UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
10 S. Riverside Plaza, Suite 1520
Chicago, IL
(Address of principal executive
offices)
85-1792291
(I.R.S. Employer Identification No.)
60606
(Zip Code)
1-312-766-2138
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, no par value
Trading Symbol
KFS
Name of Each Exchange on Which
Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2022, the aggregate market value of the registrant’s voting common stock held by non-affiliates of registrant was $48,712,518 based
upon the closing sale price of the common stock as reported by the New York Stock Exchange. Solely for purposes of this calculation, all executive
officers and directors of the registrant are considered affiliates.
The number of shares, including restricted common shares, of the Registrant’s Common Stock outstanding as of March 8, 2023 was 25,045,024.
Part III of this Form 10-K is incorporated by reference to certain sections of the Proxy Statement for the 2022 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended December 31, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
KINGSWAY FINANCIAL SERVICES INC.
Table of Contents
Caution Regarding Forward-Looking Statements
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EXHIBIT INDEX
SIGNATURES
i
ii
1
1
8
17
17
17
17
18
18
18
19
41
42
104
104
105
105
106
106
106
106
106
106
107
107
112
112
115
KINGSWAY FINANCIAL SERVICES INC.
Caution Regarding Forward-Looking Statements
This 2022 Annual Report on Form 10-K (the “2022 Annual Report”), including the accompanying consolidated financial statements of
Kingsway Financial Services Inc. (“Kingsway”) and its subsidiaries (individually and collectively referred to herein as the “Company”)
and the notes thereto appearing in Item 8 herein (the “Consolidated Financial Statements”), Management’s Discussion and Analysis of
Financial Condition and Results of Operations appearing in Item 7 herein (“MD&A”), and the other Exhibits and Financial Statement
Schedules filed as a part hereof or incorporated by reference herein may contain or incorporate by reference information that includes
or is based on 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.
Forward-looking statements relate to future events or future performance and reflect Kingsway management’s current beliefs, based on
information currently available. The words “anticipate,” “expect,” “believe,” “may,” “should,” “estimate,” “project,” “outlook,”
“forecast” and variations or similar words and expressions are used to identify such forward looking information, but these words are
not the exclusive means of identifying forward-looking statements. Specifically, statements about (i) the Company’s ability to preserve
and use its net operating losses; (ii) the Company’s expected liquidity; and (iii) the potential impact of volatile investment markets and
other economic conditions on the Company’s investment portfolio, among others, are forward-looking, and the Company may also make
forward-looking statements about, among other things:
•
•
•
•
•
•
its results of operations and financial condition (including, among other things, net and operating income, investment income and
performance, return on equity and expected current returns);
changes in industry trends and significant industry developments, especially as it relates to the automotive service contract and
business services industries;
the impact of certain guarantees and indemnities made by the Company;
its ability to complete and integrate current or future acquisitions successfully;
its ability execute its strategic initiatives successfully; and
the potential impact of the uncertainties related to actual or potential changes in international, national, regional and local economic,
business and financial conditions on the short and long-term economic effects on the Company’s business.
For a discussion of some of the factors that could cause actual results to differ, see Item 1A,”Risk Factors” and our disclosures under
the heading “Significant Accounting Policies and Critical Estimates” in MD&A in this 2022 Annual Report.
Except as expressly required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise, that might arise subsequent to the date
of this 2022 Annual Report.
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KINGSWAY FINANCIAL SERVICES INC.
Part I
Item 1. BUSINESS
In this report, the terms “Kingsway,” the “Company,” “we,” “us” or “our” mean Kingsway Financial Services Inc. and all entities
included in our Consolidated Financial Statements.
Kingsway Financial Services Inc. 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. The Company’s registered office is located at 10 S. Riverside Plaza, Suite 1520, Chicago, Illinois 60606. The common shares
of Kingsway are listed on the NYSE under the trading symbol “KFS.”
Kingsway is a holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries
primarily in the extended warranty and business services industries. Kingsway conducts its business through two reportable segments
- Extended Warranty and Kingsway Search Xcelerator - that conduct their business and distribute their products and services in the
United States.
Prior to the fourth quarter of 2022, the Company conducted its business through a third reportable segment, Leased Real Estate,
which included the following subsidiaries of the Company: CMC Industries, Inc. (“CMC”) and VA Lafayette, LLC (“VA Lafayette”):
• CMC owned, 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. On December 22, 2022, the Company announced a definitive
agreement for the sale of the Real Property, for gross cash proceeds of $44.5 million and the assumption of the two
mortgages. On December 29, 2022, the sale was completed.
• 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 a
mortgage (the “LA Mortgage”). During the fourth quarter, the Company began executing a plan to sell VA Lafayette, and as
a result, VA Lafayette is reported as held for sale at December 31, 2022.
• Both CMC and VA Lafayette have been classified as discontinued operations and the results of their operations are reported
separately for all periods presented. All segmented information has been restated to exclude the Leased Real Estate segment
for all periods presented.
Financial information about Kingsway’s reportable business segments for the years ended December 31, 2022 and December 31, 2021
is contained in the following sections of this 2022 Annual Report: (i) Note 22, “Segmented Information,” to the Consolidated Financial
Statements; and (ii) “Results of Continuing Operations” section of MD&A.
All of the dollar amounts in this 2022 Annual Report are expressed in U.S. dollars.
GENERAL DEVELOPMENT OF BUSINESS
Acquisition of CSuite Financial Partners, LLC
On November 1, 2022, the Company acquired 100% of the outstanding equity interests of CSuite Financial Partners, LLC
(“CSuite”). CSuite, based in Manhattan Beach, California, is a national financial executive services firm providing financial
management leadership to companies in every industry, regardless of size, throughout the United States. CSuite is included in the
Kingsway Search Xcelerator segment.
The Company acquired CSuite for aggregate cash consideration of approximately $8.5 million, less certain escrowed amounts for
purposes of indemnification claims and working capital adjustments. The Company will also pay additional contingent consideration,
only to the extent earned, in an aggregate amount of up to $3.6 million, which is subject to certain conditions, including the successful
achievement of certain financial metrics for CSuite during the three-year period commencing on the first full calendar month following
the acquisition date. Further information is contained in Note 4, “Acquisitions,” to the Consolidated Financial Statements.
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KINGSWAY FINANCIAL SERVICES INC.
The closing purchase price was paid with cash on hand; however, subsequent to the CSuite acquisition, on November 16, 2022, the
Company amended its October 1, 2021 loan agreement with Avidbank to borrow an additional $6.0 million in the form of a
supplemental term loan (the “2022 Ravix Loan”). The 2022 Ravix Loan has a variable interest rate equal to the Prime Rate plus 0.75%.
The 2022 Ravix Loan requires monthly principal and interest payments and the term loan matures on November 16, 2028.
Acquisition of Secure Nursing Service, Inc.
On November 18, 2022, the Company acquired substantially all of the assets and assumed certain specified liabilities of Secure Nursing
Service, Inc. (“SNS”). SNS, based in Los Angeles, California, employs highly skilled, professional per diem and travel Registered
Nurses, Licensed Vocational Nurses, Certified Nurse Assistants and Allied Healthcare Professionals with multiple years of acute care
hospital experience. SNS places these healthcare professionals in both per diem assignments, and in short-term and long-term travel
assignments in a variety of hospitals in southern California. SNS is included in the Kingsway Search Xcelerator segment.
The Company acquired SNS for aggregate cash consideration of $11.5 million, less certain escrowed amounts for purposes of
indemnification claims and working capital adjustments. Further information is contained in Note 4, “Acquisitions,” to the Consolidated
Financial Statements.
The closing purchase price was financed with a combination of debt financing provided by Signature Bank and cash on hand. Secure
Nursing Service LLC and Pegasus Acquirer LLC, subsidiaries of Kingsway, borrowed a total of $6.5 million, in the form of a term loan,
and established a $1 million revolver (together, the “SNS Loan”) that was undrawn at close. The Loan has a variable interest rate equal
to the Prime Rate plus 0.50%, with a floor of 5.00%. The SNS Loan requires monthly principal and interest payments, and the term loan
matures on November 18, 2028.
Disposal of 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 “PWSC 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 price, subject to customary
adjustments for net working capital, and non-compensation related transaction expenses of approximately $1.7 million.
To the extent the EBITDA of PWSC (as defined in the PWSC 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. Further information is contained in Note
5, “Disposal and Discontinued Operations” to the Consolidated Financial Statements.
Sale of CMC Real Property
On December 22, 2022, TRT Leaseco, LLC (“TRT”), an indirect subsidiary of the Company, entered into a Purchase and Sale Agreement
(the “Agreement”) with BNSF Dayton LLC (“Purchaser”), pursuant to which TRT agreed to sell to the Purchaser the Real Property. The
Real Property was subject to two mortgages. TRT is also the landlord under an existing railway lease over the Real Property. An affiliate
of the Purchaser is the current tenant under the existing railway lease. Under the terms of the Agreement, at the closing on December 29,
2022, TRT assigned, and the Purchaser assumed, the rights and obligations of the landlord under the existing railway lease.
The purchase price paid by the Purchaser at the closing consisted of $44.5 million in cash plus the assumption of the unpaid principal
balance as of the closing of the two mortgages of approximately $170.7 million, netting cash proceeds of $21.4 million to Kingsway
after taxes, fees and distribution to the minority shareholder. Further information is contained in Note 5, “Disposal and Discontinued
Operations” to the Consolidated Financial Statements.
Asset Held for Sale
During the fourth quarter of 2022, the Company’s subsidiary VA Lafayette was classified as held for sale. Further information is
contained in Note 5, “Disposal and Discontinued Operations” to the Consolidated Financial Statements. VA Lafayette owns the LA
Real Property, which is also subject to the LA Mortgage.
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KINGSWAY FINANCIAL SERVICES INC.
EXTENDED WARRANTY SEGMENT
Extended Warranty includes the following subsidiaries of the Company (collectively, “Extended Warranty”):
•
IWS Acquisition Corporation (“IWS”)
• Geminus Holding Company, Inc. (“Geminus”)
•
•
•
PWI Holdings, Inc. (“PWI”)
Professional Warranty Service Corporation (“PWSC”), up until its sale on July 29, 2022
Trinity Warranty Solutions LLC (“Trinity”)
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 50 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 39 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
networks 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 (“AAS”) in three states with a “white label” agreement. PWI also has a “white
label” agreement with Norman & Company, Inc., that sells and administers a guaranteed asset protection product (“GAP”), under the
Classic product name, in states in which Classic is approved.
As discussed in Note 5, “Disposal and Discontinued Operations” to the Consolidated Financial Statements, the Company disposed of
PWSC on July 29, 2022. The earnings of PWSC are included in the consolidated statements of operations and the segment disclosures
through the disposal date. 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.
Extended Warranty Products
Automotive
IWS, Geminus and PWI market and administer vehicle service agreements (“VSAs”) and related products for new and used automobiles
throughout the United States. IWS and PWI also market and administer VSAs for motorcycles and ATV’s. A VSA is an agreement
between the Company and the vehicle purchaser under which the Company agrees to replace or repair, for a specific term, designated
vehicle parts in the event of a mechanical breakdown. VSAs supplement, or are in lieu of, manufacturers’ warranties and provide a
variety of extended coverage options. The cost of the VSA is a function of the contract term, coverage limits and type of vehicle.
•
IWS serves as the administrator on all contracts it originates. VSA’s range from one to seven years and/or 12,000 miles to
125,000 miles. The average term of a VSA is between four and five years.
• Geminus goes to market through its subsidiaries, Penn and Prime. Penn and Prime serve as the administrator on all contracts they
originate and its VSAs range from three months to sixty months and/or 3,000 miles to 165,000 miles. Penn offers a limited product
line of vehicle service agreements with unlimited miles offerings that have an average term of twelve to twenty-four months.
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KINGSWAY FINANCIAL SERVICES INC.
•
PWI serves as the contract administrator and originator in all states, except for Alaska, Florida and Washington. In those states,
PWI partners with American Auto Shield (“AAS”) in a white label relationship where the VSAs are branded PWI, are originated
and administered by AAS, with PWI generating fee income on every contract sold. Across all states, PWI has an extensive menu
of VSAs with terms starting at three months to ninety-six months and mileage bands up to 200,000 miles. Products range from
basic Powertrain to the Exclusionary product (“Premier”). The average term of a VSA is twenty-two months.
In addition to marketing vehicle service agreements, IWS, Geminus and PWI also administer and broker a GAP product through their
distribution channels. GAP generally covers a consumer’s out-of-pocket amount, related to an automobile loan or lease, if the vehicle is
stolen or damaged beyond repair. IWS, Geminus and PWI earn a commission when a consumer purchases a GAP certificate but do not
take on any insurance risk.
Home
PWSC has two insured home warranty products:
•
•
The primary product is designed for new home construction companies, and the warranty is issued to new home buyers. The
warranty coverage is provided nationwide by a single, A+ rated insurance carrier. The warranty document is an agreement
between the homebuilder and the purchaser of the home and includes specific tolerances related to covered defects and precise
definitions of damages. Each damage category includes materials defect coverage for the first year, major systems coverage
for the second year, and workmanship and structural coverage for years three through ten. The warranty enables certain
damages to be resolved by the homebuilder without admitting fault or negligence, and the warranty offers an efficient method
to resolve buyer complaints and avoid costly litigation through mediation and mandatory binding arbitration.
The second insured warranty product is designed for existing homes and covers major systems and appliances. PWSC designs
the product specifications, but the administration is conducted by an independent third party. PWSC is not a risk-taker on this
product; instead, it leverages an independent, reputable insurance carrier. PWSC sells this product directly to consumers and
through various other channels, such as credit unions, brokers, and property managers.
PWSC also has an uninsured warranty administration services program. The warranty document issued through this program is an
agreement between the homebuilder and the purchaser of the home, and it includes performance standards established by the
homebuilder and warrants conditions in the home that could constitute a construction defect throughout the warranty period. This
program enables construction defects to be efficiently and amicably resolved by the homebuilder through mediation and mandatory
binding arbitration to avoid costly litigation. Claims are covered for a period of time as may be required by law, for an elected time-
frame by the builder in a specific state, or per agreement with a general liability insurance carrier. The warranty document is designed
to ensure all parties’ interests are aligned in order to handle their claims relative to construction defects promptly and without attorney
intervention.
HVAC
Trinity sells HVAC, standby generator, commercial LED lighting and commercial refrigeration warranty products. 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.
Trinity also provides equipment breakdown and maintenance support services to companies across the United States. As a provider of
such 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.
Marketing, Distribution and Competition
No Extended Warranty customer or group of affiliated customers accounts for 10% or more of the Company’s consolidated revenues,
and no loss of a customer or group of affiliated customers would have a material adverse effect on the Company.
Automotive
IWS markets its products primarily through credit unions. IWS enters into an exclusive agreement with each credit union whereby the
credit union receives a stipulated access fee for each vehicle service agreement issued to its members. The credit unions are served by
IWS employee representatives located throughout the United States in close geographical proximity to the credit unions they serve. IWS
distributes and markets its products in 25 states and the District of Columbia.
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KINGSWAY FINANCIAL SERVICES INC.
IWS focuses exclusively on the automotive finance market with its core VSA and related product offerings, while much of its
competition in the credit union channel has a less targeted product approach. IWS’ typical competitor takes a generalist approach to
market by providing credit unions with a variety of different product offerings. They might be unable to deliver specialty expertise on
par with IWS and may not give VSA products the attention they require for healthy profitability and strong risk management.
Geminus goes to market through its subsidiaries, Penn and Prime, which market their products primarily through independent
automotive dealerships and franchise automotive dealerships. Penn and Prime enter into dealer wholesale agreements that allow the
dealer to resell Penn and Prime vehicle service agreements at a retail rate that varies by state as they earn potential commission on the
remarketing. The dealer base is serviced by the Company’s employees located throughout the United States in close geographical
proximity to the dealers they serve. Penn and Prime distribute and market their products in 39 and 40 states, respectively.
Penn and Prime focus exclusively on the automotive finance market with its core VSA and related product offerings, while much of its
competition is non-employee based or agent centric. Penn and Prime’s typical competitor’s approach to market is by working through
non-employees or agents with a variety of different product offerings. Penn and Prime solely focuses on the suite of VSAs it offers,
which allows the proper attention required for healthy profitability and risk management.
PWI markets, sells and administers VSAs to used car buyers in all fifty states, primarily through a network of approved automobile
dealer partners. PWI enters into an agreement with dealer partners that permits dealers to legally sell PWI products to its customers. The
distribution of PWI VSAs is supported by an internal sales team geographically located around the country and in close proximity to its
dealer partners.
PWI operates exclusively in the automotive finance market with its sole focus on VSAs. PWI does operate within a highly competitive
environment where product pricing and product options are important. Most of its competitors have a comprehensive menu of products
and services to offer the independent and franchise dealers. PWI’s future strategy will drive additional competitiveness by adding new
products to its existing menu of VSAs and GAP. PWI’s competitors are a blend of national and regional competitors implementing
employee and agent-based sales models.
Home
PWSC markets its insured warranty products through a sales force directly to the homebuilder and its uninsured builder backed warranty
products through a network of construction general liability insurance carriers and domestic insurance brokers. Homebuilder prospects
are developed through membership in local homebuilder associations, attendance at homebuilder conventions, distribution of
promotional products and direct mail efforts. For its uninsured homebuilder backed product, PWSC dedicates senior personnel to
working with the construction general liability insurers and domestic insurance brokers to identify and assist in developing new
opportunities and devotes marketing resources to sell its product.
For its insured warranty product, PWSC operates in an environment with several competitors. PWSC differentiates itself through its
relationship with and backing by an A+ rated global insurance carrier; having over 20 years of experience in the field of new home
warranty administration; its dispute resolution services; and its best in class customer service. For its uninsured builder backed product,
PWSC operates in an environment with very few competitors. The most significant features differentiating the builder backed product
from its competition are an express warranty for all construction defects, the only warranty that is fully integrated with the general
liability policy in its definition and coverage of construction defects, and mutual agreement between the homebuilder and the home
buyer that all claims be resolved through mediation or, if necessary, binding arbitration.
HVAC
Trinity directly markets and distributes its warranty products to manufacturers, distributors and installers of HVAC, standby generator,
commercial LED lighting and commercial refrigeration equipment. As a provider of equipment breakdown and maintenance support,
Trinity directly markets and distributes its product through its clients, which are primarily companies that directly own and operate
numerous locations across the United States.
Trinity operates in an environment with few market competitors. Trinity competes on two important facets: its belief that it provides
superior customer service relative to its competitors and its ability, through the support of its insurance company partners, to provide
warranty solutions to a wider range of HVAC, standby generator, commercial LED lighting and commercial refrigeration equipment
customers than that of its competitors.
Claims Management
Claims management is the process by which Extended Warranty determines the validity and amount of a claim. The Company believes
that claims management is fundamental to its operating results. The Company’s goal is to settle claims fairly for the benefit of
policyholders in a manner that is consistent with the policy language and the Company’s regulatory and legal obligations.
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KINGSWAY FINANCIAL SERVICES INC.
IWS, Geminus and PWI effectively and efficiently manage claims by utilizing in-house expertise and information systems. They employ
an experienced claims staff, in some cases comprised of Automotive Service Excellence certified mechanics, knowledgeable in all aspects
of vehicle repairs and potential claims. Additionally, each owns a proprietary database of historical claims information that has been
compiled over several years. Management utilizes these databases to drive real-time pricing adjustments and strategic decision-making.
Under PWSC’s warranty products, disputes typically arise when there is a difference between what the homeowner expects of the builder
and what the builder believes are its legitimate warranty service responsibilities. PWSC employs an experienced claims staff who
respond to all inquiries from homeowners and from requests by builders. Any inquiries or complaints received are submitted or
communicated to the builder. PWSC will not make any determination as to the validity or resolution of any complaint; however, PWSC
will discuss alternatives or resolutions to disputes with all parties and can mediate or negotiate a fair solution to a dispute. This process
ensures that homebuilders can effectively manage new home construction risk and reduce the potential for substantial legal costs
associated with litigation. PWSC may, at times, act as a third-party administrator for claims under the insured warranty product; however,
at no time does PWSC bear the loss of claims on warranty products.
Trinity claims on warranty products are managed by the insurance companies with which Trinity partners. Trinity may, at times, act as
a third-party administrator of such claims; however, at no time does Trinity bear the loss of claims on warranty products.
KINGSWAY SEARCH XCELERATOR SEGMENT
Kingsway Search Xcelerator includes the following subsidiaries of the Company (collectively, “Kingsway Search Xcelerator”), and
includes the Company’s unique CEO Accelerator program. Revenue is derived from the provision of business services.
• CSuite
• Ravix
•
SNS
Business Services
CSuite provides financial executive services, for project and interim-staffing engagements, and search services for full-time placements
for customers throughout the United States.
Ravix provides outsourced finance and human resources consulting services to its clients on a fractional basis for both projects with
definitive endpoints and ongoing engagements of indeterminate length for customers in several states. All services are delivered by
employees who are located in the United States. Ravix offers its services across four different practices:
• Operational Accounting. Offers services oriented around day-to-day financial stewardship of its clients, such as bookkeeping,
accounting, financial reporting and analysis and strategic finance.
• Technical Accounting. Provides specialized expertise in areas of technical accounting, such as initial public offerings, SEC
reporting and international consolidation;
• Human Resources. Offers human resources, workforce management, and compliance support; and
• Advisory Services. Focuses on managing clients through liquidations and assignment for the benefit of the creditors.
SNS provides healthcare staffing services to acute healthcare facilities on a contract or per diem basis in the United States, primarily in
California. Today, SNS is focused on providing temporary registered nurses to hospitals; however, SNS maintains contracts to provide
allied healthcare professionals to hospitals. SNS offers its services across two different practices:
• Travel Staffing. Offers healthcare staffing services to address the short-term needs of hospitals – contracts have a guaranteed
length, which is typically 13 weeks.
• Per Diem Staffing. Offers healthcare staffing services to meet the day-to-day needs of hospitals.
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KINGSWAY FINANCIAL SERVICES INC.
Marketing, Distribution and Competition
CSuite actively markets its services via sponsorship of industry events and conferences typically targeted at private equity and related
service providers.
Ravix does not actively market its services through traditional channels. Instead, Ravix focuses primarily on venture-capital-funded startups
and receives most of its new business as a result of business networking activities, referrals from service providers and former clients.
SNS does not actively market its services through traditional channels. Instead, SNS relies on word-of-mouth to recruit nurses to help
meet the demands of the hospitals.
No Kingsway Search Xcelerator customer or group of affiliated customers accounts for 10% or more of the Company’s consolidated
revenues, and no loss of a customer or group of affiliated customers would have a material adverse effect on the Company.
CEO Accelerator
The Company has developed a unique program, whereby it employs dedicated Operator-in-residence (or “Searcher”) personnel whose
sole function is to search for an appropriate business for Kingsway to acquire and then to ultimately run that business. As an example,
our first Searcher, who was hired in May 2020, identified Ravix as a potential acquisition, which the Company closed on in October
2021.
The CEO Accelerator focuses on identifying and acquiring privately-held businesses with enterprise values between $10 and $30 million
where the owner/operator is looking to transition from day-to-day operating responsibilities. The CEO Accelerator utilizes the proven
framework and characteristics of the Search Fund acquisition model and targets industries and companies with pre-defined
characteristics.
The Company believes that having a dedicated Searcher(s) – whose background includes a mix of real-world work experience and a
graduate degree (usually a master’s of business administration) – who is ready to transition into the role of CEO gives it a competitive
advantage over traditional private equity firms and other potential acquirers of businesses in the lower middle market.
When a search ends with a successful acquisition, the Searcher transitions into an operational role as CEO of the acquired company and
receives a financial incentive, in the form of various stock-based grants, in the acquired company. The awards have both time and
performance vesting requirements, which aligns the incentives with those of the overall Company.
The Company currently has three full-time Searchers as of December 31, 2022. The Company intends to maintain this level – and
potentially expand it – as business opportunities permit.
PRICING AND PRODUCT MANAGEMENT
Responsibility for pricing and product management rests with the Company’s individual operating subsidiaries in Extended Warranty
and Kingsway Search Xcelerator. In Extended Warranty, teams typically comprised of pricing actuaries, product managers and business
development managers work together by territory to develop policy forms and language, rating structures, regulatory filings and new
product ideas. Data solutions and claims groups within the individual operating subsidiaries track loss performance monthly to alert the
operating subsidiaries’ management teams to the potential need to adjust forms or rates. For Kingsway Search Xcelerator, an annual
review of billing rates is performed and rates are adjusted to reflect prevailing marketing expectations.
INVESTMENTS
The Company manages its investments to support its liabilities, preserve capital, maintain adequate liquidity and maximize after-tax
investment returns within acceptable risks:
• The fixed maturities portfolios are managed by a third-party firm and are comprised predominantly of high-quality fixed maturities
with relatively short durations.
• Equity, limited liability and other investments are generally overseen by corporate.
• Limited liability investments, at fair value, investments in private companies and real estate investments are generally overseen by
corporate, who engages third-party managers for certain holdings.
The Investment Committee of the Board of Directors is responsible for monitoring the performance of the Company’s investments and
compliance with the Company’s investment policies and guidelines, which it reviews annually.
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KINGSWAY FINANCIAL SERVICES INC.
For further descriptions of the Company’s investments, see “Investments” and “Significant Accounting Policies and Critical Estimates”
in MD&A and Note 7, “Investments,” and Note 23, “Fair Value of Financial Instruments,” to the Consolidated Financial Statements.
REGULATORY ENVIRONMENT
Insurance
The Company has one U.S. insurance subsidiary, Kingsway Amigo Insurance Company (“Amigo”), which is organized and domiciled
under the insurance statutes of Florida and is in voluntary run-off. During 2022, all remaining outstanding claims were settled and
paid. As such, in late 2022 the Company began procedures with the Florida Office of Insurance Regulation in order to
surrender Amigo’s Certificate of Authority (“COA”) to operate as a property and casualty insurer in the state of Florida, which was
completed as of March 7, 2023. As such, Amigo is no longer a regulated insurance company. To the best of the Company’s knowledge,
it was in compliance with all applicable regulations.
Extended Warranty
Vehicle service agreements are regulated in all states in the United States, and IWS, Geminus and PWI are subject to these regulations.
Most states utilize the approach of the Uniform Service Contract Act that was adopted by the National Association of Insurance
Commissioners in the early 1990’s. Under that approach, states regulate vehicle service contract companies by requiring them annually
to file documentation, together with a copy of the contract of insurance covering their liability under the service contracts, which
complies with the particular state’s regulatory requirements. IWS, Geminus and PWI are in compliance with the regulations of each
state where it sells vehicle service agreements.
Certain, but not all, states regulate the sale of HVAC and equipment warranty contracts. Trinity is licensed as a service contract provider
in those states where it is required.
HUMAN CAPITAL MANAGEMENT
At December 31, 2022, the Company employed 471 personnel supporting its operations, all of which were full-time employees. None
of our employees is subject to a collective bargaining agreement and we consider our relationship with our employees to be good.
We believe the skills and experience of our employees are an essential driver of our business and important to our future prospects. To
attract qualified applicants and retain our employees, we offer our employees what we believe to be competitive salaries, comprehensive
benefit packages, equity compensation awards, and discretionary bonuses based on a combination of seniority, individual performance
and corporate performance. The principal purposes of these employee benefits are to attract, retain, reward and motivate our personnel
and to provide long-term incentives that align the interests of employees with the interests of our stockholders.
ACCESS TO REPORTS
The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge
through its website at www.kingsway-financial.com as soon as reasonably practicable after such material is electronically filed with, or
furnished to, the U.S. Securities and Exchange Commission (“SEC”).
Item 1A. Risk Factors
Most issuers, including Kingsway, are exposed to numerous risk factors that could cause actual results to differ materially from recent
results or anticipated future results. The risks and uncertainties described below are those specific to the Company that we currently
believe have the potential to be material, but they may not be the only ones we face. If any of the following risks, or any other risks and
uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks,
our business, prospects, financial condition, results of operations and cash flows could be materially and adversely affected. Investors
are advised to consider these factors along with the other information included in this 2022 Annual Report and to consult any further
disclosures Kingsway makes in its filings with the SEC.
