FlexShopper, Inc.
Q3 2018 Earnings Call Transcript

Published: 5 Nov 2018

[Operator:]

Greetings and welcome to the FlexShopper Third Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman. Jeremy Please go ahead.

[Jeremy Hellman:]

Thank you, operator. This presentation includes forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our current views with respect to future events and involve inherent risks and uncertainties which could cause actual results to differ materially from our historical experience and present expectations or projections as a result of various factors, including those risks and uncertainties described in the risk factors in management's discussion and analysis of financial condition and results of operations sections of the Company's most recently filed annual report on Form 10-K, subsequently filed quarterly reports on Form 10-Q. When combined many but not all of these statements by looking for terms such as belief, expect, look, project, may, will, should, would, could, seek, intent, plan, estimate, anticipate and similar terms. Our statements other than statements of historical facts, included during this conference call, including statements regarding our strategies and prospects, financial condition, operations cost, plans and objectives are forward-looking statements. I urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution listeners not to place undue reliance upon any such forward-looking statements which represent our estimates and assumptions only as of the date here off. Accept as required by law, we undertake no obligation to update any forward-looking statements, whether written or oral that may be made from time to time, whether as a result of new information, future developments or otherwise. We anticipate a subsequent events and developments will cause our views to change. With that, I would like to turn the call over the FlexShopper's CEO, Brad Bernstein. Go ahead Brad.

[Brad Bernstein:]

Thank you, Jeremy, and welcome everyone to our 2018 third quarter and three months ended September 30th earnings call. I'll start by providing some several business highlights from the third quarter. Then I'll hand the call to our CFO, Russ Heiser, who will discuss our financial results and guidance in more detail. And then, we'll open the lineup to your questions. The third quarter was another quarter of solid growth for FlexShopper. In the third quarter, we achieved a 27% increase in gross sales and 90% increase in lease originations compared to the same quarter last year. The continued growth in lease originations is a key metrics because originating more leases drives our revenues, our gross profit dollars and ultimately, our profits. To the third quarter, we had a $600,000 increase in marketing expense compared to the same period last year and these were wisely invested dollars and within our budget. For the quarter, our average cost to acquire a customer was at its lowest ever in the Company's history at $133 compared to $249 for the same quarter last year. This decrease is the result of continued optimization of our marketing and underwriting strategies combined with increased lease originations through retail partners in particular our recent large scale tires for rollout. We continue to grow our direct-to-consumer channel within an approximately 50-50 split between direct response TV and digital marketing. I'd also like to add importantly that in the third quarter of 2018, we added 11,973 new customers, compared to 4,001 in the same period last year. These new customers ultimately expand our returning customer base and our revenue potential going forward. As many of you are aware on this call at the end of the September, we completely a $10 million growth capital raise, which was primarily for working capital to continue our pace of growth. Growth plus rightsizing our overhead are key components of our proactive plan to become EBITDA positive and profitable. Hence in October, we initiated a cost reduction plan with up to $1.4 million in annual cash savings that includes personnel reductions that we've already made. As we move forward, our efficient on-line and virtual in-store model is designed to enable us to grow without adding large amounts of infrastructure and expense. Our recent 730 location targets for rollout which we completed in the third quarter also contributed to our significant third quarter growth in lease originations. We are very pleased with the progress of our tarsal partnership and its contributions to our business. As a reminder of our retail approach to help retailers save the sale with consumers that don't have sufficient cash or credit to purchase their goods, we were able to execute this rollout quickly with our new integration-less retail process flow. This process relies on our mobile app and requires minimal retailer resources to execute. Our method has key competitive advantages since it requires no equipment in stores and no integration in the retailers' point-of-sale system. From start to finish, the lease on transactions executed through our mobile application and completed with the consumers entering a virtual credit card number at the PoS to pay for the item. In addition, we just released a new version of our app which has an improved user experience, which includes scanning an applicant's drivers' license to prep-populate fields in the application. Our customer-centric approach has been positively received because retailers are always juggling many initiatives so one that requires no integration and minimal employee effort our attractive features. We are promoting this strategy heavily in our retail B2B marketing efforts to acquire other retail partners. Another milestone for the Company is the patent we receive from the United States Patent and Trademark office, the patent is for a system that enables e-commerce servers to complete LTO transactions through their e-commerce websites. We believe this patent will constitute a significant differentiator for us in the LTO industry. I'm now going to handle up to Russ Heiser, our CFO to discuss our financial performance and metrics in more detail and our 2019 outlook. Then, we'll open the call for some questions.

