STANDARD PREMIUM FINANCE HOLDINGS, INC. – 10-Q – 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,
targeting premium financing loans from
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
Over the past three years, the Company has expanded its operations, and
currently is financing insurance premiums in
licenses in six additional 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 financial institution collateralized by our loan receivables and our
other assets. We receive additional funding from unsecured subordinate
noteholders that pays monthly interest to the investors. We have also used
proceeds from operating cash flow to fund loans in the past and continue to
finance a portion of our outstanding loans with these funds. See Liquidity and
Capital Resources for additional information regarding our financing strategy.
The Company's main source of funding is its line of credit, which represented
approximately 64% (
30, 2022
(
approximately 7% (
provides approximately 3% (
represents approximately 1% (
retained earnings and common paid-in capital represents the remaining 8%
(
20
Key Financial and Operating Metrics
We regularly monitor a series of metrics in order to measure our current
performance and project our future performance. These metrics aid us in
developing and refining our growth strategies and making strategic decisions.
As of or for the Three Months Ended June 30,
2022 2021
(unaudited) (unaudited)
Gross Revenue $ 2,042,981 $ 1,922,827
Originations $ 29,869,917 $ 28,416,546
Interest Earned Rate 15.10 % 15.80 %
Cost of Funds Rate, Gross 4.61 % 4.61 %
Cost of Funds Rate, Net 3.46 % 3.46 %
Reserve Ratio 1.97 % 1.81 %
Provision Rate 0.91 % 0.66 %
Return on Assets 1.35 % 1.17 %
Return on Equity 18.38 % 18.84 %
As of or for the Six Months Ended June 30,
2022 2021
(unaudited) (unaudited)
Gross Revenue $ 3,925,578 $ 3,634,731
Originations $ 58,987,768 $ 55,846,046
Interest Earned Rate 14.96 % 15.53 %
Cost of Funds Rate, Gross 4.33 % 4.41 %
Cost of Funds Rate, Net 3.25 % 3.31 %
Reserve Ratio 1.97 % 1.81 %
Provision Rate 0.74 % 0.65 %
Return on Assets 1.49 % 1.34 %
Return on Equity 20.08 % 21.10 %
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 is calculated as interest expense divided by average debt
outstanding for the period.
Cost of Funds Rate, Net
Cost of Funds Rate is calculated as interest expense divided by average debt
outstanding for the period, net of the interest related tax benefit.
Reserve Ratio
Reserve Ratio is our allowance for credit losses at the end of the period
divided by the total amount of principal outstanding on Loans at the end of the
period. It excludes net deferred origination costs and associated fees.
21 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 Three Months ended
Three Months ended
Revenue
Revenue increased by 6.2% overall or
ended
The increase in revenue was primarily due to a 7.9% or
finance charges offset by a 13.2% or
origination fees. Revenue from finance charges comprised 83.2% and 81.9% of
overall revenue for the three months ended
During the three months ended
originations. This increase was due largely to increased marketing efforts
throughout our established states. Although the Company increased amounts
financed, the Company noted a decrease in the quantity of loan originations to
6,039 new loans for the three months ended
for the three months ended
directly correlated to the decrease in origination charge revenue, as the
Company immediately recognizes an origination fee on substantially all new
loans.
Under the terms of the line of credit agreement, the loan receivables and our
other assets provide the collateral for the loan. As the receivables increase,
driven by new sales, the company has greater borrowing power, giving it the
opportunity generate additional sales. In
credit. In
its line of credit to
availability on our line of credit was an essential driver to our increased
financed amount of new loan originations during the three months ended
2022
Requirements for the Company's strategy regarding its line of credit.
Expense
Expenses increased by 3.9% or
The increase in expenses was primarily due to increases in the following
categories:
· $84,152 increase in bad debt expense as a result of maintaining the
allowance for doubtful accounts in line with the balance in accounts
receivable from increased new loan originations.
· $38,529 increase in other operating expenses as a result of software
programming fees and market related expenses. The Company has begun
development of the web-based portion of its proprietary software, which
should lead to cost savings as well as synergistic effects with any
mergers or acquisitions. For the three months ended June 30, 2022 as
compared to the three months ended June 30, 2021 , the Company has also
paid additional fees to its transfer agent, market maker, and OTC Markets
related to the initiation of public trading of its common stock.
· $29,169 increase in interest expense as a result of loan originations
leading to increased borrowings on the line of credit. The Company
increased borrowings on the line of credit of $1,911,087 , an increase of
6.0%, at June 30, 2022 as compared to June 30, 2021 . Interest expense
increased by 6.4% or $29,169 during the three months ended June 30, 2022
as compared to the three months ended June 30, 2021 . The Company's new
line of credit with First Horizon Bank has a lower minimum rate, which
the Company has benefited from for the second quarter of 2021. During the
three months ended June 30, 2022 , the Company's increased borrowings on
the line of credit also led to the increase in interest expense. See
Liquidity and Capital Resources for more information on the new line of
credit.
22
The increases in expenses was primarily offset by a decrease in the following
category:
· $44,954 decrease in professional fees related to costs expensed as
incurred related to its financial statement audit and reviews.
Income before Taxes
Income before taxes increased by
months ended
2021
discussed above.
Income Tax Provision
Income tax provision increased
increase was primarily attributable to the increase in taxable income.
Net Income
Net Income increased by
ended
increase was attributable to the
to increased business activity partially offset by the
provision for income taxes related to increased taxable income.
