FlexShopper, Inc.

Greetings. Welcome to the Flex Shopper fourth 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 fourth 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 earnings release yesterday, which we'll be referencing during today's call. Our earnings release and SEC filings 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 report. reports, including our annual report 10-K for the year ending December 31st, 2023. These statements reflect management's current beliefs, assumptions, and expectations, and are subject to a number of factors that may cause them to 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 these gap measurements and certain additional information are also included in today's earning release, which is also 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.

Thank you, Carlos, and thanks to everyone joining us this morning. We're excited to discuss our fourth quarter performance and provide some insights into the first quarter of 2024. Overall, the fourth quarter continued the financial progress from prior periods. Comparing the fourth quarter of 2023 versus the fourth quarter of the prior year, total fundings were up 7%. Net lease and loan revenues were up 42%. Gross profit was up over 300%. And operating income was a positive $5.6 million compared with the operating income loss of $5.5 million. And then moving on to 2023 full-year results, see a similar pattern. Total fundings were up 8% versus the prior year. Lease and loan revenues were up 3%. Gross profit was up 47%. And operating income was a positive $13.7 million compared with an operating income loss of $6.3 million in 2022. Despite all these financial improvements, the hallmark of the fourth quarter was the work going on behind the scenes. As we mentioned on the last call, we are continuing to transition our FlexShopper.com business significantly. What was traditionally an online lead generator for lease to own transactions is now transitioning into a retail platform with other payment options for consumers in addition to FlexShopper's lease to own product. The first quarter of 2024 There will be a new line on our income statement reflecting revenue from goods sold on FlexShopper.com that were not funded by us. Since February, we have been selling merchandise on our site that was funded via a payment option that was not a FlexShopper lease. The average margin on the products was approximately 23%. More importantly, this means that we are making more wholesale profit per day on FlexShopper.com than we are spending on daily marketing. Our next steps are fourfolds. First, we will continue to add additional payment options to FlexShopper.com so that almost every visitor can find a payment option that fits their credit profile. Whether it is a prime consumer looking for a 12-month deferred interest offering or a near-prime customer looking for pricing lower than our traditional lease-to-own product. As we have mentioned previously on these calls, we are monetizing less than 1% of the unique visitors to our site. More payment options lets us monetize the visitors that are already coming to FlexShopper.com. Second, we will continue expanding the number of SKUs on our site to provide our customers with a wider range of goods, both from a price perspective and from a product selection perspective. We want to continue to follow a no-inventory dropship model. Therefore, our merchandising team is adding manufacturer, distributor, and shipping partners that broaden our reach into the higher-margin appliance, furniture, and specialty goods markets to complement our traditionally strong electronics presence. Third, given that the margins on goods sold via other payment options are leased from FlexShopper per day is greater than our daily marketing spend, we are continually but prudently and cost-effectively increasing our marketing spend. This will allow us to grow not only the amount of goods sold on the site, but also the amount of goods leased from us on the site. As I mentioned, this venture only launched in mid-February, but we are excited about the runway in front of us. Finally, we launched the first of what we expect will be numerous microsites in early March, focused on individual product verticals that will expand our reach and efficiently adding new traffic to the FlexShopper ecosystem. Using generative AI, the goal is to quickly expand beyond the legacy FlexShopper.com marketplace experience to create streamlined sites for expediting item purchases and lease fulfillment. Our first was focused on gaming computers and consoles as that is a core competency, The microsites launched this year will range from jewelry to furniture, and over time represent all of the primary verticals for leaseable goods. Moving past the digital marketplace, FlexShopper continues to roll out the lease offering into new locations. Since the end of 2023, we have expanded into an additional 720 units through today, with an additional 580 more planned through the middle of May. And of course, further opportunity lies in improving the in-store leasing process with our current retailer partners. With another long-term partner, we're exploring how we can originate more leases together and are piloting an improved leasing and checkout process in a subset of locations that is currently sustaining an over 200% improvement in lease-through rate. After a bit more refinement and testing, we plan on rolling out the improved process into approximately 1,600 stores by the end of the summer. Finally, before I hand off the call to our CRO, I want to mention the recent positive support from our lender. Last Wednesday, we closed on a new credit facility that increased the funding commitment from $110 million to $150 million, pushed the maturity date to April 2027, and decreased our interest costs by 2% per year. And I'll hand the call over to John Davis to dive into the company's fourth quarter performance.

