STANDARD PREMIUM FINANCE HOLDINGS, INC. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

Commission File No. 000-56243

STANDARD PREMIUM FINANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

13590 SW 134 th Avenue, Suite 214, Miami, FL 33186

(Address of principal executive offices and Zip Code)

305-232-2752

(Registrant’s telephone number, including area code)

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.    Yes  ☒    No  ☐

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).    Yes  ☒    No  ☐

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.

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 2,905,016 shares of common stock issued and outstanding as of November 10, 2022.

Explanatory Note

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Form 10-Q”) contains certain financial statements and information for the nine months ended September 30, 2021 filed by Standard Premium Finance Holdings, Inc. (the “Company”) with the Securities and Exchange Commission (the “SEC”) on its Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 filed on November 11, 2021.

In connection with preparing the Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 for this Quarterly Report on Form 10-Q, the Company determined that it previously incorrectly classified its Increase/Decrease in Premium Finance Contracts Receivable as operating activities. Beginning in the third quarter of 2022, the Company adjusted its consolidated statements of cash flows to present Increase/Decrease in Premium Finance Contracts Receivable as investing activities in accordance with ASC 230, Statement of Cash Flows.

The consolidated statement of cash flows for the nine months ended September 30, 2021 contained in this Form 10-Q has been restated to reflect these adjustments to the presentation. The Company will be filing an amended Annual Report on Form 10-K for the year ended December 31, 2021 to reflect the classification of its Increase/Decrease in Premium Finance Contracts Receivable as investing activities in its Consolidated Statement of Cash Flows filed in such Annual Report.

See Note 3 Adjustment to Statement of Cash Flows to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information regarding the restated Consolidated Statement of Cash Flows information contained in this Form 10-Q.

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, 2021, which was filed with the SEC on March 25, 2022. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Forward-looking statements represent intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements.

Each of the terms the “Company” and “Standard Premium” as used herein refers collectively to Standard Premium Finance Holdings, Inc. and its wholly owned subsidiaries, unless otherwise stated.

STANDARD PREMIUM FINANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

STANDARD PREMIUM FINANCE HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

Table of Contents

Standard Premium Finance Holdings, Inc. and Subsidiary

Consolidated Balance Sheets

September 30, 2022 (unaudited) and December 31, 2021

See accompanying condensed notes to the consolidated unaudited financial statements.

Standard Premium Finance Holdings, Inc. and Subsidiary

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

See accompanying condensed notes to the consolidated unaudited financial statements.

Standard Premium Finance Holdings, Inc. and Subsidiary

Consolidated Statement of Changes in Stockholders' Equity

For the Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

See accompanying condensed notes to the consolidated unaudited financial statements.

Standard Premium Finance Holdings, Inc. and Subsidiary

Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2022 and 2021

(Unaudited)

See accompanying condensed notes to the consolidated unaudited financial statements.

Standard Premium Finance Holdings, Inc. and Subsidiary

Condensed Notes to Consolidated Financial Statements

June 30, 2022 and 2021

(unaudited)

1. Principles of Consolidation and Description of Business

Standard Premium Finance Holdings, Inc. (“SPFH” or the “Holding”) was incorporated on May 12, 2016, pursuant to the laws of the State of Florida.

Standard Premium Finance Management Corporation (“SPFMC” or the “subsidiary”) was incorporated on April 23, 1991, pursuant to the laws of the State of Florida, to engage principally in the insurance premium financing business. The Subsidiary is a licensed insurance premium finance company in Florida, Georgia, North Carolina, South Carolina, Texas, Arizona, Virginia, Arkansas, Nebraska, Mississippi, Maryland, Colorado, Ohio, Louisiana, Tennessee, Massachusetts, Minnesota, and Alabama.

The accompanying condensed consolidated financial statements include the accounts of SPFH and its wholly-owned subsidiary SPFMC. SPFH and its subsidiary are collectively referred to as (“the Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements (unaudited), which include the accounts of Standard Premium Finance Holdings, Inc. and its wholly-owned subsidiary, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended December 31, 2021.

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, 2021, have been omitted.

Cash and Cash Equivalents

The Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents. There are no cash equivalents at September 30, 2022 and December 31, 2021.

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. For Florida, Georgia, North Carolina and Texas contracts, an initial origination fee of $20 per contract and the first month’s interest are recognized as income at the inception of a contract. The same treatment is applied to the $15 initial origination fee and first month’s interest in South Carolina. The origination fee can only be charged once to an insured in a twelve-month period. In accordance with industry practice, finance charges are recognized as income using the “Rule of 78s” method of amortizing finance charge income, which does not materially differ from the interest method of amortizing finance charge income on short term receivables. Late charges are recognized as income when charged. Unearned interest is netted against Premium Finance Contracts and Related Receivables on the balance sheet for reporting purposes.

