Standard Premium Finance Holdings, Inc 10-Q for FY2021 Q3
Standard Premium Finance Holdings, Inc. (SPFX)
About this 10-Q
Standard Premium Finance Holdings, Inc filed this 10-Q on November 8, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.07M
- up 27.0% from $1.63M a year earlier
- Net income
- $297.76K
- up 8.7% from net income of $273.86K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from to .
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices and Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive
Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
There were shares of common stock issued and outstanding as of November 5, 2021.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties. These statements may relate to, but are not limited to, information or assumptions about us, our capital and other expenditures, dividends, financing plans, capital structure, cash flow, our potential future business acquisitions, future economic performance, operating income and management’s plans, strategies, goals and objectives for future operations and growth. These forward-looking statements generally are accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect,” “should,” “seek,” “project,” “plan,” “would,” “could,” “can,” “may,” and similar terms. Any statement that is not a historical fact is a forward-looking statement. It should be understood that these forward-looking statements are necessarily estimates reflecting the best judgment of senior management, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described in Part II. “Item 1A. Risk Factors” in this Quarterly Report. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Forward-looking statements represent intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements.
Each of the terms the “Company” and “Standard Premium” as used herein refers collectively to Standard Premium Finance Holdings, Inc. and its wholly owned subsidiaries, unless otherwise stated.
STANDARD PREMIUM FINANCE HOLDINGS, INC.
TABLE OF CONTENTS
Part I – FINANCIAL INFORMATION | ||
Item 1. |
Financial Statements | 1 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 26 |
Item 4. |
Controls and Procedures | 26 |
| ||
Item 1. |
Legal Proceedings | 27 |
Item 1A. |
Risk Factors | 27 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 27 |
Item 3. |
Defaults Upon Senior Securities | 27 |
Item 4. |
Mine Safety Disclosures | 27 |
Item 5. |
Other Information | 27 |
Item 6. |
Exhibits | 27 |
| SIGNATURES | ||
| i |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
STANDARD PREMIUM FINANCE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
Table of Contents
| 1 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
September 30, 2021 (unaudited) and December 31, 2020
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Premium finance contracts and related receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| PROPERTY AND EQUIPMENT, NET | ||||||||
| OPERATING LEASE ASSETS | ||||||||
| OTHER ASSETS | ||||||||
| Cash surrender value of life insurance, net of policy loan | ||||||||
| Deferred tax asset | ||||||||
| TOTAL OTHER ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Line of credit, net | $ | $ | ||||||
| Drafts payable | ||||||||
| Note payable - current portion | ||||||||
| Note payable - stockholders and related parties - current portion | ||||||||
| Payroll Protection Program loan - current portion | ||||||||
| Operating lease obligation - current portion | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Note payable, net of current portion | ||||||||
| Note payable - stockholders and related parties, net of current portion | ||||||||
| Payroll Protection Program loan, net of current portion | ||||||||
| Operating lease obligation, net of current portion | ||||||||
| TOTAL LONG-TERM LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (see Note 13) | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock, par value $ per share; million shares authorized, shares designated as Series A - convertible, and issued and outstanding at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Common stock, par value $ per share; million shares authorized, and shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| TOTAL STOCKHOLDERS' EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying notes to the condensed consolidated unaudited financial statements.
| 2 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Operations
For the Three and Nine Months Ended September 30, 2021 and 2020
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUES | ||||||||||||||||
| Finance charges | $ | $ | $ | $ | ||||||||||||
| Late charges | ||||||||||||||||
| Origination fees | ||||||||||||||||
| TOTAL REVENUES | ||||||||||||||||
| OPERATING COSTS AND EXPENSES | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Salaries and wages | ||||||||||||||||
| Commission expense | ||||||||||||||||
| Bad debts | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Postage expense | ||||||||||||||||
| Insurance expense | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| TOTAL COSTS AND EXPENSES | ||||||||||||||||
| INCOME BEFORE INCOME TAXES | ||||||||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME | ||||||||||||||||
| PREFERRED SHARE DIVIDENDS | ||||||||||||||||
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | $ | $ | $ | ||||||||||||
| Net income per share attributable to common shareholders | ||||||||||||||||
| Basic and Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
See accompanying notes to the condensed consolidated unaudited financial statements.
| 3 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Three and Nine Months Ended September 30, 2021 and 2020
(unaudited)
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Debt issued to retire stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Options issued for services | ||||||||||||||||||||||||||||
| Distributions (preferred shares) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2020 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Options issued for services | — | — | ||||||||||||||||||||||||||
| Distributions (preferred shares) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Series A Convertible Preferred Stock issued in exchange for note payable and cash | ||||||||||||||||||||||||||||
| Warrants issued for services | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2020 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Options issued for services | — | — | ||||||||||||||||||||||||||
| Distributions (preferred shares) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Sale of preferred stock | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2020 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated unaudited financial statements.
4
Standard Premium Finance Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the Three and Nine Months Ended September 30, 2021 and 2020
(unaudited)
| Additional | Total | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Options issued for services | — | — | ||||||||||||||||||||||||||
| Distributions (preferred shares) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2021 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Options issued for services | — | — | ||||||||||||||||||||||||||
| Warrants issued for services | ||||||||||||||||||||||||||||
| Distributions (preferred shares) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2021 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Options issued for services | — | — | ||||||||||||||||||||||||||
| Distributions (preferred shares) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2021 (unaudited) | $ | $ | $ | $ | $ | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated unaudited financial statements.
| 5 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 2021 and 2020
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| NET INCOME | $ | $ | ||||||
| ADJUSTMENTS TO RECONCILE NET INCOME TO CASH FLOW USED IN OPERATING ACTIVITIES: | ||||||||
| Depreciation | ||||||||
| Amortization of right to use asset - operating lease | ||||||||
| Bad debt expense | ||||||||
| Amortization of loan origination fees | ||||||||
| Options issued for services | ||||||||
| Warrants issued for services | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase)/Decrease in premium finance contracts | ( | ) | ( | ) | ||||
| (Increase)/Decrease in prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| (Increase)/Decrease in deferred tax asset, net | ( | ) | ( | ) | ||||
| Increase/(Decrease) in drafts payable | ||||||||
| Increase/(Decrease) in accounts payable and accrued expenses | ||||||||
| Increase/(Decrease) in operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Payments made on life insurance policy | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from notes payable - stockholders and related parties | ||||||||
| Repayment of notes payable - stockholders and related parties | ( | ) | ||||||
| Proceeds from PPP Loan | ||||||||
| Proceeds of line of credit, net of repayments | ||||||||
| Dividends paid | ( | ) | ( | ) | ||||
| Proceeds from sale of preferred stock | ||||||||
| Proceeds from notes payable - other | ||||||||
| Repayment of notes payable - other | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| NET CHANGE IN CASH | ( | ) | ||||||
| CASH AT THE BEGINNING OF THE PERIOD | ||||||||
| CASH AT THE END OF THE PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING TRANSACTION: | ||||||||
| Debt issued to retire common stock | $ | $ | ||||||
| Debt exchanged for Series A Convertible Preferred Stock | $ | $ | ||||||
| Operating lease asset obtained in exchange for operating lease liability | $ | $ | ||||||
See accompanying notes to the condensed consolidated unaudited financial statements.
