Q3 2024 FlexShopper Inc Earnings Call

Unknown Executive: Ladies and gentlemen, good morning and welcome to the FlexShopper Inc. Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.

Ladies and gentlemen, good morning, and welcome to the Flex Shopper, Inc. Third quarter earnings Conference call.

At this time all participants are in a listen only mode.

Unknown Executive: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded.

A brief 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.

As a reminder, this conference is being recorded.

Andrew Berger: It is now my pleasure to introduce your host, Andrew Berger, from Investor Relations. Please go ahead.

Speaker Change: It is now my pleasure to introduce your host Andrew Bogo from Investor Relations. Please go ahead.

Unknown Executive: Thank you, Ryan.

Andrew Bogo: Thank you Ryan and good morning, everyone welcome to Flex shoppers third quarter 2024 financial results Conference call with me today are Russ Heiser, our Chief Executive Officer, and John Davis, Our Chief operating Officer, we issued an earnings release, this morning, which will be which we'll be referencing during today's call. Our earnings release can be found on our own.

Andrew Berger: And good morning, everyone. Welcome to FlexShopper's third quarter 2024 Financial Results Conference call. With me today are Russ Heiser, our Chief Executive Officer, and John Davis, our Chief Operating Officer. We issued an earnings release this morning, which we'll be referencing during today's call. Our earnings release can be found on our investor relations section of our website. We will be available for Q&A following today's prepared remarks.

Andrew Bogo: Oster relations section of our website, we will be available for Q&A following today's prepared remarks.

Andrew Berger: Before we begin, I would like to remind everyone that this call will contain forward-looking statements regarding future events and financial performance, including statements regarding our market opportunity, the impact of the growth initiatives underway, and future financial performance. These statements 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 most recent 10-Q. 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 may undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise.

Andrew Bogo: Before we begin I would like to remind everyone that this call will contain forward looking statements regarding future events or financial performance.

Andrew Bogo: Statements regarding our market opportunity the impact of the growth initiatives underway and future financial performance. These statements 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 most recent 10-Q.

Andrew Bogo: 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.

As required by law, we may undertake no obligation to publicly update or revise any of these statements whether as a result of any new information future events or otherwise.

Andrew Berger: 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 of these measurements and certain additional information are also included in today's earnings release, which is also available on the Investor Relations section of our website.

Andrew Bogo: During today's discussion of our financial performance, we will provide certain financial information that contains non-GAAP financial measures under SEC rules.

Andrew Bogo: 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 of these measurements and certain additional information are also included in today's earnings release, which is also available on the investors relations section of our website. This call is.

Unknown Executive: This call is being recorded and a webcast will be available for replay on our Investor Relations section of our website.

Being recorded and the 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 Heizer Russ go ahead.

Russ Heiser: I will now turn the call over to our CEO, Russ Heiser. Russ, go ahead.

Russ Heiser: Thank you, Andy. Thanks to everyone for joining us for this morning's call to review our third quarter performance. I'll start today's call with an update on the growth strategies we are pursuing, and then we'll turn the call over to JD, who will discuss our operations and financial results in more detail before we take your questions. Third quarter was an exceptionally busy period, demonstrating the growing momentum underway across our business. As a result, we believe 2024 is shaping up to be a transformative year for FlexShopper, as the strategies we are pursuing to profitably grow our business take hold, and more retail partners and consumers recognize the value of our unique payment solution.

Russ Heizer: Thank you Andy and thanks to everyone for joining us for this morning's call to review our third quarter performance.

Russ Heizer: I'll start today's call with an update on the growth strategies. We are pursuing and then will turn the call over to J D, who will discuss our operations and financial results in more detail before we take your questions.

Russ Heizer: Third quarter was an exceptionally busy period, demonstrating the growing momentum underway across our business. As a result, we believe 2024 is shaping up to be a transformative year for flex shopper as the strategies, we are pursuing to profitably grow our business take hold and more retail partners and consumers recognize the value of our unique payment solutions.

Russ Heiser: More importantly, our strong third quarter results reflect the hard work and commitment of our team members. As we mentioned last quarter, we pursued strategies to expand our financing options, which have resulted in a full suite of payment solutions within our digital marketplace. Today our platform consists of traditional lease-to-own offerings, unsecured consumer loan products, and a traditional e-commerce retail business with a growing range of financing options. In addition, we offer a diverse payment solutions to customers directly through our website, as well as through partnerships with leading e-commerce and brick-and-mortar retailers in the automotive, electronics, and pawn spaces.

Russ Heizer: More importantly, our strong third quarter results reflect the hard work and commitment of our team members.

Russ Heizer: As we mentioned last quarter, we are pursuing strategies to expand our financing options, which have resulted in a full suite of payment solutions within our digital marketplace.

Today, our platform consists of traditional lease to own offerings unsecured consumer loan products in our traditional e-commerce retail business with a growing range of financing options. In addition, we offer a diverse payment solutions to customers directly through our website as well as through partnerships with leading e-commerce and brick and mortar retailers in the automotive electron.

Russ Heizer: <unk> and PON spaces.

Russ Heiser: After making meaningful investments across our business, including enhancements to our internal underwriting collections and account servicing capabilities, we are now focused on pursuing proactive growth strategies within our B2C and B2B channels.

After making meaningful investments across our business, including enhancements to our internal underwriting collections and account servicing capabilities. We are now focused on pursuing proactive growth strategies within our b to C and D to be channels, our third quarter of 2024 results demonstrate the successful transformation underway as we increased total revenue 23.

Russ Heiser: Our third quarter of 2024 results demonstrate the successful transformation underway as we increased total revenue 23% to a quarterly record of nearly $39 million, increased adjusted EBITDA by 45% to a quarterly record of more than $12 million and produced net income attributable to common stockholders of $1.2 million or $0.05 per diluted share. So let's look at the third quarter's performance in more detail, starting with the growth in our B2B channel. Trends within our B2B business are accelerating as we partner with more payment platforms and retailers. To date, we have announced new partnerships with leading payment platforms, including Paid Tomorrow, Tariff Finance, Versatile Credit, and PayPossible.

To a quarterly record of nearly $39 million increased adjusted EBITDA by 45% to a quarterly record of more than 12 million and produced net income attributable to common stockholders of $1 2 million or five cents per diluted share.

Russ Heizer: So let's look at the third quarter's performance in more detail starting with the growth in our <unk> channel.

Russ Heizer: Trends within our <unk> business are accelerating as we partner with more payment platforms and retailers to date, we have announced new partnerships with leading payment platforms, including pay Tomorrow Terrace finance personal credit and pay possible as these platforms integrate flex shopper into their payment waterfalls, we can leverage their networks to provide our leading L. T O solutions to their.

Russ Heiser: As these platforms integrate FlexShopper into their payment waterfalls, we can leverage their networks to provide our leading LTO solutions to their merchant partners. In addition, we continue to pursue retailers directly that need an LTO solution. As a result of our efforts, total lease funding approvals compared to the prior year period increased 33% during the third quarter to $77 million. To date, we have a signed store count of approximately 7,800 locations, nearly 250% increase from approximately 2,300 retail locations at the end of 2023. This includes the upcoming rollout of over 3,700 new locations associated with our recent partnership with the Aftermarket Auto Parts Alliance.

Partners. In addition, we continue to pursue retailers directly that need an L. T O solution as a result of our efforts federal lease funding approvals compared to the prior year period increased 33% during the third quarter $77 million.

Russ Heizer: To date, we've a sign store count or approximately 7800 locations nearly 250% increase from approximately 2300 retail locations at the end of 2023.

Russ Heizer: This includes the upcoming rollout of over 3700, new locations associated with our recent partnership with the aftermarket auto parts Alliance. We have also recently announced retail partnership partnerships with Randy's worldwide and Monroe.

Russ Heiser: We have also recently announced retail partnership partnerships with Randy's Worldwide and Monroe. location growth has exceeded our projections. We have a strong pipeline of potential payment and retail partners. We expect to announce new partners in the coming month. Higher demand for our payment solutions is being driven by the investments we have made to our platform and the growth strategies we are pursuing. In addition, as other lenders have tightened their credit box, we believe we have opportunities to provide our retail partners with the resources needed to capture incremental customers. Looking at our emerging B2C marketplace, we continue to pursue growth strategies to increase sales at FlexShopper.com, which is the leading LTO marketplace in the industry.

Russ Heizer: Location growth has exceeded our projections, we have a strong pipeline of potential payment and retail partners, we expect to announce new partners in the coming months.

