SPFX 10-Q
Standard Premium Finance Holdings, Inc. (SPFX)
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 and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post 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 |
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
There were shares
of common stock issued and outstanding as of May 13, 2024.
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 I. “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on March 15, 2024. 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
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Item 1. |
Financial Statements | 2 |
Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 26 |
Item 4. |
Controls and Procedures | 26 |
PART II – OTHER INFORMATION
| ||
Item 1. |
Legal Proceedings | 26 |
Item 1A. |
Risk Factors | 26 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
Item 3. |
Defaults Upon Senior Securities | 26 |
Item 4. |
Mine Safety Disclosures | 26 |
Item 5. |
Other Information | 26 |
Item 6. |
Exhibits | 27 |
| SIGNATURES | 29 | |
| 1 |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
STANDARD PREMIUM FINANCE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE PERIOD ENDED
MARCH 31, 2024
| 2 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2024 (unaudited) and December 31, 2023
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Premium finance contracts and related receivable, net of allowance for credit
losses of $ |
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| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets | ||||||||
| Finance lease assets | ||||||||
| OTHER ASSETS | ||||||||
| Cash surrender value of life insurance | ||||||||
| Deferred tax asset | ||||||||
| TOTAL OTHER ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Cash overdraft | $ | $ | ||||||
| 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 | ||||||||
| Finance 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 | ||||||||
| Finance 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, issued and outstanding at March 31, 2024 and December 31, 2023 |
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| Common stock, par value $ per share; shares authorized, shares issued and outstanding at March 31, 2024 and December 31, 2023 |
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| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| TOTAL STOCKHOLDERS' EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying condensed notes to the consolidated unaudited financial statements.
| 3 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three Months Ended March 31, 2024 and 2023
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| REVENUES | ||||||||
| Finance charges | $ | $ | ||||||
| Late charges | ||||||||
| Origination fees | ||||||||
| TOTAL REVENUES | ||||||||
| OPERATING COSTS AND EXPENSES | ||||||||
| Interest | ||||||||
| Salaries and wages | ||||||||
| Commissions | ||||||||
| Provision for credit losses | ||||||||
| Professional fees | ||||||||
| Postage | ||||||||
| Insurance | ||||||||
| 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 STOCKHOLDERS | $ | $ | ||||||
| Net income per share attributable to common stockholders | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying condensed notes to the consolidated unaudited financial statements.
| 4 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2024 and 2023
(unaudited)
| Series A Preferred Stock | Common Stock | Additional Paid-in | Retained | Total Stockholders' | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Equity | |||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Options issued for services | — | — | |||||||||||||||||||||||||||
| Dividends paid on preferred stock | — | — | ( | ) | ( | ||||||||||||||||||||||||
| Net income | — | — | |||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2023 (unaudited) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Series A Preferred Stock | Common Stock | Additional Paid-in | Retained | Total Stockholders' | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Equity | |||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Options issued for services | — | — | |||||||||||||||||||||||||||
| Dividends paid on preferred stock | — | — | ( | ) | ( | ||||||||||||||||||||||||
| Net income | — | — | |||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2024 (unaudited) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
See accompanying condensed notes to the consolidated unaudited financial statements.
