts to enable the company to profit not only from generating leases on our site, but also capturing a retailer margin on more of our goods. Furthermore, we have worked to increase conversion opportunities on our site by enabling risk-based pricing initiatives that recognize that all of our customers are not the same or fit into a single lease-to-own offer while maintaining attractive asset-level returns. Studying that idea even further, we are exploring partnerships with other financing channels to provide an even broader selection of purchase options to consumers that do not have the current liquidity to transact on more traditional e-commerce platforms. FlexShopper is positioning itself as a marketplace with an assortment of payment options for the larger universe of credit challenge consumers that will extend beyond our historical lease-to-own options. In addition, we are utilizing generative AI tools to create smaller versions of our main site focused on product verticals. These microsites are expected to provide significant marketing leverage that will allow us to reach and monetize customers at decreased acquisition costs. With all these changes in place, we believe FlexShopper and our marketplace will have greater control of its growth opportunities. First, it allows us to direct marketing spend where it is most efficient. Our marketing spend online is only constrained by acquisition costs, and achieving the appropriate return on capital, unlike other verticals where we might be dependent upon foot traffic to a store. Second, it allows us to be focused on achieving the ideal asset level return without trying to hit benchmark approval rates or spending limits as can occur with our enterprise customers. This doesn't mean that we aren't continuing to grow the direct brick and mortar and online enterprise relationships. In fact, a lot of the technologies developed for our marketplace are providing more value to our large enterprise customers and permitting higher approval rates and conversion rates among these customers. Our enterprise experience continues to result in big wins. We are in the final stages of another thousand plus store contract that will grow our enterprise leasing originations by at least 25%. We just want to be thoughtful in terms of making sure that we don't chase new doors or originations instead stay focused on the bottom line. Finally, the storefront lending business that we acquired late last year is gaining momentum. As we have mentioned in the past, The goal is to develop a framework that can allow us to reach large, non-prime customer segments with our combination of state-licensed and lease-to-own products complemented by other liquidity providers. We continue to believe that by providing the widest assortment of products and payment options to consumers, we can leverage and grow the exclusive arrangements we have with a wider assortment of retailers and service providers. Looking forward to the holiday season and early next year, we expect to see continued growth and originations as a result of our improvements to the FlexShopper marketplace and new enterprise partners. Combined with the focus on asset level performance, our allowance for doubtful accounts as a percentage of gross billings will decline, resulting in a leap forward in net revenue. The continued merchandising efforts should continue to increase the margin on our products, resulting in relative declines in the depreciation of lease merchandise. All of this will enhance gross profit over the near term. The management team at Flex Shopper believes we are at an inflection point in the business and look forward to demonstrating our progress going forward. With that, I will turn the call over to our COO, John Davis.