2. Summary of Significant Accounting Policies (Continued)

The Company follows the provisions of Financial Accounting Standards Board (“FASB”) ASC 606, Revenue from Contracts with Customers (“ASC 606”), which provides 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).

Premium Finance Contracts and Related Receivable

The Company finances insurance premium on policies primarily for commercial enterprises. The term of each contract varies from 3 to 12 monthly payments. Repayment terms are structured such that the contracts will be repaid within the term of the underlying insurance policy, generally less than one year. The contracts are secured by the unearned premium of the insurance carrier which is obligated to pay the Company any unearned premium in the event the insurance policy is cancelled pursuant a power of attorney contained in the finance contract. As of September 30, 2022 and December 31, 2021, the amount of unearned premium on open and cancelled contracts totaled $75,986,257 and $67,929,695, respectively. The annual percentage interest rates on new contracts averaged approximately 15.6% and 15.5% during nine months ended September 30, 2022 and 2021, respectively.

Allowance for Doubtful Accounts

The carrying amount of the Premium Finance Contracts (“Contracts”) is reduced by an allowance for losses that are maintained at a level which, in management’s judgment, is adequate to absorb losses 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 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 tend to be relatively small. The collectability of amounts due from agents is determined by the financial strength of the agency.

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 5 - 7 years

Computer equipment and software 3 - 5 years

Leasehold improvements 10 years

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.

2. Summary of Significant Accounting Policies (Continued)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include assumptions used in valuation of deferred tax assets, allowance for doubtful accounts, depreciable lives of property and equipment, and valuation of stock-based compensation.

Concentration of Credit and Financial Instrument Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and 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 $250,000. Uninsured balances are $134,790 and $0 at September 30, 2022 and December 31, 2021, respectively. The Company mitigates this risk by maintaining its cash balances at high-quality financial institutions. The following table provides a reconciliation between uninsured balances and cash per the 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 57% and 51% of the Company’s business activity is with customers located in Florida for 2022 and 2021, respectively. Approximately 13% and 22% of the Company’s business activity is with customers located in Georgia for 2022 and 2021, respectively. Approximately 13% and 14% of the Company's business activity is with customers located in North Carolina for 2022 and 2021, respectively. There were no other significant regional, industrial or group concentrations during the nine months ended September 30, 2022 and 2021.

Cash Surrender Value of Life Insurance

The Company is the owner and beneficiary of a life insurance policy on its president. The cash surrender value relative to the policy in place at September 30, 2022 and December 31, 2021 was $596,087 and $559,877, respectively.

2. Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments

The Company’s carrying amounts of financial instruments as defined by Financial Accounting Standards Board (“FASB”) ASC 825, “Disclosures about Fair Value of Financial Instruments”, including finance contract and related receivables, prepaid expenses, drafts payable, accrued expenses and other current liabilities, approximate their fair value due to the relatively short period to maturity for these instruments. The fair value of the line of credit and long-term debt are based on current rates at which the Company could borrow funds with similar remaining maturities and the carrying value approximates fair value.

Income Taxes

The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

Uncertain tax positions are recognized only when the Company believes it is more likely than not that the tax position will be upheld on examination by the taxing authorities based on the merits of the position. The Company has no material unrecognized tax benefits and no adjustments to its consolidated financial position, results of operations or cash flows were required as of September 30, 2022.

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 not have any accrued interest or penalties associated with uncertain tax positions as of December 31, 2021.

Stock-Based Compensation

The Company account 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 are 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 on expectations of future developments over the term of the option.

Earnings per Common Share

The Corporation accounts for earnings (loss) per share in accordance with FASB ASC Topic No. 260 - 10, “Earnings Per Share”, which establishes the requirements for presenting earnings per share (“EPS”). FASB ASC Topic No. 260 - 10 requires the presentation of “basic” and “diluted” EPS on the face of the statement of operations. Basic EPS amounts are calculated using the weighted-average number of common shares outstanding during each period. Diluted EPS assumes the exercise of all stock options, warrants and convertible securities having exercise prices less than the average market price of the common stock during the periods, using the treasury stock method.

2. Summary of Significant Accounting Policies (Continued)

For the nine months ended September 30, 2022 and 2021, stock options to purchase 207,400 and 187,400 shares of common stock were outstanding, respectively, as described in Note 12. 93,700 of these options vested on March 1, 2021, 93,700 stock options vested on March 1, 2022, 10,000 stock options vest on June 29, 2023, and the remaining 10,000 stock options vest on June 29, 2024. The 187,400 vested stock options are considered dilutive and included in the calculation of diluted EPS at September 30, 2022, but considered anti-dilutive and excluded from the calculation of diluted EPS at September 30, 2021.