| 5 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2024 and 2023
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| NET INCOME | $ | $ | ||||||
| ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES: | ||||||||
| Depreciation | ||||||||
| Amortization of right to use asset - operating lease | ||||||||
| Amortization of finance lease asset | ||||||||
| Provision for credit losses | ||||||||
| Amortization of loan origination fees | ||||||||
| Options issued for services | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease in prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| (Increase)/Decrease in deferred tax asset, net | ( | ) | ( | ) | ||||
| Increase/(Decrease) in drafts payable | ||||||||
| Increase/(Decrease) in accrued expenses and other current liabilities | ||||||||
| Decrease in operating lease liability | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Disbursements under premium finance contracts receivable, net | ( | ) | ( | ) | ||||
| Payments made on cash surrender value of life insurance | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Cash overdraft | ||||||||
| Proceeds of line of credit, net of repayments | ||||||||
| Proceeds from notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from notes payable - stockholders and related parties | ||||||||
| Repayment of notes payable - stockholders and related parties | ( | ) | ||||||
| Repayment of finance lease obligation | ( | ) | ( | ) | ||||
| Repayment of PPP loan | ( | ) | ( | ) | ||||
| Dividends paid on Series A Convertible Preferred Stock | ( | ) | ( | ) | ||||
| 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 year for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING TRANSACTION: | ||||||||
| Operating lease assets obtained in exchange for lease liabilities | $ | $ | ||||||
See accompanying condensed notes to the consolidated unaudited financial statements.
| 6 |
Standard Premium Finance Holdings, Inc. and Subsidiary
Condensed Notes to Consolidated Financial Statements
March 31, 2024
(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 thirty-three states.
The accompanying 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 intercompany balances and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Basis of Presentation
The 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 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, 2023.
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, 2023, have been omitted.
Cash and Cash Equivalents and Cash Overdraft
The Company considers short-term interest-bearing
investments with initial maturities of three months or less to be cash equivalents. There are
The Company experienced a cash overdraft of $
Revenue Recognition
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. An initial service fee, where permissible, and the first month’s interest, on a pro rata basis, are recognized as income at the inception of a contract. The initial service 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 sheets for reporting purposes.
The provisions of Financial Accounting Standards Board (“FASB”) ASC 606, Revenue from Contracts with Customers (“ASC 606”) provide guidance on the recognition, presentation, and disclosure of revenue in financial statements. ASC 606 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. ASC 606 requires revenue to be recognized upon transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for services that are distinct and accounted for as separate performance obligations. In such cases, revenue would be recognized at the time of delivery or over time for each performance of service. However, ASC 606 exempts items under ASC 835-30 and ASC 310-20 (i.e. finance charges, late charges and origination fee income for the Company).
| 7 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
2. Summary of Significant Accounting Policies (Continued)
Premium Finance Contracts and Related Receivable
The Company finances insurance premiums on policies
primarily for commercial enterprises. The Company amortizes these loans over the term of each contract, which varies from three to twelve
monthly payments, and manages these loans on a collective basis based on similar risk characteristics. As of March 31, 2024 and December
31, 2023, the portfolio has an amortized cost basis of $
Allowance for Credit Losses
The carrying amount of the Premium Finance Contracts (“Contracts”) is reduced by an allowance for credit losses that are maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent 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, historical data, specific impaired Contracts, current and forecasted economic conditions, and other risks inherent in the Contracts. The allowance is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recovery.
To estimate expected credit losses on loans that exhibit similar risk characteristics, the Company considers historical loss information (updated for current conditions and reasonable and supportable forecasts that affect the expected collectability of the amortized cost basis pool) using a loss-rate approach. The Company monitors the A.M. Best rating for insurance carriers whose policies are being financed as a factor of the quality of its contract receivables. As of March 31, 2024, and December 31, 2023, the Company did not expect any material degradation to the ratings of the insurance carriers it currently underwrites or anticipates underwriting in a way that would affect the allowance for credit losses.
Amortization of Line of Credit Costs
Amortization of line of credit costs is computed using the straight-line method over the life of the loan.
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 credit losses, depreciable lives of property and equipment, and valuation of stock-based compensation.
| 8 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
2. Summary of Significant Accounting Policies (Continued)
Concentration of Credit and Financial Instrument Risk
Financial instruments that potentially subject the
Company to concentrations of credit risk are primarily cash and loans receivable from customers, agents, and insurance companies. The
Company maintains its cash balances at two banks. Accounts at these financial institutions are insured by the Federal Deposit Insurance
Corporation up to $
| March 31, 2024 (unaudited) | December 31, 2023 | |||||||
| Uninsured balance | $ | $ | ||||||
| Plus: Insured balances | ||||||||
| Plus: Balances at institutions that do not exceed FDIC limit | ||||||||
| Plus: Cash overdraft | ||||||||
| 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.