Russ Heizer: Higher demand for our payment solutions is being driven by the investments we have made to our platform and the growth strategies. We are pursuing condition is other lenders have tightened their credit box. We believe we have opportunities to provide our retail partners with the resources needed to capture incremental customers.

Russ Heizer: Looking at our emerging DTC marketplace, we continue to pursue growth strategies to increase sales at flex shopper Dot com, which is the leading L. T O marketplace in the industry, we've added new capabilities that allow customers on our website to receive payment options that fit their credit profile in conjunction with this we have broadened the product assortment available for sale on flex shopper Dot com.

Russ Heiser: We have added new capabilities that allow customers on our website to receive payment options that fit their credit profile. In conjunction with this, we have broadened the product assortment available for sale on FlexShopper.com. This expanded marketplace is resonating with consumers and broadens our addressable market to serve more customers, regardless of their credit score. Since launching these capabilities during the first quarter of 2024, we have seen steady growth in retail revenue increase from $780,000 for the quarter ended March 31, 2024, to $1.2 million for the quarter ended September 30, 2024. We continue to test, learn, and adjust our approach to focus on profitably growing retail sales.

Russ Heizer: This expanded marketplace is resonating with consumers and broadens our addressable market to serve more customers regardless of their credit score.

Russ Heizer: Since watching these capabilities during the first quarter of 2024, we have seen steady growth in retail revenue increase from 780000 for the quarter ended March 31, 2024 to $1 2 million for the quarter ended September 32024.

We continue to test learn and adjust our approach to focus on profitably growing retail sales, we plan to expand our marketing spend to drive traffic and increase conversion.

Russ Heiser: We plan to expand our marketing spend to drive traffic and increase conversion. Based on our recent performance and the strategies we're pursuing to grow the FlexShopper marketplace, we expect retail revenue to continue increasing over the coming quarters. We also continue to add more SKUs and product categories to the FlexShopper site to gain a larger share of our customer spend. We continue expanding the furniture category supported by LTL Freight Shipping, and we have launched personal luxury categories such as handbags, sunglasses, and watches. In addition, we continue to look at launching micro sites that have the potential to reach more customers than a single FlexShopper.com marketplace site.

Russ Heizer: As shown in our recent performance and the strategies, we're pursuing to grow the flex shopper marketplace. We expect retail revenue to continue increasing over the coming quarters.

Russ Heizer: We also continue to add more skus and product categories to the flex shop, our site to gain a larger share of our customer spend we continue to expand in the furniture category supported by L. T. L. Free shipping we have launched personal luxury categories, such as handbags sunglasses and watches.

Russ Heizer: In addition, we continue to look at launching micro sites that have the potential to reach more customers in a single flex shopper dot com marketplace site.

Russ Heiser: It's important to note that we do not take inventory of any products offered on our websites. We have developed strategic relationships with distributors and manufacturers who drop ship products directly to customers. We believe this provides us with a competitive advantage by eliminating inventory risks and reducing the capital requirements of our business. This in turn allows us to invest capital, support our technology roadmap, marketing programs, and loan and lease growth. As you can see, positive growth trends are underway. We feel really good about the direction of our business.

Russ Heizer: It's important to note that we do not take inventory of any products offered on our website, we have developed strategic relationships with distributors and manufacturers, who drop ship products directly to customers.

Russ Heizer: We believe this provides us with a competitive advantage by eliminating inventory risks and reducing the capital requirements of our business. This in turn allows us to invest capital support our technology roadmap marketing programs and loan and lease growth.

Russ Heizer: As you can see positive growth trends are underway and we feel really good about the direction of our business.

Russ Heiser: Before I turn the call over to J.D. to provide more detail on our performance, I want to review important actions that we have recently announced, including the patent infringement lawsuits we filed against two of our competitors, the opportunity to redeem our Series 2 preferred stock. and I'll review the proposed rights offering at the end of the call. As we've outlined historically, FlexShopper has invested heavily with both our time and capital to create an innovative next generation LTO platform. And the five issued patents we have received are central to our business and strategy. As a result, we have retained Quintin Manuel to represent the company.

Speaker Change: I turn the call over to J D to provide more detail on our performance I want to review important actions that we have recently announced including the patent infringement lawsuits were filed against two of our competitors the opportunity to redeem our series T preferred stock.

Speaker Change: And I will review the proposed rights offering at the end of the call.

Speaker Change: As we've outlined historically <unk> invested heavily with both our time and capital to create an innovative next generation L. T O platform and the five issued patents. We have received are central to our business and strategies.

Speaker Change: As a result, we've retained quintin many well to represent the company. We filed the initial patent infringement lawsuits in the U S District Court for the Eastern District of Texas against abound in catapult the lawsuits revolve around five key patents granted between 2018, and a presence, which protect flex shoppers online L. T O technology.

Russ Heiser: We filed initial patent infringement lawsuits in the U.S. District Court for the Eastern District of Texas against Upbound and Catapult. The lawsuits revolve around five key patents granted between 2018 and the present, which protect FlexShopper's online LTO technology. The lawsuits against Upbound and Catapult were initially filed on September 30th. Investors should read our complaints to gain more insight into our rationale and position. We look forward to these two lawsuits moving forward quickly and we'll be updating investors along the way. going forward, we plan to vigorously defend against LTO competitors who are infringing on our patented technology.

Speaker Change: The lawsuits against outbound in catapult, where initially filed on September 30th investors should read our complaints to gain more insight into our rationale and position. We look forward to these two lawsuits moving forward quickly and we'll be updating investors along the way.

Speaker Change: Going forward, we plan to vigorously defend against L. T O competitors, who are infringing on our patented technologies.

Russ Heiser: The next action I want to review today is the opportunity to redeem 91% of our Series 2 Preferred Stock. This Preferred Stock is the last remaining investment from a fund that is winding down. As a result, we have the opportunity to redeem a majority of our Preferred Stock at a greater than 50% discount to its liquidation value of $44 million as September 30, 2024. We believe this opportunity will enhance shareholder value by improving our cost of capital, simplifying our capital structure, and transferring the discount of $23 million of equity value to our common shareholders, representing approximately $1 per share.

Speaker Change: The next section I want to review today's opportunity to redeem 91% of our series T preferred stock.

Speaker Change: This preferred stock is the last remaining investments from a fund that is winding down.

Speaker Change: As a result, we have the opportunity to redeem a majority of our preferred stock at a greater than 50% discount to its liquidation value of 44 million at September 30 of 2024, we believe this opportunity will enhance shareholder value by improving our cost of capital simplifying our capital structure and transferring the discount of 23 million of equity value to our common shareholders.

Speaker Change: Representing approximately $1 per share. In addition, the redemption of our series T preferred stock will be highly accretive to earnings and will contribute over $4 million to annual operating income.

Russ Heiser: In addition, the redemption of our Series 2 Preferred Stock will be highly accretive to earnings and will contribute over $4 million to annual operating income. The 50% discount is based upon the date of repayment and the option to purchase last for a one-year period. In addition, further payments to the seller of the preferred stock may be required based upon the purchase price and a change of control in the next 12 months or patent settlement announcements in the next 24 months. We are working hard to redeem the Series 2 preferred stock owned in the near term so common shareholders can unlock this significant value.

Speaker Change: The 50% discount is based upon the date of repayments and the option to purchase last for one year period. In addition, further payments to the seller of the preferred stock may be required based upon purchase price and a change of control in the next 12 months or patent settlement announcements in the next 24 months, we're working hard to redeem the series C preferred stock.

Speaker Change: In the near term so common shareholders can unlock the significant value.

Russ Heiser: We believe our third quarter performance demonstrates the significant transformation underway at the company. The positive momentum and favorable trends underway across many aspects of our business are supporting additional opportunities to create significant value for our shareholders in 2025 and beyond. I'm excited by the direction we're headed, and I look forward to updating our investors on FlexShopper's success in the months ahead.

Speaker Change: We believe our third quarter performance demonstrates the significant transformation underway at the company the positive momentum and favorable trends underway across many aspects of our business are supporting additional opportunities to create significant value for our shareholders in 2025 and beyond I'm excited about the direction, we're headed and I look forward to updating our investors on flex shopper success in.

The months ahead before I turn the call over to J D. I Wonder apologize for last minute earnings release, and mentioned that grant Thornton may need additional time to finalize the audit of the Companys third quarter financial results.

