Overview

We are an insurance premium financing company, specializing primarily in commercial policies. We make it efficient for companies to access financing for insurance premiums. Enabled by our network of marketing representatives and relationships with insurance agents, we provide a value-driven, customer-focused lending service.

We have offered premium financing since 1991 through our wholly owned subsidiary, Standard Premium Finance Management Corporation. We are generally targeting premium financing loans from $1,000 to $15,000, with repayment terms ranging from 6 to 10 months, although we may offer larger loans in cases we deem appropriate. Qualified customers may have multiple financings with us concurrently, which we believe provides opportunities for repeat business, as well as increased value to our customers.

We originate loans primarily in Florida, although we operate in several states. Over the past three years, the Company has expanded its operations, and currently is financing insurance premiums in Florida, Georgia, South Carolina, North Carolina, Texas, Tennessee and Arizona. Throughout 2022, we have obtained licenses in six additional states: Virginia, Maryland, Colorado, Mississippi, Ohio, and Louisiana. 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 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% ($33,794,962) of its capital as of June 30, 2022. As of June 30, 2022, the Company's subordinated notes payable represented approximately 17% ($9,003,810) of the Company's capital, operating liabilities provide approximately 7% ($3,722,551) of the Company's capital, preferred equity provides approximately 3% ($1,660,000) 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 8% ($3,936,892) of the Company's capital structure.





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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.





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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 June 30, 2022 Compared to the Three Months ended June 30. 2021





Revenue

Revenue increased by 6.2% overall or $120,155 to $2,042,982 for the three months ended June 30, 2022 from $1,922,827 for the three months ended June 30, 2021. The increase in revenue was primarily due to a 7.9% or $124,062 increase in finance charges offset by a 13.2% or $14,198 decrease in revenue from origination fees. Revenue from finance charges comprised 83.2% and 81.9% of overall revenue for the three months ended June 30, 2022 and 2021, respectively.

During the three months ended June 30, 2022 compared to the three months ended June 30, 2021, the company financed an additional $1,453,371 in new loan 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 June 30, 2022 as compared to 6,962 for the three months ended June 30, 2021. The quantity of loan originations is 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 February 2021, the Company executed a $35,000,000 line of credit with a new lender, terminating the previous 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. The additional availability on our line of credit was an essential driver to our increased financed amount of new loan originations during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. See Future Cash Requirements for the Company's strategy regarding its line of credit.





Expense

Expenses increased by 3.9% or $67,984 to $1,789,848 for the three months ended June 30, 2022 from $1,721,864 for the three months ended June 30, 2021.

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.




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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 $52,171, or 26.0%, to $253,134 for the three months ended June 30, 2022 from $200,963 for the three months ended June 30, 2021. This increase was attributable to the net increases and decreases as discussed above.





Income Tax Provision

Income tax provision increased $22,791 to $67,781 for the three months ended June 30, 2022 from $44,990 for the three months ended June 30, 2021. This increase was primarily attributable to the increase in taxable income.





Net Income

Net Income increased by $29,380, or 18.8%, to $185,353 for the three months ended June 30, 2022 from $155,973 for the three months ended June 30, 2021. This increase was attributable to the $52,171 increase in income before taxes related to increased business activity partially offset by the $22,791 increase in the provision for income taxes related to increased taxable income.

Results of Operations for the Six Months ended June 30, 2022 Compared to the Six Months ended June 30, 2021





Revenue

Revenue increased by 8.0% overall or $290,847 to $3,925,578 for the six months ended June 30, 2022 from $3,634,731 for the six months ended June 30, 2021. The increase in revenue was primarily due to a 9.7% or $288,071 increase in finance charges and a 4.7% or $21,530 increase in revenue from late charges, partially offset by a 9.1% or $18,754 decrease in revenue from origination fees. Revenue from finance charges comprised 83.0% and 81.7% of overall revenue for the six months ended June 30, 2022 and 2021, respectively.