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 March 31, 2024 and December 31, 2023 was
$
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
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 premium finance contracts 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 notes payable are based on current rates at which the Company could borrow funds with similar remaining maturities and the carrying value approximates fair value.
| 9 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
2. Summary of Significant Accounting Policies (Continued)
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 no material unrecognized tax benefits and no adjustments to its consolidated financial position, results of operations or cash flows were required as of March 31, 2024
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
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC Topic No. 718, “Stock Compensation,” which establishes the requirements for expensing equity awards. The Company measures and recognizes as compensation expense the fair value of all share-based payment awards based on estimated grant date fair values. Our stock-based compensation includes issuances made to directors, executives, employees and consultants, which includes employee stock options related to our 2019 Equity Incentive Plan and stock warrants. The determination of fair value involves a number of significant estimates. We use the Black-Scholes option pricing model to estimate the value of employee stock options and stock warrants which requires a number of assumptions to determine the model inputs. These include the expected volatility of our stock and employee exercise behavior which are based expectations of future developments over the term of the option.
The Company 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 Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
2. Summary of Significant Accounting Policies (Continued)
For each of the three months ended March
31, 2024 and 2023, stock options to purchase shares of common stock were outstanding and stock warrants to purchase
| March 31, 2024 (unaudited) | March 31, 2023 (unaudited) | |||||||
| Options included in the calculation of diluted EPS | ||||||||
| Vested but antidilutive options | ||||||||
| Nonvested options | ||||||||
| Total options outstanding | ||||||||
| Warrants included in the calculation of diluted EPS | ||||||||
| Vested but antidilutive warrants | ||||||||
| Total warrants outstanding | ||||||||
The Series A Convertible Preferred Stock can be converted to common stock at 80% of the prevailing market price over the previous 30-day period at the option of the Company. This preferred stock is anti-dilutive as of March 31, 2024 and December 31, 2023, and excluded from dilutive earnings per share.
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.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts on an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exceptions. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company did not experience any impact on the consolidated financial statements from the adoption of the standard.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the existing "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. Under the CECL model, the Company is required to present certain financial assets carried at amortized cost, such as insurance premium finance loans held for investment, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted this standard in the first fiscal quarter of 2023. There has been no impact on current earnings due to the adoption of this standard.
3. Premium Finance Contracts, Related Receivable and Allowance for Credit Losses
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 Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
3. Premium Finance Contracts, Related Receivable and Allowance for Credit Losses (Continued)
At March 31, 2024 and December 31, 2023, premium finance contract and agents’ receivable consists of the following:
| Description | March 31, 2024 | December 31, 2023 | ||||||
| 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 credit losses | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
The allowance for credit losses at March 31, 2024 and December 31, 2023 are as follows:
| March 31, 2024 | December 31, 2023 | |||||||
| Allowance for premium finance contracts | $ | $ | ||||||
| Allowance for amounts due from agents | ||||||||
| Total allowance for credit losses | $ | $ | ||||||
Activity in the allowance for credit losses for the three months ended March 31, 2024 and the year ended December 31, 2023 are as follows:
| March 31, 2024 | December 31, 2023 | |||||||
| Balance at the beginning of the year | $ | $ | ||||||
| Current year provision | ||||||||
| Direct write-downs charged against the allowance | ( | ) | ( | ) | ||||
| Recoveries of amounts previously charged off | ||||||||
| Balance at end of the year | $ | $ | ||||||
