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Texas		45-5311713
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒
Emerging growth company ☐

PART I.  FINANCIAL INFORMATION		Page Number
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Position as of March 31, 2018 (Unaudited) and December 31, 2017		3
Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (Unaudited)		4
Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017 (Unaudited)		5
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2018 and 2017 (Unaudited)		6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (Unaudited)		7
Notes to Consolidated Financial Statements (Unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 4. Controls and Procedures		23
Part II.  OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3. Defaults upon Senior Securities		24
Item 4. Mine Safety Disclosures		24
Item 5. Other Information		24
Item 6. Exhibits		24
Signatures		25

		March 31, 2018				December 31, 2017
		(Unaudited)
Assets
Available-for-sale fixed maturity securities at fair value (Amortized cost: $4,144,574 and $2,288,321 as of March 31, 2018 and December 31, 2017, respectively)		$	4,131,830			$	2,374,588
Other long-term investments			255,925				-
Total investments			4,387,755				2,374,588
Cash and cash equivalents			10,758,020				12,578,650
Accrued investment income			58,557				22,709
Deferred policy acquisition costs			251,918				193,585
Deferred sales inducement costs			104,801				79,866
Advances and notes receivable			23,110				24,850
Security deposit			7,109				7,109
Prepaid and other assets			24,532				29,381
Furniture and equipment, net			30,646				33,230
Total assets		$	15,646,448			$	15,343,968
Liabilities and Shareholders’ Equity
Policy liabilities
Policyholders’ account balances		$	2,180,225			$	1,487,763
Future policy benefits			220,122				175,023
Policy claims and other benefits			741				2,504
Other policyholder liabilities			97,960				83,201
Total policy liabilities			2,499,048				1,748,491
Accounts payable			34,428				55,120
Total liabilities			2,533,476				1,803,611
Shareholders’ equity
Common stock, par value $.01 per share, 25,000,000 shares authorized, 14,867,097 issued as of March 31, 2018 and December 31, 2017, and 14,864,097 outstanding as of March 31, 2018 and December 31, 2017			148,671				148,671
Additional paid-in capital			20,198,314				20,198,314
Treasury stock, at cost (3,000 shares as of March 31, 2018 and December 31, 2017)			(15,000	)			(15,000	)
Offering costs			(2,659,696	)			(2,659,696	)
Accumulated other comprehensive income (loss)			(11,945	)			86,267
Accumulated deficit			(4,547,372	)			(4,218,199	)
Total shareholders’ equity			13,112,972				13,540,357
Total liabilities and shareholders’ equity		$	15,646,448			$	15,343,968

See notes to consolidated financial statements (unaudited).

 

Texas Republic Capital Corporation and Subsidiaries

Three Months Ended March 31, 2018 and 2017

(Unaudited)

 

																		Accumulated
		Common				Additional												Other								Total
		Stock				Paid-in				Treasury				Offering				Comprehensive				Accumulated				Shareholders’
		$.01 Par Value				Capital				Stock				Costs				Income (Loss)				Deficit				Equity
Balance as of January 1, 2017		$	144,866			$	18,299,869			$	(10,000	)		$	(2,449,432	)		$	53,701			$	(2,882,616	)		$	13,156,388
Subscriptions of common stock: $5.00 per share			3,722				1,857,028				-				-				-				-				1,860,750
Purchase of common stock			-				-				(5,000	)			-				-				-				(5,000	)
Offering costs			-				-				-				(158,192	)			-				-				(158,192	)
Other comprehensive income			-				-				-				-				12,655				-				12,655
Net loss			-				-				-				-				-				(327,812	)			(327,812	)
Balance as of March 31, 2017		$	148,588			$	20,156,897			$	(15,000	)		$	(2,607,624	)		$	66,356			$	(3,210,428	)		$	14,538,789
Balance as of December 31, 2017		$	148,671			$	20,198,314			$	(15,000	)		$	(2,659,696	)		$	86,267			$	(4,218,199	)		$	13,540,357
Other comprehensive loss			-				-				-				-				(98,212	)			-				(98,212	)
Net loss			-				-				-				-				-				(329,173	)			(329,173	)
Balance as of March 31, 2018		$	148,671			$	20,198,314			$	(15,000	)		$	(2,659,696	)		$	(11,945	)		$	(4,547,372	)		$	13,112,972

 

See notes to consolidated financial statements (unaudited).