FINANCIAL RISK
We have substantial outstanding recourse debt, which could adversely affect our ability to obtain financing in the future, react
to changes in our business and satisfy our obligations.
As of December 31, 2022, we had $90.5 million principal value of outstanding recourse subordinated debt in the form of trust preferred
securities, with redemption dates beginning in December 2032, and which has deferred interest accrued of $25.5 million as
of December 31, 2022.
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KINGSWAY FINANCIAL SERVICES INC.
Pursuant to the indentures governing our outstanding trust preferred securities, we are permitted to defer interest payments for up to 20
quarters. During the third quarter of 2018, the Company gave notice to the trustees of its outstanding trust preferred securities of the
Company’s intention to exercise its voluntary right to defer interest. On March 2, 2023, we gave notice to the holders of five series of
our trust preferred securities of our intention to exercise repurchase options no later than March 15, 2023. We will also pay interest
accrued during the deferral period on the remaining series of trust preferred securities not subject to repurchase. After the repurchase is
completed we will have $15 million of principal outstanding related to the remaining series of trust preferred securities. The Company
is currently prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being
deferred. We also gave notice of our intention to redeem all the outstanding shares of Class A Preferred Stock on March 15, 2023,
following the repurchase and payment of accrued interest on our trust preferred securities.
Additionally, we incurred indebtedness in connection with our acquisitions of PWI Holdings, Inc. and its various subsidiaries
(collectively, “PWI”) on December 1, 2020, Ravix Financial, Inc. (“Ravix”) on October 1, 2021, CSuite Financial Partners, LLC
(“CSuite”) on November 1, 2022 and Secure Nursing Service Inc. (“SNS”) on November 18, 2022. As of as of December 31, 2022, we
have $34.8 million principal value of such acquisition financing outstanding.
Because of our substantial outstanding recourse debt:
•
•
•
our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing could be limited;
our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general
corporate purposes and our ability to satisfy our obligations with respect to our debt may be impaired in the future;
a large portion of our cash flow must be dedicated to the payment of interest on our debt, thereby reducing the funds available to
us for other purposes;
• we are exposed to the risk of increased interest rates because our outstanding subordinated debt and our outstanding acquisition
financing bear interest directly related to the London interbank offered interest rate (“LIBOR”), the Secured Overnight Financing
Rate (“SOFR”) and the Prime Rate;
•
it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on, and acceleration of,
such debt;
• we may be more vulnerable to general adverse economic and industry conditions and may have reduced flexibility to deploy capital
or otherwise respond to changes;
• we may be at a competitive disadvantage compared to our competitors with proportionately less debt or with comparable debt on
more favorable terms and, as a result, they may be better positioned to withstand economic downturns;
•
•
•
our ability to refinance debt may be limited or the associated costs to do so may increase;
our ability to transfer funds among our various subsidiaries and/or distribute such funds to the holding company are limited;
our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited;
• we were unable to redeem outstanding shares of our redeemable preferred stock on the required date, which could lead to increased
financing costs and/or costs associated with any disputes that might arise involving the holders of such preferred stock; and
• we may be prevented from carrying out capital spending that is, among other things, necessary or important to our growth strategy
and efforts to improve the operating results of our businesses.
Increases in interest rates would increase the cost of servicing our outstanding recourse debt and could adversely affect our
results of operation.
Our outstanding recourse subordinate debt as of December 31, 2022 of $90.5 million principal value bears interest directly related to
LIBOR (and will in the future bear interest related to SOFR) and our outstanding acquisition financing of $34.8 million related to the
acquisitions of PWI, Ravix, CSuite and SNS bears interest directly related to either SOFR or the Prime Rate. As a result, increases in
LIBOR, SOFR and the Prime Rate would increase the cost of servicing our debt and could adversely affect our results of operations.
Each one hundred basis point increase in LIBOR, SOFR or the Prime Rate would result in an approximately $1.4 million increase in
our annual interest expense.
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KINGSWAY FINANCIAL SERVICES INC.
The expected discontinuation of LIBOR could adversely affect the cost of servicing our outstanding debt.
Our outstanding recourse subordinate debt, which has redemption dates ranging from December 4, 2032 through January 8, 2034, bear
interest directly related to LIBOR and extend beyond June 2023, by which time the United Kingdom’s Financial Conduct Authority,
which regulates LIBOR, has announced it intends to phase out U.S dollar LIBOR.
The transition from LIBOR to other benchmarks has been the subject of private sector and governmental activity. It is unclear if
alternative rates or benchmarks, such as SOFR, will be widely adopted, and this uncertainty may impact the liquidity of the SOFR loan
markets. In addition, the transition from LIBOR could have a significant impact on the overall interest rate environment and on our
borrowing costs. The indentures governing the Company’s outstanding recourse debt and the loan and security agreement governing
our outstanding acquisition financing provide alternative means of determining the Company’s interest expense on its outstanding debt,
but at this time, the Company cannot yet reasonably estimate the expected impact of the discontinuation of LIBOR.
Our operations are restricted by the terms of our debt indentures, which could limit our ability to plan for or react to market
conditions or meet our capital needs.
Our debt indentures contain numerous covenants that limit our ability, among other things, to make particular types of restricted
payments and pay dividends or redeem capital stock. The covenants under our debt agreements could limit our ability to plan for or
react to market conditions or to meet our capital needs. No assurances can be given that we will be able to maintain compliance with
these covenants.
If we are not able to comply with the covenants and other requirements contained in the debt indentures, an event of default under the
relevant debt instrument could occur, which could result in the acceleration of all obligations under such debt instruments.
The Board of Directors closely monitors the debt and capital position and, from time to time, recommends capital initiatives based upon
the circumstances of the Company.
We may not be able to realize our investment objectives, which could significantly reduce our earnings and liquidity.
We depend on our investments for a substantial portion of our liquidity. As of December 31, 2022, our investments included $37.6
million of fixed maturities, at fair value. General economic conditions can adversely affect the markets for interest rate-sensitive
instruments, including the extent and timing of investor participation in such markets, the level and volatility of interest rates and,
consequently, the fair value of fixed maturities. In addition, changing economic conditions can result in increased defaults by the issuers
of investments that we own. Interest rates are highly sensitive to many factors, including monetary policies, domestic and international
economic and political conditions and other factors beyond our control. Given the low interest rate environment that exists for fixed
maturities, a significant increase in investment yields or an impairment of investments that we own could have a material adverse effect
on our business, results of operations or financial condition by reducing the fair value of the investments we own, particularly if we
were forced to liquidate investments at a loss.
As of December 31, 2022, our investments also included $0.2 million of equity investments, $1.0 million of limited liability investments,
$17.1 million of limited liability investments, at fair value, $0.8 million of investments in private companies, at adjusted cost and other
investments, at cost of $0.4 million. These investments are less liquid than fixed maturities. General economic conditions, stock market
conditions and many other factors can adversely affect the fair value of the investments we own. If circumstances necessitated us
disposing of our limited liability investments prematurely in order to generate liquidity for operating purposes, we would be exposed to
realizing less than their carrying value.
Our ability to achieve our investment objectives is affected by general economic conditions that are beyond our control and our own
liquidity needs for operating purposes. We may not be able to realize our investment objectives, which could adversely affect our results
of operations, financial condition and available cash resources.
Our business, financial condition and results of operations could be materially and adversely affected by changes in international
and national economic and industry conditions.
The COVID-19 pandemic has created significant disruption and uncertainty in the global economy and has negatively impacted our
business and results of operations and financial condition. We continue to take steps to assess the effects, and mitigate the adverse
consequences to our businesses, of the COVID-19 pandemic; however, though the magnitude of the impact continues to develop and
change as new variants of COVID-19 emerge, our businesses have been and will continue to be adversely impacted by the outbreak of
COVID-19.
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KINGSWAY FINANCIAL SERVICES INC.
In addition to adverse United States domestic and global macroeconomic effects, including the adverse impacts on various industries’
supply chains and automobile sales, which has decreased, and may continue to decrease, consumer demand for our products and services,
reduce our ability to access capital, and otherwise adversely impact the operation of our businesses, the COVID-19 pandemic has caused,
and will continue to cause, substantial disruption to our employees, distribution channels, investors, tenants, and customers through self-
isolation, travel limitations, business restrictions, and other means, all of which has resulted in declines in sales. These effects,
individually or in the aggregate, will continue to adversely impact our businesses, financial condition, operating results and cash flows
and such adverse impacts may be material.
Additionally, actual or potential changes in international, national, regional and local economic, business and financial conditions,
including recession, high inflation and trade protection measures and creditworthiness of our customers, may negatively affect consumer
preferences, perceptions, spending patterns or demographic trends, any of which could adversely affect our business, financial condition,
results of operations and/or liquidity.
We are subject to macro-economic fluctuations in the U.S. and worldwide economy. Concerns about consumer and investor confidence,
volatile corporate profits and reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic
illness could reduce customer orders or cause customer order cancellations. In addition, political and social turmoil may put further
pressure on economic conditions in the United States and abroad. The global economy has been periodically impacted by the effects of
global economic downturns (such as recently related to COVID-19). There can be no assurance that there will not be further such events
or deterioration in the global economy. These economic conditions make it more difficult for us to accurately forecast and plan our
future business activities.
Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from U.S. and European leaders. These events
may escalate and have created increasingly volatile global economic conditions. Resulting changes in U.S. trade policy could trigger
retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” Furthermore, if the
conflict between Russia and Ukraine continues for a long period of time, or if other countries, including the U.S., become further
involved in the conflict, we could face material adverse effects on our business, financial condition, results of operations and/or liquidity.
A difficult economy generally could materially adversely affect the credit, investment and financial markets which, in turn,
could materially adversely affect our business, results of operations or financial condition.
An adverse change in market conditions, including changes caused by the COVID-19 pandemic, leading to instability in the global
credit markets presents additional risks and uncertainties for our business. Depending on market conditions going forward, we could
incur substantial realized and unrealized losses in future periods, which could have an adverse effect on our results of operations or
financial condition. Certain trust accounts for the benefit of related companies and third-parties have been established with collateral on
deposit under the terms and conditions of the relevant trust agreements. The value of collateral could fall below the levels required under
these agreements putting the subsidiary or subsidiaries in breach of the agreements which could expose us to damages or otherwise
adversely impact our business, financial condition, operating results or cash flows.
Market volatility may also make it more difficult to value certain of our investments if trading becomes less frequent and the liquidity
of such investment declines. Disruptions, uncertainty and volatility in the global credit markets may also adversely affect our ability to
obtain financing for future acquisitions. If financing is available, it may only be available at an unattractive cost of capital, which would
decrease our profitability or result in our inability to consummate such acquisitions. There can be no assurance that market conditions
will not deteriorate in the future.
Financial disruption or a prolonged economic downturn could materially and adversely affect our business.
Worldwide financial markets have recently experienced periods of extraordinary disruption and volatility, which has been exacerbated
by the COVID-19 pandemic, resulting in heightened credit risk, reduced valuation of investments and decreased economic activity.
Moreover, many companies have experienced reduced liquidity and uncertainty as to their ability to raise capital during such periods of
market disruption and volatility. In the event that these conditions recur or result in a prolonged economic downturn, our results of
operations, financial position and/or liquidity could be materially and adversely affected. These market conditions may affect the
Company’s ability to access debt and equity capital markets.
We are party to a Settlement Agreement that may require us to make cash payments from time to time, which payments could
materially adversely affect our business, results of operations or financial condition.
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 we breached a contractual obligation to indemnify
Aegis for certain customs bond losses incurred by Aegis under the indemnity and hold harmless agreements provided by us to Aegis for
certain customs bonds reinsured by Lincoln General Insurance Company (“Lincoln General”) during the period of time that Lincoln
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KINGSWAY FINANCIAL SERVICES INC.
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, we entered into a Settlement Agreement with Aegis with respect to such litigation pursuant to which we
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. From 2020 to 2022, the
Company made reimbursement payments to Aegis totaling $1.0 million in connection with the Settlement Agreement. The timing and
severity of our future payments pursuant to this Settlement Agreement are not reasonably determinable. No assurances can be given,
however, that we will not be required to perform under this Settlement Agreement in a manner that has a material adverse effect on our
business, results of operations or financial condition.
We have generated net operating loss carryforwards for U.S. income tax purposes, but our ability to use these net operating
losses could be limited by our inability to generate future taxable income.
Our U.S. businesses have generated consolidated net operating loss carryforwards (“U.S. NOLs”) for U.S. federal income tax purposes
of approximately $644.2 million as of December 31, 2022. These U.S. NOLs can be available to reduce income taxes that might
otherwise be incurred on future U.S. taxable income and would have a positive effect on our cash flow. There can be no assurance that
we will generate the taxable income in the future necessary to utilize these U.S. NOLs and realize the positive cash flow benefit. Also,
almost all of our U.S. NOLs have expiration dates. There can be no assurance that, if and when we generate taxable income in the future
from operations or the sale of assets or businesses, we will generate such taxable income before our U.S. NOLs expire.
We have generated U.S. NOLs, but our ability to preserve and use these U.S. NOLs could be limited or impaired by future
ownership changes.
Our ability to utilize the U.S. NOLs after an “ownership change” is subject to the rules of Section 382 of the U.S. Internal Revenue
Code of 1986, as amended (“Section 382”). An ownership change occurs if, among other things, the shareholders (or specified groups
of shareholders) who own or have owned, directly or indirectly, five percent (5%) or more of the value of our shares or are otherwise
treated as five percent (5%) shareholders under Section 382 and the regulations promulgated thereunder increase their aggregate
percentage ownership of the value of our shares by more than fifty (50) percentage points over the lowest percentage of the value of the
shares owned by these shareholders over a three-year rolling period. An ownership change could also be triggered by other activities,
including the sale of our shares that are owned by our five percent (5%) shareholders.
In the event of an ownership change, Section 382 would impose an annual limitation on the amount of taxable income we may offset
with U.S. NOLs. This annual limitation is generally equal to the product of the value of our shares on the date of the ownership change
multiplied by the long-term tax-exempt rate in effect on the date of the ownership change. The long-term tax-exempt rate is published
monthly by the Internal Revenue Service. Any unused Section 382 annual limitation may be carried over to later years until the
applicable expiration date for the respective U.S. NOLs. In the event an ownership change as defined under Section 382 were to occur,
our ability to utilize our U.S. NOLs would become substantially limited. The consequence of this limitation would be the potential loss
of a significant future cash flow benefit because we would no longer be able to substantially offset future taxable income with U.S.
NOLs. There can be no assurance that such ownership change will not occur in the future.
Expiration of our tax benefit preservation plan could increase the probability that we will experience an ownership change as
defined under Section 382.
In order to reduce the likelihood that we would experience an ownership change without the approval of our Board of Directors, our
shareholders ratified and approved the tax benefit preservation plan agreement (the “Plan”), dated as of September 28, 2010, between
the Company and Computershare Investor Services Inc., as rights agent, for the sole purpose of protecting the U.S. NOLs. The Plan
expired on September 28, 2013. There can be no assurance that our Board of Directors will recommend to our shareholders that a similar
tax benefit preservation plan be approved to replace the expired Plan; furthermore, there can be no assurance that our shareholders would
approve any new tax benefit preservation plan were our Board of Directors to present one for shareholder approval. The expiration of
the Plan, without a new tax benefit preservation plan, exposes us to certain changes in share ownership that we would not be able to
prevent as we would have been able to prevent under the Plan. Such changes in share ownership could trigger an ownership change as
defined under Section 382 resulting in restrictions on the use of NOLs in future periods, as discussed above.
We will only be able to utilize our U.S. NOLs against the future taxable income generated by companies we acquire if we are
able to include the acquired companies in our U.S. consolidated tax return group.
We have in the past acquired companies and expect to do so in the future. Our ability to include acquired companies in our U.S.
consolidated tax return group is subject to the rules of Section 1504 of the U.S. Internal Revenue Code of 1986, as amended. If it were
ever determined that an acquired company did not qualify to be included in our U.S. consolidated tax return group, such acquired
company would be required to file a U.S. tax return separate and apart from our U.S. consolidated tax return group. In that instance, the
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KINGSWAY FINANCIAL SERVICES INC.
acquired company would be required to pay U.S. income tax on its taxable income despite the existence of our U.S. NOLs, which would
be a use of cash at the acquired company; furthermore, were the income tax obligation of the acquired company in such instance to be
greater than its available cash, we could be obligated to contribute cash to our subsidiary to meet its income tax obligation. There can
be no assurance that an acquired company will generate taxable income and, if an acquired company does generate taxable income,
there can be no assurance that the acquired company will be allowed to be included in our U.S. consolidated tax return group.
COMPLIANCE RISK
If we fail to comply with applicable insurance and securities laws or regulatory requirements, our business, results of operations,
financial condition or cash flow could be adversely affected.
As a publicly traded holding company listed on the New York Stock Exchange, we are subject to numerous laws and regulations. These
laws and regulations delegate regulatory, supervisory and administrative powers to federal, provincial or state regulators.
Any failure to comply with applicable laws or regulations or the mandates of applicable regulators could result in the imposition of fines
or significant restrictions on our ability to do business, which could adversely affect our results of operations or financial condition. In
addition, any changes in laws or regulations (or the interpretation or application thereof, including changes to applicable case law and
legal precedent) could materially adversely affect our business, results of operations or financial condition. It is not possible to predict
the future effect of changing federal, state and provincial law or regulation (or the interpretation or application thereof) on our operations,
and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws and
regulations.
Our business is subject to risks related to litigation.
In connection with our operations in the ordinary course of business, at times we are named as defendants in various actions for damages
and costs allegedly sustained by the plaintiffs. While it is not possible to estimate the loss, or range of loss, if any, that would be incurred
in connection with any of the various proceedings at this time, it is possible an individual action would result in a loss having a material
adverse effect on our business, results of operations or financial condition.
Material weaknesses in our internal control over financial reporting could result in material misstatements in our consolidated
financial statements.
We are required to evaluate the effectiveness of the design and operation of our disclosure controls and procedures under the Securities
Exchange Act of 1934. As described in Item 9A, Controls and Procedures, of this 2022 Annual Report, in previous years we identified
the existence of material weaknesses in internal control over financial reporting. We have one material weakness that has not yet been
fully remediated. We are actively engaged in developing and implementing remediation plans as described in Item 9A, Controls and
Procedures, of this 2022 Annual Report, but we can provide no assurance that additional material weaknesses in our internal control
over financial reporting will not be identified in the future and that such material weaknesses, if identified, will not result in material
misstatements in our consolidated financial statements.
Failure to comply with the NYSE’s continued listing requirements and rules could result in the NYSE delisting our common
stock, which could negatively affect our company, the price of our common stock and your ability to sell our common stock.
On April 17, 2020, the Company received a notice from NYSE that the Company was not in compliance with NYSE listing standard
802.01B because our average global market capitalization over a consecutive 30 trading-day period was less than $50.0 million and
stockholders’ equity was less than $50.0 million. In accordance with the NYSE listing requirements, we submitted a plan that
demonstrated how we expected to return to compliance with NYSE listing standard 802.01B. On July 9, 2020, the NYSE notified us
that our plan was accepted. On January 18, 2021, NYSE notified us that we were again in compliance with NYSE listing standard
802.01B but that we were subject to continued monitoring and review for a period of 12 months. While we remained in compliance
during this 12-month period, we may in the future again fail to be in compliance with the NYSE listing standards and we may be subject
to corrective action by NYSE, which may include suspension and delisting procedures.
If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting. A delisting of our
common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing
the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing;
decreasing the amount of news and analyst coverage of us; and limiting our ability to issue additional securities or obtain additional
financing in the future. In addition, delisting from the NYSE may negatively impact our reputation and, consequently, our business.
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STRATEGIC RISK
The achievement of our strategic objectives is highly dependent on effective change management.
Over the past several years we have restructured our operating insurance subsidiaries, including exiting states and lines of business,
placing subsidiaries into voluntary run-off, terminating managing general agent relationships, hiring a new management team, selling
Mendota and CMC and acquiring PWI, Ravix, CSuite and SNS with the objective of focusing on our Extended Warranty and Kingsway
Search Xcelerator segments, creating a more effective and efficient operating structure and focusing on profitability. These actions
resulted in changes to our structure and business processes. While these changes are expected to bring us benefits in the form of a more
agile and focused business, success is dependent on management effectively realizing the intended benefits. Change management may
result in disruptions to the operations of the business or may cause employees to act in a manner that is inconsistent with our objectives.
Any of these events could negatively affect our performance. We may not always achieve the expected cost savings and other benefits
of our initiatives.
We may experience difficulty continuing to retain our holding company staff.
There can be no assurance that our businesses will produce enough cash flow to adequately compensate and retain staff and to service
our other holding company obligations, particularly the interest expense burden of our remaining outstanding debt.
The highly competitive environment in which we operate could have an adverse effect on our business, results of operations or
financial condition.
The vehicle service agreement market in which we compete is comprised of a number of companies, including a few large companies,
which market service agreements on a national basis and have significantly more financial, marketing and management resources than
we do, as well as several other companies that are somewhat similar in size to our Extended Warranty companies. There may also be
other companies of which we are not aware that may be planning to enter the vehicle service agreement industry.
Competitors in our market generally compete on coverages offered, claims handling, customer service, financial stability and, to a lesser
extent, price. Larger competitors of ours benefit from added advantages such as industry endorsements and preferred vendor status. We
do not believe that it is in our best interest to compete solely on price. Instead, we focus our marketing on the total value experience,
with an emphasis on customer service. While we historically have been able to adjust our product offering to remain competitive when
competitors have focused on price, our business could be adversely affected by the loss of business to competitors offering vehicle
service agreements at lower prices.
Engaging in acquisitions involves risks, and, if we are unable to effectively manage these risks, our business could be
materially harmed.
From time to time we engage in discussions concerning acquisition opportunities and, as a result of such discussions, may enter into
acquisition transactions.
Acquisitions entail numerous potential risks, including the following:
•
•
•
•
•
difficulties in the integration of the acquired business, including implementation of proper internal controls over financial reporting;
assumption of unknown material liabilities;
diversion of management’s attention from other business concerns;
failure to achieve financial or operating objectives or other anticipated benefits or synergies and/or anticipated cost savings; and
potential loss of customers or key employees.
We may not be able to integrate or operate successfully any business, operations, personnel, services or products that we may acquire
in the future.
14
KINGSWAY FINANCIAL SERVICES INC.
OPERATIONAL RISK
Our Extended Warranty subsidiaries’ deferred service fees may be inadequate, which would result in a reduction in our net
income and could adversely affect our financial condition.
Our Extended Warranty subsidiaries’ deferred service fees do not represent an exact calculation but are estimates involving actuarial
and statistical projections at a given point in time of what we expect to be the remaining future revenue to be recognized in relation to
our remaining future obligations to provide policy administration and claim-handling services. The process for establishing deferred
service fees reflects the uncertainties and significant judgmental factors inherent in estimating the length of time and the amount of work
related to our future service obligations. If we amortize the deferred service fees too quickly, we could overstate current revenues, which
may result in a future significant reversal of revenue and adversely affect future reported operating results.
As time passes and more information about the remaining service obligations becomes known, the estimates are appropriately adjusted
upward or downward to reflect this additional information. We cannot assure that we will not have unfavorable re-estimations in the
future of our deferred service fees and that such unfavorable re-estimations will not have a material adverse effect on our business,
results of operations or financial condition. In addition, we have in the past, and may in the future, acquire companies that record deferred
service fees. We cannot assure that the deferred service fees of the companies that we acquire are or will be adequate.
Extended Warranty’s reliance on credit unions and dealers, as well as our overall reliance on automobile sales could adversely
affect our ability to maintain business.
The Extended Warranty business markets and distributes vehicle service agreements through a network of credit unions and dealers in
the United States. We have competitors that offer similar products exclusively through credit unions and competitors that distribute
similar products through dealers. Loss of all or a substantial portion of our existing relationships could have a material adverse effect on
our business, results of operations or financial condition. Moreover, our vehicle service agreement businesses rely heavily on the sale
of new and used vehicles to drive product sales. Accordingly, a significant decline in new and used automobile sales could have a
material adverse effect on our business, results of operations or financial condition.
Our reliance on a limited number of warranty and maintenance support clients and customers could adversely affect our ability
to maintain business.
We market and distribute our warranty products and equipment breakdown and maintenance support services through a limited number
of customers and clients across the United States. Loss of all or a substantial portion of our existing customers and clients could have a
material adverse effect on our business, results of operations or financial condition.
We have reclassified certain assets and discontinued a portion of our operations which could adversely affect our business
and operations.
As discussed in Note 5, “Disposal and Discontinued Operations” to our Consolidated Financial Statements, all operations related to
CMC and VA Lafayette, which serves as a medical and dental clinic for the Department of Veteran Affairs, are included as discontinued
operations. In the future, it may be necessary to write-off charges and other costs or incur additional expenses in connection with our
discontinued operations, which could have a material adverse effect on our business, results of operations or financial condition.
Additionally, as of December 31, 2022, we classified VA Lafayette as an asset “held for sale”. We can provide no assurances that we
will successfully sell VA Lafayette, that we will do so in accordance with our expected timeline or that we will recover the carrying
value of the assets, which could have a material adverse effect on our business, results of operations or financial condition. Additionally,
any decisions made regarding our deployment or use of any sales proceeds we receive in any sale involves risks and uncertainties. As a
result, our decisions with respect to such proceeds may not lead to increased long-term stockholder value.
CSuite’s focus on serving private equity backed businesses creates exposure to general mergers and acquisitions
(“M&A”) activity.
CSuite’s business opportunities outside of search are correlated with M&A activities. Clients will often engage CSuite’s financial
executive services to prepare a business for a transaction or to assist with post-acquisition implementation. Accordingly, a major
contraction of M&A activity could have a material effect on our business, results of operations or financial condition.
Ravix’s concentration in venture-capital-funded startups creates exposure to the venture capital funding cycles.
Ravix focuses on venture-capital-funded companies, often in Silicon Valley, as its clients and receives a significant portion of its referrals
from service providers focused on servicing the same market. Accordingly, a major contraction of available venture capital funding into
companies or industries that Ravix services could have a material adverse effect on our business, results of operations or financial condition.
15
KINGSWAY FINANCIAL SERVICES INC.
SNS may experience increased costs that reduce its revenue and profitability if applicable government regulations change.
The introduction of new regulatory provisions could materially raise the costs associated with hiring temporary employees such as per
diem and travel nurses. For example, a state could impose sales taxes or increase sales tax rates on temporary healthcare staffing services.
Furthermore, if government regulations were implemented that limit the amount SNS is permitted to charge for its services,
SNS’ profitability could be adversely affected.
Healthcare is a regulated industry and modifications, inaccurate interpretations or violations of any applicable statutory or
regulatory requirements may result in material costs or penalties as well as litigation and could reduce SNS’ revenue
and profitability.
Healthcare is subject to many complex federal, state, local and international laws and regulations related to professional licensing, the
payment of employees (e.g., wage and hour laws, employment taxes, arbitration agreements, and income tax withholdings, etc.)
and general business operations (e.g., federal, state and local tax laws). Failure to comply with all applicable laws and regulations could
result in civil and/or criminal penalties as well as litigation, injunction or other equitable remedies. SNS maintains insurance coverage
for employment claims, however, SNS’ insurance coverage may not be sufficient to fully cover all claims against SNS or may not
continue to be available to SNS at a reasonable cost or without coverage exclusions. If SNS’ insurance does not cover the claim or SNS
is otherwise not able to maintain adequate insurance coverage, SNS may be exposed to substantial liabilities that would materially
impact its business and financial performance.
SNS’ profitability could be adversely impacted if SNS is unable to adjust its nurse pay rates as the bill rates decline.
SNS does not have control over the bill rate from hospitals and negotiates the pay rates with the nurses who work with the company. If
the bill rates decline, SNS will need to renegotiate the pay rates with its nurses and successfully recruit new nurses at lower pay rates.