For the nine months ended September 30, 2022 and 2021, stock warrants to purchase 1,035,000 and 975,000 shares of common stock were outstanding, respectively, as described in Note 12. All the stock warrants vested immediately. 635,000 warrants are considered dilutive and included in the calculation of diluted EPS and the remaining 400,000 warrants are “out-of-the-money” and excluded from the calculation of diluted EPS as of September 30, 2022. As of September 30, 2021, all 975,000 outstanding warrants are not “in-the-money” and are thus anti-dilutive and excluded from the calculation of diluted EPS.

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 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 is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.

2. Summary of Significant Accounting Policies (Continued)

Reclassification

In 2021, the Company reconsidered its definition of related party when classifying its notes payable. The Company previously had recorded notes payable due to any stockholder as a related party note. Under the new classification, only notes payable to officers, directors, greater than 5% shareholders, and insiders are considered related party notes. See Footnote 10 and Footnote 11 for more information on the notes payable. The effect of this reclassification on the consolidated statement of cash flows for the nine months ended September 30, 2021 is as follows:

3. Restatement of the Statement of Cash Flows

In the third quarter of 2022, pursuant to the advice of a technical expert, the Company restated its consolidated statements of cash flows to present the increase/decrease in premium finance contracts receivable as investing activities, in accordance with ASC 230, Statement of Cash Flows. Previously, the increase/decrease in premium finance contracts receivable were presented within operating activities on the Company's consolidated statements of cash flows. These changes have no impact on previously reported consolidated statements of operations and balance sheets as well as earnings per share.

The consolidated statement of cash flows for the nine months ended September 30, 2021, the six months ended June 30, 2022 and 2021, and the three months ended March 31, 2022 and 2021 have been restated to reflect these adjustments to the presentation. The following tables present the effects of the changes on the presentation of the previously reported consolidated statement of cash flows:

3. Adjustment to Statement of Cash Flows (Continued)

4. Premium Finance Contracts, Related Receivable and Allowance for Doubtful Accounts

Premium Finance Contracts and Related Receivable represent monthly payments due on insurance premium finance contracts. The Company finances insurance policies over periods from three months to one year for businesses and consumers who make an initial down payment of, on average, 25 percent of the insurance policy amounts. The entire amount of the contract is recorded including amounts due for finance charges and services charges. These receivables are reported net of unearned interest for financial statements purposes. Amounts due from agents represent balances related to (1) an agent’s unearned commission due to a policy cancellation and (2) down payments collected by the agents on behalf of the insured, which are due to us. Receivables from insurance premium finance contracts cancelled are due from the insurance companies.

At September 30, 2022 and December 31, 2021, premium finance contract and agents’ receivable consists of the following:

4. Premium Finance Contracts, Related Receivable and Allowance for Doubtful Accounts (Continued)

The allowance for doubtful accounts at September 30, 2022 and December 31, 2021 are as follows:

Activity in the allowance for doubtful accounts for the nine months ended September 30, 2022 and the year ended December 31, 2021 are as follows:

The Company maintains its allowance at gross amounts, which includes allowances for write-offs of unearned revenues. Provisions and write-offs per the footnote table above are displayed at gross amounts, which include provisions and write-offs of unearned revenues. These write-offs are appropriately split between the principal (i.e. bad debt expense) and interest/fee (i.e. contra-revenue) portions on the income statement. The following tables show a reconciliation between the total provision per the footnote and bad debt expense on the consolidated statement of operations:

5. Property and Equipment, Net

The Company’s property and equipment consists of the following:

The Company recorded depreciation expense of $16,103 and $25,239, respectively for the nine months ended September 30, 2022 and 2021. The Company recorded depreciation expense of $5,781 and $8,683, respectively for the three months ended September 30, 2022 and 2021.

6. Leases

The Company accounts for leases in accordance with ASC Topic 842. In March 2021, the Company renewed its office lease with Marlenko Acquisitions, LLC. The new two-year lease is identical to the previous lease and expires on February 28, 2023 with a one-year option to renew. The right-of-use asset and operating lease liability at the execution of this lease totaled $235,335. The Company used its incremental borrowing rate of 5.25% for all operating leases as of September 30, 2022 and December 31, 2021. In September 2022, the Company renewed its secure facility lease as described below. In September 2022, the Company also entered into a new lease agreement for computer hardware as described below.

Office lease – On March 1, 2021, the Company entered into a two (2) year lease for an office facility located in Miami Florida with an entity controlled by our CEO and related parties. The lease has a one-time renewal option for one year which management is reasonably certain will be exercised. The lease is $7,450 per month and expires in February 2024, including the renewal option (see Note 13).