[Russ Heiser:]

Thanks, Brad, and good morning. On the investor portal of our website, we've provided an updated management presentation for review. Those of you not as familiar with the FlexShopper stories spend some time with it. Before I cover management's guidance, I want to point out a few the slides in the presentation. Going to start on Slide 15 when you draw your attention to the charts on the bottom of the page. On the left is the ratio between gross revenues and previous year originations, which you can see has trended greater than two times and tied into our realized markup on our lease portfolio. On the bottom righty is the ratio between gross profit and previous year originations which strength close to the realized cash return that we experience on the leased portfolio. These metrics are important because our investors can ease these trends to reliably predict forward revenue and gross profit based on the growth originations that we've been reporting each month and from the basis for our revenue and gross profit guidance. Turning to Slide 16, our customer lifetime value continues to increase overtime and customer acquisition costs continue to decrease. The Q1 2015 vintage average customer has reached over $3,000 in lease purchases, extrapolating marketing efficiency based upon our most recent customer acquisition cost. Each customer will generate about $500 of gross profits and for every one dollar of marketing spend, the Company generates $3 dollars of forward gross profit. In addition that ratio continually improved as both the customer vintage is mature and the Company continues to lower customer acquisition cost. Just this year there has been approximately a 30% improvement in customer acquisition cost as shown on the bottom of page 16. Finally moving to Slide 26 our path to profitability. Given their originations that we expect to have for full-year 2018, by what that means for both revenue and gross profit in the subsequent year and factoring in the operating expense changes that Brad outlined earlier, we have constructed our initial guidance. Growth originations are greater than 52 million for full-year 2018. Gross revenues are greater than 105 million for full-year 2019. Gross profits are greater than 24 million for full-year 2019 and over $3 million in EBITDA for the full year 2019. Now, let me turn the call back over to Brad for some final thoughts.

[Brad Bernstein:]

Thanks, Russ. I'd also like to add and I'm extremely pleased to report that our pace of growth continued through October 2018. October gross lease originations were 5 million, an increase of 82.6% from 2.7 million during the same period in 2017. Cumulative gross lease originations for the 10 months ended October 31, 2018 were 35.8 million representing a 51.4% increase from 23.6 million in the same period in 2017, a very significant growth. Overall, we are pleased to report another quarter of continued revenue and lease origination growth. In the quarter, the combination of well executed underwriting and marketing initiatives and increased retail lease originations resulted in our lowest customer acquisition costs ever. With our recent 10 million growth capital raise and continued strong momentum through October, we are ready to execute for the holiday season, during which we typically originate up to 35% of our annual lease originations. We are excited, as our record lease originations are expected to translate into revenues and gross profits in future periods and give us the confidence to provide the financial guidance for 2019 that rest is presented. Please keep in mind that this guidance is based on a go forward of our business based on historical performance and we have not accounted for new retail rollouts or contributions from new growth initiatives, which are progressing. Since we started this business just five years ago, the need for better nonprime and least own options remains fast and deeply underserved. We believe we are well-positioned to continue to penetrate this market with our omni-channel approach for retailers and consumers, further expansion of our B2C and B2B channels and continued success in managing our innovative technology underwriting and customer acquisition costs. Before opening up to question, let me add that we had updated our investor presentation as Russ mentioned on our IR page where you will find updated metrics on our business, including solid continued portfolio performance and quarterly trends. With that, we'd be happy to take your questions. Operator.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Steve Emerson from Emerson Investment Group. Your line is now live.