Texas Republic Capital Corporation and Subsidiaries

(Unaudited)

 

		Three Months Ended March 31,
		2018				2017
Operating activities
Net loss		$	(329,173	)		$	(327,812	)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of discount on investments			(88	)			(474	)
Provision for depreciation			2,584				586
Policy acquisition costs deferred			(67,492	)			-
Policy acquisition costs amortized			9,959				-
Interest credited to policyholders			19,702				-
Change in assets and liabilities:
Accrued investment income			(35,848	)			(3,675	)
Advances and notes receivable			1,740				10,115
Prepaid and other assets			4,849				(15,188	)
Future policy benefits			45,099				-
Policy claims			(1,763	)			-
Other policy liabilities			14,759				-
Accounts payable			(20,692	)			10,529
Net cash used in operating activities			(356,364	)			(325,919	)
Investing activities
Purchase of furniture and equipment			-				(3,541	)
Purchase of fixed maturity securities			(1,861,091	)			-
Purchase of other long-term investments			(251,000	)			-
Net cash used in investing activities			(2,112,091	)			(3,541	)
Financing activities
Proceeds from public stock offering			-				1,860,750
Offering costs			-				(158,192	)
Purchase of treasury stock			-				(5,000	)
Policyholder deposits			647,825				-
Net cash provided by financing activities			647,825				1,697,558
Increase (decrease) in cash and cash equivalents			(1,820,630	)			1,368,098
Cash and cash equivalents, beginning of period			12,578,650				10,780,672
Cash and cash equivalents, end of period		$	10,758,020			$	12,148,770

 

See notes to consolidated financial statements (unaudited).

Texas Republic Capital Corporation and Subsidiaries

March 31, 2018

(Unaudited)

 

1.          Organization and Significant Accounting Policies

Nature of Operations

Texas Republic Capital Corporation (the “Company”) is the parent holding company of Texas Republic Life Insurance Company (“TRLIC”) and Texas Republic Life Solutions, Inc. (“TRLS”).  The Company was incorporated in Texas on May 15, 2012, for the primary purpose of forming and capitalizing a life insurance company subsidiary.

 

The Texas Department of Insurance approved TRLIC’s life insurance charter on August 1, 2016.  The Company capitalized TRLIC with $3,000,000 and owns 100% of TRLIC.  TRLIC began insurance operations on April 3, 2017 and is currently selling life and annuity products in the state of Texas.  TRLS, an insurance agency, was incorporated February 1, 2017.  The Company capitalized TRLS with $50,000 and owns 100% of TRLS. 

 

From incorporation through April 2, 2017, the Company was involved in the sale of common stock to provide working capital.  During this time the Company completed an organizational offering, three private placement stock offerings and an intrastate public stock offering in the state of Texas.  The Company raised $10,336,500 and incurred $1,215,569 of offering costs through the issuance of 12,865,000 shares from the organizational offering and three private placement offerings. The intrastate public stock offering was registered to raise $25,000,000 by offering 5,000,000 shares of its common stock and was ended on April 2, 2017.  This offering raised $10,010,485 and incurred $1,444,127 of offering costs through the sale of 2,002,097 shares of the common stock. 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.

 

The results of operations for the three-month period ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ended December 31, 2018 or for any other interim period or for any other future year.  Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted.  The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s report on Form 10-K for the year ended December 31, 2017.

 

Principles of Consolidation

The consolidated financial statements include the accounts and operations of the Company and its subsidiaries.  All intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

 

Investments

Fixed maturity securities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income.  The amortized cost of fixed maturity securities available-for-sale is generally adjusted for amortization of premium and accretion of discount.

Interest income, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method.  The amortized cost of fixed maturity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary.

The Company evaluates the difference between the cost or amortized cost and estimated fair value of its investments to determine whether any decline in value is other-than-temporary in nature.  This determination involves a degree of uncertainty.  If a decline in the fair value of a security is determined to be temporary, the decline is recorded as an unrealized loss in stockholders’ equity.  If a decline in a security’s fair value is considered to be other-than-temporary, the Company then determines the proper treatment for the other-than-temporary impairment.  For fixed maturity securities, available-for-sale, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security.

