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. 18 We originate loans primarily inFlorida , although we operate in several states. Over the past three years, the Company has expanded its operations, and currently is financing insurance premiums inFlorida ,Georgia ,South Carolina ,North Carolina ,Texas ,Tennessee andArizona . 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. 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 63% ($30,476,375 ) of its capital as ofDecember 31, 2021 . This line of credit was replaced with a new lender,First Horizon Bank , onFebruary 3, 2021 . As ofDecember 31, 2021 , the Company's subordinated notes payable represented approximately 19% ($9,341,112 ) of the Company's capital, operating liabilities provide approximately 8% ($3,894,934 ) 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 7% ($3,544,779 ) of the Company's capital structure.
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 Years Ended December 31, 2021 2020 Gross Revenue $ 7,664,743 $ 6,434,182 Originations $ 109,803,362 $ 91,412,909 Interest Earned Rate 15.4 % 15.5 % Cost of Funds Rate 3.50 % 3.71 % Reserve Ratio 2.13 % 1.67 % Provision Rate 0.77 % 0.43 % Return on Assets 1.81 % 1.56 % Return on Equity 25.87 % 24.42 % 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.
19 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.
RESULTS of OPERATIONS
Results of Operations for the Year ended
Revenue
Revenue increased by 19.1% overall or$1,230,561 to$7,664,743 for the year endedDecember 31, 2021 from$6,434,182 for the year endedDecember 31, 2020 . The increase in revenue was due to a 19.7% or$1,039,530 increase in finance charges, a 12.5% or$108,334 increase in revenue from late charges, and a 27.0% or$82,697 increase in origination charges. Revenue from finance charges comprised 82.2% of overall revenue for the year endedDecember 31, 2021 . During the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , the company financed an additional$18,390,453 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 4,915 new loans for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 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 originations, the company has greater borrowing power, giving it the opportunity generate additional revenues. 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. InFebruary 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 year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . InOctober 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. Expenses
Expenses increased by 18.7% or
The increase in expenses was primarily due to increases in the following categories:
·
Company experienced during 2021. The Company maintains a bad debt reserve based
on the gross value of its premium finance contracts and related receivable.
These receivables grew 19.7% or
to
monthly to mitigate any unlikely uncertainties related to growth in the Company's receivables. 20
·
services for technological, legal, and
employed the services of technological consultants to help expand and improve
the Company's proprietary software. The Company also had increased legal and
consulting fees related to the new line of credit and
anticipation of getting its common stock trading.
·
in 2021. Commission expense is directly tied to loan originations, thus an
increase in commission expense is expected during periods of growth, such as
the Company experienced during the year ended
·
marketing representative to service our
region as well as increases in salary and hourly rates for our office staff.
·
Despite the increase in borrowings on the line of credit of
increase of 18.8% for the year ended
31, 2020, interest expense increased by
This is a 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 year ended
cost of funds. Furthermore, the Company's new line of credit, effective in
See Liquidity and Capital Resources for more information regarding the Company's new line of credit. Income before Taxes
Net Income before taxes increased by
Income Tax Provision Income tax provision increased$19,718 to$310,007 for the year endedDecember 31, 2021 from$290,289 for the year endedDecember 31, 2020 . This increase was primarily attributable to the increase in taxable income. Net Income Net Income increased by$188,918 to$876,323 for the year endedDecember 31, 2021 from$687,405 for the year endedDecember 31, 2020 . This increase was attributable to the$208,636 increase in income before taxes related to increased business activity, partially offset by the$19,718 increase in the provision for income taxes related to increased taxable income.
Comparison of Cash Flows for the Year Ended
Cash Flows from Operating Activities
We used$6,450,444 in cash for our operating activities in 2021 compared to$1,296,702 provided by our operating activities in 2020. The increase in cash used of$7,747,146 was primarily due to a$8,452,691 increase of cash used to support working capital components and offset by a$705,545 increase in net income as adjusted for noncash items. The$8,452,691 increase in cash used to support working capital components was primarily the due to a$7,918,781 increase in the change in premium finance contracts, and a$518,956 increase in the change in drafts payable. The Company's premium finance contracts receivable increased significantly throughout 2021, which requires investments in working capital to support the larger portfolio. As such, the Company expects these net cash outflows from operations during periods of growth. As discussed in the Revenues and Future Cash Requirements section, although the Company was able to grow in 2020, the Company was effectively constrained by the limit of its previous line of credit agreement. During 2021, the Company utilized its increased availability on its new line of credit leading to the large increase in premium finance contracts receivable. The$705,545 increase of cash from net earnings as adjusted by noncash items resulted primarily from an$188,918 increase in net income, a$444,986 increase in bad debt expense, and$81,331 increase in amortization of loan origination fees. As discussed in the Expenses section, the Company bolstered its bad debts reserve for its premium finance contracts receivable in accordance with the growth experienced during 2021.