SNS’ ability to recruit and retain nurses is contingent on SNS’ ability to offer attractive assignments with competitive wages and benefits
or payments.
SNS may be unable to recruit and retain enough quality nurses to meet the demand.
SNS relies on its ability to attract, develop, and retain nurses who possess the skills, experience and required licenses necessary to meet
the specified requirements of the healthcare facilities. SNS competes for nurses with other temporary healthcare staffing companies.
SNS relies on word-of-mouth referrals, as well as social and digital media to attract qualified nurses. If SNS’ social and digital media
strategy is not successful, SNS’ ability to attract qualified nurses could be negatively impacted. Moreover, the competition for nurses
remains high as many areas of the United States continue to experience a shortage of qualified nurses.
Disruptions or security failures in our information technology systems could create liability for us and/or limit our ability to
effectively monitor, operate and control our operations and adversely affect our reputation, business, financial condition, results
of operation and cash flows.
Our information technology systems facilitate our ability to monitor, operate and control our operations. Changes or modifications to
our information technology systems could cause disruption to our operations or cause challenges with respect to our compliance with
laws, regulations or other applicable standards. For example, delays, higher than expected costs or unsuccessful implementation of new
information technology systems could adversely affect our operations. In addition, any disruption in or failure of our information
technology systems to operate as expected could, depending on the magnitude of the problem, adversely affect our business, financial
condition, results of operation and cash flows, including by limiting our capacity to monitor, operate and control our operations
effectively. Failures of our information technology systems could also lead to violations of privacy laws, regulations, trade guidelines
or practices related to our customers and employees. If our disaster recovery plans do not work as anticipated, or if the third-party
vendors to which we have outsourced certain information technology or other services fail to fulfill their obligations to us, our operations
may be adversely affected. Any of these circumstances could adversely affect our reputation, business, financial condition, results of
operation and cash flows.
Our success depends on our ability to price accurately the risks we underwrite.
Our results of operation or financial condition depend on our ability to price accurately for a wide variety of risks. Adequate rates are
necessary to generate revenues sufficient to pay expenses and to earn a profit. To price our products accurately, we must collect and
properly analyze a substantial amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely
recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these
efforts successfully, and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are
outside our control, including:
•
•
the availability of reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
16
KINGSWAY FINANCIAL SERVICES INC.
•
•
our selection and application of appropriate pricing techniques; and
changes in applicable legal liability standards and in the civil litigation system generally.
Consequently, we could underprice risks, which would adversely affect our results, or we could overprice risks, which would reduce
our sales volume and competitiveness. In either case, our results of operation could be materially and adversely affected.
HUMAN RESOURCES RISK
Our business depends upon key employees, and if we are unable to retain the services of these key employees or to attract and
retain additional qualified personnel, our business could be adversely affected.
Our success at improving our performance will be dependent in part on our ability to retain the services of our existing key employees
and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key employees, or the inability
to identify, hire and retain other highly qualified personnel in the future, could adversely affect our results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Leased Properties
Extended Warranty leases facilities with an aggregate square footage of approximately 27,758 at five locations in three states. The latest
expiration date of the existing leases is in February 2026.
Kingsway Search Xcelerator leases facilities with an aggregate square footage of approximately 6,085 at three locations in one state.
The latest expiration date of the existing leases is in January 2027.
The Company leases a facility for its corporate office with an aggregate square footage of approximately 3,219 at one location in one
state. The expiration date of the existing lease is in February 2028.
The properties described above are in good condition. We consider our office facilities suitable and adequate for our current levels
of operations.
Owned Properties
The LA Real Property is subject to a long-term lease agreement and is currently held for sale. The LA Real Property consists of
approximately 6.5 acres and contains a 29,224 square foot single-tenant medical office building.
Item 3. Legal Proceedings
In connection with its operations in the ordinary course of business, the Company and its subsidiaries are named as defendants in various
actions for damages and costs allegedly sustained by the plaintiffs. While it is not possible to estimate reasonably the loss, or range of
loss, if any, that would be incurred in connection with any of the various proceedings at this time, it is possible an individual action
could result in a loss having a material adverse effect on the Company’s business, results of operations or financial condition.
See Note 25, “Commitments and Contingent Liabilities,” to the Consolidated Financial Statements, for further information regarding
the Company’s legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
17
KINGSWAY FINANCIAL SERVICES INC.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are listed on the New York Stock Exchange (“NYSE”) under the trading symbol “KFS.”
The following table sets forth, for the calendar quarters indicated, the high and low sales price for our common shares as reported on
the NYSE.
2022
Quarter 4
Quarter 3
Quarter 2
Quarter 1
2021
Quarter 4
Quarter 3
Quarter 2
Quarter 1
Shareholders of Record
$
$
NYSE
High - US$
Low - US$
8.08 $
7.81
5.70
5.60
5.77 $
5.70
5.24
5.36
5.88
5.69
5.15
5.08
5.04
4.88
4.46
4.35
As of March 7, 2023 the closing sales price of our common shares as reported by the NYSE was $10.05 per share.
As of March 8, 2023, we had 25,045,024 common shares issued and outstanding. As of March 8, 2023, there were 9 shareholders of
record of our common stock. The number of shareholders of record includes one single shareholder, Cede & Co., for all of the shares
held by our shareholders in individual brokerage accounts maintained at banks, brokers and institutions.
Dividends
The Company has not declared a dividend since the first quarter of 2009. The declaration and payment of dividends is subject to the
discretion of our Board of Directors after taking into account many factors, including financial condition, results of operations,
anticipated cash needs and other factors deemed relevant by our Board of Directors. For a discussion of our cash resources and needs,
see the “Liquidity and Capital Resources” section of MD&A.
Securities Authorized for Issuance under Equity Compensation Plans
The information required related to securities authorized for issuance under equity compensation plans is incorporated herein by
reference to the Proxy Statement for our 2022 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days
after the end of our fiscal year ended December 31, 2022.
Recent Sales of Unregistered Securities
During the year ended December 31, 2022, we did not have any unregistered sales of our equity securities.
Issuer Purchases of Equity Securities
During the year ended December 31, 2022, we did not have any repurchases of our equity securities.
Item 6. Reserved.
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KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management’s discussion and analysis (“MD&A”) of our financial condition and results of operations should be read
together with the Consolidated Financial Statements included in Part II, Item 8 of this 2022 Annual Report.
OVERVIEW
Kingsway is a holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries
primarily in the extended warranty and business services industries. Kingsway conducts its business through the following
two reportable segments: Extended Warranty and Kingsway Search Xcelerator.
Prior to the fourth quarter of 2022, the Company conducted its business through a third reportable segment, Leased Real Estate. Leased
Real Estate included the following subsidiaries of the Company: CMC Industries, Inc. (“CMC”) and VA Lafayette, LLC (“VA
Lafayette”).
• CMC owned, 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. On December 22, 2022, the Company announced a definitive
agreement for the sale of the Real Property, for gross cash proceeds of $44.5 million and the assumption of the mortgages. On
December 29, 2022, the sale was completed.
• 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 a mortgage (the
“LA Mortgage”). During the fourth quarter, the Company began executing a plan to sell VA Lafayette, and as a result, VA
Lafayette is reported as held for sale at December 31, 2022.
• Both CMC and VA Lafayette have been classified as discontinued operations and the results of their operations are reported separately
for all periods presented. See Note 5, “Disposal and Discontinued Operations,” to the Consolidated Financial Statements for further
discussion. All segmented information has been restated to exclude the Leased Real Estate segment for all periods presented.
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, “Disposal and Discontinued Operations,” to the Consolidated Financial
Statements, the Company disposed of PWSC on July 29, 2022. The earnings of PWSC are included in the consolidated statements of
operations and the segment disclosures through the disposal date. Throughout this 2022 Annual Report, 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 in 25 states and the District of Columbia to their members, with customers in all 50 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 39 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.
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KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
sells heating, ventilation, air conditioning
lighting and
(“HVAC”),
Trinity
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.
standby generator, commercial LED
Kingsway Search Xcelerator includes the Company’s subsidiaries, CSuite Financial Partners, LLC (“CSuite”), Ravix Financial, Inc.
(“Ravix”) and Secure Nursing Service LLC (“SNS”). Throughout this 2022 Annual Report, the term “Kingsway Search Xcelerator” is
used to refer to this segment.
CSuite provides financial executive services, for project and interim-staffing engagements, and search services for full-time placements
for customers throughout the United States.
Ravix provides outsourced financial services and human resources consulting for short or long duration engagements for customers in
several states.
SNS provides healthcare staffing services to acute healthcare facilities on a contract or per diem basis in the United States, primarily in
California.
NON U.S.-GAAP FINANCIAL MEASURE
Throughout this 2022 Annual 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. In addition to the U.S. GAAP presentation of net income, 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 presented in the consolidated statements of operations are not
subtotaled by segment; however, this information is available in total and by segment in Note 22, “Segmented Information,” to the
Consolidated 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 total
segment operating income, includes net investment income, net realized gains, loss on change in fair value of equity investments, (loss)
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, 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 years ended December 31, 2022 and December 31, 2021 is presented in Table 1 of the “Results of
Continuing Operations” section of MD&A.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts and classification 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 Company has identified the following as its most critical accounting policies and
judgments. 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.
20
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Revenue Recognition
Service fee and commission revenue represents 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 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 Company’s revenue recognition policy follows guidance from ASC 606, Revenue from Contracts with Customers, which utilizes a
five-step revenue recognition framework. The Company identifies the contract with its customers and then identifies the performance
obligations in the contracts. The transaction price is determined based on the amount we expect to be entitled to in exchange for providing
the promised services to the customer. The transaction price is allocated to each distinct performance obligation on a relative standalone
selling price basis. Revenue is recognized when performance obligations are satisfied.
Certain of the Company’s contracts with customers include obligations to provide multiple services to a customer. Determining whether
services are considered distinct performance obligations that should be accounted for separately from one another requires judgment.
Revenue from GAP commissions and homebuilder warranty service fees contain multiple distinct performance obligations that are
accounted for separately.
Judgment is required to determine the standalone selling price (“SASP”) for each distinct performance obligation. Revenue is allocated
to each performance obligation based on the relative SASP. SASP are not directly observable in the GAP and homebuilder warranty
contracts for the separate performance obligations. As a result, the Company has applied the expected cost plus a margin approach to
develop models to estimate the standalone selling price for each of its performance obligations in order to allocate the transaction price
to the two separate performance obligations identified. In these models, the Company makes judgments about which of its actual costs
are associated with each of the performance obligations. The relative percentage of expected costs plus a margin associated with these
performance obligations is applied to the transaction price to determine the estimated SASP of the performance obligations, which the
Company recognizes as earned as services are performed over the term of the contract period.
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.
Refer to Note 2, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for information about our
revenue recognition accounting policies.
Valuation of Fixed Maturities and Equity Investments
Our equity investments, including warrants, are recorded at fair value with changes in fair value recognized in net income. Fair value
for our equity investments are determined using 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.
For fixed maturities, we use observable inputs such as 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. We do not have any fixed maturities in our portfolio that require us to use unobservable inputs.
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.
We have 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.
Gains and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged to the
consolidated statements of operations. Premium and discount on investments are amortized using the interest method and charged or
credited to net investment income.
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KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Fixed maturities and equity investments are exposed to various risks, such as interest rate risk, credit risk and overall market volatility
risk. Accordingly, it is reasonably possible that changes in the fair values of the Company’s investments reported at fair value will occur
in the near term and such changes could materially affect the amounts reported in the consolidated financial statements.
Impairment Assessment of Investments
The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates.
We perform a quarterly analysis of our investments classified as available-for-sale and our limited liability investments to determine if
any declines in market value are other-than-temporary. The analysis for available-for-sale investments includes some or all of the
following procedures, as applicable:
•
•
•
•
•
•
•
identifying all unrealized loss positions that have existed for at least six months;
identifying other circumstances management believes may affect the recoverability of the unrealized loss positions;
obtaining a valuation analysis from third-party investment managers regarding the intrinsic value of these investments based on
their knowledge and experience together with market-based valuation techniques;
reviewing the trading range of certain investments over the preceding calendar period;
assessing if declines in market value are other-than-temporary for debt instruments based on the investment grade credit ratings
from third-party rating agencies;
assessing if declines in market value are other-than-temporary for any debt instrument with a non-investment grade credit rating
based on the continuity of its debt service record;
determining the necessary provision for declines in market value that are considered other-than-temporary based on the analyses
performed; and
•
assessing the Company’s ability and intent to hold these investments at least until any investment impairment is recovered.
The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-
temporary include, but may not be limited to, the following:
•
•
•
•
the opinions of professional investment managers could be incorrect;
the historical trading patterns of individual investments may not reflect future valuation trends;
the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts related to a
company’s financial situation; and
the debt service pattern of non-investment grade instruments may not reflect future debt service capabilities and may not reflect a
company’s unknown underlying financial problems.
We perform a quarterly analysis of our investments in private companies. The analysis includes some or all of the following procedures,
as applicable:
•
•
•
•
•
•
the opinions of external investment and portfolio managers;
the financial condition and prospects of the investee;
recent operating trends and forecasted performance of the investee;
current market conditions in the geographic area or industry in which the investee operates;
changes in credit ratings; and
changes in the regulatory environment.
22
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
As a result of the analysis performed to determine declines in market value that are other-than-temporary, the Company recorded write
downs for other-than-temporary impairment related to limited liability investments, at fair value. See “Investments” section below
and Note 7, “Investments,” to the Consolidated Financial Statements for further information.
Valuation of Limited Liability Investments, at Fair Value
Limited liability investments, at fair value represent the underlying investments of the Company’s consolidated entities Net Lease
Investment Grade Portfolio LLC (“Net Lease”) and Argo Holdings Fund I, LLC (“Argo Holdings”). The Company accounts for these
investments at fair value with changes in fair value reported in the consolidated statements of operations.
Net Lease owns investments in limited liability companies that hold investment properties. The fair value of Net Lease’s investments is
based upon the net asset values of the underlying investments companies as a practical expedient to estimate fair value.
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 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.
Refer to Note 23, “Fair Value of Financial Instruments,” to the Consolidated Financial Statements for further information.
Valuation of Deferred Income Taxes
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in our consolidated financial
statements. In determining our provision for income taxes, we interpret tax legislation in a variety of jurisdictions and make assumptions
about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of deferred income taxes.
The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the
periods in which the Company’s temporary differences reverse and become deductible. A valuation allowance is established when it is
more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining whether a valuation
allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset
balances, including the Company’s historical and anticipated future performance, the reversal of deferred income tax liabilities, and the
availability of tax planning strategies.
Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of a
company’s deferred income tax asset balances when significant negative evidence exists. Cumulative losses are the most compelling
form of negative evidence considered by management in this determination. To the extent a valuation allowance is established in a
period, an expense must be recorded within the income tax provision in the consolidated statements of operations. As of December 31,
2022, the Company maintains a valuation allowance of $130.6 million, all of which relates to its U.S. deferred income taxes. The largest
component of the U.S. deferred income tax asset balance relates to tax loss carryforwards that have arisen as a result of losses generated
from the Company’s U.S. operations. Uncertainty over the Company’s ability to utilize these losses over the short-term has led the
Company to record a valuation allowance.
Future events may result in the valuation allowance being adjusted, which could materially affect our financial position and results of
operations. If sufficient positive evidence were to arise in the future indicating that all or a portion of the deferred income tax assets
would meet the more likely than not standard, all or a portion of the valuation allowance would be reversed in the period that such a
conclusion was reached, which would beneficially impact our results of operations.
Accounting for Business Combinations and Asset Acquisitions
The Company evaluates acquisitions in accordance with Accounting Standards Codification 805, Business Combinations (“ASC
805”), to determine if a transaction represents an acquisition of a business or an acquisition of assets.
An acquisition of a business represents a business combination. The acquisition method of accounting is used to account for a business
combination by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and
liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as
goodwill. We determine the fair value of such assets and liabilities, often in consultation with third-party valuation
advisors. Determining the fair value of assets acquired and liabilities assumed requires significant judgment and estimates, including
the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, royalty rates, and selection
of comparable companies. The resulting fair values and useful lives assigned to acquisition-related intangible assets impact the amount
and timing of future amortization expense. Acquired intangible assets with finite lives are amortized over their estimated useful lives.
23
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Adjustments to fair value assessments are recorded to goodwill over the measurement period, which is not to exceed one year but is
considered complete once all necessary information is available to management to estimate fair value. Acquisition costs related to a
business combination are expensed as incurred.
When an acquisition does not meet the definition of a business combination either because: (i) substantially all of the fair value of the
gross assets acquired is concentrated in a single identifiable asset, or group of similar identified assets, or (ii) the acquired entity does
not have an input and a substantive process that together significantly contribute to the ability to create outputs, the Company accounts
for the acquisition as an asset acquisition. In an asset acquisition, goodwill is not recognized. Any excess of the total purchase price
plus transaction costs over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets
at the acquisition date. The net assets acquired in an asset acquisition of property generally include, but are not limited to: land, building,
building and tenant improvements, and intangible assets or liabilities associated with above-market and below-market leases and in-
place leases.
The Company’s methodology for determining fair value of the acquired tangible and intangible assets and liabilities includes estimating
an “as-if vacant” fair value of the physical property, which includes land, building, and improvements. In addition, the Company
determines the estimated fair value of identifiable intangible assets and liabilities, considering the following categories: (i) value of in-
place leases, and (ii) above and below-market value of in-place leases. The value of in-place leases is estimated based on the value
associated with the costs avoided in originating leases compared to the acquired in-place leases as well as the value associated with lost
rental and recovery revenue during the assumed lease-up period. The value of in-place leases is amortized on a straight-line basis over
the remaining lease term and is included in amortization of intangible assets in the consolidated statements of operations. The fair value
of the above-market or below-market component of an acquired lease is based upon the present value (calculated using a market discount
rate) of the difference between the contractual rents to be paid pursuant to the lease over its remaining term and management’s estimate
of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition over the remaining term of
the lease. An identifiable intangible asset or liability is recorded if there is an above-market or below-market lease at an acquired
property. The amounts recorded for above-market leases are included in intangible assets on the consolidated balance sheets, and the
amounts for below-market leases are included in accrued expenses and other liabilities on the consolidated balance sheets. These
amounts are amortized on a straight-line basis as an adjustment to rental revenue over the remaining term of the applicable
leases. Changes to these assumptions could result in a different pattern of recognition. If tenants do not remain in their lease through
the expected term or exercise an assumed renewal option, there could be a material impact to earnings.
Valuation and Impairment Assessment of Intangible Assets
Intangible assets are recorded at their estimated fair values at the date of acquisition. Intangible assets with definite useful lives consist
of database and customer relationships. Intangible assets with definite useful lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If circumstances require
that a definite-lived intangible asset be tested for possible impairment, we first compare the undiscounted cash flows expected to be
generated by that definite-lived intangible asset to its carrying amount. If the carrying amount of the definite-lived intangible asset is
not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its
fair value.
Indefinite-lived intangible assets consist of trade names, which are assessed for impairment annually as of November 30, or more
frequently if events or circumstances indicate that the carrying value may not be recoverable. The Company may perform its impairment
test for any indefinite-lived intangible asset through a qualitative assessment or elect to proceed directly to a quantitative impairment
test, however, the Company may resume a qualitative assessment in any subsequent period if facts and circumstances permit.
Under the qualitative approach, the impairment test consists of an assessment of whether it is more likely than not that an indefinite-lived
intangible asset is impaired. If the Company elects to bypass the qualitative assessment for any indefinite-lived intangible asset, or if a
qualitative assessment indicates it is more likely than not that the estimated carrying amount of such asset exceeds its fair value, the
Company performs a quantitative test. Factors that could trigger a quantitative impairment review include, but are not limited to, significant
under performance relative to historical or projected future operating results and significant negative industry or economic trends.
As of November 30, 2022, the Company conducted its annual qualitative assessment. As a result, the Company determined that certain
trade names should be further examined under a quantitative approach. Based on the results of the quantitative approach, the estimated
fair values of the trade names exceeded their respective carrying values; therefore, the Company did not record any impairment.
No impairment charges were recorded against intangible assets in 2022 or 2021. Additional information regarding our intangible assets
is included in Note 9, “Intangible Assets,” to the Consolidated Financial Statements.
24
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Goodwill Recoverability
Goodwill is assessed for impairment annually as of November 30, or more frequently if events or circumstances indicate that the carrying
value may not be recoverable. In evaluating the recoverability of goodwill, the Company estimates the fair value of its reporting units
and compares it to the carrying value. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized
in an amount equal to such excess.
For Extended Warranty, the Company estimates the fair value using a valuation technique based on observed market capitalization
multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of publicly traded insurance services
and insurance brokerage companies, an approach that the Company views as a technique consistent with the objective of measuring fair
value consistent with prior years’ assessments performed.
For Kingsway Search Xcelerator, the Company estimates the fair value using a valuation technique based on observed market
capitalization multiples of EBITDA from its recent acquisitions of similar businesses.
Estimating the fair value of reporting units requires the use of significant judgments that are based on a number of factors including
actual operating results, internal forecasts, market observable pricing multiples of similar businesses and comparable transactions and
determining the appropriate discount rate and long-term growth rate assumptions. There are inherent uncertainties related to these factors
and management’s judgment in applying them to the analysis of goodwill impairment. It is reasonably possible that the judgments and
estimates described above could change in future periods.
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due
to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other
underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill
impairment charge, or both.
No impairment charges were recorded against goodwill in 2022 or 2021, as the estimated fair values of the reporting units exceeded
their respective carrying values. Additional information regarding our goodwill is included in Note 8, “Goodwill,” to the Consolidated
Financial Statements.
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 incremental costs to obtain a contract and costs to fulfill a contract with a
customer are recorded in commissions and general and administrative expenses, respectively, in the consolidated statements of
operations. No impairment charges related to deferred contract costs were recorded in 2022 or 2021.
Fair Value Assumptions for Subordinated Debt Obligations
Our subordinated debt is measured and reported at fair value. 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 following summarizes the impacts:
Impact of Rate Change on Fair Value
2022 Result
2021 Result
Libor:
increase causes fair value to increase; decrease causes fair value to decrease
Risk free rate:
increase causes fair value to decrease; decrease causes fair value to increase
Increase to fair value Increase to fair value
Decrease to fair value Decrease to 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.
Therefore, changes in the underlying interest rates used would cause the fair value to be impacted, but only impacts the income statement
(or comprehensive income/loss for the portion related to credit risk) and does not impact cash flows.
25
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Fair Value Assumptions for Subsidiary Stock-Based Compensation Awards
Three of the Company’s subsidiaries, PWSC, Ravix and SNS, have made grants of restricted stock awards or restricted unit awards
(together “Subsidiary Restricted Awards”). The Subsidiary Restricted Awards are measured at fair value on the date of grant and
recognized as compensation expense on a straight-line basis over the requisite service period during which awards are expected to vest,
with a corresponding increase to either additional paid-in capital for equity-classified awards or to a liability for liability-classified
awards. Certain of the Subsidiary Restricted Awards are classified as a liability, either because they contain a noncontingent put option
that is exercisable less than six months after the vesting of certain shares or because the awards are expected to settle in cash. Liability-
classified awards, included in accrued expenses and other liabilities in the consolidated balance sheets, are measured and reported at fair
value on the date of grant and are remeasured each reporting period. The Subsidiary Restricted Awards contain performance vesting
and/or market vesting conditions. Performance vesting conditions are reviewed quarterly to assess the probability of achievement of
the performance condition. Compensation expense is adjusted when a change in the assessment of achievement of the specific
performance condition is determined to be probable. Compensation expense is recognized on a straight-line basis for awards subject to
market conditions regardless of whether the market condition is satisfied, provided that the requisite service has been
provided. Forfeitures are recognized in the period that Subsidiary Restricted Awards are forfeited.
The determination of fair value of the Subsidiary Restricted Awards is subjective and involves significant estimates and assumptions of
whether the awards will achieve performance thresholds. The fair value of the Subsidiary Restricted Awards is estimated using either an
internal valuation model without relevant observable market inputs, the Black-Scholes option pricing model and/or the Monte Carlo
simulation model to derive certain inputs. The significant inputs used in the internal valuation model includes a valuation multiple applied
to trailing twelve month earnings before interest, tax, depreciation and amortization. The determination of the grant date fair value using
the Black-Scholes option-pricing model is affected by subjective assumptions, including the expected term of the awards, expected
volatility over the expected term of the awards, expected dividend yield, and risk-free interest rates. The determination of the grant date
fair value using the Monte Carlo simulation model is affected by subjective assumptions, including the expected term of the awards,
expected volatility over the expected term of the awards and risk-free interest rates. The assumptions used in the Company’s Black-
Scholes option-pricing and Monte Carlo simulation models requires significant judgment and represents management’s best estimates.
Derivative Financial Instruments
Derivative financial instruments include interest rate swap contract 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 11, “Derivatives” and Note 23, “Fair Value of Financial Instruments” to
the Consolidated Financial Statements, for further discussion.
Contingent Consideration
The consideration for certain of the Company’s acquisitions include 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 at the date of acquisition with subsequent changes in fair value reported in the consolidated statements of operations as non-
operating other (expense) revenue.
Determining the fair value of contingent consideration liabilities requires management to make assumptions and judgments. The fair
value of Company’s contingent consideration liabilities is estimated by applying the Monte Carlo simulation method to forecast
achievement of gross profit or gross revenue. These fair value measurements are based on significant inputs not observable in the
market. Key inputs in the valuations include forecasted gross profit or revenue, gross profit or revenue volatility, discount rate and
discount term. Management must use judgment in determining the appropriateness of these assumptions as of the acquisition date and
for each subsequent period. Changes in assumptions could have a material impact on the amount of contingent consideration benefit or
expense reported in the consolidated statements of operations and have an impact on the payout of contingent consideration liabilities.
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 key inputs 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
(expense) revenue. Additional information regarding our contingent consideration liabilities is included in Note 23, “Fair Value of
Financial Instruments,” to the Consolidated Financial Statements.
26
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
RESULTS OF CONTINUING OPERATIONS
A reconciliation of total segment operating income to net income for the years ended December 31, 2022 and December 31, 2021 is
presented in Table 1 below:
Table 1 Segment Operating Income for the Years Ended December 31, 2022 and December 31, 2021
For the years ended December 31 (in thousands of dollars)
Segment operating income (loss)
Extended Warranty
Kingsway Search Xcelerator
Total segment operating income
Net investment income
Net realized gains
Loss on change in fair value of equity investments
(Loss) 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
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
Gain on extinguishment of debt not allocated to segments
Income (loss) from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
(Loss) income from discontinued operations, net of taxes
Loss on disposal of discontinued operations, net of taxes
Net income
2022
2021 Change
9,879
3,548
13,427
2,305
1,209
(26)
(1,754)
1,488
16,730
(8,092)
(17,206)
(6,133)
(4,908)
37,917
—
34,957
4,825
30,132
(12,805)
(2,262)
15,065
12,636
484
13,120
1,575
1,809
(242)
2,391
—
—
(6,161)
(11,395)
(4,837)
(3,201)
—
311
(6,630)
(3,916)
(2,714)
4,574
—
1,860
(2,757)
3,064
307
730
(600)
216
(4,145)
1,488
16,730
(1,931)
(5,811)
(1,296)
(1,707)
37,917
(311)
41,587
8,741
32,846
(17,379)
(2,262)
13,205
Segment Operating Income, Income (Loss) from Continuing Operations and Net Income
For the year ended December 31, 2022, we reported segment operating income of $13.4 million compared to $13.1 million for the
year ended December 31, 2021. The increase is primarily due to the following items:
•
•
•
Increased operating income from Kingsway Search Xcelerator, primarily due to including Ravix for twelve months in 2022
(acquired October 2021), as well as the November 2022 acquisitions of CSuite and SNS, which was partially offset by
2021 operating income in Extended Warranty segment includes a gain on extinguishment of debt of $2.2 million, related to
Paycheck Protection Program (“PPP”) loan forgiveness, while there was zero in 2022;
2022 operating income 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, which had segment operating income of $0.1 million and $2.6
million for 2022 and 2021, respectively.