The Company maintains a gross allowance, which includes allowances for write-offs of unearned revenues. The provisions and write-offs per this footnote are also displayed at gross amounts. These write-offs are split between the principal (i.e. provision for credit losses) and interest/fee (i.e. contra-revenue) portions on the consolidated statement of operations. The following table shows a reconciliation between the gross provision per this footnote and the provision for credit losses on the consolidated statement of operations:
| For the three months ended
March 31, | ||||||||
| 2024 (unaudited) | 2023 (unaudited) | |||||||
| Current additions to the allowance | $ | $ | ||||||
| Less: Contra-revenues | ( | ) | ( | ) | ||||
| Provision for credit losses | $ | $ | ||||||
| 12 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
3. Premium Finance Contracts, Related Receivable and Allowance for Credit Losses (Continued)
The aging analyses of contract receivables as of March 31, 2024 and December 31, 2023 are as
follows:
| Greater | ||||||||||||||||||||||||||||
| As of March 31, 2024 | 30–59 Days | 60–89 Days | 90-119 Days | Than 120 Days | Total Past-Due | Current | Grand Total | |||||||||||||||||||||
| Premium finance contracts: | ||||||||||||||||||||||||||||
| Outstanding | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Cancelled | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Greater | ||||||||||||||||||||||||||||
| As of December 31, 2023 | 30–59 Days | 60–89 Days | 90-119 Days | Than 120 Days | Total Past-Due | Current | Grand Total | |||||||||||||||||||||
| Premium finance contracts: | ||||||||||||||||||||||||||||
| Outstanding | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Cancelled | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
4. Property and Equipment, Net
The Company’s property and equipment consists of the following:
| March 31, 2024 | ||||||||
| (unaudited) | December 31, 2023 | |||||||
| Computer Software | $ | $ | ||||||
| Automobile | ||||||||
| Furniture & Fixtures | ||||||||
| Leasehold Improvements | ||||||||
| Computer Equipment | ||||||||
| Property and equipment, gross | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
The Company recorded depreciation expense in other
operating expenses of $
5. Leases
The Company accounts for leases in accordance with
ASC Topic 842. In March 2024, 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, 2026 with a one-year option to renew. The right-of-use asset and operating lease liability
at the execution of this lease totaled $
| 13 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
5. Leases (Continued)
Office lease – On March 1,
2024, the Company entered into a two (
Secure facility lease – On
September 26, 2022, the Company entered into a three (
Copier lease – On October
14, 2019 the Company entered into a copier lease. The right to use asset and lease liability at inception of the copier lease was $
Hardware lease – On September
30, 2022, the Company entered into a three-year lease for computer hardware. The lease has no renewal option. The lease is $
Server lease – On December 7, 2021,
the Company entered into a five-year
| March 31, 2024 | ||||||||||
| Leases | Classification | (unaudited) | December 31, 2023 | |||||||
| Right-of-use assets | Operating lease assets | $ | $ | |||||||
| Server lease | Finance lease assets | |||||||||
| Total lease assets | $ | $ | ||||||||
| Current operating lease liability | Current operating lease liabilities | $ | $ | |||||||
| Non-current operating lease liability | Long-term operating lease liabilities | |||||||||
| Total operating lease liabilities | $ | $ | ||||||||
| Current finance lease liability | Current finance lease liabilities | $ | $ | |||||||
| Non-current finance lease liability | Long-term finance lease liabilities | |||||||||
| Total finance lease liabilities | $ | $ | ||||||||
The weighted-average remaining lease term
was
| 14 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
6. Drafts Payable
Drafts payable outstanding represent unpaid drafts
that have not been disbursed by our senior lender as of the reporting date, on insurance premium finance contracts received by the Company
prior to the reporting date. As of March 31, 2024 and December 31, 2023, the draft payable balances are $
7. Line of Credit
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, our senior lender, for a revolving line of credit in the amount of $
At March 31, 2024 and December 31, 2023, the advance
rate was
The Company’s agreements with 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 adjusted 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, and copies of filings with regulatory bodies. On November 14, 2023, the Company executed an amendment of the loan agreement, which provided a waiver of default on its Interest Coverage Ratio as of September 30, 2023. The amendment also reduced the Minimum Interest Coverage Ratio for the following four quarters through September 30, 2024. Management believes it was in compliance with the applicable debt covenants as of March 31, 2024 and December 31, 2023.
