FlexShopper (FPAY) has broken down, and we think the momentum is going to last and given the amount of influence that kicks in, the race is likely to run well into the black.
FlexShopper is an online version of the lease-to-own market that allows customers with low or no credit score the opportunity to purchase durable consumer goods such as electronics and home appliances through short-term (one-year) leases. The company has had a good run and now returns a GAAP profit:
Needless to say, the shares have broken: 
The market opportunity is great, from the December 2019 IR presentation:
The company operates online through two main channels, it is its own B2C website (FlexShopper.com), a B2B channel that sells through partners, from 10-K:
And here is the segment revenue division, from November IR presentation:
They have a mobile app and offer retailers a cash payment technology, which is good for 10% of the company's revenue.
A business model that relies on consumers with poor or no credit rating is responsible for generating a lot of bad debt, and in fact the company assumes a hefty 33% interest rate, from the November IR presentation ::
This is not as problematic as it may seem because it is assumed in the core business metrics and the model builds on it. It may also be remembered that the leased goods belong to the company until the client has paid for the entire lease.
We are particularly concerned about business models that contain a lot of leverage. At first glance, FlexShopper does not appear to qualify because of the modest gross margins (mid to high 30s).
However, the leverage generated by the platform technology is called LTO Engine, which operates the primary sales channels and is very well scalable as a result of:
- The absence of inventory costs and risk when order fulfillment, distribution and shipping are performed by retail partners.
- The company operates no brick-and-mortar stores and serves customers throughout the United States.
- The LTO engine does not require much in the form of additional operating costs as sales increase.
- The cost of acquiring customers falls quite dramatically, they have fallen by 75% in three years.  On the latter, from the November presentation of the IR:
There are several reasons for this dramatic drop in customer acquisition:
- The introduction of the B2B channel (good for 33% of the company's revenue in the third quarter up from only 10% a year since the quarter), which has zero acquisition cost.
- Growth in repeat customers (good for 40% of rental origin in Q3).
- The cash payment option (good for 10% of revenue in Q3).  And this leads to results, a pretty dramatic upward trend in operating margins:
And there is another benefit of the rapidly growing B2B channel, earnings PR:
Improved lease portfolio performance as a result of B2B retail channel growth. Leases originate in the company's B2B retail channel and have historically lower crime rates than the B2C channel. This affected gross profit, which increased by approximately 700 basis points during Q3 2019 to 37% compared to the same period last year.
So more business coming through the new B2B channel has a dampening effect on criminal matters, and raises gross profits in process. We could not find criminal charges, but the increased gross profits are real.
Here's another view with adjusted EBITDA, from the November presentation of the IR:
From 10-Q:  Accounts receivable and allowance for doubtful accounts – FlexShopper seeks to collect Amounts owed under their leases from each customer on a weekly or monthly basis by debiting bank accounts or credit cards. Accounts receivable mainly consist of rental payments that are currently due to FlexShopper being due, as FlexShopper has not been able to collect in the manner described above. Provision for doubtful accounts is based on revenue and historical experience with balance charged as a percentage of revenue. Accounts receivable consisted of the following from September 30, 2019 and December 31, 2018:
The reimbursement is a significant percentage of the balance because FlexShopper does not charge any customer accounts until it has exhausted all collection efforts respecting each account, including attempts to transfer items. In addition, while collections are being pursued, the same criminal customers continue to incur weekly charges until they are charged that such charges are fully reserved. Accounts receivable charged were $ 9,838,873 and $ 19,215,275 for the three and nine months ended September 30, 2019, and $ 6,766,866 and $ 14,209,066 for the three and nine months, respectively. September 30, 2018.
So the compensation for dubious accounts increased significantly, so we're not sure if the implied reduction in criminal conditions as a result of the rapid growth of B2B actually materialized, but there is no more information in 10 -Q about this.
Here are the most important metrics, from earnings of PR:
- Net lease income and fees 1 increased 52.4% to $ 22.3 million from $ 14.6 million.