For the year ended December 31, 2022, we reported income from continuing operations of $30.1 million compared to a loss from
continuing operations of $2.7 million for the year ended December 31, 2021. The income from continuing operations for 2022 is
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 $16.7 million, related to the trust preferred debt
repurchase options;
27
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
• A gain on change in fair value of real estate investments of $1.5 million; all of which were partially offset by
• An increase in interest expense related to rising interest rates;
• Other revenue and expenses not allocated to segments, net, which includes 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 and $1.2 million increase
in expense due to the increase in fair value of the Ravix contingent consideration;
• Loss on change in fair value of debt, which increased by $1.7 million;
• Loss on change in fair value of limited liability investments, at fair value which increased by $4.1 million (see below); and
•
Income tax expense which increased by $8.7 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 release of valuation allowance as a result of deferred tax liabilities available in 2021 arising from the
acquisitions of Ravix Financial and PWI available to offset existing deferred tax assets.
The loss from continuing operations for the year ended December 31, 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) 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, net realized gains, gain on change
in fair value of limited liability investments, at fair value and income tax benefit, partially offset by interest expense, 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.
For the year ended December 31, 2022, we reported net income of $15.1 million compared to $1.9 million for the year ended
December 31, 2021. In addition to the items described above impacting income (loss) from continuing operations, the
net income includes:
• A loss from discontinued operations, net of taxes of $12.8 million and income from discontinued operations, net of taxes of
$4.6 million for the years ended December 31, 2022 and December 31, 2021, respectively;
• A loss on disposal of discontinued operations, net of taxes of $2.3 million for the year ended December 31, 2022.
The loss from discontinued operations is related to the operations of CMC and VA Lafayette and is primarily due to a final management
fee of $16.4 million resulting from the sale of the CMC railyard.
The loss on disposal of discontinued operations includes the gain on disposal of CMC of $0.2 million and a loss of $2.5 million related
to a liability recorded at September 30, 2022 regarding the Company’s obligation to indemnify a former subsidiary for open claims (the
maximum liability under the indemnity is $2.5 million). See Note 5 “Disposal and Discontinued Operations,” to the Consolidated
Financial Statements, for further discussion.
Extended Warranty
The Extended Warranty service fee and commission revenue decreased 0.1% (or $0.9 million) to $74.0 million for the year ended
December 31, 2022 compared with $74.9 million for the year ended December 31, 2021. Service fee and commission revenue was
impacted by the following in 2022:
• A $3.1 million decrease at PWSC, due to the sale of PWSC on July 29, 2022 (the financial results for PWSC are only included
through the disposal date);
• A $0.7 million decrease at Geminus, due to the continued supply-chain issues in the automotive industry, resulting in
significant increases in the prices of used automobiles, making it difficult for smaller automobile dealers to obtain inventory
and, therefore, putting downward pressure on revenue; both of which were partially offset by
• A $1.3 million increase at PWI. 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. This was partially offset by similar macro-economic conditions as explained above for Geminus, as
well as a restructuring of leadership at PWI that has resulted in a higher focus salesforce production;
28
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
• A $1.2 million increase at Trinity, primarily driven by a $0.9 million increase in its equipment breakdown and maintenance
support services, as Trinity continues to recover from the original impacts of the COVID-19 pandemic; and
• A $0.4 million increase at IWS. 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 revenue of $1.2 million. This reduction was
more than 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. 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.
The Extended Warranty operating income was $9.9 million for the year ended December 31, 2022 compared with $12.6 million for the
year ended December 31, 2021. 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 PPP loan forgiveness related to Extended Warranty companies of $2.2 million for 2021, of which there was zero
in 2022;
• A 1.1 million decrease at PWSC to an operating income of $0.9 million, primarily due to the sale of PWSC on July 29, 2022;
• A $0.5 million decrease at Geminus to $1.3 million, due to a decrease in revenue that was partially offset by a slight decrease
in general and administrative expenses; all of which were partially offset by
• A $0.5 million increase at IWS to $4.0 million, primarily due to increased revenue. This was partially offset by 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 in 2022. Also, during 2022, IWS had a slight increase in commission and
claims expense, as a decrease in the number of claims was slightly more than offset by an increase in the average cost of a claim;
• A $0.3 million increase at PWI to $2.1 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 2022 was impacted by an increase in claims expense (decreased volume of
claims that was more than offset by a higher average cost per claim) compared to 2021; and
• A $0.2 million increase at Trinity to $1.7 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 to 2021.
Kingsway Search Xcelerator
The Kingsway Search Xcelerator revenue increased to $19.2 million for the year ended December 31, 2022 compared with $3.5 million
for the year ended December 31, 2021. Kingsway Search Xcelerator operating income was $3.5 million for the year ended
December 31, 2022 compared with $0.5 million for the year ended December 31, 2021. The increase in revenue and operating income
is primarily due to the inclusion of Ravix for a full year in 2022 following its acquisition effective October 1, 2021, as well as revenue
and operating income derived from CSuite and SNS, which were acquired on November 1, 2022 and November 18, 2022, respectively.
Net Investment Income
Net investment income was $2.3 million in 2022 compared to $1.6 million in 2021. The increase in 2022 relates primarily to higher
investment income from the Company’s limited liability investments, fixed maturities and cash equivalents. The Company also
benefited from increasing interest rates and an increase in the Company’s unrestricted cash balance (from $10.1 million as of
December 31, 2021 to $64.2 million as of December 31, 2022).
The increases above were partially offset by a decrease in investment income from the Company’s limited liability investments, at fair
value, which is recognized based on the Company’s share of the earnings of the limited liability entities.
29
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Net Realized Gains
The Company recorded net realized gains of $1.2 million in 2022 compared to $1.8 million in 2021. The net realized gains for 2022 and
2021 primarily relate to:
• Net realized gains on sales of limited liability investments;
• Realized gains recognized by Argo Holdings Fund I, LLC (“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.
(Loss) Gain on Change in Fair Value of Limited Liability Investments, at Fair Value
Loss on change in fair value of limited liability investments, at fair value was $1.8 million in 2022 compared to a gain of $2.4 million
in 2021. The loss for the year ended December 31, 2022 represents decreases in fair value of $0.9 million related to Net Lease Investment
Grade Portfolio LLC (“Net Lease”) and $0.8 million related to Argo Holdings. The remaining property in Net Lease was sold in
February 2023.
The gain for the year ended December 31, 2021 includes increases in fair value of $1.6 million related to Net Lease, due to the sale of
one of the Net Lease investment properties, and $0.8 million related to Argo Holdings.
Gain on Change in Fair Value of Real Estate Investments
Gain on change in fair value of real estate investments was $1.5 million in 2022 compared to zero in 2021. Real estate
investments solely relates to 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 Flower real estate investment properties for $12.2 million, which closed on September 29, 2022. As a
result of the three-month lag, the Company recorded 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 $16.7 million in 2022 compared to zero in 2021, due to the fact
that the Company entered into three option agreements during the third quarter of 2022 to repurchase a significant portion of its
subordinated debt. The amount relates to the difference between the value of the option at date of inception and the cash consideration
paid of (total of $11.4 million), and the subsequent change in fair value of $5.3 million through December 31, 2022.
Refer to Note 11, “Derivatives,” to the Consolidated Financial Statements, for further information on the option agreements.
Interest Expense
Interest expense for 2022 was $8.1 million compared to $6.2 million in 2021. The increase in 2022 is primarily attributable to:
•
$2.1 million higher interest expense on the Company’s subordinated debt, which resulted from generally higher London
interbank offered interest rates (“LIBOR”) for three-month U.S. dollar deposits during 2022 compared to 2021. The
Company’s subordinated debt bears interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%;
• An increase of $0.3 million related to the 2021 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 8.00%);
• An increase of $0.1 million related to the new $6.0 million 2022 Ravix Loan, which was effective November 16, 2022 and has
an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 8.25%);
• An increase of $0.1 million related to the new $6.5 million SNS Loan, which was effective November 18, 2022 and has an
annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 8.00%); all of which were
partially offset by
• A decrease of $0.4 million, related to the 2020 KWH Loan, as a result of lower principal balance, as well as an increase in fair
value of the interest rate swap related to the 2020 KWH bank loan; and
30
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
• A decrease of $0.1 million related to notes payable at Net Lease. The Net Lease debt was repaid in the fourth quarter of 2020,
however due to the three-month reporting lag for Net Lease, the Company continued to report interest expense through the
first quarter of 2021 related to the Net Lease debt.
See “Debt” section below for further details.
Other Revenue and Expenses not Allocated to Segments, Net
Other revenue and expenses not allocated to segments was a net expense of $17.2 million in 2022 compared to $11.4 million in
2021. 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 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 and an increase in the fair value of the Ravix contingent consideration
liability of $1.2 million, partially offset by lower general and administrative expense incurred by the holding company during 2022
compared to 2021.
Amortization of Intangible Assets
Amortization of intangible assets was $6.1 million in 2022 compared to $4.8 million in 2021.
The higher amortization expense for 2022 is related to amortization of intangible assets recorded in conjunction with the
Company’s acquisitions of Ravix effective October 1, 2021, CSuite effective November 1, 2022 and SNS effective November 18,
2022. During 2022, the Company recorded $1.1 million, $0.3 million and $0.3 million, respectively, of amortization expense related to
the intangible assets identified as part of the acquisitions of Ravix, CSuite and SNS.
See Note 4, “Acquisitions,” to the Consolidated Financial Statements for further details on the Company’s acquisitions of Ravix, CSuite
and SNS.
Loss on Change in Fair Value of Debt
The loss on change in fair value of debt amounted to $4.9 million in 2022 compared to $3.2 million in 2021. The loss for 2022 reflects
an increase 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
2022 Result
2021 Result
Libor:
increase causes fair value to increase; decrease causes fair value to decrease
Increase to fair value
Increase 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
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 third quarter of 2022. The sale of PWSC did not represent a strategic shift that would have
a major effect on the Company’s operations or financial results; therefore, PWSC is not presented within discontinued operations.
See Note 5, “Disposal and Discontinued Operations,” to the Consolidated Financial Statements, for further discussion of the
PWSC disposal.
Gain on Extinguishment of Debt not Allocated to Segments
During 2021, gain on extinguishment of debt not allocated to segments consists of a $0.3 million gain (recorded in the first quarter of
2021) on forgiveness of the balance of the holding company’s loan obtained through the PPP of the Coronavirus Aid, Relief, and
Economic Security (“CARES”) Act. See Note 12, “Debt,” to the Consolidated Financial Statements, for further discussion.
31
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Income Tax Expense (Benefit)
Income tax expense for 2022 was $4.8 million compared to income tax benefit of $3.9 million in 2021. The 2022 and 2021 income tax
expense (benefit) is primarily related to:
• An income tax expense of $1.0 million and an income tax benefit $0.4 million in 2022 and 2021, respectively, for the partial
release of the Company’s deferred income tax valuation allowance associated with business interest expense with an
indefinite life;
• An income tax benefit of $0.2 million in 2022 for the partial release of the Company’s deferred tax valuation allowance related
to the change in future income assumptions and $4.1 million in 2021 for the partial release of the Company’s deferred income
tax valuation allowance related to its acquisitions of PWI and Ravix;
• An income tax expense of $0.1 million and $0.2 million in 2022 and 2021, respectively, relating to a change in indefinite life
deferred income tax liabilities; and
• An income tax expense of $3.9 million and $0.4 million in 2022 and 2021, respectively, for state income taxes.
See Note 15, “Income Taxes,” to the Consolidated Financial Statements, for additional detail of the income tax benefit recorded for the
years ended December 31, 2022 and December 31, 2021, respectively.
INVESTMENTS
Portfolio Composition
The following is an overview of how we account for our various investments:
•
Investments in fixed maturities are classified as available-for-sale and are reported at fair value.
• Equity investments are reported at fair value.
• Limited liability investments are accounted for under the equity method of accounting. The most recently available financial
statements of the limited liability investments are used in applying the equity method. The difference between the end of the
reporting period of the limited liability investments and that of the Company is no more than three months.
• Limited liability investments, at fair value represent the underlying investments of the Company’s consolidated entities Net
Lease and Argo Holdings. The difference between the end of the reporting period of the limited liability investments, at fair
value and that of the Company is no more than three months.
•
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. These investments do not have
readily determinable fair values and, therefore, are reported at cost, adjusted for observable price changes and impairments.
• Real estate investments are reported at fair value, which consisted of Flowers.
• Other investments include collateral loans and are reported at their unpaid principal balance.
•
Short-term investments, which consist of investments with original maturities between three months and one year, are reported
at cost, which approximates fair value.
At December 31, 2022, we held cash and cash equivalents, restricted cash and investments with a carrying value of $134.2 million. Our
U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations.
32
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
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
As of December 31 (in thousands of dollars, except for percentages)
Type of investment
Fixed maturities:
U.S. government, government agencies and authorities
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Limited liability investments
Limited liability investments, at fair value
Investments in private companies
Real estate investments
Other investments
Short-term investments
Total investments
Cash and cash equivalents
Restricted cash
Total
Other-Than-Temporary Impairment
2022 % of Total
2021 % of Total
15,080
2,232
8,412
1,610
10,257
37,591
153
—
153
983
17,059
790
—
201
157
56,934
64,168
13,064
134,166
11.2 %
1.7 %
6.3 %
1.2 %
7.6 %
28.0 %
0.1 %
— %
0.1 %
0.7 %
12.7 %
0.6 %
— %
0.2 %
0.1 %
42.4 %
47.9 %
9.7 %
100.0 %
16,223
1,878
7,629
445
9,491
35,666
171
8
179
1,901
18,826
790
10,662
256
157
68,437
10,084
17,257
95,778
16.9 %
2.0 %
8.0 %
0.5 %
9.9 %
37.2 %
0.2 %
0.0 %
0.2 %
2.0 %
19.7 %
0.8 %
11.1 %
0.3 %
0.2 %
71.5 %
10.5 %
18.0 %
100.0 %
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 MD&A.
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 less than $0.1 million and $0.1 million for the years ended December 31, 2022 and December 31,
2021, respectively, which are included in (loss) 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 years ended December 31, 2022 and December 31, 2021.
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 December 31, 2022 and December 31, 2021, the gross unrealized losses for fixed maturities amounted to $2.5 million
and $0.3 million, and there were no unrealized losses attributable to non-investment grade fixed maturities. At each of December 31,
2022 and December 31, 2021, all unrealized losses on individual investments were considered temporary.
DEBT
See Note 12 , “ Debt,” to the Consolidated Financial Statements for further details to those provided below.
33
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
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 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 3.00%. During
the second quarter of 2022, the 2020 KWH Loan was amended to change the annual interest rate to be equal to the Secured Overnight
Financing Rate (“SOFR”), having a floor of 0.75%, plus spreads ranging from 2.62% to 3.12%. At December 31, 2022, the interest rate
was 6.96%. The 2020 KWH Loan is carried in the consolidated balance sheets at its amortized cost, which reflects the 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.
On February 28, 2023, KWH entered into a second amendment to the 2020 KWH Loan (the “KWH DDTL”) that provides for an
additional delayed draw term loan in the principal amount of up to $10 million, with a maturity date of December 1, 2025. All or any
portion of the KWH DDTL, subject to a $2 million minimum draw amount, may be requested at any time through February 27, 2024.
The proceeds are evidenced by an intercompany loan and guarantee between KAI and KWH. Proceeds from certain assets dispositions,
as defined, may be required to be used to repay outstanding draws under the DDTL. The principal amount shall be repaid in quarterly
installments in an amount equal to 3.75% of the original amount of the drawn DDTL. The KWH DDTL also increases the senior cash
flow leverage ratio maximum permissible for certain periods.
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 “2021 Ravix Loan”). The 2021 Ravix Loan has an annual interest
rate equal to the greater of the Prime Rate plus 0.5%, or 3.75% (current rate of 8.00%) 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 term loan matures on October 1, 2027.
Subsequent to the acquisition of CSuite on November 1, 2022, CSuite became a wholly owned subsidiary of Ravix LLC. As a result of
the acquisition of CSuite, on November 16, 2022, the Ravix Loan was amended to (1) include CSuite as a borrower; (2) borrow an
additional principal amount of $6.0 million in the form of a supplemental term loan (the “2022 Ravix Loan”); and (3) amend the maturity
date and interest rate of the $1.0 million revolver (the “2022 Revolver”). The 2022 Ravix Loan matures on November 16, 2028 and has
an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 8.25%) and is carried in the consolidated balance sheet at
December 31, 2022 at its amortized cost, which reflects the monthly pay-down of principal. The 2022 Revolver matures on
November 16, 2024 and has an annual interest rate equal to the Prime Rate plus 0.50%.
The 2021 Ravix Loan and 2022 Ravix Loan contain 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 2021 Ravix Loan and 2022 Ravix Loan that, among other
things, restrict Ravix and CSuite’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 asset acquisition of SNS on November 18, 2022, the Company formed Secure Nursing Service LLC, who became a wholly
owned subsidiary of Pegasus Acquirer Holdings LLC (“Pegasus LLC”), and together they borrowed from a bank a principal amount of
$6.5 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of SNS (together, the “SNS
Loan”). The SNS Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 8.00%)
and is carried in the consolidated balance sheet at December 31, 2022 at its amortized cost, which reflects the monthly amortization of
the debt discount and issuance costs using the effective interest rate method. The term loan matures on November 18, 2028 and revolver
matures on November 18, 2023.
The SNS Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio and limits on
annual capital expenditures, all of which are as defined in and calculated pursuant to the SNS Loan that, among other things, restrict
SNS’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.
34
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
Notes Payable
On January 5, 2015, Flower Portfolio 001, LLC assumed a $9.2 million mortgage in conjunction with the purchase of investment real
estate properties (“the Flower Note”). The Flower Note was scheduled to mature on December 10, 2031 and had 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. At December 31, 2021, the Flower Note is carried in the consolidated balance sheet at its
unpaid principal balance.
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 December 31, 2022 and December 31, 2021, deferred interest payable of $25.5 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, 2022 agreement is subject to the same terms
and conditions as the August 2, 2022 and no additional consideration was paid.
35
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
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.
The Company continues to accrue interest on all six of the TruPs.
In February 2023, the Company entered into amendments to the repurchase agreements described above that would give the Company
an additional discount on the total repurchase price if the Company effected a 100% repurchase on or before March 15, 2023. On
March 2, 2023, the Company gave notice to the holders that it intends to exercise its options to repurchase 100% of the principal no
later than March 15, 2023. The total amount to be paid will be $56.5 million, which includes a credit for the $2.3 million that the
Company previously paid at the time of entering into the repurchase agreements. As a result, the Company will have repurchased $75.5
million of principal and $21.2 million of deferred interest (valued as of December 31, 2022). The Company intends to use currently
available funds from working capital to fund the repurchases.
In order to execute the repurchase, the Company will have to pay an estimated $4.7 million of deferred interest to the remaining trust
preferred debt instrument for which the Company did not have the right to repurchase. After the repurchase is completed, the Company
will continue to have $15 million of principal outstanding related to remaining trust preferred debt instrument.
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 December 31, 2022, the carrying value of the subordinated
debt is $67.8 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 23, “Fair Value of Financial Instruments,” to the Consolidated Financial Statements.
During the year ended December 31, 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 2022, along
with the passage of time, contributed to the $6.8 million increase in fair value of the Company’s subordinated debt between
December 31, 2021 and December 31, 2022.
Of the $6.8 million increase in fair value of the Company’s subordinated debt between December 31, 2021 and December 31,
2022, $1.9 million is reported as an increase in fair value of debt attributable to instrument-specific credit risk in the Company’s
consolidated statements of comprehensive income (loss) and $4.9 million is reported as loss on change in fair value of debt in the
Company’s 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.
36
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
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 historically 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.
Cash Flows from Continuing Operations
During 2022, the Company reported $2.6 million of net cash used in operating activities from continuing operations, primarily due to:
• The sale of PWSC, which generated cash flows of $1.8 million through the date of the sale in 2022, compared to $2.8 million
for 2021;
• A $0.4 million reduction in cash flows from the remaining Extended Warranty companies;
• Outflows at the holding company related to the TruPs repurchase option ($2.3 million); all of which were partially offset by;
• Continued cost containment initiatives at the holding company regarding ongoing expenses; and
•
Increases in cash flows from the KSX companies, due to the inclusion of Ravix for the full twelve months in 2022 and the
acquisitions of CSuite and SNS.
During 2021, the Company reported $6.5 million of net cash provided by operating activities from continuing operations, primarily due
to cash inflows generated by the Extended Warranty segment (which includes PWI for 12 months in 2021) and cost containment
initiatives at the holding company.
During 2022, the net cash provided by investing activities from continuing operations was $58.1 million. This source of cash was
primarily attributed to:
• Net cash proceeds received, net of cash disposed of from the sale of PWSC, of $35.2 million;
• Net cash proceeds received from the sale of the CMC Real Property of $26.4 million;
• Cash proceeds received from the sale of real estate investments of $12.2 million;
• The acquisitions of CSuite and SNS in 2022, which totaled $13.7 million, net of cash acquired; and
•
Purchases of fixed maturities in excess of proceeds from limited liability investments and from sales and maturities of
fixed maturities.
During 2021, the net cash used in investing activities from continuing operations was $9.0 million. This use of cash was primarily
attributed to:
•
Purchases of fixed maturities in excess of proceeds from sales and maturities of fixed maturities of $15.6 million;
• The acquisitions of Ravix and RoeCo in 2021, which totaled $12.6 million, net of cash acquired;
37
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
• Distributions received (reducing the use of cash) by Net Lease from two of its limited liability investment companies of $16.3
million; and
•
Proceeds received (reducing the use of cash) from the Company’s limited liability investments.
During 2022, the net cash used in financing activities from continuing operations was $5.6 million, primarily attributed to:
•
Principal repayments: on bank loans of $5.2 million, notes payable of $6.4 million, which relates to the repayment of the Flower
Note;
• Distributions to noncontrolling interest holders of $6.0 million; and
• Net proceeds (reducing the use of cash) from bank loans of $12.7 million related to the 2022 Ravix Loan and the SNS Loan,
and proceeds from the exercise of warrants of $0.5 million.
During 2021, the net cash used in financing activities from continuing operations was $9.3 million, primarily attributed to:
•
Principal repayments: on bank loans of $4.9 million, notes payable of $9.5 million, of which $9.0 million relates to the
repayment of Net Lease’s $9.0 million mezzanine loan and $0.5 million relating to principal paydowns on the Flower Note;
• Distributions to noncontrolling interest holders of $2.4 million; and
• Net proceeds (reducing the use of cash) from bank loans of $6.2 million related to the Ravix Loan 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.
Pursuant to satisfying the covenants under the 2020 KWH Loan, distributions to the holding company in an aggregate amount not to
exceed $1.5 million in any 12-month period are permitted. Also, 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. In
2022, the Company was entitled to 50% of the excess cash flow with the other 50% used to pay down the 2020 KWH Loan. During
2022, the 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):
If leverage ratio is
Greater than 1.75:1.00
Less than 1.75:1.00 but greater than
0.75:1.00
Less than 0.75:1.0
Percent of excess cash flow
retained by the Company
50%
75%
100%
The Company anticipates that in 2023 it will be entitled to receive 75% of the 2022 excess cash flow.
On October 1, 2021, the Company closed on the acquisition of Ravix. Related to the Ravix acquisition, the Company secured the 2021
Ravix Loan with Ravix and Ravix LLC as borrowers under the 2021 Ravix Loan. On November 1, 2022, the Company closed on the
acquisition of CSuite. Related to the CSuite acquisition, the Company secured the 2022 Ravix Loan with CSuite, Ravix and Ravix
LLC as borrowers under the 2022 Ravix Loan. Pursuant to the covenants under the 2021 Ravix Loan and the 2022 Ravix Loan, Ravix
and CSuite are 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 2021 Ravix Loan and 2022 Ravix Loan.
On November 18, 2022, the Company closed on the acquisition of SNS. Related to the SNS acquisition, the Company secured the SNS
Loan with SNS and Pegasus LLC as borrowers under the SNS Loan. Pursuant to the covenants under the SNS Loan, SNS is not permitted
to make distributions to the holding company without the consent of the lender.
38
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
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 during the third quarter of 2022, which is included in accrued expenses and other liabilities in the consolidated balance sheet at
December 31, 2022 and loss on disposal of discontinued operations in the consolidated statement of operations for the year ended
December 31, 2022. There were no payments made by the Company related to the open claims during the years ended December 31,
2022 and December 31, 2021. During the first quarter of 2023, the $2.0 million that had been previously deposited into an escrow
account was released and remitted to the buyer to satisfy the Company’s payment with respect to the open claims.
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 $48.9 million and $2.2 million at December 31, 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 $64.2 million and $10.1 million reported at December 31, 2022 and December 31, 2021, respectively,
on the Company’s consolidated balance sheets. The significant increase is primarily due to the sale of PWSC and the sale of the CMC
railyard in 2022.
In addition to its collections from subsidiaries and holding company expenditures, the Company anticipates the following cash inflows
and outflows over the next twelve months:
• Inflows:
• Distributions from Net Lease of $8.3 million, from the sale of the last commercial real estate property in February 2023
• $3.7 million from the exercise of 0.7 million warrants from January 1 through February 28, 2023
• $1.5 million distribution from Amigo, given that as of early March 2023 it was no longer a regulated insurance company
• Outflows:
• $56.5 million to repurchase the trust preferred debt instruments (aka subordinate debt) for which it has the option to
repurchase, which outflow is expected no later than March 15, 2023 (see Note 11, “Derivatives,” and Note 26, “Subsequent
Events,” to the Consolidated Financial Statements)
• $4.7 million of deferred interest to the remaining trust preferred debt instrument for which the Company did not have the right
to repurchase (see Note 26, “Subsequent Events,” to the Consolidated Financial Statements); the Company would have the
ability to defer interest payments for up to 20 quarters on the remaining trust preferred debt instrument, if it so elected
• $6.1 million required to redeem the Class A Preferred Shares; however, based on discussions with the holders of the Class A
Preferred Shares, the Company anticipates that 100% of the Class A Preferred Shares would be converted and, in that case,
there would be no cash outlay by the Company (see Note 19, “Redeemable Class A Preferred Stock,” and Note 26,
“Subsequent Events,” to the Consolidated Financial Statements)
The Company notes there are outstanding warrants that expire in September 2023 (see Note 20, “Shareholders’ Equity,” to the
Consolidated Financial Statements) and, if all outstanding warrants were exercised, the Company would receive an additional $18.7
39
KINGSWAY FINANCIAL SERVICES INC.
Management’s Discussion and Analysis
million. The Company also notes that it has an additional $10 million available from the second amendment to the 2020 KWH Loan
(see Note 12, “Debt,” and Note 26, “Subsequent Events,” to the Consolidated Financial Statements), that is available to be drawn.
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, repurchase its trust preferred securities and pay
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 developing macro-economic environment.
Regulatory Capital
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. As of December 31, 2022, the capital maintained by Kingsway Re was in excess of the regulatory
capital requirements in Barbados.
CONTRACTUAL OBLIGATIONS
Table 3 summarizes cash disbursements related to the Company’s contractual obligations projected by period, including debt maturities,
interest payments on outstanding debt and future minimum payments under operating leases. Interest payments on outstanding debt in
Table 3 related to the subordinated debt, the 2020 KWH Loan, the 2021 Ravix Loan, the 2022 Ravix Loan and the SNS Loan assume
the variable rates remain constant throughout the projection period. Also, interest payments on outstanding debt reflect the interest
deferral described in the “Subordinated Debt” section above.