| 15 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
8. PPP Loan
On April 18, 2020, the Company entered into a $
On June 22, 2022, the Company executed a loan modification
with Woodforest National Bank (“WNB”) allowing for the repayment of the PPP loan to WNB. The modified loan has a maturity
date of April 18, 2025 with a
| March 31, 2024 (unaudited) | December 31, 2023 | |||||||
| Total PPP loan | $ | $ | ||||||
| Less current maturities | ( | ) | ( | ) | ||||
| Long-term portion of PPP loan | $ | $ | ||||||
9. Notes Payable
At March 31, 2024 and December 31, 2023, the balances of long-term unsecured notes to unrelated parties are as follows:
| March 31, 2024 | ||||||||
| (unaudited) | December 31, 2023 | |||||||
| Total notes payable - Others | $ | $ | ||||||
| Less current maturities | ( | ) | ( | ) | ||||
| Long-term maturities | $ | $ | ||||||
These are notes payable to individuals. The notes
have interest payable monthly, ranging from
| 16 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
10. Notes Payable – Stockholders and Related Parties
At March 31, 2024 and December 31, 2023, the balances of long-term notes payable to stockholders and related parties are as follows:
| March 31, 2024 | ||||||||
| (unaudited) | December 31, 2023 | |||||||
| 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
11. Equity
Preferred Stock
As of March 31, 2024, the Company was authorized to issue million shares of preferred stock with a par value of $ 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 $
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 $
| 17 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
11. Equity (Continued)
December 31, 2022 dividends in arrears were declared and paid in January 2023. March 31, 2023 dividends in arrears were declared and paid in April 2023. June 30, 2023 dividends in arrears were declared and paid in July 2023. September 30, 2023 dividends in arrears were declared and paid in October 2023. December 31, 2023 dividends in arrears were declared and paid in January 2024. March 31, 2024 dividends in arrears were declared and paid in May 2024.
Common Stock
As of both March 31, 2024 and December 31, 2023, the Company was authorized to issue shares of common stock with a par value of $ per share, of which shares were issued and outstanding.
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.
The following table summarizes information about employee stock options outstanding at March 31, 2024:
| Outstanding Options | Vested Options | |||||||||||||||||||||||||
| Exercise Price | Number Outstanding at March 31, 2024 | Weighted Average Remaining Term | Weighted Average Exercise Price | Number Exercisable at March 31, 2024 | Weighted Average Remaining Term | Weighted Average Exercise Price | ||||||||||||||||||||
| $ | 0.80 | $ | $ | |||||||||||||||||||||||
| $ | 4.50 | $ | ||||||||||||||||||||||||
| $ | 4.95 | $ | ||||||||||||||||||||||||
| Outstanding options | years | $ | years | $ | ||||||||||||||||||||||
A summary of information regarding the stock options outstanding is as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Intrinsic Value | |||||||||||||||
| Outstanding at December 31, 2023 | $ | years | $ | |||||||||||||||
| Issued | — | — | ||||||||||||||||
| Exercised | — | — | ||||||||||||||||
| Outstanding at March 31, 2024 | $ | years | $ | |||||||||||||||
| Exercisable at March 31, 2024 | $ | years | $ | |||||||||||||||
During each of the three months ended March
31, 2024 and 2023, the Company recognized $
| 18 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
11. Equity (Continued)
Stock Warrants
A summary of information regarding the stock warrants outstanding is as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Intrinsic Value | |||||||||||||||
| Outstanding at December 31, 2023 | $ | years | $ | |||||||||||||||
| Issued | — | — | ||||||||||||||||
| Exercised | — | — | ||||||||||||||||
| Outstanding at March 31, 2024 | $ | years | ||||||||||||||||
| Exercisable at March 31, 2024 | $ | years | ||||||||||||||||
The warrants vested immediately. During each of the
three months ended March 31, 2024 and 2023, 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 board members 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 March 31, 2024 and December 31, 2023, the amounts advanced were $