Cash Flows from Investing Activities
We used$80,500 of cash in our investing activities in 2021 compared to$62,294 in cash used in 2020. The increase in cash used of$18,206 is due primarily to an increase in purchases of property and equipment of$15,304 . In 2021, the Company purchased a new vehicle, which is being depreciated over five years. 21
Cash Flows from Financing Activities
We were provided$6,074,642 cash in our financing activities in 2021 compared to$1,102,725 used in financing activities in 2020. The increase in funds provided of$7,177,367 is due primarily to an increase in proceeds from our line of credit of$5,911,670 , an increase in proceeds from notes payable - others of$1,076,047 , and a decrease in repayments of notes payable - others of$555,600 . These were partially offset by a decrease of$320,000 in proceeds from the sale of Series A convertible preferred stock and a decrease of$271,000 in proceeds from the PPP loan. 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 - others.
LIQUIDITY and CAPITAL RESOURCES as of
We had$20,987 cash and a working capital surplus of$9,621,194 atDecember 31, 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. InFebruary 2021 , the Company entered into a contract with a new lender,First Horizon Bank , for a two-year$35,000,000 line of credit. InOctober 2021 , the Company executed a loan amendment withFirst Horizon Bank to increase its line of credit to$45,000,000 , an increase of$10,000,000 . 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. 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 businesses and repay our obligations as they become due for at least the next 12 months. During the year endedDecember 31, 2021 , the Company raised an additional$168,000 in subordinated notes payable - related parties and$1,246,047 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. InApril 2020 , the Company received a$271,000 loan through the PPP program with theSmall 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 with support from the PPP loan. The Company expects to repay this loan during 2022. 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, inFebruary 2021 , the Company entered into a contract with a new lender for a two-year$35,000,000 line of credit. Furthermore, inOctober 2021 , the Company executed a loan amendment with this lender to increase its line of credit to$45,000,000 , an increase of$10,000,000 .
Uses of Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including costs associated with our premium finance loans, capital expenditures, debt repayments, acquisitions (if any), pursuing market expansion, supporting sales and marketing activities, and other general corporate purposes. While we believe we have sufficient liquidity and capital resources to fund our operations and repay our debt, we may elect to pursue additional financing activities such as refinancing or expanding existing debt or pursuing other debt or equity offerings to provide flexibility with our cash management and provide capital for potential acquisitions.
Off-balance Sheet Arrangements
None. 22 Contractual Obligations As ofDecember 31, 2021 , the Company was contractually obligated as follows: Payments Due by Period More than 5 Total Less than 1 Year 1 - 3 Years 3 - 5 Years Years Line of credit$ 30,476,375 $ 30,476,375 $ - $ - $ - Subordinated notes payable 9,341,112 3,147,023 5,935,105 258,984 - Capital lease obligations 64,910 11,857 39,536 13,517 - Operating lease obligations 228,954 98,249 130,705 - - Purchase obligations - - - - - Other long-term obligations 271,000 271,000 - - - Total contractual obligations$ 40,382,351 $ 34,004,504 $ 6,105,346 $ 272,501 $ - As ofDecember 31, 2020 , the Company was contractually obligated as follows: Payments Due by Period More than 5 Total Less than 1 Year 1 - 3 Years 3 - 5 Years Years Line of credit$ 25,653,473 $ 25,653,473 $ - $ - $ - Subordinated notes payable 8,029,465 2,609,122 5,021,484 398,859 - Capital lease obligations - - - - - Operating lease obligations 95,425 39,344 56,081 - - Purchase obligations - - - - - Other long-term obligations 271,000 15,022 255,978 - - Total contractual obligations$ 34,049,363 $ 28,316,961 $ 5,333,543 $ 398,859 $ -
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 premium finance contract receivable 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 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 loan losses, which is charged to expense, and reduced by charge-offs, net of recovery.
In addition, specific allowances are established for accounts past due over 120 days. 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 in determining the adequacy of the allowance for doubtful accounts. The collectability of amounts due from agents is determined by the financial strength of the agency. 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.
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