TABLE 3 Cash payments related to contractual obligations projected by period
As of December 31, 2022 (in thousands of dollars)
Bank loans
Subordinated debt
Interest payments on outstanding debt
Future minimum lease payments
Total
2023
5,413
—
36,451
472
42,336
2024
6,580
—
10,461
356
17,397
2025
12,723
—
9,859
191
22,773
2026
3,750
—
9,162
124
13,036
2027 Thereafter
3,775
—
8,832
59
Total
34,808
2,567
90,500
90,500
41,189 115,954
1,263
12,666 134,317 242,525
61
Table 3 above does not assume that the Company has repurchased any of its TruPs subordinated debt on or before March 15, 2023, as
discussed in the “Debt” section above, given the table presents information as of December 31, 2022. Refer to Note 11, “Derivatives,”
to the Consolidated Financial Statements for further information regarding the trust preferred debt repurchase option agreements.
While the Company gave notice on March 1, 2023 of its intent to redeem the Preferred Shares on March 15, 2023, Table 3 above does
not reflect the $6.1 million that may be paid for the redemption. See “Holding Company Liquidity” above for further discussion. Refer
to Note 19, “Redeemable Class A Preferred Stock,” to the Consolidated Financial Statements for further information regarding the
Preferred Shares.
40
KINGSWAY FINANCIAL SERVICES INC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are not
required to make disclosures under this Item.
41
KINGSWAY FINANCIAL SERVICES INC.
Item 8. Financial Statements and Supplementary Data.
Index to the Consolidated Financial Statements of
Kingsway Financial Services Inc.
Report of Independent Registered Public Accounting Firm (PCAOB ID 166)
Consolidated Balance Sheets at December 31, 2022 and 2021
Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2022 and 2021
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021
Notes to the Consolidated Financial Statements
Note 1 -Business
Note 2-Summary of Significant Accounting Policies
Note 3-Recently Issued Accounting Standards
Note 4-Acquisitions
Note 5-Disposal and Discontinued Operations
Note 6-Variable Interest Entities
Note 7-Investments
Note 8-Goodwill
Note 9-Intangible Assets
Note 10-Property and Equipment
Note 11-Derivatives
Note 12-Debt
Note 13-Leases
Note 14-Revenue from Contracts with Customers
Note 15-Income Taxes
Note 16-Earnings (Loss) Per Share
Note 17-Stock-Based Compensation
Note 18-Employee Benefit Plan
Note 19-Redeemable Class A Preferred Stock
Note 20-Shareholders’ Equity
Note 21-Accumulated Other Comprehensive Income
Note 22-Segmented Information
Note 23-Fair Value of Financial Instruments
Note 24-Related Parties
Note 25-Commitments and Contingent Liabilities
Note 26-Subsequent Events
43
46
47
48
49
50
52
52
52
60
60
65
68
70
73
74
75
76
77
80
81
82
85
86
89
89
90
90
91
93
101
101
102
42
KINGSWAY FINANCIAL SERVICES INC.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Kingsway Financial Services, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Kingsway Financial Services, Inc. (the “Company”) as of December 31, 2022 and
December 31, 2021, the related statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each
of the years in the two-year period ended December 31, 2022, and the related notes and schedule (collectively referred to as the “financial
statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2022 and December 31, 2021, and the results of its operations and its cash flows for each of the years
in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.
Revenue Recognition – Refer to Note 2 and Note 14 to the financial statements
Critical Audit Matter Description
The Company’s revenue from contracts with customers (ASC 606) relates to extended warranty service fee and commission income,
which is comprised of multiple revenue streams including: vehicle service agreement fees, guaranteed asset protection commissions,
maintenance support service fees, warranty product commissions, homebuilder warranty service fees, and homebuilder warranty
commissions. Many of the Company’s contracts include revenue which is generated from contracts with multiple performance
obligations. Accordingly, the application of revenue recognition policies requires the Company to exercise significant judgement in the
following areas:
• Determination of whether individual services are promises which are considered distinct performance obligations.
• Assessing whether the Company is a principal or an agent in providing services to the ultimate customer in the contract.
• Assessing variable consideration attributable to each contract and the related estimates of variable consideration, which
are significant in vehicle service contracts, based on refund rights provided to the customer under vehicle service contracts
and related business practices.
43
KINGSWAY FINANCIAL SERVICES INC.
• Assessing the transaction price including the impact of various dealer and partner incentive and rebate programs which
are considered contract acquisition costs.
• Determining stand-alone selling prices for each distinct service and allocation to each individual performance obligation
on a relative selling price basis.
• Determining the timing of when revenue is recognized for separate performance obligations and whether the performance
is deemed to occur over time or at a point in time.
•
For performance obligations satisfied over time, the selection of an appropriate methodology which best depicts the
transfer of services to the customer under the contract.
For these reasons, we identified revenue recognition as a critical audit matter.
How the Critical Audit Matter was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included the following, among other procedures:
• We obtained an understanding of the processes and internal controls related to each significant revenue generating activity
within scope of ASC 606.
• We evaluated the Company’s application of the portfolio approach to individual groups of contracts to ensure the
application was in compliance with ASC 606.
• We tested the determination of individual performance obligations identified by management to ensure distinct
performance obligations identified were consistent with the underlying contracts. We also tested whether all distinct
performance obligations within each contract were complete and reflected all material promises which are capable of
being distinct.
• We evaluated and tested the key judgements applied by management, including:
o
o
o
o
o
Assessing whether the Company is deemed to be the principal or an agent in delivering services to the customer. We
evaluated the key factors to determine whether the Company is responsible for fulfillment of each significant service
provided to the customer.
Estimating variable consideration, primarily related to refund liabilities on vehicle service contracts, based on
historical patterns and future expectations of customer refund requests. We tested the estimated amount of expected
refunds including management’s assessment of refund rates on each significant type of warranty contract to assess
the overall reasonableness of the refund liabilities.
Determining whether certain incentive payments to dealers and partners were considered customer acquisition costs
and should be included in the determination of the overall transaction price by examining the underlying program
agreements and related business practices followed by the Company.
Estimating stand-alone selling prices when multiple performance obligations exist within a contract, based on
management’s internal estimates of cost plus an appropriate margin to support expected selling prices. We tested
the related costs expected to be incurred in satisfying the delivery of services at contract commencement and those
expected to be incurred over the life of the contract which are primarily associated with contract administration
services. We also tested the relative selling price allocation of the contract price to each separate
performance obligation.
Application of over time recognition patterns, including management’s estimates related to claims emergence
patterns for each separate group of contracts which possess similar characteristics that faithfully represent the
transfer of services to the customer. We tested contracts at the warranty company subsidiaries to determine the
accuracy and consistency of claim emergence patterns.
44
KINGSWAY FINANCIAL SERVICES INC.
Trust Preferred Debt Repurchase Options – Refer to Note 2 and Note 11 to the financial statements
Critical Audit Matter Description
The Company entered into agreements with multiple holders of trust preferred debt instruments that gives the Company the option to
repurchase 100% of the holder’s principal and deferred interest at agreed upon prices. These agreements constitute derivative financial
instruments are carried at fair value and are required to be revalued each reporting period, with corresponding changes in fair value
recorded in the consolidated statements of operations.
The fair value of the Trust Preferred Repurchase 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 which in their entirety
fall under level 3 in the fair value hierarchy. Significant judgment is required, as the transaction(s) are based upon a hypothetical market
and the initial deposit consideration paid by the Company does not reflect fair value as the deposit consideration was not based on the
most advantageous market from a market participant assumption basis.
For these reasons, we identified the derivative option contracts as a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included the following, among other procedures:
• We evaluated the Company’s application of the accounting for derivatives to ensure the application was in compliance
with ASC 815.
• We confirmed the terms of the trust preferred debt repurchase options directly with debt holders.
• We evaluated the business purpose of the transactions for reasonableness.
• We reviewed and tested the methodologies and key assumptions in the valuation analysis provided by management using
our internal valuation specialists. In performing these procedures, we considered the following:
o Completeness and accuracy of underlying data provided by management
o
The nature and basis for valuation adjustments and calculations used by management’s valuation specialists
o Reasonableness of the valuation methods and assumptions used by management’s valuation specialists in the analysis
o
o
The sensitivity of significant inputs to the valuation model and their impact on management’s conclusions.
The probabilities of certain outcomes as selected by management
• We tested key inputs to the valuation model, including checking calculations of significant inputs to the valuation model.
• We considered the sensitivity of key assumptions and performed sensitivity analysis around the key assumptions in
evaluating their reasonableness.
/s/ Plante & Moran PLLC
We have served as the Company’s auditor since 2020.
Denver, CO
March 8, 2023
45
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Balance Sheets
(in thousands, except share data)
December 31, 2022 December 31, 2021
Assets
Investments:
Fixed maturities, at fair value (amortized cost of $40,127 and $35,889, respectively)
Equity investments, at fair value (cost of $187 and $1,147, respectively)
Limited liability investments
Limited liability investments, at fair value
Investments in private companies, at adjusted cost
Real estate investments, at fair value (cost of $0 and $10,225, respectively)
Other investments, at cost which approximates fair value
Short-term investments, at cost which approximates fair value
$
Total investments
Cash and cash equivalents
Restricted cash
Accrued investment income
Service fee receivable, net of allowance for doubtful accounts of $147 and $241, respectively
Other receivables, net of allowance for doubtful accounts of $8 and $5, respectively
Deferred contract costs
Property and equipment, net of accumulated depreciation of $1,041 and $2,235, respectively
Right-of-use asset
Goodwill
Intangible assets, net of accumulated amortization of $22,228 and $19,990, respectively
Other assets
Assets held for sale
Assets of discontinued operations
Total Assets
Liabilities and Shareholders’ Equity
Liabilities:
Accrued expenses and other liabilities
Income taxes payable
Deferred service fees
Bank loans
Notes payable
Subordinated debt, at fair value
Lease liability
Net deferred income tax liabilities
Liabilities held for sale
Liabilities of discontinued operations
Total Liabilities
Redeemable Class A preferred stock, no par value; 1,000,000 authorized; 149,733 and 169,733
issued and outstanding at December 31, 2022 and December 31, 2021, respectively; redemption
amount of $6,013 and $6,497 at December 31, 2022 and December 31, 2021, respectively
Shareholders’ Equity:
Common stock, no par value; 50,000,000 authorized; 23,437,530 and 23,130,064 issued at
December 31, 2022 and December 31, 2021, respectively; and 23,190,080 and 22,882,614
outstanding at December 31, 2022 and December 31, 2021, respectively
Additional paid-in capital
Treasury stock, at cost; 247,450 and 247,450 outstanding at December 31, 2022 and December 31,
2021, respectively
Accumulated deficit
Accumulated other comprehensive income
Shareholders’ equity attributable to common shareholders
Noncontrolling interests in consolidated subsidiaries
Total Shareholders’ Equity
Total Liabilities, Class A preferred stock and Shareholders’ Equity
$
$
$
See accompanying notes to Consolidated Financial Statements.
46
37,591 $
153
983
17,059
790
—
201
157
56,934
64,168
13,064
1,195
10,304
3,720
13,257
773
911
45,498
33,099
23,249
19,478
—
285,650 $
55,801 $
945
82,713
34,281
—
67,811
1,217
4,176
16,585
—
263,529
35,666
179
1,901
18,826
790
10,662
256
157
68,437
10,084
17,257
1,013
6,656
4,032
10,930
1,101
2,248
49,264
30,833
4,394
19,913
249,472
475,634
44,974
294
89,217
26,717
6,411
60,973
2,479
28,553
17,035
184,227
460,880
6,013
6,497
—
359,985
(492 )
(370,427 )
26,605
15,671
437
16,108
285,650 $
—
359,138
(492 )
(395,149 )
30,779
(5,724 )
13,981
8,257
475,634
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Revenues:
Service fee and commission revenue
Total revenues
Operating expenses:
Claims authorized on vehicle service agreements
Commissions
Cost of services sold
General and administrative expenses
Disposal of subsidiary transaction expenses
Total operating expenses
Operating loss
Other revenues (expenses), net:
Net investment income
Net realized gains
Loss on change in fair value of equity investments
(Loss) 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
Non-operating other (expense) revenue
Interest expense
Amortization of intangible assets
Loss on change in fair value of debt
Gain on disposal of subsidiary
Gain on extinguishment of debt
Total other revenue (expenses), net
Income (loss) from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
(Loss) income from discontinued operations, net of taxes
Loss on disposal of discontinued operations, net of taxes
Net income
Less: Net (loss) income from continuing operations attributable to noncontrolling interests in
consolidated subsidiaries
Less: Net (loss) income from discontinued operations attributable to noncontrolling interests
in consolidated subsidiaries
Less: Dividends on preferred stock
Net income (loss) attributable to common shareholders
Net income (loss) from continuing operations attributable to common shareholders
Net (loss) income from discontinued operations attributable to common shareholders
Net income (loss) attributable to common shareholders
Basic earnings (loss) per share attributable to common shareholders:
Continuing operations
Discontinued operations
Basic earnings (loss) per share - net income (loss) attributable to common shareholders
Diluted earnings (loss) per share attributable to common shareholders:
Continuing operations
Discontinued operations
Diluted earnings (loss) per share - net income (loss) attributable to common shareholders
Weighted average shares outstanding (in ‘000s):
Basic:
Diluted:
$
$
$
$
$
$
$
$
$
$
See accompanying notes to Consolidated Financial Statements.
47
Years ended December 31,
2021
2022
93,280 $
93,280
20,895
8,358
18,673
43,519
5,408
96,853
(3,573 )
2,305
1,209
(26 )
(1,754 )
1,488
16,730
(206 )
(8,092 )
(6,133 )
(4,908 )
37,917
—
38,530
34,957
4,825
30,132
(12,805 )
(2,262 )
15,065
78,401
78,401
19,536
7,042
7,052
45,245
—
78,875
(474 )
1,575
1,809
(242 )
2,391
—
—
16
(6,161 )
(4,837 )
(3,201 )
—
2,494
(6,156 )
(6,630 )
(3,916 )
(2,714 )
4,574
—
1,860
(1,471 )
1,660
(8,186 )
306
24,416 $
31,297 $
(6,881 )
24,416 $
1.36 $
(0.30 ) $
1.06 $
1.25 $
(0.27 ) $
0.98 $
542
494
(836 )
(4,868 )
4,032
(836 )
(0.22 )
0.18
(0.04 )
(0.22 )
0.18
(0.04 )
22,961
25,304
22,537
22,537
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Net income
Other comprehensive loss, net of taxes(1):
Unrealized (losses) gains on available-for-sale investments:
Unrealized losses arising during the period
Reclassification adjustment for amounts included in net income
Change in fair value of debt attributable to instrument-specific credit risk
Other comprehensive loss
Comprehensive income (loss)
Less: comprehensive (loss) income attributable to noncontrolling interests in consolidated
subsidiaries
Comprehensive income (loss) attributable to common shareholders
(1) Net of income tax expense (benefit) of $0 and $0 in 2022 and 2021, respectively
Years ended December 31,
2021
2022
$
15,065 $
1,860
(2,330 )
22
(1,930 )
(4,238 )
10,827 $
(9,721 )
20,548 $
(478 )
27
(6,844 )
(7,295 )
(5,435 )
2,187
(7,622 )
$
$
See accompanying notes to Consolidated Financial Statements.
48
Balance, December 31, 2020
Vesting of restricted stock awards,
net of share settlements for tax
withholdings
Conversion of redeemable Class A
preferred stock to common stock
Exercise of Series B warrants
Net (loss) income
Preferred stock dividends
Distributions to noncontrolling
interest holders
Other comprehensive loss
Stock-based compensation
Balance, December 31, 2021
Vesting of restricted stock awards,
net of share settlements for tax
withholdings
Conversion of redeemable Class A
preferred stock to common stock
Exercise of Series B warrants
Net income (loss)
Preferred stock dividends
Distributions to noncontrolling
interest holders
Deconsolidation of noncontrolling
interest
Other comprehensive loss
Redemption of equity awards related
to disposal of subsidiary
Stock-based compensation
Balance, December 31, 2022
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
Additional
Paid-in
Capital
Common Stock
Amount
Shares
22,211,069 $ — $ 355,242 $
Accumulated
Other
Shareholders’
Equity
Attributable to
Noncontrolling
Interests in
Total
Treasury Accumulated Comprehensive Common
Stock Deficit
Income (Loss) Shareholders Subsidiaries
Consolidated Shareholders’
Equity
(492 ) $
(394,807 ) $
38,059
(1,998 ) $
14,157 $
12,159
239,402 —
—
—
—
82,143 —
350,000 —
— —
— —
500
1,750
—
(494 )
—
—
—
—
—
—
(342 )
—
—
—
—
—
—
—
—
2,140
22,882,614 $ — $ 359,138 $
— —
— —
— —
—
—
—
(492 ) $
—
—
—
(395,149 ) $
—
(7,280 )
—
30,779
—
—
—
500
1,750
(342 )
(494 )
—
(7,280 )
2,140
(5,724 ) $
—
—
2,202
—
(2,363 )
(15 )
—
13,981 $
500
1,750
1,860
(494 )
(2,363 )
(7,295 )
2,140
8,257
73,437 —
—
—
—
125,000 —
109,029 —
— —
— —
788
545
—
(306 )
—
—
—
—
—
—
24,722
—
— —
—
—
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
788
545
24,722
(306 )
—
—
(9,657 )
—
788
545
15,065
(306 )
—
(6,016 )
(6,016 )
—
(4,174 )
—
(4,174 )
2,193
(64 )
2,193
(4,238 )
(1,056 )
876
16,108
(1,056 )
876
23,190,080 $ — $ 359,985 $
— —
— —
—
—
(492 ) $
—
—
(370,427 ) $
—
—
26,605 $
(1,056 )
876
15,671 $
—
—
437 $
See accompanying notes to Consolidated Financial Statements.
49
KINGSWAY FINANCIAL SERVICES INC.
Consolidated Statements of Cash Flows
(in thousands)
Years ended December 31,
2021
2022
Cash provided by (used in):
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss (income) from discontinued operations, net of taxes
Loss on disposal of discontinued operations, net of taxes
Equity in net income of limited liability investments
Depreciation and amortization expense
Stock-based compensation expense, net of forfeitures
Net realized gains
Loss on change in fair value of equity investments
Loss (gain) on change in fair value of limited liability investments, at fair value
Gain on change in fair value of real estate investments
Loss on change in fair value of debt
(Gain) loss on change in fair value of derivatives
Loss on change in fair value of contingent consideration
Deferred income taxes, adjusted for Ravix liabilities assumed
Amortization of fixed maturities premiums and discounts
Gain on disposal of subsidiary
Gain on extinguishment of debt
Changes in operating assets and liabilities:
Service fee receivable, net, adjusted for CSuite, SNS and Ravix assets acquired
Other receivables, net, adjusted for CSuite and Ravix assets acquired
Deferred contract costs
Other assets, adjusted for CSuite, SNS and Ravix assets acquired
Deferred service fees
Other, net, adjusted for CSuite, SNS and Ravix assets acquired and liabilities assumed
Cash (used in) provided by operating activities - continuing operations
Cash used in operating activities - discontinued operations
Net cash used in operating activities
Investing activities:
Proceeds from sales and maturities of fixed maturities
Proceeds from sales of equity investments
Purchases of fixed maturities
Net proceeds from limited liability investments
Net proceeds from limited liability investments, at fair value
Net proceeds from investments in private companies
Proceeds from sale of real estate investments
Net proceeds from other investments
Net proceeds from disposal of subsidiary, net of cash disposed of $1,391
Acquisition of businesses, net of cash acquired
Acquisition of assets, net of cash acquired
Net disposals (purchases) of property and equipment
Cash provided by (used in) investing activities - continuing operations
Cash provided by investing activities - discontinued operations
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from exercise of warrants
Distributions to noncontrolling interest holders
Payment of contingent consideration from acquisition
Taxes paid related to net share settlements of restricted stock awards
Principal proceeds from bank loans, net of debt issuance costs of $167 in 2022 and $160 in 2021
Principal payments on bank loans
Principal payments on notes payable
Cash used in financing activities - continuing operations
Cash (used in) provided by financing activities - discontinued operations
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash from continuing operations
Cash and cash equivalents and restricted cash at beginning of period
Less: cash and cash equivalents and restricted cash of discontinued operations
Cash and cash equivalents and restricted cash of continuing operations at beginning of period
Cash and cash equivalents and restricted cash of continuing operations at end of period
50
$
15,065 $
12,805
2,262
(293 )
6,449
4,052
(1,209 )
26
1,754
(1,488 )
4,908
(17,070 )
1,510
1,406
236
(37,917 )
—
(136 )
(7 )
(2,327 )
(2,067 )
(6,504 )
15,916
(2,629 )
(11,945 )
(14,574 )
9,714
—
(14,211 )
1,577
621
258
12,150
55
35,158
(13,689 )
—
26,461
58,094
42,846
100,940
545
(6,016 )
(750 )
(396 )
12,682
(5,228 )
(6,411 )
(5,574 )
(32,358 )
(37,932 )
49,891
29,899
2,558
27,341
77,232 $
$
1,860
(4,574 )
—
(27 )
5,067
3,598
(1,809 )
242
(2,391 )
—
3,201
14
263
2,203
230
—
(2,494 )
(791 )
75
(2,095 )
(387 )
(2,354 )
6,647
6,478
(12,386 )
(5,908 )
6,251
23
(21,868 )
2,664
17,006
391
38
—
(10,003 )
(2,635 )
(830 )
(8,963 )
365
(8,598 )
1,750
(2,363 )
—
(499 )
6,240
(4,914 )
(9,474 )
(9,260 )
8,720
(540 )
(11,745 )
44,945
5,859
39,086
27,341
KINGSWAY FINANCIAL SERVICES INC.
Supplemental disclosures of cash flows information:
Cash paid by continuing operations during the year for:
Interest
Income taxes
Non-cash investing and financing activities from continuing operations:
Contingent consideration for acquisition of business
Conversion of redeemable Class A preferred stock to common stock
Accrued dividends on Class A preferred stock issued
Years ended December 31,
2021
2022
$
$
$
$
$
1,427 $
501 $
— $
788 $
306 $
821
243
2,195
500
340
See accompanying notes to Consolidated Financial Statements.
51
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 and business services industries.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Principles of consolidation:
The accompanying information in the 2022 Annual Report has been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
The accompanying consolidated financial statements include the accounts of Kingsway and its majority owned and controlled
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
In addition, the Company evaluates its relationships or investments for consolidation pursuant to authoritative accounting guidance
related to the consolidation of a variable interest entity (“VIE”) under the Variable Interest Model prescribed by the Financial Accounting
Standards Board (“FASB”).
The Company’s investments include certain investments, primarily in limited liability companies and limited partnerships in which the
Company holds a variable interest. The Company evaluates these investments for the characteristics of a VIE. The Variable Interest Model
identifies the characteristics of a VIE to include investments (1) lacking sufficient equity to finance activities without additional
subordinated support or (2) in which the holders of equity at risk in the investments lack characteristics of a controlling financial interest,
such as the power to direct activities that most significantly impact the legal entity’s economic performance; the obligation to absorb the
legal entity’s expected losses; or the right to receive the expected residual returns of the legal entity. The equity investors as a group are
considered to lack the power to direct activities that most significantly impact the legal entity’s economic performance when (1) the voting
rights of some investors are not proportional to their obligations to absorb the expected losses of the legal entity or their rights to receive
the expected residual returns of the legal entity and (2) substantially all of the activities of the legal entity are conducted on behalf of an
investor with disproportionately few voting rights. When evaluating whether an investment lacks characteristics of a controlling financial
interest, the Company considers limited liability companies and limited partnerships to lack the power of a controlling financial interest
if neither of the following exists: (1) a simple majority or lower threshold of partners or members with equity at risk are able to exercise
substantive kick-out rights through voting interest over the general partner(s) or managing member(s) or (2) limited partners with equity
at risk are able to exercise substantive participating rights over the general partner(s) or managing member(s).
If the characteristics of a VIE are met, the Company evaluates whether it meets the primary beneficiary criteria. The primary beneficiary
is considered to be the entity holding a variable interest that has the power to direct activities that most significantly impact the economic
performance of the VIE; the obligation to absorb losses of the VIE; or the right to receive benefits from the VIE that could potentially
be significant to the VIE. In instances where the Company is considered to be the primary beneficiary, the Company consolidates the
VIE. When the Company is not considered to be the primary beneficiary of the VIE, the VIE is not consolidated and the Company uses
the equity method to account for the investment. Under this method, the carrying value is generally the Company’s share of the net asset
value of the unconsolidated entity, and changes in the Company’s share of the net asset value are recorded in net investment income.
Certain prior year amounts have been reclassified to conform to current year presentation. Such reclassifications had no impact on
previously reported net income or total shareholders’ equity.
Subsidiaries
The Company’s consolidated financial statements include the assets, liabilities, shareholders’ equity, revenues, expenses and cash flows
of the holding company and its subsidiaries and have been prepared in accordance with U.S. GAAP. A subsidiary is an entity controlled,
directly or indirectly, through ownership of more than 50% of the outstanding voting rights, or where the Company has the power to
govern the financial and operating policies so as to obtain benefits from its activities. Assessment of control is based on the substance
of the relationship between the Company and the entity and includes consideration of both existing voting rights and, if applicable,
potential voting rights that are currently exercisable and convertible. The operating results of subsidiaries that have been disposed are
included up to the date control ceased, and any difference between the fair value of the consideration received and the carrying value of
a subsidiary that has been disposed is recognized in the consolidated statements of operations. All intercompany balances and
transactions are eliminated in full.
52
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The consolidated financial statements are prepared as of December 31, 2022 based on individual company financial statements at the
same date, or in the case of certain limited liability companies that are consolidated, on a three-month lag basis. Accounting policies of
subsidiaries have been aligned where necessary to ensure consistency with those of Kingsway.
The Company’s subsidiaries Argo Holdings Fund I, LLC (“Argo Holdings”), Flower Portfolio 001, LLC (“Flower”) and Net Lease
Investment Grade Portfolio LLC (“Net Lease”) meet the definition of an investment company and follow the accounting and reporting
guidance in Financial Accounting Standards Codification Topic 946, Financial Services-Investment Companies.
Noncontrolling interests
The Company has noncontrolling interests attributable to certain of its subsidiaries. A noncontrolling interest arises where the Company
owns less than 100% of the voting rights and economic interests in a subsidiary. A noncontrolling interest is initially recognized at the
proportionate share of the identifiable net assets of the subsidiary at the acquisition date and is subsequently adjusted for the
noncontrolling interest’s share of the acquiree’s net income (loss) and changes in capital. The effects of transactions with noncontrolling
interests are recorded in shareholders’ equity where there is no change of control.
(b)
Use of estimates:
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 classification 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 consolidated financial statements include, but are not limited
to, revenue recognition; valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of
limited liability investments, at fair value; 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 instruments and contingent consideration.
(c)
Business combinations and asset acquisitions:
The Company evaluates acquisitions in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations
(“ASC 805”), to determine if a transaction represents an acquisition of a business or an acquisition of assets. The results of
acquired subsidiaries are included in the consolidated statements of operations from the date of acquisition.
An acquisition of a business represents a business combination. The acquisition method of accounting is used to account for a business
combination. The cost of an acquired business is measured as the fair value of the assets received, equity instruments issued and liabilities
incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any noncontrolling interest.
The excess of the cost of an acquired business over the fair value of the Company’s share of the identifiable net assets acquired is
recorded as goodwill. If the cost of acquired business is less than the fair value of the net assets of the subsidiary acquired, the difference
is recognized in the consolidated statements of operations. Noncontrolling interests in the net assets of consolidated entities are reported
separately in shareholders’ equity and initially measured at fair value. Acquisition costs related to a business combination are expensed
as incurred.
When an acquisition does not meet the definition of a business combination either because: (i) substantially all of the fair value of the
gross assets acquired is concentrated in a single identifiable asset, or group of similar identified assets, or (ii) the acquired entity does
not have an input and a substantive process that together significantly contribute to the ability to create outputs, the Company accounts
for the acquisition as an asset acquisition. In an asset acquisition, goodwill is not recognized. Any excess of the total purchase price
plus transaction costs over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets
at the acquisition date.