6. Leases (Continued)

Secure facility lease – On September 11, 2017, the Company entered into a five (5) year lease for a secure facility located in Miami Florida. The lease had no renewal option. The lease was $1,233 per month and expired in August 2022. On September 26, 2022, the Company entered into a three (3) year lease for a secure facility located in Miami, Florida. The lease has no renewal option. The lease is $1,418 per month, with payment increases of 4% annually, and expires in September 2025. The right-of-use asset and operating lease liability at the execution of this lease totaled $48,979.

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 $68,799. The Company used its incremental borrowing rate of 5.25% to determine the present value of the lease payment. The cost of the copier lease is $1,116 per month and expires October 14, 2024 with a one-year renewal option which the Company expects to exercise.

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 $664 per month and expires in September 2025. The right-of-use asset and operating lease liability at the execution of this lease totaled $22,059.

Server lease – On December 7, 2021, the Company entered into a five-year lease for a computer server. The lease contains a bargain purchase option, which the Company intends to exercise. The Company recorded this lease as a finance lease. The fixed asset and lease liability at inception of the lease was $66,281 and $65,801, respectively. The Company used its incremental borrowing rate of 5.25% to determine the present value of the lease payment. The lease payments are $1,249 per month through December 2026.

The weighted-average remaining lease term was 2.59 years and 2.99 years as of September 30, 2022 and December 31, 2021, respectively. For the nine months ended September 30, 2022 and 2021, the total lease cost was $85,610 and $76,837, respectively. For the three months ended September 30, 2022 and 2021, the total lease cost was $28,051 and $24,645, respectively.

7. 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 September 30, 2022 and December 31, 2021, the draft payable balances are $2,141,140 and $1,935,278, respectively.

8. Line of Credit

Relationship with Woodforest National Bank (“WNB”)

On October 5, 2018, the Company entered into an exclusive twenty-four month loan agreement with Woodforest National Bank for a revolving line of credit in the amount of $25,000,000. The Company recorded $164,396 of loan origination costs. On July 30, 2019, the Company’s line of credit was modified to $27,500,000, maturing October 5, 2020. On October 5, 2020, the Company’s line of credit was extended to a maturity date of January 5, 2021.

Interest expense on this line of credit for the nine months ended September 30, 2022 and 2021 totaled approximately $0 and $86,000, respectively. This line of credit was fully paid off on February 3, 2021 (see below).

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 $35,000,000, which was immediately funded for $25,974,695 to pay off the prior line of credit with WNB. On this date, the line of credit with WNB was fully repaid and terminated. The Company recorded $180,350 of loan origination costs. In October 2021, the Company increased its line of credit with First Horizon Bank from $35,000,000 to $45,000,000.

At September 30, 2022 and December 31, 2021, the advance rate was 85% of the aggregate unpaid balance of the Company’s eligible accounts receivable. The line of credit is secured by all the Company’s assets and is personally guaranteed by our CEO and two members of the Board of Directors of the Company. The line of credit bears interest at 30 Day Libor plus 2.85% per annum (5.41% at September 30, 2022 and 3.35% at December 31, 2021). The terms of the Line of Credit agreement provide for a minimum interest of 3.35% when the 30 Day Libor falls below 0.50%. As of September 30, 2022, the amount of principal outstanding on the line of credit was $35,379,169 and is reported on the consolidated balance sheet net of $15,533 of unamortized loan origination fees. As of December 31, 2021, the amount of principal outstanding on the line of credit was $30,537,067 and is reported on the consolidated balance sheet net of $60,692 of unamortized loan origination fees. Interest expense on this line of credit for the three months ended September 30, 2022 and 2021 totaled approximately $452,000 and $202,000, respectively. Interest expense on this line of credit for the nine months ended September 30, 2022 and 2021 totaled approximately $980,000 and $603,000, respectively. The Company recorded amortized loan origination fees for the three months ended September 30, 2022 and 2021 of $11,650 and $37,856, respectively. The Company recorded amortized loan origination fees for the nine months ended September 30, 2022 and 2021 of $45,158 and $100,950, respectively. The Company had availability on this line of credit of $6,869,268 as of September 30, 2022.

The Company’s agreements with WNB and FHB contain certain financial covenants and restrictions. Under these restrictions, all the Company’s assets are pledged to secure the line of credit, the Company must maintain certain financial ratios such as an adjusted tangible net worth ratio, interest coverage ratio and senior leverage ratio. The loan agreement also provides for certain covenants such as audited financial statements, notice of change of control, budget, permission for any new debt, copy of filings with regulatory bodies, minimum balances. Management believes it was in compliance with the applicable debt covenants as of September 30, 2022 and December 31, 2021.