[Steve Emerson:]

In particular, I'm very pleased to see year guidance and confidence in the future. A small suggestion, I was only able to find the Investor button and Investor presentation at the usual spot, which is at the top of your webpage. I just scroll down several pages through all your product categories for additional information. So please put an Investor button at the top of your top bar on your webpage. Thank you.

[Brad Bernstein:]

Absolutely, and Steve, thanks for participating today. I think when you go to the IR page, you will see we've taken you up on your suggestion.

[Operator:]

Your next question is coming from Walter Schenker from MAZ Partner. Your line is now live.

[Walter Schenker:]

Maybe one quarter premature, the rollout of your B2B programs with a tire retailer. I was wondering, if you can give us some feel for the metrics as to both client acquisition costs and maybe more significantly and this one maybe too early provision for doubtful accounts as to whether or not when you're working B2B or something like this, those type of metrics might be different than your traditional business.

[Brad Bernstein:]

So, to provide some color and insight to your question. Because of confidentiality, we can't -- we're not disclosing who the retailer is. But I can say, we are very pleased to how the tire rollout is contributing, one, to our lease originations growth. I will say from leading in-store channel in terms of performance and risk performance, the in-store channel always performs better than the online. And particularly when it comes to certain durable goods like tires even appliances, those performed better too. So, we're also extremely pleased with the portfolio results from the tire rollout. They are better than our core online channel which is expected. At the same time in terms of acquisition cost, as I mentioned the decline in our lowest historical acquisition cost ever a $133, which you if you actually compares to other online subprime providers you'll find that their acquisition cost per customer are north of $200. So, it's a pretty significant feet. At the same time, I will say that the retail store rollout contributed and the acquisition cost for those originations is significantly lower than online, but at the same time, I will say that I know that 133 customer acquisition cost is the result of tremendous optimization in our marketing and underwriting, and those trends were significantly evident even before the rollout took place. And by the way even if you look at third quarter results, let me also add that, that we finish that rollout in the third quarter so the effect and contribution of that retail business has not been fully -- has not fully impacted our numbers yet obviously.

[Walter Schenker:]

Yes, just one question. Now that you've put out of 2019 guidance for revenues and just to gross profit and adjusted EBITDA. Could you also address given those numbers, what sort of capital requirements you might have to meet that target?

[Brad Bernstein:]

Sure. So, those numbers are based upon working with what we have. That's the guidance.

[Walter Schenker:]

No, I understand that. So will just take that without any additional programs or anything different and you may have said that, but I may have missed it to meet that numbers I mean nothing else happens, plus or minus. What type of capital requirements you will have given the much higher revenue i.e. are you internally going to be able to generate enough funds to meet that target?

[Brad Bernstein:]

Yes, so the combination of our line of credit, our debt facilities and our recent capital rates, that's the guidance that we've provided to meet, yes. The answer is, yes.

[Operator:]

[Operator Instructions] Our next question is coming from Larry Lytton from Second Line Capital. Your line is now live.

[Larry Lytton:]

As we model the business even beyond the 2019, what type of contributory margin would you assume on incremental revenues?

[Brad Bernstein:]

So, ultimately, we see this business as it matures, you know with contribution margin north of 15%, and obviously with scale, that's what we feel we can achieve 15% and higher.

[Larry Lytton:]

You mentioned the debt facility. What is the debt facility? And also, can just remind us what's the fully diluted share count is now?

[Brad Bernstein:]

Sure, we have up to a $100 million line of credit with Waterfall Asset Management. That is based on eligible receivables. We also have the ability to also provide sub-debt and basically that facility that we used to fund the purchases for the underlying leases. I’m going to let Russ take the capital structure.

[Russ Heiser:]

Sure, including both the approximately 17.5 million of common shares plus the additional 7.5 million shares of preferred Series 2 can convert into that’s roughly the $25 million of current outstanding shares. In terms of additional common share equivalent, as you know there is roughly 6 million of worth that are also outstanding. And if you turn to page, Slide 24 of our investor deck to be filed that walks through all of those common shares and common share equivalents.

[Operator:]

Next question is coming from Jeffrey [indiscernible] with HSB Holdings. Your line is now live.