53
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(d)
Investments:
Investments in fixed maturities are classified as available-for-sale and reported at fair value. Unrealized gains and losses are included in
accumulated other comprehensive income, net of tax, until sold or until an other-than-temporary impairment is recognized, at which
point cumulative unrealized gains or losses are reclassified to the consolidated statements of operations.
Equity investments include common stocks and warrants and are reported at fair value. Changes in fair value of equity investments are
recognized in net income.
Limited liability investments include investments in limited liability companies and limited partnerships in which the Company’s
interests 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. 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.
Limited liability investments, at fair value are accounted for at fair value with changes in fair value included in gain on change in fair
value of limited liability investments, at fair value. The difference between the end of the reporting period of the limited liability
investments, at fair value and that of the Company is no more than three months.
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. These investments do not have readily determinable
fair values and, therefore, are reported at cost, adjusted for observable price changes and impairments. Changes in carrying value are
included in net change in unrealized loss on private company investments.
Real estate investments are reported at fair value, which is zero as of December 31, 2022 due to the sale of Flower’s investment real
estate properties for $12.2 million on September 29, 2022. Note 7, “Investments,” for further details.
Other investments include collateral loans and are reported at their unpaid principal balance, which approximates fair value.
Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost,
which approximates fair value.
Realized gains and losses on sales, determined on a first-in first-out basis, are included in net realized gains.
Dividends and interest income are included in net investment income. Investment income is recorded as it accrues.
The Company accounts for all financial instruments using trade date accounting.
The Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment.
Impairment is charged to the consolidated statements of operations if the fair value of an instrument falls below its cost/amortized cost
and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include
the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and
the Company’s ability and intent to hold investments for a period of time sufficient to allow for any anticipated recovery.
(e)
Cash and cash equivalents:
Cash and cash equivalents include cash and investments with original maturities of no more than three months when purchased that are
readily convertible into cash.
(f)
Restricted cash:
Restricted cash represents certain cash and cash equivalent balances restricted as to withdrawal or use. The Company’s restricted cash
is comprised primarily of cash held for the payment of vehicle service agreement claims under the terms of certain contractual
agreements, funds held in escrow, statutory deposits and amounts pledged to third-parties as deposits or to collateralize liabilities.
54
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(g)
Service fee receivable:
Service fee receivable includes balances due and uncollected from customers. Service fee receivable is reported net of an estimated
allowance for doubtful accounts. The allowance for doubtful accounts is determined based on periodic evaluations of aged receivables,
historical business data, management’s experience and current economic conditions.
(h)
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 incremental costs to obtain a contract and costs to fulfill a contract with a
customer are recorded in commissions and general and administrative expenses, respectively, in the consolidated statements of
operations. Changes in estimates, if any, are recorded in the accounting period in which they are determined.
(i)
Property and equipment:
Property and equipment are reported in the consolidated financial statements at cost. Depreciation of property and equipment has been
provided using the straight-line method over the estimated useful lives of such assets. Repairs and maintenance are recognized in
operations during the period incurred. Land is not depreciated. The Company estimates useful life to be three to ten years for leasehold
improvements; three to seven years for furniture and equipment; and three to five years for computer hardware.
(j)
Goodwill and intangible assets:
When the Company acquires a subsidiary or other business where it exerts significant influence, the fair value of the net tangible and
intangible assets acquired is determined and compared to the amount paid for the subsidiary or business acquired. Any excess of the
amount paid over the fair value of those net assets is considered to be goodwill.
Goodwill is tested for impairment annually as of November 30, or more frequently if events or circumstances indicate that the carrying
value may not be recoverable, to ensure that its fair value is greater than or equal to the carrying value. Any excess of carrying value
over fair value is charged to the consolidated statements of operations in the period in which the impairment is determined.
When the Company acquires a subsidiary or other business where it exerts significant influence or acquires certain assets, intangible assets
may be acquired, which are recorded at their fair value at the time of the acquisition. An intangible asset with a definite useful life is
amortized in the consolidated statements of operations over its estimated useful life. The Company writes down the value of an intangible
asset with a definite useful life when the undiscounted cash flows are not expected to allow for full recovery of the carrying value.
Intangible assets with indefinite useful lives are not subject to amortization and are tested for impairment annually as of November 30,
or more frequently if events or circumstances indicate that the carrying value may not be recoverable, to ensure that fair values are
greater than or equal to carrying values. Any excess of carrying value over fair value is charged to the consolidated statements of
operations in the period in which the impairment is determined.
(k)
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 11, “Derivatives,” for further information.
The Company entered into a pay fixed, receive variable interest rate swap contract to reduce its exposure to changes in interest rates. The
interest rate swap contract is included in other assets and accrued expenses and other liabilities in the consolidated balance sheets at
December 31, 2022 and December 31, 2021, respectively. The Company has not elected hedge accounting for the interest rate swap,
therefore changes in fair value are recorded in current period earnings and are included in interest expense in the consolidated statements
of operations.
55
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
During the third quarter of 2022, the Company entered into three trust preferred debt repurchase option agreements. The trust preferred
debt repurchase options are included in other assets in the consolidated balance sheet at December 31, 2022 with changes in fair value
included in gain on change in fair value of derivative asset option contracts in the consolidated statement of operations.
(l)
Debt:
Bank loans and notes payable are reported in the consolidated balance sheets at par value adjusted for unamortized discount or premium
and unamortized issuance costs. Discounts, premiums, and costs directly related to the issuance of debt are capitalized and amortized
through the maturity date of the debt using the effective interest rate method and are recorded in interest expense in the consolidated
statements of operations. Gains and losses on the extinguishment of debt are recorded in gain on extinguishment of debt.
The Company’s subordinated debt is measured and reported at fair value. 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 portion of the change in fair value of subordinated debt
related to the instrument-specific credit risk is recognized in other comprehensive loss.
(m)
Contingent consideration:
The consideration for certain of the Company’s acquisitions include future payments to 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 at the date of acquisition and are included in accrued expenses and other liabilities in the consolidated balance sheets. 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. These fair value measurements are based on significant
inputs not observable in the market. Changes in assumptions could have an impact on the payout of contingent consideration liabilities.
Changes in fair value are reported in the consolidated statements of operations as non-operating other (expense) revenue.
(n)
Income taxes:
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities
are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and their respective
tax bases and (ii) loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment.
Future tax benefits are recognized to the extent that realization of such benefits is more likely than not and a valuation allowance is
established for any portion of a deferred tax asset that management believes will not be realized. Current federal income taxes are
charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the
current year. The Company accounts for uncertain tax positions in accordance with the income tax accounting guidance. The Company
recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit).
(o)
Leases:
The Company records a right of use asset and lease liability for all leases in which the estimated term exceeds twelve months. The
Company treats contracts as a lease when the contract: (1) conveys the right to use a physically distinct property or equipment asset for
a period of time in exchange for consideration, (2) the Company directs the use of the asset and (3) the Company obtains substantially
all the economic benefits of the asset. Right-of-use assets and lease liabilities are measured and recognized based on the present value
of the future minimum lease payments over the lease term at the commencement date. As the Company’s leases are office leases, the
Company is unable to determine an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information
available at the lease commencement date in determining the present value of future payments for those leases. The Company includes
options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain that
such options will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company determines lease classification at the commencement date. Leases not classified as sales-type (lessor) or financing leases
(lessor and lessee) are classified as operating leases. The primary accounting criteria the Company uses that results in operating lease
classification are: (a) the lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term, (b) the lease
does not grant the lessee a purchase option that the lessee is reasonably certain to exercise, (c) using a seventy-five percent or more
threshold in addition to other qualitative factors, the lease term is not for a major part of the remaining economic life of the underlying
56
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
asset, (d) using a ninety percent or more threshold in addition to other qualitative factors, the present value of the sum of the lease payments
and residual value guarantee from the lessee, if any, does not equal or substantially exceed the fair value of the underlying asset.
As an accounting policy, the Company has elected not to apply the recognition requirements in ASC 842 to short-term leases (generally
those with terms of twelve months or less). Instead, the Company recognizes the lease payments as expense on a straight-line basis over
the lease term and any variable lease payments in the period in which the obligation for those payments is incurred.
Rental expense for operating leases is recognized on a straight-line basis over the lease term, net of any applicable lease incentive
amortization.
(p)
Revenue recognition:
Service fee and commission revenue and deferred service fees
Service fee and commission revenue represents 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 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.
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.
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.
Standalone selling prices are not directly observable in the contract for each of the separate home warranty performance obligations. As
a result, the Company has applied the expected cost plus a margin approach to develop models to estimate the standalone selling price
for each of its performance obligations in order to allocate the transaction price to the two separate performance obligations identified.
57
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
For the model related to the warranty administrative services performance obligation, the Company makes judgments about which of
its actual costs are associated with enrolling each home sold by the builder into the program and the warranty administrative system and
delivering the warranty product. For the model related to the other warranty services performance obligation, the Company makes
judgments about which of its actual costs are associated with activities, such as answering builder or homeowner questions regarding
the home warranty and dispute resolution services, which are performed over the life of the warranty coverage period. The relative
percentage of expected costs plus a margin associated with the warranty administrative services performance obligation is applied to the
transaction price to determine the estimated standalone selling price of the warranty administrative services performance obligation,
which the Company recognizes as earned at the time the home is enrolled and the warranty product is delivered. The relative percentage
of expected costs plus a margin associated with the other warranty services performance obligation is applied to the transaction price to
determine the estimated standalone selling price of the other warranty services performance obligation, which the Company recognizes
as earned as services are performed over the warranty coverage period.
For the other warranty services performance obligation, the Company applies an input method of measurement, based on the expected
costs plus a margin of providing services, to determine the transfer of its services over the warranty coverage period. The Company uses
historical data regarding the number of calls it receives and activities performed, in addition to the number of homes enrolled, to estimate
the number of complaints and dispute resolution requests to be received by year until coverage expires, which allows the Company to
develop a revenue recognition pattern that it believes provides a faithful depiction of the transfer of services over time for the other
warranty services performance obligation.
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 acts as an agent on behalf of the third-party insurance company
that underwrites and guaranties these warranty contracts. Homebuilder warranty commissions are 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 earns fees to manage remediation or repair
services related to claims on insurance-backed warranty obligations, which are earned when the claims are closed.
Kingsway Search Xcelerator consulting
finance and human
resources consulting services, as well as healthcare professional staffing services. The Company invoices for services revenue based on
contracted rates. Revenue is earned as services are provided.
revenue from providing outsourced
includes
revenue
the
Contingent consideration receivable
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,
“Disposal and Discontinued Operations,” for further discussion.
(q)
Stock-based compensation:
The Company uses the fair-value method of accounting for stock-based compensation awards granted to employees. Expense is
recognized on a straight-line basis over the requisite service period during which awards are expected to vest, with a corresponding
increase to either additional paid-in capital for equity-classified awards or to a liability for liability-classified awards. Liability-classified
awards, included in accrued expenses and other liabilities in the consolidated balance sheets, are measured and reported at fair value on
the date of grant and are remeasured each reporting period. Compensation expense related to the change in fair value for liability-
classified awards is reported in the consolidated statements of operations as general and administrative expenses. For awards with a
graded vesting schedule, expense is recognized on a straight-line basis over the requisite service period for each separately vesting
portion of the award. For awards subject to a performance condition, expense is recognized when the performance condition has been
satisfied or is probable of being satisfied. For awards subject to a market condition, compensation expense is recognized on a straight-
line basis regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Forfeitures are
recognized in the period that the award is forfeited.
(r)
Fair value of financial instruments:
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
58
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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.
(s)
Holding company liquidity:
The Company’s Extended Warranty and Kingsway Search Xcelerator subsidiaries fund their obligations primarily through service fee
and commission 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.
The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway
America Inc. (“KAI”), was $48.9 million and $2.2 million at December 31, 2022 and December 31, 2021, respectively. The holding
company cash amounts are reflected in the cash and cash equivalents of $64.2 million and $10.1 million reported at December 31, 2022
and December 31, 2021, respectively, on the Company’s consolidated balance sheets.
In addition to its collections from subsidiaries and holding company expenditures, the Company anticipates the following cash inflows
and outflows over the next twelve months:
• Inflows:
• Distributions from Net Lease of $8.3 million, from the sale of the last commercial real estate property in February 2023
• $3.7 million from the exercise of 0.7 million warrants from January 1 through February 28, 2023
• $1.5 million distribution from Amigo, given that as of early March 2023 it was no longer a regulated insurance company
• Outflows:
• $56.5 million to repurchase the trust preferred debt instruments (aka subordinate debt) for which it has the option to
repurchase, which outflow is expected no later than March 15, 2023 (see Note 11, “Derivatives,” and Note 26,
“Subsequent Events ”)
• $4.7 million of deferred interest to the remaining trust preferred debt instrument for which the Company did not have the
right to repurchase (see Note 26, “Subsequent Events”); the Company would have the ability to defer interest payments for
up to 20 quarters on the remaining trust preferred debt instrument, if it so elected
• $6.1 million required to redeem the Class A Preferred Shares; however, based on discussions with the holders of the Class
A Preferred Shares, the Company anticipates that 100% of the Class A Preferred Shares would be converted and, in that case,
there would be no cash outlay by the Company (see Note 19, “Redeemable Class A Preferred Stock,” and Note 26,
“Subsequent Events”)
The Company notes there are outstanding warrants that expire in September 2023 (see Note 20, “Shareholders’ Equity”) and, if all
outstanding warrants were exercised, the Company would receive an additional $18.7 million. The Company also notes that it has an
additional $10 million available from the second amendment to the 2020 KWH Loan (see Note 12, “Debt,” and Note 26, “Subsequent
Events”), that is available to be drawn.
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, repurchase its trust preferred securities and to pay
the 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 developing macro-economic environment.
59
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 3 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.
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting that provides optional expedients for a limited period of time for accounting for contracts, hedging
relationships, and other transactions affected by the London Interbank Offered Rate (“LIBOR”) or other reference rates expected to be
discontinued. These optional expedients can be applied from March 2020 through December 31, 2022. In December 2022, the FASB
issued ASU No. 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 which deferred the sunset date of
Topic 848 from December 31, 2022 to December 31, 2024. Debt arrangements that were entered into during the year ended December
31, 2022, including the new term loans expiring in November 2028 and the new revolving credit facilities expiring in November 2024,
no longer use LIBOR as a reference rate. LIBOR continues to be the reference rate for our trust preferred subordinated debt with maturity
dates ranging from December 2032 through January 2034. The phase out of LIBOR reference rates for our subordinated debt will occur
beginning in June 2023. The Company’s adoption of this new standard occurred during the year ended December 31, 2022, prior to
the phase-out of the LIBOR reference rate. There was no material impact to the Company’s consolidated financial statements, nor do we
expect the adoption of this standard to have a material impact on the consolidated financial statements during the LIBOR transition period.
(b)
Accounting Standards Not Yet Adopted:
In June 2016, the 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’s service fee
receivable and other receivables are within the scope of ASU 2016-13, however the Company does not anticipate the impact of adopting
this standard will be material to its consolidated financial statements.
NOTE 4 ACQUISITIONS
(a)
Business Combinations
During the years ended December 31, 2022 and December 31, 2021, the Company incurred acquisition expenses related to business
combinations of $1.1 million and $0.4 million, respectively, which are included in general and administrative expenses in the
consolidated statements of operations.
60
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
CSuite Financial Partners, LLC
On November 1, 2022, the Company acquired 100% of the outstanding equity interests of CSuite Financial Partners, LLC
(“CSuite”). CSuite, based in Manhattan Beach, California, is a national financial executive services firm providing financial
management leadership to companies in every industry, regardless of size, throughout the United States. As further discussed in Note
22, “Segmented Information,” CSuite is included in the Kingsway Search Xcelerator segment. This acquisition was the Company’s
second 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 CSuite for aggregate cash consideration of approximately $8.5 million, less certain escrowed amounts for
purposes of indemnification claims and working capital adjustments. The Company will also pay additional contingent consideration,
only to the extent earned, in an aggregate amount of up to $3.6 million, which is subject to certain conditions, including the successful
achievement of certain financial metrics for CSuite during the three-year period commencing on the first full calendar month following
the acquisition date.
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
are subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one-year as permitted under
U.S. GAAP. The Company expects to complete its purchase price allocation in early 2023. These estimates, allocations and calculations
are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed could
change from the estimates included in these consolidated financial statements.
Refer to Note 9, “Intangible Assets,” for further disclosure of the intangible assets related to this acquisition. The goodwill
of $4.1 million represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company
paid to grow its portfolio of companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes. The
estimated fair value of the contingent consideration obligation at the acquisition date of zero was determined using a Monte Carlo
simulation based on forecasted future results.
The following table summarizes the preliminary estimated allocation of the CSuite assets acquired and liabilities assumed at the date
of acquisition:
(in thousands)
Cash and cash equivalents
Service fee receivable
Other receivables
Goodwill
Intangible asset not subject to amortization - trade name
Intangible asset subject to amortization - customer relationships
Other assets
Total assets
Accrued expenses and other liabilities
Total liabilities
Purchase price
November 1, 2022
569
$
311
21
4,109
1,500
2,500
53
9,063
$
$
$
$
539
539
8,524
The consolidated statements of operations include the earnings of CSuite from the date of acquisition. From the date of acquisition
through December 31, 2022, CSuite earned revenue of $1.3 million and had a net loss of less than $0.1 million.
Secure Nursing Service, Inc.
On November 18, 2022, the Company acquired substantially all of the assets and assumed certain specified liabilities of Secure Nursing
Service, Inc. (“SNS”) for aggregate cash consideration of $11.5 million, less certain escrowed amounts for purposes of indemnification
claims and working capital adjustments. SNS, based in Los Angeles, California, employs highly skilled and professional per diem and
travel Registered Nurses, Licensed Vocational Nurses, Certified Nurse Assistants and Allied Healthcare Professionals with multiple years
of acute care hospital experience. SNS places these healthcare professionals in both per diem assignments, and in short-term and long-
61
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
term travel assignments in a variety of hospitals in southern California. As further discussed in Note 22, “Segmented Information,” SNS
is included in the Kingsway Search Xcelerator segment. This acquisition was the Company’s third acquisition under its novel CEO
Accelerator program and further expands the Company’s portfolio of businesses with recurring revenue and low capital intensity.
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
are subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one-year as permitted under
U.S. GAAP. The Company expects to complete its purchase price allocation in early 2023. These estimates, allocations and calculations
are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed could
change from the estimates included in these consolidated financial statements.
Refer to Note 9, “Intangible Assets,” for further disclosure of the intangible assets related to this acquisition. The goodwill of $1.6
million represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company paid to
grow its portfolio of companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes.
The following table summarizes the preliminary estimated allocation of the SNS assets acquired and liabilities assumed at the date
of acquisition:
(in thousands)
Service fee receivable
Goodwill
Intangible asset not subject to amortization - trade name
Intangible asset subject to amortization - customer relationships
Other assets
Total assets
Accrued expenses and other liabilities
Total liabilities
Purchase price
$
November 18, 2022
3,200
1,600
3,100
3,600
6
11,506
$
$
$
$
6
6
11,500
The consolidated statements of operations include the earnings of SNS from the date of acquisition. From the date of acquisition
through December 31, 2022, SNS earned revenue of $2.4 million and had a net loss of $0.1 million.
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
the Kingsway Search
in Note 22, “Segmented Information,” Ravix is
engagements. As further discussed
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.
included
in
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. During 2022, Ravix
made a cash earn-out payment of $0.8 million.
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.
62
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Refer to Note 9, “Intangible Assets,” for further disclosure of the intangible assets related to this acquisition. The goodwill of $7.9
million represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company paid to
grow its portfolio of companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes. The estimated
fair value of the contingent consideration obligation at the acquisition date of $2.2 million was determined using a Monte Carlo
simulation based on forecasted future results. See Note 23, “Fair Value of Financial Instruments,” for further discussion related to the
contingent consideration.
The following table summarizes the purchase price of Ravix:
(in thousands)
Purchase price:
Cash paid at closing
Working capital adjustment
Contingent consideration
Total purchase price
October 1, 2021
10,930
$
83
2,195
13,208
$
The following table summarizes the estimated allocation of the Ravix assets acquired and liabilities assumed at the date of acquisition:
(in thousands)
Cash and cash equivalents
Restricted cash
Service fee receivable
Other receivables
Right-of-use asset
Goodwill
Intangible asset subject to amortization - customer relationships
Intangible asset not subject to amortization - trade name
Other assets
Total assets
Accrued expenses and other liabilities
Income taxes payable
Lease liability
Net deferred income tax liabilities
Total liabilities
Purchase price
October 1, 2021
225
$
752
1,031
17
116
7,905
4,000
2,500
133
16,679
$
$
$
$
1,546
13
116
1,796
3,471
13,208
The consolidated statements of operations include the earnings of Ravix from the date of acquisition. From the date of acquisition
through December 31, 2021, Ravix earned revenue of $3.5 million and had a net loss of $0.2 million.
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 compared to the amount recorded at
December 31, 2020. The measurement period adjustments reflected changes in the estimated fair values of certain assets and
liabilities, and the working capital true-up.
63
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The measurement period adjustments resulted in an increase in amortization expense of $1.9 million related to the customer relationships
intangible asset and a decrease to service fee and commission revenue of $1.9 million, both of which were recorded during the third
quarter of 2021.
Unaudited Pro Forma Summary
The following unaudited pro forma summary presents the Company’s consolidated financial statements for the year ended December 31,
2022 and December 31, 2021 as if CSuite, SNS and Ravix had been acquired on January 1 of the year prior to the acquisitions. The pro
forma summary is presented for illustrative purposes only and does not purport to represent the results of our operations that would have
actually occurred had the acquisitions occurred as of the beginning of the period presented or project our results of operations as of any
future date or for any future period, as applicable. The pro forma results primarily include purchase accounting adjustments related to
the acquisitions of CSuite, SNS and Ravix, interest expense and the amortization of debt issuance costs and discount associated with the
related financing obtained in connection with the CSuite, SNS and Ravix acquisitions (see Note 12, “Debt”), tax related adjustments
and acquisition-related expenses.
(in thousands, except per share data)
Revenues
Income (loss) from continuing operations attributable to common shareholders
Basic earnings (loss) per share - continuing operations
Diluted earnings (loss) per share - continuing operations
Years ended December 31,
2021
$ 113,342
$ (4,439)
$ (0.20)
$ (0.20)
2022
$ 121,789
$ 35,009
$ 1.52
$ 1.40
(b)
Asset Acquisition
VA Lafayette, LLC (formerly 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. Refer
to Note 24, “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 a mortgage in the principal amount of
$13.5 million (the “LA Mortgage”) at the date of acquisition plus a premium of $3.5 million.
The acquisition 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, was allocated
to the individual net assets acquired based on their relative fair values. In connection with the acquisition, the Company recorded an
above-market lease intangible asset of $0.8 million and in-place and other lease intangible assets of $2.1 million.
The following table summarizes the allocation of the purchase price to the net assets of VA Lafayette at the date of acquisition:
(in thousands)
Purchase price:
Cash
Acquisition costs
Liabilities assumed
Total purchase price
Fair value of net assets acquired:
Cash and cash equivalents
Other receivables
Property and equipment, net
Intangible asset subject to amortization - Above-market lease
Intangible asset subject to amortization - In-place and other lease assets
Accrued expenses and other liabilities
Net deferred income tax liabilities
Total fair value of net assets acquired
64
December 30, 2021
2,386
$
249
16,983
19,618
$
December 30, 2021
365
$
133
16,466
835
2,114
(50 )
(245 )
19,618
$
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Since VA Lafayette was acquired on December 30, 2021, the consolidated statement of operations for the year ended December 31,
2021 did not include any revenue or earnings of VA Lafayette, as such items are immaterial.
During the fourth quarter of 2022, the Company began executing a plan to sell VA Lafayette, and as a result, VA Lafayette
is reported as held for sale. Further information is contained in Note 5, “Disposal and Discontinued Operations” to the consolidated
financial statements.
NOTE 5 DISPOSAL AND DISCONTINUED OPERATIONS
(a) 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 price, 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 year ended December 31, 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 disposal of $37.9 million, net of direct selling costs of $1.7 million, during
the year ended December 31, 2022. The sale of PWSC did not represent a strategic shift that would 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
is included in the Extended Warranty segment, are included in the 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, that had contributions to Extended Warranty
service fee and commission revenue of $4.9 million and $8.0 million for the years ended December 31, 2022 and December 31, 2021,
respectively. Additionally, PWSC had a pre-tax loss of $5.5 million for the year ended December 31, 2022 and pre-tax income of
$0.6 million for the for the year ended December 31, 2021. For the years ended December 31, 2022 and December 31, 2021, pre-tax
loss of $4.4 million and pre-tax income of $0.5 million was attributable to the controlling interest, 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 that are included in disposal of subsidiary
transaction expenses in the consolidated statement of operations for the for the year ended December 31, 2022.
(b) Discontinued Operations
Leased Real Estate Segment
The Company’s subsidiaries, VA Lafayette and CMC Industries Inc. (“CMC”), which includes CMC’s subsidiaries Texas Rail Terminal
LLC and TRT Leaseco, LLC (“TRT”), comprised the Company’s entire Leased Real Estate segment. Each of CMC, through indirect
wholly owned subsidiary, TRT, and VA Lafayette own a single asset, which is real estate property. As further described below, on
December 29, 2022, TRT sold its assets and at December 31, 2022, VA Lafayette was classified as held for sale.
65
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
In accordance with ASU No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an
Entity, a disposal is categorized as a discontinued operation if the disposal group is a component of an entity or group of components
that meets the held for sale criteria, is disposed of by sale, or is disposed of other than by sale, and represents a strategic shift that has or
will have a major effect on an entity’s operations and financial results.
Leased Real Estate is a component of Kingsway since its operations and cash flows can be clearly distinguished, both operationally and
for financial reporting purposes, from the rest of the reporting entity. A component of an entity may consist of multiple disposal groups
and does not need to be disposed of in a single transaction. The disposal of the Leased Real Estate segment represents a strategic
shift that will have a major effect on the Company’s operations and financial results, as the disposal of the Leased Real Estate assets is
in excess of 20% of the entity’s total assets. As a result, the assets, liabilities, operating results and cash flows related to Leased Real
Estate have been classified as discontinued operations in the consolidated financial statements for all periods presented.
Sale of CMC Real Property
CMC owned, through its indirect wholly owned subsidiary, TRT, 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 (the “Mortgages”).
On December 22, 2022, TRT entered into a Purchase and Sale Agreement (the “CMC Agreement”) with BNSF Dayton LLC
(“Purchaser”), pursuant to which TRT agreed to sell to the Purchaser the Real Property. TRT was also the landlord and an affiliate of
the Purchaser was the current tenant under the long-term triple net lease over the Real Property. Under the terms of the CMC Agreement,
at the closing on December 29, 2022, TRT assigned, and the Purchaser assumed, the rights and obligations of the landlord under the
existing long-term triple net lease.
The purchase price paid by the Purchaser at the closing consisted of $44.5 million in cash plus the assumption of the unpaid principal
balance as of the closing of the Mortgages of approximately $170.7 million, netting cash proceeds of $21.4 million to Kingsway after
taxes, fees and distribution to the minority shareholder. The Company recognized a gain on disposal of CMC of $0.2 million which is
included in loss on disposal of discontinued operations, net of taxes in the consolidated statement of operations for the year
ended December 31, 2022.
As discussed above, CMC and TRT are part of the Leased Real Estate disposal group. The sale of the Leased Real Estate’s
assets represents a strategic shift that will have a major effect on the Company’s operations and financial results. As a result, CMC and
its subsidiaries, have been classified as a discontinued operation and the results of their operations are reported separately for all periods
presented. The assets and liabilities of CMC are presented as discontinued operations in the consolidated balance sheet at
December 31, 2021.
VA Lafayette
During the fourth quarter of 2022, the Company began executing a plan to sell its subsidiary, VA Lafayette. VA Lafayette owns the LA
Real Property, that is subject to a long-term lease and the LA Mortgage.
