Annual Statements Open main menu

KINGSWAY FINANCIAL SERVICES INC - Quarter Report: 2022 September (Form 10-Q)

kfs20220930_10q.htm
 

 

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 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 Number: 001-15204

Kingsway Financial Services Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

85-1792291

(I.R.S. Employer

Identification No.)

 

10 S. Riverside Plaza, Suite 1520, Chicago, IL 60606

(Address of principal executive offices and zip code)

1-312-766-2138

(Registrant's telephone number, including area code)

 


 

Indicate by checkmark 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller Reporting Company ☒

Emerging Growth Company ☐

 

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 Act). Yes ☐ No ☒

 

The number of shares, including restricted common shares, outstanding of the registrant's common stock as of November 10, 2022 was 24,224,616.

 

 

 
 

KINGSWAY FINANCIAL SERVICES INC.

   
   

Table Of Contents

PART I - FINANCIAL INFORMATION

3

ITEM 1. FINANCIAL STATEMENTS

3

Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021

3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

4

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)

8

Notes to Consolidated Financial Statements (unaudited)

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

39

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

53

ITEM 4. CONTROLS AND PROCEDURES

53

PART II - OTHER INFORMATION

54

ITEM 1. LEGAL PROCEEDINGS

54

ITEM 1A. RISK FACTORS

54

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

54

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

54

ITEM 4. MINE SAFETY DISCLOSURES

54

ITEM 5. OTHER INFORMATION

54

ITEM 6. EXHIBITS

55

SIGNATURES

56

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Consolidated Balance Sheets

(in thousands, except share data)

 

  

September 30, 2022

  

December 31, 2021

 
  

(unaudited)

     

Assets

        

Investments:

        

Fixed maturities, at fair value (amortized cost of $39,507 and $35,889, respectively)

 $36,728  $35,666 

Equity investments, at fair value (cost of $187 and $1,147, respectively)

  126   179 

Limited liability investments

  1,010   1,901 

Limited liability investments, at fair value

  19,182   18,826 

Investments in private companies, at adjusted cost

  790   790 

Real estate investments, at fair value (cost of $10,225 and $10,225, respectively)

  12,150   10,662 

Other investments, at cost which approximates fair value

  204   256 

Short-term investments, at cost which approximates fair value

  157   157 

Total investments

  70,347   68,437 

Cash and cash equivalents

  48,640   12,642 

Restricted cash

  13,165   17,257 

Accrued investment income

  1,135   1,013 

Service fee receivable, net of allowance for doubtful accounts of $200 and $241, respectively

  7,219   6,656 

Other receivables, net of allowance for doubtful accounts of $8 and $5, respectively

  12,828   13,898 

Deferred contract costs

  13,065   10,930 

Property and equipment, net of accumulated depreciation of $25,234 and $24,224, respectively

  106,025   108,587 

Right-of-use asset

  887   2,248 

Goodwill

  100,773   110,247 

Intangible assets, net of accumulated amortization of $20,878 and $20,333, respectively

  101,489   108,230 

Other assets

  30,482   15,489 

Total Assets

 $506,055  $475,634 

Liabilities and Shareholders' Equity

        

Liabilities:

        

Accrued expenses and other liabilities

 $53,981  $47,622 

Income taxes payable

  2,602   294 

Deferred service fees

  84,428   89,217 

Bank loans

  21,769   26,717 

Notes payable

  199,554   205,025 

Subordinated debt, at fair value

  62,302   60,973 

Lease liability

  1,189   2,479 

Net deferred income tax liabilities

  31,250   28,553 

Total Liabilities

  457,075   460,880 

Redeemable Class A preferred stock, no par value; 1,000,000 authorized; 149,733 and 169,733 issued and outstanding at September 30, 2022 and December 31, 2021, respectively; redemption amount of $5,942 and $6,497 at September 30, 2022 and December 31, 2021, respectively

  5,942   6,497 

Shareholders' Equity:

        

Common stock, no par value; 50,000,000 authorized; 23,319,312 and 23,130,064 issued at September 30, 2022 and December 31, 2021, respectively; and 23,071,862 and 22,882,614 outstanding at September 30, 2022 and December 31, 2021, respectively

      

Additional paid-in capital

  359,203   359,138 

Treasury stock, at cost; 247,450 and 247,450 outstanding at September 30, 2022 and December 31, 2021, respectively

  (492)  (492)

Accumulated deficit

  (362,130)  (395,149)

Accumulated other comprehensive income

  31,960   30,779 

Shareholders' equity attributable to common shareholders

  28,541   (5,724)

Noncontrolling interests in consolidated subsidiaries

  14,497   13,981 

Total Shareholders' Equity

  43,038   8,257 

Total Liabilities, Class A preferred stock and Shareholders' Equity

 $506,055  $475,634 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenues:

                

Service fee and commission revenue

 $22,396  $17,627  $68,442  $54,956 

Rental revenue

  3,633   3,341   10,933   10,023 

Total revenues

  26,029   20,968   79,375   64,979 

Operating expenses:

                

Claims authorized on vehicle service agreements

  5,243   4,951   15,771   14,869 

Commissions

  2,277   1,501   5,537   4,377 

Cost of services sold

  4,090   1,244   12,908   3,176 

General and administrative expenses

  10,764   11,779   34,974   36,496 

Disposal of subsidiary transaction expenses

  5,408      5,408    

Leased real estate segment interest expense

  1,651   1,607   5,005   4,575 

Total operating expenses

  29,433   21,082   79,603   63,493 

Operating (loss) income

  (3,404)  (114)  (228)  1,486 

Other revenues (expenses), net:

                

Net investment income

  463   389   1,547   1,213 

Net realized gains

  797   159   1,035   397 

Loss on change in fair value of equity investments

  (5)  (39)  (53)  (235)

Gain on change in fair value of limited liability investments, at fair value

  195   1,211   368   1,740 

Gain on change in fair value of real estate investments

  1,488      1,488    

Gain on change in fair value of derivative asset option contracts

  13,498      13,498    

Non-operating other revenue (expenses)

  240   53   (413)  (2,581)

Interest expense not allocated to segments

  (2,139)  (1,497)  (5,207)  (4,642)

Amortization of intangible assets

  (1,409)  (2,432)  (4,397)  (3,425)

Loss on change in fair value of debt

  (1,794)  (412)  (4,992)  (2,169)

Gain on disposal of subsidiary

  37,917      37,917    

Gain on extinguishment of debt

           2,494 

Total other revenue (expenses), net

  49,251   (2,568)  40,791   (7,208)

Income (loss) from continuing operations before income tax expense (benefit)

  45,847   (2,682)  40,563   (5,722)

Income tax expense (benefit)

  6,074   (2,456)  5,659   (6,139)

Income (loss) from continuing operations

  39,773   (226)  34,904   417 

Loss on disposal of discontinued operations, net of taxes

  (2,500)     (2,500)   

Net income (loss)

  37,273   (226)  32,404   417 

Less: net (loss) income attributable to noncontrolling interests in consolidated subsidiaries

  (1,067)  782   (615)  1,469 

Less: dividends on preferred stock

  77   86   234   409 

Net income (loss) attributable to common shareholders

 $38,263  $(1,094) $32,785  $(1,461)

Earnings (loss) per share – continuing operations:

                

Basic:

 $1.78  $(0.05) $1.54  $(0.07)

Diluted:

 $1.59  $(0.05) $1.42  $(0.07)

Loss per share – discontinued operations:

                

Basic:

 $(0.11) $  $(0.11) $ 

Diluted:

 $(0.10) $  $(0.10) $ 

Earnings (loss) per share – net loss attributable to common shareholders:

                

Basic:

 $1.67  $(0.05) $1.43  $(0.07)

Diluted:

 $1.49  $(0.05) $1.32  $(0.07)

Weighted-average shares outstanding (in ‘000s):

                

Basic:

  22,960   22,732   22,909   22,440 

Diluted:

  25,716   22,732   25,055   22,440 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net income (loss)

 $37,273  $(226) $32,404  $417 

Other comprehensive (loss) income, net of taxes(1):

                

Unrealized losses on available-for-sale investments:

                

Unrealized losses arising during the period

  (861)  (107)  (2,563)  (217)

Reclassification adjustment for amounts included in net income (loss)

  3   11   10   25 

Change in fair value of debt attributable to instrument-specific credit risk

  (3,226)  (971)  3,663   (6,505)

Other comprehensive (loss) income, net of taxes(1):

  (4,084)  (1,067)  1,110   (6,697)

Comprehensive income (loss)

  33,189   (1,293)  33,514   (6,280)

Less: comprehensive (loss) income attributable to noncontrolling interests in consolidated subsidiaries

  (1,094)  780   (686)  1,462 

Comprehensive income (loss) attributable to common shareholders

 $34,283  $(2,073) $34,200  $(7,742)

 

(1) Net of income tax benefit of $0 for the three and nine months ended September 30, 2022 and September 30, 2021.

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Shareholders' Equity

(in thousands, except share data)

 

  

Three Months Ended September 30, 2022

 
                      

Accumulated

  

Shareholders'

  

Noncontrolling

     
          

Additional

          

Other

  

Equity Attributable

  

Interests in

  

Total

 
          

Paid-in

  

Treasury

  

Accumulated

  

Comprehensive

  

to Common

  

Consolidated

  

Shareholders'

 
  

Common Stock

  

Capital

  

Stock

  

Deficit

  

Income

  

Shareholders

  

Subsidiaries

  

Equity

 
  

Shares

  

Amount

                             

Balance, June 30, 2022

  22,882,614  $  $359,536  $(492) $(400,470) $36,017  $(5,409) $13,692  $8,283 

Vesting of restricted stock awards, net of share settlements for tax withholdings

  56,194                         

Conversion of redeemable Class A preferred stock to common stock

  125,000      788            788      788 

Exercise of Series B warrants

  8,054      40            40      40 

Net income (loss)

              38,340      38,340   (1,067)  37,273 

Preferred stock dividends

        (77)           (77)     (77)

Distributions to noncontrolling interest holders

                       (294)  (294)

Deconsolidation of noncontrolling interest

                       2,193   2,193 

Other comprehensive income (loss)

                 (4,057)  (4,057)  (27)  (4,084)

Redemption of equity awards related to disposal of subsidiary

        (1,056)           (1,056)     (1,056)

Stock-based compensation, net of forfeitures

        (28)           (28)     (28)

Balance, September 30, 2022

  23,071,862  $  $359,203  $(492) $(362,130) $31,960  $28,541  $14,497  $43,038 

 

 

   

Three Months Ended September 30, 2021

 
                                           

Accumulated

   

Shareholders'

   

Noncontrolling

         
                   

Additional

                   

Other

   

Equity Attributable

   

Interests in

   

Total

 
                   

Paid-in

   

Treasury

   

Accumulated

   

Comprehensive

   

to Common

   

Consolidated

   

Shareholders'

 
   

Common Stock

   

Capital

   

Stock

   

Deficit

   

Income

   

Shareholders

   

Subsidiaries

   

Equity

 
   

Shares

   

Amount

                                                         

Balance, June 30, 2021

    22,365,631     $     $ 356,331     $ (492 )   $ (394,851 )   $ 32,434     $ (6,578 )   $ 14,669     $ 8,091  

Vesting of restricted stock awards, net of share settlements for tax withholdings

    70,700                                                  

Exercise of Series B warrants

    350,000             1,750                         1,750             1,750  

Net (loss) income

                            (1,008 )           (1,008 )     782       (226 )

Preferred stock dividends

                (86 )                       (86 )           (86 )

Distributions to noncontrolling interest holders

                                              (1,933 )     (1,933 )

Other comprehensive loss

                                  (1,065 )     (1,065 )     (2 )     (1,067 )

Stock-based compensation

                211                         211             211  

Balance, September 30, 2021

    22,786,331     $     $ 358,206     $ (492 )   $ (395,859 )   $ 31,369     $ (6,776 )   $ 13,516     $ 6,740  

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

   

Nine Months Ended September 30, 2022

 
                                           

Accumulated

   

Shareholders'

   

Noncontrolling

         
                   

Additional

                   

Other

   

Equity Attributable

   

Interests in

   

Total

 
                   

Paid-in

   

Treasury

   

Accumulated

   

Comprehensive

   

to Common

   

Consolidated

   

Shareholders'

 
   

Common Stock

   

Capital

   

Stock

   

Deficit

   

Income

   

Shareholders

   

Subsidiaries

   

Equity

 
   

Shares

   

Amount

                                                         

Balance, December 31, 2021

    22,882,614     $     $ 359,138     $ (492 )   $ (395,149 )   $ 30,779     $ (5,724 )   $ 13,981     $ 8,257  

Vesting of restricted stock awards, net of share settlements for tax withholdings

    56,194                                                  

Conversion of redeemable Class A preferred stock to common stock

    125,000             788                         788             788  

Exercise of Series B warrants

    8,054             40                         40             40  

Net income

                            33,019             33,019       (615 )     32,404  

Preferred stock dividends

                (234 )                       (234 )           (234 )

Distributions to noncontrolling interest holders

                                              (991 )     (991 )

Deconsolidation of noncontrolling interest

                                              2,193       2,193  

Other comprehensive income (loss)

                                  1,181       1,181       (71 )     1,110  

Redemption of equity awards related to disposal of subsidiary

                (1,056 )                       (1,056 )           (1,056 )

Stock-based compensation, net of forfeitures

                527                         527             527  

Balance, September 30, 2022

    23,071,862     $     $ 359,203     $ (492 )   $ (362,130 )   $ 31,960     $ 28,541     $ 14,497     $ 43,038  

 

   

Nine Months Ended September 30, 2021

 
                                           

Accumulated

   

Shareholders'

   

Noncontrolling

         
                   

Additional

                   

Other

   

Equity Attributable

   

Interests in

   

Total

 
                   

Paid-in

   

Treasury

   

Accumulated

   

Comprehensive

   

to Common

   

Consolidated

   

Shareholders'

 
   

Common Stock

   

Capital

   

Stock

   

Deficit

   

Income (Loss)

   

Shareholders

   

Subsidiaries

   

Equity

 
   

Shares

   

Amount

                                                         

Balance, December 31, 2020

    22,211,069     $     $ 355,242     $ (492 )   $ (394,807 )   $ 38,059     $ (1,998 )   $ 14,157     $ 12,159  

Vesting of restricted stock awards, net of share settlements for tax withholdings

    225,262                                                  

Exercise of Series B warrants

    350,000             1,750                         1,750             1,750  

Net (loss) income

                            (1,052 )           (1,052 )     1,469       417  

Preferred stock dividends

                (409 )                       (409 )           (409 )

Distributions to noncontrolling interest holders

                                              (2,103 )     (2,103 )

Other comprehensive loss

                                  (6,690 )     (6,690 )     (7 )     (6,697 )

Stock-based compensation, net of forfeitures

                1,623                         1,623             1,623  

Balance, September 30, 2021

    22,786,331     $     $ 358,206     $ (492 )   $ (395,859 )   $ 31,369     $ (6,776 )   $ 13,516     $ 6,740  

See accompanying notes to unaudited consolidated financial statements

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

  

Nine months ended September 30,

 
  

2022

  

2021

 

Cash provided by (used in):

        

Operating activities:

        

Net income

 $32,404  $417 

Adjustments to reconcile net income to net cash used in operating activities:

        

Loss on disposal of discontinued operations, net of taxes

  2,500    

Equity in net income of limited liability investments

  (275)  (31)

Depreciation and amortization expense

  6,916   6,369 

Stock-based compensation expense, net of forfeitures

  3,604   2,955 

Net realized gains

  (1,035)  (397)

Loss on change in fair value of equity investments

  53   235 

Gain on change in fair value of limited liability investments, at fair value

  (368)  (1,740)

Gain on change in fair value of real estate investments

  (1,488)   

Loss on change in fair value of debt

  4,992   2,169 

(Gain) loss on change in fair value of derivatives

  (13,854)  65 

Loss on change in fair value of contingent consideration

  1,519    

Deferred income taxes

  2,697   589 

Amortization of fixed maturities premiums and discounts

  197   154 

Amortization of notes payable premium, discounts and debt issue costs

  (740)  (606)

Gain on disposal of subsidiary

  (37,917)   

Gain on extinguishment of debt

     (2,494)

Changes in operating assets and liabilities:

        

Service fee receivable, net

  (563)  (1,667)

Other receivables, net

  1,426   2,974 

Deferred contract costs

  (2,135)  (212)

Other assets

  (1,495)  (11,030)

Deferred service fees

  (4,789)  (427)

Other, net

  17,694   (5,268)

Net cash provided by (used in) operating activities

  9,343   (8,044)

Investing activities:

        

Proceeds from sales and maturities of fixed maturities

  6,792   4,477 

Proceeds from sales of equity investments

     23 

Purchases of fixed maturities

  (10,630)  (18,455)

Net proceeds from limited liability investments

  1,531   522 

Net proceeds from limited liability investments, at fair value

  461   16,661 

Net proceeds from investments in private companies

  245   151 

Net proceeds from other investments

  52   22 

Net proceeds from disposal of subsidiary, net of cash disposed of $1,391

  35,158    

Acquisition of business, net of cash acquired

  (83)  (50)

Net disposals (purchases) of property and equipment

  43   (689)

Net cash provided by investing activities

  33,569   2,662 

Financing activities:

        

Proceeds from exercise of warrants

  40   1,750 

Distributions to noncontrolling interest holders

  (991)  (2,103)

Taxes paid related to net share settlements of restricted stock awards

  (297)  (468)

Principal payments on bank loans

  (5,028)  (3,088)

Principal proceeds from notes payable, net of debt issuance costs of $1,685 in 2021

     13,270 

Principal payments on notes payable

  (4,730)  (12,645)

Net cash used in financing activities

  (11,006)  (3,284)

Net increase (decrease) in cash and cash equivalents and restricted cash

  31,906   (8,666)

Cash and cash equivalents and restricted cash at beginning of period

  29,899   44,945 

Cash and cash equivalents and restricted cash at end of period

 $61,805  $36,279 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

NOTE 1 BUSINESS

 

Kingsway Financial Services Inc. (the "Company" or "Kingsway") was incorporated under the Business Corporations Act (Ontario) on September 19, 1989. Effective December 31, 2018 the Company changed its jurisdiction of incorporation from the province of Ontario, Canada, to the State of Delaware.  Kingsway is a holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty, business services, asset management and real estate industries.

 

 

NOTE 2 BASIS OF PRESENTATION

 

The accompanying unaudited consolidated interim 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 notes required by U.S. GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year.

 

The accompanying unaudited consolidated interim financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included within our Annual Report on Form 10-K ("2021 Annual Report") for the year ended December 31, 2021.

 

The unaudited consolidated interim financial statements include the accounts of the Company and its subsidiaries, as well as certain variable interest entities as further described in Note 5, "Variable Interest Entities," to the consolidated financial statements in the 2021 Annual Report. All material intercompany transactions and balances have been eliminated in consolidation.

 

Certain amounts in the unaudited consolidated interim financial statements as of and for the three and nine months ended September 30, 2021 have been reclassified in order to conform to the 2022 presentation.

 

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined.

 

The critical accounting estimates and assumptions in the accompanying unaudited consolidated interim financial statements include the valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of real estate investments; valuation of deferred income taxes; accounting for business combinations and asset acquisitions; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred contract costs; fair value assumptions for subordinated debt obligations; fair value assumptions for subsidiary stock-based compensation awards; fair value assumptions for derivative financial instruments; contingent consideration and revenue recognition.

 

The fair values of the Company's investments in fixed maturities and equity investments, limited liability investments, at fair value, real estate investments, subordinated debt, stock-based compensation liabilities, derivative financial instruments and contingent consideration are estimated using a fair value hierarchy to categorize the inputs it uses in valuation techniques. Fair values for other investments approximate their unpaid principal balance. The carrying amounts reported in the consolidated balance sheets approximate fair values for cash and cash equivalents, restricted cash, short-term investments and certain other assets and other liabilities because of their short-term nature.

 

 

NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Except as set forth below there have been no material changes to our significant accounting policies as reported in our 2021 Annual Report.

 

Contingent revenue

The terms of the sale of one of the Company's subsidiaries includes potential receipt by the Company of future earnout payments. The gain related to the earnout payments is recorded when the consideration is determined to be realizable and is reported in the consolidated statements of operations as gain on disposal of subsidiary. The assumptions and methodologies used are continually reviewed and any adjustments are reflected in the consolidated statements of operations in the period in which the adjustments are made.  See Note 5(c), "Acquisitions, Disposal and Discontinued Operations," for further discussion.

Derivative financial instruments

Derivative financial instruments include an interest rate swap contact and the trust preferred debt repurchase options.   The Company measures derivative financial instruments at fair value. The fair value of derivative financial instruments is required to be revalued each reporting period, with corresponding changes in fair value recorded in the consolidated statements of operations. Realized gains or losses are recognized upon settlement of the contracts.  Refer to Note 10, "Derivatives," for further information. 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

Holding Company Liquidity

 

The Company's Extended Warranty and Kingsway Search Xcelerator subsidiaries fund their obligations primarily through service fee and commission revenue. The Company's Leased Real Estate subsidiaries fund their obligations through rental revenue. 

 

The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; certain debt and associated interest; and any other extraordinary demands on the holding company.

 

Actions available to the holding company to generate liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities; exercise of warrants; distributions from the Company’s Extended Warranty subsidiaries, subject to certain restrictions; and giving notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters on the six subsidiary trusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018.

 

Historically, dividends from the Leased Real Estate segment were not generally considered a source of liquidity for the holding company, except upon the occurrence of certain events that would trigger payment of service fees. However, as more fully described in Note 21, "Commitments and Contingencies," the holding company is now permitted to receive 20% of the proceeds from the increased rental payments resulting from an earlier amendment to the lease (or any borrowings against such increased rental payments).  Refer to Note 11, "Debt," for further information about this borrowing.

 

The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway America Inc., was $44.6 million and $2.2 million at September 30, 2022 and December 31, 2021, respectively, which excludes future actions available to the holding company that could be taken to generate liquidity. The holding company cash amounts are reflected in the cash and cash equivalents of $48.6 million and $12.6 million reported at September 30, 2022 and December 31, 2021, respectively, on the Company’s consolidated balance sheets. 

 

As of September 30, 2022, there are 149,733 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. The outstanding Preferred Shares were required to be redeemed by the Company on April 1, 2021 ("Redemption Date"). However, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferred securities") and, therefore is prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred (total deferred interest was $23.2 million at September 30, 2022).  As such, the Preferred Shares were not redeemed on the Redemption Date and instead remain outstanding with a redemption value of $5.9 million, as of  September 30, 2022, continue to be convertible at the discretion of the holder, and will accrue dividends until such time that either (i) the shares are converted at the discretion of the holder or (ii) the interest on the trust preferred securities is no longer deferred and the Company redeems the outstanding Preferred Shares at that time. The Company is permitted to continue to defer interest on the trust preferred securities through the third quarter of 2023.

 

Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, including the cash that may be required to redeem the Preferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic.