| 6 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
1. Principles of Consolidation and Description of Business
Standard Premium Finance Holdings, Inc. (“SPFH” or the “Holding”) was incorporated on May 12, 2016, pursuant to the laws of the State of Florida.
Standard Premium Finance Management Corporation (“SPFMC” or the “subsidiary”) was incorporated on April 23, 1991, pursuant to the laws of the State of Florida, to engage principally in the insurance premium financing business. The Subsidiary is a licensed insurance premium finance company in Florida, Georgia, North Carolina, South Carolina, Tennessee, Texas and Arizona.
The accompanying condensed consolidated financial statements include the accounts of SPFH and its wholly-owned subsidiary SPFMC. SPFH and its subsidiary are collectively referred to as (“the Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements (unaudited), which include the accounts of Standard Premium Finance Holdings, Inc. and its wholly-owned subsidiary, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended December 31, 2020.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements of Standard Premium Finance Holdings, Inc. and its wholly-owned subsidiary for the fiscal year ended December 31, 2020, have been omitted.
Cash and Cash Equivalents
The Company considers short-term interest-bearing
investments with initial maturities of three months or less to be cash equivalents. The Company has
Revenue Recognition
Revenues are recognized when control of the promised services is transferred to the customer and in an amount that reflects the consideration the Company expects to be entitled to in exchange for these services. For the services where the Company’s performance obligation is satisfied at a point in time and for which there is no ongoing obligation, revenue is recognized upon delivery. For the services where the Company satisfies its performance obligation over time as the service is being transferred to the customer, revenue is generally recognized using the output method as the services are delivered.
Finance charges on insurance premium installment contracts are initially recorded as unearned interest and are credited to income monthly over the term of the finance agreement. For Florida, Georgia, North Carolina and Texas contracts, an initial service fee of $20 per contract and the first month’s interest are recognized as income at the inception of a contract. The same treatment is applied to the $15 initial service fee and first month’s interest in South Carolina. The initial $20 per contract fee can only be charged once to an insured in a twelve-month period. In accordance with industry practice, finance charges are recognized as income using the “Rule of 78s” method of amortizing finance charge income, which does not materially differ from the interest method of amortizing finance charge income on short term receivables. Late charges are recognized as income when charged. Unearned interest is netted against Premium Finance Contracts and Related Receivables on the balance sheet for reporting purposes.
| 7 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
2. Summary of Significant Accounting Policies (Continued)
Premium Finance Contracts and Related Receivable
The Company finances insurance premium on
policies for the transportation industry and other commercial enterprises. The term of each contract varies from 3 to 12 monthly
payments. Repayment terms are structured such that the contracts will be repaid within the term of the underlying insurance policy,
generally less than one year. The contracts are secured by the unearned premium of the insurance carrier which is obligated to pay
the Company any unearned premium in the event the insurance policy is cancelled pursuant to a power of attorney contained in the
finance contract. As of September 30, 2021 and December 31, 2020, the amount of unearned premium on open and cancelled contracts
totaled $
Allowance for Doubtful Accounts
The carrying amount of the Premium Finance Contracts (“Contracts”) is reduced by an allowance for losses that are maintained at a level which, in management’s judgment, is adequate to absorb losses inherit in the Contracts. The amount of the allowance is based upon management’s evaluation of the collectability of the Contracts, including the nature of the accounts, credit concentration, trends, and historical data, specific impaired Contracts, economic conditions, and other risks inherent in the Contracts. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recovery.
| 8 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
2. Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Furniture
and equipment
Computer
equipment and software
Leasehold
improvements
Amortization of Loan Origination Costs
Amortization of loan origination costs is computed using the straight-line method over the life of the loan agreement.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include assumptions used in valuation of deferred tax assets, allowance for doubtful accounts, depreciable lives of property and equipment, and valuation of stock-based compensation.
Concentration of Credit and Financial Instrument Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk are primarily cash and accounts receivable from customers,
agents, and insurance companies. The Company maintains its cash balances at three banks. Accounts at these financial institutions are
insured by the Federal Deposit Insurance Corporation up to $
| Schedule of reconciliation between uninsured balances and cash per the balance sheet | ||||||||
| September 30, 2021
(unaudited) | December 31, 2020 | |||||||
| Uninsured Balance | $ | $ | ||||||
| Plus: Insured balances | ||||||||
| Plus: Balances at other institutions that do not exceed FDIC limit | ||||||||
| Less: Outstanding checks | ( | ) | ( | ) | ||||
| Cash per Consolidated Balance Sheet | $ | $ | ||||||
The Company controls its credit risk in accounts receivable through credit standards, limits on exposure, by monitoring the financial condition of insurance companies, by adhering to statutory cancellation policies, and by monitoring and pursuing collections from past due accounts. We cancel policies at the earliest permissible date allowed by the statutory cancellation regulations.
| 9 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
2. Summary of Significant Accounting Policies (Continued)
Approximately
Cash Surrender Value of Life Insurance
The Company is the owner and beneficiary of
a life insurance policy on its president. The cash surrender value relative to the policy in place at September 30, 2021 and
December 31, 2020 was $
Fair Value of Financial Instruments
The Company’s carrying amounts of financial instruments as defined by Financial Accounting Standards Board (“FASB”) ASC 825, “Disclosures about Fair Value of Financial Instruments”, including finance contract and related receivables, prepaid expenses, drafts payable, accrued expenses and other current liabilities, approximate their fair value due to the relatively short period to maturity for these instruments. The fair value of the line of credit and long-term debt are based on current rates at which the Company could borrow funds with similar remaining maturities and the carrying value approximates fair value.