LIBOR will cease to be published after June 30, 2023. The Company expects that any of our future loan agreements will be based on a different benchmark rate.

9. PPP Loan

On April 18, 2020, the Company entered into a $271,000 loan with Woodforest National Bank, under a program administered by the Small Business Administration (“SBA”) as part of the Paycheck Protection Program (“PPP”) approved under the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES Act”) (Pub. L. No. 116-136). The loan matures in two (2) years and accrues interest at 1% from the origination of the loan. After a 6 month deferral, interest and principal payments are due monthly. The Note is subject to partial or full forgiveness, the terms of which are dictated by the SBA, the CARES Act, section 7(a)(36) of the Small Business Act, all rules and regulations promulgated thereunder including, without limitation, Interim Final Rule RIN 3245-AH34, subsequent SBA guidance, and the Code of Federal Regulations.

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 1% fixed interest rate and monthly principal and interest payments of $7,801.12 beginning on May 18, 2022.

As of September 30, 2022 and December 31, 2021, the balance of the PPP loan is as follows:

10. Note Payable – Others

At September 30, 2022 and December 31, 2021, the balances of long-term unsecured notes to unrelated parties are as follows:

These are notes payable to individuals. The notes have interest payable monthly, ranging from 6% to 8% per annum and are unsecured and subordinated. The principal is due on various dates through December 31, 2026. The notes roll-over at periods from 8 months to 4 years on maturity unless the note holder requests repayment through written instructions at least 90 days prior to the expiration date. Interest expense on these notes totaled approximately $377,000 and $357,000 during the nine months ended September 30, 2022 and 2021, respectively. Interest expense on these notes totaled approximately $126,000 and $137,000 during the three months ended September 30, 2022 and 2021, respectively. The Company received proceeds on these notes of $505,000 and $1,216,426 for the nine months ended September 30, 2022 and 2021, respectively. The Company repaid principal on these notes of $236,000 and $55,000 for the nine months ended September 30, 2022 and 2021, respectively.

In April 2022, the Company exchanged $250,000 of these notes for 25,000 shares of Series A Convertible Preferred Stock at a price of $10.00 per share.

11. Note Payable – Stockholders and Related Parties

At September 30, 2022 and December 31, 2021, the balances of long-term notes payable to stockholders and related parties are as follows:

These are notes payable to stockholders and related parties. The notes have interest payable monthly ranging from 6% to 8% per annum and are unsecured and subordinated. The principal is due on various dates through August 31, 2026. The notes roll-over at periods from 8 months to 4 years on maturity unless the note holder requests repayment through written instructions at least 90 days prior to the expiration date. Interest expense on these notes totaled approximately $119,000 and $120,000 during the nine months ended September 30, 2022 and 2021, respectively. Interest expense on these notes totaled approximately $39,000 and $42,000 during the three months ended September 30, 2022 and 2021, respectively. The Company received proceeds on these notes of $25,000 and $143,000 for the nine months ended September 30, 2022 and 2021, respectively. The Company repaid principal on these notes of $181,032 and $25,000 for the nine months ended September 30, 2022 and 2021, respectively.

In January 2022, the Company exchanged $20,000 of these notes payable for 2,000 shares of Series A Convertible Preferred Stock at a price of $10.00 per share.

12. Equity

Preferred Stock

As of September 30, 2022, the Company was authorized to issue 20 million shares of preferred stock with a par value of $0.001 per share, of which 600,000 shares had been designated as Series A convertible and 166,000 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 $10 for each share of preferred stock, plus all unpaid dividends that have been accrued, accumulated or declared. As of September 30, 2022, the total liquidation preference on the preferred stock is $1,689,050. The Company may redeem the preferred stock from the holders at any time following the second anniversary of the closing of the original purchase of the preferred stock. 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.

Holders of preferred stock are entitled to receive preferential cumulative dividends, only if declared by the board of directors, at a rate of 7% per annum per share of the liquidation preference amount of $10 per share. During the nine months ended September 30, 2022 and 2021, the Board of Directors has declared and paid dividends on the preferred stock of $60,141 and $51,975, respectively. During the three months ended September 30, 2022 and 2021, the Board of Directors has declared and paid dividends on the preferred stock of $25,258 and $17,325, respectively. As of September 30, 2022 and December 31, 2021, preferred dividends are in arrears by $29,050 and $17,325, respectively.