 

 

NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS

 

(a)    Adoption of New Accounting Standards:

 

Effective January 1, 2022, the Company adopted Accounting Standards Update ("ASU") 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) ("ASU 2021-04").  ASU 2021-04 clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 provides guidance that will clarify whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The adoption of ASU 2021-04 did not have an effect on the Company’s consolidated financial statements.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(b)    Accounting Standards Not Yet Adopted:

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss model used to measure impairment losses with an expected loss model for trade, reinsurance, and other receivables as well as financial instruments measured at amortized cost. ASU 2016-13 will require a financial asset measured at amortized cost, including reinsurance balances recoverable, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income (loss). Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale investments is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through irreversible write-downs. On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, per ASU 2019-10 the Company would adopt ASU 2016-13 beginning January 1, 2023, as the Company is a smaller reporting company.   The Company is currently evaluating ASU 2016-13 to determine the potential impact that adopting this standard will have on its consolidated financial statements.

 

 

NOTE 5 ACQUISITIONS, DISPOSAL AND DISCONTINUED OPERATIONS

 

(a)

Business Combinations

 

Ravix Financial, Inc.

 

On October 1, 2021, the Company acquired 100% of the outstanding equity interests of Ravix Financial, Inc. ("Ravix").  Ravix, based in San Jose, California, provides outsourced financial services and human resources consulting for short or long duration engagements.  As further discussed in Note 18 , " Segmented Information ," Ravix is included in the Kingsway Search Xcelerator segment, which was created as a result of the Ravix acquisition.  This acquisition was the Company’s first acquisition under its novel CEO Accelerator program and further expands the Company’s portfolio of businesses with recurring revenue and low capital intensity.

 

The Company acquired Ravix for aggregate cash consideration of approximately $10.9 million, less certain escrowed amounts for purposes of indemnification claims.  The final purchase price was subject to a working capital true-up of $0.1 million that was settled during the first quarter of 2022. The Company will also pay additional contingent consideration, only to the extent earned, in an aggregate amount of up to $4.5 million, which is subject to certain conditions, including the successful achievement of gross profit for Ravix during the three-year period commencing on the first full calendar month following the acquisition date.  See Note 19 , " Fair Value of Financial Instruments ," for further discussion of the contingent consideration.

 

This acquisition was accounted for as a business combination using the acquisition method of accounting.  The purchase price was provisionally allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition and were subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one-year as permitted under U.S. GAAP.  During the first quarter of 2022, the Company finalized its fair value analysis of the assets acquired and liabilities assumed with the assistance of a third-party.  No measurement period adjustments were recorded as a result of finalizing the fair value analysis.
 
PWI Holdings, Inc.

 

On December 1, 2020, the Company acquired 100% of the outstanding shares of PWI Holdings, Inc.  This acquisition was accounted for as a business combination using the acquisition method of accounting.  The purchase price was provisionally allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and were subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one-year as permitted under U.S. GAAP.   During the third quarter of 2021, the Company finalized its fair value analysis of the assets acquired and liabilities assumed with the assistance of a third-party.  

 

The Company records measurement period adjustments in the period in which the adjustments occur.  During the third quarter of 2021, the Company recorded a cumulative net measurement period adjustment of $18.8 million, including amortization expense of $1.9 million that was recorded during the three months ended September 30, 2021, of which $0.6 million relates to the three months ended September 30, 2021 and $1.3 million relates to the period from acquisition through  June 30, 2021.  

 

See Note 5, "Acquisitions" to the consolidated financial statements in the 2021 Annual Report for further details on the Company’s acquisition of PWI.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(b)

Asset Acquisition

 
VA Lafayette, LLC (formerly known as  RoeCo Lafayette, LLC) 

 

On December 30, 2021, the Company acquired 100% of the outstanding membership interests of RoeCo Lafayette, LLC ("RoeCo") from a current holder of the Company’s Preferred Shares, for cash consideration of approximately $2.4 million.  R efer to Note 20 , " Related Parties ," for further disclosure.  In 2022, RoeCo changed its name to VA Lafayette, LLC ("VA Lafayette").  VA Lafayette owns real property consisting of approximately 6.5 acres and a 29,224 square foot single-tenant medical office building located in the State of Louisiana (the "LA Real Property"). The LA Real Property serves as a medical and dental clinic for the Department of Veteran Affairs and is subject to a long-term lease.  The LA Real Property is also subject to mortgages with a total principal amount of $13.5 million (the "LA Mortgage") at the date of acquisition plus a premium of $3.5 million.  As further discussed in Note 18 , " Segmented Information , VA Lafayette is included in the Leased Real Estate segment.

 

This transaction was accounted for as an asset acquisition as substantially all the fair value of the gross assets acquired is concentrated in a single asset comprised of land, building and improvements.  The total purchase price, including the transaction costs, were allocated to the individual net assets acquired based on their relative fair values.  In connection with the acquisition, the Company recorded $2.9 million of separately identifiable intangible assets, related to above-market lease and in-place and other lease assets.  The above-market lease intangible asset of $0.8 million resulted from the terms of the acquired operating lease contract being favorable relative to market terms of comparable leases on the date of acquisition.  The in-place and other lease intangible assets of $2.1 million were estimated based on the costs avoided in originating leases comparable to the acquired in-place lease as well as the value associated with lost rental revenue during the assumed lease-up period.  The above-market and in-place and other lease assets are amortized on a straight-line basis over the remaining lease term, which expires in  September 2036.

 

(c)

Disposal

 

Professional Warranty Service Corporation  

 

On July 29, 2022, Professional Warranty Services LLC ("PWS LLC"), a subsidiary of the Company entered into an Equity Purchase Agreement (the "Agreement") with Professional Warranty Service Corporation ("PWSC"), an 80% majority-owned, indirect subsidiary of the Company, Tyler Gordy, the president of PWSC and a 20% owner of PWSC ("Gordy") and PCF Insurance Services of the West, LLC ("Buyer"), pursuant to which PWS LLC and Gordy sold PWSC to Buyer. 

 

The purchase price paid by Buyer to PWS LLC and Gordy consisted of $51.2 million in base purchase pric e, subject to customary adjustments for net working capital, and non-compensation related transaction expenses of approximately $1.7 million.  As a result of the sale, the Company incurred compensation expenses of $5.4 million, primarily related to previously-granted awards to PWSC employees that are accounted for on a fair value basis, which are included in disposal of subsidiary transaction expenses in the consolidated statement of operations for the three and  nine months ended September 30, 2022.
 
To the extent the EBITDA of PWSC (as defined in the Agreement) for the one-year period following the sale transaction exceeds 103% of the EBITDA at the closing of the sale transaction (the "Closing EBITDA"), PWS LLC and Gordy will also be entitled to receive an earnout payment in an amount equal to five times the EBITDA in excess of 103% of Closing EBITDA.  The Company does not have access to the information needed to reasonably estimate the potential earnout payment and accordingly any gain related to the earnout payment will be recorded in the period the consideration is determined to be realizable.
 
As a result of the sale, the Company recognized a net gain on dispos al of  $37.9  million, net of direct selling costs of $1.7 million, during the three months ended  September 30, 2022.  The sale of PWSC did not represent a strategic shift that will have a major effect on the Company's operations or financial results; therefore, PWSC is not presented as a discontinued operation.  The earnings of PWSC, which was included in the Extended Warranty segment, are included in the unaudited interim consolidated statements of operations through the July 29, 2022 disposal date.  The assets, liabilities and equity (including the non-controlling interest) of PWSC were deconsolidated effective July 29, 2022.
 
The sale of PWSC represents the disposal of a significant subsidiary of the Company, which had contributions to Extended Warranty service fee and commission revenue of $0.7 million and $2.0 million for the  three months ended September 30, 2022 and September 30, 2021, respectively ( $4.9 million and $5.9 million for the  nine months ended September 30, 2022 and September 30, 2021, respectively).  Additionally, PWSC had pre-tax loss of $5.2 million and pre-tax income of $0.1 million for the  three months ended September 30, 2022 and September 30, 2021, respectively (pre-tax loss of $5.5 million for the  nine months ended September 30, 2022 and pre-tax income of $0.4 million for the nine months ended  September 30, 2021).  For the  three months ended September 30, 2022 and September 30, 2021, pre-tax loss of $4.1 million and pre-tax income of $0.1 million, respectively, was attributable to the controlling interest (pre-tax loss of $4.4 million and pre-tax income of $0.3 million was attributable to the controlling interest for the  nine months ended September 30, 2022 and September 30, 2021, respectively).  At the July 29, 2022 disposal date, PWSC had service fee receivables totaling $0.7 million, intangible assets, net of $2.3 million, deferred service fees of $7.6 million and a non-controlling interest of ( $2.2) million. 
 
As a result of the sale, the Company incurred additional compensation expenses of $5.4 million related which are included in disposal of subsidiary transaction expenses in the consolidated statement of operations for the three and   nine months ended September 30, 2022.
 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(d)

Discontinued Operations

 

Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company

 

As part of the October 18, 2018 transaction to sell Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"), the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims is $2.5 million.   Per the purchase agreement, a security interest on the Company’s equity interest in its consolidated subsidiary, Net Lease Investment Grade Portfolio LLC ("Net Lease") , as well as any distributions to the Company from Net Lease, was to be collateral for the Company’s payment of obligations with respect to the open claims.
 
During the third quarter of 2021, the purchasers of Mendota and the Company agreed to release the Company's equity interest in Net Lease as collateral and allow Net Lease to make distributions to the Company.  In exchange, the Company agreed to deposit  $2.0 million into an escrow account and advance  $0.5 million to the purchaser of Mendota to satisfy the Company's payment obligation with respect to the open claims.
 
During the third quarter of 2022, the buyer provided to the Company an analysis of the claims development that indicated that the Company's potential exposure with respect to the open claims was at the maximum obligation amount.  Previous communications from the buyer noted no such development and the buyer was not obligated to provide development information to the Company until the first quarter of 2023.  As a result of the newly provided information, the Company recorded a liability of $2.5 million at September 30, 2022, which is included in accrued expenses and other liabilities in the unaudited consolidated balance sheet and loss on disposal of discontinued operations, net of taxes in the unaudited consolidated statement of operations for the three months ended  September 30, 2022.  Per the terms of the agreement, no payment is due until the first quarter of 2023.  There were no payments made by the Company related to the open claims during the nine months ended September 30, 2022 and September 30, 2021.  
 
 

NOTE 6 INVESTMENTS

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at September 30, 2022 and December 31, 2021 are summarized in the tables shown below:

 

(in thousands)

 

September 30, 2022

 
  

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Estimated Fair Value

 

Fixed maturities:

                

U.S. government, government agencies and authorities

 $15,389  $  $795  $14,594 

States, municipalities and political subdivisions

  2,315      171   2,144 

Mortgage-backed

  8,850      672   8,178 

Asset-backed

  1,697      75   1,622 

Corporate

  11,256      1,066   10,190 

Total fixed maturities

 $39,507  $  $2,779  $36,728 

 

(in thousands)

 

December 31, 2021

 
  

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Estimated Fair Value

 

Fixed maturities:

                

U.S. government, government agencies and authorities

 $16,276  $31  $84  $16,223 

States, municipalities and political subdivisions

  1,880   3   5   1,878 

Mortgage-backed

  7,679   18   68   7,629 

Asset-backed

  449      4   445 

Corporate

  9,605   15   129   9,491 

Total fixed maturities

 $35,889  $67  $290  $35,666 

 

The table below summarizes the Company's fixed maturities at September 30, 2022 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of these obligations.

 

(in thousands)

 

September 30, 2022

 
  

Amortized Cost

  

Estimated Fair Value

 

Due in one year or less

 $8,618  $8,467 

Due after one year through five years

  24,563   22,624 

Due after five years through ten years

  1,952   1,727 

Due after ten years

  4,374   3,910 

Total

 $39,507  $36,728 

 

13

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

The following tables highlight the aggregate unrealized loss position, by security type, of available-for-sale investments in unrealized loss positions as of September 30, 2022 and December 31, 2021. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.

 

(in thousands)

 

September 30, 2022

 
  

Less than 12 Months

  

Greater than 12 Months

  

Total

 
  

Estimated Fair Value

  

Unrealized Loss

  

Estimated Fair Value

  

Unrealized Loss

  

Estimated Fair Value

  

Unrealized Loss

 

Fixed maturities:

                        

U.S. government, government agencies and authorities

 $4,407  $89  $10,187  $706  $14,594  $795 

States, municipalities and political subdivisions

  726   61   1,344   110   2,070   171 

Mortgage-backed

  4,119   328   3,870   344   7,989   672 

Asset-backed

  1,249   58   373   17   1,622   75 

Corporate

  5,768   571   4,422   495   10,190   1,066 

Total fixed maturities

 $16,269  $1,107  $20,196  $1,672  $36,465  $2,779 

 

 

(in thousands)

 

December 31, 2021

 
  

Less than 12 Months

  

Greater than 12 Months

  

Total

 
  

Estimated Fair Value

  

Unrealized Loss

  

Estimated Fair Value

  

Unrealized Loss

  

Estimated Fair Value

  

Unrealized Loss

 

Fixed maturities:

                        

U.S. government, government agencies and authorities

 $12,077  $84  $  $  $12,077  $84 

States, municipalities and political subdivisions

  846   5         846   5 

Mortgage-backed

  5,388   68         5,388   68 

Asset-backed

  445   4         445   4 

Corporate

  7,542   129         7,542   129 

Total fixed maturities

 $26,298  $290  $  $  $26,298  $290 

 

There are approximately 213and 138 individual available-for-sale investments that were in unrealized loss positions as of September 30, 2022 and December 31, 2021, respectively. 

 

The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. See the "Significant Accounting Policies and Critical Estimates" section of Management's Discussion and Analysis of Financial Condition included in the 2021 Annual Report for further information regarding the Company's detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment.

 

As a result of the analysis performed by the Company to determine declines in market value that are other-than-temporary, the Company did not record any write-downs for other-than-temporary impairment related to available-for sale investments, limited liability investments, investments in private companies and other investments for the three and nine months ended September 30, 2022 and September 30, 2021.

 

The Company has reviewed currently available information regarding investments with estimated fair values less than their carrying amounts and believes these unrealized losses are not other-than-temporary and are primarily due to temporary market and sector-related factors rather than to issuer-specific factors. The Company does not intend to sell those investments, and it is not likely it will be required to sell those investments before recovery of its amortized cost.

 

The Company does not have any exposure to subprime mortgage-backed investments.

 

Limited liability investments include investments in limited liability companies and limited partnerships. The Company's interests in these investments are not deemed minor and, therefore, are accounted for under the equity method of accounting. The most recently available financial statements are used in applying the equity method. The difference between the end of the reporting period of the limited liability entities and that of the Company is no more than three months. As of September 30, 2022 and December 31, 2021, the carrying value of limited liability investments totaled $1.0 million and $1.9 million, respectively. Income or loss from limited liability investments is recognized based on the Company's share of the earnings of the limited liability entities and is included in net investment income in the consolidated statements of operations. At September 30, 2022, the Company had no unfunded commitments related to limited liability investments.  

 

Limited liability investments, at fair value represents the underlying investments of the Company’s consolidated entities Net Lease and Argo Holdings Fund I, LLC ("Argo Holdings"). As of September 30, 2022 and December 31, 2021, the carrying value of the Company's limited liability investments, at fair value was $19.2 million and $18.8 million, respectively.   The Company recorded impairments related to limited liability investments, at fair value of zero and less than $0.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively (less than $0.1 million and $0.1 million for the three and nine months ended  September 30, 2021, respectively) which are included in gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. At September 30, 2022, the Company had no unfunded commitments to fund limited liability investments, at fair value.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

The Company consolidates the financial statements of Net Lease on a three-month lag. Net Lease owns investments in limited liability companies that hold investment properties.  During the second quarter of 2021, one of Net Lease’s limited liability companies sold their investment property for $14.3 million. As a result of the three-month lag, the Company recorded this transaction in its third quarter 2021 financial statements.  A portion of the proceeds from the sale were distributed to Net Lease. As a result of the distribution, Net Lease recorded a gain of $0.8 million related to its investment in the limited liability company, with an offsetting change in unrealized gain of $0.8 million, which collectively are included in net investment income in the consolidated statement of operations for the three months ended September 30, 2021.  During the fourth quarter of 2020, one of Net Lease's limited liability companies sold their investment property.  A portion of the proceeds from the sale were distributed to Net Lease who used them primarily to repay their $9.0 million mezzanine loan. As a result of the distribution, Net Lease recorded a gain of $1.2 million related to its investment in the limited liability company, with an offsetting change in unrealized gain of $1.2 million, which collectively are included in net investment income in the consolidated statement of operations for the nine months ended  September 30, 2021.   

 

Investments in private companies consist of convertible preferred stocks and notes in privately owned companies and investments in limited liability companies in which the Company’s interests are deemed minor. The Company's investments in private companies do not have readily determinable fair values. The Company has elected to record investments in private companies at cost, adjusted for observable price changes and impairments. As of September 30, 2022 and December 31, 2021, the carrying value of the Company's investments in private companies totaled $0.8 million. For the three and nine months ended September 30, 2022 and September 30, 2021, the Company did not record any adjustments to the fair value of its investments in private companies for observable price changes.

 

The Company performs a quarterly impairment analysis of its investments in private companies.  As a result of the analysis performed, the Company did not record any impairments related to investments in private companies for the three and nine months ended September 30, 2022 and September 30, 2021.

 

Real estate investments represent investment real estate properties held by the Company’s consolidated subsidiary, Flower Portfolio 001, LLC ("Flower"). As of September 30, 2022 and December 31, 2021, the carrying value of the Company's real estate investments was $12.2 million and $10.7 million, respectively.  The Company consolidates the financial statements of Flower on a three-month lag.  On September 29, 2022, Flower sold their investment real estate properties for $12.2 million.  A portion of the proceeds from the sale were used to repay the Flower note payable with an unpaid principal balance of $5.9 million at the transaction date.  Given the proximity of the sale to September 30, 2022, the Company believes the selling price is the best indication of fair value at June 30, 2022 for Flower which is recorded on a three-month lag in the September 30, 2022 consolidated balance sheet.   As a result of the three month lag, the Company will record the sale transaction in its fourth quarter 2022 financial statements.

 

Net investment income for the three and nine months ended September 30, 2022 and September 30, 2021 is comprised as follows:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Investment income:

                

Interest from fixed maturities

 $153  $62  $363  $160 

Dividends

  42   31   106   94 

(Loss) income from limited liability investments

  (12)  (14)  275   31 

Income from limited liability investments, at fair value

     25   4   106 

Income from real estate investments

  200   200   600   600 

Other

  110   94   280   274 

Gross investment income

  493   398   1,628   1,265 

Investment expenses

  (30)  (9)  (81)  (52)

Net investment income

 $463  $389  $1,547  $1,213 

 

Gross realized gains and losses on available-for-sale investments, limited liability investments, limited liability investments, at fair value and investments in private companies for the three and nine months ended September 30, 2022 and September 30, 2021 are comprised as follows:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Gross realized gains

 $1,214  $193  $1,473  $505 

Gross realized losses

  (417)  (34)  (438)  (108)

Net realized gains

 $797  $159  $1,035  $397 

 

Loss on change in fair value of equity investments for the three and nine months ended September 30, 2022 and September 30, 2021 is comprised as follows:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net gains recognized on equity investments sold during the period

 $  $  $  $13 

Change in unrealized losses on equity investments held at end of the period

  (5)  (39)  (53)  (248)

Loss on change in fair value of equity investments

 $(5) $(39) $(53) $(235)

 

15

 
 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

NOTE 7 GOODWILL

 

The following table summarizes the goodwill activity for the nine months ended September 30, 2022:

 

(in thousands)

 

Extended Warranty

  

Leased Real Estate

  

Kingsway Search Xcelerator

  

Corporate

  

Total

 

Balance, December 31, 2021

 $40,627  $60,983  $7,905  $732  $110,247 

Goodwill disposed of related to PWSC

  (9,474)           (9,474)

Balance, September 30, 2022

 $31,153  $60,983  $7,905  $732  $100,773 

 

On a quarterly basis, the Company reviews goodwill to determine whether events occurred or circumstances have changed that would more likely than not reduce the fair value of a reporting unit below its carrying amount (indicating that goodwill may be impaired). For Leased Real Estate as it pertains to CMC (having goodwill of $61.0 million), the Company models a hypothetical sale of the underlying asset in order to arrive at fair value, which, due to the unique nature of Leased Real Estate, the Company views as a technique consistent with the objective of measuring fair value.

 

The estimated fair value for CMC is highly sensitive to discount rates applied and cash flow assumptions used.  For its third quarter 2022 review of goodwill, the Company developed a range of discount rates and cash flow assumptions that it believes a reasonable market participant would use in determining fair value and noted that using the most conservative end of that range resulted in no indication of impairment.  The Company also examined qualitative factors, such as tenant credit quality and macro-economic trends, which did not indicate goodwill may be impaired.

 

The excess of fair value over the book value of equity of CMC has narrowed as of September 30, 2022. However, underlying assumptions in the future could differ materially due to the inherent uncertainty in making such estimates. Additionally, estimates regarding future cash flows and timing as well as future appraised values could also have a significant impact on the estimated fair value. Finally, if there were sustained increases in the underlying interest rates used in the analysis then the future fair value could be reduced to a level that could indicate impairment.

 

NOTE 8 INTANGIBLE ASSETS

 

Intangible assets at September 30, 2022 and December 31, 2021 are comprised as follows:

 

(in thousands)

 

September 30, 2022

 
  

Gross Carrying Value

  

Accumulated Amortization

  

Net Carrying Value

 

Intangible assets subject to amortization:

            

Database

 $4,918  $4,809  $109 

Vehicle service agreements in-force

  3,680   3,680    

Customer relationships

  26,342   11,847   14,495 

In-place lease and other lease assets

  3,238   499   2,739 

Above-market lease

  835   43   792 

Non-compete

         

Intangible assets not subject to amortization:

            

Tenant relationship

  73,667      73,667 

Trade names

  9,687      9,687 

Total

 $122,367  $20,878  $101,489 

 

(in thousands)

 

December 31, 2021

 
  

Gross Carrying Value

  

Accumulated Amortization

  

Net Carrying Value

 

Intangible assets subject to amortization:

            

Database

 $4,918  $4,488  $430 

Vehicle service agreements in-force

  3,680   3,680    

Customer relationships

  31,645   11,598   20,047 

In-place lease and other lease assets

  3,238   343   2,895 

Above-market lease

  835      835 

Non-compete

  266   224   42 

Intangible assets not subject to amortization:

            

Tenant relationship

  73,667      73,667 

Trade names

  10,314      10,314 

Total

 $128,563  $20,333  $108,230 

 

As discussed in Note 5, " Acquisitions, Disposal and Discontinued Operations," the Company disposed of PWSC on July 29, 2022.  PWSC had intangible assets with a gross carrying value of $6.2 million and a net carrying value of $2.3 million at the disposal date.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

The Company's intangible assets with definite useful lives are amortized either based on the patterns in which the economic benefits of the intangible assets are expected to be consumed or using the straight-line method over their estimated useful lives, which range from 5 to 18 years. Amortization of intangible assets was $1.4 million and $2.4 million for the three months ended September 30, 2022 and September 30, 2021, respectively ($4.4 million and $3.4 million for the nine months ended September 30, 2022 and September 30, 2021, respectively). The higher amortization expense for the nine months ended September 30, 2022 is related to amortization of intangible assets recorded in conjunction with the Company's acquisitions of Ravix effective October 1, 2021 and VA Lafayette effective December 30, 2021.