| 19 |
Standard Premium Finance Holdings, Inc. and Subsidiary Condensed Notes to Consolidated Financial Statements March 31, 2024 (unaudited) |
12. Related Party Transactions (Continued)
Stock options
As discussed in Note 11, on June 29, 2022, the Company
issued
13. Commitments and Contingencies
On June 29, 2022, the Company signed “at-will”
employment agreements with its CEO and CFO, which include fixed salary increases over the next five years and performance-based equity
compensation. At the execution of the agreements, the Company issued a total of
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 April 2024, the Company issued $
| 20 |
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 $50,000, 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 Arizona, Colorado, Florida, Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Texas, and Virginia. Throughout 2023, we obtained licenses in fourteen additional states. 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 and lesser amounts of principal repayment during the first months of the loan, while decreasing interest income and increasing principal repayment 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 bank 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 66% ($44,737,234) of its capital and total liabilities as of March 31, 2024. As of March 31, 2024, the Company’s subordinated notes payable and PPP loan represented approximately 15% ($9,944,484) of the Company’s capital and total liabilities, operating liabilities provide approximately 9% ($6,310,720) of the Company’s capital and total liabilities, preferred equity provides approximately 3% ($1,660,000) of the Company’s capital and total liabilities, and equity in retained earnings and common stock paid-in capital represents the remaining 7% ($4,833,646) of the Company’s capital and total liabilities.
| 22 |
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 March 31, | ||||||||
2024 (unaudited) | 2023 (unaudited) | |||||||
| Gross Revenue | $ | 2,829,953 | $ | 2,078,804 | ||||
| Originations | $ | 39,215,406 | $ | 30,910,034 | ||||
| Interest Earned Rate | 17.2 | % | 16.5 | % | ||||
| Cost of Funds Rate, Gross | 7.92 | % | 7.22 | % | ||||
| Cost of Funds Rate, Net | 6.60 | % | 5.56 | % | ||||
| Reserve Ratio | 2.18 | % | 1.94 | % | ||||
| Provision Rate | 0.57 | % | 0.62 | % | ||||
| Return on Assets | 0.55 | % | 0.30 | % | ||||
| Return on Equity | 7.21 | % | 3.69 | % | ||||
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, Gross
Cost of Funds Rate, Gross is calculated as interest expense divided by average debt outstanding for the period.
Cost of Funds Rate, Net
Cost of Funds Rate, Net 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.
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.
| 23 |
RESULTS of OPERATIONS
Results of Operations for the Three Months ended March 31, 2024 Compared to the Three Months ended March 31. 2023
Revenue
Revenue increased by 36.1% overall or $751,149 to $2,829,953 for the three months ended March 31, 2024 from $2,078,804 for the three months ended March 31, 2023. The increase in revenue was primarily due to a 41.0% or $713,257 increase in finance charges and a 12.2% or $30,141 increase in late charges. Revenue from finance charges comprised 86.6% and 83.6% of overall revenue for the three months ended March 31, 2024 and 2023, respectively.
During the three months ended March 31, 2024 compared to the three months ended March 31, 2023, the company financed an additional $8,305,372 in new loan originations. This increase was due largely to increased marketing efforts throughout our established states and new states. The total quantity of loan originations increased by 456 for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. 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 to generate additional sales. In November 2022, the Company extended the maturity of this line of credit until November 30, 2025. See Future Cash Requirements for the Company’s strategy regarding its line of credit.
Expense
Expenses increased by 33.3% or $666,303 to $2,665,359 for the three months ended March 31, 2024 from $1,999,056 for the three months ended March 31, 2023.