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security.  It is not possible to accurately predict when it may be determined that a specific security will become impaired.  Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.

Likewise, if a change occurs in the Company’s intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that the Company will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result.  If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortizes the reduced book value back to the security’s expected recovery value over the remaining term of the bond.  The Company continues to review the security for further impairment that would prompt another write-down in the value.

 

Purchases and sales of securities are recorded on a trade-date basis.  Interest earned on investments is recorded on the accrual basis and is included in net investment income.

 

The Company’s other long-term investments are comprised of lottery prize cash flows holdings held at amortized cost. They are categorized as other long-term investments in the statement of financial position and are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and money market instruments.

Advances and Notes Receivable

Advances and notes receivable are recorded at unpaid principal balances.  Management evaluates the collectability of advances and notes receivable on the specific identification basis. Uncollectible amounts are reported in the results of operations in the year the determination is made.

Deferred Policy Acquisition Costs

Costs that relate to and vary with the successful production of new business are deferred over life of the policy.  Deferred acquisition costs, (DAC), consist of commissions and policy issuance, underwriting and agency expenses.  DAC expenses are amortized primarily over the premium-paying period of the policies, using the same assumptions as were used in computing liabilities for future policy benefits.

 

Deferred Sales Inducement Costs

 

Furniture and Equipment

Furniture and equipment are carried at cost less accumulated depreciation or amortization. Office furniture, equipment and EDP equipment is recorded at cost or fair value at acquisition less accumulated depreciation or amortization using the straight-line method over the estimated useful life of the respective assets of three to seven years.

Policyholders’ Account Balances

The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus applicable bonus and interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 2.65% to 4.75%.

 

Future Policy Benefits

Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, mortality and withdrawals based upon the Company’s experience.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves.  Management’s judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.

Common Stock

Common stock is fully paid, non-assessable and has a par value of $.01 per share.

Treasury Stock

Treasury stock, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, are recorded at cost.

Federal Income Taxes

The Company uses the asset and liability method of accounting for income taxes.  Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined using tax bases.

Offering Costs

Certain costs directly related to the sale of the Company’s securities are capitalized against the proceeds from the sales. These costs include legal fees, recruiting and training expenses, commissions, printing, mailing and other expenses related to the offering.

Net Loss Per Common Share Outstanding and Subscribed

 

Net loss per common share is calculated using the weighted average number of common shares outstanding and subscribed during the year. Shares sold during the period are considered to be outstanding for one half of the month in which they were sold. The weighted average common shares outstanding and subscribed were 14,864,097 and 14,628,505 for the three months ended March 31, 2018 and 2017, respectively. 

 

 

 

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”).  ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, trade receivables, and reinsurance recoverable. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets and that they be presented on the financial statements net of the valuation allowance.  This methodology is referred to as the current expected credit loss model. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on the Company’s financial condition and results of operations.  However, currently the Company does not expect a material impact on the Company’s financial condition or results of operations from the adoption of this guidance.

 

 

2.          Investments

Fixed Maturity Securities Available-For-Sale

Investments in fixed maturity securities available-for-sale as of March 31, 2018 and December 31, 2017 are summarized as follows:

 

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2018

(Unaudited)

 

2.          Investments (continued)

 

For securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of March 31, 2018 and December 31, 2017 are summarized as follows:

						Unrealized				Number of
March 31, 2018 (Unaudited)		Fair Value				Loss				Securities
Fixed maturity securities
Less than 12 months
Corporate bonds		$	1,866,205			$	43,842				17
Greater than 12 months
Corporate bonds			90,750				11,070				1
Total fixed maturity securities		$	1,956,955			$	54,912				18

 

						Unrealized				Number of
December 31, 2017		Fair Value				Loss				Securities
Fixed maturity securities
Greater than 12 months
Corporate bonds		$	94,250			$	7,675				1
Total fixed maturity securities		$	94,250			$	7,675				1

 

As of March 31, 2018, all of the fixed maturity securities in a less than 12-month loss position had a fair value to amortized cost ratio equal to or greater than 94%.  The single issue in a loss position greater than 12-months had a fair value to amortized cost ratio of 89% and 92% as of March 31, 2018 and December 31, 2017, respectively.  Two fixed maturity securities with a par value of $250,000 are below investment grade as rated by Standard and Poor’s as of March 31, 2018 and December 31, 2017.