Russ Heiser: Before I turn the call over to JD, I want to apologize for our last-minute earnings release and mention that Grant Thornton may need additional time to finalize the audit of the company's third quarter financial results. If so, we plan to file an automatic extension with the SEC later today. We'll file our 10-Q for the quarter ended September 30, 2024, within the five-business-day extension window. We don't anticipate any changes to financial results presented in our earnings release or communicated in today's conference call.

Speaker Change: So we plan to file an automatic extension with the SEC later today, we will file our 10-Q for the quarter ended September 32024 within the five business day extension window, we don't anticipate any changes the financial results presented in our earnings release are communicated and today's conference call. So with this overview I'll hand, the call over to J D to dive into the Companys third quarter performance.

John Davis: So with this overview, I'll hand the call over to JD to dive into the company's third quarter performance. Thanks, Russ.

Thanks Russ.

John Davis: As I've stated on prior calls, our long term plan for our lease business consists of three key items. First, we want to improve overall asset quality from the more challenging time periods where removal of government stimulus, reduced savings, and higher consumer price inflation cause a deterioration in payment Second, we want to continue to roll out our online retail strategy, where we realize product margin revenue on the products we sell on our FlexShopper.com market. And third, we want to take these quality originations and grow them. Our strong third quarter revenue growth and a significant improvement in profitability demonstrates the progress we are making executing against these strategies.

J D: As I've stated on prior calls our long term plan for our lease business consists of three key items first we want to improve overall asset quality from the more challenging time periods, where removal of government stimulus reduced savings and higher consumer price inflation caused the deterioration in payment performance.

J D: Second we want to continue to roll out our online retail strategy, where we realized product margin revenue on the products, we sell on our flex shopper dot com marketplace.

J D: And third we want to take these quality originations and broken.

Our strong third quarter revenue growth and a significant improvement in profitability demonstrates the progress we are making executing against these strategies.

John Davis: Let me start with asset quality. The provision for doubtful accounts as a percentage of gross lease billings and fees was 22.2% in Q3 of 2024. This compares to 32.1% in Q3 of 2023, which was a 990 basis point improvement or a 30.8% reduction year over year. Improved asset quality drove a $2 million benefit in the third quarter provision compared to the same period last year. New Originations continue to demonstrate favorable early payments versus the same period last year, which suggests that the provision level should continue its year over year favorability into Q4, absent any unforeseen short term macro economic impact.

Speaker Change: Let me start with asset quality.

Speaker Change: Provision for doubtful accounts as a percentage of gross lease billings and fees was 22, 2% in Q3 of 2024. This compares to 32, 1% in Q3 of 2023, which was a 990 basis point improvement or 38% reduction year over year.

Speaker Change: Improved asset quality drove a 2 million dollar benefit in the third quarter provision compared to the same period last year.

Speaker Change: New originations continue to demonstrate favorable early payments versus the same period last year.

Speaker Change: Just that the provision levels should continue its year over year favorability into two into Q4 absent any unforeseen short term macroeconomic impacts.

John Davis: I'm pleased with the quality of originations today. We are accomplishing our first goal of continued asset performance improvement.

Speaker Change: I'm pleased with the quality of originations today, we are accomplishing our first goal of continued asset performance improvement.

John Davis: Regarding our online retail strategy, we continue to realize the benefits of introducing product margin to our business. enabled by our FlexShopper.com market. Our depreciation and impairment of lease merchandise cost as a percentage of gross lease billings and fees continued to improve and was 39.8% in Q3 of 2024, compared to 41.8% in the same quarter last year. This is a 200 basis point improvement year over year as our product margins continue to improve and mature into the portfolio. Overall depreciation and impairment costs increased by $1.4 million year-over-year, but this is due to a significant increase in lease revenue of $5.1 million.

Speaker Change: Regarding our online retail strategy, we continue to realize the benefits of introducing product margin to our business.

Speaker Change: Enabled by our flex shopper dot com marketplace.

Our depreciation and impairment of lease merchandise costs as a percentage of gross lease billings and fees.

Speaker Change: <unk> to improve and was 39, 8% in Q3 of 2024 compared to 41, 8% in the same quarter last year.

Speaker Change: This is a 200 basis point improvement year over year as our product margins continued to improve and mature into the portfolio.

Speaker Change: Overall, depreciation and impairment costs increased by $1 $4 million year over year, but this is due to a significant increase in lease revenue of $5 $1 million.

John Davis: Adjusting for this year-over-year revenue increase, this improved product margin improved lease profitability by $2.1 million this year versus the same quarter last year. In addition, our third quarter gross profit expanded 32.9% year over year. This produced a 58% gross margin in Q3 of 2024 compared to 54% in Q3 of 2023 and 50% in Q2 of 2024. The significant growth in gross profit and gross margin is a direct result of the strategies we are pursuing to capture retail revenue and margin. I'm pleased with our progress on our second goal of improving gross margins, and we continue to work on adding higher product margins to higher margin products to a marketplace, including furniture, mattresses, jewelry, and personal luxury.

Speaker Change: Adjusting for this year over year revenue increase this improved product margin improved lease profitability by $2 $1 million this year versus the same quarter last year.

Speaker Change: In addition, our third quarter gross profit expanded 32, 9% year over year.

Speaker Change: This produced a 58% gross margin in Q3 of 2024 compared to 54% in Q3 of 2023 and 50% in Q2 with 2024.

Speaker Change: The significant growth.

Speaker Change: And gross profit and gross margin is a direct result of the strategies, we are pursuing to capture retail revenue and margin.

I am pleased with our progress on our second goal of improving gross margins and we continue to work on adding higher product margins to higher margin products to our marketplace, including furniture mattresses jewelry and personal luxury items.

John Davis: We now offer multiple payment solutions on our marketplace, which provides more options for customers to transact on the marketplace with an offer that fits their credit profile. and what they can obtain from another credit provider. We are working to expand this panel of payment providers to attract a broader range of customers. that should increase interest and subsequently sales on FlexShopper.com. This includes a large prime credit issuer to expand our total addressable market to levels beyond the traditional subprime customer. and increase online traffic of customers that already visit our site daily. Providing a full spectrum of payment options on our marketplace can dramatically increase overall revenue, provide a positive impact in the quality of our lease origin and increase our marketing.

Speaker Change: We now offer multiple payment solutions on our marketplace, which provides more options for customers to transact on a on the marketplace with an offer that fits their credit profile.

Speaker Change: And what they can obtain from another credit provider.

Speaker Change: We are working to expand this panel of payment providers to attract a broader range of customers that should increase interest and subsequently sales on <unk> dot com.

Speaker Change: This includes a large prime credit issuer to expand our total addressable market to levels beyond the traditional subprime customer.

Speaker Change: Increased online traffic of.

Speaker Change: Customers that already visit our site daily.

Providing a full spectrum of payment options on our marketplace and dramatically increase overall revenue provide a positive impact in the quality of our lease originations and increase our marketing efficiency.

John Davis: Every incremental sale on our marketplace to customers outside our traditional LTO offerings expands income and cash flow that is immediately recognized versus amortized over a 12 month lease.

Speaker Change: Every incremental sale our marketplace to customers outside our traditional L. T O offerings expands income and cash flow that is immediately recognized versus amortized over a 12 month lease.

John Davis: Let me now discuss our third goal, third goal of increasing profitable revenue. overall net revenue grew by 22.9% year over year for Q3 versus to $38.6 million. Gross lease revenues increased $5.1 million versus Q3 of 2023 to $36.4 million. The total net lease revenues increasing by $7.3 million versus last year's Q3 to $28.4 million. This year-over-year increase in lease revenue accelerated from Q2, where comparative gross lease revenue grew by 6.7% year-over-year a quarter ago, when it's up by $1.7 million from Q2 of 2024. lease revenue is being fueled by a 14% increase in lease origination dollars compared to last is coming from both increased lease counts and higher average lease value.

Let me now discuss our third golf third goal of increasing profitable revenue.

Speaker Change: Overall net revenue grew by 22, 9% year over year for Q3 versus to $38 $6 million.

Speaker Change: Gross lease revenues increased $5 $1 million versus Q3 of 2023 to $36 4 million with total net lease revenues, increasing by $7 $3 million versus last year's Q3 to $28 4 million.

Speaker Change: This year over year increase in lease revenue accelerated from Q2 for comparative gross lease revenue grew by six 7% year over year a quarter ago. When is up by $1 7 million from to Q2 of 2024.

Speaker Change: This revenue is being fueled by a 14% increase in lease origination dollars compared to last year, which is coming from both increased lease counts and higher average lease value.