As discussed above, VA Lafayette is part of the Leased Real Estate disposal group. In conjunction with the sale of the CMC Real
Property, the sale of the Leased Real Estate’s assets represents a strategic shift that will have a major effect on the Company’s operations
and financial results. As a result, VA Lafayette has been classified as a discontinued operation and the results of its operations are
reported separately for all periods presented. The assets and liabilities of VA Lafayette are presented as held for sale in the consolidated
balance sheets at December 31, 2022 and December 31, 2021.
Summary financial information for Leased Real Estate included in (loss) income from discontinued operations, net of taxes in the
statements of operations for the years ended December 31, 2022 and December 31, 2021 is presented below:
(in thousands)
(Loss) income from discontinued operations, net of taxes:
Revenues:
Rental revenue
Total revenues
Years ended December 31,
2021
2022
$
14,567 $
14,567
13,365
13,365
66
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands)
Expenses:
Cost of services sold
General and administrative expenses
Leased real estate segment interest expense
Non-operating other (expense) revenue
Amortization of intangible assets
Total expenses
(Loss) income from discontinued operations before income tax benefit
Income tax benefit
(Loss) income from discontinued operations, net of taxes
$
Years ended December 31,
2021
2022
204
20,778
6,387
154
206
27,729
(13,162 )
(357 )
(12,805 ) $
—
3,488
6,164
2,804
63
12,519
846
(3,728 )
4,574
For the years ended December 31, 2022 and December 31, 2021, pre-tax loss from discontinued operations of $10.7 million and pre-tax
income from discontinued operations of $0.7 million was attributable to the controlling interest, respectively.
The assets and liabilities of Leased Real Estate are presented as held for sale and as discontinued operations in the consolidated balance
sheets at December 31, 2022 and December 31, 2021.
The carrying amounts of the major classes of assets and liabilities of Leased Real Estate presented as held for sale at December 31, 2022
and December 31, 2021 are as follows:
(in thousands)
Assets
Cash and cash equivalents
Other receivables, net
Property and equipment, net
Intangible assets, net
Assets held for sale
Liabilities
Accrued expenses and other liabilities
Notes payable
Liabilities held for sale
December 31,
2022
December 31,
2021
$
$
$
$
570 $
—
16,160
2,748
19,478 $
473 $
16,112
16,585 $
365
133
16,466
2,949
19,913
52
16,983
17,035
The carrying amounts of the major classes of assets and liabilities of Leased Real Estate presented as discontinued operations at
December 31, 2021 are as follows:
(in thousands)
Assets
Cash and cash equivalents
Other receivables, net
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Assets of discontinued operations
Liabilities
Accrued expenses and other liabilities
Notes payable
Liabilities of discontinued operations
67
December 31,
2021
$
$
$
$
2,193
9,733
91,019
60,983
74,448
11,096
249,472
2,596
181,631
184,227
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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, 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, which is
included in accrued expenses and other liabilities in the consolidated balance sheet at December 31, 2022 and loss on disposal of
discontinued operations, net of taxes in the consolidated statement of operations for the year ended December 31, 2022. There were no
payments made by the Company related to the open claims during the years ended December 31, 2022 and December 31, 2021. During
the first quarter of 2023, the $2.0 million that had been previously deposited into an escrow account was released and remitted to the
buyer to satisfy the Company’s payment with respect to the open claims.
Loss on disposal of discontinued operations, net of taxes, related to Leased Real Estate and Mendota, in the statements of operations for
the years ended December 31, 2022 and December 31, 2021 is comprised on the following:
(in thousands)
Loss on disposal of discontinued operations before income tax benefit
Income tax benefit
Loss on disposal of discontinued operations, net of taxes
Years ended December 31,
2021
—
—
—
2022
(26,751 )
(24,489 )
(2,262 ) $
$
NOTE 6 VARIABLE INTEREST ENTITIES
(a)
Consolidated VIEs
Argo Holdings Fund I, LLC
The Company holds a 43.4% investment in Argo Holdings at December 31, 2022 and December 31, 2021. Argo Holdings makes
investments, primarily in established lower middle market companies based in North America, through investments in search funds.
The managing member of Argo Holdings is Argo Management Group, LLC (“Argo Management”), a wholly owned subsidiary of the
Company. Argo Holdings is considered to be a VIE as the members holding equity at risk lack characteristics of a controlling financial
interest. The Company holds a variable interest in Argo Holdings due to its right to absorb significant economics in Argo Holdings and
through its controlling interest in Argo Management, through which the Company holds the power to direct the significant activities of
Argo Holdings. As such, the Company was the primary beneficiary of Argo Holdings and consolidated Argo Holdings at December 31,
2022 and December 31, 2021.
Net Lease Investment Grade Portfolio, LLC
The Company holds a 71.0% investment in Net Lease at December 31, 2022 and December 31, 2021. Net Lease holds one commercial
property under a triple net lease. The current property is encumbered by a mortgage loan. Net Lease is considered to be a VIE as the
members holding equity at risk lack characteristics of a controlling financial interest. The Company holds a variable interest in Net
Lease due to its right to absorb significant economics in Net Lease and to control the management decisions of Net Lease, which allows
the Company to hold the power to direct the significant activities of Net Lease. As such, the Company is the primary beneficiary of Net
Lease and consolidated Net Lease at December 31, 2022 and December 31, 2021.
68
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The following table summarizes the assets and liabilities related to VIEs consolidated by the Company at December 31, 2022 and
December 31, 2021:
(in thousands)
Assets
Limited liability investments, at fair value
Cash and cash equivalents
Accrued investment income
Total Assets
Liabilities
Accrued expenses and other liabilities
Total Liabilities
2022
December 31,
2021
$
$
17,059 $
573
829
18,461
333
333 $
18,826
944
716
20,486
250
250
No arrangements exist requiring the Company to provide additional funding to the consolidated VIEs in excess of the Company’s
unfunded commitments to its consolidated VIEs. At December 31, 2022 and December 31, 2021, the Company had no unfunded
commitments. There are no restrictions on assets consolidated by these VIEs. There are no structured settlements of liabilities
consolidated by these VIEs. Creditors have no recourse to the general credit of the Company as the primary beneficiary of these VIEs.
(b)
Non-Consolidated VIEs
The Company’s investments include certain non-consolidated investments, primarily in limited liability companies and limited
partnerships in which the Company holds variable interests, that are considered VIEs due to the legal entities holding insufficient equity;
the holders of equity at risk in the legal entities lacking controlling financial interests; and/or the holders of equity at risk having non-
proportional voting rights.
The Company’s risk of loss associated with its non-consolidated VIEs is limited and depends on the investment. Limited liability
investments accounted for under the equity method are limited to the Company’s initial investments. At December 31, 2022 and
December 31, 2021, the Company had no unfunded commitments to its non-consolidated VIEs.
The following table summarizes the carrying value and maximum loss exposure of the Company’s non-consolidated VIEs at
December 31, 2022 and December 31, 2021:
(in thousands)
2022
Carrying
Value
Maximum
Loss
Exposure
December 31,
2021
Maximum
Loss
Exposure
Carrying
Value
Investments in non-consolidated VIEs
$
940 $
940 $
1,514 $
1,514
The following table summarizes the Company’s non-consolidated VIEs by category at December 31, 2022 and December 31, 2021:
(in thousands)
Investments in non-consolidated VIEs:
Real estate related
Non-real estate related
Total investments in non-consolidated VIEs
2022
December 31,
2021
Carrying
Value
Percent of
total
Carrying
Value
Percent of
total
$
$
—
940
940
— % $
100.0 %
100.0 % $
628
886
1,514
41.5 %
58.5 %
100.0 %
69
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The following table presents aggregated summarized financial information of the Company’s non-consolidated VIEs at December 31,
2022 and December 31, 2021. For certain of the non-consolidated VIEs, the financial information is presented on a lag basis, consistent
with how the changes in the Company’s share of the net asset values of these equity method investees are recorded in net investment
income. The difference between the end of the reporting period of an equity method investee and that of the Company is typically no
more than three months.
(in thousands)
Assets
Liabilities
Equity
(in thousands)
Net income
NOTE 7 INVESTMENTS
2022
241,050 $
330,470 $
(89,420 ) $
December 31,
2021
283,432
299,340
(15,908 )
2022
16,330 $
December 31,
2021
18,647
$
$
$
$
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s available-for-sale investments at
December 31, 2022 and December 31, 2021 are summarized in the tables shown below:
(in thousands)
Fixed maturities:
U.S. government, government agencies and authorities
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed
Corporate
Total fixed maturities
(in thousands)
Gross
Amortized
Cost
Unrealized
Gains
Gross
December 31, 2022
Estimated
Fair
Value
Unrealized
Losses
$
$
15,797 $
2,390
9,058
1,682
11,200
40,127 $
— $
—
1
—
1
2 $
717 $
158
647
72
944
2,538 $
15,080
2,232
8,412
1,610
10,257
37,591
Gross
Amortized
Cost
Unrealized
Gains
Gross
December 31, 2021
Estimated
Fair
Value
Unrealized
Losses
Fixed maturities:
U.S. government, government agencies and authorities
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed
Corporate
Total fixed maturities
$
$
16,276 $
1,880
7,679
449
9,605
35,889 $
31 $
3
18
—
15
67 $
84 $
5
68
4
129
290 $
16,223
1,878
7,629
445
9,491
35,666
70
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The table below summarizes the Company’s fixed maturities at December 31, 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)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Amortized Cost
$
December 31, 2022
Estimated Fair
Value
7,034
24,628
1,982
3,947
37,591
7,163 $
26,317
2,239
4,408
40,127 $
$
The following tables highlight the aggregate unrealized loss position, by security type, of available-for-sale investments in unrealized
loss positions as of December 31, 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)
December 31, 2022
Less than 12 Months
Greater than 12 Months
Total
Estimated
Fair Value
Unrealized Estimated
Unrealized Estimated
Loss
Fair Value
Loss
Fair Value
Unrealized
Loss
Fixed maturities:
U.S. government, government
agencies and authorities
States, municipalities and political
subdivisions
Mortgage-backed
Asset-backed
Corporate
Total fixed maturities
$
(in thousands)
$
4,543 $
126 $
10,537 $
591 $
15,080 $
717
1,040
2,248
1,251
3,244
12,326 $
73
93
39
155
486 $
937
5,756
299
6,760
24,289 $
85
554
33
789
2,052 $
1,977
8,004
1,550
10,004
36,615 $
158
647
72
944
2,538
Less than 12 Months
Greater than 12 Months
Total
December 31, 2021
Estimated
Fair Value
Unrealized Estimated
Unrealized Estimated
Loss
Fair Value
Loss
Fair Value
Unrealized
Loss
Fixed maturities:
U.S. government, government
agencies and authorities
States, municipalities and political
subdivisions
Mortgage-backed
Asset-backed
Corporate
Total fixed maturities
$
$
12,077 $
84 $
— $
— $
12,077 $
846
5,388
445
7,542
26,298 $
5
68
4
129
290 $
—
—
—
—
— $
—
—
—
—
— $
846
5,388
445
7,542
26,298 $
84
5
68
4
129
290
There are approximately 208 and 138 individual available-for-sale investments that were in unrealized loss positions as of December 31,
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.
Refer to “Significant Accounting Policies and Critical Estimates” section of Management’s Discussion & Analysis for further
information regarding the Company’s detailed analysis and factors considered in establishing an other-than-temporary impairment on
an investment.
71
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 years ended December 31, 2022 and December 31, 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.
As of December 31, 2022 and December 31, 2021, the carrying value of limited liability investments totaled $1.0 million and
$1.9 million, respectively. At December 31, 2022, the Company has 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. As of December 31, 2022 and December 31, 2021, the carrying value of the Company’s limited liability investments,
at fair value was $17.1 million and $18.8 million, respectively. The Company recorded impairments related to limited liability
investments, at fair value of less than $0.1 million and $0.1 million for the years ended December 31, 2022 and December 31, 2021,
respectively, which are included in (loss) gain on change in fair value of limited liability investments, at fair value in the consolidated
statements of operations. At December 31, 2022, the Company has no unfunded commitments related to limited liability investments,
at fair value.
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 2021, one of Net Lease’s limited liability companies sold their investment property for $14.3 million. 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 year ended
December 31, 2021.
• During the fourth quarter of 2020, one of Net Lease’s limited liability companies sold their investment property. As a result
of the three-month lag, the Company recorded this transaction in its first quarter 2021 financial statements. 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 for the year ended December 31, 2021.
• Net Lease sold its final property in February 2023.
As of December 31, 2022 and December 31, 2021, the carrying value of the Company’s investments in private companies totaled $0.8
million. For the years ended December 31, 2022 and December 31, 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 years ended December 31, 2022 and
December 31, 2021.
Real estate investments represent investment real estate properties held by the Company’s consolidated subsidiary, Flower. As of
December 31, 2022 and December 31, 2021, the carrying value of the Company’s real estate investments was zero 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. Flower recorded a gain of $1.5 million related to the
sale, which is included in gain on change in fair value of real estate investments in the consolidated statement of operations for the year
ended December 31, 2022.
72
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Net investment income for the years ended December 31, 2022 and December 31, 2021, respectively, is comprised as follows:
(in thousands)
Investment income
Interest from fixed maturities
Dividends
Income from limited liability investments
Income from limited liability investments, at fair value
Income from real estate investments
Other
Gross investment income
Investment expenses
Net investment income
Years ended December 31,
2021
2022
$
$
556 $
159
293
4
795
612
2,419
(114 )
2,305 $
242
125
27
106
800
364
1,664
(89 )
1,575
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 years ended December 31, 2022 and December 31, 2021 is comprised as follows:
(in thousands)
Gross realized gains
Gross realized losses
Net realized gains
Years ended December 31,
2021
1,917
(108 )
1,809
2022
1,648 $
(439 )
1,209 $
$
$
(Loss) gain on change in fair value of equity investments for the years ended December 31, 2022 and December 31, 2021 is comprised
as follows:
(in thousands)
Net gain recognized on equity investments sold during the period
Change in unrealized losses on equity investments held at end of the period
Loss on change in fair value of equity investments
$
$
2022
Years ended December 31,
2021
13
(255 )
(242 )
— $
(26 )
(26 ) $
NOTE 8 GOODWILL
The following table summarizes goodwill activity for the years ended December 31, 2022 and December 31, 2021:
(in thousands)
Balance, December 31, 2020
Acquisition
Measurement period adjustment
Balance, December 31, 2021
Acquisitions
Goodwill disposed of related to PWSC
Balance, December 31, 2022
Extended
Warranty
Kingsway
Search
Xcelerator Corporate
Total
$
$
59,415 $
—
(18,788 )
40,627
—
(9,474 )
31,153 $
— $
7,905
—
7,905
5,708
—
13,613 $
732 $
—
—
732
—
—
732 $
60,147
7,905
(18,788 )
49,264
5,708
(9,474 )
45,498
As further discussed in Note 4, “Acquisitions,” during 2022, the Company recorded goodwill of $4.1 million related to the acquisition
of CSuite on November 1, 2021 and $1.6 million related to the acquisition of SNS on November 18, 2022. The goodwill related to
these acquisitions is provisional and subject to adjustment during the measurement period. The Company expects to complete its
purchase price allocations in early 2023. The estimates, allocations and calculations recorded at December 31, 2022 are subject to
73
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed may not agree with
the estimates included in these consolidated financial statements.
As further discussed in Note 4, “Acquisitions,” during 2021, the Company recorded goodwill of $7.9 million related to the acquisition
of Ravix on October 1, 2021.
In 2020, the Company recorded goodwill of $39.0 million related to the acquisition of PWI on December 1, 2020 which was provisional
and subject to adjustment during the measurement period. As further discussed in Note 4, “Acquisitions,” during the third quarter of
2021, the Company recorded a cumulative net measurement period adjustment, related to the acquisition of PWI, that decreased
goodwill by $18.8 million.
Goodwill is assessed for impairment annually as of November 30, or more frequently if events or circumstances indicate that the carrying
value may not be recoverable. Although the Company believes its estimates of fair value are reasonable, actual financial results could
differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future
financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the
amount of the goodwill impairment charge, or both. Based on the assessment performed, no goodwill impairments were recognized
in 2022 and 2021.
NOTE 9 INTANGIBLE ASSETS
Intangible assets at December 31, 2022 and December 31, 2021 are comprised as follows:
(in thousands)
Intangible assets subject to amortization
Database
Vehicle service agreements in-force
Customer relationships
Intangible assets not subject to amortization
Trade names
Total
(in thousands)
Intangible assets subject to amortization
Database
Vehicle service agreements in-force
Customer relationships
Non-compete
Intangible assets not subject to amortization
Trade names
Total
Gross Carrying Accumulated
Amortization
Value
December 31, 2022
Net Carrying
Value
$
$
4,918 $
3,680
32,442
14,287
55,327 $
4,918 $
3,680
13,630
—
22,228 $
—
—
18,812
14,287
33,099
Gross Carrying Accumulated
Amortization
Value
December 31, 2021
Net Carrying
Value
$
$
4,918 $
3,680
31,645
266
10,314
50,823 $
4,488 $
3,680
11,598
224
—
19,990 $
430
—
20,047
42
—
10,314
30,833
As discussed in Note 5, “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.
As further discussed in Note 4, “Acquisitions,” during the fourth quarter of 2022, the Company recorded $4.0 million of separately
identifiable intangible assets, related to acquired customer relationships and trade name, as part of the acquisition of CSuite on
November 1, 2022. The customer relationships intangible asset of $2.5 million is being amortized over seven years based on the pattern
intangible
in which
asset of $1.5 million is deemed
this
life and
acquisition are provisional and subject to adjustment during the measurement period. The Company expects to complete its purchase
price allocation in early 2023. The estimates, allocations and calculations recorded at December 31, 2022 are subject to change as we
the economic benefits of
to have
the
indefinite useful
intangible asset are expected
intangible assets related
to be consumed. The
is not amortized. The
trade name
to
74
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed may not agree with the estimates
included in these consolidated financial statements.
As further discussed in Note 4, “Acquisitions,” during the fourth quarter of 2022, the Company recorded $6.7 million of separately
identifiable intangible assets, related to acquired customer relationships and trade name, as part of the acquisition of SNS on
November 18, 2022. The customer relationships intangible asset of $3.6 million is being amortized over nine years based on the pattern
intangible
in which
asset of $3.1 million is deemed
this
life and
acquisition are provisional and subject to adjustment during the measurement period. The Company expects to complete its purchase
price allocation in early 2023. The estimates, allocations and calculations recorded at December 31, 2022 are subject to change as we
obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed may not agree with the estimates
included in these consolidated financial statements.
the economic benefits of
to have
the
indefinite useful
intangible asset are expected
intangible assets related
to be consumed. The
is not amortized. The
trade name
to
As further discussed in Note 4, “Acquisitions,” during the fourth quarter of 2021, the Company recorded $6.5 million of separately
identifiable intangible assets, related to acquired customer relationships and trade name, as part of the acquisition of Ravix on
October 1, 2021. The customer relationships intangible asset of $4.0 million is being amortized over seven years based on the pattern in
which the economic benefits of the intangible asset are expected to be consumed. The trade name intangible asset of $2.5
million is deemed to have indefinite useful life and is not amortized.
The Company’s other 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 7 to 15 years. Amortization of intangible assets was $6.1 million and $4.8 million for the years ended December 31, 2022
and December 31, 2021, respectively. The estimated aggregate future amortization expense of all intangible assets is $5.6 million for
2023, $4.3 million for 2024, $3.1 million for 2025, $2.2 million for 2026, $1.6 million for 2027 and $2.0 million thereafter.
The trade names intangible assets have indefinite useful lives and are not amortized. All intangible assets with indefinite useful lives are
reviewed annually by the Company for impairment. No impairment charges were taken on intangible assets in 2022 or 2021.
NOTE 10 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2022 and December 31, 2021 are comprised as follows:
(in thousands)
Leasehold improvements
Furniture and equipment
Computer hardware
Total
(in thousands)
Leasehold improvements
Furniture and equipment
Computer hardware
Total
$
$
$
$
Total Property and Equipment
December 31, 2022
Cost
Accumulated
Depreciation
Carrying Value
279
56
438
773
206 $
319
516
1,041 $
Total Property and Equipment
December 31, 2021
Cost
Accumulated
Depreciation
Carrying Value
123
120
858
1,101
163 $
442
1,630
2,235 $
485 $
375
954
1,814 $
286 $
562
2,488
3,336 $
For the years ended December 31, 2022 and December 31, 2021, depreciation expense on property and equipment of $0.3 million
and $0.2 million, respectively, is included in general and administrative expenses in the consolidated statements of operations.
75
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 11 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 12, “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 statement of operations.
The notional amount of the interest rate swap contract is $8.6 million at December 31, 2022. At December 31, 2022 and December 31,
2021, the 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 years ended December 31, 2022 and December 31, 2021, the Company recognized a gain of $0.3 million and a loss of less than $0.1
million, respectively, related to the change in fair value of the interest rate swap, which is included in interest expense in the consolidated
statements of operations and within cash flows (used in) provided by operating activities from continuing operations in the consolidated
statements of cash flows. Net cash receipts of $0.1 million were made to the Company during the year ended December 31, 2022 and
net cash payments of less than $0.1 million were made by the Company during the year ended December 31, 2021, to settle a portion of
the liabilities related to the interest rate swap agreement. These cash receipts and payments are reflected as cash inflows or outflows in
the consolidated statements of cash flows within net cash (used in) provided by operating activities from continuing operations.
(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, 2022 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.
76
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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.
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 December 31, 2022. At December 31, 2022, the fair value of the
TruPs Options contracts was an asset of $19.0 million, which is included in other assets in the consolidated balance sheet. See Note 23,
“Fair Value of Financial Instruments,” for further discussion. During the year ended December 31, 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 $5.3 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 used
in operating activities from continuing operations in the consolidated statement of cash flows. No cash payments were made to repurchase
any of the TruPs during the year ended December 31, 2022 with respect to the TruPs Options contracts.
NOTE 12 DEBT
Debt consists of the following instruments at December 31, 2022 and December 31, 2021:
(in thousands)
Bank loans:
2021 Ravix Loan
2022 Ravix Loan
SNS Loan
2020 KWH Loan
Total bank loans
Notes payable:
Flower Note
Total notes payable
Subordinated debt
Total
December 31, 2022
Carrying
Value
Fair Value Principal
December 31, 2021
Carrying
Value
Fair Value
Principal
$
5,300 $
5,950
6,850
16,708
34,808
5,300 $
5,754
6,755
16,472
34,281
5,460 $
6,245
6,921
16,819
35,445
6,000 $
—
—
21,186
27,186
—
—
90,500
125,308 $
—
—
67,811
102,092 $
—
—
67,811
103,256 $
6,411
6,411
90,500
124,097 $
$
5,847 $
—
—
20,870
26,717
6,411
6,411
60,973
94,101 $
5,936
—
—
20,815
26,751
7,101
7,101
60,973
94,825
Subordinated debt mentioned above consists of the following trust preferred debt instruments:
Issuer
Kingsway CT Statutory
Trust I
Kingsway CT Statutory
Trust II
Kingsway CT Statutory
Trust III
Kingsway DE Statutory
Trust III
Kingsway DE Statutory
Trust IV
Kingsway DE Statutory
Trust VI
Principal
(in thousands)
Issue date
$
$
$
$
$
$
15,000
12/4/2002
17,500
5/15/2003
20,000 10/29/2003
15,000
5/22/2003
10,000
9/30/2003
13,000 12/16/2003
Interest
annual interest rate equal to LIBOR, plus 4.00%
payable quarterly
annual interest rate equal to LIBOR, plus 4.10%
payable quarterly
annual interest rate equal to LIBOR, plus 3.95%
payable quarterly
annual interest rate equal to LIBOR, plus 4.20%
payable quarterly
annual interest rate equal to LIBOR, plus 3.85%
payable quarterly
annual interest rate equal to LIBOR, plus 4.00%
payable quarterly
Redemption date
12/4/2032
5/15/2033
10/29/2033
5/22/2033
9/30/2033
1/8/2034
77
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(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 “2021 Ravix Loan”). The 2021 Ravix Loan requires monthly payments
of principal and interest. The 2021 Ravix Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 3.75%. At
December 31, 2022, the interest rate was 8.00%. The term loan matures on October 1, 2027 and the revolver was scheduled to mature on
October 1, 2023 (see discussion below related to the 2022 Ravix Loan). Subsequent to October 1, 2021, Ravix borrowed and made
payments under the revolver. The carrying values at December 31, 2022 and December 31, 2021 for the 2021 Ravix Loan includes $5.1
million and $5.7 million, respectively, related to the term loan and zero and $0.1 million related to the revolver. The Company also
recorded as a discount to the carrying value of the 2021 Ravix Loan issuance costs of $0.2 million specifically related to the 2021 Ravix
Loan. The 2021 Ravix Loan is carried in the consolidated balance sheet at December 31, 2022 at its unpaid principal balance.
Subsequent to the acquisition of CSuite on November 1, 2022, CSuite became a wholly owned subsidiary of Ravix LLC. As a result of
the acquisition of CSuite, on November 16, 2022, the 2021 Ravix Loan was amended to (1) include CSuite as a borrower; (2) borrow
an additional principal amount of $6.0 million in the form of a supplemental term loan (the “2022 Ravix Loan”); and (3) amend the
maturity date and interest rate of the $1.0 million revolver (the “2022 Revolver”). The 2022 Ravix Loan requires monthly payments of
principal and interest. The 2022 Ravix Loan matures on November 16, 2028 and has an annual interest rate equal to the Prime Rate plus
0.75%. At December 31, 2022, the interest rate was 8.25%. The 2022 Revolver matures on November 16, 2024 and has an annual
interest rate equal to the Prime Rate plus 0.50%. At December 31, 2022, the balance of the 2022 Revolver was zero.
The Company also recorded as a discount to the carrying value of the 2022 Ravix Loan issuance costs of $0.1 million specifically related
to the 2022 Ravix Loan. The 2022 Ravix Loan is carried in the consolidated balance sheet at December 31, 2022 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 2022 Ravix Loan and the 2021 Ravix Loan were not deemed to be substantially different; therefore, the 2022 Ravix Loan is
accounted for as a modification of the 2021 Ravix Loan and a new effective interest rate was determined based on the carrying amount
of the 2021 Ravix Loan. The issuance costs related to the 2022 Ravix Loan, along with the existing unamortized issuance costs from
the 2021 Ravix Loan, are being amortized over the remaining term of the 2022 Ravix Loan using the effective interest rate.
The fair values of the 2021 Ravix Loan and the 2022 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 2021
Ravix Loan and the 2022 Ravix Loan are secured by certain of the equity interests and assets of Ravix and CSuite.
The 2021 Ravix Loan and the 2022 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 2021 Ravix Loan and 2022 Ravix Loan that, among other
things, restrict Ravix and CSuite’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.
SNS
As part of the asset acquisition of SNS on November 18, 2022, the Company formed Secure Nursing Service LLC, who became a wholly
owned subsidiary of Pegasus Acquirer Holdings LLC (“Pegasus LLC”), and together they borrowed from a bank a principal amount of
$6.5 million in the form of a term loan, and established a $1.0 million revolver to finance the acquisition of SNS (together, the “SNS
Loan”). The SNS Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00%. At December 31, 2022,
the interest rate was 8.00%. Monthly principal payments on the term loan begin on November 15, 2023. The revolver matures on
November 18, 2023 and the term loan matures on November 18, 2028. Subsequent to November 18, 2022, SNS borrowed under the
revolver. The carrying value at December 31, 2022 for the SNS Loan includes $6.4 million related to the term loan
and $0.4 million related to the revolver.
The Company also recorded as a discount to the carrying value of the SNS Loan issuance costs of $0.1 million specifically related to
the SNS Loan. The SNS Loan is carried in the consolidated balance sheet at its amortized cost, which reflects the amortization of the
debt discount and issuance costs using the effective interest rate method. The fair value of the SNS 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 SNS Loan is secured by certain of the equity interests and assets of SNS.