[Unidentified Analyst:]

I have a few things. On the tire rollout and basically the strategies going B2B, can you talk a little bit more in detail as to some of those things? I know you guys have been at some shows and if there is any more color, you could, you can glean that we could basically try to understand, how much of this can add to the business and what the tire business? I know Brad you said you can’t really disclose numbers, but it's hard to really get a sense for what this business can be. We’re just trying to understand a little better the way to what. Go ahead, sir.

[Brad Bernstein:]

No, I could tell you that we're in discussions with others and you know the bottom line is that, we've heard the retailers and we listen to the retailers. We listen to the consumer. And obviously, I think one of the edges that we have here that I discussed this morning was the fact that, it is a customer centric process. If you talk to these retailers today, they have so much on their plates, that if you put a key in the store where is it going to go. If you're going to use their Wi-Fi, you need permission. So what retailers love about our app and our methodology is the fact that they have to very little. They basically tell the consumer to text the word tires to a number. It's all done on an app and what they even like better is that they also get paid instantly at the point-of-sale. As far as the opportunity within the tire sector, it's very significant. If you go back I believe to that one of the spring issues of modern tire dealer, their feature article was held basically secondary financing and rent to own was changing the industry. So just like all the other traditional retail categories, I know, are looking to take the sale and interest from rent to own, very much the same climate and condition in the whole tire industry. So, we are excited about the opportunity, and as I mentioned, we are in discussions with some others.

[Unidentified Analyst:]

Can you talk about what the competitive climate is like, now that obviously people are certainly getting your new guys, I mean, I would think some of the bigger names or some existing names are going to start investing and try to build up their offerings? Could you talk a little bit more about that?

[Brad Bernstein:]

Well, there's no doubt and in fact if not as if we were the first to strike here. It is a competitive climate, but at the same time there's tremendous runway in the lease to own market in terms of opportunity. It is a $25 billion opportunity for these durable goods, direct to the consumer and through third-party retail. So, there is plenty of room for everyone. At the end of the day, we continue to focus on what the retailers need technology, making it easier for the consumer and the retailer. And I believe and that's why I believe we are getting the traction. If you go to the deck and you will get our product compared to the competitive landscape to theirs, there are many compelling reasons why retailers would want to use ours. So, again, this is -- we went into this business five years ago because of the tremendous opportunity because of the ability to address the leased on business online and with technology. And we're making obviously significant inroads.

[Russ Heiser:]

One point on Page 7 of our presentation maybe the best indicator of understanding how the B2B business is doing is, we do breakout the retails channel now in detail separate from both online and the payment plug-in which is the same to sell on third party website. You can see the retail business.

[Unidentified Analyst:]

I see that yes 0.8 million right.

[Russ Heiser:]

Right versus last year and I think more important is to understand, when you look at the number of retail stores and as they come on, the bulk of that happens in the third quarter of this year was some other taking place at the tail end of 2Q. So, that's with the very sort of short time period of retail door increases that gross with lease originations through that channel has increased pretty significantly.

[Unidentified Analyst:]

Let me ask you the still I mean obviously you look at the top line of this business. You guys have grown it tremendously well. You've had to cough a lot of capital to do it, and when I look at the numbers and you look at when you go down to the operations and you look at the operating income, you look at the cash flows, and you would think that things would be improving, I think a little more. Maybe you can point out what I'm some of the things that I'm comparing cash flows 2018 versus '17 just so basically the bottom line operating income the numbers, the numbers all have gone the worse. So why don’t you talk through why that is?

