Business Context and Reporting Period
Company: DCAP Group, Inc. (Note: The registrant is seeking to change its name to Kingstone Companies, Inc. pending a potential conversion of Commercial Mutual Insurance Company).
Reporting Period: Quarterly Report (Form 10-Q) for the period ended September 30, 2008.
Business Overview: The company operates a network of retail insurance offices and franchises selling auto, motorcycle, boat, business, and homeowner's insurance. It also provides automobile club services and tax preparation. On February 1, 2008, the company sold its premium finance loan portfolio, reclassifying those operations as discontinued.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Revenue (Commissions & Fees) | $3,767,475 | $4,486,855 |
| Net (Loss) Income | $(441,663) | $283,178 |
| Operating Loss (Continuing Ops) | $(808,148) | $(490,316) |
| Cash and Cash Equivalents | $520,558 | $1,030,822 (Dec 31, 2007) |
| Working Capital Deficit | $(2,396,388) | $(1,401,539) (Dec 31, 2007) |
| Total Debt (Current + Long-term) | $2,249,142 | $2,598,054 (Dec 31, 2007) |
| Notes Receivable (CMIC Surplus Notes) | $5,901,719 | $5,170,804 (Dec 31, 2007) |
Material Changes vs. Prior Period
- Revenue Decline: Continuing operations revenue decreased 16% ($720,000) year-over-year, primarily due to a reduction in insurance policies sold caused by heightened competition in the voluntary insurance market. This was partially offset by $330,000 in new placement fees from the premium finance portfolio sale.
- Net Loss: The company reported a net loss of $441,663 for the nine months ended September 30, 2008, compared to net income of $283,178 in the prior year. This swing was driven by a loss from continuing operations and a loss from discontinued operations.
- Discontinued Operations: The sale of the premium finance portfolio on February 1, 2008, resulted in a $251,282 loss on sale and the cessation of significant revenue streams previously generated by that segment.
- Interest Income: Interest income from notes receivable decreased 25% ($240,000) due to the full accretion of the discount on Surplus Notes in July 2008 and a reduction in the variable prime rate.
- Liquidity: Cash and cash equivalents decreased by approximately $510,000 during the period. The company currently holds a working capital deficit of approximately $2.4 million.
Outlook, Risks, and Management Commentary
- CMIC Conversion Strategy: The company holds $3.75 million in Surplus Notes from Commercial Mutual Insurance Company (CMIC). CMIC is undergoing a conversion to a stock property and casualty insurance company. If approved, DCAP Group would exchange its notes for 100% of CMIC's stock, and the company would change its name to Kingstone Companies, Inc. A policyholder meeting to approve this is anticipated around December 31, 2008.
- Debt Extensions: Management has secured extensions on critical debt obligations to maintain liquidity:
- Subordinated Debt: The $1.5 million maturity was extended to July 10, 2009, or 90 days post-CMIC conversion, in exchange for an incentive payment.
- Preferred Stock: Mandatory redemption dates for Series D preferred stock ($780,000) were extended to July 31, 2009.
- Term Loan: The M&T term loan maturity was extended to December 31, 2008.
- Liquidity Outlook: Management believes it has sufficient cash to fund working capital for the next 12 months, contingent on successful debt refinancing/extension and the potential sale or closure of unprofitable stores. No definitive arrangements are in place for these actions.
- Risks:
- Uncertainty regarding the approval of the CMIC conversion.
- Persistent material weaknesses in internal controls related to information technology applications.
- Continued competitive pressure in the non-standard insurance market.
Investor Verification Checklist
- CMIC Conversion Status: Verify the outcome of the policyholder meeting and Superintendent approval for the CMIC conversion, as this is central to the company's strategic pivot and potential name change.
- Debt Covenants and Extensions: Confirm that the extensions on the $1.5 million subordinated debt and $780,000 preferred stock remain in good standing and that no acceleration clauses have been triggered.
- Internal Control Remediation: Review progress on the remediation plan for the material weakness in information technology applications and infrastructure.
- Store Performance: Assess the financial performance of the remaining retail locations to determine if the planned closures of unprofitable stores are necessary to stabilize the working capital deficit.
- Notes Receivable Valuation: Evaluate the collectibility of the $5.9 million in CMIC Surplus Notes, given they are past due and payments depend on CMIC's surplus and regulatory approval.