 

During the third quarter of 2021, the Company finalized its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWI, and as a result, recorded $19.6 million of separately identifiable intangible assets, related to acquired customer relationships and trade name, as part of the acquisition of PWI.  The measurement period adjustment recorded during the third quarter of 2021 related to the PWI customer relationships intangible asset resulted in an increase in amortization expense of $1.9 million that was recorded during the three months ended September 30, 2021, of which:

 

• $0.6 million relates to the three months ended September 30, 2021; and

 

• $1.3 million relates to the period from acquisition through  June 30, 2021.

 

The tenant relationship and trade names intangible assets have indefinite useful lives and are not amortized. No impairment charges were recorded during the three and nine months ended September 30, 2022 and September 30, 2021.

 

 

NOTE 9 PROPERTY AND EQUIPMENT

 

Property and equipment at September 30, 2022 and December 31, 2021 are comprised as follows:

 

(in thousands)

 

September 30, 2022

 
  

Cost

  

Accumulated Depreciation

  

Carrying Value

 

Land

 $25,623  $  $25,623 

Site and tenant improvements

  92,047   23,988   68,059 

Buildings

  11,805   277   11,528 

Leasehold improvements

  485   184   301 

Furniture and equipment

  379   310   69 

Computer hardware

  920   475   445 

Total

 $131,259  $25,234  $106,025 

 

 

 

(in thousands)

 

December 31, 2021

 
  

Cost

  

Accumulated Depreciation

  

Carrying Value

 

Land

 $25,623  $  $25,623 

Site and tenant improvements

  92,047   21,910   70,137 

Buildings

  11,805   79   11,726 

Leasehold improvements

  286   163   123 

Furniture and equipment

  562   442   120 

Computer hardware

  2,488   1,630   858 

Total

 $132,811  $24,224  $108,587 

 

For the three months ended September 30, 2022 and September 30, 2021, depreciation expense on property and equipment o f $0.8  million and $0.8 million, respectively ($2.5 million and $2.9 million for the nine months ended  September 30, 2022 and September 30, 2021 , respectively), is included in general and administrative expenses in the consolidated statements of operations.

 

 

NOTE 10 DERIVATIVES

 

(a)

Interest rate swap

 

On April 1, 2021, the Company entered into an interest rate swap agreement with CIBC Bank USA to convert the variable London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR") interest rate on a portion of its 2020 KWH Loan (as defined below in Note 11, "Debt,") to a fixed interest rate of 1.18%.  On September 15, 2022, the interest rate swap agreement was amended to convert from a variable Secured Overnight Financing Rate ("SOFR") to a fixed interest rate of 1.103%.  The interest rate swap had an initial notional amount of $11.9 million and matures on February 29, 2024.

 

The purpose of this interest rate swap, which is not designated as a cash flow hedge, is to reduce the Company's exposure to variability in cash flows from interest payments attributable to fluctuations in the variable interest rate associated with the 2020 KWH Loan.  The Company has not elected hedge accounting for the interest rate swap.  The interest rate swap is recorded in the consolidated balance sheets at fair value with changes in fair value recorded in the consolidated statements of operations.

 

The notional amount of the interest rate swap contract is $9.1 million at September 30, 2022.  At September 30, 2022 and December 31, 2021the fair value of the interest rate swap contract was an asset of $0.3 million and a liability of less than $0.1 million, respectively, which is included in other receivables and accrued expenses and other liabilities, respectively, in the consolidated balance sheets.  During the three and nine months ended September 30, 2022the Company recognized a gain of $0.1 million and $0.2 million, respectively (gain of less than $0.1 million a loss of $0.1 million for the three and nine months ended September 30, 2021 respectively), related to the change in fair value of the interest rate swap, which is included in interest expense not allocated to segments in the consolidated statement of operations and within cash flows from operating activities in the consolidated statement of cash flows.  Net cash receipts of less than $0.1 million were made to the Company during the three and nine months ended September 30, 2022 and net cash payments of less than $0.1 million were made during the three and nine months ended  September 30, 2021, to settle a portion of the liabilities related to the interest rate swap agreement.  These payments are reflected as cash outflows in the consolidated statements of cash flows within net cash provided by (used in) operating activities.

 

(b)Trust preferred debt repurchase options

On August 2, 2022, the Company entered into an agreement with a holder of four of the trust preferred debt instruments ("TruPs") that gives the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for a purchase price equal to 63.75% of the outstanding principal and deferred interest ( "August Option"). Originally, the agreement called for a repurchase at 63%, which escalated to 63.75% once the September 26, 2022 agreement (described below) was signed.  The Company has agreed that any repurchase made will be for no less than 50% of the TruPs held by the holder.  

Until the earlier of (i) the date that all four of the preferred debt instruments have been repurchased and (ii) the nine month anniversary of the agreement ( "May Termination Date"), all interest on the four preferred debt instruments will continue to accrue.  However, with respect to TruPs that are repurchased prior to the May Termination Date, the amount of interest accrued during the term of the agreement will be treated as an offset and reduce the repurchase price for such TruPs.  The Company will have no obligation to pay any such accrued interest with respect to any of the TruPs that are repurchased prior to the May Termination Date.

The Company paid approximately $2.0 million to the holder for this option and the Company has until the May Termination Date to execute the repurchases.  If the Company repurchases less than $30.0 million of principal and deferred interest, or fails to purchase any principal or deferred interest within one year, then the $2.0 million paid is forfeited.  If the Company repurchases an amount equal to or greater than $30.0 million, then the $2.0 million paid would be applied to such repurchases.

On September 20, 2022, the Company entered into an additional agreement with the same party to the August 2, 2022 agreement that gives the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for 63.75% of the outstanding principal and deferred interest relating to a portion of a fifth TruPs held ( "September 20 Option"). The September 20, 2020 agreement is subject to the same terms and conditions as the August 2, 2022 and no additional consideration was paid.

On September 26, 2022, the Company entered into an agreement with a holder of a portion of one of the TruPs that gives the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for a purchase price equal to 63% of the outstanding principal and deferred interest ( "September 26 Option"). 

Until the earlier of (i) the date that all of the preferred debt instrument has been repurchased and (ii) the May Termination Date, all interest on the preferred debt instrument will continue to accrue.  However, with respect to TruPs that are repurchased prior to the May Termination Date, the amount of interest accrued during the term of the agreement will be treated as an offset and reduce the repurchase price for such TruPs.  The Company will have no obligation to pay any such accrued interest with respect to the TruPs that are repurchased prior to the May Termination Date.

The Company paid approximately $0.3 million to the holder for this option and the Company has until the May Termination Date to execute the repurchase.  If the Company fails to purchase any principal or deferred interest by the May Termination Date, then the $0.3 million paid is forfeited.  If the Company repurchases any of the TruPs, then the $0.3 million paid would be applied to any repurchases.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

If the Company is able to secure an agreement with the holders of the remaining trust preferred debt instrument to repurchase all of their outstanding principal and deferred interest within four months of August 4, 2022, then the price paid in accordance with the August 2, 2022 agreement and the September 20, 2022 agreement would increase to 64.5%.

The August Option,  September 20 Option and September 26 Options (collectively "the TruPs Options") are derivative contracts. The Company's accounting policies do not apply hedge accounting treatment to derivative instruments.  The TruPs options are recorded in the consolidated balance sheets at fair value with changes in fair value recorded in the consolidated statements of operations.

The notional amount of the TruPs Options contracts is $59.7 million at September 30, 2022.  At September 30, 2022, the fair value of the TruPs Options contracts was an asset of $15.8 million, which is included in other assets in the consolidated balance sheet. See Note 19, "Fair Value of Financial Instruments," for further discussion. During the three and nine months ended September 30, 2022, the Company recognized an initial gain of $11.4 million, equal to the difference between the fair value of the TruPs Options contracts at the date of inception and the cash consideration paid, and a subsequent gain on change in fair value of $2.1 million, both of which are included in gain on change in fair value of derivative asset option contracts in the consolidated statement of operations and as an adjustment to calculate cash flows provided by operating activities in the consolidated statement of cash flows.  No cash payments were made to repurchase any of the TruPs during the three and nine months ended September 30, 2022 with respect to the TruPs Options contracts.

 

NOTE 11 DEBT

 

Debt consists of the following instruments at September 30, 2022 and December 31, 2021:

 

(in thousands)

 

September 30, 2022

  

December 31, 2021

 
  

Principal

  

Carrying Value

  

Fair Value

  

Principal

  

Carrying Value

  

Fair Value

 

Bank loan:

                        

Ravix Loan

 $5,450  $5,317  $5,258  $6,000  $5,847  $5,936 

2020 KWH Loan

  16,708   16,452   15,907   21,186   20,870   20,815 

Total bank loans

  22,158   21,769   21,165   27,186   26,717   26,751 

Notes payable:

                        

Mortgage

  158,647   164,756   144,151   161,998   168,730   182,128 

Additional Mortgage

  13,924   12,404   12,298   14,514   12,901   15,104 

LA Mortgage

  13,046   16,354   12,849   13,463   16,983   16,437 

Flower Note

  6,040   6,040   5,916   6,411   6,411   7,101 

Total notes payable

  191,657   199,554   175,214   196,386   205,025   220,770 

Subordinated debt

  90,500   62,302   62,302   90,500   60,973   60,973 

Total

 $304,315  $283,625  $258,681  $314,072  $292,715  $308,494 

 

Subordinated debt mentioned above consists of the following trust preferred debt instruments:

 

Issuer

 

Principal (in thousands)

 

Issue date

Interest

Redemption date

Kingsway CT Statutory Trust I

 $15,000 

12/4/2002

annual interest rate equal to LIBOR, plus 4.00% payable quarterly

12/4/2032

Kingsway CT Statutory Trust II

 $17,500 

5/15/2003

annual interest rate equal to LIBOR, plus 4.10% payable quarterly

5/15/2033

Kingsway CT Statutory Trust III

 $20,000 

10/29/2003

annual interest rate equal to LIBOR, plus 3.95% payable quarterly

10/29/2033

Kingsway DE Statutory Trust III

 $15,000 

5/22/2003

annual interest rate equal to LIBOR, plus 4.20% payable quarterly

5/22/2033

Kingsway DE Statutory Trust IV

 $10,000 

9/30/2003

annual interest rate equal to LIBOR, plus 3.85% payable quarterly

9/30/2033

Kingsway DE Statutory Trust VI

 $13,000 

12/16/2003

annual interest rate equal to LIBOR, plus 4.00% payable quarterly

1/8/2034

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(a)          Bank loans:

 

Ravix

 

As part of the acquisition of Ravix on October 1, 2021, Ravix became a wholly owned subsidiary of Ravix Acquisition LLC ("Ravix LLC"), and together they borrowed from a bank a principal amount of $6.0 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of Ravix (together, the "Ravix Loan"). The Ravix Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75%. At September 30, 2022, the interest rate was6.00%. The revolver matures on October 1, 2023 and the term loan matures on October 1, 2027.  Subsequent to October 1, 2021, Ravix has borrowed and made payments under the revolver.  The carrying values at  September 30, 2022 and December 31, 2021 includes $5.3 million and $5.7 million, respectively, related to the term loan and zero and $0.1 million, respectively related to revolver.

 

The Company also recorded as a discount to the carrying value of the Ravix Loan issuance costs of $0.2 million specifically related to the Ravix Loan.  The Ravix Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method.  The fair value of the Ravix Loan disclosed in the table above is derived from quoted market prices of B and BB minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. 

 

The Ravix Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio, all of which are as defined in and calculated pursuant to the Ravix Loan that, among other things, restrict Ravix’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets.

 

KWH

 

In 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose subsidiaries include IWS Acquisition Corporation ("IWS"), Geminus Holdings Company, Inc. ("Geminus") and Trinity Warranty Solutions LLC ("Trinity"). As part of the acquisition of PWI on December 1, 2020, PWI became a wholly owned subsidiary of KWH, which borrowed a principal amount of $25.7 million from a bank, consisting of a $24.7 million term loan and a $1.0 million revolving credit facility (the "2020 KWH Loan"). The proceeds from the 2020 KWH Loan were used to partially fund the acquisition of PWI and to fully repay the prior outstanding loan at KWH, which occurred on December 1, 2020.

 

The 2020 KWH Loan had an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 2.75%.  During the second quarter of 2022, the 2020 KWH Loan was amended to change the annual interest rate to be equal to SOFR, having a floor of 0.75%, plus spreads ranging from 2.62% to 3.12%.  At September 30, 2022, the interest rate was5.33%. The 2020 KWH Loan matures on December 1, 2025. The Company also recorded as a discount to the carrying value of the 2020 KWH Loan issuance costs of $0.4 million specifically related to the 2020 KWH Loan. The 2020 KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method.  The carrying values at  September 30, 2022 and December 31, 2021 includes $16.0 million and $20.4 million, respectively, related to the term loan and $0.5 million and $0.5 million, respectively, related to revolver. The fair value of the 2020 KWH Loan disclosed in the table above is derived from quoted market prices of B and BB minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy. The 2020 KWH Loan is secured by certain of the equity interests and assets of KWH and its subsidiaries.

 

The 2020 KWH Loan contains a number of covenants, including, but not limited to, a leverage ratio, a fixed charge ratio and limits on annual capital expenditures, all of which are as defined in and calculated pursuant to the 2020 KWH Loan that, among other things, restrict KWH’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets.

 

(b)          Notes payable:

 

CMC Industries 

 

As part of the acquisition of CMC Industries, Inc. ("CMC") in July 2016, the Company assumed a mortgage, which is recorded as note payable in the consolidated balance sheets ("the Mortgage").  The Mortgage was recorded at its estimated fair value of $191.7 million, which included the unpaid principal amount of $180.0 million as of the date of acquisition plus a premium of $11.7 million. The Mortgage matures on May 15, 2034 and has a fixed interest rate of 4.07%. The Mortgage is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the premium using the effective interest rate method. The fair value of the Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

On June 2, 2021, TRT Leaseco ("TRT"), a subsidiary of CMC, entered into an amendment to the Mortgage to borrow an additional $15.0 million, which is recorded as note payable in the consolidated balance sheets ("the Additional Mortgage").  The net proceeds from the Additional Mortgage were used to advance increased rental payments to the parties that had entered into a legal settlement agreement reached during the first quarter of 2021, including the Company which received $2.7 million.  See Note 21(a), "Commitments and Contingencies - Legal proceedings," for further discussion of the CMC litigation settlement agreement.

 

The Additional Mortgage matures on May 15, 2034 and has a fixed interest rate of 3.20%.  The Company recorded as a discount to the carrying value of the Additional Mortgage issuance costs of $1.7 million specifically related to the Additional Mortgage. The Additional Mortgage is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method.  The fair value of the Additional Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

Both the Mortgage and the Additional Mortgage are nonrecourse indebtedness with respect to CMC and its subsidiaries, and the Mortgage and Additional Mortgage are not, nor will it be, guaranteed by Kingsway or its affiliates. The Mortgage and Additional Mortgage are collateralized by a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property") and the assignment of leases and rents related to a long-term triple net lease agreement with an unrelated third-party.

 

VA Lafayette (formerly known as RoeCo)

 

As part of its acquisition of VA Lafayette on  December 30, 2021, the Company assumed the LA Mortgage, which is comprised of a senior amortizing note, a senior interest only note and a junior note. The LA Mortgage is nonrecourse indebtedness with respect to the assets of VA Lafayette, and the LA Mortgage is not, nor will it be, guaranteed by Kingsway or its affiliates unless VA Lafayette acts in bad-faith or commits intentional acts with respect to the LA Mortgage.  Refer to Note 21(b), "Commitments and Contingencies" for further disclosure. The LA Mortgage is collateralized by a parcel of real property and a single tenant building located in the state of Louisiana (the "LA Real Property") and the assignment of a lease and rent related to a long-term lease agreement with an unrelated third-party.  The Company recorded the LA Mortgage at its aggregate unpaid principal amount of $13.5 million as of the date of acquisition plus a premium of $3.5 million. The senior amortizing note, which has unpaid principal of $6.1 million and $6.6 million at September 30, 2022 and December 31, 2021, respectively, matures on September 14, 2036 and has a fixed interest rate of 3.75%. The senior interest only note, which has unpaid principal of $5.0 million at September 30, 2022 and December 31, 2021, matures on October 14, 2036 and has a fixed interest rate of 5.682%.  The junior note, which has unpaid principal of $2.0 million and $1.9 million at September 30, 2022 and  December 31, 2021, respectively, matures on September 16, 2036 and has a fixed interest rate of 7.0%, of which a fixed amount is payable semi-annually and the remainder is added to the principal balance of the junior note.  The LA Mortgage is carried in the consolidated balance sheets at its aggregate unpaid principal balance.  The fair value of the LA Mortgage disclosed in the table above is derived from quoted market prices of bonds backed by loans to hospitals and guaranteed by the U.S. Government and A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

Flower

 

On January 5, 2015, Flower assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Flower Note"). The Flower Note requires monthly payments of principal and interest and is secured by certain investments of Flower. The Flower Note was scheduled to mature on December 10, 2031 and has a fixed interest rate of 4.81%. On September 29, 2022, Flower sold its investment real estate properties and used a portion of the sales proceeds to repay the unpaid principal balance of the Flower Note.  Since the Company reports the financial statements of Flower on a three-month lag, the consolidated balance sheet continues to report the carrying value of the Flower Note at September 30, 2022 of $6.0 million, which represents its unpaid principal balance at June 30, 2022.  The fair value of the Flower Note disclosed in the table above is derived from quoted market prices of A and BBB plus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

Paycheck Protection Program 

 

In April 2020, certain subsidiaries of the Company received loan proceeds under the Paycheck Protection Program ("PPP"), totaling $2.9 million with a stated annual interest rate of 1.00%. The PPP, established as part of the Coronavirus Aid, Relief, and Economic Security Act and administered by the U.S. Small Business Administration (the "SBA"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll costs (as defined for purposes of the PPP) of the qualifying business. The loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, costs, rent and utilities, during the twenty-four week period following the borrower’s receipt of the loan and maintains its payroll levels and employee headcount. The amount of loan forgiveness will be reduced if the borrower reduces its employee headcount below its average employee headcount during a benchmark period or significantly reduces salaries for certain employees during the covered period.

 

The Company used the entire loan amount for qualifying expenses. The U.S. Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2.0 million. If the Company were to be audited and receive an adverse outcome in such an audit, it could be required to return the full amount of the PPP Loan and may potentially be subject to civil and criminal fines and penalties.

 

On December 21, 2020 the SBA approved the forgiveness of the full amount of one of the five PPP loans, which included principal and interest of $0.4 million. In January 2021 and March 2021, the SBA provided the Company with notices of forgiveness of the full amount of the remaining four loans. The forgiveness in the first quarter of 2021 included total principal and interest of $2.5 million.  The loan forgiveness is included in gain on extinguishment of debt, net in the consolidated statement of operations for the nine months ended September 30, 2021.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(c)          Subordinated debt:

 

Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third-parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by KAI to the trust in exchange for the proceeds from the private sale. The floating rate debentures bear interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. The Company has the right to call each of these securities at par value any time after five years from their issuance until their maturity.

 

The subordinated debt is carried in the consolidated balance sheets at fair value. See Note 19, "Fair Value of Financial Instruments," for further discussion of the subordinated debt. The portion of the change in fair value of subordinated debt related to the instrument-specific credit risk is recognized in other comprehensive (loss) income. Of the $1.3 million increase in fair value of the Company’s subordinated debt between December 31, 2021 and September 30, 2022, $3.7 million is reported as decrease in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive income (loss) and $5.0 million reported as loss on change in fair value of debt in the Company’s consolidated statements of operations.

 

During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures. At September 30, 2022 and December 31, 2021, deferred interest payable of $23.2 million and $18.7 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets.

 

 

 

NOTE 12 LEASES

 

(a)          Lessee leases:

 

The Company has operating leases for office space that include fixed base rent payments, as well as variable rent payments to reimburse the landlord for operating expenses and taxes. The Company’s variable lease payments do not depend on a published index or rate, and therefore, are expensed as incurred. The Company includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. There are no residual value guarantees.

 

Operating lease costs and variable lease costs included in general and administrative expenses for the three months ended September 30, 2022 were $0.2 million and less than $0.1 million, respectively ($0.7 million and $0.1 million for the nine months ended  September 30, 2022). Operating lease costs and variable lease costs included in general and administrative expenses for the three months ended September 30, 2021 were $0.2 million and less than $0.1 million, respectively ($0.7 million and $0.1 million for the nine months ended  September 30, 2021).

 

The annual maturities of lease liabilities as of September 30, 2022 were as follows:

 

(in thousands)

 

Lease Commitments

 

2022

 $162 

2023

  402 

2024

  356 

2025

  180 

2026

  114 

2027 and thereafter

  120 

Total undiscounted lease payments

  1,334 

Imputed interest

  145 

Total lease liabilities

 $1,189 

 

Lease liabilities are included in accrued expenses and other liabilities in the consolidated balance sheets. The weighted-average remaining lease term for our operating leases was 3.43 years as of September 30, 2022. The weighted average discount rate of our operating leases was 5.84% as of September 30, 2022. Cash paid for amounts included in the measurement of lease liabilities was $0.6 million and $0.7 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(b)           Lessor leases:

 

The Company owns the Real Property that is subject to a long-term triple net lease agreement with an unrelated third-party. The lease provides for future rent escalations and renewal options. The initial lease term ends in May 2034. The lessee bears the cost of maintenance and property taxes. Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental revenue includes a de minimus amount of amortization of below market lease liabilities for the three and  nine months ended September 30, 2022 and September 30, 2021. The estimated aggregate future amortization of below market lease liabilities is $0.1 million for 2022, $0.1 million for 2023, $0.1 million for 2024,  $0.1 million for 2025 and  $0.1 million for 2026. Realization of the residual values of the assets under lease is dependent on the future ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assets are included in property and equipment in the consolidated balance sheets. R efer to Note 9 , " Property and Equipment ".

 

The Company acquired the LA Real Property on December 30, 2021.  The LA Real Property is subject to a long-term lease agreement with an unrelated third-party. The lease provides for future rent decreases. The initial lease term ends in March 2035. The lessee bears the cost of maintenance and property taxes. Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental revenue includes a de minimus amount of amortization of above-market lease asset related to the LA Real Property for the three and nine months ended September 30, 2022. The estimated aggregate future amortization of above-market lease asset is $0.1 million for 2022, $0.1 million for 2023, $0.1 million for 2024, $0.1 million for 2025 and $0.1 million for 2026. Realization of the residual values of the assets under lease is dependent on the future ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assets are included in property and equipment in the consolidated balance sheets. Refer to Note 9, "Property and Equipment".