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Uncertain tax positions are recognized only when the Company believes it is more likely than not that the tax position will be upheld on examination by the taxing authorities based on the merits of the position. The Company has
Tax returns are open to examination by taxing authorities for three years after filing. No income tax returns are currently under examination by taxing authorities. SPFMC and SPFH recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. SPFMC and SPFH did
The Corporation accounts for earnings (loss) per share in accordance with FASB ASC Topic No. 260 - 10, “Earnings Per Share”, which establishes the requirements for presenting earnings per share (“EPS”). FASB ASC Topic No. 260 - 10 requires the presentation of “basic” and “diluted” EPS on the face of the statement of operations. Basic EPS amounts are calculated using the weighted-average number of common shares outstanding during each period. Diluted EPS assumes the exercise of all stock options, warrants and convertible securities having exercise prices less than the average market price of the common stock during the periods, using the treasury stock method.
| 10 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
2. Summary of Significant Accounting Policies (Continued)
For both the nine months ended September 30,
2021 and 2020, stock options to purchase
shares of common stock were outstanding as described in Note 11.
of these options vested on March 1, 2021 and the remaining
stock options vest on March 1, 2022. The stock options are anti-dilutive and not included in the calculation of diluted EPS at
September 30, 2021 and 2020. For the nine months ended September 30, 2021 and 2020, stock warrants to purchase
Leases
The Company recognizes and measures its leases in accordance with ASC Topic 842, “Leases”. The Company determines if an arrangement is a lease, or contains a lease, at inception of a contract and when the terms of an existing contract are changed. The Company recognizes a lease liability and a right of use (ROU) asset at the commencement date of the lease. The lease liability is initially and subsequently recognized based on the present value of its future lease payments calculated using the Company’s incremental borrowing rate.
3. Premium Finance Contracts, Related Receivable and Allowance for Doubtful Accounts
Premium Finance Contracts and Related Receivable represent monthly payments due on insurance premium finance contracts. The Company finances insurance policies over periods from three months to one year for businesses and consumers who make an initial down payment of, on average, 25 percent of the insurance policy amounts. The entire amount of the contract is recorded including amounts due for finance charges and services charges. These receivables are reported net of unearned interest for financial statements purposes. Amounts due from agents represent balances related to (1) an agent’s unearned commission due to a policy cancellation and (2) down payments collected by the agents on behalf of the insured, which are due to us. Receivables from insurance premium finance contracts cancelled are due from the insurance companies.
| 11 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
3. Premium Finance Contracts, Related Receivable and Allowance for Doubtful Accounts (Continued)
Premium finance contract and agents’ receivable at September 30, 2021 and December 31, 2020 are as follows:
| Schedule of premium finance contract and agents’ receivable | ||||||||
| September 30, 2021 | December 31, | |||||||
| Description | (unaudited) | 2020 | ||||||
| Premium finance contract and agents’ receivable at June 30, 2021 and December 31, 2020 are as follows: | ||||||||
| Insurance premium finance contracts outstanding | $ | $ | ||||||
| Insurance premium finance contracts cancelled | ||||||||
| Insurance Premium finance contracts gross | ||||||||
| Amounts due from agents | ||||||||
| Less: Unearned interest | ( | ) | ( | ) | ||||
| Insurance premium finance contracts net | ||||||||
| Less: Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
The allowance for doubtful accounts at September 30, 2021 and December 31, 2020 are as follows:
| Schedule of allowance for doubtful accounts | ||||||||
| September 30, 2021 (unaudited) | December 31, 2020 | |||||||
| Allowance for premium finance contracts | $ | $ | ||||||
| Allowance for amounts due from agents | ||||||||
| Total allowance for doubtful accounts | $ | $ | ||||||
Activity in the allowance for doubtful accounts for the nine months ended September 30, 2021 and the year ended December 31, 2020 are as follows:
| Activity in the allowance for doubtful accounts | ||||||||
| September 30, 2021 (unaudited) | December 31, 2020 | |||||||
| Balance, at the beginning of the period | $ | $ | ||||||
| Current year provision | ||||||||
| Direct write-downs charged against the allowance | ( | ) | ( | ) | ||||
| Recoveries of amounts previously charged off | ||||||||
| Balance at end of the period | $ | $ | ||||||
The Company maintains its allowance at gross amounts, which includes allowances for write-offs of unearned revenues. Provisions and write-offs per the footnote table above are displayed at gross amounts, which include provisions and write-offs of unearned revenues. These write-offs are appropriately split between the principal (i.e. bad debt expense) and interest/fee (i.e. contra-revenue) portions on the income statement. The following tables show a reconciliation between the total provision per the footnote and bad debt expense on the consolidated statement of operations:
| Schedule of footnote and bad debt expense | ||||||||
| For the three months ended
September 30, | ||||||||
| 2021 (unaudited) | 2020 (unaudited) | |||||||
| Total Provision | $ | $ | ||||||
| Less: Contra-revenues | ( | ) | ( | ) | ||||
| Bad Debt Expense per the Consolidated Statement of Operations | $ | $ | ||||||
| For the nine months ended
September 30, | ||||||||
| 2021 (unaudited) | 2020 (unaudited) | |||||||
| Total Provision | $ | $ | ||||||
| Less: Contra-revenues | ( | ) | ( | ) | ||||
| Less: Current year provisions for amounts due from agents | ( | ) | ||||||
| Bad Debt Expense per the Consolidated Statement of Operations | $ | $ | ||||||
| 12 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
4. Property and Equipment, Net
The Company’s property and equipment consists of the following:
| Property and Equipment, Net | ||||||||
| September 30, | ||||||||
2020 (unaudited) | December 31, 2020 | |||||||
| Computer Software | $ | $ | ||||||
| Automobile | ||||||||
| Furniture & Fixtures | ||||||||
| Leasehold Improvements | ||||||||
| Computer Equipment | ||||||||
| Property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
The
Company recorded depreciation expense of $
5. Leases
The
Company accounts for leases in accordance with ASC Topic 842. In March 2021, the Company renewed its office lease with Marlenko Acquisitions,
LLC. The new two-year lease is identical to the previous lease and expires on February 28, 2023 with a one-year option to renew. The
right-of-use asset and operating lease liability at the execution of this lease totaled $235,335. The Company used its incremental borrowing
rate of
Supplemental balance sheet information related to leases is as follows:
| Supplemental balance sheet information related to leases | ||||||||||
| September 30, | December 31, | |||||||||
| Operating Leases | Classification | 2021 | 2020 | |||||||
| (unaudited) | ||||||||||
| Right-of-use assets | Operating lease assets | $ | $ | |||||||
| Current lease liability | Current operating lease liability | |||||||||
| Non-current lease liability | Long-term operating lease liability | |||||||||
| Total lease liabilities | $ | $ | ||||||||
The
weighted-average remaining lease term was
6. Drafts Payable
Drafts
payable outstanding represent unpaid drafts that have not been disbursed by the bank as of the reporting date, on insurance premium finance
contracts received by the Company prior to the reporting date. As of September 30, 2021 and December 31, 2020, the draft payable balances
are $
| 13 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
7. Line of Credit
Relationship with Woodforest National Bank (“WNB”)
On
October 5, 2018, the Company entered into an exclusive twenty-four month loan agreement with Woodforest National Bank for a
revolving line of credit in the amount of $
At December
31, 2020, the advance rate was 85% of the aggregate unpaid balance of the Company’s eligible accounts receivable. The line of credit
is secured by all the Company’s assets and is personally guaranteed by our CEO and four significant stockholders of the Company.