John Davis: As Russ mentioned earlier, our signed store count is approximately 250% higher than the beginning of the year. approximately 7,800 locations. Our location count has blown by our original target of 5,000 by year end 2024.

Speaker Change: As Russ mentioned earlier, our sign store count is approximately 250% higher than the beginning of the year.

Speaker Change: Approximately 7800 locations our location count has blown by our original target of 5000 by year end 2024.

John Davis: The unique competitive advantage that FlexShopper has versus other companies on our industry is our marketplace, which greatly enhances our ability to drive repeat originations versus a model that is mainly retail focused only. As we add more new customers to our ecosystem through this expanding location base. Marketplace revenue will also benefit from repeat repeat purchases beyond our direct to consumer marketing efforts. Total lease funding approvals were 33% higher at $77 million in Q3 of 2024 versus $57.9 million in Q3 of 2023. Submitted applications were 58% higher year over year, showing the impact of strong consumer demand and our increasing location count.

Speaker Change: The unique competitive advantage that flex shopper has versus other companies our industry is our marketplace, which greatly enhances our ability to drive repeat originations versus a model that is mainly retail focused only.

Speaker Change: As we add more new customers to our ecosystem through this expanding location base.

Speaker Change: Marketplace revenue will also benefit from repeat repeat purchases beyond our direct to.

Speaker Change: Sumer marketing efforts.

Speaker Change: Total lease funding approvals were 33% higher at $77 million in Q3 of 'twenty 'twenty four versus $57 $9 million in Q3 of 2023.

Speaker Change: Submitted applications were 58% higher year over year, showing the impact of strong consumer demand and our increasing location counts.

John Davis: Our marketing team has developed a robust remarketing engine, which will enable approved customers to more easily use their available spending limits on our marketplace during the upcoming holiday shopping season. Overall, net loan revenues were $9 million this year versus $10.3 million last year.

Speaker Change: Our marketing team has developed a robust remarketing engine, which will enable approved customers to more easily use their available spending limits on our marketplace during the upcoming holiday shopping season.

Speaker Change: Overall net loan revenues were $9 million this year versus $10 $3 million last year.

John Davis: Net revenue in our state licensed business model increased 249% versus last year, while net revenues from our bank partner loan model dropped to a loss of $190,000 versus a $7.7 million gain last year. Our bank partner chose to exit the high APR business in 2023. Our state licensed lending business was acquired in December 2022 and consists of branch based loan distributions among owned and operated as well as third party franchise owned locations. In Q3, we recorded a gain on the fair value estimate of the portfolio, as many of these loans were placed with a new third-party collections partner that is demonstrating improved cash collection.

Speaker Change: Net revenue in our state licensed business model increased 249% versus last year, while net revenues from our bank partner loan model drops to a loss of $190000 versus a $7.7 million gain last year.

Speaker Change: Our bank partner chose to exit the high APR business in 2023.

Speaker Change: Our state licensed lending business was acquired in December 2022, and consists of branch based loan distributions among owned and operated as well as third party franchise owned locations.

Speaker Change: Q3, we recorded a gain on the fair value estimate of the portfolio as many of these loans were placed with a new third party collections partner that is demonstrating improved cash collections.

John Davis: Overall origination counts were down at 8% in Q3 versus the same period last year. The new customer origination dollars were up 32% year-over-year in September and 28% year-over-year in October. This improvement and new customer originations is in part due to new leadership we brought in in the middle of the third quarter. Our state-licensed loan model customer has a high propensity to repeat, so higher new customer volumes will create an annuity of repeat volume that will grow as new customer comps remain favorable. Additionally, synergy between our loan and lease businesses through customer cross-marketing and the sharing of back-office risk, marketing, and finance resources is a natural advantage that FlexShopper has versus a monoline lending business.

Speaker Change: Overall origination counts were down 8% in Q3 versus the same period last year, a new customer origination dollars were up 32% year over year in September and 28% year over year in October this.

Speaker Change: This improvement in new customer originations is in part due to new leadership, we brought in in the middle of the third quarter.

Speaker Change: Our state licensed loan model customer has a high propensity to repeat the higher new customer volumes will create an annuity of repeat volume that will grow as new customer comps remain favorable.

Speaker Change: Additionally, synergy between our loan and lease businesses through customer cross marketing and the sharing of back office risk marketing and finance resources has a natural advantage of flex shopper has versus a mono line lending business.

John Davis: I am pleased with the initial momentum of our new our new team is bringing to this business and I'm hopeful that they will bring continued revenue and profitability growth for our loan channel.

I am pleased with the initial momentum of our new our new team is bringing to this business and I'm hopeful that they will bring continued revenue and profitability growth for our loan channel.

John Davis: The combined result of the growth strategies underway produced a material increase in adjusted EBITDA, which expanded from $8.4 million for Q3 of 2023 to $12.2 million for Q3 of 2024. As a percentage of total revenue, our adjusted EBITDA margin was 31.5% compared to 26.7% for the same period last year. In addition to the improvements in bad debt and leased depreciation as a percentage of revenue, salaries and operating expenses excluding marketing as a percentage of revenue improved by approximately 130 basis points. Additionally, marketing and loan origination costs and fees as a percentage of revenue improved by approximately 280.

Speaker Change: The combined result of the growth strategies underway produced the material increase in adjusted EBITA, which expanded from $8 4 million for Q3 of 2023 to $12 2 million for Q3 of 2024.

Speaker Change: As a percentage of total revenue our adjusted EBITDA margin was 31, 5% compared to 26, 7% for the same period last year.

Speaker Change: In addition to the improvements in bad debt and lease depreciation as a percentage of revenue salaries and operating expenses, excluding marketing as a percentage of revenue improved by approximately 130 basis points.

Speaker Change: Additionally, marketing and loan origination cost and fees as a percentage of revenue improved by approximately 280 basis points.

John Davis: Our strategic plan remains in place, which is to continue to grow our lease and loan business with favorable asset performance that we are seeing. and the online retail opportunities that is in front of. We're achieving year over year and quarterly sequential revenue growth. We are seeing improved asset quality with lower bad debt. We are increasing product margin, which has a material benefit to our income statement. We are gaining leverage on our marketing and operating expenses.

Speaker Change: Our strategic plan remains in place with just to continue to grow our lease and loan business with favorable asset performance that we're seeing and expand the online retail opportunities that is in front of us.

Speaker Change: We are achieving year over year and quarterly sequential revenue growth.

Speaker Change: Seeing improved asset quality with lower bad debt.

Speaker Change: We are increasing product margin, which has a material benefit to our income statement.

Speaker Change: We're gaining leverage on our marketing and operating expenses.

John Davis: Result of these strategies has produced significant year over year EBITDA growth and positive net income during the third quarter. We will remain vigilant in regards to signs of any potential future economic slowdown. We continue to see customer interest in shopping within our channels. The Continued Job Growth and Low Unemployment Rates, as well as Stabilizing Consumer Price.

Speaker Change: <unk> of these strategies has produced significant year over year EBITDA growth and positive net income during the third quarter.

Speaker Change: We will remain vigilant in regards to signs of any potential future economic slowdown we continue to see customer interest in shopping within our channels.

Speaker Change: Continued job growth and low unemployment rates as well as stabilizing consumer prices.

John Davis: want to thank our team for the hard work and results.

Speaker Change: I want to thank our team for the hard work and results look forward to what we can achieve in 2024 and believe we are well positioned for continued growth and improved profitability in 2025 and beyond.

John Davis: We look forward to what we can achieve in 2024 and believe we are well positioned for continued growth and improved profitability in 2025 and beyond.

Russ Heiser: With that, let me turn the call back over to Russ to review the rights offering in more detail. Thanks, JD. A record third quarter revenue and adjust the EBITDA demonstrate the success of the growth strategies underway.

Speaker Change: With that let me turn the call back over to Russ.

Russ Heizer: Review the rights offering in more detail.

Russ Heizer: Thanks, J D a.

Russ Heizer: Our record third quarter revenue and adjusted EBITDA demonstrate the success of the growth strategies underway as we position the business for sustainable sustainable growth and profitability. We have simultaneously been pursuing actions that are intended to simplify and improve our capital structure and ultimately increased net income and earnings per common share.