 

Lease revenue related to operating lease payments was $3.6 million and $3.3 millionfor the three months ended  September 30, 2022 and September 30, 2021, respectively ($10.8 million and $10.0 million for the nine months ended September 30, 2022 and September 30, 2021, respectively).  Lease revenue related to variable lease payments was less than $0.1 million and zero for the three months ended  September 30, 2022 and September 30, 2021, respectively ($0.1 million and zero for the nine months ended September 30, 2022 and  September 30, 2021, respectively). 

 

The following table provides the net book value of operating lease property included in property and equipment in the consolidated balance sheets at September 30, 2022 and December 31, 2021:

 

(in thousands)

 

September 30, 2022

  

December 31, 2021

 
         

Land

 $25,623  $25,623 

Site improvements

  92,047   92,047 

Buildings

  11,805   11,805 

Gross property and equipment leased

  129,475   129,475 

Accumulation depreciation

  (24,265)  (21,989)

Net property and equipment leased

 $105,210  $107,486 

 

As of September 30, 2022, future undiscounted cash flows to be received in each of the next five years and thereafter, on non-cancelable operating leases are as follows:

 

(in thousands)

    

2022

 $3,507 

2023

  14,190 

2024

  14,475 

2025

  14,766 

2026

  14,883 

Thereafter

  119,590 

 

 

NOTE 13 REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Revenue from contracts with customers relates to the Extended Warranty and Kingsway Search Xcelerator segments and includes: vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees, homebuilder warranty commissions and business services consulting revenue.  Revenue is based on terms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warranty contract, commission product sale, or when consulting services are billed, or on terms subject to the Company’s customary credit reviews.

 

The following table disaggregates revenues from contracts with customers by revenue type:

 

(in thousands)

  

Three months ended September 30,

  

Nine months ended September 30,

 
   

2022

  

2021

  

2022

  

2021

 
                  

Vehicle service agreement fees and GAP commissions

IWS, Geminus and PWI

 $15,046  $12,905  $43,181  $42,255 

Maintenance support service fees

Trinity

  1,555   1,396   4,747   3,482 

Warranty product commissions

Trinity

  1,264   1,306   3,492   3,298 

Homebuilder warranty service fees

PWSC (a)

  621   1,790   4,348   5,322 

Homebuilder warranty commissions

PWSC (a)

  92   230   540   599 

Business services consulting fees

Ravix

  3,818      12,134    

Service fee and commission revenue

 $22,396  $17,627  $68,442  $54,956 
 (a)Through the July 29, 2022 disposal
23

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

Vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement fees are earned over the duration of the vehicle service agreement contracts as the single performance obligation is satisfied. Vehicle service agreement fees are initially recorded as deferred service fees with revenues recognized over the term of the contract based on the proportion of expected claims to total overall claims to be incurred over the life of the contract.  The Company believes this reasonably represents the transfer of services to the vehicle service contract holder over the warranty term. The Company compares the remaining deferred service fees balance to the estimated amount of expected future claims under the vehicle service agreement contracts and records an additional accrual if the deferred service fees balance is less than expected future claims costs.

 

In certain jurisdictions the Company is required to refund to a customer a pro-rata share of the vehicle service agreement fees if a customer cancels the agreement prior to the end of the term. Depending on the jurisdiction, the Company may be entitled to deduct from the refund a cancellation fee and/or amounts for claims incurred prior to cancellation. While refunds vary depending on the term and type of product offered, historically refunds have averaged 9% to 13% of the original amount of the vehicle service agreement fee. Revenues recorded by the Company are net of variable consideration related to refunds and the associated refund liability is included in accrued expenses and other liabilities. The Company estimates refunds based on the actual historical refund rates by warranty type taking into consideration current observable refund trends in estimating the expected amount of future customer refunds to be paid at each reporting period.

 

GAP commissions include commissions from the sale of GAP products. The Company acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these GAP contracts. The Company receives a single commission fee as its transaction price at the time it sells a GAP contract to a customer. Each GAP contract contains two separate performance obligations - sale of a GAP contract and GAP claims administration. The first performance obligation is related to the sale of a GAP contract and is satisfied upon closing the sale. The second performance obligation is related to the administration of claims during the GAP contract period. The amount of revenue the Company recognizes is based the costs to provide services during the GAP contract period, including an appropriate estimate of profit margin.

 

Maintenance support service fees include the service fees collected to administer equipment breakdown and maintenance support services and are earned as services are rendered.

 

Warranty product commissions include the commissions from the sale of warranty contracts for certain new and used heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration equipment. The Company acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. The Company does not guaranty the performance underlying the warranty contracts it sells. Warranty product commissions are earned at the time of the warranty product sales.

 

Homebuilder warranty service fees include fees collected from the sale of warranties issued by new homebuilders. The Company receives a single warranty service fee as its transaction price at the time it enters into a written contract with each of its builder customers. Each contract contains two separate performance obligations - warranty administrative services and other warranty services. Warranty administrative services include enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product. Other warranty services include answering builder or homeowner questions regarding the home warranty and dispute resolution services.

 

Homebuilder warranty commissions include commissions from the sale of warranty contracts for those builders who have requested and receive insurance backing of their warranty obligations. The Company acted as an agent on behalf of the third-party insurance company that underwrites and guaranties these warranty contracts. Homebuilder warranty commissions were earned on the certification date, which is typically the date of the closing of the sale of the home to the buyer. The Company also earned fees to manage remediation or repair services related to claims on insurance-backed warranty obligations, which were earned when the claims are closed.

 

Ravix consulting revenue includes the revenue from providing outsourced finance and human resources consulting services. The Company invoices for business services consulting revenue based on contracted rates.  Revenue is earned as services are provided.

 

The Company's revenue recognition policies are further described in Note 2(p), "Summary of Significant Accounting Policies - Revenue recognition," to the consolidated financial statements in the 2021 Annual Report.

 

Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at September 30, 2022 and December 31, 2021 were $7.2 million and $6.7 million, respectively.  The increase in receivables from contracts with customers is primarily due to the timing difference between the Company's satisfaction of performance obligations and customer payments, partially offset by a decrease due to the disposal of PWSC on July 29, 2022.  During the nine months ended  September 30, 2022, increased revenue at IWS, Trinity and Ravix primarily resulted in the increase in receivables from contracts with customers.

 

The Company records deferred service fees resulting from contracts with customers when payment is received in advance of satisfying the performance obligations. Changes in deferred service fees for the nine months ended  September 30, 2022 were as follows:

 

(in thousands)

 

Nine months ended September 30, 2022

 

Balance, December 31, 2021

 $89,217 

Deferral of revenue

  47,047 

Recognition of deferred service fees

  (44,240)

Deferred service fees disposed of related to PWSC

  (7,596)

Balance, September 30, 2022

 $84,428 

 

The decrease in deferred service fees between December 31, 2021 and September 30, 2022 is primarily due to the disposal of PWSC on July 29, 2022, partially offset by additions to deferred service fees in excess of deferred service fees recognized during the nine months ended September 30, 2022.

 

The Company expects to recognize within one year as service fee and commission revenue approximately 52.2% of the deferred service fees as of September 30, 2022. Approximately $32.6 million and $24.7 million of service fee and commission revenue recognized during the nine months ended September 30, 2022 and September 30, 2021 was included in deferred service fees as of December 31, 2021 and December 31, 2020, respectively.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

Deferred contract costs

 

Deferred contract costs represent the deferral of incremental costs to obtain or fulfill a contract with a customer.  Incremental costs to obtain a contract with a customer primarily include sales commissions.  The Company capitalizes costs incurred to fulfill a contract if the costs are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered.  Costs to fulfill a contract include labor costs for set-up activities directly related to the acquisition of vehicle service agreements.  Contract costs are deferred and amortized over the expected customer relationship period consistent with the pattern in which the related revenues are earned.  Amortization of deferred contract costs are recorded in general and administrative expenses in the unaudited consolidated statements of operations.  No impairment charges related to deferred contract costs were recorded during the three and nine months ended September 30, 2022 and September 30, 2021.

 

The deferred contract costs balances and related amortization expense for the three months ended  September 30, 2022 and September 30, 2021 are comprised as follows:

 

(in thousands)

 

Three months ended September 30, 2022

  

Three months ended September 30, 2021

 
  

Costs to Obtain a Contract

  

Costs to Fulfill a Contract

  

Total

  

Costs to Obtain a Contract

  

Costs to Fulfill a Contract

  

Total

 

Balance at June 30, net

 $12,535  $82  $12,617  $9,025  $81  $9,106 

Additions

  2,389   5   2,394   1,292   5   1,297 

Amortization

  (1,943)  (3)  (1,946)  (1,349)  (7)  (1,356)

Balance at September 30, net

 $12,981  $84  $13,065  $8,968  $79  $9,047 

 

The deferred contract costs balances and related amortization expense for the nine months ended September 30, 2022 and September 30, 2021 are comprised as follows:

 

(in thousands)

 

Nine months ended September 30, 2022

  

Nine months ended September 30, 2021

 
  

Costs to Obtain a Contract

  

Costs to Fulfill a Contract

  

Total

  

Costs to Obtain a Contract

  

Costs to Fulfill a Contract

  

Total

 

Balance at December 31, net

 $10,850  $80  $10,930  $8,759  $76  $8,835 

Additions

  7,233   16   7,249   4,313   22   4,335 

Amortization

  (5,102)  (12)  (5,114)  (4,104)  (19)  (4,123)

Balance at September 30, net

 $12,981  $84  $13,065  $8,968  $79  $9,047 

 

 

NOTE 14 INCOME TAXES

 

Income tax expense (benefit) for the three and nine months ended September 30, 2022 and September 30, 2021 varies from the amount that would result by applying the applicable U.S. federal corporate income tax rate of 21% to income (loss) from continuing operations before income tax expense (benefit). The following table summarizes the differences:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Income tax expense (benefit) at United States statutory income tax rate

 $9,102  $(563) $7,993  $(1,202)

Valuation allowance

  (9,259)  (2,161)  (9,269)  (3,039)

Non-deductible compensation

  695   187   763   523 

Non-taxable income

           (524)

Investment income

  (161)  (115)  (172)  (158)

State income tax

  2,496   117   2,707   287 

Change in unrecognized tax benefits(1)

  2   2   6   (2,813)

Indemnification receivable

        (1)  591 

Indefinite life intangibles

  (78)  54   29   161 

Disposition of subsidiary

  3,267      3,267    

Contingent consideration

  4      319    

Other

  6   23   17   35 

Income tax expense (benefit) at United States statutory income tax rate

 $6,074  $(2,456) $5,659  $(6,139)

 

( 1) Includes interest and penalty expense related to unrecognized tax benefits.

 

The Company maintains a valuation allowance for its gross deferred tax assets at September 30, 2022 and December 31, 2021. The Company's operations have generated substantial operating losses in prior years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income; however, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its September 30, 2022 and December 31, 2021 net deferred tax asset, excluding the deferred income tax asset and liability amounts set forth in the paragraph below. 

 

During the three months ended September 30, 2021, the Company released into income $3.3 million of its valuation allowance, as a result of its acquisition of PWI, due to net deferred income tax liabilities that are expected to reverse during the period in which the Company will have deferred income tax assets available.

 

25

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

The Company carries net deferred income tax liabilities of $31.3 million and $28.6 million at September 30, 2022 and December 31, 2021, respectively, that consists of:

 

 

$8.2 million and $8.2 million of deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the Company's consolidated U.S. net operating loss carryforwards;

 

$23.8 million and $23.8 million of deferred income tax liabilities related to land and indefinite lived intangible assets;

 

$1.1 million and $3.3 million of deferred income tax assets associated with business interest expense carryforwards with an indefinite life;

 

zero and $0.5 million of deferred state income tax assets; and 

 

$0.4 million and $0.4 million of deferred state income tax liabilities.

 

As of September 30, 2022 and December 31, 2021, the Company carried a liability for unrecognized tax benefits of $0.1 million and $0.1 million, respectively, which is included in income taxes payable in the consolidated balance sheets. The Company classifies interest and penalty accruals, if any, related to unrecognized tax benefits as income tax expense.

 

 

NOTE 15 EARNINGS (LOSS) FROM CONTINUING OPERATIONS PER SHARE

 

The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings (loss) from continuing operations per share computation for the three and nine months ended September 30, 2022 and September 30, 2021:

 

(in thousands, except per share data)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Numerator:

                

Income (loss) from continuing operations

 $39,773  $(226) $34,904  $417 

Plus (less): net loss (income) attributable to noncontrolling interests

  1,067   (782)  615   (1,469)

Less: dividends on preferred stock

  (77)  (86)  (234)  (409)

Income (loss) from continuing operations attributable to common shareholders used in calculating basic earnings (loss) per share

 $40,763  $(1,094) $35,285  $(1,461)

Adjustment to add-back dividends on preferred stock

  77      234    

Adjustment for proportionate interest in Ravix's earnings attributable to common stock

  (23)     51    

Income (loss) from continuing operations attributable to common shareholders used in calculating diluted earnings (loss) from continuing operations per share

 $40,817  $(1,094) $35,570  $(1,461)
                 

Denominator:

                

Weighted average basic shares

                

Weighted average common shares outstanding

  22,960   22,732   22,909   22,440 

Weighted average diluted shares

                

Weighted average common shares outstanding

  22,960   22,732   22,909   22,440 

Effect of potentially dilutive securities (a)

                

Unvested restricted stock awards

  641      560    

Warrants

  1,179      650    

Convertible preferred stock

  936      936    

Total weighted average diluted shares

  25,716   22,732   25,055   22,440 

Basic earnings (loss) from continuing operations per share

 $1.78  $(0.05) $1.54  $(0.07)

Diluted earnings (loss) from continuing operations per share

 $1.59  $(0.05) $1.42  $(0.07)

 

 

(a)

Potentially dilutive securities consist of unvested restricted stock awards and warrants, calculated using the treasury stock method, and convertible preferred stock, using the if-converted method. Because the Company is reporting a loss from continuing operations attributable to common shareholders for the three and nine months ended  September 30, 2021, all potentially dilutive securities outstanding were excluded from the calculation of diluted loss from continuing operations per share since their inclusion would have been anti-dilutive.

 

Basic earnings (loss) from continuing operations per share excludes dilution and is computed by dividing income (loss) from continuing operations attributable to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted earnings (loss) from continuing operations per share is calculated using weighted-average diluted shares. Weighted-average diluted shares is calculated by adding the effect of potentially dilutive securities to weighted-average common shares outstanding.  Potentially dilutive securities are excluded from the diluted earnings (loss) from continuing operations per share computation in loss periods and when the applicable exercise price is greater than the market price on the period end date as their effect would be anti-dilutive.

 
The following weighted-average potentially dilutive securities are not included in the diluted earnings (loss)  from continuing operations per share calculations above because they would have had an antidilutive effect on the earnings ( loss)  from continuing operations per share:

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Unvested restricted stock awards

  511,740   1,240,000   592,162   1,240,000 

Warrants

     4,573,765      4,573,765 

Convertible preferred stock

     1,142,975      1,142,975 

Total

  511,740   6,956,740   592,162   6,956,740 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

 

NOTE 16 STOCK-BASED COMPENSATION

 

(a)     Restricted Stock Awards of the Company

 

Under the 2013 Equity Incentive Plan, the Company granted 500,000 restricted common stock awards to an officer on  September 5, 2018 (the "2018 Restricted Stock Award"). The 2018 Restricted Stock Award shall become fully vested and the restriction period shall lapse as of March 28, 2024 subject to the officer's continued employment through the vesting date. The 2018 Restricted Stock Award is amortized on a straight-line basis over the requisite service period. The grant-date fair value of the 2018 Restricted Stock Award was determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2018 Restricted Stock Award at September 30, 2022 was $0.6 million.

 

Under the 2020 Equity Incentive Plan, the Company granted 1,092,754 restricted common stock awards to certain officers of the Company during 2021 (the "2021 Restricted Stock Awards"). The 2021 Restricted Stock Awards vest according to a graded vesting schedule and shall become fully vested subject to the officers' continued employment through the applicable vesting dates. The 2021 Restricted Stock Awards are amortized on a straight-line basis over the requisite service periods. The grant-date fair values of the 2021 Restricted Stock Awards were determined using the closing price of Kingsway common stock on the date of grant. During the nine months ended  September 30, 2022, 100,000 shares of the 2021 Restricted Stock Awards became fully vested.  Total unamortized compensation expense related to unvested 2021 Restricted Stock Awards at September 30, 2022 was $2.9 million.

 

The following table summarizes the activity related to unvested 2021 Restricted Stock Awards and 2018 Restricted Stock Award (collectively "Restricted Stock Awards") for the nine months ended September 30, 2022:

 

  

Number of

  

Weighted-Average

 
  

Restricted

  

Grant Date Fair

 
  

Stock Awards

  

Value (per Share)

 

Unvested at December 31, 2021

  1,252,754  $5.09 

Granted

      

Vested

  (56,194)  4.65 

Cancelled for Tax Withholding

  (43,806)  4.65 

Unvested at September 30, 2022

  1,152,754  $5.13 

 

The unvested balance at September 30, 2022 in the table above is comprised of 652,754 shares of the 2021 Restricted Stock Awards and 500,000 shares of the 2018 Restricted Stock Award.

 

Stock-based compensation expense related to the Restricted Stock Awards was $0.2 million and $0.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively ($0.7 million and $1.9 million for the nine months ended  September 30, 2022 and September 30, 2021, respectively).

 

(b)     Restricted Stock Awards of PWSC

 

The Company's subsidiary, PWSC, granted 1,000 restricted Class B common stock awards ("2018 PWSC RSA") to an officer of PWSC pursuant to an agreement dated September 7, 2018. The 2018 PWSC RSA contains both a service and a performance condition that affects vesting. On December 18, 2020, the 2018 PWSC RSA was amended to modify the vesting terms related to the service and performance condition ("Modified PWSC RSA").  

 

PWSC granted 250 restricted Class B common stock awards to an officer of PWSC pursuant to an agreement dated December 18, 2020 ("2020 PWSC RSA"). The 2020 PWSC RSA contained both a service and a performance condition that affected vesting.

 

As discussed in Note 5, "Acquisitions, Disposal and Discontinued Operations," the Company sold PWSC on July 29, 2022; therefore there are no outstanding Modified PWSC RSA and 2020 PWSC RSA reported in the consolidated balance sheet at  September 30, 2022.

 

The service condition for the Modified PWSC RSA and the 2020 PWSC RSA vested according to a graded vesting schedule. The performance condition was based on the internal rate of return of PWSC. The grant-date fair value of the Modified PWSC RSA and the 2020 PWSC RSA were estimated using an internal valuation model. See Note 19, "Fair Value of Financial Instruments," for further discussion related to the valuation of the Modified PWSC RSA and the 2020 PWSC RSA.

 

The Modified PWSC RSA and the 2020 PWSC RSA included a noncontingent put option that was exercisable between February 20, 2022 and February 20, 2023. Since the put option was exercisable less than six months after the vesting of certain shares, the compensation expense related to these shares was classified as a liability and included in accrued expenses and other liabilities in the consolidated balance sheet at  December 31, 2021.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

On February 20, 2022, both the service condition and performance condition of the Modified PWSC RSA became fully vested. During the nine months ended  September 30, 2022, 437.50 shares of the Modified PWSC RSA became fully vested.  At September 30, 2022 and December 31, 2021, there were zero and 437.50 unvested shares, respectively, of the Modified PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to the Modified PWSC RSA at September 30, 2022 was zero.

 

On February 20, 2022, both the service condition and performance condition of the 2020 PWSC RSA became fully vested. During the nine months ended  September 30, 2022, 109.38 shares of the 2020 PWSC RSA became fully vested.  At September 30, 2022 and December 31, 2021, there were zero and 109.38 unvested shares, respectively, of the 2020 PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to the 2020 PWSC RSA at September 30, 2022 was zero.

 

Stock-based compensation expense related to the Restricted Stock Awards of PWSC was $2.7 million and $0.2 million for the three months ended September 30, 2022 and September 30, 2021, respectively ($2.8 million and $1.1 million for the nine months ended  September 30, 2022 and September 30, 2021, respectively).

(c)     Restricted Common Unit Awards of Ravix

Ravix LLC granted 199,000 restricted Class B common unit awards to an officer of Ravix pursuant to an agreement dated October 1, 2021 ("2021 Ravix RUA"). The 2021 Ravix RUA contains both a service and a performance condition that affects vesting.

 

On October 1, 2021, 83,333 shares, representing one half of the service condition for the 2021 Ravix RUA, became fully vested. The remainder of the service condition vests according to a graded vesting schedule and shall become fully vested on October 1, 2025 subject to the officer's continued employment through the applicable vesting dates. The performance condition vests on October 1, 2025 and is based on the internal rate of return of Ravix. The grant-date fair value of the 2021 Ravix RUA was estimated using the Black-Scholes option pricing model, using the following assumptions: expected term of four years, expected volatility of 75%, expected dividend yield of zero, and risk-free interest rate of 0.93%. 

 

At September 30, 2022, both the service condition and performance condition of the 2021 Ravix RUA were probable of vesting.  During the nine months ended  September 30, 2022, no shares of the 2021 Ravix RUA became fully vested.  At September 30, 2022 and December 31, 2021, there were 115,667 unvested shares of the 2021 Ravix RUA with a weighted-average grant date fair value of $3.08 per share. Total unamortized compensation expense related to unvested 2021 Ravix RUA at  September 30, 2022 was $0.2 million.

 

Stock-based compensation expense related to the 2021 Ravix RUA was less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2022respectively.

 

 

NOTE 17 ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The tables below detail the change in the balance of each component of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2022 and September 30, 2021 as relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets.