The line of credit bears interest at
Relationship with First Horizon Bank (“FHB”)
On
February 3, 2021, the Company entered into an exclusive twenty-four month loan agreement with First Horizon Bank for a revolving line
of credit in the amount of $
At September
30, 2021, the advance rate was 85% of the aggregate unpaid balance of the Company’s eligible accounts receivable. The line of
credit is secured by all the Company’s assets and is personally guaranteed by our CEO and a member of the Board of Directors
of the Company. The line of credit bears interest at
The Company’s agreements with WNB and FHB contain certain financial covenants and restrictions. Under these restrictions, all the Company’s assets are pledged to secure the line of credit, the Company must maintain certain financial ratios such as an adjusted tangible net worth ratio, interest coverage ratio and senior leverage ratio. The loan agreement also provides for certain covenants such as audited financial statements, notice of change of control, budget, permission for any new debt, copy of filings with regulatory bodies, and minimum balances. Management believes it was in compliance with the applicable debt covenants as of September 30, 2021 and December 31, 2020.
| 14 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
8. PPP Loan
On
April 18, 2020, the Company entered into a $
As of September 30, 2021 and December 31, 2020, the balance of the PPP loan is as follows:
| Schedule of PPP loan | ||||||||
September
30, (unaudited) | December 31, 2020 | |||||||
| Total PPP loan | $ | $ | ||||||
| Less current maturities | ( | ) | ||||||
| Total | $ | $ | ||||||
9. Note Payable – Others
At September 30, 2021 and December 31, 2020, the balances of long-term unsecured notes to unrelated parties are as follows:
| Note Payable - Others | ||||||||
| September 30, | ||||||||
2021 (unaudited) | December 31, 2020 | |||||||
| Total notes payable - Others | $ | $ | ||||||
| Less current maturities | ( | ) | ( | ) | ||||
| Long-term maturities | $ | $ | ||||||
These are notes
payable to individuals. The notes have interest payable monthly, ranging from
| 15 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
10. Note Payable – Stockholders and Related Parties
At September 30, 2021 and December 31, 2020, the balances of long-term notes payable to stockholders and related parties are as follows:
| Schedule of long-term notes payable to stockholders and related parties | September 30, | |||||||
2021 (unaudited) | December 31, 2020 | |||||||
| Total notes payable - Related parties | ||||||||
| Less current maturities | ( | ) | ( | ) | ||||
| Long-term maturities | $ | $ | ||||||
These are notes
payable to stockholders and related parties. The notes have interest payable monthly ranging from
On March 30, 2020, the Company repurchased and retired shares of common stock from a significant shareholder. The Company issued a $ note payable in exchange for these shares, which is due four years from the repurchase date bearing % interest. The Company retains the right to prepay the note at any time with no prepayment penalty.
11. Equity
Preferred Stock
As of September 30, 2021, the Company was authorized to issue million shares of preferred stock with a par value of $0 per share, of which shares had been designated as Series A convertible and shares had been issued and are outstanding.
In the event
of any liquidation, dissolution or winding up of the Company, the holders of preferred stock shall be entitled to receive, prior and
in preference to any distribution of any of the assets of the Company to the holders of common stock, an amount equal to $
| 16 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
11. Equity (Continued)
Holders of preferred
stock are entitled to receive preferential cumulative dividends, only if declared by the board of directors, at a rate of 7% per annum
per share of the liquidation preference amount of $10 per share. During the nine months ended September 30, 2021 and 2020, the Board
of Directors has declared and paid dividends on the preferred stock of $
December 31, 2019 dividends in arrears were declared and paid in January 2020. March 31, 2020 dividends in arrears were declared and paid in April 2020. June 30, 2020 dividends in arrears were declared and paid in July 2020. September 30, 2020 dividends in arrears were declared and paid in October 2020. December 31, 2020 dividends in arrears were declared and paid in January 2021. March 31, 2021 dividends in arrears were declared and paid in April 2021. June 30, 2021 dividends in arrears were declared and paid in July 2021. September 30, 2021 dividends in arrears were declared and paid in October 2021.
Common Stock
As of both September 30, 2021 and December 31, 2020, the Company was authorized to issue million shares of common stock with a par value of $0 per share, of which shares were issued and outstanding.
On March 30, 2020, the Company repurchased and retired shares of common stock from a significant shareholder. The Company issued a $ note payable in exchange for these shares, which is due four years from the repurchase date bearing % interest. The Company retains the right to prepay the note at any time with no prepayment penalty.
Stock Options
In 2019, the Company’s Board of Directors approved the creation of the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the issuance of incentive stock options to designated employees, certain key advisors and non-employee members of the Board of Directors with the opportunity to receive grant awards to acquire, in the aggregate, up to 300,000 shares of the Corporation’s common stock.