Russ Heiser: As we position the business versus for sustainable sustainable growth and profitability, we have simultaneously been pursuing actions that are intended to simplify and improve our capital structure and ultimately increase net income and earnings per common share. Agreeing on a favorable purchase price to redeem 91% of our Series 2 Preferred Stock at a 50% plus discount to its liquidation value has the added effect of negating the weighted average anti-dilution provision for the vast majority of preferred stock and is a fundamental catalyst to raise equity capital accretively as we reduce interest and dividend expense. In addition, as I mentioned earlier, assuming our enterprise value stays constant, redeeming the preferred stock at a 50% discount has the potential to add approximately $1 per share to our enterprise value based on our current share count.

Agreeing on a favorable purchase price to redeem 91% of our series T preferred stock at 50% plus discount to its liquidation value has the added effect of negating the weighted average anti dilution provision for the vast majority of the preferred stock and as a fundamental catalyst to raise equity capital Accretively as we reduce interest and dividend expense. In addition.

Russ Heizer: <unk> as I mentioned earlier, assuming our enterprise value stays constant we're doing they're redeeming the preferred stock at a 50%.

Russ Heizer: Count has the potential to add approximately $1 per share to our enterprise value based on our current share count.

Russ Heiser: Therefore, on October 28, 2024, we filed an S-1 registration statement with the SEC for a proposed rights offering. When the S-1 becomes effective, we plan to launch a rights offering to purchase up to 35 million units in which each shareholder, as of the record date, receives two non-transferable rights to purchase units. Each unit consists of one share of common stock and a series A, B, and C right which expires 30, 60, and 90 days, respectively, after the initial offering. These short-dated rights permit participants to make additional share purchases after learning the impact on balance sheet improvements from the proceeds of the initial raise.

Russ Heizer: Therefore on October 28, 2024, we filed an S. One registration statement with the SEC for proposed rights offering.

Russ Heizer: When the S. One becomes effective we plan to launch a rights offering to purchase up to 35 million units in which each shareholder as of the record date received two non transferable rights to purchase units.

Russ Heizer: Each unit consisted of one share of common stock and our series, a b and C right, which expires 30, 60, and 90 days respectively. After the initial offering east short dated rights permit from parts.

Russ Heizer: Participants to make additional share purchases after learning the impact on balance sheet improvements from the proceeds of the initial raise.

Russ Heiser: We believe raising capital through a rights offering is in the best interest of shareholders because it allows existing investors the opportunity to maintain their level of ownership in the company. In fact, holders who fully exercise their basic subscription rights will be entitled to oversubscribe for an additional number of units, if available, that are not purchased by other stockholders. Subject to pro rata allocation based on the oversubscription request, we intend to allocate the proceeds of the offering to actions that will produce the largest reduction to our cost of capital.

Russ Heizer: We believe raising capital through a rights offering is the best is in the best interest of shareholders because it allows existing investors the opportunity to maintain their level of ownership in the company.

Fact holders who fully exercise their basic subscription rights will be entitled to Oversubscribe for an additional number of units if available that are not purchased by other stockholders subject to pro rata allocation based on the Oversubscription request, we intend to allocate the proceeds of the offering to actions that were produced the largest reduction to our cost of capital.

Russ Heiser: I know that equity races are often viewed negatively at face value. However, in this instance, as I mentioned, as I mentioned previously, this transaction has a clear use of proceeds that we believe will be accretive to investors. In fact, the more shares sold, the more creative the offering is. And of course, the higher the offering price, the more creative the transaction is for all shareholders. In the free writing prospectus filed with the SEC on October 29th, we estimate that for every $25 million in net proceeds raised by the offering, we will increase net income by $4.5 million.

Russ Heizer: I know the equity raises are often viewed negatively at face value. However in this instance, as I mentioned as I mentioned previously this transaction is a clear use of proceeds that we believe will be accretive to investors in fact more shares sold the more accretive the offering is and of course, the higher the offering price the more accretive transaction is for all shareholders.

Russ Heizer: And the free running prospectus filed with the SEC on October 29, we estimate that for every 25 million in net proceeds rate proceeds raised by the offering we will increase net income by $4 5 million looking.

Russ Heiser: Looking at the accretive nature of the rights offering another way, and assuming we raise $50 million of net proceeds, we have the flexibility to pay off the $10.9 million balance of our subordinated notes, which will save us $2 million in annual interest expense, redeem 91% of our Series 2 preferred stock, which will reduce associated dividends by $4.4 million per year, and use the remaining capital to pay down a portion of our credit facility agreement, which will add an additional $2.6 million in annual interest savings. We estimate these actions combined will increase annual net income to common shareholders by approximately $9 million and increase earnings for common share.

Russ Heizer: Looking at the accretive nature of the rights offering another way and I assume when we raised $50 million of net proceeds we have the flexibility to.

Pay off the $10 9 million balance of our subordinated notes, which will save us $2 million in annual interest expense redeemed, 91% of our series C preferred stock, which will reduce associated dividends by $4 4 million per year.

Russ Heizer: And use the remaining capital pay down a portion of our credit facility agreement, which will add an additional $2 6 million in annual interest savings. We estimate. These actions combined will increase annual net income to common shareholders by approximately $9 million and increased earnings per common share.

Russ Heiser: Simplifying and equitizing our capital structure while reducing interest or dividend expense allow us to allocate earnings back into our business, fund more of our growth internally and produce a higher return on equity.

Russ Heizer: Simplifying and <unk>, our capital structure, while reducing interest or dividend expense allow us to allocate earnings back into our business fund more of our growth internally and produce a higher return on equity.

Russ Heiser: Our third quarter performance demonstrates we are pursuing this rights offering from a position of strength, and members of FlexShopper's management team and board of directors plan to participate in the offering. I look forward to completing the rights offering in the coming months and updating our investors on FlexShopper's continued success through upcoming press releases and on our next call.

Russ Heizer: Our third quarter performance demonstrates we are pursuing this rights offering from a position of strength and members of flex shoppers management team and board of directors plan to participate in the offering I look forward to completing the rights offering in the coming months and updating our investors on flex shoppers continued success through upcoming press releases and on our next call.

Unknown Executive: This completes our prepared remarks.

This completes our prepared remarks.

Unknown Executive: Operator, please open the call for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd 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 key.

Speaker Change: Operator, please open the call for questions.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.

Speaker Change: If you'd like to ask a question. Please press star and one on the telephone keypad.

Speaker Change: Confirmation tone will indicate your line is in the question queue.

Speaker Change: You May press star two if you'd like to remove your question from the queue.

Speaker Change: All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.

Unknown Executive: Ladies and gentlemen, we will wait for a moment while we poll for questions.

Speaker Change: Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Scott Buck: The first question comes from the line of Scott Buck from HC Wainwright, please go ahead. Hi, good morning guys, congrats on the results and thanks for taking my questions. I want to ask you about the improvement in payment performance. How much of that is driven by improved underwriting versus quality of the borrower versus improvements in account servicing? Just trying to kind of piece all that together and see if there's maybe some, even some more room there for improvement. Thank you. Sure.

Speaker Change: The first question comes from the line of Scott Buck from H C. Wainwright. Please go ahead.

Speaker Change: Hi, Good morning, guys. Congrats on the results and thanks for taking my questions.

Speaker Change: I wanted to ask about the improvement in payment performance, how much of that is driven by improved underwriting versus quality of the borrower versus improvements in account servicing just trying to kind of piece all that together and.

Speaker Change: If there's maybe some even some more room there for improvement.

JD: Yeah, this is JD. So I think if I had to rank order, the first one is improved underwriting and fraud evaluation. So we've invested a lot in our risk and analytics team and have done a lot to really make lots of headway in that kind of, you know, efforts. I think the second one is going to be on the quality of the customer. So in our marketing, we actually have a lot of algorithms that look for ideal customers. And as a part of that, we've actually seen a bit of a mix upwards in, you know, the way that we evaluate credit.

J D: Oh sure. Yeah. This is J D. So I think if I had to rank order.

J D: The first one is improved underwriting and broad evaluation.

J D: So we've invested a lot in our.

Risk and analytics team and have done a lot to.

J D: So it really make lots of headway in that kind of efforts I think the second one is going to be on the quality of the customer. So in our marketing are we actually have a lot of algorithms that look for <unk>.

J D: Deal customers.

J D: And as a part of that we've actually seen a.

J D: A bit of a mix upwards in.

J D: The way that we evaluate credit I think another contributor to that is as companies above us are pulling back.

JD: I think another contributor to that is as companies above us are pulling back, their bottom customers are now not getting approved by that credit provider above us, and are coming down to us to take those offers. So we're also seeing a bit of a tailwind when it comes to the quality.