The increase in expenses was primarily due to increases in the following categories:
| · | $291,513 increase in interest expense as a result of increases in the line of credit interest rate and increased borrowings on the line of credit to fund growth in the loan portfolio. Due to benchmark interest rate increases adopted by the Federal Reserve Board throughout 2022 and 2023, interest rates throughout the marketplace have increased accordingly. Our line of credit features a variable interest rate based on one-month SOFR. As of March 31, 2024 and 2023, our line of credit’s interest rate was 8.29% and 7.42%, respectively. Furthermore, as of March 31, 2024, our net borrowings on the line of credit had increased by $10,079,329 to $44,737,234 from $34,657,905 at March 31, 2023. This increase in borrowings is due primarily to increased loan originations. | |
| · | $144,108 increase in commissions as a result of increased loan originations because commissions are correlated with the amount of loan originations. | |
| · | $68,551 increase in salaries and wages expense primarily related to the hiring of additional marketing representatives in new and existing territories. |
Income before Taxes
Income before taxes increased by $84,846 to $164,954 for the three months ended March 31, 2024 from $79,748 for the three months ended March 31, 2023. This increase was attributable to the net increases and decreases as discussed above.
Income Tax Provision
Income tax provision increased by $34,924 to $45,792 for the three months ended March 31, 2024 from $10,868 for the three months ended March 31, 2023. This increase was primarily attributable to the increase in taxable income.
Net Income
Net Income increased by $49,922 to $118,802 for the three months ended March 31, 2024 from $68,880 for the three months ended March 31, 2023. This increase was attributable to the $84,846 increase in income before taxes related primarily to increased revenues, partially offset by the $34,924 increase in the provision for income taxes.
| 24 |
LIQUIDITY and CAPITAL RESOURCES as of March 31, 2024
We had $1,144 of cash and a working capital surplus of $11,694,325 at March 31, 2024. 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. 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. In November 2022, the Company extended the maturity of this line of credit until November 30, 2025 and replaced the benchmark rate of the loan from 30-day LIBOR to 30-day SOFR (Secured Overnight Financing Rate). LIBOR ceased to be published after June 30, 2023. The terms of the amended line of credit include an interest rate based on the 30-day SOFR rate plus an applicable margin of 2.55% - 2.96%, with a minimum rate of 3.35%. The applicable margin is based on the Company’s ratio of total liabilities to tangible net worth. As of March 31, 2024, the Company’s applicable margin was 2.96%. On November 14, 2023, the Company executed an amendment of the loan agreement, which provided a waiver of default on its Interest Coverage Ratio as of September 30, 2023. The amendment also reduced the Minimum Interest Coverage Ratio for the following four quarters through September 30, 2024. We anticipate that the interest rate we pay on our revolving credit agreement will remain elevated due to the recently adopted benchmark interest rate increases by the Federal Reserve Board. We believe that we will be able to pass along a portion of the interest rate increase on loans funded after the interest rate increase so that material effects to our net interest spread can be mitigated. Furthermore, because of the short-term nature of our loans, we are not bound to any particular loan and its fixed interest rate for a long period of time. 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 in the next 12 months.
During the three months ended March 31, 2024, the Company raised an additional $398,000 in subordinated notes payable – related parties and $518,698 in subordinated notes payable. The Company repaid $42,000 of notes payable. The Company utilizes its inflows from subordinated debt as a financing source before drawing additionally from the line of credit.
Future Cash Requirements
As the Company anticipates its growth patterns to continue, the larger line of credit is paramount to fueling this growth. The Company’s line of credit is $45,000,000 and its maturity on its line of credit facility is November 30, 2025. The extended maturity provides stability for the Company’s future cash requirements.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider the following to be our most critical accounting policy because it involves critical accounting estimates and a significant degree of management judgment:
Allowance for credit losses
We are subject to the risk of loss associated with our borrowers’ inability to fulfill their payment obligations, the risk that we will not collect sufficient unearned premium refunds on the cancelled policies on the defaulted loans to fully cover the unpaid loan principal and the risk that payments due us from insurance agents and brokers will not be paid.