A summary of information regarding the stock options outstanding is as follows:
| Schedule of stock options outstanding | |||||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | |||||||||||
| Outstanding at December 31, 2020 | $ | ||||||||||||
| Issued | |||||||||||||
| Exercised | |||||||||||||
| Outstanding at September 30, 2021 | $ | years | |||||||||||
| Exercisable at September 30, 2021 | |||||||||||||
The above
outstanding options were granted on March 1, 2020, to designated Officers and employees. Half of the options vested on March 1, 2021
and the other half will vest on March 1, 2022. During the nine months ended September 30, 2021 and 2020, the Company recognized $
| 17 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
11. Equity (Continued)
Stock Warrants
On
April 1, 2020, the Company issued
| Schedule of stock warrants | |||||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | |||||||||||
| Outstanding at December 31, 2020 | $ | ||||||||||||
| Issued | |||||||||||||
| Exercised | |||||||||||||
| Outstanding at September 30, 2021 | $ | years | |||||||||||
| Exercisable at September 30, 2021 | |||||||||||||
During the nine
months ended September 30, 2021 and 2020, the Company recognized $
12. Related Party Transactions
The Company has engaged in transactions with related parties primarily shareholders, officers and directors and their relatives that involve financing activities and services to the Company. The following discussion summarizes its activities with related parties.
Office lease
The
Company entered a three-year lease for its office space in Miami, FL with an entity that is controlled by our CEO and related parties.
The Company leases approximately 3,000 square feet of office space. Rent of $
Line of credit
As discussed in Note 7, the Company secured its
primary financing in part through the assistance of our CEO and two significant shareholders who guaranteed the loan to the financial
institution. The current line of credit with First Horizon Bank was initiated at $
Notes payable
As discussed in
Note 10, the Company has been advanced funds by its shareholders. As of September 30, 2021 and December 31, 2020, the amounts advanced were
$
Common Stock
As discussed in Note 11, on March 30, 2020, the Company repurchased and retired shares of common stock from a significant shareholder. The Company issued a $ note payable in exchange for these shares, which is due four years from the repurchase date bearing interest. The Company retains the right to prepay the note at any time with no prepayment penalty.
| 18 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2021 and 2020
(unaudited)
12. Related Party Transactions (Continued)
Stock Options
As
discussed in Note 11, on March 1, 2020, the Company issued
Stock Warrants
As
discussed in Note 11, on April 1, 2020, the Company issued
13. Commitments and Contingencies
From time-to-time, we may be involved in litigation or be subject to claims arising out of our operations or content appearing on our websites in the normal course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on our company because of defense and settlement costs, diversion of management resources and other factors.
14. Subsequent Events
In October 2021,
the Board of Directors declared and paid dividends on the Series A convertible preferred stock of $
In October 2021, the Company increased its line
of credit with First Horizon Bank from $
| 19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are an insurance premium financing company, specializing primarily in commercial policies. We make it efficient for companies to access financing for insurance premiums. Enabled by our network of marketing representatives and relationships with insurance agents, we provide a value-driven, customer-focused lending service.
We have offered premium financing since 1991 through our wholly owned subsidiary, Standard Premium Finance Management Corporation. We are generally targeting premium financing loans from $1,000 to $15,000, with repayment terms ranging from 6 to 10 months, although we may offer larger loans in cases we deem appropriate. Qualified customers may have multiple financings with us concurrently, which we believe provides opportunities for repeat business, as well as increased value to our customers.
We originate loans primarily in Florida, although we operate in several states. Over the past three years, the Company has expanded its operations, and currently is financing insurance premiums in Florida, Georgia, South Carolina, North Carolina, Texas, Tennessee and Arizona. We intend to continue to expand our market into new states as part of our organic growth trend. Loans are originated primarily through a network of insurance agents solicited by our in-house sales team and marketing representatives.
We generate the majority of our revenue through interest income and the associated fees earned from our loan products. We earn interest based on the “rule of 78” and earn other associated fees as applicable to each loan. These fees include, but are not limited to, a one-time finance charge, late fees, and NSF fees. Our company charges interest to its customers solely by the Rule of 78. Charging interest per the Rule of 78 is the industry standard among premium finance loans. The Rule of 78 is a method to calculate the amount of principal and interest paid by each payment on a loan with equal monthly payments. The Rule of 78 is a permissible method of calculating interest in the states in which we operate. The Rule of 78 recognizes greater amounts of interest income during the first months of the loan, while decreasing interest income during the final months of the loan. Whenever a loan is repaid prior to full maturity, the Rule of 78 methodology is applied and the borrower is refunded accordingly.
We rely on a diversified set of funding sources for the loans we make to our customers. Our primary source of financing has historically been a line of credit at a financial institution collateralized by our loan receivables and our other assets. We receive additional funding from unsecured subordinate noteholders that pays monthly interest to the investors. We have also used proceeds from operating cash flow to fund loans in the past and continue to finance a portion of our outstanding loans with these funds. See Liquidity and Capital Resources for additional information regarding our financing strategy.
The Company’s main source of funding is its line of credit, which represented approximately 65% ($33,131,761) of its capital as of September 30, 2021. This line of credit was placed with a new lender, First Horizon Bank, on February 3, 2021. As of September 30, 2021, the Company’s subordinated notes payable represented approximately 18% ($9,308,891) of the Company’s capital, operating liabilities provide approximately 8% ($3,840,607) of the Company’s capital, preferred equity provides approximately 2% ($990,000) of the Company’s capital, the PPP loan represents approximately 1% ($271,000) of the Company’s capital, and equity in retained earnings and common paid-in capital represents the remaining 6% ($3,311,104) of the Company’s capital structure.
| 20 |
Key Financial and Operating Metrics
We regularly monitor a series of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
| As of or for the Three Months Ended September 30, | ||||||||
2021 (unaudited) | 2020 (unaudited) | |||||||
| Gross Revenue | $ | 2,066,048 | $ | 1,626,830 | ||||
| Originations | $ | 28,575,140 | $ | 22,405,923 | ||||
| Interest Earned Rate | 15.36 | % | 15.68 | % | ||||
| Cost of Funds Rate | 2.95 | % | 3.52 | % | ||||
| Reserve Ratio | 2.15 | % | 1.57 | % | ||||
| Provision Rate | 1.07 | % | 0.36 | % | ||||
| Return on Assets | 2.24 | % | 2.48 | % | ||||
| Return on Equity | 35.43 | % | 44.82 | % | ||||
| As of or for the Nine Months Ended September 30, | ||||||||
2021 (unaudited) | 2020 (unaudited) | |||||||
| Gross Revenue | $ | 5,700,779 | $ | 4,808,709 | ||||
| Originations | $ | 84,421,186 | $ | 69,394,892 | ||||
| Interest Earned Rate | 15.47 | % | 15.61 | % | ||||
| Cost of Funds Rate | 3.21 | % | 3.28 | % | ||||
| Reserve Ratio | 2.15 | % | 1.57 | % | ||||
| Provision Rate | 0.79 | % | 0.56 | % | ||||
| Return on Assets | 1.69 | % | 1.42 | % | ||||
| Return on Equity | 25.85 | % | 23.57 | % | ||||
Gross Revenue
Gross Revenue represents the sum of interest and finance income, associated fees and other revenue.