J D: Their bottom customers are now not getting approved I that a credit provider of above us are coming down to us to take those offers so we're also seeing a bit of a.

J D: Tailwind when it comes to the quality and then.

JD: And then, you know, I think, you know, third, but not too far behind is our servicing capabilities. You know, one big initiative for 2025 is actually to introduce a lot of AI-driven automation in collector servicing capabilities, both, you know, through first party as well as some of our third party partners. As that gets deployed and as the right offer is presented to the right customer at the right time through the right channel, there will be tailwind, which is going to be a bit of an initiative for us in 2025.

J D: Third, but not too far behind is our servicing capabilities.

J D: One.

Big initiative for 2025 is actually to introduce a lot of AI driven.

J D: Automation in.

J D: In collector servicing capabilities, both through first party as well as some of our third party partners.

J D: As that gets deployed and as the right offer is presented to the right customer at the right time through the right channel.

J D: There will be tailwind, which is going to be a.

J D: And initiative for Us in 2025.

Scott Buck: Great, I appreciate that, that color, JD.

Speaker Change: Great I appreciate that that color J D. And then on the <unk> business can you remind us.

JD: And then on the B2B business, can you remind us, you know, how long it takes to get some of these new locations kind of up to up to speed? And I can't remember, is there an 80% principle here where, you know, 20% of the locations are generating 80% of the leases? Or is it? Significantly different than that. No, you're you're right. I mean, I think, you know, what we have, I mean, it's not quite 8020. But certainly, the, you know, that those top few deciles certainly are responsible for the majority. and on the other side, the bottom decile or two, it doesn't contribute a whole lot, but much like in our underwriting process, right?

Speaker Change: How long it takes to get some of these new locations kind of up to up to speed and I can't remember is there are 80% principle here where.

Speaker Change: 20% of the locations are generating 80% of the leases or is it.

Speaker Change: Significantly different than that.

Speaker Change: No Youre right I mean I think.

Speaker Change: You know what we have I mean, it's not quite 80 20, but certainly.

Speaker Change: The.

Speaker Change: Those top few decile certainly are responsible for the majority.

Speaker Change: And and and.

Speaker Change: On the other side, the bottom decile or too it doesn't contribute a whole lot but.

Speaker Change: So much like in our underwriting process right, we work off of the Ah <unk>.

JD: We work off of the entire vintage. And so as we're thinking about that entire... segment and how it comes, you know, comes together, we've noticed certainly by segment, there's some discrepancies. But when it comes, you know, when it comes down to, you know, automotive, you know, versus other, you know, we tend to find that everyone. So I'm hopeful, as we continue to stay in the automotive sector, that we'll continue to see similar progress. will result in pretty significant gains on the B2B side.

Speaker Change: Tire.

Speaker Change: Vintage and so as we're thinking about that entire.

Speaker Change: Segment and how it comes it comes together.

Speaker Change: We've noticed.

Speaker Change: Certainly by segment there are some discrepancies, but when it comes when it comes down to automotive versus other we tend to find that.

Everyone.

Speaker Change: Sure.

Speaker Change: Reverts to a similar mean so I'm.

Speaker Change: Hopefully as we continue to stay in the automotive sector that will continue to see similar progress and so adding this many stores.

Speaker Change: It will.

Speaker Change: Our result in pretty significant.

Speaker Change: Gains on the <unk> side what is.

Speaker Change: You know.

JD: In terms of rollout time, you know, that's, that's always an issue. And you know, when you factor in seasonality and upcoming holidays, you know, it always tends to, to slow down retailers a little bit. You know, on one hand, you know, you have that, you know, that top portion that really wants to drive growth, you know, will really embrace it during the holidays. And so we'll get some significant lift. and the ones that you know, are slower to embrace will probably, you know, end up more sort of in that, you know, early part of next year before they really start to, to embrace the product.

Speaker Change: In terms of rollout time, that's it's always an issue in and when you factor in seasonality in upcoming holidays, it always tends to to slowdown retailers a little bit.

Speaker Change: On one hand.

Speaker Change: That that top portion that really wants to.

Speaker Change: To drive growth will really embrace it during the holidays and so we will get some.

Speaker Change: A significant lift.

Speaker Change: And the ones that are slow to embrace we'll probably.

Speaker Change: Ended up more sort of in that early part of next year before they really start to.

Speaker Change: To embrace the product.

Speaker Change:

JD: You know, we'd like to, like to think that in that six to nine month time frame, we've you know, outside of improvements to process, right, you know, maybe integrating more directly or making some other modifications when it comes to just the efforts within the stores and what the teams are able to do in those stores, we find that, you know, you've started to plateau, you know, store count being constant, you started to plateau within six to nine months. So there is definitely a lead time, you know, maybe compounded by the upcoming holidays, but we'll know, like I said, it's really based upon how the individual store managers, team leaders, etc, you know, embrace Yeah, I can appreciate that.

Speaker Change: We'd like to I'd like to think that's in that six to nine month timeframe. We've.

Speaker Change: Outside of improvement step process, right, maybe integrating more directly or making some other modifications when it comes to just the efforts within the stores and what the teams are able to do in those stores, we find that.

Speaker Change: You've started to plateau.

Speaker Change: Store count being constant you started to plateau within six to nine months. So so there is definitely a lead time.

Speaker Change: Maybe compounded by the upcoming holidays, but we will.

Speaker Change: Yeah like I said, it's really based upon how the individual store managers team leaders et cetera embracing.

Speaker Change: Yeah I can appreciate that thanks, and then last one for me just curious given kind of seasonality and the holidays coming up whether we should expect to see a bit of a revenue mix shift.

Scott Buck: Thanks.

JD: And then last one for me, just curious, given kind of seasonality and the holidays coming up, whether we should expect to see a bit of a revenue mix shift between the three verticals, you know, should we see a higher retail component here in the fourth quarter? Well, as you know, having followed us for a while, you know, that the fourth quarter is a big one for us, you know, certainly that that, you know, FlexShopper.com retail component definitely grows a good bit, you know, from a But it's also important to remember from a revenue perspective that a lot of these originations will take place in that, you know, Thanksgiving to Christmas timeframe and won't be fully represented in the fourth quarter.

Speaker Change: Between the three verticals you know should we see a higher retail component here in the fourth quarter.

Well as you know, having followed us for a while you know that the fourth quarter's a big one for us certainly that.

Speaker Change: Flex shopper dot com retail component definitely.

Gross a good bit.

Speaker Change: A.

Speaker Change: But it's also important to remember from a revenue perspective that a lot of these originations will take place in that.

Speaker Change: Giving to Christmas timeframe and won't be fully represented in the fourth quarter, we usually think of that.

JD: Yeah, we usually think that, you know, you'll see the marketing spend, you'll see the origination counts, you'll see all of that take place in the fourth quarter, but doesn't really show itself until the, you know, the first quarter of the next year. Yep, no, it makes sense.

Speaker Change: You'll see the marketing spend you will see the origination counts youll see all of that take place in the fourth quarter, but doesn't really.

Speaker Change: Show itself until the.

Speaker Change: The first quarter of the next year.

Speaker Change: Yeah, no that makes sense I appreciate it guys. Thanks for the time and congrats again on the results.

Scott Buck: I appreciate it, guys.

Unknown Executive: Thanks for the time and congrats again on the result. Thanks.

Speaker Change: Thanks, guys.

Michael Diana: Thank you. The next question comes from the line of Michael Diana from Maxim Group. Please go ahead. Okay, thank you. So, you all have been extremely busy in the great quarter. I want to go back to the credit quality, and I think that was the main reason for the gross margin improvement up to 58%. Is that sort of a new benchmark for you, do you think? It seems like some of the Some of the improvement has had such a material effect. You probably won't receive that sort of kick going forward. Is that right or wrong?

Speaker Change: Thank you.

Speaker Change: The next question comes from the line of Michael Diana from Maxim Group. Please go ahead.

Okay. Thank you so you've all been extremely busy.

Speaker Change: Good quarter.

I wanted to go back to the credit quality and I think that that was the main reason for the gross margin improvement.

Speaker Change: 258%.

Speaker Change: Is that sort of a new benchmark for you do you think.

Speaker Change: It seems like some of them some of them.

Some of the improvement has had such a material effect.

Speaker Change: Probably you won't receive that served kit going forward is that right or wrong.