 

(in thousands)

 

Three months ended September 30, 2022

 
  

Unrealized Gains

  

Foreign

  

Change in Fair Value

  

Total

 
  

(Losses) on

  

Currency

  

of Debt Attributable

  

Accumulated Other

 
  

Available-for-Sale

  

Translation

  

to Instrument-Specific

  

Comprehensive

 
  

Investments

  

Adjustments

  

Credit Risk

  

Income

 
                 

Balance at June 30, 2022

 $(1,871) $(3,286) $41,174  $36,017 
                 

Other comprehensive loss arising during the period

  (834)     (3,226)  (4,060)

Amounts reclassified from accumulated other comprehensive income

  3         3 

Net current-period other comprehensive loss

  (831)     (3,226)  (4,057)
                 

Balance at September 30, 2022

 $(2,702) $(3,286) $37,948  $31,960 

 

(in thousands)

 

Three months ended September 30, 2021

 
  

Unrealized Gains

  

Foreign

  

Change in Fair Value

  

Total

 
  

(Losses) on

  

Currency

  

of Debt Attributable

  

Accumulated Other

 
  

Available-for-Sale

  

Translation

  

to Instrument-Specific

  

Comprehensive

 
  

Investments

  

Adjustments

  

Credit Risk

  

Income

 
                 

Balance at June 30, 2021

 $125  $(3,286) $35,595  $32,434 
                 

Other comprehensive loss arising during the period

  (105)     (971)  (1,076)

Amounts reclassified from accumulated other comprehensive income

  11         11 

Net current-period other comprehensive loss

  (94)     (971)  (1,065)
                 

Balance at September 30, 2021

 $31  $(3,286) $34,624  $31,369 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(in thousands)

 

Nine months ended September 30, 2022

 
  

Unrealized Gains

  

Foreign

  

Change in Fair Value

  

Total

 
  

(Losses) on

  

Currency

  

of Debt Attributable

  

Accumulated Other

 
  

Available-for-Sale

  

Translation

  

to Instrument-Specific

  

Comprehensive

 
  

Investments

  

Adjustments

  

Credit Risk

  

Income

 
                 

Balance at January 1, 2022

 $(220) $(3,286) $34,285  $30,779 
                 

Other comprehensive (loss) income arising during the period

  (2,492)     3,663   1,171 

Amounts reclassified from accumulated other comprehensive income

  10         10 

Net current-period other comprehensive (loss) income

  (2,482)     3,663   1,181 
                 

Balance at September 30, 2022

 $(2,702) $(3,286) $37,948  $31,960 

 

(in thousands)

 

Nine months ended September 30, 2021

 
  

Unrealized Gains

  

Foreign

  

Change in Fair Value

  

Total

 
  

(Losses) on

  

Currency

  

of Debt Attributable

  

Accumulated Other

 
  

Available-for-Sale

  

Translation

  

to Instrument-Specific

  

Comprehensive

 
  

Investments

  

Adjustments

  

Credit Risk

  

Income

 
                 

Balance at January 1, 2021

 $216  $(3,286) $41,129  $38,059 
                 

Other comprehensive loss arising during the period

  (210)     (6,505)  (6,715)

Amounts reclassified from accumulated other comprehensive income

  25         25 

Net current-period other comprehensive loss

  (185)     (6,505)  (6,690)
                 

Balance at September 30, 2021

 $31  $(3,286) $34,624  $31,369 

 

It should be noted that the unaudited consolidated statements of comprehensive income (loss) present the components of other comprehensive (loss) income, net of tax, only for the three and nine months ended September 30, 2022 and September 30, 2021 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.

 

Components of accumulated other comprehensive income were reclassified to the following lines of the unaudited consolidated statements of operations for the three and nine months ended September 30, 2022 and September 30, 2021:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Reclassification of accumulated other comprehensive income from unrealized gains (losses) on available-for-sale investments to:

                

Net realized gains

 $(3) $(11) $(10) $(25)

Other-than-temporary impairment loss

            

Income (loss) from continuing operations before income tax expense (benefit)

  (3)  (11)  (10)  (25)

Income tax expense (benefit)

            

Income (loss) from continuing operations

  (3)  (11)  (10)  (25)

Loss on disposal of discontinued operations, net of taxes

            

Net income (loss)

 $(3) $(11) $(10) $(25)

 

 

NOTE 18 SEGMENTED INFORMATION

 

The Company reports segment information based on the "management" approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as a source of the Company’s reportable operating segments. The Company conducts its business through the following three reportable segments: Extended Warranty, Leased Real Estate and Kingsway Search Xcelerator.

 

Extended Warranty Segment

 

Extended Warranty includes the following subsidiaries of the Company: IWS, Geminus, PW I, PWSC and Trinity (collectively, "Extended Warranty").  As discussed in  Note 5 , " Acquisitions, Disposal and Discontinued Operations ," the Company disposed of PWSC on July 29, 2022.  The earnings of PWSC are included in the unaudited interim consolidated statements of operations and the segment disclosures through the disposal date.   

 

IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 25 states and the District of Columbia to their members, with customers in all fifty states.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022


 

Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, Penn and Prime. Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.

 

PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a white label agreement.  PWI also has a white label agreement with a third-party that sells and administers a GAP product in certain states.

 

PWSC sells new home warranty products and provides administration services to home builders and homeowners across the United States. PWSC distributes its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.

 

Trinity sells HVAC, standby generator, commercial LED lighting and commercial refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.

 

Leased Real Estate Segment

 

Leased Real Estate includes the Company's subsidiaries, CMC and VA Lafayette.

 

CMC owns the Real Property that is leased to a third party pursuant to a long-term triple net lease with a single customer. The Real Property is also subject to the Mortgage and Additional Mortgage. When assessing and measuring the operational and financial performance of the Leased Real Estate segment, interest expense related to the Mortgage and Additional Mortgage is included in Leased Real Estate's segment operating income.

 

VA Lafayette owns the LA Real Property that is leased to a third-party pursuant to a long-term lease with a single customer. The LA Real Property is also subject to the LA Mortgage. When assessing and measuring the operational and financial performance of the Leased Real Estate segment, interest expense related to the LA Mortgage is included in Leased Real Estate's segment operating income.

 

Kingsway Search Xcelerator Segment

 

Kingsway Search Xcelerator includes the Company's subsidiary, Ravix.  Ravix provides outsourced financial services and human resources consulting for short or long duration engagements for customers in 24 states and 4 countries. All services are delivered by employees who are located in the United States.

 

Revenues and Operating Income by Reportable Segment

 

Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the unaudited consolidated interim financial statements. The following tables provide financial data used by management. Segment assets are not allocated for management use and, therefore, are not included in the segment disclosures below.

 

Revenues by reportable segment reconciled to consolidated revenues for the three and nine months ended September 30, 2022 and September 30, 2021 were:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenues:

                

Extended Warranty:

                

Service fee and commission revenue

 $18,578  $17,627  $56,308  $54,956 

Total Extended Warranty

  18,578   17,627   56,308   54,956 

Leased Real Estate:

                

Rental revenue

  3,633   3,341   10,933   10,023 

Total Leased Real Estate

  3,633   3,341   10,933   10,023 

Kingsway Search Xcelerator:

                

Service fee and commission revenue

  3,818      12,134    

Total Kingsway Search Xcelerator

  3,818      12,134    

Total revenues

 $26,029  $20,968  $79,375  $64,979 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022


 

The operating income by reportable segment in the following table is before income taxes and includes revenues and direct segment costs. Total segment operating income reconciled to the consolidated income (loss) from continuing operations for the three and nine months ended September 30, 2022 and September 30, 2021 were:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Segment operating income:

                

Extended Warranty (a)

 $2,461  $1,400  $7,120  $9,310 

Leased Real Estate (b)

  894   1,095   3,304   86 

Kingsway Search Xcelerator

  723      2,422    

Total segment operating income

  4,078   2,495   12,846   9,396 

Net investment income

  463   389   1,547   1,213 

Net realized gains

  797   159   1,035   397 

Loss on change in fair value of equity investments

  (5)  (39)  (53)  (235)

Gain on change in fair value of limited liability investments, at fair value

  195   1,211   368   1,740 

Gain on change in fair value of real estate investments

  1,488      1,488    

Gain on change in fair value of derivative asset option contracts

  13,498      13,498    

Interest expense not allocated to segments

  (2,139)  (1,497)  (5,207)  (4,642)

Other revenue and expenses not allocated to segments, net

  (7,242)  (2,556)  (13,487)  (8,308)

Amortization of intangible assets

  (1,409)  (2,432)  (4,397)  (3,425)

Loss on change in fair value of debt

  (1,794)  (412)  (4,992)  (2,169)

Gain on disposal of subsidiary

  37,917      37,917    

Gain on extinguishment of debt not allocated to segments

           311 

Income (loss) from continuing operations before income tax expense (benefit)

  45,847   (2,682)  40,563   (5,722)

Income tax expense (benefit) (b)

  6,074   (2,456)  5,659   (6,139)

Income (loss) from continuing operations

 $39,773  $(226) $34,904  $417 

 

 

(a)

For the nine months ended September 30, 2021, Extended Warranty segment operating income includes gain on extinguishment of debt of $2.2 million, related to PPP loan forgiveness directly associated with the respective warranty businesses. Extended Warranty segment operating income before the gain on extinguishment of debt totaled $7.1 million for the nine months ended September 30, 2021.  SeeNote 11, "Debt," for further discussion.

 

 (b)For the nine months ended September 30, 2021, includes $2.9 million expense due to the release of an indemnification receivable, which is exactly offset in net income by an income tax benefit of $2.9 million for the release of a liability that had been included in income taxes payable in the consolidated balance sheets.                                            

 

 

NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity.

 

The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1:

 

 

Level 1 – Quoted prices for identical instruments in active markets.

 

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.

 

The Company classifies its investments in fixed maturities as available-for-sale and reports these investments at fair value. The Company's equity investments, limited liability investments, at fair value, real estate investments, subordinated debt, stock-based compensation liabilities, derivative contracts (interest rate swap and trust preferred debt repurchase options) and contingent consideration are measured and reported at fair value.

 

Fixed maturities - Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third party evidence. All classes of the Company’s fixed maturities, primarily consisting of investments in US. Treasury bills and government bonds; obligations of states, municipalities and political subdivisions; mortgage-backed securities; and corporate securities, are classified as Level 2. Level 2 is applied to valuations based upon quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that are inactive; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

The Company engages a third-party vendor who utilizes third-party pricing sources and primarily employs a market approach to determine the fair values of our fixed maturities. The market approach includes primarily obtaining prices from independent third-party pricing services as well as, to a lesser extent, quotes from broker-dealers. Our third-party vendor also monitors market indicators, as well as industry and economic events, to ensure pricing is appropriate. All classes of our fixed maturities are valued using this technique. The Company has obtained an understanding of our third-party vendor’s valuation methodologies and inputs. Fair values obtained from our third-party vendor are not adjusted by the Company.

 

The following is a description of the significant inputs, by asset class, used by the third-party pricing services to determine the fair values of our fixed maturities included in Level 2:

 

 

U.S. government, government agencies and authorities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets and maturity.

 

States, municipalities and political subdivisions are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, new issuances and credit spreads.

 

Mortgage-backed and asset-backed securities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, expected prepayments, expected credit default rates, delinquencies and issue specific information including, but not limited to, collateral type, seniority and vintage.

 

Corporate securities are generally priced using the market approach using pricing vendors. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, issuer rating, benchmark yields, maturity and credit spreads.

 

Equity investments - Fair values of equity investments, including warrants, reflect quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no active markets exist.

 

Limited liability investments, at fair value - Limited liability investments, at fair value include the underlying investments of Net Lease and Argo Holdings. Net Lease owns investments in limited liability companies that hold investment properties. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies.

 

 

The fair value of Net Lease's investments in limited liability companies is based upon the net asset values of the underlying investments in companies as a practical expedient to estimate fair value. The Company applies the net asset value practical expedient to Net Lease's limited liability investments on an investment-by-investment basis unless it is probable that the Company will sell a portion of an investment at an amount different from the net asset value of the investment. Investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy.

 

The fair value of Argo Holdings' limited liability investments that hold investments in search funds is based on the initial investment in the search funds. The fair value of Argo Holdings' limited liability investments that hold investments in private operating companies is valued using a market approach including valuation multiples applied to corresponding performance metrics, such as earnings before interest, tax, depreciation and amortization; revenue; or net earnings. The selected valuation multiples were estimated using multiples provided by the investees and review of those multiples in light of investor updates, performance reports, financial statements and other relevant information. These investments are categorized in Level 3 of the fair value hierarchy.

 

Real estate investments - The fair value of real estate investments involves a combination of the market and income valuation techniques. Under this approach, a market-based capitalization rate is derived from comparable transactions, adjusted for any unique characteristics of each asset, and applied to the asset under consideration. The cap rates used during underwriting and subsequent valuation incorporate the consideration of risks of vacancy and collection loss, administrative costs of owning net leased assets and possible capital expenditures that could be determined a landlord expense. These investments are categorized in Level 3 of the fair value hierarchy.

 

Subordinated debt - The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. These inputs include credit spread assumptions developed by a third party and market observable swap rates. The subordinated debt is categorized in Level 2 of the fair value hierarchy.

 

Stock-based compensation liabilities- Certain of the restricted stock awards granted by PWSC were classified as a liability prior to the sale of PWSC on July 29, 2022. Liability-classified awards are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets.  The fair value of the restricted stock awards granted by PWSC were estimated using an internal valuation model without relevant observable market inputs. The significant inputs used in the model include a valuation multiple applied to trailing twelve month earnings before interest, tax, depreciation and amortization. Liability-classified restricted stock awards are categorized in Level 3 of the fair value hierarchy.

 

Derivative contract - interest rate swap - As described in Note 10, "Derivatives," the Company entered into an interest rate swap agreement effective April 1, 2021 to convert the variable interest rate on a portion of the 2020 KWH Loan to a fixed interest rate.  The interest rate swap contract is measured and reported at fair value and is included in other receivables and accrued expenses and other liabilities in the consolidated balance sheets at September 30, 2022 and December 31, 2021, respectively. The fair value of the interest rate swap contract is estimated using inputs which the Company obtains from the counterparty and is determined using a discounted cash flow analysis on the expected cash flows of the derivative.  The discounted cash flow valuation technique reflects the contractual term of the derivative contract, including the period to maturity, and uses observable market based inputs, including quoted mid-market prices or third-party consensus pricing, interest rate curves and implied volatilities.  The interest rate swap contract is categorized in Level 2 of the fair value hierarchy. 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

Derivative contracts - trust preferred debt repurchase options - As described in Note 10, "Derivatives," the Company entered into three TruPs Options contracts during the third quarter of 2022.  The TruPs Options contracts are measured and reported at fair value and are included in other assets in the consolidated balance sheet at September 30, 2022. The fair value of the TruPs Options contracts are estimated using the binomial lattice model.  Key inputs in the valuation include credit spread assumptions, interest rate volatility, debt coupon interest rate and time to maturity.  The TruPs Options contracts are categorized in Level 3 of the fair value hierarchy. 

 

Contingent consideration - The consideration for Company's acquisition of Ravix includes future payments to the former owners that are contingent upon the achievement of certain targets over future reporting periods. Liabilities for contingent consideration are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets. The fair value of the Company's contingent consideration liability is estimated by applying the Monte Carlo simulation method to forecast achievement of gross profit which  may result in up to $4.5 million in total payments to the former owners of Ravix through October 2024.  Key inputs in the valuation include forecasted gross profit, gross profit volatility, discount rate and discount term.  Contingent consideration liabilities are revalued each reporting period. Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, including adjustments to the discount rates or changes in the assumed achievement or timing of any targets. Any changes in fair value are reported in the consolidated statements of operations as non-operating other revenue. The contingent consideration liability is categorized in Level 3 of the fair value hierarchy.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The balances of the Company's financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2022 and December 31, 2021 are as follows. Certain investments in limited liability companies that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following tables to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets:

 

(in thousands)

 

September 30, 2022

 
  

Fair Value Measurements at the End of the Reporting Period Using

 
                     
      

Quoted Prices in

  

Significant

  

Significant

     
      

Active Markets for

  

Other Observable

  

Unobservable

     
      

Identical Assets

  

Inputs

  

Inputs

  

Measured at

 
  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Net Asset Value

 

Recurring fair value measurements:

                    
                     

Assets:

                    

Fixed maturities:

                    

U.S. government, government agencies and authorities

 $14,594  $  $14,594  $  $ 

States, municipalities and political subdivisions

  2,144      2,144       

Mortgage-backed

  8,178      8,178       

Asset-backed

  1,622      1,622       

Corporate

  10,190      10,190       

Total fixed maturities

  36,728      36,728       

Equity investments:

                    

Common stock

  126   126          

Total equity investments

  126   126          

Limited liability investments, at fair value

  19,182         3,215   15,967 

Real estate investments

  12,150         12,150    

Derivative contract - interest rate swap

  342      342       

Derivative contract - trust preferred debt repurchase options

  15,802         15,802    

Total assets

 $84,330  $126  $37,070  $31,167  $15,967 
                     

Liabilities:

                    

Subordinated debt

 $62,302  $  $62,302  $  $ 

Contingent consideration

  3,977         3,977    

Stock-based compensation liabilities

               

Total liabilities

 $66,279  $  $62,302  $3,977  $ 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(in thousands)

 

December 31, 2021

 
  

Fair Value Measurements at the End of the Reporting Period Using

 
                     
      

Quoted Prices in

  

Significant

  

Significant

     
      

Active Markets for

  

Other Observable

  

Unobservable

     
      

Identical Assets

  

Inputs

  

Inputs

  

Measured at

 
  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Net Asset Value

 

Recurring fair value measurements:

                    
                     

Assets:

                    

Fixed maturities:

                    

U.S. government, government agencies and authorities

 $16,223  $  $16,223  $  $ 

States municipalities and political subdivisions

  1,878      1,878       

Mortgage-backed

  7,629      7,629       

Asset-backed

  445      445       

Corporate

  9,491      9,491       

Total fixed maturities

  35,666      35,666       

Equity investments:

                    

Common stock

  171   171          

Warrants

  8      8       

Total equity investments

  179   171   8       

Limited liability investments, at fair value

  18,826         4,022   14,804 

Real estate investments

  10,662         10,662    

Total assets

 $65,333  $171  $35,674  $14,684  $14,804 
                     

Liabilities:

                    

Subordinated debt

 $60,973  $  $60,973  $  $ 

Contingent consideration

  2,458         2,458    

Stock-based compensation liabilities

  1,402         1,402    

Derivative contract - interest rate swap

  14      14       

Total liabilities

 $64,847  $  $60,987  $3,860  $ 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

 

The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the three and nine months ended September 30, 2022 and September 30, 2021:

 

(in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Assets:

                

Limited liability investments, at fair value:

                

Beginning balance

 $3,413  $3,302  $4,022  $3,263 

Distributions received

  (250)  (80)  (461)  (313)

Realized gains included in net income (loss)

  250   80   447   290 

Change in fair value of limited liability investments, at fair value included in net income (loss)

  (198)  442   (793)  504 

Ending balance

 $3,215  $3,744  $3,215  $3,744 

Unrealized (gains) losses on limited liability investments, at fair value held at end of period:

                

Included in net income (loss)

 $(198) $442  $(793) $504 

Included in other comprehensive (loss) income

 $  $  $  $ 

Real estate investments:

                

Beginning balance

 $10,662  $10,662  $10,662  $10,662 

Change in fair value of real estate investments included in net income (loss)

  1,488      1,488    

Ending balance

 $12,150  $10,662  $12,150  $10,662 

Unrealized gains recognized on real estate investments held at end of period:

                

Included in net income (loss)

 $1,488  $  $1,488  $ 

Included in other comprehensive (loss) income

            

Derivative - trust preferred debt repurchase options:

                

Beginning balance

 $  $  $  $ 

Purchase of options

  2,304      2,304    

Initial valuation of options included in net income (loss)

  11,412      11,412    

Change in fair value of derivative assets included in net income (loss)

  2,086      2,086    

Ending balance

 $15,802  $  $15,802  $ 

Unrealized gains recognized on derivative assets held at end of period:

                

Included in net income (loss)

 $13,498  $  $13,498  $ 

Included in other comprehensive (loss) income

            

Ending balance - assets

 $31,167  $14,406  $31,167  $14,406 

Liabilities:

                

Contingent consideration:

                

Beginning balance

 $3,959  $  $2,458  $ 

Change in fair value of contingent consideration included in net income (loss)

  18      1,519    

Ending balance

 $3,977  $  $3,977  $ 

Unrealized gains recognized on contingent consideration liability held at end of period:

                

Included in net income (loss)

 $18  $  $1,519  $ 

Included in other comprehensive (loss) income

 $  $  $  $ 

Stock-based compensation liabilities:

                

Beginning balance

 $1,475  $1,134  $1,402  $443 

Change in fair value of stock-based compensation liabilities included in net income (loss)

  2,707   172   2,780   863 

Stock-based compensation liabilities disposed of related to PWSC

  (4,182)     (4,182)   

Ending balance

 $  $1,306  $  $1,306 

Unrealized gains recognized on stock-based compensation liabilities held at end of period:

                

Included in net income (loss)

 $2,707  $172  $2,780  $863 

Included in other comprehensive (loss) income

 $  $  $  $ 

Ending balance - liabilities

 $3,977  $1,306  $3,977  $1,306 

 

The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at September 30, 2022:

 

Categories

 

Fair Value

 

Valuation Techniques

Unobservable Inputs

 

Input Value(s)

 

Limited liability investments, at fair value

 $3,215 

Market approach

Valuation multiples

 

1.0x - 9.0x

 

Real estate investments

 $12,150 

Market and income approach

Cap rates

  7.5%

Derivative - trust preferred debt repurchase options

 $15,802 

Binomial lattice option approach

Credit spread

  10.47%
      

Interest rate volatility

 2.3%
      

Debt coupon interest rate

 7.71%-7.85% 
      

Time to maturity (in years)

 10.6 - 10.84 

Contingent consideration

 $3,977 

Option-based income approach

Discount rate

  7.00%
      

Risk-free rate

 4.18%
      

Expected volatility

 0.13 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at December 31, 2021:

 

Categories

 

Fair Value

 

Valuation Techniques

Unobservable Inputs

 

Input Value(s)

 

Limited liability investments, at fair value

 $4,022 

Market approach

Valuation multiples

 

1.0x - 8.0x

 

Real estate investments

 $10,662 

Market and income approach

Cap rates

  7.5%

Contingent consideration

 $2,458 

Option-based income approach

Discount rate

  4.0%
      

Risk-free rate

 0.49%
      

Expected volatility

 15.0%

Stock-based compensation liabilities

 $1,402 

Market approach

Valuation multiple

 

6.0x

 

 

Investments Measured Using the Net Asset Value per Share Practical Expedient

 

The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at September 30, 2022:

 

  

Fair Value

       

Redemption

 

Category

 

(in thousands)

  

Unfunded Commitments

 

Redemption Frequency

  

Notice Period

 

Limited liability investments, at fair value

 $15,967  n/a n/a  n/a 

 

 

The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at December 31, 2021:

 

  

Fair Value

       

Redemption

 

Category

 

(in thousands)

  

Unfunded Commitments

 

Redemption Frequency

  

Notice Period

 

Limited liability investments, at fair value

 $14,804  n/a n/a  n/a 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are adjusted for observable price changes or written down to fair value as a result of an impairment. For the three and nine months ended September 30, 2022 and September 30, 2021, the Company did not record any adjustments to the fair value of its investments in private companies for observable price changes.  The Company did not record any impairments related to investments in private companies for the three and nine months ended September 30, 2022 and September 30, 2021. To determine the fair value of investments in these private companies, the Company considered rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable transactions, trading multiples and changes in market outlook, among other factors. The Company has classified the fair value measurements of these investments in private companies as Level 3 because they involve significant unobservable inputs.

 

 

NOTE 20 RELATED PARTIES

 

Related party transactions, including services provided to or received by the Company's subsidiaries, are measured in part by the amount of consideration paid or received as established and agreed by the parties. Except where disclosed elsewhere in these unaudited consolidated interim financial statements, the following is a summary of related party relationships and transactions.