 

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value based on all the factors considered.  Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer and the coupon and/or dividend payment history of the issuer.  The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.

For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors.  The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security and that difference is charged to earnings.  The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss).

 

Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of operations.  Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of operations in the periods incurred as the difference between fair value and cost.

Based on management’s review, the Company experienced no other-than-temporary impairments during the three months ended March 31, 2018 and the year ended December 31, 2017.

Management believes that the Company will fully recover its cost basis in the securities held as of March 31, 2018, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.  The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

Texas Republic Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2018

(Unaudited)

 

2.          Investments (continued)

 

Net unrealized gains/losses included in other comprehensive income for investments classified as available-for-sale are summarized as follows:

 

The amortized cost and fair value of fixed maturity available-for-sale securities as of March 31, 2018, by contractual maturity, are summarized as follows:

 

		(Unaudited)
		Amortized Cost				Fair Value
Due after one year through five years		$	492,618			$	488,597
Due after five years through ten years			3,096,007				3,111,295
Due after ten years			555,949				531,938
Total fixed maturity securities		$	4,144,574			$	4,131,830

 

Major categories of net investment income for the three months ended March 31, 2018 and 2017 are summarized as follows:

 

3.          Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) on the measurement date.  The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.

The Company holds fixed maturity securities that are measured and reported at fair market value on the consolidated statement of financial position.  The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value, as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company has no Level 1 assets that would include securities traded in an active exchange market.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  This category generally includes investments where independent pricing information was not able to be obtained for a significant portion of the underlying assets.

 

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy.  If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.  A review of fair value hierarchy classifications is conducted on a quarterly basis.  Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting the levels of the fair value hierarchy are reported as transfers in and out of the specific level category as of the beginning of the period in which the reclassifications occur.

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 are summarized as follows:

 

 

Fair values for Level 2 assets for the Company’s fixed maturity securities available-for-sale are primarily based on prices supplied by a third-party investment service.  The third-party investment service provides quoted prices in the market which use observable inputs in developing such rates.

The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources.  Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third-party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing.  As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy.  The Company’s Level 2 investments include corporate bonds.

The Company’s fixed maturity securities available-for-sale portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.

Fair Value of Financial Instruments

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of March 31, 2018 and December 31, 2017 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

Financial Instruments Disclosed, But Not Carried, at Fair Value:

 

		March 31, 2018 (Unaudited)
		Carrying				Fair
		Amount				Value				Level 1				Level 2				Level 3
Financial assets
Cash and cash equivalents		$	10,758,020			$	10,758,020			$	10,758,020			$	-			$	-
Other long-term investments			255,925				302,988				-				-				302,988
Accrued investment income			58,557				58,557				-				-				58,557
Advances and notes receivable			23,110				23,110				-				-				23,110
Total financial assets		$	11,095,612			$	11,142,675			$	10,758,020			$	-			$	384,655
Financial liabilities
Policyholders’ account balances		$	2,180,225			$	1,611,064			$	-			$	-			$	1,611,064
Policy claims			741				741				-				-				741
Total financial liabilities		$	2,180,966			$	1,611,805			$	-			$	-			$	1,611,805

 

 

The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies.  However, considerable judgment was required to interpret market data to develop these estimates.  Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange.  The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:

Fixed Maturity Securities

The fair value of fixed maturity securities is based on the principles previously discussed as Level 1, Level 2 and Level 3.

Cash and Cash Equivalents, Accrued Investment Income and Advances and Notes Receivable

The carrying value of these financial instruments approximates their fair values due to the expected short-term nature until the cash settlement of these items.  Cash and cash equivalents are included in Level 1 of the fair value hierarchy due to their highly liquid nature.  Accrued investment income and advances and notes receivable are included in Level 3 of the fair value hierarchy due to little or no availability of market activity for these types of assets.

 

Policyholders’ Account Balances

The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

 

The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.

Policy Claims

The carrying amounts reported for these liabilities approximate their fair value.