Thanks, Russ. As we have discussed in previous quarters, We have been focused on improving asset quality, rolling out a retail margin strategy on our FlexShopper.com marketplace, and to grow the business. I'm pleased on our progress on all these fronts. FlexShopper adjusted EBITDA was $23.2 million for 2023 versus minus $536,000 in 2022, which was almost a $24 million year-over-year improvement. For Q4 of 2023, adjusted EBITDA was $8.2 million versus a minus $4 million last year. Helping to drive this improvement in financial performance is our continued efforts on rolling out a retail revenue strategy and our focus on asset quality improvement over the year. Our merchandising team has been working on new relationships with wholesalers, distributors, and manufacturers over the past year to increase the number of products on offer in our online marketplace with higher retail margins. This margin, when originated through a Flex Shopper lease agreement, is recognized over the life of the lease. The resulting financial benefit shows up on our P&L via cost of merchandise sold. The cost of merchandise sold as a percentage of lease revenue is 42.8% for full year 2023 versus 47% in 2022, and 39.9% in Q4 of 23 versus 44.7% in Q4 of 2022. This was a $3 million benefit in Q4 of this year versus last year. As Russ was mentioning earlier, in Q1 of 2024, we launched a new initiative to offer alternative partner payment solution options on FlexShopper.com to broaden our reach to a wider set of customers both above and below our current credit segment served by the FlexShopper lease. With our expanding retail margin on products offered online, Any additional sales from existing website traffic are immediately accretive. A large percentage of our current website traffic does not convert today due to the client applicants or non-spenders looking for a better deal. By offering a broader range of payment solutions, we expect to increase website sales, which will result in higher retail margins that is immediately recognized and received. For the first two months that we have been offering other payment options, we have sold an additional approximately $750,000 on our marketplace, with a markup of over 20% on cost of goods sold. There is significant opportunity to expand into higher product price ranges and new product categories, as well as the opportunity to reinvest this retail margin into additional marketing to drive more traffic to our website, which will also have a halo effect on lease originations. As we continue to look to improve conversion, We are increasing the investment into generative AI content creation, targeted response models that will identify the most relevant product and payment solutions for a customer, and a wider selection of products that have a broader appeal to our potential customers. In regards to our efforts on asset quality, we have made significant strides on underwriting and front improvements over 2023. Full-year lease bad debt as a percentage of lease revenue was 32.2% for 2023 versus 37.1% in 2022. For Q4 2023, this was 30.9% versus 40.2% in Q4 of last year. This was a $4.4 million benefit in Q4 this year versus last year, which is a 30% year-over-year reduction in bad debt. Numerous new strategies have been deployed over the course of 2023, and this work is ongoing. Coming out of higher price inflation in 2022, we tightened our underwriting policy to control asset quality, which resulted in lower lease originations. However, I am pleased to report that Q4 lease originations increased year over year for the first time since Q2 of 2022, while keeping conservative underwriting standards in place. Lease revenue is spread out for up to 12 months over the life of the lease, so there will be a lagged effect on lease revenue from these larger origination levels. Our risk and fraud modeling continues to evolve and improve with the use of online search and navigation patterns, part contents, and continuous testing of third-party data sources, which are all combined into new machine learning-driven models and strategies which identify riskier customers on a real-time basis. Our partnership point of sale lease channel also continues to experience growth. We have launched a new strategic partner in the tire space in Q1 of 2024, which is expected to significantly increase the storefront count, offering flex shopper payment solutions. And we continue to expand within our existing partner networks as they expand their various footprints. As of December 31st, 2023, we saw a 51% year-over-year increase in storefronts. and our current rollout pipeline suggests an estimated growth of an additional approximately 50% this year. We're also expecting growth from other retailer websites that offer Flex Shop releases via credit waterfall partnerships. Our goal is to provide a platform of sustainable and profitable growth. We have heavily invested in a strong leadership team, a robust technology stack, making the use of the latest tools available to the marketplace, and a continuous focus and investment on asset quality and fraud prevention. I am pleased with what Flex Shopper accomplished in 2023. We are poised to continue this momentum in 2024. I would like to also thank our team members who have worked very hard over the past year to achieve these results. With that, let me turn the call back to the operator for Q&A.

Thank you. We will now 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 star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Scott Buck with HC Wainwright. Please proceed with your questions.

Hi, good morning, guys. Thanks for taking my questions. Russ, I was hoping we could just kind of get an update on the state of the consumer and maybe any shifts you're seeing in demand or payment trends that are worth pointing out.