12. Equity (Continued)

December 31, 2020 dividends in arrears were declared and paid in January 2021. March 31, 2021 dividends in arrears were declared and paid in April 2021. June 30, 2021 dividends in arrears were declared and paid in July 2021. September 30, 2021 dividends in arrears were declared and paid in October 2021. December 31, 2021 dividends in arrears were declared and paid in January 2022. March 31, 2022 dividends in arrears were declared and paid in April 2022. June 30, 2022 dividends in arrears were declared and paid in July 2022. September 30, 2022 dividends in arrears were declared and paid in October 2022.

In January 2022, the Company exchanged $20,000 of its notes payable for 2,000 shares of Series A Convertible Preferred Stock at a price of $10.00 per share. On April 30, 2022, the Company issued 65,000 shares of Series A Convertible Preferred Stock for $400,000 cash and exchanged for $250,000 of its notes payable at a price of $10.00 per share. There were no gains or losses on these exchanges.

Common Stock

As of both September 30, 2022 and December 31, 2021, the Company was authorized to issue 100 million shares of common stock with a par value of $0.001 per share, of which 2,905,016 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.

A summary of information regarding the stock options outstanding is as follows:

On March 1, 2020, 187,400 of the above options were granted to designated Officers and employees. Half of those options vested on March 1, 2021 and the other half vested on March 1, 2022. On June 29, 2022 20,000 of the above options were granted to designated Officers. Half of these options vest on June 29, 2023 and the other half vest on June 29, 2024. During the nine months ended September 30, 2022 and 2021, the Company recognized $12,828 and $26,002, respectively, of stock option expense. During the three months ended September 30, 2022 and 2021, the Company recognized $7,050 and $8,668, respectively, of stock option expense.

12. Equity (Continued)

The fair value of the stock options originated in 2022 was determined using the Black Scholes Option Pricing Model based on the following assumptions:

Stock Warrants

On April 1, 2020, the Company issued 800,000 of previously authorized warrants for the purchase of common stock that are split into two classes of warrants. The 400,000 Class W4 warrants are issued at $.001 Par Value and exercisable at a strike price of $4 for a period of five (5) years. The 400,000 Class W12 warrants are issued at $.001 Par Value and are exercisable at a strike price of $12 for a period of five (5) years. On June 11, 2021, the Company issued 175,000 of previously authorized warrants for the purchase of common stock. The 175,000 Class W4A warrants are issued at $.001 Par Value and exercisable at a strike price of $4 for a period of five (5) years. On June 1, 2022 the Company issued 60,000 of previously authorized warrants for the purchase of common stock. The 60,000 Class W4A warrants are issued at $.0001 Par Value and exercisable at a strike price of $4 for a period of five (5) years. A summary of information regarding the stock options outstanding is as follows:

The above outstanding warrants were issued on June 29, 2022, June 11, 2021 and April 1, 2020, to designated Officers, Directors, and consultants with a total fair value of $10,800, $9,275 and $27,200 on the grant date, respectively. The warrants vested immediately. During the three months ended September 30, 2022 and 2021, the Company recognized $0 and $0, respectively, of stock warrant expense. During the nine months ended September 30, 2022 and 2021, the Company recognized $10,800 and $9,275, respectively, of stock warrant expense.

The fair value of the stock options originated in 2022 was determined using the Black Scholes Option Pricing Model based on the following assumptions:

13. 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 $7,451 is paid monthly. The lease contract expires in February 2024.

Line of credit

As discussed in Note 8, 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 $35,000,000. In October 2021, the Company increased its line of credit with First Horizon Bank from $35,000,000 to $45,000,000.

Notes payable

As discussed in Note 11, the Company has been advanced funds by its shareholders. As of September 30, 2022 and December 31, 2021, the amounts advanced were $1,915,000 and $2,091,302, respectively.

Stock Options

As discussed in Note 12, on March 1, 2020, the Company issued 187,400 stock options, of which 167,400 stock options were issued to officers and directors under the terms of the 2019 Equity Incentive Plan. The impact on earnings from this transaction was a total of $69,338, which has been fully amortized as of March 31, 2022. This transaction also increased additional paid in capital over the same period.

On June 29, 2022, the Company issued 20,000 stock options to officers and directors under the terms of the 2019 Equity Incentive Plan. The impact on future earnings from this transaction is a total of $56,400, which is being amortized over 24 months at a rate of $2,350. This transaction will also increase additional paid in capital over the same period at the same rate.

Stock Warrants

As discussed in Note 12, on April 1, 2020, the Company issued 800,000 stock warrants, of which 800,000 stock warrants were issued to officers, directors, and a related party. On June 11, 2021, the Company issued 175,000 stock warrants, of which 175,000 were issued to officers, directors, and a related party.

14. 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 20,000 stock options for the purchase of common stock pursuant to its 2019 Equity Incentive Plan. These stock options vest over a two-year period.

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.