Originations
Originations represent the total principal amount of Loans made during the period.
Interest Earned Rate
The Interest Earned Rate is the average annual percentage interest rate earned on new loans.
Cost of Funds Rate
Cost of Funds Rate is calculated as interest expense divided by average debt outstanding for the period, net of the interest related tax benefit.
Reserve Ratio
Reserve Ratio is our allowance for credit losses at the end of the period divided by the total amount of principal outstanding on Loans at the end of the period. It excludes net deferred origination costs and associated fees.
Provision Rate
Provision Rate equals the provision for credit losses for the period divided by originations for the period. Because we reserve for probable credit losses inherent in the portfolio upon origination, this rate is significantly impacted by the expectation of credit losses for the period’s originations volume. This rate is also impacted by changes in loss expectations for contract receivables originated prior to the commencement of the period.
| 21 |
Return on Assets
Return on Assets is calculated as annualized net income (loss) attributable to common stockholders for the period divided by average total assets for the period.
Return on Equity
Return on Equity is calculated as annualized net income (loss) attributable to common stockholders for the period divided by average stockholders’ equity attributable to common stockholders for the period.
RESULTS of OPERATIONS
Results of Operations for the Three Months ended September 30, 2021 Compared to the Three Months ended September 30. 2020
Revenue
Revenue increased by 27.0% overall or $439,218 to $2,066,048 for the three months ended September 30, 2021 from $1,626,830 for the three months ended September 30, 2020. The increase in revenue was due to a 25.4% or $344,216 increase in finance charges, a 37.3% or $72,272 increase in revenue from late charges, and a 29.6% or $22,730 increase in revenue from origination charges. Revenue from finance charges comprised 82.3% and 83.4% of overall revenue for the three months ended September 30, 2021 and 2020, respectively.
During the three months ended September 30, 2021 compared to the three months ended September 30, 2020, the company financed an additional $6,169,217 in new loan originations. This increase was due largely to increased marketing efforts throughout our established states. In conjunction with the increased amounts financed, the Company also increased the quantity of loan originations by 1,351 new loans for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The quantity of loan originations is directly correlated to the origination charge revenue, as the Company immediately recognizes an origination fee on substantially all new loans.
Under the terms of the line of credit agreement, the loan receivables and our other assets provide the collateral for the loan. As the receivables increase, driven by new sales, the company has greater borrowing power, giving it the opportunity generate additional sales. Throughout 2020, the Company experienced a constraint on loan originations as it pushed near the limit of its previous $27,500,000 line of credit. In February 2021, the Company executed a $35,000,000 line of credit with a new lender, terminating the previous line of credit. The additional availability on our line of credit was an essential driver to our increased originations during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. In October 2021, the Company further increased its borrowing power on its line of credit to $45,000,000, an increase of $10,000,000. See Future Cash Requirements for the Company’s strategy regarding its line of credit.
Expense
Expenses increased by 30.0% or $389,672 to $1,688,770 for the three months ended September 30, 2021 from $1,299,098 for the three months ended September 30, 2020.
The increase in expenses was primarily due to increases in the following categories:
| · | $226,447 increase in bad debt expense as a result of maintaining the allowance for doubtful accounts in line with the balance in premium finance contracts receivable from increased new loan originations. The Company experienced substantial growth in its loan portfolio in 2021 and increased its reserves accordingly with the size of the loan portfolio. | |
| · | $77,327 increase in other operating expenses primarily related to increased marketing efforts in line with the tapering of the COVID-19 pandemic. The Company noted a $13,633 increase in convention expense and a $9,582 increase in business travel during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The Company also increased its profit-sharing contributions by $15,000 for the benefit of its employees during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. | |
| · | $35,582 increase in commission expense as a result of an increase in loan originations. Commission expense is correlated with the dollar amount and quantity of loan originations. Since the Company experienced an increase in originations during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, a related increase in commissions is expected. |
| 22 |
Income before Taxes
Income before taxes increased by $49,546, or 15.1%, to $377,278 for the three months ended September 30, 2021 from $327,732 for the three months ended September 30, 2020. This increase was attributable to the net increases and decreases as discussed above.
Income Tax Provision
Income tax provision increased $25,639 to $79,515 for the three months ended September 30, 2021 from $53,876 for the three months ended September 30, 2020. This increase was primarily attributable to the increase in income partially offset by an increase in deferred tax assets related to allowances on receivables.
Net Income
Net Income increased by $23,907, or 8.7%, to $297,763 for the three months ended September 30, 2021 from $273,856 for the three months ended September 30, 2020. This increase was attributable to the $49,546 increase in income before taxes related to increased business activity, partially offset by the $25,639 increase in the provision for income taxes related to increased taxable income.
Results of Operations for the Nine Months ended September 30, 2021 Compared to the Nine Months ended September 30, 2020
Revenue
Revenue increased by 18.6% overall or $892,070 to $5,700,779 for the nine months ended September 30, 2021 from $4,808,709 for the nine months ended September 30, 2020. The increase in revenue was primarily due to a 19.0% or $744,748 increase in finance charges, a 12.1% or $77,965 increase in revenue from late charges, and a 29.3% or $69,357 increase in revenue from origination charges. Revenue from finance charges comprised 81.9% and 81.7% of overall revenue for the nine months ended September 30, 2021 and 2020, respectively.
During the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, the company financed an additional $15,026,294 in new loan originations. This increase was due largely to increased marketing efforts throughout our established states. In conjunction with the increased amounts financed, the Company also increased the quantity of loan originations by 3,978 new loans for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The quantity of loan originations is directly correlated to the origination charge revenue, as the Company immediately recognizes an origination fee on substantially all new loans.