 

(a)

Argo Management Group, LLC

 

The Company acquired Argo Management Group, LLC ("Argo Management") in April 2016. Argo Management's primary business is to act as Managing Member of Argo Holdings. At  September 30, 2022 and December 31, 2021, each of the Company, John T. Fitzgerald ("Fitzgerald"), the Company's Chief Executive Officer and President, and certain of Fitzgerald’s immediate family members owns equity interests in Argo Holdings, all of which interests were acquired prior to the Company’s acquisition of Argo Management. Subject to certain limitations, Argo Holdings' governing documents require all individuals and entities owning an equity interest in Argo Holdings to fund upon request his/her/its pro rata share of any funding requirements of Argo Holdings up to an aggregate maximum amount equal to his/her/its total capital commitment (each request for funds being referred to as a "Capital Call"). Argo Holdings made no Capital Calls during the nine months ended September 30, 2022 and the year ended  December 31, 2021.  

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(b)

VA Lafayette (formerly RoeCo)

 

On December 30 2021, the Company closed on an agreement to acquire 100% of the membership interests in VA Lafayette from a current holder of the Company’s Preferred Shares (refer to Note 5, "Acquisitions, Disposal and Discontinued Operations," for further detail).  The Company determined the acquisition was an arms-length transaction based upon the purchase price paid compared to the pricing of similar third-party transactions.

 

 

NOTE 21 COMMITMENTS AND CONTINGENCIES

 

(a)    Legal proceedings:

 

CMC Industries

 

In April 2018, TRT LeaseCo, LLC ("TRT LeaseCo"), an indirect subsidiary of Kingsway, was named as a defendant in a lawsuit filed in the United States District Court for the Southern District of New York relating to CMC and its subsidiaries.  Kingsway indirectly, through its indirect, wholly-owned subsidiary, CMC Acquisition, LLC ("CMCA"), owns 81% of CMC.  TRT LeaseCo (an indirect, wholly-owned subsidiary of CMC) entered into a Management Services Agreement (the "MSA") with DGI-BNSF Corp. ("DGI") (an affiliate of CRIC TRT Acquisition, LLC ("CRIC"), the entity that owns the remaining 19% of CMC) in July 2016 pursuant to which, among other things, DGI agreed to provide services to TRT LeaseCo in exchange for the fees specified in the MSA.  The complaint filed by DGI alleged that DGI was owed certain fees under the MSA that had not been paid.

 

In March 2021, DGI, TRT LeaseCo and various other entities affiliated with each of them entered into a settlement agreement with respect to such litigation and certain other matters ("CMC Settlement Agreement"). Pursuant to the CMC Settlement Agreement, the parties agreed that proceeds from increased rental payments due to an earlier amendment to the lease of the Real Property (or any borrowings against such increased rental payments) would be split 80% to DGI as a management fee under the MSA and 20% to CMCA as a priority distribution on its ownership of CMC, after CMCA received a priority payment of $1.5 million. The parties also agreed that net proceeds from an eventual sale or renewal of the lease of the Real Property (after repayment of outstanding indebtedness and various other fees and expenses) would be split as follows:

 

(a) if such net proceeds are equal to or greater than $72 million, (i) CMCA would receive the first $40 million as a distribution of a preferred return on its ownership of CMC, (ii) CRIC would receive the next $9.4 million as a distribution on its ownership of CMC, (iii) DGI would receive the next $30.6 million as a management fee under the MSA, and (iv) the remainder of such net proceeds (if any) would be split 48.6% to CMCA as a distribution in respect of its ownership of CMC, 40% to DGI in the form of a management fee under the MSA, and 11.4% to CRIC s a distributions in respect of its ownership of CMC; or

 

(b) if such net proceeds are less than $72 million, (i) 55% to CMCA as a distribution of a preferred return on its ownership of CMC, (ii) 12.9% to CRIC as a distribution on its ownership of CMC, and (iii) 32.1% to DGI in the form of a management fee to DGI under the MSA.

 

On June 2, 2021, TRT, a subsidiary of CMC, borrowed $15.0 million under the Additional Mortgage. The Company distributed $10.6 million to DGI during the second quarter of 2021 as a prepaid management fee, representing 80% of the net proceeds from the Additional Mortgage, and $2.7 million (20%) to CMCA as a priority distribution on its ownership of CMC.

 

Aegis

 

In May 2016, Aegis Security Insurance Company ("Aegis") filed a complaint for breach of contract and declaratory relief against the Company in the Eastern District of Pennsylvania alleging, among other things, that the Company breached a contractual obligation to indemnify Aegis for certain customs bond losses incurred by Aegis under the indemnity and hold harmless agreements provided by the Company to Aegis for certain customs bonds reinsured by Lincoln General Insurance Company ("Lincoln General") during the period of time that Lincoln General was a subsidiary of the Company.  Lincoln General was placed into liquidation in November 2015 and Aegis subsequently invoked its rights to indemnity under the indemnity and hold harmless agreements. Effective January 20, 2020, Aegis and the Company entered into a Settlement Agreement with respect to such litigation pursuant to which the Company agreed to pay Aegis a one-time settlement amount of $0.9 million, and to reimburse Aegis for 60% of future losses that Aegis may sustain in connection with such customs bonds, up to a maximum reimbursement amount of $4.8 million. During 2020, the Company made reimbursement payments to Aegis of $0.5 million in connection with the Settlement Agreement.  During the third quarter of 2021, the Company made a reimbursement payment to Aegis of $0.1 million in connection with the Settlement Agreement. During the first and third quarters of 2022, the Company made reimbursement payments to Aegis of $0.1 million and $0.1 million, respectively, in connection with the Settlement Agreement, which are included in general and administrative expenses in its consolidated statement of operations for the nine months ended September 30, 2022. The Company’s potential exposure under these agreements was not reasonably determinable at September 30, 2022, and no liability has been recorded in the unaudited consolidated interim financial statements at September 30, 2022.

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2022

 

(b)    Guarantees:

 

Mendota

 

As part of the October 18, 2018 transaction to sell Mendota, the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims is $2.5 million.  Per the purchase agreement, a security interest on the Company’s equity interest in its consolidated subsidiary, Net Lease, as well as any distributions to the Company from Net Lease, was to be collateral for the Company’s payment of obligations with respect to the open claims.

 

During the third quarter of 2021, the purchasers of Mendota and the Company agreed to release the Company's equity interest in Net Lease as collateral and allow Net Lease to make distributions to the Company.  In exchange, the Company agreed to deposit $2.0 million into an escrow account and advance $0.5 million to the purchaser of Mendota to satisfy the Company's payment obligation with respect to the open claims.

 

During the third quarter of 2022, the buyer provided to the Company an analysis of the claims development that indicated that the Company's potential exposure with respect to the open claims was at the maximum obligation amount.  Previous communications from the buyer noted no such development and the buyer was not obligated to provide development information to the Company until the first quarter of 2023.  As a result of the newly provided information, the Company recorded a liability of $2.5 million at September 30, 2022, which is included in accrued expenses and other liabilities in the unaudited consolidated balance sheet and loss on disposal of discontinued operations in the unaudited consolidated statement of operations for the three months ended  September 30, 2022.  Per the terms of the agreement, no payment is due until the first quarter of 2023.  There were no payments made by the Company related to the open claims during the nine months ended September 30, 2022 and September 30, 2021.  

 

CMC Industries

 

In conjunction with the Additional Mortgage, TRT paid a guarantee fee of $1.1 million to a third-party during the second quarter of 2021, who is serving as a guarantor or indemnitor with respect to certain obligations between TRT and the holder of the Additional Mortgage.  The guarantee fee was recorded as a debt issuance cost related to the Additional Mortgage. 

 

VA Lafayette (formerly RoeCo)

 

The LA Mortgage is nonrecourse indebtedness with respect to the assets of VA Lafayette, and the LA Mortgage is not, nor will it be, guaranteed by Kingsway or its affiliates unless VA Lafayette acts in bad-faith or commits intentional acts with respect to the LA Mortgage.  The LA Mortgage is secured in part by a guaranty of recourse liabilities, whereby KAI, as guarantor, would become liable for the recourse liabilities if VA Lafayette, as borrower, violates certain terms of the loan agreement.  Under the guarantee, the lender can recover losses from the guarantor for certain bad-faith or other intentional acts of the borrower, such as rents retained by the borrower in violation of the loan documents, fraud or intentional misrepresentation, changes to the lease without the lender's consent, willful misconduct, criminal acts and environmental losses sustained by lender.  In addition, the guarantee provides that the LA Mortgage will be the full personal recourse obligation of the guarantor, for certain actions, such as prohibited transfers of the collateral or bankruptcy of the borrower. 

 

(c) Collateral pledged and restricted cash:

 

Short-term investments with an estimated fair value of $0.2 million at September 30, 2022 and December 31, 2021, were on deposit with state regulatory authorities.

 

The Company also has restricted cash of $13.2 million and $17.3 million at September 30, 2022 and December 31, 2021, respectively. Included in restricted cash are:

 

 

$8.6 million and $12.6 million at September 30, 2022 and December 31, 2021, respectively, held as deposits by IWS, Geminus, PWI, PWSC ( December 31, 2021 only) and Ravix;

 

$1.9 million at both September 30, 2022 and December 31, 2021, on deposit with state regulatory authorities; and

 

$2.7 million and $2.8 million at September 30, 2022 and December 31, 2021, respectively, pledged to third-parties as deposits or to collateralize liabilities. Collateral pledging transactions are conducted under terms that are common and customary to standard collateral pledging and are subject to the Company's standard risk management controls.

 

 

NOTE 22 SUBSEQUENT EVENT 

 

On November 1, 2022, CSuite Acquisition, LLC ("CSuite LLC”), a newly formed subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the "Agreement") with Arthur J. Cohen and Beth Garden, as Trustees of the Cohen Garden Trust dated July 13, 2015 (the "Cohen Garden Trust"), Realized Potential, LLC, a Delaware limited liability company ("Realized Potential" and, together with the Cohen Garden Trust, the "Sellers"), and Arthur J. Cohen, in his capacity as the Sellers’ Representative ("Sellers’ Representative") pursuant to which CSuite LLC acquired all of the outstanding equity interests of CSuite Financial Partners, LLC (the "CSuite Interests"). 

 

Pursuant to the terms of the Agreement, as consideration for the CSuite Interests, CSuite LLC paid to the Sellers aggregate cash consideration of approximately $8.5 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments (the "Closing Consideration"), but inclusive of $0.9 million for cash on hand at close.  The Closing Consideration was paid using cash on hand.  CSuite LLC will also pay additional contingent consideration, only to the extent earned, in an aggregate amount of up to $3.6 million (the "Earnout Payments"), which is subject to certain conditions, including the successful achievement of gross profit for CSuite Financial Partners, LLC during the three-year period commencing on the first full calendar month following the date of the Agreement. The Sellers may become entitled to a portion of the Earnout Payments based on the successful achievement of a minimum level of gross profit during the first six months following the date of the Agreement, but in no event shall the Earnout Payments exceed $3.6 million in the aggregate.

  

 

 

KINGSWAY FINANCIAL SERVICES INC.


 

 

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

 

FORWARD-LOOKING STATEMENTS

 

Management's Discussion and Analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “seeks” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect Kingsway management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see Kingsway’s securities filings, including its Annual Report on Form 10-K for the year ended December 31, 2021 ("2021 Annual Report"). The Company's securities filings can be accessed on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov, on the Canadian Securities Administrators’ website at www.sedar.com or through the Company’s website at www.kingsway-financial.com. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements because of new information, future events or otherwise.

 

OVERVIEW

 

Kingsway is a Delaware holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty, business services, asset management and real estate industries. Kingsway conducts its business through three reportable segments: Extended Warranty, Leased Real Estate and Kingsway Search Xcelerator.

 

Extended Warranty includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS"), Geminus Holding Company, Inc. ("Geminus"), PWI Holdings, Inc. ("PWI"), Professional Warranty Service Corporation ("PWSC") and Trinity Warranty Solutions LLC ("Trinity"). As discussed in Note 5, "Acquisitions, Disposal and Discontinued Operations," to the unaudited consolidated interim financial statements, the Company disposed of PWSC on July 29, 2022.  The earnings of PWSC are included in the unaudited interim consolidated statements of operations and the segment disclosures through the disposal date.  Throughout Management's Discussion and Analysis, the term "Extended Warranty" is used to refer to this segment.

 

IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in25 states and the District of Columbia to their members, with customers in all fifty states.

 

Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care, Inc. ("Prime"). Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.

 

PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a white label agreement.  PWI also has a white label agreement with Classic to sell a guaranteed asset protection product ("GAP") in states that Classic is approved in.

 

PWSC sells home warranty products and provides administration services to homebuilders and homeowners across the United States. PWSC distributes its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.

 

Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.

 

Leased Real Estate includes the Company's subsidiaries, CMC Industries, Inc. ("CMC") and VA Lafayette, LLC, formerly Roeco Lafayette, LLC ("VA Lafayette"). Throughout Management's Discussion and Analysis, the term "Leased Real Estate" is used to refer to this segment.

 

CMC owns, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property"), which is subject to a long-term triple net lease agreement. The Real Property is also subject to two mortgages, which are recorded as notes payable in the consolidated balance sheets (the "Mortgage" and the "Additional Mortgage").

 

VA Lafayette owns real property consisting of approximately 6.5 acres and a 29,224 square foot single-tenant medical office building located in the State of Louisiana (the "LA Real Property"). The LA Real Property serves as a medical and dental clinic for the Department of Veteran Affairs and is subject to a long-term lease. The LA Real Property is also subject to mortgages, which are recorded as notes payable in the consolidated balance sheets (the "LA Mortgage").  

 

Kingsway Search Xcelerator includes the Company's subsidiary, Ravix Financial, Inc. ("Ravix").  Ravix provides outsourced financial services and human resources consulting for short or long duration engagements for customers in 24 states and 4 countries.  All services are delivered by employees who are located in the United States.  Throughout Management's Discussion and Analysis, the term "Kingsway Search Xcelerator" is used to refer to this segment.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

NON-U.S. GAAP FINANCIAL MEASURE

 

Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. Our unaudited consolidated interim 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. In addition to the U.S. GAAP presentationof net income (loss), we present segment operating income as a non-U.S. GAAP financial measure, which we believe is valuable in managing our business and drawing comparisons to our peers. Below is a definition of our non-U.S. GAAP measure and its relationship to U.S. GAAP.

 

Segment Operating Income

 

Segment operating income represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from direct segment revenues. Revenues and expenses are presented in the unaudited consolidated statements of operations, but are not subtotaled by segment; however, this information is available in total and by segmentin Note 18, "Segmented Information," to the unaudited consolidated interim financial statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure to total segment operating income is income (loss) from continuing operations before income tax expense (benefit) that, in addition to segment operating income, includes net investment income, net realized gains, loss on change in fair value of equity investments, gain on change in fair value of limited liability investments, at fair value, gain on change in fair value of real estate investments, gain on change in fair value of derivative asset option contracts, interest expense not allocated to segments, other revenue and expenses not allocated to segments, net, amortization of intangible assets, loss on change in fair value of debt, gain on disposal of subsidiary and gain on extinguishment of debt not allocated to segments. A reconciliation of total segment operating income to income (loss) from continuing operations before income tax expense (benefit) for the three and nine months ended September 30, 2022 and September 30, 2021 is presented below in Table 1 of the "Results of Continuing Operations" section of Management's Discussion and Analysis.

 

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

 

The preparation of unaudited consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined.

 

The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The critical accounting policies and judgments in the accompanying unaudited consolidated interim financial statements include the valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of real estate investments; valuation of deferred income taxes; accounting for business combinations and asset acquisitions; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred contract costs; fair value assumptions for subordinated debt obligations; fair value assumptions for subsidiary stock-based compensation awards; fair value assumptions for derivative financial instruments; contingent consideration; and revenue recognition. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.

 

The Company’s significant accounting policies and critical estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2021 Annual Report. There has been no material change subsequent to December 31, 2021 to the information previously disclosed in the 2021 Annual Report with respect to these significant accounting policies and critical estimates.  The Company has added the following critical accounting policy:

 

Derivative Financial Instruments:

 

Derivative financial instruments include interest rate swap contact and the trust preferred debt repurchase options.  The Company measures derivative financial instruments at fair value. The fair value of derivative financial instruments is required to be revalued each reporting period, with corresponding changes in fair value recorded in the consolidated statements of operations. Realized gains or losses are recognized upon settlement of the contracts. See Note 10, "Derivatives" and "Note 19 ,"Fair Value of Financial Instruments" to the unaudited consolidated interim financial statements, for further discussion.     

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

 

RESULTS OF CONTINUING OPERATIONS

 

A reconciliation of total segment operating income to net income (loss) for the three and nine months ended September 30, 2022 and September 30, 2021 is presented in Table 1 below:

 

Table 1 Segment Operating Income

(in thousands of dollars)

 

   

For the three months ended September 30,

   

For the nine months ended September 30,

 
   

2022

   

2021

   

Change

   

2022

   

2021

   

Change

 

Segment operating income:

                                               

Extended Warranty

  $ 2,461     $ 1,400     $ 1,061     $ 7,120     $ 9,310     $ (2,190 )

Leased Real Estate

    894       1,095       (201 )     3,304       86       3,218  

Kingsway Search Xcelerator

    723             723       2,422             2,422  

Total segment operating income

    4,078       2,495       1,583       12,846       9,396       3,450  

Net investment income

    463       389       74       1,547       1,213       334  

Net realized gains

    797       159       638       1,035       397       638  

Loss on change in fair value of equity investments

    (5 )     (39 )     34       (53 )     (235 )     182  

Gain on change in fair value of limited liability investments, at fair value

    195       1,211       (1,016 )     368       1,740       (1,372 )

Gain on change in fair value of real estate investments

    1,488             1,488       1,488             1,488  

Gain on change in fair value of derivative asset option contracts

    13,498             13,498       13,498             13,498  

Interest expense not allocated to segments

    (2,139 )     (1,497 )     (642 )     (5,207 )     (4,642 )     (565 )

Other revenue and expenses not allocated to segments, net

    (7,242 )     (2,556 )     (4,686 )     (13,487 )     (8,308 )     (5,179 )

Amortization of intangible assets

    (1,409 )     (2,432 )     1,023       (4,397 )     (3,425 )     (972 )

Loss on change in fair value of debt

    (1,794 )     (412 )     (1,382 )     (4,992 )     (2,169 )     (2,823 )

Gain on disposal of subsidiary

    37,917             37,917       37,917             37,917  

Gain on extinguishment of debt not allocated to segments

                            311       (311 )

Income (loss) from continuing operations before income tax expense (benefit)

    45,847       (2,682 )     48,529       40,563       (5,722 )     46,285  

Income tax expense (benefit) (b)

    6,074       (2,456 )     8,530       5,659       (6,139 )     11,798  

Income (loss) from continuing operations

    39,773       (226 )     39,999       34,904       417       34,487  

Loss on disposal of discontinued operations, net of taxes

    (2,500 )           (2,500 )     (2,500 )           (2,500 )

Net income (loss)

  $ 37,273     $ (226 )   $ 37,499     $ 32,404     $ 417     $ 31,987  

 

Segment Operating Income, Income (Loss) from Continuing Operations and Net Income (Loss)

 

In the third quarter of 2022, we reported segment operating income of $4.1 million, an increase of $1.6 million from the same period in 2021 ($12.8 million year to date, an increase of$3.5 million compared to prior year to date).  The increase for the three months ended September 30, 2022 is primarily due to the following items:

 

 

Increased operating income in Extended Warranty and operating income from Kingsway Search Xcelerator (resulting from the Ravix acquisition in October 2021); both of which were partially offset by;

  Decreased operating income in Leased Real Estate and the disposal of PWSC as of July 29, 2022.  

 

 

The increase in operating income for the nine months ended September 30, 2022 compared to the same period in 2021 was impacted by the following items:

 

 

2021 operating income for the year to date in Leased Real Estate includes a $2.9 million expense recorded during the second quarter of 2021 to write-off an indemnification receivable (which is exactly offset by a tax benefit of $2.9 million);

 

Increased operating income in Leased Real Estate and operating income from Kingsway Search Xcelerator (resulting from the Ravix acquisition in October 2021) in 2022; 

 

2021 operating income for the year to date in Extended Warranty segment includes a gain on extinguishment of debt of $2.2 million, related to Paycheck Protection Program ("PPP") loan forgiveness;

 

2022 operating income for the year to date includes a reduction to IWS operating income of $0.9 million, due to a change in estimate of IWS' deferred revenue and deferred contract costs associated with vehicle service contract fees; and 

 

The disposal of PWSC as of July 29, 2022.

 

In the third quarter of 2022, we reported income from continuing operations of $39.8 million compared to loss from continuing operations of $0.2 million in the third quarter of 2021. The income from continuing operations for the three months ended September 30, 2022is primarily due to:

 

  A gain on disposal of subsidiary of  $37.9 million, related to the sale of PWSC;
  A gain on change in fair value of derivative asset option contracts of $13.5 million, related to the trust preferred debt repurchase options; and
  Segment operating income of $4.1 million,
  All of which was partially offset by an increase in other revenue and expenses not allocated to segments, net.

 

See Note 5, " Acquisitions, Disposal and Discontinued Operations," and Note 10, "Derivatives," to the unaudited consolidated interim financial statements, for further discussion of the PWSC disposal and trust preferred debt repurchase options.     

 

During the third quarter of 2021, the Company completed its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWI, which resulted in PWI recording a $3.6 million reduction to deferred service fees that will be amortized over time.  As a result, PWI recorded a $1.9 million non-cash, cumulative reduction to service fee and commission revenue during the three months ended September 30, 2021.  Of this amount, $1.4 million relates to the period from acquisition through June 30, 2021 and $0.4 million relates to the period from July 1, 2021 through September 30, 2021.

 

The loss from continuing operations for the three months ended September 30, 2021 is primarily due to recording a $1.9 million non-cash, cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting, interest expense not allocated to segments, other revenue and expenses not allocated to segments, net and increased amortization expense as a result of a $1.9 million non-cash, cumulative adjustment related to finalizing the PWI purchase accounting, partially offset by operating income in Extended Warranty and Leased Real Estate, gain on change in fair value of limited liability investments, at fair value and income tax benefit.  

 

For the nine months ended  September 30, 2022, we reported income from continuing operations of $34.9 million compared to  $0.4 million for the nine months ended September 30, 2021. The income from continuing operations for the nine months ended  September 30, 2022 is primarily due to gain on disposal of subsidiary of $37.9 million, related to the sale of PWSC, gain on change in fair value of derivative asset option contracts of  $13.5  million, related to the trust preferred debt repurchase options, and  segment operating income which increased by $3.5 million, that was partially offset by:
 
 

Interest expense not allocated to segments;

 

Other revenue and expenses not allocated to segments, net, which includes a $4.7 million increase in the fair value of previously-granted awards to PWSC employees that are accounted for on a fair value basis and $1.5 million of expense due to the increase in fair value of the Ravix contingent consideration;

 

Loss on change in fair value of debt which increased by $2.8 million; and 

  Income tax expense which increased by $11.8 million.  The income tax expense in 2022 is primarily due to the state tax expense associated with the sale of PWSC on July 29, 2022 and the related increase in valuation allowance from the accelerated utilization of indefinite life interest expense carryforwards as a result of such sale.  The income tax benefit in 2021 is primarily due to the resolution of certain uncertain tax positions during the period ended September 30, 2021.