Thanks, Russ. We continue to be pleased with the asset quality of both our lease and loan segments. As we have mentioned in previous calls, the transition from government stimulus coming out of the pandemic to a high inflationary environment was difficult for our customers. During this time, our efforts were targeted towards improving bad debt levels on our lease channel, continuing to develop enterprise and smaller partnership distribution opportunities, expand retail margins within our marketplace lease channel via manufacturer and distributor partnerships, and continue to develop our state model lending business through our revolution finance platform. I am pleased with the results of all of these activities, just setting up Flex Shopper to achieve sustainable, profitable growth. Lease fundings were 4% higher versus Q2 of 2023 and 11% lower versus Q3 of 2022. An important point to note is that September lease fundings were higher year over year, which was the first monthly positive comp since July of 2022. October lease fundings were also higher year over year, had the highest lease dollar funding for all of 2023. November is also trending higher year-over-year as of the middle of the month. Gross lease billings and fees were 19% lower year-over-year, or $7.3 million lower versus last year. As a reminder, this line item has a lag to fundings as this revenue is recognized over the term of the lease. The key factor in the asset profitability of our lease business include gross lease billings and fees, provision for doubtful accounts, and impairment of lease merchandise in market. While we look at these components, we are seeing improvements based on the initiatives we have been undertaking. The provision for bad debt expense was $10.2 million in Q3 of 2023 versus $14.1 million in Q3 of 2022, which was an improvement of $3.9 million year over year. As a percentage of gross lease billings, 2023 Q3 was 32.6%, versus 36.5% for the same quarter last year, or a 390 basis point improvement year over year, even with including some sales of delinquent receivables last year, which did not occur this year. This improvement is a result of our underwriting tightening, as well as continued enhancements to our fraud and credit risk capabilities and strategies. We have recently upgraded our operational leadership team as well, as adding new collection agencies to work on our past due portfolios. We expect that this new leadership and capabilities will result in continued improvement in past due liquidations, which will provide future support to keeping this expense trending in a favorable way. Depreciation and impairment of lease merchandise expense was $13.1 million in Q3 of 2023 versus $18.8 million in Q3 of 2022, or $5 million lower year over year. As a percentage of gross lease billings, 2023 Q3 was 41.8% versus 48.6% for the same quarter last year for a 680 basis point improvement year over year. This is the result of the rollout of our retail product margin initiatives into the portfolio, which in a similar way to gross lease billing and fees is spread out over the life of the lease. We are constantly evaluating the selection of products that we offer to better match our customers wants and needs as well as to continue to improve gross product margin on what we sell. Additionally, we are investing in our technology platform to add flexibility and scalability to this important initiative, which is already adding significant value to the company. Marketing costs were $1.7 million in Q3 of 2023 versus $2.4 million in Q3 of 2022, or $700,000 lower year over year. Importantly, Total marketing spend was 30% lower year over year while funding was only 11% lower year over year. We are seeing more efficiency in our marketing efforts in comparison to last year with the difference between year over year spend and origination volume. We are continuing to improve this efficiency by way of testing new marketing partners for better targeting and personalization, adding new capabilities and generative AI content creation on our marketplace to increase traffic and conversion, and price testing on both our products as well as our lease costs to optimize revenue and risk. Adding all these versus $3.4 million for the same quarter last year, or $3 million better year over year. With the underlying components of our lease business at favorable levels, our goal now is to increase revenue. As I mentioned earlier, lease funding levels in September and October were up year-over-year, which will, if that trend continues, eventually result in higher top-line lease revenue. We are also introducing new financing and payment option partners on our marketplace that will allow for increased revenue from retail product margin from customers that either do not convert with our lease pricing or customers that we decline the subsequent funding partner approves. we expect little cannibalization on our lease origination as our partner payment offerings are controlled from a credit profile standpoint to minimize overlap. On the enterprise and smaller partnership point of sale lease channel, our partner door count that had our lease product available increased approximately 15% from last quarter. We expect that this will continue into Q4 of 2023 and into 2024, with new potential partners currently in different stages of discussion. We are excited about this growth channel, not only for the direct revenue that these partnerships provide, but for the increased customers that may also take advantage of our marketplace offerings. On our lending front, we originated $14.8 million in Q3 through our revolution finance platform and $0.1 million through our loan participation program. This compares to $10.4 million in Q2 of last year in our loan participation program, but no originations through Revolution, which we acquired in Q4 of last year. As a reminder, we issue consumer loans within approximately 100 storefronts consisting of owned physical locations and virtual locations within Liberty Tax Stores using state lending licenses. We are seeing incremental growth within Revolution with a 6% increase in originations from last quarter and a 42% year-for-year increase in overall lending related to the fundings. Similar to our lease operations, we have invested in leadership within the Revolution platform and expect growth to accelerate into Q4 of this year and into 2024. As we invest in our leadership team, our technology capabilities, and our servicing and lease and loan distribution partners, we expect to simultaneously achieve top-line growth and favorable economics within the P&L. To that end, we saw an increase in our bank participation portfolio collections due to our investments in operations and agency partnerships that I mentioned earlier, which has resulted in a $7.1 million positive net change in the fair value of loan receivables due to higher future expected cash flows from the portfolio. As we continue with these investments in people, strategy, and technology, I'm personally very excited about what our business can do. With that, let me turn the call back over to the operator for any questions.