Under the terms of the line of credit agreement, the loan receivables and our other assets provide the collateral for the loan. As the receivables increase, driven by new sales, the company has greater borrowing power, giving it the opportunity generate additional sales. Throughout 2020, the Company experienced a constraint on loan originations as it pushed near the limit of its previous $27,500,000 line of credit. In February 2021, the Company executed a $35,000,000 line of credit with a new lender, terminating the previous line of credit. The additional availability on our line of credit was an essential driver to our increased originations during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. In October 2021, the Company further increased its borrowing power on its line of credit to $45,000,000, an increase of $10,000,000. See Future Cash Requirements for the Company’s strategy regarding its line of credit.
Expense
Expenses increased by 16.4% or $686,284 to $4,865,341 for the nine months ended September 30, 2021 from $4,179,057 for the nine months ended September 30, 2020.
The increase in expenses was primarily due to increases in the following categories:
| · | $280,847 increase in bad debt expense as a result of maintaining the allowance for doubtful accounts in line with the balance in premium contracts receivable from increased new loan originations. The Company experienced substantial growth in its loan portfolio in 2021 and increased its reserves accordingly with the size of the loan portfolio. | |
| · | $157,001 increase in commission expense as a result of an increase in loan originations. Commission expense is correlated with the dollar amount and quantity of loan originations. Since the Company experienced an increase in originations during the nine months ended September 30, 2021 as compared to September 30, 2020, a related increase in commissions is expected. | |
| · | $128,332 increase in professional fees primarily because of legal and audit fees related to closing the new line of credit with First Horizon Bank as well as financial statement audit and review fees incurred. | |
| · | $106,397 increase in other operating expenses primarily related to increased marketing efforts in line with the tapering of the COVID-19 pandemic. The Company noted a $26,318 increase in other taxes, a $25,633 increase in convention expense and a $11,757 increase in business travel during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The Company also increased its profit-sharing contributions by $22,500 for the benefit of its employees during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 | |
| 23 |
The increases in expenses was primarily offset by a decrease in the following category:
| · | $31,668 decrease in interest expense as a result of a reduction in the line of credit interest rate. Despite the increase in borrowings on the line of credit of $5,724,094, an increase of 20.9%, at September 30, 2021 as compared to September 30, 2020, interest expense decreased by 2.4% for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. This is the result of a significant reduction in the 30-day LIBOR rate used in calculating the Company’s interest on the line of credit during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, thus greatly reducing the cost of funds. Furthermore, the Company’s new line of credit with First Horizon Bank has a lower minimum rate, which the Company has benefited from during 2021. See Liquidity and Capital Resources for more information on the new line of credit. |
Income before Taxes
Income before taxes increased by $205,786, or 32.7%, to $835,438 for the nine months ended September 30, 2021 from $629,652 for the nine months ended September 30, 2020. This increase was attributable to the net increases and decreases as discussed above.
Income Tax Provision
Income tax provision increased $43,828 to $201,448 for the nine months ended September 30, 2021 from $157,620 for the nine months ended September 30, 2020. This increase was primarily attributable to the increase in taxable income.
Net Income
Net Income increased by $161,958, or 34.3%, to $633,990 for the nine months ended September 30, 2021 from $472,032 for the nine months ended September 30, 2020. This increase was attributable to the $205,786 increase in income before taxes related to increased business activity, partially offset by the $43,828 increase in the provision for income taxes related to increased taxable income.
Comparison of Cash Flows for the Nine Months Ended September 30, 2021 and September 30, 2020
Cash Flows from Operating Activities
We used $8,931,159 of cash in our operating activities in 2021 compared to $962,094 used in our operating activities in 2020. The increase in cash used of $7,969,065 was primarily due to a $8,436,819 increase of cash used to support working capital components partially offset by a $467,754 increase of net income as adjusted for noncash items.
The $8,436,819 increase of cash used to support working capital components was primarily due to a $8,494,362 decrease in the change in premium finance contracts, a $105,000 decrease in the change in deferred tax assets, and a $83,917 decrease in the change in accounts payable and accrued expenses, partially offset by a $281,319 increase in the change in drafts payable. These are natural fluctuations in operating accounts that occur during the normal course of business. The Company expects net cash outflows from operations during periods of growth. As discussed in the Revenues section, although the Company was able to continue to grow in 2020, the Company was effectively constrained by the limit of its previous line of credit agreement. During 2021, the Company has utilized its increased availability on its line of credit leading to the large increase in premium finance contracts receivable.
The $467,754 increase of cash from net earnings as adjusted by noncash items resulted primarily from an $161,958 increase in net income and a $280,847 increase in bad debt expense. As the Company grew its receivables portfolio in 2021, bad debt expense increased to adjust the allowance accordingly.
Cash Flows from Investing Activities
We used $69,508 of cash in our investing activities in 2021 compared to $39,483 of cash used in 2020. The increase in cash used of $30,025 is primarily due to purchases of property and equipment of $27,495. In 2021, the Company purchased a new vehicle used by a marketing representative to service the Florida market, which is being depreciated over five years.
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Cash Flows from Financing Activities
We received $8,604,789 of cash provided by our financing activities in 2021 compared to $1,010,196 provided by financing activities in 2020. The increase in funds provided of $7,594,593 is due primarily to an increase in proceeds from the line of credit, net of repayments, of $6,854,892, an increase in proceeds of notes payable – others of $716,426, and an increase in proceeds from notes payable – related parties of $413,000, and a decrease in repayments of notes payable – other of $245,000. These were partially offset by a decrease in proceeds from the sale of preferred stock of $320,000 and a decrease in proceeds from the PPP loan of $271,000. As discussed in the Revenues and Liquidity and Capital Resources sections, in 2020, the Company was limited in the amounts it could draw from its line of credit, due to reaching maximum availability throughout the year. In 2021, the Company utilized its increased line of credit to finance its increased premium finance contracts receivable. In conjunction with the new line of credit, the Company was required to increase its subordinated debt, which accounts for the increases in proceeds from notes payable – related parties and notes payable – others.