 

The income from continuing operations for the nine months ended September 30, 2021 is primarily due to operating income in Extended Warranty (which includes gain on extinguishment of debt of $2.2 million, related to PPP loan forgiveness) and Leased Real Estate that was negatively impacted by recording a $1.9 million non-cash, cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting, net investment income, gain on change in fair value of limited liability investments, at fair value and income tax benefit, partially offset by interest expense not allocated to segments, other revenue and expenses not allocated to segments, net, increased amortization of intangible assets as a result of a $1.9 million non-cash,  cumulative adjustment related to finalizing the PWI purchase accounting and loss on change in fair value of debt. 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

In the third quarter of 2022, we reported net income of $37.3 million compared to net loss of $0.2 million in the third quarter of 2021 (net income of $32.4 millionyear to date compared to net income of $0.4 million prior to date).  In addition to the items described above impacting income from continuing operations, the net income for the three and nine months ended September 30, 2022 includes a loss on discontinued operations, net of taxes of $2.5 million.  The loss on discontinued operations is related to a liability recorded at September 30, 2022 regarding the Company's obligation to indemnify a former subsidiary for open claims.  See Note 5, " Acquisitions, Disposal and Discontinued Operations," to the unaudited consolidated interim financial statements, for further discussion.

 

Extended Warranty

 

The Extended Warranty service fee and commission revenue increased 5.7% (or $1.0 million) to $18.6 million for the three months ended September 30, 2022 compared with $17.6 million for the three months ended September 30, 2021 ($56.3 million year to date compared to $55.0 million prior year to date). Service fee and commission revenue was impacted by the following for the three and nine months ended September 30, 2022:

 

  A $2.0 million increase at PWI for the three months ended September 30, 2022 (an increase of $1.8 million year to date). During the third quarter of 2021, PWI recorded a $1.9 million non-cash, cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting.  The increase in revenue was partially offset by the continued supply-chain issues in the automotive industry, resulting in significant increases in the prices of used automobiles (PWI’s primary market), making it difficult for smaller automobile dealers to obtain inventory and, therefore, putting downward pressure on PWI’s revenue; 

 

  A $0.3 million increase at IWS for the three months ended September 30, 2022 (a decrease of $0.1 million year to date). During the first quarter of 2022, there was a change in estimate of IWS' deferred revenue associated with vehicle service contract fees, which resulted in a reduction to IWS year to date revenue of $1.2 million.  This reduction was partially offset by an increase in revenue due primarily to an increase in the number of VSAs written in 2022, as sales volume continues to trend up towards pre-COVID levels.  While IWS’ market has been impacted by macro-economic conditions brought on by the continued COVID-19 pandemic, IWS sells a substantial amount of VSAs for new automobiles but, more importantly, its products are distributed through credit unions at the point of vehicle financing, which has been less impacted by the recent macro-economic conditions;

 

 
A $0.1 million increase at Trinity for the three months ended September 30, 2022 (an increase of $1.5 million year to date), 
primarily driven by a $0.2 million increase in its equipment breakdown and maintenance support services, as Trinity continues to recover from the original impacts of the COVID-19 pandemic ($1.3 million increase year to date);

 

 

A $1.3 million decrease at PWSC for the three months ended September 30, 2022 (a decrease of $1.0 million year to date) primarily due to the sale of PWSC on July 29, 2022.  Due to the sale, the financial results for PWSC are only included through the disposal date; and

 

 

A $0.2 million decrease at Geminus for the three months ended September 30, 2022 (a decrease of $0.8 million year to date), which is being impacted by similar macro-economic conditions as explained above for PWI.

 

The Extended Warranty operating income was $2.5 million for the three months ended September 30, 2022 compared with $1.4 million for the three months ended September 30, 2021 ($7.1 million year to date compared to $9.3 million prior year to date). The 2021 operating income results include a $1.9 million non-cash, cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting.

 

Operating income was primarily impacted by the following:

 

 

Inclusion of Paycheck Protection Program ("PPP") loan forgiveness related to Extended Warranty companies of $2.2 million for the nine months ended September 30, 2021;

 

  A $1.6 million increase at PWI to $0.6 million for the three months ended September 30, 2022 (an increase of $0.6 million year to date to $1.6 million). The 2021 results include a $1.9 million non-cash, cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting.  The operating income for the three and nine months ended September 30, 2022 was impacted by an increase in claims authorized on vehicle service agreements (decreased volume of claims that was offset by a higher average cost per claim) and higher commission expense compared with the same periods in 2021; 

 

 

A $0.3 million increase at IWS to $1.1 million for the three months ended September 30, 2022 (an increase of $0.2 million year to date to $2.4 million), primarily due to increased revenue.  During the first quarter of 2022, there was a change in estimate of IWS' deferred revenue and deferred contract costs associated with vehicle service contract fees, which resulted in a reduction to IWS operating income of $0.9 million for the nine months ended September 30, 2022.  For the quarter and year to date, IWS had an increase in commission expense and claims authorized on vehicle service agreements increased slightly, as a decrease in the number of claims was slightly more than offset by an increase in the average cost of a claim;

 

 

A less than $0.1 million increase at Trinity to $0.6 million for the three months ended September 30, 2022 (an increase of $0.2 million year to date to $1.4 million), primarily due to an increase in revenue that was partially offset by an increase in cost of services sold and higher general and administrative expenses compared with the same periods in 2021;

 

 

A $0.6 million decrease at PWSC to an operating loss of $0.1 million for the three months ended September 30, 2022 (a decrease of $0.5 million year to date to $0.9 million), primarily due to the sale of PWSC on July 29, 2022.  Due to the sale, the financial results for PWSC are only included through the disposal date; and

 

 

A $0.2 million decrease at Geminus to $0.3 million for the three months ended September 30, 2022 (a decrease of $0.5 million year to date to $0.9 million), due to a decrease in revenue that was partially offset by a slight decrease in claims authorized on vehicle service agreements and slightly lower general and administrative expenses.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Leased Real Estate

 

Leased Real Estate rental revenue was $3.6 million and $3.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively ($10.9 million and $10.0 million for the nine months ended September 30, 2022 and September 30, 2021, respectively).  The rental income is derived from Leased Real Estate's long-term leases.  The increase in rental income is due to the inclusion of VA Lafayette during 2022 following its acquisition on December 30, 2021.

 

Leased Real Estate operating income was$0.9million for the three months ended September 30, 2022 compared to $1.1 million for the three months ended September 30, 2021 ($3.3 million year to date compared to $0.1 million prior year to date).  Leased Real Estate operating income includes interest expense of $1.7 million and $1.6 million for the three months ended September 30, 2022 and September 30, 2021, respectively ($5.0 million and $4.6 million for the nine months ended September 30, 2022and September 30, 2021, respectively).

 

The operating income for the three and nine months ended September 30, 2022 was impacted by the following:

 

  An increase in general and administrative expenses compared to the same period in 2021;
  The operating income for the nine months ended September 30, 2021 includes a $2.9 million expense recorded during the second quarter of 2021 to write-off an indemnification receivable (which is exactly offset by a tax benefit of $2.9 million in net income), as well as management expense of $0.5 million for the nine months ended September 30, 2021 as a result of the March settlement agreement. The operating income for the nine months ended September 30, 2021 also includes a $0.6 million benefit recorded in 2021 related to the finalization of management fees and legal expenses associated with the settlement of CMC litigation (see Note 21, "Commitments and Contingencies," to the unaudited consolidated interim financial statements, for further information on the settlement); and 
  An increase in rental revenue for the three and nine months ended September 30, 2022 due to the inclusion of VA  Lafayette in 2022 following its acquisition on December 30, 2021.

 

Kingsway Search Xcelerator

 

The Kingsway Search Xcelerator revenue was $3.8 million and $12.1 million for the three and nine months ended September 30, 2022, respectively, and is derived from the Company's subsidiary, Ravix, that was acquired on October 1, 2021. Kingsway Search Xcelerator operating income was $0.7 million and $2.4 million for the three and nine months ended September 30, 2022, respectively.  

 

Net Investment Income

 

Net investment income was $0.5 million in the third quarter of 2022 compared to $0.4 million in the third quarter of 2021 ($1.5 million year to date compared to $1.2 million prior year to date). The increase in net investment income for the three months ended September 30, 2022 relates to slightly higher investment income from fixed maturities as a result of general changes in market conditions.  The increase in net investment income for the nine months ended September 30, 2022 relates primarily to higher investment income from the Company's limited liability investments and fixed maturities, partially offset by a decrease in investment income from the Company's limited liability investments, at fair value.  Income from limited liability investments is recognized based on the Company's share of the earnings of the limited liability entities.

 

Net Realized Gains

Net realized gains were $0.8 million in the third quarter of 2022 compared to $0.2 million in the third quarter of 2021 ($1.0 million year to date compared to $0.4 million prior year to date).  The net realized gains for the three and nine months ended September 30, 2022 primarily relate to net realized gains on sales of limited liability investments, distributions received from one of the Company’s investments in private companies in which its carrying value previously had been written down to zero as a result of prior distributions and realized gains recognized by Argo Holdings Fund I, LLC ("Argo Holdings").

The net realized gains for the three and nine months ended September 30, 2021 primarily relate to realized gains recognized by Argo Holdings and distributions received from one of the Company’s investments in private companies in which its carrying value previously had been written down to zero as a result of prior distributions.
 
Gain on Change in Fair Value of Limited Liability Investments, at Fair Value
 

Gain on change in fair value of limited liability investments, at fair value was $0.2 million in the third quarter of 2022 compared to $1.2 million in the third quarter of 2021 ($0.4 million year to date compared to $1.7 million prior year to date). The gain for the three months ended September 30, 2022 represents an increase in fair value of $0.4 million related to Net Lease Investment Grade Portfolio LLC ("Net Lease"), partially offset by a decrease in fair value of $0.2 million related to Argo Holdings. The gain for the three months ended September 30, 2021 represents an increase in fair value of $0.8 million related to Net Lease due to net cash proceeds received in excess of the carrying value from the sale of one of the properties and a reduction in debt at one of the underlying LLC's, and an increase in fair value of $0.4 million related to Argo Holdings.

 

The gain for the nine months ended September 30, 2022 represents an increase in fair value of $1.2 million related to Net Lease, partially offset by a decrease in fair value of $0.8 million related to Argo Holdings.  The gain for the nine months ended September 30, 2021 represent increases in fair value of $1.2 million related to Net Lease and $0.5 million related to Argo Holdings.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Gain on Change in Fair Value of Real Estate Investments
 
Gain on change in fair value of real estate investments was $1.5 million for the three and nine months ended  September 30, 2022 compared to zero for the three and nine months ended September 30, 2021.  Real estate investments represent investment real estate properties held by the Company’s consolidated subsidiary, Flower Portfolio 001, LLC ("Flower").  The Company consolidates the financial statements of Flower on a three-month lag.  The increase in fair value is attributable to the sale of the real estate investment properties for $12.2 million, which closed on September 29, 2022.  Given the proximity of the sale to September 30, 2022, the Company believes the selling price is the best indication of fair value at June 30, 2022 for Flower which is recorded on a three-month lag in the September 30, 2022 consolidated balance sheet.  As a result of the three month lag, the Company will record the sale transaction in its fourth quarter 2022 financial statements.
 
Gain on Change in Fair Value of Derivative Asset Option Contracts
 
Gain on change in fair value of derivative asset option contracts was  $13.5  million for the three and nine months ended  September 30, 2022 compared to zero for the three and nine months ended September 30, 2021 due to the fact that  the Company entered into three trust preferred debt repurchase option agreements during the third quarter of 2022.  The amount relates to the difference between the value of the option at date of inception and the cash consideration paid of $11.4 million, as well as the subsequent change in fair value of $2.1 million as of September 30, 2022 .
 

Refer to Note 10, "Derivatives," to the unaudited consolidated interim financial statements, for further information on the option agreements.

 

Interest Expense not Allocated to Segments

 

Interest expense not allocated to segments for the third quarter of 2022 was $2.1 million compared to $1.5 million in the third quarter of 2021 ($5.2 million year to date compared to $4.6 million prior year to date).  This includes interest on all debt except for interest on the Mortgage, Additional Mortgage, and LA Mortgage, all of which is included in the Real Estate Segment.

 

The increase for the three and nine months ended September 30, 2022 is primarily attributable higher interest expense related to the Company's subordinated debt, which resulted from higher London interbank offered interest rates for three-month U.S. dollar deposits ("LIBOR") during the three and nine months ended September 30, 2022 compared to the same periods in 2021 This increase was partially offset by an increase in fair value of the interest rate swap related to the Company's 2020 KWH bank loan, which resulted in lower interest expense of $0.1 million and $0.4 million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.  

 

Interest expense not allocated to segments for the nine months ended September 30, 2022 also includes $0.2 million related to the Ravix Loan, which was effective October 1, 2021, and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75% (current rate of 6.00%).

 

Other Revenue and Expenses not Allocated to Segments, Net

 

Other revenue and expenses not allocated to segments, net was a net expense of $7.2 million in the third quarter of 2022 compared to $2.6 million in the third quarter of 2021 ($13.5 million year to date compared to $8.3 million prior year to date).  Included are revenue and expenses associated with our various other investments that are accounted for on a consolidated basis, our insurance company that has been in run-off since 2012, and expenses associated with our corporate holding company.

 

The increase in net expense for the three months ended September 30, 2022 is primarily attributable to a $4.8 million increase in the fair value of previously-granted awards to PWSC employees that are accounted for on a fair value basis during the three months ended September 30, 2022 compared to same period in 2021.

 

The increase in net expense for the nine months ended September 30, 2022 is primarily attributable to a $4.7 million increase in the fair value of previously-granted awards to PWSC employees that are accounted for on a fair value basis and an increase in the fair value of the Ravix contingent consideration liability of $1.5 million, partially offset by lower expense related to restricted stock awards of officers of the Company during the nine months ended September 30, 2022 compared to same period in 2021.

 

KINGSWAY FINANCIAL SERVICES INC.

 

Amortization of Intangible Assets

 

Amortization of intangible assets was $1.4 million in the third quarter of 2022 compared to $2.4 million in the third quarter of 2021 ($4.4 million year to date compared to $3.4 million prior year to date).

 

During the third quarter of 2021, the Company finalized its fair value analysis of the assets acquired and liabilities assumed in its December 1, 2020 acquisition of PWI, which resulted in the Company recording (i) $1.3 million of amortization expense during the third quarter of 2021 for the period from the date of acquisition through June 30, 2021 and (ii) $0.6 million of amortization expense during the third quarter of 2021 for the period July 1, 2021 through September 30, 2021 related to the intangible assets identified. 

 

The higher amortization expense for the nine months ended September 30, 2022 is related to amortization of intangible assets recorded in conjunction with the Company's acquisitions of Ravix effective October 1, 2021 and VA Lafayette effective December 30, 2021.  During the three and nine months ended September 30, 2022, the Company recorded $0.3 million and $0.9 million, respectively, of amortization expense related to the intangible assets identified as part of the acquisitions of Ravix and VA Lafayette. 

 

See Note 5, "Acquisitions" to the consolidated financial statements in the 2021 Annual Report for further details on the Company’s acquisitions of PWI, Ravix and VA Lafayette.

 

Loss on Change in Fair Value of Debt

 

Loss on change in fair value of debt was $1.8 million in the third quarter of 2022 compared to $0.4 million in the third quarter of 2021 ($5.0 million year to date compared to $2.2 million prior year to date). The loss for three and nine months ended September 30, 2022 and September 30, 2021 reflect increases in the fair value of the subordinated debt resulting primarily from changes in interest rates used (not related to instrument-specific credit risk).  The following summarizes the impacts: 

 

Impact of Rate Change on Fair Value

 

Three months ended September 30, 2022

 

Three months ended September 30, 2021

 

Nine months ended September 30, 2022

 

Nine months ended September 30, 2021

   

Result

 

Result

 

Result

 

Result

LIBOR:

               

increase causes fair value to increase; decrease causes fair value to decrease

 

Increase to fair value

 

Increase to fair value

 

Increase to fair value

 

Decrease to fair value

Risk free rate:

               

increase causes fair value to decrease; decrease causes fair value to increase

 

Decrease to fair value

 

Decrease to fair value

 

Decrease to fair value

 

Increase to fair value

 

See "Debt" section below for further information.

 

Gain on Disposal of Subsidiary
 

On July 29, 2022, the Company sold its 80% majority-owned subsidiary, PWSC.  As a result of the sale, the Company recognized a net gain on disposal of $37.9 million during the three months ended September 30, 2022.  The sale of PWSC did not represent a strategic shift that will have a major effect on the Company's operations or financial results; therefore, PWSC is not presented as a discontinued operation.  

 

See  Note 5 , " Acquisitions, Disposal and Discontinued Operations ," to the unaudited consolidated interim financial statements, for further discussion of the PWSC disposal.
 

Gain on Extinguishment of Debt not Allocated to Segments

 

For the nine months ended September 30, 2021, gain on extinguishment of debt not allocated to segments consists of a $37.9 million gain (recorded in the first quarter of 2021) on forgiveness of the balance of the holding company's loan obtained through the PPP.  See Note 11 "Debt," to the unaudited consolidated interim financial statements, for further discussion.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Income Tax Expense (Benefit)

 

Income tax expense for the third quarter of 2022 was $6.1 million compared to income tax benefit of $2.5 million in the third quarter of 2021 (income tax expense of $5.7 million year to date compared to income tax benefit of $6.1 million prior year to date). For the three months ended September 30, 2022the Company reported income tax expense primarily due to the state tax expense associated with the sale of PWSC during the period and the related increase in valuation allowance from the accelerated utilization of indefinite life interest expense carryforwards as a result of such sale.  For the three months ended September 30, 2021the Company reported a tax benefit primarily due to the release of its valuation allowance associated with indefinite life business interest expense carryforwards. In addition, during the three months ended September 30, 2021, the Company recorded an income tax benefit of $2.9 million for the release of a liability that had been included in income taxes payable in the consolidated balance sheets. See Note 14, "Income Taxes," to the unaudited consolidated interim financial statements, for additional detail of the income tax expense (benefit) recorded for the three and nine months ended September 30, 2022 and September 30, 2021.

 

 

INVESTMENTS

 

Portfolio Composition

 

See Note 2(d), "Summary of Significant Accounting Policies - Investments," to the consolidated financial statements in the 2021 Annual Report for an overview of how we account for our various investments.

 

At September 30, 2022, we held cash and cash equivalents, restricted cash and investments with a carrying value of $132.2 million.

 

Investments held by our insurance subsidiary, Kingsway Amigo Insurance Company ("Amigo"), must comply with domiciliary state regulations that prescribe the type, quality and concentration of investments. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations.

 

Table 2 below summarizes the carrying value of investments, including cash and cash equivalents and restricted cash, at the dates indicated.

 

TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cash

(in thousands of dollars, except for percentages)

 

Type of investment

 

September 30, 2022

   

% of Total

   

December 31, 2021

   

% of Total

 

Fixed maturities:

                               

U.S. government, government agencies and authorities

    14,594       11.0 %     16,223       16.5 %

States, municipalities and political subdivisions

    2,144       1.6 %     1,878       1.9 %

Mortgage-backed

    8,178       6.2 %     7,629       7.8 %

Asset-backed

    1,622       1.2 %     445       0.5 %

Corporate

    10,190       7.7 %     9,491       9.7 %

Total fixed maturities

    36,728       27.8 %     35,666       36.4 %

Equity investments:

                               

Common stock

    126       0.1 %     171       0.2 %

Warrants

          %     8       0.0 %

Total equity investments

    126       0.1 %     179       0.2 %

Limited liability investments

    1,010       0.8 %     1,901       1.9 %

Limited liability investments, at fair value

    19,182       14.5 %     18,826       19.1 %

Investments in private companies

    790       0.6 %     790       0.8 %

Real estate investments

    12,150       9.2 %     10,662       10.8 %

Other investments

    204       0.2 %     256       0.3 %

Short-term investments

    157       0.1 %     157       0.1 %

Total investments

    70,347       53.2 %     68,437       69.6 %

Cash and cash equivalents

    48,640       36.8 %     12,642       12.9 %

Restricted cash

    13,165       10.0 %     17,257       17.5 %

Total

    132,152       100.0 %     98,336       100.0 %

 

Other-Than-Temporary Impairment

 

The Company performs a quarterly analysis of its investments to determine if declines in market value are other-than-temporary. Further information regarding our detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within the "Significant Accounting Policies and Critical Estimates" section of Management's Discussion and Analysis of Financial Condition included in the 2021 Annual Report.

 

As a result of the analysis performed, the Company recorded write downs for other-than-temporary impairment related to limited liability investments, at fair value of zero and less than $0.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively (less than $0.1 million and $0.1 million for the nine months ended September 30, 2022 and September 30, 2021, respectively), which are included in gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations.

 

There were no write-downs recorded for other-than-temporary impairments related to available-for sale investments, limited liability investments, investments in private companies and other investments for the three and nine months ended September 30, 2022 and September 30, 2021.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

The length of time a fixed maturity investment may be held in an unrealized loss position may vary based on the opinion of the investment manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In the case of a fixed maturity investment where the investment manager determines that there is little or no risk of default prior to the maturity of a holding, we would elect to hold the investment in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, the Company may elect to sell a fixed maturity investment at a loss.

 

At September 30, 2022 and December 31, 2021, the gross unrealized losses for fixed maturities amounted to $2.8 million and $0.3 million, respectively, and there were no unrealized losses attributable to non-investment grade fixed maturities. At each of September 30, 2022 and December 31, 2021, all unrealized losses on individual investments were considered temporary.

 

 

DEBT

 

See Note 11, "Debt," to the unaudited consolidated interim financial statements for further details to those provided below.

 

Bank Loans

 

In 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose subsidiaries at the time included IWS, Geminus and Trinity. As part of the acquisition of PWI on December 1, 2020, PWI became a wholly owned subsidiary of KWH, which borrowed a principal amount of $25.7 million from a bank to partially finance its acquisition of PWI and to fully repay the prior outstanding loan at KWH (the "2020 KWH Loan").  The 2020 KWH Loan had an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 2.75%.  During the second quarter of 2022, the 2020 KWH Loan was amended to change the annual interest rate to be equal to SOFR, having a floor of 0.75%, plus spreads ranging from 2.62% to 3.12%.  At September 30, 2022, the interest rate was 5.33%. The 2020 KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the quarterly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The 2020 KWH Loan matures on December 1, 2025. 

 

The 2020 KWH Loan contains a number of covenants, including, but not limited to, a leverage ratio, a fixed charge ratio and limits on annual capital expenditures, all of which are as defined in and calculated pursuant to the 2020 KWH Loan that, among other things, restrict KWH’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets.