During the six months ended June 30, 2022 compared to the six months ended June 30, 2021, the company financed an additional $3,141,722 in new loan 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 June 30, 2022 as compared to 13,317 for the six months ended June 30, 2021. The quantity of loan originations is 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 February 2021, the Company executed a $35,000,000 line of credit with a new lender, terminating the previous 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. The additional availability on our line of credit was an essential driver to our increased financed amount of new loan originations during the six months ended June 30, 2022 as compared to the three months ended June 30, 2021. See Future Cash Requirements for the Company's strategy regarding its line of credit.





Expense

Expenses increased by 6.1% or $195,185 to $3,371,756 for the six months ended June 30, 2022 from $3,176,571 for the six months ended June 30, 2021.





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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 $95,662, or 20.9%, to $553,822 for the six months ended June 30, 2022 from $458,160 for the six months ended June 30, 2021. This increase was attributable to the net increases and decreases as discussed above.





Income Tax Provision

Income tax provision increased $21,471 to $143,404 for the six months ended June 30, 2022 from $121,933 for the six months ended June 30, 2021. This increase was primarily attributable to the increase in taxable income.





Net Income

Net Income increased by $74,191, or 22.1%, to $410,418 for the six months ended June 30, 2022 from $336,227 for the six months ended June 30, 2021. This increase was attributable to the $95,662 increase in income before taxes related to increased business activity, partially offset by the $21,471 increase in the provision for income taxes related to increased taxable income.

Comparison of Cash Flows for the Six Months Ended June 30, 2022 and June 30, 2021

Cash Flows from Operating Activities

We used $3,226,589 of cash in our operating activities in 2022 compared to $7,411,612 used in our operating activities in 2021. The decrease in cash used of $4,185,043 was primarily due to a $4,073,965 decrease of cash used to support working capital components and a $111,078 increase of net income as adjusted for noncash items.

The $4,185,043 decrease of cash used to support working capital components was primarily due to a $4,500,988 decrease in the change in premium finance contracts, a $131,896 increase in the change in prepaid expenses and other current assets, a $70,000 increase in the change in deferred tax assets, partially offset by a $565,108 decrease in the change in accounts payable and accrued expenses and a $65,072 decrease in the change in drafts payable. These are natural fluctuations in operating accounts that occur during the normal course of business. The Company expects net cash outflows from operations during periods of growth. 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.





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The $111,078 increase of cash from net earnings as adjusted by noncash items resulted primarily from a $74,191 increase in net income and a $75,204 increase in bad debt expense, partially offset by a $29,586 decrease in the amortization 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 $33,953 of cash in our investing activities in 2022 compared to $48,269 in cash used in 2021. The decrease in cash used of $14,316 is due to a decrease in payments made on life insurance policies of $20,228 partially offset by an increase in purchases of property and equipment of $10,412.

Cash Flows from Financing Activities

We received $3,423,779 of cash provided by our financing activities in 2022 compared to $6,999,622 provided by financing activities in 2021. The decrease in funds provided of $3,575,843 is due primarily to an decrease in proceeds from the line of credit, net of repayments, of $2,882,229, an decrease in proceeds from notes payable - others of $456,964, an increase in repayments of notes payable - others of $236,000, an increase in repayments of notes payable - related parties of $166,302, and a decrease in cash overdraft of $153,264. These were partially offset by an increase in proceeds from the sale of preferred stock of $400,000. In 2021, the Company experienced breakout growth due to its 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 June 30, 2022

We had $184,244 of cash and a working capital surplus of $12,554,694 at June 30, 2022. 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. 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%. 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 Federal Reserve Board. We believe that we will be able to pass along any interest rate increase 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 June 30, 2022, the Company raised an additional $25,000 in subordinated notes payable - related parties and $325,000 in subordinated notes payable - others, and repaid $181,302 in subordinated notes payable - related parties and $236,000 in subordinated notes payable - others. 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 June 30, 2022, the Company sold 67,000 shares of Series A Convertible Preferred Stock ("Preferred Stock") for $400,000 in cash and exchanging $270,000 of its subordinated notes at a price of $10.00 per 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 $45,000,000, the Company expects to satisfy the cash requirements anticipated by 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.



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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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