The carrying amount of the Premium Finance Contracts (“Contracts”) is reduced by an allowance for credit losses that are maintained at a level which, in management’s judgment, is adequate to absorb losses inherent 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 credit losses, which is charged to expense, and reduced by charge-offs, net of recovery.
In addition, additional scrutiny is placed on accounts over 120 days to determine whether specific allowances should be maintained. Individual contracts are written off against the allowance when collection of the individual contracts appears doubtful. The collectability of outstanding and cancelled contracts is generally secured by collateral in the form of the unearned premiums on the underlying policies and accordingly historical losses are approximately 1% to 1.5% of the principal amount of loans made each year. The Company considers historical losses as well as forward-looking attributes in determining the adequacy of the allowance for credit losses. The collectability of amounts due from agents is determined by the financial strength of the agency.
| 25 |
Stock-Based Compensation
We account for stock-based compensation by measuring and recognizing as compensation expense the fair value of all share-based payment awards made to directors, executives, employees and consultants, including employee stock options related to our 2019 Equity Incentive Plan and stock warrants based on estimated grant date fair values. The determination of fair value involves a number of significant estimates. We use the Black Scholes option pricing model to estimate the value of employee stock options and stock warrants which requires a number of assumptions to determine the model inputs. These include the expected volatility of our stock and employee exercise behavior which are based expectations of future developments over the term of the option.
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 March 31, 2024. 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 March 31, 2024 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 March 31, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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 Part I. “Item 1A. Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on March 15, 2024 (“2023 Form 10-K”), which could adversely affect our business, financial condition, results of operations and cash flows. During the three months ended March 31, 2024, there have been no material changes in our risk factors disclosed in our 2023 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.
During the three
months ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act)
| 26 |
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 3.1 to Registrant's Current Report on Form 8-K filed on May 2, 2022) | |
| 4.1 | Description of Securities. (Incorporated by reference to Exhibit 4.1 to Registrant's Form 10-K filed on March 17, 2023) | |
| 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 | 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) | |
| 10.9 | First Amendment to Loan Agreement dated October 5, 2021 among Standard Premium Finance Management Corporation and First Horizon Bank. (Incorporated by reference to Exhibit 10.9 to Registrant’s Form 10-K filed on March 17, 2023) | |
| 10.10 | Second Amendment to Loan Agreement dated November 30, 2022 among Standard Premium Finance Management Corporation and First Horizon Bank. (Incorporated by reference to Exhibit 10.10 to Registrant’s Form 10-K filed on March 17, 2023) | |
| 10.11 | William Koppelmann Employment Contract. (Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed on July 6, 2022) | |
| 10.12 | Brian Krogol Employment Contract. (Incorporated by reference to Exhibit 10.3 to Registrant’s Form 8-K filed on July 6, 2022) | |
| 10.13* | William Koppelmann Employment Contract. (Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed on July 6, 2022) | |
| 10.14* | Brian Krogol Employment Contract. (Incorporated by reference to Exhibit 10.3 to Registrant’s Form 8-K filed on July 6, 2022) | |
| 10.15 | Procedures and Guidelines Governing Securities Transactions by Company Personnel. (Incorporated by reference to Exhibit 10.15 to Registrant’s Annual Report on Form 10-K filed on March 15, 2024) | |
| 14.1 | Code of Ethics. (Incorporated by reference to Exhibit 14.1 to Registrant’s Annual Report on Form 10-K filed on March 31, 2021) | |
| 21.1 | Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21.1 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 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.
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Date: May 13, 2024 |
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| STANDARD PREMIUM FINANCE HOLDINGS, INC. | ||||||||
| By: | /s/ William Koppelmann | |||||||
| William Koppelmann | ||||||||
| Chairman, President and Chief Executive Officer (Principal Executive Officer) |
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| By: | /s/ Brian Krogol | |||||||
| Brian Krogol | ||||||||
| Chief Financial Officer (Principal Financial Officer) |
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