 

As part of the acquisition of Ravix on October 1, 2021, Ravix became a wholly owned subsidiary of Ravix Acquisition LLC ("Ravix LLC"), and together they borrowed from a bank a principal amount of $6.0 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of Ravix (together, the "Ravix Loan").  The Ravix Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75% (current rate of 6.00%) and is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method. The revolver matures on October 1, 2023 and the term loan matures on October 1, 2027. 

 

The Ravix Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio, all of which are as defined in and calculated pursuant to the Ravix Loan that, among other things, restrict Ravix’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets.

 

Notes Payable

 

As part of its acquisition of CMC in July 2016, the Company assumed the Mortgage and recorded the Mortgage at its estimated fair value of $191.7 million, which included the unpaid principal amount of $180.0 million as of the date of acquisition plus a premium of $11.7 million. The Mortgage matures on May 15, 2034 and has a fixed interest rate of 4.07%. The Mortgage is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the premium using the effective interest rate method.

 

On June 2, 2021, TRT Leaseco ("TRT"), a subsidiary of CMC, entered into an amendment to the Mortgage to borrow an additional $15.0 million, which is recorded as note payable in the consolidated balance sheets ("the Additional Mortgage").  The net proceeds from the Additional Mortgage were used to advance increased rental payments to the parties that had entered into a legal settlement agreement reached during the first quarter of 2021, including the Company which received $2.7 million.  The Additional Mortgage matures on May 15, 2034 and has a fixed interest rate of 3.20%.  The Additional Mortgage is carried in the consolidated balance sheets at its amortized cost, which reflects the monthly pay-down of principal as well as the amortization of the debt discount and issuance costs using the effective interest rate method.  See Note 21(a), "Commitments and Contingencies - Legal proceedings," to the unaudited consolidated interim financial statements for further discussion of the CMC litigation settlement agreement.

 

As part of its acquisition of VA Lafayette on December 30, 2021, the Company assumed the LA Mortgage, which is comprised of a senior amortizing note, a senior interest only note and a junior note. The Company recorded the LA Mortgage at its aggregate unpaid principal amount of $13.5 million as of the date of acquisition plus a premium of $3.5 million. The senior amortizing note matures on September 14, 2036 and has a fixed interest rate of 3.75%. The senior interest only note matures on October 14, 2036 and has a fixed interest rate of 5.682%.  The junior note matures on September 16, 2036 and has a fixed interest rate of 7.0%, of which a fixed amount is payable semi-annually and the remainder is added to the principal balance of the junior note.  The LA Mortgage is carried in the consolidated balance sheets at its aggregate unpaid principal balance.  

 

On January 5, 2015, Flower Portfolio 001, LLC ("Flower") assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties ("the Flower Note"). The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. On September 29, 2022, Flower sold its investment real estate properties and used a portion of the sales proceeds to repay the unpaid principal balance of the Flower Note.  Since the Company reports the financial statements of Flower on a three-month lag, the consolidated balance sheet continues to report the carrying value of the Flower Note at September 30, 2022 of $6.0 million, which represents its unpaid principal balance at June 30, 2022.  

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

In April 2020, certain subsidiaries of the Company received loan proceeds under the PPP, totaling $2.9 million with a stated annual interest rate of 1.00%. The PPP, established as part of the CARES Act and administered by the U.S. Small Business Administration (the "SBA"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll costs (as defined for purposes of the PPP) of the qualifying business. The loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, costs, rent and utilities, during the twenty-four week period following the borrower’s receipt of the loan and maintains its payroll levels and employee headcount. The amount of loan forgiveness will be reduced if the borrower reduces its employee headcount below its average employee headcount during a benchmark period or significantly reduces salaries for certain employees during the covered period.

 

The Company used the entire loan amount for qualifying expenses. The U.S. Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2.0 million. If we were to be audited and receive an adverse outcome in such an audit, we could be required to return the full amount of the PPP Loan and may potentially be subject to civil and criminal fines and penalties.

 

On December 21, 2020 the SBA approved the forgiveness of the full amount of one of the five PPP loans, which included principal and interest of $0.4 million. In January 2021 and March 2021, the SBA provided the Company with notices of forgiveness of the full amount of the remaining four loans. The forgiveness in the first quarter of 2021 included total principal and interest of $2.5 million. 

 

Subordinated Debt

 

Between December 4, 2002 and December 16, 2003, six subsidiary trusts of the Company issued $90.5 million of 30-year capital securities to third parties in separate private transactions. In each instance, a corresponding floating rate junior subordinated deferrable interest debenture was then issued by Kingsway America Inc. to the trust in exchange for the proceeds from the private sale. The floating rate debentures bear interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. The Company has the right to call each of these securities at par value any time after five years from their issuance until their maturity.

 

During the third quarter of 2018, the Company gave notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters, pursuant to the contractual terms of its outstanding Trust Preferred indentures, which permit interest deferral. This action does not constitute a default under the Company's Trust Preferred indentures or any of its other debt indentures. At September 30, 2022 and December 31, 2021, deferred interest payable of $23.2 million and $18.7 million, respectively, is included in accrued expenses and other liabilities in the consolidated balance sheets.

 

On August 2, 2022, the Company entered into an agreement with a holder of four of the trust preferred debt instruments ("TruPs") that gives the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for a purchase price equal to 63% of the outstanding principal and deferred interest.  Originally, the agreement called for a repurchase at 63%, which escalated to 63.75% once the September 26, 2022 agreement (described below) was signed.  The Company has agreed that any repurchase made will be for no less than 50% of the TruPs held by the holder.

 

Until the earlier of (i) the date that all four of the preferred debt instruments have been repurchased and (ii) the nine month anniversary of the agreement ("May Termination Date"), all interest on the four preferred debt instruments will continue to accrue.  However, with respect to TruPs that are repurchased prior to the May Termination Date, the amount of interest accrued during the term of the agreement will be treated as an offset and reduce the repurchase price for such TruPs.  The Company will have no obligation to pay any such accrued interest with respect to any of the TruPs that are repurchased prior to the May Termination Date.

 

The Company paid approximately $2.0 million to the holder for this option and the Company has until the May Termination Date to execute the repurchases.  If the Company repurchases less than $30.0 million of principal and deferred interest, or fails to purchase any principal or deferred interest within one year, then the $2.0 million paid is forfeited.  If the Company repurchases an amount equal to or great than $30.0 million, then the $2.0 million paid would be applied to such repurchases.

 

On September 20, 2022, the Company entered into an additional agreement with the same party to the August 2, 2022 agreement that gives the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for 63.75% of the outstanding principal and deferred interest relating to a portion of a fifth TruPs held. The September 20, 2020 agreement is subject to the same terms and conditions as the August 2, 2022 and no additional consideration was paid.

 

On September 26, 2022, the Company entered into an agreement with a holder of a portion of one of the TruPs that gives the Company the option to repurchase up to 100% of the holder’s principal and deferred interest for a purchase price equal to 63% of the outstanding principal and deferred interest. 

 

Until the earlier of (i) the date that all of the preferred debt instrument has been repurchased and (ii) the May Termination Date, all interest on the preferred debt instrument will continue to accrue.  However, with respect to TruPs that are repurchased prior to the May Termination Date, the amount of interest accrued during the term of the agreement will be treated as an offset and reduce the repurchase price for such TruPs.  The Company will have no obligation to pay any such accrued interest with respect to the TruPs that are repurchased prior to the May Termination Date.

 

The Company paid approximately $0.3 million to the holder for this option and the Company has until the May Termination Date to execute the repurchase.  If the Company fails to purchase any principal or deferred interest before the May Termination Date, then the $0.3 million paid is forfeited.  If the Company repurchases any of the TruPs, then the $0.3 million paid would be applied to any repurchases.

 

If the Company is able to secure an agreement with the holders of the remaining trust preferred debt instrument to repurchase all of their outstanding principal and deferred interest within four months of August 4, 2022, then the price paid in accordance with the August 2, 2022 agreement and the September 20, 2022 agreement would increase to 64.5%.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

The agreements governing our subordinated debt contain a number of covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, make dividends and distributions, and make certain payments in respect of the Company’s outstanding securities.

 

The Company's subordinated debt is measured and reported at fair value. At September 30, 2022, the carrying value of the subordinated debt is $62.3 million. The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. For a description of the market observable inputs and inputs developed by a third party used in determining fair value of debt, see Note 19, "Fair Value of Financial Instruments," to the unaudited consolidated interim financial statements.

 

During the nine months ended September 30, 2022, the market observable swap rates changed, and the Company experienced a decrease in the credit spread assumption developed by the third-party. Changes in the market observable swap rates affect the fair value model in different ways. An increase in the LIBOR swap rates has the effect of increasing the fair value of the Company's subordinated debt while an increase in the risk-free swap rates has the effect of decreasing the fair value. The increase in the credit spread assumption has the effect of decreasing the fair value of the Company's subordinated debt while a decrease in the credit spread assumption has the effect of increasing the fair value. The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effect of increasing the fair value of debt. The changes to the credit spread and swap rate variables during the nine months ended September 30, 2022, along with the passage of time, contributed to the $1.3 million increase in fair value of the Company’s subordinated debt between December 31, 2021 and September 30, 2022.

 

Of the $1.3 million increase in fair value of the Company’s subordinated debt between December 31, 2021 and September 30, 2022, $3.7 million is reported as decrease in fair value of debt attributable to instrument-specific credit risk in the Company's unaudited consolidated statements of comprehensive income (loss) and $5.0 million is reported as loss on change in fair value of debt in the Company’s unaudited consolidated statements of operations.

 

Though changes in the market observable swap rates will continue to introduce some volatility each quarter to the Company’s reported gain or loss on change in fair value of debt, changes in the credit spread assumption developed by the third party does not introduce volatility to the Company’s consolidated statements of operations. The fair value of the Company’s subordinated debt will eventually equal the principal value totaling $90.5 million of the subordinated debt by the time of the stated redemption date of each trust, beginning with the trust maturing on December 4, 2032 and continuing through January 8, 2034, the redemption date of the last of the Company’s outstanding trusts.

 

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

SeeNote 4, "Recently Issued Accounting Standards," to the unaudited consolidated interim financial statements, for discussion of certain accounting standards that may be applicable to the Company's current and future consolidated financial statements.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations, capital raising, disposal of subsidiaries, investment maturities and investment income, and other returns received on investments and from the sale of investments.

 

A significant portion of the cash provided by our Extended Warranty companies is required to be placed into restricted trust accounts, as determined by the insurers who back-up our service contracts, in order to fund future expected claims.  On a periodic basis (quarterly or annually), we may be required to contribute more into the restricted accounts or we may be permitted to draw additional funds from the restricted accounts, dependent upon actuarial analyses performed by the insurers regarding sufficiency of funds to cover future expected claims.  A substantial portion of the restricted trust accounts are invested in fixed maturities and other instruments that have durations similar to the expected future claim projections.

 

Cash provided from these sources is used primarily for warranty expenses, business service expenses, debt servicing, acquisitions and operating expenses of the holding company.

 

The Company's Extended Warranty and Kingsway Search Xcelerator subsidiaries fund their obligations primarily through service fee and commission revenue. The Company's Leased Real Estate subsidiaries fund their obligations through rental revenue. 

 

Cash Flows

 

During the nine months ended September 30, 2022, the Company reported $9.3 million of net cash provided by operating activities, primarily due to operating income from the Extended Warranty and Kingsway Search Xcelerator segments.  During the nine months ended September 30, 2021, the Company reported $8.0 million of net cash used in operating activities, primarily due to $10.6 million prepaid management fees recorded during the second quarter of 2021.  The $10.6 million was only paid because of the gross proceeds received under the Additional Mortgage (see explanation of cash provided by financing activities below), of which the Company retained $2.7 million.  

 

During the nine months ended September 30, 2022, the net cash provided by investing activities was $33.6 million. This source of cash is primarily attributed to the net cash proceeds received, net of cash disposed of from the sale of PWSC, of $35.2 million.  This source of cash was partially offset by purchases of fixed maturities in excess of proceeds from limited liability investments and from sales and maturities of fixed maturities.  During the nine months ended September 30, 2021, the net cash provided by investing activities was $2.7 million. This source of cash was primarily attributed to distributions received by Net Lease from two of its limited liability investment companies of $16.3 million during 2021, partially offset by purchases of fixed maturities in excess of proceeds from sales and maturities of fixed maturities.

 

During the nine months ended September 30, 2022, the net cash used in financing activities was $11.0 million. This use of cash was primarily attributed to principal repayment on bank loans of $5.0 million, principal repayments on notes payable of $4.7 million and distributions to noncontrolling interest holders of $1.0 million.  During the nine months ended September 30, 2021, the net cash used in financing activities was $3.3 million. This use of cash was primarily attributed to principal repayment on bank loan of $3.1 million, principal repayments of $12.6 million on the notes payable, of which $9.0 million relates to the repayment of Net Lease's $9.0 million mezzanine loan and $3.6 million relating to principal paydowns on the Mortgage, Additional Mortgage and the Flower Note and distributions to noncontrolling interest holders of $2.1 million; partially offset by net proceeds from notes payable of $13.3 million related to the Additional Mortgage and proceeds from the exercise of warrants of $1.8 million.

 

Holding Company Liquidity

 

The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; and any other extraordinary demands on the holding company.

 

Actions available to the holding company to increase liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities; exercise of warrants; distributions from the Company’s Extended Warranty and Kingsway Search Xcelerator subsidiaries, as further described below; and giving notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters on the six subsidiary trusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018.

 

On December 1, 2020, the Company closed on the acquisition of PWI, a full-service provider of vehicle service agreements. Related to the PWI acquisition, the Company secured the 2020 KWH Loan with IWS, Trinity, Geminus and PWI (the "KWH Subs") as borrowers under the 2020 KWH Loan. Pursuant to satisfying the covenants under the 2020 KWH Loan, the KWH Subs were permitted to make distributions to the holding company in an aggregate amount not to exceed $1.5 million in any 12-month period.

 

Beginning in 2022, the holding company is permitted to receive a portion of the excess cash flow (as defined in the 2020 KWH Loan document) generated by the KWH Subs in the previous year.  Based on current covenants, the holding company is entitled to 50% of the excess cash flow with the other 50% used to pay down the 2020 KWH Loan.  The holding company received $1.7 million and in March 2022 paid down the KWH 2020 Loan by $1.7 million

 

The amount of excess cash flow the Company is entitled to retain is dependent upon the leverage ratio (as defined in the 2020 KWH Loan document):

 

   

Percent of excess cash flow

If leverage ratio is

 

retained by the Company

Greater than 1.75:1.00

 

50%

Less than 1.75:1.00 but greater than 0.75:1.00

 

75%

Less than 0.75:1.0

 

100%

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

On October 1, 2021, the Company closed on the acquisition of Ravix. Related to the Ravix acquisition, the Company secured the Ravix Loan with Ravix and Ravix LLC as borrowers under the Ravix Loan. Pursuant to the covenants under the Ravix Loan, Ravix is permitted to make distributions to the holding company so long as doing such would not cause non-compliance with the various covenants outlined within the Ravix Loan.

 

Historically, dividends from the Leased Real Estate segment were not generally considered a source of liquidity for the holding company. However, as more fully described inNote 21(a), "Commitments and Contingencies," to the unaudited consolidated interim financial statements, the holding company is now permitted to receive 20% of the proceeds from the increased rental payments resulting from an earlier amendment to the CMC lease (or any borrowings against such increased rental payments).  Refer toNote 11, "Debt," to the unaudited consolidated interim financial statements, for further information about this borrowing.  In conjunction with the Additional Mortgage, TRT paid a guarantee fee of $1.1 million to a third-party during the second quarter of 2021, who is serving as a guarantor or indemnitor with respect to certain obligations between TRT and the holder of the Additional Mortgage.  Refer toNote 21(b), "Commitments and Contingencies," to the unaudited consolidated interim financial statements for further discussion of this off-balance sheet guarantee.

 

On October 18, 2018, the Company completed the previously announced sale of its non-standard automobile insurance companies Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"). As part of the transaction, the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims is $2.5 million. Per the purchase agreement, a security interest on the Company’s equity interest in its consolidated subsidiary, Net Lease, as well as any distributions to the Company from Net Lease, was to be collateral for the Company’s payment of obligations with respect to the open claims.

 

During the third quarter of 2021, the purchasers of Mendota and the Company agreed to release the Company's equity interest in Net Lease as collateral and allow Net Lease to make distributions to the Company.  In exchange, the Company agreed to deposit $2.0 million into an escrow account and advance $0.5 million to the purchaser of Mendota to satisfy the Company's payment obligation with respect to the open claims.

 

During the third quarter of 2022, the buyer provided to the Company an analysis of the claims development that indicated that the Company's potential exposure with respect to the open claims was at the maximum obligation amount.  Previous communications from the buyer noted no such development.  As a result of the newly provided information, the Company recorded a liability of $2.5 million at September 30, 2022, which is included in accrued expenses and other liabilities in the unaudited consolidated balance sheet and loss on disposal of discontinued operations in the unaudited consolidated statement of operations for the three months ended September 30, 2022.  There were no payments made by the Company related to the open claims during the nine months ended September 30, 2022 and September 30, 2021.  

 

The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway America Inc., was $44.6 millionand $2.2 million at September 30, 2022 and December 31, 2021, respectively, which excludes future actions available to the holding company that could be taken to generate liquidity. The holding company cash amounts are reflected in the cash and cash equivalents of $48.6 million and $12.6 million reported at September 30, 2022 and December 31, 2021, respectively, on the Company’s consolidated balance sheets. 

 

The holding company’s liquidity at September 30, 2022 represents only actual cash on hand and does not include cash that would be made available to the holding company from the sale of investments owned by the holding company. In addition, the holding company has access to some of the operating cash generated by the Extended Warranty and Kingsway Search Xcelerator subsidiaries as described above. While these sources do not represent cash of the holding company, they do represent future sources of liquidity.

 

As of September 30, 2022, there are 149,733 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. The outstanding Preferred Shares were required to be redeemed by the Company on April 1, 2021 ("Redemption Date").  However, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferred securities") and, therefore is prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred (total deferred interest was $23.2 million at September 30, 2022).  As such, the Preferred Shares were not redeemed on the Redemption Date and instead remain outstanding with a redemption value of $5.9 million as of September 30, 2022, continue to be convertible at the discretion of the holder, and will accrue dividends until such time that either (i) the shares are converted at the discretion of the holder or (ii) the interest on the trust preferred securities is no longer deferred and the Company redeems the outstanding Preferred Shares at that time. The Company is permitted to continue to defer interest on the trust preferred securities through the third quarter of 2023.

 

Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, including the cash that may be required to redeem the Preferred Shares and deferred interest on its trust preferred securities, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic.

 

Regulatory Capital

 

In the United States, a risk-based capital ("RBC") formula is used by the National Association of Insurance Commissioners ("NAIC") to identify property and casualty insurance companies that may not be adequately capitalized. In general, insurers reporting surplus as regards policyholders below 200% of the authorized control level, as defined by the NAIC, at December 31 are subject to varying levels of regulatory action, including discontinuation of operations. As of December 31, 2021, surplus as regards policyholders reported by Amigo exceeded the 200% threshold.

 

During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. In April 2013, Kingsway filed a comprehensive run-off plan with the Florida Office of Insurance Regulation, which outlines plans for Amigo's run-off. Amigo remains in compliance with that plan.

 

Kingsway Reinsurance Corporation ("Kingsway Re"), our reinsurance subsidiary domiciled in Barbados, is required by the regulator in Barbados to maintain minimum statutory capital of $125,000. Kingsway Re is currently operating with statutory capital near the regulatory minimum, requiring us to periodically contribute capital to fund operating expenses. Kingsway Re incurs operating expenses of approximately $0.1 million per year.

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); therefore, pursuant to Regulation S-K, we are not required to make disclosures under this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2022.

 

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, the Company’s management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Our disclosure controls and procedures have been designed to meet reasonable assurance standards.   In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints that require the Company’s management to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Based on the evaluation of our disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were not effective as a result of one unremediated material weakness in the Company's internal control over financial reporting that was discovered during the course of the 2018 external audit of the accounts, relating to the accounting for and disclosure of certain complex and nonrecurring transactions as it specifically pertains to the adoption and application of ASU 2014-09, Revenue from Contracts with Customers.  Not all material weaknesses necessarily present the same risks from period to period as a result of differing events and transactions which have occurred or may occur in current and future periods.

 

Material Weaknesses in Internal Control over Financial Reporting

 

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.

 

With respect to the inadequate design accounting for and operation of internal disclosure of certain complex and nonrecurring transactions, the execution of the controls over the application of accounting literature did not operate effectively with respect to the adoption and application of ASU 2014-09.  This matter was discovered during the course of the 2018 external audit of the accounts and was reviewed with the Company's Audit Committee.

 

As a result of this material weakness, the Company’s management directed a comprehensive review of its consolidated financial statements to assess the possibility of further material misstatements that may remain unidentified. As a result of such review, and notwithstanding the material weakness described above, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, believes that the unaudited consolidated financial statements contained in this Form 10-Q for the three and nine months ended September 30, 2022 and September 30, 2021 fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Remediation Process

 

The Company has been evaluating the material weakness and is in process of executing its plan to strengthen the effectiveness of the design and operation of its internal control environment. The remediation plan includes implementing additional review procedures with respect to its accounting under ASC 606, executing a thorough review of all revenue streams, and educating key financial personnel to ensure the Company’s accounting will continue to be in accordance with that standard on a go-forward basis.

 

The actions that the Company is taking are subject to ongoing senior management review as well as Audit Committee oversight. The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in its controls. 

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company's internal control over financial reporting during the period beginning July 1, 2022, and ending September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Information concerning pending legal proceedings is incorporated herein by reference to Note 21, "Commitments and Contingencies," to the unaudited consolidated interim financial statements in Part I of this Form 10-Q.

 

 

Item 1A. Risk Factors

 

There have been no material changes with respect to those risk factors previously disclosed in our 2021 Annual Report.

 

 

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

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

 

 

Item 6. Exhibits

 

10.1   Membership Interest Purchase Agreement by and among CSuite Acquisition, LLC, Arthur J. Cohen and Beth Garden, as Trustees of the Cohen Garden Trust dated July 13, 2015, Realized Potential, LLC, and Arthur J. Cohen, as the Sellers’ Representative, dated November 1, 2022 (included as Exhibit 10.1 to the Form 8-K, filed November 2, 2022, and incorporated herein by reference).
     

31.1

 

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

31.2

 

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

32.1

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

32.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

101.INS

 

Inline XBRL Instance Document

     

101.SCH

 

Inline XBRL Taxonomy Extension Schema

     

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase

     

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase

     

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase

     

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase

     

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

     

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     

KINGSWAY FINANCIAL SERVICES INC.

       

Date:

November 10, 2022

By:

/s/ John T. Fitzgerald

     

John T. Fitzgerald, President, Chief Executive Officer and Director

     

(principal executive officer)

       

Date:

November 10, 2022

By:

/s/ Kent A. Hansen

     

Kent A. Hansen, Chief Financial Officer and Executive Vice President

     

(principal financial officer)

       

 

 

56