Results of Operations for the Six Months ended
Months ended
Revenue
Revenue increased by 8.0% overall or
ended
increase in revenue was primarily due to a 9.7% or
charges and a 4.7% or
offset by a 9.1% or
from finance charges comprised 83.0% and 81.7% of overall revenue for the six
months ended
During the six months ended
30, 2021
originations. This increase was due largely to increased marketing efforts
throughout our established states. Although the Company increased amounts
financed, the Company noted a decrease in the quantity of loan originations to
12,255 new loans for the six months ended
for the six months ended
directly correlated to the decrease in origination charge revenue, as the
Company immediately recognizes an origination fee on substantially all new
loans.
Under the terms of the line of credit agreement, the loan receivables and our
other assets provide the collateral for the loan. As the receivables increase,
driven by new sales, the company has greater borrowing power, giving it the
opportunity generate additional sales. In
credit. In
its line of credit to
availability on our line of credit was an essential driver to our increased
financed amount of new loan originations during the six months ended
2022
Requirements for the Company's strategy regarding its line of credit.
Expense
Expenses increased by 6.1% or
23
The increase in expenses was primarily due to increases in the following
categories:
· $75,204 increase in bad debt expense as a result of maintaining the
allowance for doubtful accounts in line with the balance in accounts
receivable from increased new loan originations.
· $72,370 increase in other operating expenses as a result of software
programming fees and market related expenses. The Company has begun
development of the web-based portion of its proprietary software, which
should lead to cost savings as well as synergistic effects with any
mergers or acquisitions. For the six months ended June 30, 2022 as
compared to the six months ended June 30, 2021 , the Company has also paid
additional fees to its transfer agent, market maker, and OTC Markets
related to the initiation of public trading of its common stock.
· $60,835 increase in interest expense as a result of loan originations
leading to increased borrowings on the line of credit. The Company
increased borrowings on the line of credit of $1,911,087 , an increase of
6.0%, at June 30, 2022 as compared to June 30, 2021 . Interest expense
increased by 7.2% or $60,835 during the six months ended June 30, 2022 as
compared to the three months ended June 30, 2021 . The Company's new line
of credit with First Horizon Bank has a lower minimum rate, which the
Company has benefited from for the second quarter of 2021. During the six
months ended June 30, 2022 , the Company's increased borrowings on the
line of credit also led to the increase in interest expense, which
increased interest expense. See Liquidity and Capital Resources for more
information on the new line of credit.
· $21,742 increase in salaries and wages as a result of increases to staff
wages for the six months ended June 30, 2022 as compared to the six
months ended June 30, 2021 .
The increases in expenses was primarily offset by a decrease in the following
category:
· $40,466 decrease in commission expense primarily due to a lower Earned
Interest Rate for the six months ended June 30, 2022 as compared to the
six months ended June 30, 2021 . As the Company funds higher dollar value
loans, it must remain competitive on interest rates. The Company pays
lower commissions to agents when the interest rate on a loan origination
is lower. Furthermore, as the Company experiences increases in its line
of credit interest rates, the Company pays out lower commissions when
agents cannot or will not pass through those increases to its customers.
Income before Taxes
Income before taxes increased by
months ended
This increase was attributable to the net increases and decreases as discussed
above.
Income Tax Provision
Income tax provision increased
30, 2022
primarily attributable to the increase in taxable income.
Net Income
Net Income increased by
increase was attributable to the
to increased business activity, partially offset by the
provision for income taxes related to increased taxable income.
Comparison of Cash Flows for the Six Months Ended
2021
Cash Flows from Operating Activities
We used
of
working capital components and a
noncash items.
The
primarily due to a
contracts, a
current assets, a
partially offset by a
accrued expenses and a
are natural fluctuations in operating accounts that occur during the normal
course of business. The Company expects net cash outflows from operations during
periods of growth. The Company experienced breakout growth in the early months
of 2021 due to the increased line of credit. During 2022, the Company has
utilized its increased availability on its line of credit leading to consistent
growth in its investment in new loan originations and an increased premium
finance contracts receivable.
24
The
resulted primarily from a
in bad debt expense, partially offset by a
of loan origination fees. As the Company grew its receivables portfolio in 2022,
bad debt expense increased to adjust the allowance accordingly.
Cash Flows from Investing Activities
We used
in cash used in 2021. The decrease in cash used of
in payments made on life insurance policies of
increase in purchases of property and equipment of
Cash Flows from Financing Activities
We received
compared to
funds provided of
the line of credit, net of repayments, of
from notes payable - others of
payable - others of
related parties of
were partially offset by an increase in proceeds from the sale of preferred
stock of
new line of credit, utilizing its increased borrowing power to finance its
increased premium finance contracts receivable. In conjunction with the new line
of credit, the Company was required to increase its subordinated debt, which
accounts for the increases in proceeds from notes payable - related parties and
notes payable - others. During 2022, the Company's financing stabilized as
financing was primarily provided by its line of credit.
LIQUIDITY and CAPITAL RESOURCES as of
We had
2022
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
new lender,
credit to
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%. We anticipate
that the interest rate we pay on our revolving credit agreement may rise due to
the recently adopted benchmark interest rate increases by the
Board
to our borrowers so that our net interest spread will not be materially
affected. 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 six months ended
subordinated notes payable - others, and repaid
payable - related parties and
The Company utilizes its inflows from subordinated debt as a financing source
before drawing additionally from the line of credit.
During the six months ended
Series A Convertible Preferred Stock ("Preferred Stock") for
and exchanging
share. The additional Preferred Stock bolsters shareholder's equity, which, in
turn, increases leveraging ability on our 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. By increasing its line of credit to
its growth in the immediate future.
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. 25
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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