Thank you, and at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. 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 your handset before pressing the start keys. Our first question comes from the line of Scott Buck with HC Wainwright. Please proceed with your question.

Hi, good morning, guys. Thanks for taking my questions. First one, on the enterprise door rollout, can you remind us what the typical kind of cadence is for those relationships to mature? I mean, is it six months or 12 months before you really start to see some momentum there?

Good morning, Scott. I wish it was as simple as having a standard cadence for all of these enterprises. We have a recent one that just fully rolled out into about 600 locations and It was a pilot for six months, and then as we started a fuller rollout, and then it was just paused for the summer and then took a little while. So that entire process was probably 15 months or so. This most recent one that I mentioned on the call earlier was – Probably it'll be five months from start to finish, so it doesn't really have a fixed pattern. I think our approach has been let's look for opportunities where we can achieve at the right acquisition cost the sort of right type of growth to expend resources to focus on it. and hope to continue to add in the area of 1,500 to 2,000 stores a year. And it looks like we've, for the past couple of years, we've done a little bit better than that.

Great. That's helpful, Russ. And then a second one, can you give us an update on the competitive environment? Anybody encroaching on your space, or are you seeing anybody act generally more aggressively?

What we've seen actually is a pullback in a couple of our sectors as the bank partnership programs have become a little bit more difficult to sustain as more banks have ended those programs. We've seen some pullback there. I think all of it is about choosing the right verticals. Obviously, some are more contested than others, but no new entrants.

Great. And then just last one for me, if you could give us kind of an update on where we are in the fourth quarter versus what we've seen historically with a seasonal bump, I guess, in originations.

Sure. I'll let John take this one.

Yeah. We are pretty pleased with what we're seeing early. You know, I had mentioned earlier in my prepared remarks, you know, September had a positive comp, and this was, both on our enterprise side as well as our marketplace. And we're actually seeing those comps increase as we are getting closer and closer to the holiday period. Our holiday period really accelerates from Black Friday into Cyber Monday and then peaking probably mid-December. But if we compare the trend coming into the festive period, we are favorable to what we've seen in the past couple years.

That's helpful. I appreciate the added color, guys. Thank you again, and congrats on the quarter.

Thanks. Our next question comes from the line of Michael Diana with Maxim Group. Please proceed with your question.

Thank you. Hey, Russ. Good morning. Actually, I was going to ask, about the same two topics. So, let me just ask a little different question. So, on the 1,000 store enterprise rollout, did I hear you correctly in saying that you think this should increase your lease volume by 25%? Sure. And, well, the enterprise lease volume by 25%.

Okay. And, yes. Okay.

uh right and and i guess you just said you expect that program to be fully up and running about five months right so well it should impact the holiday season that's coming on here but it it won't be fully rolled out is that right that's correct uh i would expect the um

As you can imagine, the retailer partners have a lot of priorities during the holiday season. It's not always our rollout, but it should be fully rolled out before the end of the first quarter.

Okay. And then that relates to my next question, which is, so you're obviously expecting a big holiday quarter in the fourth quarter. Do you expect the first quarter of 2014 to evidence the typical big downturn or because of everything you've been doing lately, it may be less of a fall off?

Hey, this is John. Yeah, you typically will see a drop from Q4 to Q1. But if the trends continue as we're seeing them right now, um we're expecting a higher year-over-year q1 um you know versus uh 2023 um yeah but you'll always see that that seasonal downtick you know roughly 40 of our origination volume comes from q4 every uh every year so obviously it's a very important season but the good thing about especially these enterprise rollouts that we're bringing online, those are not as seasonally dependent. You know, if you look at a tire store, that is a year-round sale for us. So that should help us smooth out our overall lease origination line.

Okay, great. Thank you very much.

And we have reached the end of the question and answer session. I'll now turn the call back over to management for closing remarks.

We appreciate everyone dialing in this morning. We want to thank the team for all their hard work over this past quarter and the results it generated. And we look forward to a great holiday season and catching up with you all to report our full year results shortly.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.