[Russ Heiser:]

Sure, I think it's important to understand our model and that the financials that we are looking at today is really based upon the origination to that took place in the prior year, aligned with the marketing spend and the operating expenses that we have currently to support even more origination. So, there's always a misalignment in our financial statements. You have the costs for the current period and you have their revenue from essentially leases generated a year ago, that’s why we thought it was so important starting with this call to start giving this guidance. So it was more clear as to what originations growth that we have this year, what that means in terms of revenue for next year, what that means in terms of gross profit for next year, and finally what that means in terms of EBITDA. But in all these scenarios, once again, the expenses are really -- our current period of expenses and the revenues were flat leases, the revenue from leases originating your prior. So, there is always a mismatch there, and I’m happy sort of off line to take you those, those numbers, but that's really I think what we see at this point. Whenever we have substantial growth, you will see it in terms of originations, but it takes a while to see in terms of both revenue and gross profit, yet our expenses in order to support that significant origination growth shows up in our financial statements. So, once again, we feel there is still…

[Unidentified Analyst:]

No, I was just going to say I just think there is a misunderstanding with that. When you look at how may be the marketplace views you, not at the stock marketplace because and you look at obviously stock down today. But I think people maybe don't understand or this is helpful for people to understand the model, and obviously giving guidance is a helpful thing to see that there is a path to profit.

[Brad Bernstein:]

Right, one of the quick -- that’s the reasons for some of the ratios that we put in place to understand what -- so people could understand what revenues -- how revenues in gross relate to prior year origination so that people better understand that model. But we will take your point that we need to make sure people are well informed on how our financial statements work.

[Russ Heiser:]

Jeff, I think there is no doubt that there is a disconnect, I would also like to put in context the its not -- if you look at other businesses addressing this consumer and have I mentioned their online supply businesses have a customer acquisition cost of over $200, and at the same time added a gate, part of what contribute to our business is this repeat dynamic right. So, it's not unusual for business to invest in the marketing dollars right. And if you look at the customer, our lifetime value of the consumer rights ultimately this consumer will throw off significant cash to us. But those upfront investments, especially when you start this business out of the gate like we did just a little five years ago and you don't have that repeat base it does mute the earnings. But the bottom line is today is that with our core you know we reach this critical mass between repeat and generating new and working within the confines of a budget that we're able to give this positive guidance for next year. And obviously, that's what it's all about.

[Unidentified Analyst:]

I just want one last question. And you know we've been holder for a while and now we’re big fans of the Company, but one thing that definitely, I don't think was doing real well is this whole capital situation from, our company valuation the stock was much higher. You got points where you got pressed and I'd like to better understand. Why -- what that process was like? And why there's so much you know obviously every existing holder got really diluted? And why it was done at such sort of a higher selling price?

[Brad Bernstein:]

Well, that's an interesting question. We had -- by the way, we did go to a whole process. There are certain things that I can't say and can't say, we did go to a whole process that started at the beginning of the year.

[Unidentified Analyst:]

I know that.

[Brad Bernstein:]

At the same time, there frankly I don’t -- the dynamics of our cash structure before this equity raise being kind of just hybrid public private having significant shareholder in us and hardly any liquidity in the stock, probably not the best dynamic and frankly didn’t service well in terms of raising money from private institutions that we are looking for future that you can't give in a public company. And then obviously the fact that, our stock doesn’t have a lot of trading or liquidity also difficult from a doing a raise in this micro cap small cap climate, so I think at the end of the day that this obviously with more liquidity in the stock obviously this path will service and ultimately obviously the performance of the Company when is the day right, that's what it's all about. But I think this hybrid structure between having some very significant investors in the Company, very little float didn’t service well. So, at the same time, we are -- now that we do have trading in the sock, we are looking to share our story, create more buying, and we're embracing the fact that we are you public and using the public markets. So, the floor win we would go out and share our story, the issue was, well, love your company, but how do I require stake if you are trading 4000 shares a day. So I think…

[Unidentified Analyst:]

There won't be a problem anymore Brad. So, now you guys got at least [Multiple Speakers]. Just take care of itself.

[Brad Bernstein:]

And look, I'm in the same boat. I started this company, and yes, it's a not -- it's a tough, it's a tough thing, obviously. And I think the -- I think that cash structure did not serve us as well. And going forward, we're looking to make sure that our current prep structure does.

[Operator:]

Thank you. With that, let's turn it back to management for closing remarks.

[Brad Bernstein:]

Yes, so I just want to thank everyone for joining us today. Appreciate the support. We look forward to speaking with each of you again early next year and watch out for our releases as the business progresses through the fourth quarter and into next year. Thanks again.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.