LIQUIDITY and CAPITAL RESOURCES as of September 30, 2021
We had $81,411 cash and a working capital surplus of $9,099,392 at September 30, 2021. A significant working capital surplus is generally expected through the normal course of business due primarily to the difference between the balance in loan receivables and the related line of credit liability. As discussed in the Revenues section, the Company’s line of credit is currently the primary source of operating funds. In February 2021, the Company entered into a contract with a new lender, First Horizon Bank, for a two-year $35,000,000 line of credit. The terms of the new line of credit are generally more favorable than the previous line of credit, including an interest rate based on the 30-day LIBOR rate plus 2.85% with a minimum rate of 3.35%. The previous, terminated line of credit had an interest rate based on the 30-day LIBOR rate plus 2.75% with a minimum rate of 3.75%. The Company believes that the interest rate will be based on the minimum rate for the entire term of the line of credit, which will lead to savings on interest expense over the term of the deal, though the Company cannot guarantee the minimum rate will be employed for the term of the loan. In October 2021, the Company executed a loan amendment with First Horizon Bank to increase its line of credit to $45,000,000, an increase of $10,000,000. Based on our estimates and taking into account the risks and uncertainties of our plans, we believe that we will have adequate liquidity to finance and operate our business and repay our obligations as they become due for at least the next 12 months.
During the nine months ended September 30, 2021, the Company raised an additional $493,000 in subordinated notes payable – related parties and $866,426 in subordinated notes payable – others. A requirement of the new line of credit was an increase in our subordinated debt to provide additional collateral to the bank. The Company utilizes its inflows from subordinated debt as a financing source before drawing additionally from the line of credit.
In April 2020, the Company received a $271,000 loan through the PPP program with the Small Business Administration. The Company proudly applied 100% of the proceeds of the loan to its main purpose of keeping their staff employed at the same level as before the COVID-19 pandemic. The Company maintained the same level of employment throughout 2020 and 2021 with support from the PPP loan. As the Company used the proceeds of the loan on forgivable expenses, i.e. company payroll, the Company expects the loan to be fully forgiven. The Company applied for loan forgiveness in September 2020 and awaits a response from the SBA and the Company’s bank, which facilitated the loan.
Future Cash Requirements
As the Company anticipates its growth patterns to continue, the larger line of credit is paramount to fueling this growth. By securing its larger line of credit, the Company can expect to satisfy the cash requirements anticipated by its future growth. Coinciding with these goals, in February 2021, the Company entered into a contract with a new lender for a two-year $35,000,000 line of credit. Furthermore, in October 2021, the Company executed a loan amendment with this lender to increase its line of credit to $45,000,000, an increase of $10,000,000.
Uses of Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including costs associated with our premium finance loans, capital expenditures, debt repayments, acquisitions (if any), pursuing market expansion, supporting sales and marketing activities, and other general corporate purposes. While we believe we have sufficient liquidity and capital resources to fund our operations and repay our debt, we may elect to pursue additional financing activities such as refinancing or expanding existing debt or pursuing other debt or equity offerings to provide flexibility with our cash management and provide capital for potential acquisitions.
Off-balance Sheet Arrangements
None.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at September 30, 2021 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company becomes involved in various legal proceedings and claims in the normal course of business. In management’s opinion, the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including those described in the Part I. “Item 1A. Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2021 (“2020 Form 10-K”), which could adversely affect our business, financial condition, results of operations and cash flows. During the nine months ended September 30, 2021, there have been no material changes in our risk factors from those disclosed in our 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit Index
| Exhibit Number | Description | |
| 2.1 | Agreement of Share Exchange dated as of March 22, 2017 by and between Registrant, Standard Premium Finance Management Corporation and the shareholders of Standard Premium Finance Management Corporation. (Incorporated by reference to Exhibit 2.1 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 3.1 | Articles of Incorporation of Registrant filed May 12, 2016. (Incorporated by reference to Exhibit 3.1 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 3.2 | Articles of Amendment to Registrant’s Articles of Incorporation filed May 31, 2016. (Incorporated by reference to Exhibit 3.2 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 3.3 | Articles of Amendment to Articles of Incorporation filed May 17, 2017. (Incorporated by reference to Exhibit 3.3 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 3.4 | By-laws of Registrant. (Incorporated by reference to Exhibit 3.4 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 4.1 | Description of Securities. (Incorporated by reference to Exhibit 4.1 to Registrant's Form 10-K filed on March 30, 2021) | |
| 10.1* | 2019 Equity Incentive Plan. (Incorporated by reference to Exhibit 10.1 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.2* | Form of Employee Incentive Stock Option Award Agreement. (Incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.3(a)* | Form of Warrant to Purchase Common Stock. $4.00 (Incorporated by reference to Exhibit 10.3(a) to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.3(b)* | Form of Warrant to Purchase Common Stock. $12.00 (Incorporated by reference to Exhibit 10.3(b) to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.4* | Schedule of Warrants to Purchase Common Stock issued on April 1, 2020. (Incorporated by reference to Exhibit 10.4 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.5* | Consulting Agreement dated August 1, 2016 between Registrant and Bayshore Corporate Finance, LLC. (Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to Registrant's Registration Statement on Form 10 filed on March 2, 2021) |
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| 10.6 | Lease Agreement dated March 1, 2018 between Registrant and Marlenko Acquisitions, LLC. (Incorporated by reference to Exhibit 10.6 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.7* | Schedule of Employee Incentive Stock Options issued on March 1, 2020. (Incorporated by reference to Exhibit 10.7 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.8 | Credit and Guaranty Agreement dated October 5, 2018 between Standard Premium Finance Management Corporation and Woodforest National Bank. (Incorporated by reference to Exhibit 10.8 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 10.9 | Loan Agreement dated February 3, 2021 among Standard Premium Finance Management Corporation and First Horizon Bank. (Incorporated by reference to Exhibit 10.9 to Amendment No. 1 to Registrant's Registration Statement on Form 10 filed on March 2, 2021) | |
| 10.10 | First Amendment to Loan Agreement dated October 5, 2021 among Standard Premium Finance Management Corporation and First Horizon Bank. (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed October 5, 2021) | |
| 14.1 | Code of Ethics. (Incorporated by reference to Exhibit 14.1 to Registrant's Form 10-K filed on March 30, 2021) | |
| 21 | Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21 to Registrant's Registration Statement on Form 10 filed on January 19, 2021) | |
| 31.1 | Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer. | |
| 31.2 | Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer. | |
| 32.1 | Section 1350 Certifications of Principal Executive Officer and Principal Financial Officer. | |
| 101.INS | Inline XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
_______________
* Indicates a management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 8, 2021
| STANDARD PREMIUM FINANCE HOLDINGS, INC. | ||
| By: | /s/ William Koppelmann | |
| William Koppelmann | ||
| Chairman,
President and Chief Executive Officer (Principal Executive Officer) |
||
| By: | /s/ Brian Krogol | |
| Brian Krogol | ||
| Chief
Financial Officer (Principal Financial Officer) |
||
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