- Gross rental spread increased $ 4.7 million, up 37.9% to $ 17.1 million from $ 12.4 million.
- Origin rent increased to 36,531, up 25.2% from 29,185.
- The average value of origin increased to $ 468 from $ 424.
- Net income was $ 1.4 million compared to a net loss of $ (2 , 7) millions.
- Net income attributable to ordinary shareholders was $ 0.8 million, or $ 0.04 per diluted share, compared to $ (3.3) million, or $ (0.56) per diluted share.  Gross profit increased 84.4% to $ 8.2 million from $ 4.5 million.
- Adjusted EBITDA 2 increased to $ 3.2 million compared to ($ 1.0) million.
The company generated 38% more leases in the third quarter (y / y), much of it due to the rapid growth of the B2B channel. No doubt this was a huge quarter. The company had a massive revenue hit with EPS that came in at $ 0.15 better than expected at $ 0.04.
Once again, the guidance has been increased, from the November presentation in IR:
Cash flow looks worrying from the above TTM perspective, but in the first 9 months of 2019 there was actually a positive operating cash flow of nearly $ 4M, quite an improvement over last year's first nine months which experienced an operating cash flow at $ 3.8 million. from 10-Q:
Accounts receivable run significantly (+ $ 26.67M), provisions for doubtful accounts run significantly (- $ 25M) and then there is $ 35.7M outflow from lease merchandise, 10-Q:
Lease Merchandise – Until all payment obligations for ownership are fulfilled in accordance with the lease, the company maintains ownership of the lease. Rental goods consist mainly of home furniture, consumer electronics, computers, appliances and household accessories and are booked at net cost after accumulated depreciation. The company depreciates leased goods using a straight-line method over the current contract period for a consumer to acquire ownership, usually twelve months with no sales value. When transferring ownership of goods as a result of satisfying their lease obligations, the related cost and accumulated depreciation are eliminated from the lease negotiations. For leased goods returned or expected to be returned either voluntarily or through repossession, the Company provides a write-down reserve for the undrawn balance of the item net of estimated salvage value at a corresponding cost to the cost of rental income. The cost, accumulated depreciation and write-downs associated with such goods are depreciated by determining that no salvage value has been obtained.
This explains the core accounting mechanics of the business model, which is quite important given the high criminal conditions, even though the shift to the B2B channel dampens this. The business model is sensitive to these and criminal conditions can very well increase when the economic headwinds turn into headwinds. This is still a significant risk for the company.
The company has only $ 3.17 million in cash at the end of the third quarter (down from $ 6.14 at the end of 2018), and the company has significant debt ($ 24 million) that it paid $ 950K in interest expense in the third quarter.
The company also has $ 2 million in credit limit and management does not expect to have to raise equity "anytime soon."
It is no surprise that the company had to rely on debt and equity financing, there was a huge $ 11.5 million share offer (at $ 1 each) in September 2018, with 5.75 million subscription rights attached.
 These subscription rights are now being removed from the market for 0.62 shares each, so there will be an additional 3.56 million shares, taking a total of over 20 millions.
 Analyst expects EPS to come in at $ 0.14, turning to next year's profit of $ 0.08.
With adjusted EBITDA rallied to $ 8M +, the shares are trading at an EV / EBITDA multiple of 9 times, and given the likelihood of a rapid increase in EBITDA next year, the shares are really not expensive.
The company not only grows fast, it also produces a lot of utilization in a number of smart ways, such as their B2B channel and cashier technology.
The management suggested that criminal rates, which are a clear risk, are improving as a result of more revenue coming through the B2B channel which tends to have lower crime rates, but if financial conditions become somewhat, this is still something to look at .
In view of growth and influence, we believe the shares are really not expensive and will probably continue.
Disclosure: I / we have no positions in any of the listed shares, but may initiate a long position in FPAY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with any company mentioned in this article.