4.          Furniture and Equipment

Furniture and equipment as of March 31, 2018 and December 31, 2017 is summarized as follows:

 

 

5.          Income Taxes

 

6.          Concentrations of Credit Risk

The Company’s cash is held at Plains Capital Bank in Austin, Texas, UBS Financial Services, Inc. in Lexington, Kentucky, City National Bank in Cross Lanes, West Virginia, First Financial Bank in Abilene, Texas and Amarillo National Bank in Amarillo, Texas.  The Federal Deposit Insurance Corporation insures accounts up to $250,000.  Uninsured balances aggregate $2,638,535 as of March 31, 2018.  The Company monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss.  The Company has not experienced any losses in this account and believes it is not exposed to any significant credit risk on cash and cash equivalents.

7.          Lease Commitment

The Company entered into a lease with a third-party lessor in 2014 for utilization of office space in Austin, Texas.  The lease agreement ended September 30, 2017.  The lease required a deposit in the amount of $3,992 and abated the first month’s rent.  The monthly rental payments were $2,432 for the first twelve months with annual increases of approximately 3% thereafter and the Company also paid a pro rata share of the operating expenses of the building. 

 

The Company entered into a 62-month lease agreement with a third-party lessor in 2017 for utilization of office space in Austin, Texas.  The lease agreement ends November 30, 2022.  The lease required a deposit in the amount of $7,109 and will also abate the first two month’s rent.  The monthly rental payments are estimated to be $4,864 for the first twelve months after abatement. The Company also pays a pro rata share of the operating expenses of the building.  Rent expense was $18,334 and $17,583 for the three months ended March 31, 2018 and 2017, respectively. Total future minimum lease payments and a pro rata share of the buildings operating expenses to be paid under the current non-cancellable lease agreements are $60,060 in 2018, $82,229 in 2019, $83,778 in 2020, $85,327 in 2021 and $79,518 in 2022. 

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

Capitalization

Texas Republic Capital Corporation (“we” “us”, “our”, “TRCC” or the “Company”) was incorporated in May 2012 as a financial services holding company.  Between May 2012 and November 2013, we conducted an organizational offering and three private placements of our common stock.  From the organizational offering and private placements, we raised $10,336,500, incurred $1,215,569 of offering costs and issued 12,865,000 shares of our common stock.  During 2012, the funds raised, offering costs incurred and shares subscribed from the private placements were $5,051,300, $180,835 and 10,636,840, respectively.  During 2013, the funds raised, offering costs incurred and shares subscribed from the private placements were $5,285,200, $1,034,734 and 2,228,160, respectively.

We began an intrastate public offering of our common stock at a price per share of $5.00 on April 2, 2014 and completed that offering on April 2, 2017.  The Company raised $10,010,485 and incurred $1,444,127 of offering costs through the issuance of 2,002,097 shares of the Company’s common stock less treasury stock of 3,000 shares from the intrastate public stock offering.  During 2014, the funds raised, offering costs incurred and shares subscribed from the offering were $3,143,800, $576,613 and 628,760, respectively.  During 2015, the funds raised, offering costs incurred and shares subscribed from the offering were $1,901,925, $326,734 and 380,385, respectively.  During 2016 the funds raised, offering costs incurred and shares subscribed from the offering were $3,062,510, $330,516 and 612,502, respectively.  During 2017 the funds raised, offering costs incurred and shares subscribed from the offering were $1,902,250, $210,264 and 380,450, respectively. 

 

The Texas Department of Insurance approved TRLIC’s life insurance charter on August 1, 2016.  The Company capitalized TRLIC with $3,000,000 and owns 100% of TRLIC.  TRLIC began insurance operations on April 3, 2017 and is currently selling life and annuity products in the state of Texas.  Texas Republic Life Solutions (“TRLS”), an insurance agency, was incorporated February 1, 2017.  The Company capitalized TRLS with $50,000 and owns 100% of TRLS. 

 

We are a financial services holding company and have incurred significant net losses since our inception. As of March 31, 2018, we had an accumulated deficit of $4,547,372. These losses have resulted primarily from costs incurred while raising capital. We expect to continue to incur operating losses until we achieve a volume of inforce life insurance policies that provides premiums that are sufficient to cover our operating costs.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. On a continuing basis, we evaluate our estimates and assumptions.