JD: Yeah, I think when we look at how earnings increase over on from here. You know, I think our goal is kind of getting the per account profitability levels to kind of where it is. today. At least on the bad debt side, we don't really anticipate bad debt continuing to drop significantly from here. We do see, you know, more and more contribution from our retail margin, which shows up as, you know, better depreciation, that's percentage of least revenue as more products are added to our marketplace. But then really the big thing is growing the top line.

Speaker Change: Yeah, and I think when we look at how earning.

Earnings increase over.

Speaker Change: On from here.

Speaker Change: I think our goal is kind of getting the.

Speaker Change: Our account profitability levels to kind of where it is.

Speaker Change: Today at least on the bad debt side, we don't really anticipate that to continue.

Speaker Change: Continuing to drop significantly from here.

Speaker Change: We do see more and more contribution from our retail margin, which shows up as you know better depreciation as a percentage of lease revenue as more products are added to our marketplace.

Speaker Change: But then really the big thing is growing the top line.

JD: So the IRRs that we get with this kind of customer is very good. So you get to the place where if you continue to try to decrease bad debt through tightening, then you actually restrict the ability to grow. Now, having said that, are we saying that we've done everything we can do on the bad debt side? The answer is no. We will have, as I was mentioning earlier, more AI-driven capabilities on our servicing site, which that will have a natural benefit to the bad debt levels. And then our risk analytics team continue to work very hard every day to try to gain more benefit out of the existing book.

Speaker Change: So.

Speaker Change: The IRR that we get with this kind of customer is very good.

Speaker Change: So you get to the place where if you continue to try to decrease bad debt through tightening then you actually restrict the ability to grow now having said that are we saying that we're we've done everything we can do on the bad debt side. The answer is no. We will have as I was mentioning earlier.

Speaker Change: Sure.

More AI driven capabilities on our servicing site, which.

Speaker Change: We'll have a natural benefit to the.

Bad debt levels.

Speaker Change: And then our risk and analytics team.

Speaker Change: Need to work very hard everyday to try to gain more.

Speaker Change: Benefit out of the existing book and hopefully we actually continue to see more of a mix shift upward.

JD: And hopefully we actually continue to see more of a mixed shift upward as, you know, the whatever soft landing or however you would describe, you know, how the economy evolves from here will produce more customers that are more liquidity constrained than they are today. So, going forward, I, we don't. plan for a lower ad debt level. But certainly kind of where it is is, you know, we have some initiatives that hopefully will keep any potential upward pressure bedded down.

Speaker Change: As you know the whatever soft landing or however, you describe how the economy evolves from here.

Speaker Change: We will produce more customers that are more liquidity constrained than they are today. So.

Going forward, we don't.

Speaker Change: Plan for a lower debt level, but.

Certainly you kind of where it is is.

Speaker Change: We have some initiatives that hopefully, we'll keep any potential upward pressure bedded down I think adding onto that I think the one piece.

JD: I think adding on to that, I think the one piece that you know thinking at you know the gross profit level. I think that this you know the next puzzle we need to solve Mike is that there is You know, as we've talked about numerous times, there's a good number of people coming to our site. are spending time on our site, but when it comes time to check out, they're looking at the different options they have, and they might not think that they are in that. that credit band that makes sense to choose what we have available on the site.

Speaker Change: Piece that I'm thinking at the gross profit level I think that the next puzzle we need to solve.

Is that there is.

Speaker Change: You know as we've talked about numerous times there is a good number of people coming to our site.

Speaker Change: That are spending time on our sites, but when it comes.

Comes time to check out there looking at the different options they have.

Speaker Change: And they might not think that they are in that.

Speaker Change: That credit band it makes sense to choose what we have available on the site. So.

Russ Heiser: So what we've been focused on for a while, and it's taken longer than we've expected, is really trying to fill in an option for those consumers that, you know, are will say you have better credit quality than traditional lease-to-own consumer, but don't have the liquidity to go purchase, pull out a credit card or debit card and purchase at their local store or a convenient website, et cetera, and do need some of the credit options that we hope to soon have on our site. So given how much volume we drive to our website, I think there is a lot of upside if we can solve that piece of an option for the, I don't know, we'll say sort of the low 600 credit score.

Speaker Change: What we've been focused on for a while and it's taken longer than we expected is really trying to.

Speaker Change: Filling an option for those consumers that.

Speaker Change: <unk>.

Speaker Change: We will say, yes, better credit quality than traditional lease to own consumer.

Speaker Change: But don't have the liquidity to go purchase.

Speaker Change: You know pull out a credit card.

Speaker Change: Our debit card and purchase at their local store or a convenient website et cetera, and do you need some of the.

Speaker Change: Credit options that we hope to soon have on our site. So given how much volume we drive to our websites I think there is a lot of upside if we can solve that piece of it.

The option for that I don't know, we'll say sort of dead.

Speaker Change: Low 600 credit score I think that could be the next big move.

Russ Heiser: I think that could be the next big move. You know, we haven't we haven't solved it yet. And we're, you know, part of the way into the fourth quarter, but trying to have something in place before we hit December is certainly sort of top of mind. If we can actually catch that last wave right before Christmas that would be great and provide a lot of data for us but that's that's where we're you know, as we think about continuing to expand gross profit, that's where our net margin. Yeah, and that margin would show up in either a combination of additional retail revenue, or a better marketing efficiency, which we've seen some improvement already.

Speaker Change: We haven't we haven't solved it yet and we're.

Speaker Change: Part of the way into the fourth quarter, but trying to you have something in place.

Speaker Change: Yeah before we hit.

Speaker Change:

December is certainly sort of top of mind, if we can actually catch that last wave.

Wave right before Christmas that would be great and provide a lot of data for us, but that's that's where we're at.

Speaker Change: So we think about continuing to expand gross profit, that's where our net margin net margin would show up in either a combination of additional retail revenue.

Speaker Change: Or a better marketing efficiency, which we've seen some improvement already but I think.

Michael Diana: But I think this effort that Russ was talking about, hopefully will actually add more margin with higher marketing. All right.

Speaker Change: This effort that Russ was talking about hopefully will actually add more margin with higher marketing efficiency.

Speaker Change: Alright, Thanks Ross.

Michael Diana: Thanks, Russ.

Unknown Executive: Thanks, Judy. Thank you.

Speaker Change: Okay.

Speaker Change: Thank you.

Thank you. The next question comes from the line of Steve Silver from August Research. Please go ahead.

Steve Silva: The next question comes from the line of Steve Silva from Argus Research. Please go ahead. Thanks, operator. And good morning. And thanks for taking the questions. And congratulations, as well on the strong results.

Steve Silver: Thanks, operator, and good morning, and thanks for taking the questions and congratulations as well on the strong results.

Steve Silva: I was hoping you could provide some color on the retail pipeline. You guys mentioned in the prepared remarks, the strong expansion to date, and the fact that you blew past your own internal estimates on the number of locations earlier in the year. I'm just curious as to whether there are any factors you can cite for that acceleration in the pipeline compared to your initial estimates, and how you see the breadth of the retail pipeline continuing in 2025? Sure, of course. We You know, we continue to so our process, which I'm sure is, you know, similar to to other companies in our spaces, there's a lot of work that goes around, you know, elephant hunting, so to speak.

Speaker Change: I was hoping you could provide some color on the retail pipeline you guys mentioned in the prepared remarks, the strong expansion to date.

The fact that you blew past your own internal estimates on the number of locations earlier in the year I was just curious as to whether there are there any factors you can cite for that acceleration in the pipeline compared to your initial estimates and how you see the breadth of the retail pipeline continuing in 2025.

Speaker Change: Sure of course.

Speaker Change: We.

Speaker Change: We continue to so our process, which I'm sure is similar to <unk>.

Other companies are.

Speaker Change: Our spaces and there was a lot of work that goes around.

Speaker Change: The elephant hunting so to speak and.

Russ Heiser: And, you know, you make sure you target a lot of them, you know, make sure you make them the right inroads. And there always seem to be a number of these very large, you know, high door count, high website volume. potential retail partners that are out there, but you just don't know when you're going to close them, right? Conversations, you know, conversations are continuing. Tests are being planned. Technology integrations are being worked through. Contracts being finalized. But you just don't know when it's going to hit. So we've you know. for many reasons. we've tended to take the approach that we're going to hit a lot of the singles and sort of have budgeted internally for that home run once a year.

Speaker Change: You make sure you target a lot of them.

Make sure you make them right inroads and there always seemed to be a number of these very.

Speaker Change: Large high door count high website volume.

Speaker Change: Ah, yes potential.

Speaker Change: Potential retail partners that are.