15. Subsequent Events

In October 2022, the Board of Directors declared and paid dividends on the Series A convertible preferred stock of $29,050. In October 2022, the Company repaid $50,000 of notes payable – others.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

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

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

We originate loans primarily in Florida, although we operate in several states. Over the past three years, the Company has expanded its operations, and currently is financing insurance premiums in Florida, Georgia, South Carolina, North Carolina, Texas, Tennessee and Arizona. Throughout 2022, we have obtained licenses in eleven additional states: Virginia, Arkansas, Nebraska, Mississippi, Maryland, Colorado, Ohio, Louisiana, Massachusetts, Minnesota, and Alabama. 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 65% ($35,363,636) of its capital as of September 30, 2022. As of September 30, 2022, the Company’s subordinated notes payable and PPP loan represented approximately 17% ($9,422,405) of the Company’s capital, operating liabilities provide approximately 7% ($3,759,732) of the Company’s capital, preferred equity provides approximately 3% ($1,660,000) of the Company’s capital, and equity in retained earnings and common paid-in capital represents the remaining 8% ($4,073,454) 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.

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.

RESULTS of OPERATIONS

Results of Operations for the Three Months ended September 30, 2022 Compared to the Three Months ended September 30. 2021

Revenue

Revenue increased by 2.5% overall or $51,068 to $2,117,116 for the three months ended September 30, 2022 from $2,066,048 for the three months ended September 30, 2021. The increase in revenue was primarily due to a 2.9% or $48,770 increase in finance charges. Revenue from finance charges comprised 82.6% and 82.3% of overall revenue for the three months ended September 30, 2022 and 2021, respectively.

During the three months ended September 30, 2022 compared to the three months ended September 30, 2021, the company financed an additional $1,767,462 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 5,934 new loans for the three months ended September 30, 2022 as compared to 6,528 for the three months ended September 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 September 30, 2022 as compared to the three months ended September 30, 2021. See Future Cash Requirements for the Company’s strategy regarding its line of credit.

Expense

Expenses increased by 13.0% or $219,433 to $1,908,203 for the three months ended September 30, 2022 from $1,688,770 for the three months ended September 30, 2021.

The increase in expenses was primarily due to increases in the following categories:

The increases in expenses was primarily offset by a decrease in the following category:

Income before Taxes

Income before taxes decreased by $168,365, or 44.6%, to $208,913 for the three months ended September 30, 2022 from $377,278 for the three months ended September 30, 2021. This decrease was attributable to the net increases and decreases as discussed above.

Income Tax Provision

Income tax provision decreased $25,327 to $54,188 for the three months ended September 30, 2022 from $79,515 for the three months ended September 30, 2021. This increase was primarily attributable to the decrease in income.

Net Income

Net Income decreased by $143,038, or 48.0%, to $154,725 for the three months ended September 30, 2022 from $297,763 for the three months ended September 30, 2021. This increase was attributable to the $168,365 decrease in income before taxes, partially offset by the $25,327 decrease in the provision for income taxes related to decreased taxable income.

Results of Operations for the Nine Months ended September 30, 2022 Compared to the Nine Months ended September 30, 2021

Revenue

Revenue increased by 6.0% overall or $341,915 to $6,042,694 for the nine months ended September 30, 2022 from $5,700,779 for the nine months ended September 30, 2021. The increase in revenue was primarily due to a 7.2% or $336,841 increase in finance charges, a 4.0% or $29,199 increase in revenue from late charges, partially offset by a 7.9% or $24,125 decrease in revenue from origination charges. Revenue from finance charges comprised 82.9% and 81.9% of overall revenue for the nine months ended September 30, 2022 and 2021, respectively.

During the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, the company financed an additional $4,909,183 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 18,189 new loans for the nine months ended September 30, 2022 as compared to 19,845 for the nine months ended September 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 nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. See Future Cash Requirements for the Company’s strategy regarding its line of credit.

Expense

Expenses increased by 8.5% or $414,618 to $5,279,959 for the nine months ended September 30, 2022 from $4,865,341 for the nine months ended September 30, 2021.

The increase in expenses was primarily due to increases in the following categories:

The increases in expenses was primarily offset by a decrease in the following category:

Income before Taxes

Income before taxes decreased by $72,703, or 8.7%, to $762,735 for the nine months ended September 30, 2022 from $835,438 for the nine months ended September 30, 2021. This increase was attributable to the net increases and decreases as discussed above.

Income Tax Provision

Income tax provision decreased $3,856 to $197,592 for the nine months ended September 30, 2022 from $201,448 for the nine months ended September 30, 2021. This decrease was primarily attributable to the decrease in taxable income.