Sure. So, as we've mentioned in the past, Scott, there tends to be some seasonal changes that always occur as we come into this tax refund season. We always see the lighter demand at the beginning of the year. Part of what we have done by moving to the additional payment options on our site is try to find a way to make sure we, in any way we can, try to guarantee that asset-level performance. So part of the payment options that we have on our site is we also have a number of providers below us and that are essentially monetizing our declines. So what we've tried to do is really just lock in on a particular asset level return that we want to hit and then let, as opposed to try to monetize every, you know, visitor at the site that is interested in lease to own, have some of those visitors that may not necessarily fit our criteria flow down to others. So, you know, generally across the board, you know, we've essentially been tightening, but not so much in response to what we've seen from a consumer perspective, but more based upon what we want to achieve from an asset level perspective. Great, that's helpful.

On the other payment options on the site, I'm curious, are you adding items that would not typically be leasable that people can now pay for outright, or are we not seeing, I guess, that kind of shift in inventory?

No, we're not seeing that type of shift yet. That might be something we look at down the road. Given that Flex Shop historically has had a $3,000 spending limit cap, what we're really focused on now is bringing in goods that, furniture goods, home goods, et cetera, that extend beyond that $3,000 cap to really line up with other payment options. I feel like there's a lot to fill in from that perspective first, especially given the dynamics of drop shipping and especially when it comes to large parcel or LTL shipping for some of these item types. Once we've sorted through some of these other pieces, I think there is a opportunity to move into some of those other goods that aren't traditionally leaseable. I think complementary warranties and other things that can be layered on top that aren't traditionally leaseable. I think there's a A lot more room to grow, but we're just starting with the different sectors we walked through and higher-priced items than what we traditionally had.

Great.

That's helpful.

And then last one for me. Can you remind us what the typical lag is between opening up a new storefront location versus when you actually start to see some meaningful revenue contribution?

Sure. So the dynamic first starts with whether that location has had any type of financing issues. or non-prime financing in it before. To the extent they're a little bit more experienced, it speeds up the process. This most recent rollout that's taking place, we're replacing another non-prime product. So it's a little bit easier adoption plan. There's always the training and different online incentive portals that are necessary to get the retailer up to speed. But given that this latest rollout has had subprime financing in the past, I expect three or four months, and we will be close to max originations out of those stores. Then, of course, we have the lease-to-own lag that takes a while to recognize revenue. But from an originations perspective, we should get there. Certainly by the end of this summer, we should be full steam on this most recent rollout.

Great. I appreciate the added color, and congrats again on the results.

Thanks, Scott. Thank you. Our next question has come from the line of Michael Diana with Maxim Group. Please proceed with your questions.

Okay. Thank you. Russ, could you go over – you mentioned on your retail strategy 720 – another 580, eventually 1600. What exactly do those numbers refer to? What is the strategy in those?

Sure. So, in terms of the store count, so since the end of 2023, we've rolled out into additional 720 store locations. And these are locations where we're the exclusive lease-to-own provider, and they're in the automotive segment, goods and services segment. We've done 720 through today. There's another almost 600, the 580, that will continue to roll out in those locations.

Okay. And the 1,600 is, I think you said improved pricing or something.

We already have a partner that has about 1,600 locations. This is where we're working together with them to find a new improved process to increase the lease throughput. We're running a pilot with them in the Tampa market at the moment in a number of locations there. And the lease throughput is up a little more than double what we experienced previously. So this is just an easier consumer experience, tied in closer to the point of sale systems, et cetera. So we're excited to continue to work and refine the technology there and then eventually essentially re-roll out into that partner's 1,600 stores, hopefully achieving the same results we have in the pilot, which is a doubling of originations.

Okay. And then when, like you're in 2024, as far as relative contribution goes, between your FlexSharkBird.com website, the retail, what would be the order of contribution among those strategies, would you think?

Sure. So, you know, given what we're seeing on the online site and the ability to, you know, increase marketing spend because we have this high margin on goods and we've added these other payment providers, you know, we expect marketing spend in that channel. which is offset by the wholesale margin, but we expect that to more than double by the end of the year. On a cumulative basis, you know, to the same extent we feel like We'll call it the non-marketplace, the retailer model. Given this extra store rollout, given some of these new initiatives, we'll probably see similar impacts. Obviously, the repeat market dynamics are a little bit different. So from a new customer perspective, I expect it to be a new Flex Shopper customer perspective. I expect it to be about 45% online and 55% retail. From a total customer perspective, as we mentioned before, the retailer customer doesn't repeat quite as much. We expect it to be more two-thirds online, one-third retailer.

Okay, great. That's very helpful. Thanks a lot.

Thanks, Michael.

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Russ Heiser for closing remarks.

We appreciate everyone dialing in this morning. I want to thank the team here at Flex Shopper for all their hard work over the past quarter, the results generated, and we look forward to another great quarter.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.