 

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.

Investments

Fixed maturity securities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income.  The amortized cost of fixed maturity securities available-for-sale is generally adjusted for amortization of premium and accretion of discount.

Interest income, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method.  The amortized cost of fixed maturity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary.

The Company evaluates the difference between the cost or amortized cost and estimated fair value of its investments to determine whether any decline in value is other-than-temporary in nature.  This determination involves a degree of uncertainty.  If a decline in the fair value of a security is determined to be temporary, the decline is recorded as an unrealized loss in stockholders’ equity.  If a decline in a security’s fair value is considered to be other-than-temporary, the Company then determines the proper treatment for the other-than-temporary impairment.  For fixed maturity securities available-for-sale, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security.

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security.  It is not possible to accurately predict when it may be determined that a specific security will become impaired.  Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.

Likewise, if a change occurs in the Company’s intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that the Company will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result.  If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortizes the reduced book value back to the security’s expected recovery value over the remaining term of the bond.  The Company continues to review the security for further impairment that would prompt another write-down in the value.

Purchases and sales of securities are recorded on a trade-date basis.  Interest earned on investments is recorded on the accrual basis and is included in net investment income.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and money market instruments.

Income Taxes

We evaluate our deferred income tax assets, which partially offset our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the financial statements in the period in which such revisions are made.

Results of Operations – Three Months Ended March 31, 2018 and 2017

Revenues

 

Expenses

Our expenses relate to operating a financial services holding company and a life insurance company and an insurance agency.

Net Loss

 

Financial Position – As of March 31, 2018 and December 31, 2017

Total assets of the Company increased from $15,343,968 as of December 31, 2017 to $15,646,448 as of March 31, 2018, an increase of $302,480.

Cash decreased $1,820,630 as we are investing to maximize yields to support the insurance operations.  Additionally, cash balance was higher in the first quarter of 2017 due to increased activity as we were closing the stock offering.  Sales in the first quarter of 2017 exceeded the previous high quarter by 21%.  The stock offering closed on April 2, 2017.

 

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through an organizational offering, three private placement offerings and an intrastate public stock offering. Through March 31, 2018, we received $20,346,985 from the sale of 14,867,097 shares and incurred offering costs of $2,659,696.  During 2017 and 2016 we paid $5,000 and $10,000 for 1,000 and 2,000 shares of Company’s common stock that is held as treasury stock, respectively.  Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2012.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us.

 

There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements.

These factors include among others:

 

It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others.  In addition, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable developments.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

None

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

 

The Company sold 4,375,000 common shares at $.02 per share to its organizing shareholders in May of 2012 for total proceeds of $87,500.  Subsequently, the Company completed three private placement stock offerings which raised $10,249,000 through the issuance of 8,490,000 shares from the private placement offerings in 2012 and 2013, including a private placement of 2,000,000 shares for $5,000,000 between February and November 2013.  All of these shares were sold in reliance on the exemption from the registration requirements of the Securities Act of 1933 (the “1933 Act”) contained in Securities and Exchange Commission (“SEC”) Regulation D, Rule 506.  No underwriter was involved in connection with the issuance of our shares, and we paid no finder’s fees in the private placements.

On April 2, 2014, the Company commenced an offering of 5,000,000 shares of common stock at $5.00 per share ($25,000,000 maximum) with a 10% over sale provision, in an intrastate public offering registered with the Texas State Securities Board.  This offering was concluded on April 2, 2017 and was sold only to Texas residents pursuant to an exemption from the 1933 Act contained in Section 3(a)(11) of the 1933 Act and Rule 147 promulgated by the SEC.  It was sold by issuer agents registered with the Texas State Securities Board.  The Company raised $10,010,485 and paid commissions of $999,349 from the sale of 2,002,097 shares in this offering.  Through March 31, 2018 the Company paid $15,000 for 3,000 shares of the Company’s common stock (treasury stock).  Proceeds have been used for working capital and the capitalization of a life insurance company and insurance agency.

 

Item 3.  Defaults Upon Senior Securities.

None

Item 4.  Mine Safety Disclosures

None

Item 5.  Other Information

None

Item 6. Exhibits

 

**XBRL

Information is furnished and not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.