Net Income

Net income decreased by $68,847, or 10.9%, to $565,143 for the nine months ended September 30, 2022 from $633,990 for the nine months ended September 30, 2021. This decrease was attributable to the $72,703 decrease in income before taxes, partially offset by the $3,856 decrease in the provision for income taxes related to decreased taxable income.

Comparison of Cash Flows for the Nine Months Ended September 30, 2022 and September 30, 2021

Cash Flows from Operating Activities

We received $1,672,027 of cash from our operating activities in 2022 compared to $1,736,498 provided by our operating activities in 2021. The decrease in cash provided of $64,471 was primarily due to a $168,089 decrease of net income as adjusted for noncash items partially offset by a $103,618 increase of cash used to support working capital components.

The $168,089 decrease of cash from net earnings as adjusted by noncash items resulted primarily from a $68,847 decrease in net income, a $55,792 decrease in the amortization of loan origination fees, and a $33,605 decrease in bad debt expense. As the Company’s growth in its receivables portfolio tapered in 2022, bad debt expense increased more slowly to adjust the allowance accordingly.

The $103,618 increase of cash used to support working capital components was primarily due to a $448,381 increase in the change in prepaid expenses and other current assets, and a $128,000 increase in the change in deferred tax asset, net. partially offset by a $276,614 increase in the change in accounts payable and accrued expenses and a $197,318 decrease in the change in drafts payable. These are natural fluctuations in operating accounts that occur during the normal course of business.

Cash Flows from Investing Activities

We used $6,696,368 of cash in our investing activities in 2022 compared to $10,737,165 of cash used in 2021. The decrease in cash used of $4,040,797 is primarily due to a decrease in the change in premium finance contracts receivable, net. The Company expects net cash outflows from investing activities during periods of growth. However, 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.

Cash Flows from Financing Activities

We received $5,100,202 of cash provided by our financing activities in 2022 compared to $8,604,789 provided by financing activities in 2021. The decrease in funds provided of $3,504,587 is due primarily to an decrease in proceeds from the line of credit, net of repayments, of $2,535,235, a decrease in proceeds of notes payable – others of $711,426, and an increase in repayments of notes payable – others of $181,000, an increase in repayments of notes payable – related parties of $156,302, a decrease in cash overdraft of $153,264, and a decrease in proceeds from notes payable – related parties of $118,000. 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 September 30, 2022

We had $96,848 cash and a working capital surplus of $12,972,291 at September 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%. LIBOR will cease to be published after June 30, 2023. The Company expects that any of our future loan agreements will be based on a different benchmark rate. 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 on loans funded after the interest rate increase 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 nine months ended September 30, 2022, the Company raised an additional $25,000 in subordinated notes payable – related parties and $505,000 in subordinated notes payable – others. The Company repaid $181,302 of notes payable – related parties and $236,000 or 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 nine months ended September 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.

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 doubtful accounts

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. 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, had concluded that our disclosure controls and procedures were effective as of September 30, 2022 other than a material weakness in our internal control over financial reporting as of such date related to classification of certain items on our Condensed Consolidated Statement of Cash Flows as discussed below. Such material weakness had no effect on our revenues, expenses or earnings.

A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Changes in Internal Control over Financial Reporting

In connection with preparing this Quarterly Report on Form 10-Q, management became aware of an error related to the Company’s classification of its Increase/Decrease of Premium Finance Contracts on its statements of cash flows as operating activities rather that as investing activities.  This error, which was not detected as of the end of the period covered by this Quarterly Report on Form 10-Q, will result in a restatement to the Company’s Condensed Consolidated Statement of Cash Flows statement for the fiscal year ended December 31, 2021.  The error was caused by an inadequate design in controls pertaining to the Company’s review and analysis of the classification of cash flow items. The deficiency represents a material weakness in the Company’s internal control over financial reporting.

Management has taken steps, and is actively engaged in taking additional steps, to remediate the material weakness identified above.  The remediation plan includes the implementation of new controls designed to evaluate the classification of cash flow items and other items on its financial statements.

Management believes the measures described above and others that may be implemented will remediate the material weakness identified.  The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded through testing, that these controls are operating effectively.  As management continues to evaluate and improve the Company’s internal control over financial reporting, it may decide to take additional measures to address control deficiencies or determine to modify, or under appropriate circumstances not to complete, certain of the remediation measures identified.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The Company becomes involved in various legal proceedings and claims in the normal course of business. In management’s opinion, the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.

Item 1A. Risk Factors.

Our operations and financial results are subject to various risks and uncertainties, including those described in the Part I. “Item 1A. Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 25, 2022 (“2021 Form 10-K”), which could adversely affect our business, financial condition, results of operations and cash flows. During the three months ended September 30, 2022, there have been no material changes in our risk factors disclosed in our 2021 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None. 

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Index