Speaker Change: Out there, but you just don't know when youre going to close them right conversations.

Speaker Change: Conversations are continuing tests are being planned technology integrations are being worked through contracts being finalized, but you just don't know when it's going to hit so we've.

Speaker Change: So for many reasons.

Speaker Change: We tend to take the approach that we're going to hit a lot of the singles and.

Speaker Change: Sort of half half budget internally for that that homerun.

Russ Heiser: And this is a year where we had two homers and that significantly changes our estimates. But what is, you know, especially intriguing is that we continue to have a lot of these Homer opportunities that I said are sort of sitting out there. And sometimes success begets success, I think, as we continue to make more inroads, it becomes easier to close these larger deals. So we're excited that, you know, the one, you know, the normal one Homer a year turned the two this year, and we'll continue to stay at that pace going forward.

Speaker Change: Once a year and it's this is a year where.

Speaker Change: Of the two.

Speaker Change: Two homers and that's significantly changes.

Speaker Change: Our estimates are.

Speaker Change: But what is especially intriguing is that we continue to have a lot of these homer opportunities that I said are sort of sitting.

Speaker Change: Sitting out there and.

Speaker Change: Sometimes success begets success, I think as we continue to.

Speaker Change: Make more inroads it becomes easier too.

Speaker Change: To close these larger deals so we're we're.

Speaker Change: We're excited that our you know the.

Speaker Change: One.

Speaker Change: The normal one Homer a year turned to two this year and we will continue to stay at that pace going forward.

Steve Silva: Great. I appreciate the color.

Speaker Change: Great I appreciate the color and one last one if I may.

Steve Silva: And one last one, if I may.

Russ Heiser: Given the return to gap profitability this quarter and the expectation that the business remains favorable moving forward, curious as to whether there are any implications for the company's ability to further bring down its debt over time, independent of the rights offering, given the fact that the company has the lower capital risk, a lot of the IT investments are already in place. Just curious as to whether there are other uses for the positive income to invest back into the business, or some of that net income could be utilized to bring down debt independent of the rights offer.

Speaker Change: Given the return to GAAP profitability this quarter and the.

Speaker Change: Patients that the business remains of favorable moving forward I'm curious as to whether there are any implications for the company's ability to further bring down its debt over time independent of the rights offering given the fact that the company has a lower capital risk a lot of the it investments already in place just curious.

Speaker Change: Whether there are other uses for the positive income to invest back into the business or some of that net income could be utilized to bring down that independent of the rights offering.

Russ Heiser: I think that's a good question, Steve. I think what I think the way we would most likely approach it, and obviously it's dependent upon the amount of proceeds in this rights offering, there is an inflection point at which you have that's in, you know, increased net income enough that you do start to Find a way to transition to lower costs of debt capital. And so. I guess, sort of in a vacuum, it might be a little bit difficult to answer, but I think The sort of instinct would be to lead with, let's de-lever where we can, let's continue to focus on growing the business, let's be thoughtful around finding ways to lower cost of capital and, you know, through all of this, it's about making the right and thinking through how that impacts us in the long run.

Steve Silver: Oh, that's a good good question, Steve I think what I think the way, we would most likely approach and obviously its dependent upon the amount of.

Steve Silver: Net proceeds in this rights offering there is a <unk>.

Steve Silver: Inflection point at which you have.

Steve Silver: Delever enough. That's in increased net income enough that you do start to.

Steve Silver: Find a way to transition to lower cost of debt capital.

Steve Silver: So.

Steve Silver: Okay.

Steve Silver: I guess sort of in a vacuum.

Steve Silver: Might be a little bit difficult to answer, but I think I think sort of our.

Sort of instinct would be to lead with let's Delever, where we can let's continue to focus on growing the business let's be.

Steve Silver: Thoughtful around fly finding ways to lower cost of capital and through.

Steve Silver: Through all of this it's about making the right.

Steve Silver: IRR decisions and.

Steve Silver: Thinking through how that impacts us in the long run so.

Russ Heiser: I would think that we have you know, given that we continue to have a lot of success growing this B2B business, which is not you know, nearly as capital intensive in terms of headcount servicing https://www.LiveZilla.com marketing costs etc as the the online business that as you continue to grow that successfully that you know you would start to Produce Capital where, you know, you'll be able to sort of take a step back and think, are there, you know, do we do we sort of continue to grow? I mean, I know you're a little bit Newer to the FlexShopper story, but what we've always said is that the advantage of the direct to consumer website is that you can continue to spend marketing dollars and drive people to the site.

Steve Silver: I would think that we have.

Steve Silver: Given that we continue to have a lot of success growing the speed of <unk> business, which is not.

Steve Silver:

Nearly as.

Steve Silver: Uh huh.

Steve Silver: Capital intensive in terms of.

Steve Silver: Head count servicing.

Steve Silver: <unk>.

Steve Silver: Our marketing costs.

Steve Silver: Et cetera, as the the online business that as you continue to.

Steve Silver: Grow that successfully that you would start to.

Steve Silver: Produce capital, where youll be able to sort of take a.

Steve Silver: Step back and think are there.

Steve Silver: Do we do we sort of continue to grow.

Steve Silver: I know you're a little bit.

Steve Silver: Yeah.

Steve Silver: Newer to the the flagship our story, but so it.

Steve Silver: So.

Steve Silver: What we've always said is that we.

Steve Silver: The advantage of the direct to consumer website is that you can continue to spend marketing dollars and drive people to the site, obviously as you spend more becomes less efficient.

Russ Heiser: Obviously, as you spend more, it becomes less efficient. And at some point, it. While you could continue to grow, it just doesn't make economic sense. the retailer, the b2b side of that doesn't have any of those constraints, right? So you are, you're plugging into a retailer, the retailers driving the consumers to you, and you're just, you know, hopefully making very good underwriting decisions and moving forward. But we cannot make retailers do business with us, as much as we would like to. So it's really about proving to them and growing that business. But Like I said, you do get to a point where continuing to spend to grow through FlexShopper.com isn't efficient anymore.

Steve Silver: And at some point.

Steve Silver: While you could continue to grow it just doesn't make economic sense.

Steve Silver: Yes.

The retailer the beat of east side that doesn't have any of those constraints you.

Speaker Change: You are.

Speaker Change: Plugging into a retailer the retailer is driving the consumer.

Consumers to you and you're just hopefully, making very good underwriting decisions and moving forward.

Speaker Change: But we cannot make retailers do business with us as much as we would like to so it's really about proving to them in growing that business, but.

Speaker Change: Like I said, you do get to a point, where it's continuing to spend to grow through flex shopper dot com.

Isn't efficient anymore and of course at that point, you would certainly make the decision to rather than grow inefficiently, you would rather go and continue to delever other ways, but you said, it's really about exploring all the options.

Russ Heiser: And of course, at that point, you would certainly make the decision to, you know, rather than grow inefficiently, you would rather go and continue to de-lever other ways. But like I said, it's really about exploring all the options, you know, including looking for cheaper, less restrictive forms of debt capital also along the way.

Speaker Change: Including looking for a cheaper.

Speaker Change: Less restrictive forms of debt capital.

Speaker Change: Also along the way.

Steve Silva: Okay, I appreciate the extra color and congratulations again on the quarter. Thanks so much. Thank you.

Speaker Change: Okay I appreciate the extra color and congratulations again on the quarter.

Speaker Change: Thanks, so much.

Thank you Levi.

Unknown Executive: Ladies and gentlemen, this concludes our question and answer session.

Speaker Change: Ladies and gentlemen, this concludes our question and answer session I would now hand, the conference over to Russ Hi, Phil for his closing comments.

Russ Heiser: I would now hand the conference over to Russ Heiser for his closing comments. Thank you. We appreciate all the questions today. Thanks for everyone's time, and we look forward to communicating our holiday season results on our next call. Thank you.

Speaker Change: Thank you.

Speaker Change: We appreciate all the questions today.

Speaker Change: Thanks for everyone's time, and we look forward to communicating our holiday season results on our next call.

Thank you the conference we'll flex shopper has now concluded. Thank you for your participation you may now disconnect your line.

Unknown Executive: The conference of FlexShopper has now concluded. Thank you for your participation. You may now disconnect your lines.

Speaker Change: Okay.

Speaker Change: Okay.

[music].

Speaker Change: Okay.

Speaker Change: Yeah.

Thank you.

Speaker Change: Okay.

Yes.

Okay.

Speaker Change: Yeah.

Speaker Change: [music].