78
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The SNS Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio and limits on
annual capital expenditures, all of which are as defined in and calculated pursuant to the SNS Loan that, among other things, restrict
SNS’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 original subsidiaries included 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 the Secured Overnight Financing Rate
(“SOFR”), having a floor of 0.75%, plus spreads ranging from 2.62% to 3.12%. At December 31, 2022, the interest rate was 6.96%.
The 2020 KWH Loan matures on December 1, 2025. The carrying values at December 31, 2022 and December 31,
loan and $0.5 million and $0.5 million,
2021 include $16.0 million and $20.4 million,
respectively, related to the revolver.
respectively,
related
term
the
to
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 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:
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 sheet at December 31, 2021 (“the Flower Note”). The Flower Note
required monthly payments of principal and interest and was secured by certain investments of Flower. The Flower Note was scheduled
to mature on December 10, 2031 and had 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. The carrying value of the
Flower Note of $6.4 million at December 31, 2021 represents its unpaid principal balance. The fair value of the Flower Note disclosed
in the table above is derived from quoted market prices of A and BBB 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.
79
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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. The forgiveness 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 in the consolidated statement of operations for the
years ended December 31, 2021.
(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 23, “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. Of the $6.8 million increase in fair value of the Company’s subordinated debt
between December 31, 2021 and December 31, 2022, $1.9 million is reported as increase in fair value of debt attributable to instrument-
specific credit risk in the Company’s consolidated statements of comprehensive income (loss) and $4.9 million is reported as loss on
change in fair value of debt in the Company’s consolidated statements of operations. Of the $10.0 million increase in fair value of the
Company’s subordinated debt between December 31, 2020 and December 31, 2021, $6.8 million is reported as increase in fair value of
debt attributable to instrument-specific credit risk in the Company’s consolidated statements of comprehensive income (loss)
and $3.2 million is 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 December 31, 2022 and December 31, 2021, deferred interest payable of $25.5 million and $18.7 million, respectively,
is included in accrued expenses and other liabilities in the consolidated balance sheets.
The agreements governing the 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.
NOTE 13 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 year ended December 31, 2022
were $0.8 million and $0.2 million, respectively. Operating lease costs and variable lease costs included in general and administrative
expenses for the year ended December 31, 2021 were $1.0 million and $0.1 million, respectively.
80
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The annual maturities of lease liabilities as of December 31, 2022 were as follows:
(in thousands)
2023
2024
2025
2026
2027
2028 and thereafter
Total undiscounted lease payments
Imputed interest
Total lease liabilities
Lease
Commitments
438
405
231
167
107
17
1,365
148
1,217
$
$
Lease liabilities are included in accrued expenses and other liabilities in the consolidated balance sheets. The weighted-average
remaining lease term for operating leases was 3.57 years as of December 31, 2022. The weighted average discount rate of operating
leases was 5.84% as of December 31, 2022. Cash paid for amounts included in the measurement of lease liabilities was $0.8 million
and $1.0 million for the years ended December 31, 2022 and December 31, 2021, respectively.
Supplemental non-cash information related to leases for the year ended December 31, 2022 includes right-of-use assets of $0.3 million
acquired in exchange for $0.5 million of lease obligations.
NOTE 14 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, 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)
Vehicle service agreement fees and GAP commissions
Maintenance support service fees
Warranty product commissions
Homebuilder warranty service fees
Homebuilder warranty commissions
Business services consulting fees
Service fee and commission revenue
IWS, Geminus and PWI
Trinity
Trinity
PWSC (a)
PWSC (a)
Ravix, CSuite and SNS
$
$
(a) Through the July 29, 2022 disposal
Years ended December 31,
2021
2022
58,775 $
5,815
4,564
4,348
540
19,238
93,280 $
57,756
4,871
4,317
7,099
876
3,482
78,401
During the first quarter of 2022, IWS recorded a net charge of $0.9 million relating to a change in estimate in accounting for deferred
revenue and deferred contract costs associated with vehicle service agreement fees, resulting in an increase to deferred service fees of
$1.1 million and an increase in deferred contract costs of $0.2 million.
Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at
December 31, 2022 and December 31, 2021 were $10.3 million and $6.7 million, respectively. The increase in receivables from
contracts with customers is primarily due to receivables related to CSuite and SNS, which were acquired on November 1, 2022 and
November 18, 2022, respectively, and 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.
81
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 years ended December 31, 2022 and December 31, 2021 were
as follows:
(in thousands)
Balance, December 31, 2020
Deferral of revenue
Recognition of deferred service fees
Balance, December 31, 2021
Deferral of revenue
Recognition of deferred service fees
Deferred service fees disposed of related to PWSC
Balance, December 31, 2022
Years ended
December 31,
87,945
60,415
(59,143 )
89,217
61,058
(59,966 )
(7,596 )
82,713
$
$
The decrease in deferred service fees during the year ended December 31, 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 year ended
December 31, 2022 as cash sales have begun to increase. The increase in deferred service fees during the year ended December 31,
2021 is primarily due to additions to deferred service fees in excess of deferred service fees recognized during the year ended December
31, 2021, that was partially offset by the adjustment recorded in the third quarter of 2021 of $3.6 million to reduce PWI’s acquisition
date deferred revenue to fair value.
The Company expects to recognize within one year as service fee and commission revenue approximately 52.7% of the deferred service
fees as of December 31, 2022. Approximately $43.2 million and $44.2 million of service fee and commission revenue recognized during
the years ended December 31, 2022 and December 31, 2021 was included in deferred service fees as of December 31, 2021 and
December 31, 2020, respectively.
Deferred contract costs
Deferred contract costs represent the deferral of incremental costs to obtain or fulfill a contract with a customer. The deferred contract
costs balances and related amortization expense for the years ended December 31, 2022 and December 31, 2021 are comprised
as follows:
(in thousands)
Years ended December 31, 2022
Years ended December 31, 2021
Costs to
Obtain a
Contract
Costs to
Fulfill a
Contract
Costs to
Obtain a
Contract
Costs to
Fulfill a
Contract
Total
Balance at January 1, net
Additions
Amortization
Balance at December 31, net
$
$
10,850 $
9,273
(6,949 )
13,174 $
80 $
21
(18 )
83 $
10,930 $
9,294
(6,967 )
13,257 $
8,759 $
8,674
(6,583 )
10,850 $
76 $
27
(23 )
80 $
Total
8,835
8,701
(6,606 )
10,930
No impairment charges related to deferred contract costs were recorded in 2022 or 2021.
NOTE 15 INCOME TAXES
The Company and all of its eligible U.S. subsidiaries file a U.S. consolidated federal income tax return (“KFSI Tax Group”). The method
of allocating federal income taxes among the companies in the KFSI Tax Group is subject to written agreement, approved by each
company’s Board of Directors. The allocation is made primarily on a separate return basis, with current credit for any net operating
losses or other items utilized in the consolidated federal income tax return. The Company’s non-U.S. subsidiaries file separate foreign
income tax returns.
82
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Income tax expense (benefit) consists of the following:
(in thousands)
Current income tax expense
Deferred income tax expense (benefit)
Income tax expense (benefit)
Years ended December 31,
2021
2022
$
$
3,419 $
1,406
4,825 $
395
(4,311 )
(3,916 )
Income tax expense (benefit) varies from the amount that would result by applying the applicable U.S. 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)
Income tax expense (benefit) at U.S. statutory income tax rate
Valuation allowance
Indefinite life intangibles
Non-deductible compensation
Investment income
State income tax
Disposition of subsidiary
Non-taxable income
Other
Income tax expense (benefit) for continuing operations
Years ended December 31,
2021
(1,393 )
(3,103 )
215
649
(253 )
338
—
(524 )
155
(3,916 )
2022
7,341 $
(10,100 )
106
867
(62 )
3,052
3,268
—
353
4,825 $
$
$
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are presented
as follows:
(in thousands)
Deferred income tax assets:
Losses carried forward
Unpaid loss and loss adjustment expenses and unearned premiums
Intangible assets
Debt issuance costs
Investments
Deferred rent
Deferred revenue
Compensation
Other
Valuation allowance
Deferred income tax assets
Deferred income tax liabilities:
Indefinite life intangibles
Depreciation and amortization
Fair value of debt
Land
Intangible assets
Deferred revenue
Investments
Deferred acquisition costs
Other
Deferred income tax liabilities
Net deferred income tax liabilities
83
2022
December 31,
2021
$
$
$
$
$
137,155 $
3,902
1,380
474
2,065
64
147
306
155
(130,596 )
15,052 $
(3,815 ) $
(756 )
(7,598 )
(47 )
(2,606 )
(1,188 )
—
(2,784 )
(434 )
(19,228 ) $
(4,176 ) $
181,096
3,864
1,050
789
1,198
586
1,603
520
131
(169,678 )
21,159
(19,179 )
(14,485 )
(4,048 )
(4,482 )
(3,698 )
(1,443 )
(35 )
(2,295 )
(47 )
(49,712 )
(28,553 )
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The Company maintains a valuation allowance for its gross deferred income tax assets of $130.6 million (U.S. operations -
$130.6 million; Other - less than $0.1 million) and $169.7 million (U.S. operations - $169.7 million; Other - less than $0.1 million) at
December 31, 2022 and December 31, 2021, respectively. The Company’s businesses 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 December 31, 2022 and December 31,
2021 net deferred income tax assets, excluding the deferred income tax asset and liability amounts set forth in the paragraph below.
In 2022, the Company (i) increased by $2.1 million its valuation allowance associated with business interest expense carryforwards with
an indefinite life; and (ii) increased by $0.1 million its valuation allowance relating to a change in indefinite life deferred income tax
liabilities.
In 2021, the Company (i) released into income $2.0 million of its valuation allowance associated with business interest expense
carryforwards with an indefinite life and (ii) released into income $3.3 million and $0.8 million of its valuation allowance, as a result of
its acquisitions of PWI and Ravix, respectively, 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.
The Company carries net deferred income tax liabilities of $4.2 million and $28.6 million at December 31, 2022 and December 31,
2021, respectively, that consists of:
• Zero and $8.2 million of deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the KFSI
Tax Group’s consolidated U.S. net operating loss carryforwards;
•
$3.8 million and $23.8 million of deferred income tax liabilities related to land and indefinite life intangible assets;
• Zero 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 of deferred state income tax liabilities.
The Tax Cuts and Jobs Act (the “Tax Act”) modified the U.S. net operating loss deduction, effective with respect to losses arising in tax
years beginning after December 31, 2017. The Tax Act, however, did not limit the utilization, in 2018 and later tax years, of U.S. net
operating losses generated in 2017 and prior tax years.
Amounts, originating dates and expiration dates of the KFSI Tax Group’s consolidated U.S. net operating loss carryforwards,
totaling $644.2 million, are as follows:
Year of net operating loss
Expiration date
2009
2010
2011
2012
2013
2014
2016
2017
$
2029
2030
2031
2032
2033
2034
2036
2037
Net operating loss
(in thousands)
406,477
92,058
39,865
30,884
30,779
7,245
16,006
20,848
In addition, not reflected in the table above, are net operating loss carryforwards of (i) $8.9 million relating to losses generated in separate
U.S. tax return years, which losses will expire over various years through 2037 and (ii) $0.1 million relating to non-U.S. operations,
which losses will expire over various years through 2042.
84
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending unrecognized tax benefits related to discontinued operations, exclusive of interest and
penalties, is as follows:
(in thousands)
Unrecognized tax benefits - beginning of year
Gross additions
Gross reductions
Impact due to expiration of statute of limitations
Unrecognized tax benefits - end of year
2022
65 $
—
(65 )
—
— $
December 31,
2021
1,381
—
—
(1,316 )
65
$
$
The amount of unrecognized tax benefits that, if recognized as of December 31, 2022 and December 31, 2021 would affect the
Company’s effective tax rate on discontinued operations, was a benefit of $0.1 million and $2.8 million, respectively.
During the year ended December 31, 2022, the Company recorded an income tax benefit of $0.2 million for the release of a liability for
unrecognized tax benefits (including interest and penalties) that had been included in income taxes payable in the consolidated balance
sheets. The Company carried a liability for unrecognized tax benefits of zero and $0.1 million as of December 31, 2022 and
December 31, 2021, respectively, that 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 (benefit). During the years ended
December 31, 2022 and December 31, 2021, the Company recognized a benefit of $0.1 million and $1.5 million, respectively, for
interest and penalties, which are included in (loss) income from discontinued operations, net of taxes. At December 31, 2022 and
December 31, 2021, the Company carried an accrual for the payment of interest and penalties of zero and $0.1 million, respectively,
that is included in income taxes payable in the consolidated balance sheets.
The federal income tax returns of the Company’s U.S. operations for the years through 2018 are closed for Internal Revenue Service
(“IRS”) examination. The Company’s federal income tax returns are not currently under examination by the IRS for any open tax years.
The federal income tax returns of the Company’s Canadian operations for the years through 2017 are closed for Canada Revenue Agency
(“CRA”) examination. The Company’s Canadian federal income tax returns are not currently under examination by the CRA for any
open tax years.
NOTE 16 EARNINGS (LOSS) PER SHARE
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings (loss) per share
computation for the years ended December 31, 2022 and December 31, 2021:
(in thousands, except per share data)
Numerator:
Income (loss) from continuing operations
Plus (less): net loss (income) from continuing operations attributable to noncontrolling
interests
Less: dividends on preferred stock, net of tax
Numerator used in calculating basic earnings (loss) per share from continuing operations
attributable to common shareholders
Adjustment to add-back dividends on preferred stock
Adjustment for proportionate interest in Ravix and SNS’s earnings attributable to
common stock
$
Numerator used in calculating diluted earnings (loss) per share from continuing operations
attributable to common shareholders
$
Loss (income) from discontinued operations
Plus (less): net loss (income) from discontinued operations attributable to
noncontrolling interests
Numerator used in calculating diluted earnings (loss) per share - net income (loss) attributable
to common shareholders
$
85
Years ended December 31,
2021
2022
$
30,132 $
(2,714 )
1,471
(306 )
31,297 $
306
(1,660 )
(494 )
(4,868 )
—
76
—
31,679 $
(15,067 )
8,186
24,798 $
(4,868 )
4,574
(542 )
(836 )
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
Denominator:
Weighted average basic shares
Weighted average common shares outstanding
Weighted average diluted shares
Weighted average common shares outstanding
Effect of potentially dilutive securities (a)
Unvested restricted stock awards
Warrants
Convertible preferred stock
Total weighted average diluted shares
Basic earnings (loss) attributable to common shareholders:
Continuing operations
Discontinued operations
Basic earnings (loss) per share - net income (loss) attributable to common shareholders
Diluted earnings (loss) attributable to common shareholders:
Continuing operations
Discontinued operations
Diluted earnings (loss) per share - net income (loss) attributable to common shareholders
$
$
$
$
$
$
Years ended December 31,
2021
2022
$
22,961 $
22,537
22,961
22,537
596
811
936
25,304
1.36 $
(0.30 ) $
1.06 $
1.25 $
(0.27 ) $
0.98 $
—
—
—
22,537
(0.22 )
0.18
(0.04 )
(0.22 )
0.18
(0.04 )
(a) Potentially dilutive securities consist of unvested restricted stock awards, warrants and convertible preferred stock. Because the Company is
reporting a loss from continuing operations attributable to common shareholders for the year ended December 31, 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) per share excludes dilution and is computed by dividing income (loss) attributable to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted earnings (loss) 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) 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) per share calculations above
because they would have had an antidilutive effect on the earnings (loss) per share:
Unvested restricted stock awards
Warrants
Convertible preferred stock
Total
Years ended December 31,
2021
1,252,754
4,573,765
1,060,831
6,887,350
2022
550,528
—
—
550,528
NOTE 17 STOCK-BASED COMPENSATION
On September 21, 2020, the Company’s shareholders approved the 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan
replaced the Company’s previous 2013 Equity Incentive Plan (the “2013 Plan”) with respect to the granting of future equity awards.
The 2020 Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Shares,
Restricted Stock Units, Performance Share Awards, Dividend Equivalent Rights, Other Stock-Based Awards and Cash-Based Awards
(collectively “Awards”). Under the 2020 Plan, an aggregate of 1.6 million common shares will be available for all Awards, subject to
adjustment in the event of certain corporate transactions.
86
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(a)
Restricted Stock Awards of the Company
Under the 2013 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 December 31, 2022 was $0.5 million.
Under the 2020 Plan, the Company has granted restricted common stock awards to certain officers of the Company during 2022 and
2021 (the “2020 Plan Restricted Stock Awards”). The 2020 Plan 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 2020
Plan Restricted Stock Awards are amortized on a straight-line basis over the requisite service periods. The grant-date fair values of the
2020 Plan Restricted Stock Awards were determined using the closing price of Kingsway common stock on the dates of grant. During
the year ended December 31, 2022, 130,918 shares of the 2020 Plan Restricted Stock Awards became fully vested. Total unamortized
compensation expense related to unvested 2020 Plan Restricted Stock Awards at December 31, 2022 was $2.9 million.
The following table summarizes the activity related to unvested 2020 Plan Restricted Stock Awards and 2018 Restricted Stock Award
(collectively “Restricted Stock Awards”) during the year ended December 31, 2022:
Unvested at December 31, 2021
Granted
Vested
Cancelled for Tax Withholding
Unvested at December 31, 2022
Number of
Restricted
Stock Awards
Weighted-
Average
Grant Date Fair
Value
(per Share)
1,252,754 $
25,111
(73,437 )
(57,481 )
1,146,947 $
5.09
7.25
4.67
4.67
5.19
The unvested balance at December 31, 2022 in the table above is comprised of 646,947 shares of the 2020 Plan Restricted Stock Awards
and 500,000 shares of the 2018 Restricted Stock Award.
Stock-based compensation expense related to the Restricted Stock Awards was $1.0 million and $2.1 million for the years ended
December 31, 2022 and December 31, 2021, respectively.
(b)
Restricted Stock Awards of PWSC
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 contained both a service and a performance condition that affected 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, “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 December 31, 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 23, “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 is 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.
87
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
On February 20, 2022, both the service condition and performance condition of the Modified PWSC RSA became fully vested. During
the year ended December 31, 2022, 437.50 shares of the Modified RSA became fully vested. At December 31, 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 December 31, 2022 was zero.
On February 20, 2022, both the service condition and performance condition of the 2020 PWSC RSA became fully vested. During the
year ended December 31, 2022, 109.38 shares of the 2020 PWSC RSA became fully vested. At December 31, 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 December 31, 2022 was zero.
Stock-based compensation expense related to the Restricted Stock Awards of PWSC was $2.8 million and $1.2 million for the years
ended December 31, 2022 and December 31, 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 vests based on service and the achievement of criteria based on the internal rate of
return (“IRR”) 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%.
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 subject to the officer’s
continued employment through the applicable vesting dates.
On November 1, 2022, the Company modified the inputs related to the IRR portion of the 2021 Ravix RUA to be based on the combined
internal rate of return of Ravix and CSuite. The modified portion of the awards was probable of vesting both immediately before and
after the modification. As a result, the fair value of the award that is subject to the IRR was measured at the modification date and
compared to the fair value of the modified portion of the award immediately prior to the modification, with the difference resulting in
incremental compensation expense of less than $0.1 million. The incremental fair value was estimated using the Monte Carlo
simulation model, using the following assumptions at the modification date: expected term of 2.92 years, expected volatility of 72% and
risk-free interest rate of 4.44%; and the following assumptions prior to the modification: expected term of 2.92 years, expected volatility
of 58% and risk-free interest rate of 4.44%.
During the year ended December 31, 2022, 24,306 shares of the 2021 Ravix RUA became fully vested. At December 31, 2022, there
were 91,361 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 December 31, 2022 was $0.3 million.
Stock-based compensation expense related to the 2021 Ravix RUA was $0.1 million and $0.3 million for the years ended December 31,
2022 and December 31, 2021, respectively.
(d)
Restricted Common Unit Awards of SNS
Pegasus LLC granted 75,000 restricted Class B common unit awards to an officer of SNS pursuant to an agreement dated
November 18, 2022 (“SNS RUA”). The SNS RUA vests based on service and the achievement of criteria based on the IRR of SNS.
The grant-date fair value of the SNS RUA was estimated using the Monte Carlo simulation model, using the following
assumptions: expected term of four years, expected volatility of 85% and risk-free interest rate of 4.09%.
On November 18, 2022, 25,000 shares, representing one half of the service condition for the SNS RUA, became fully vested.
The remainder of the service condition vests according to a graded vesting schedule and shall become fully vested subject to the officer’s
continued employment through the applicable vesting dates.
At December 31, 2022, there were 50,000 unvested shares of the SNS RUA with a weighted-average grant date fair value of $5.95 per
share. Total unamortized compensation expense related to unvested SNS RUA at December 31, 2022 was $0.3 million.
Stock-based compensation expense related to the SNS RUA was $0.2 million for the year ended December 31, 2022.
88
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(e)
Employee Share Purchase Plan
The Company has an employee share purchase plan (“ESPP Plan”) whereby qualifying employees can choose each year to have up to
5% of their annual base earnings withheld to purchase the Company’s common shares. After one year of employment, the Company
matches 100% of the employee contribution amount, and the contributions vest immediately. All contributions are used by the plan
administrator to purchase common shares in the open market. The Company’s contribution is expensed as paid and for the years ended
December 31, 2022 and December 31, 2021 totaled $0.2 million and $0.2 million, respectively.
NOTE 18 EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan in the United States for all of its qualified employees. Qualifying employees can
choose to voluntarily contribute up to 60% of their annual earnings subject to an overall limitation of $20,500 and $19,500 in 2022 and
2021, respectively. The Company matches an amount equal to 50% of each participant’s contribution, limited to the lesser of
contributions up to 5% of a participant’s earnings or $7,250.
The contributions for the plan vest based on years of service with 100% vesting after five years of service. The Company’s contribution
is expensed as paid and for the years ended December 31, 2022 and December 31, 2021 totaled $0.5 million and $0.4 million,
respectively. All Company obligations to the plans were fully funded as of December 31, 2022.
NOTE 19 REDEEMABLE CLASS A PREFERRED STOCK
On May 13, 2013, the Company’s shareholders approved an amendment to the Company’s Articles of Incorporation to create an
unlimited number of zero par value class A preferred shares. The Company’s Board of Directors have the ability to fix the designation,
rights, privileges, restrictions and conditions attaching to the shares of each series of preferred shares. The preferred shares have priority
over the common shares.
There were 149,733 and 169,733 shares of Preferred Shares outstanding at December 31, 2022 and December 31, 2021, respectively.
Each Preferred Share is convertible into 6.25 common shares at a conversion price of $4.00 per common share any time at the option of
the holder prior to the redemption date. During 2022 and 2021, 20,000 and 13,143 Preferred Shares, respectively, were converted
into 125,000 and 82,143 common shares, respectively, at the conversion price of $4.00 per common share, or $0.5 million
and $0.3 million, respectively, at the option of the holders. As of December 31, 2022, the maximum number of common shares issuable
upon conversion of the Preferred Shares is 935,831 common shares.
The Preferred Shares are not entitled to vote. The holders of the Preferred Shares are entitled to receive fixed, cumulative, preferential
cash dividends at a rate of $1.25 per Preferred Share per year. The cash dividend rate shall be revised to $1.875 per Preferred Share per
year if the dividend accumulates for a period greater than 30 consecutive months from the date of the most recent dividend payment.
On and after February 3, 2016, the Company may redeem all or any part of the then outstanding Preferred Shares for the price of $28.75
per Preferred Share, plus accrued but unpaid dividends thereon, whether or not declared, up to and including the date specified for
redemption. The Company will redeem any Preferred Shares not previously converted into common shares, and which remain
outstanding on the redemption date, for the price of $25.00 per Preferred Share, plus accrued but unpaid dividends, whether or not
declared, up to and including the date specified for redemption.
As discussed in “Note 2(s), “Summary of Significant Accounting Policies - Holding company liquidity,” 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. As such, the
Preferred Shares were not redeemed on the Redemption Date and instead remain outstanding with a redemption value of $6.0 million
as of December 31, 2022. None of the terms of the Preferred Shares have changed after the Redemption Date. The Preferred
Shares continue to be convertible into common shares 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 accrues dividends through additional paid-in-capital at the stated coupon. At December 31, 2022 and December 31, 2021,
accrued dividends of $2.3 million and $2.3 million were included in Class A preferred stock in the consolidated balance sheets. The
redemption amount of the Preferred Shares was $6.0 million and $6.5 million at December 31, 2022 and December 31, 2021, respectively.
89
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
In accordance with FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable
Securities, redemption features not solely within the control of the issuer are required to be presented outside of permanent equity on
the consolidated balance sheets. As described above, the holder has the option to convert the Preferred Shares at any time; however, if
not converted, they are required to be redeemed when the Company has sufficient legally available funds and is not otherwise prohibited
from doing so. As such, the Preferred Shares are presented in temporary or mezzanine equity on the consolidated balance sheets.
NOTE 20 SHAREHOLDERS’ EQUITY
The Company is authorized to issue 50,000,000 shares of zero par value common stock. There were 23,190,080 and 22,882,614 shares
of common stock outstanding at December 31, 2022 and December 31, 2021, respectively.
There were no dividends declared during the years ended December 31, 2022 and December 31, 2021.
As described in Note 19, “Redeemable Class A Preferred Stock”, during 2022 and 2021, 20,000 and 13,143 Preferred Shares,
respectively, were converted into 125,000 and 82,143 common shares, respectively. As a result, $0.8 million and $0.5 million was
reclassified from redeemable Class A preferred stock to additional paid-in capital on the consolidated balance sheets at December 31,
2022 and December 31, 2021, respectively.
There were 247,450 shares of treasury stock outstanding at December 31, 2022 and December 31, 2021. The Company records treasury
stock at cost.
At December 31, 2022, the Company has 4,464,736 warrants outstanding that expire on September 15, 2023. The warrants are recorded
in shareholders’ equity and entitle each subscriber to purchase one common share of Kingsway at an exercise price of $5.00 for each
warrant. During 2022 and 2021, warrants to purchase 109,029 and 350,000 shares of common stock, respectively, were exercised,
resulting in cash proceeds of $0.5 million and $1.8 million, respectively.
In early January 2023, a holder exercised 611,547 of warrants, resulting in cash proceeds to the Company of $3.1 million. The Company
has seen an increase in warrant exercises in 2023, compared to prior periods.
NOTE 21 ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below details the change in the balance of each component of accumulated other comprehensive income, net of tax, for the
years ended December 31, 2022 and December 31, 2021 as it relates to shareholders’ equity attributable to common shareholders on the
consolidated balance sheets.
(in thousands)
Balance, December 31, 2020
Other comprehensive loss arising during the period
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive loss
Change in
Fair Value
of
Debt
Attributable
to
Instrument-
Unrealized
Gains
(Losses) on Foreign
Available- Currency
Total
Accumulated
Other
Comprehensive
Investments Adjustments Credit Risk Income (Loss)
38,059
$
Translation Specific
41,129 $
(3,286 ) $
for-Sale
216 $
(463 )
—
(6,844 )
(7,307 )
27
(436 )
—
—
—
(6,844 )
27
(7,280 )
90
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands)
Balance, December 31, 2021
Change in
Fair Value
of
Debt
Attributable
to
Instrument-
Unrealized
Gains
(Losses) on Foreign
Available- Currency
Total
Accumulated
Other
Comprehensive
Investments Adjustments Credit Risk Income (Loss)
30,779
$
Translation Specific
34,285 $
(3,286 ) $
(220 ) $
for-Sale
Other comprehensive loss arising during the period
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive loss
Balance, December 31, 2022
(2,266 )
—
(1,930 )
(4,196 )
22
(2,244 )
(2,464 ) $
—
—
(3,286 ) $
—
(1,930 )
32,355 $
22
(4,174 )
26,605
$
It should be noted that the consolidated statements of comprehensive income (loss) present the components of other comprehensive loss,
net of tax, only for the years ended December 31, 2022 and December 31, 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 consolidated statements of
operations for the years ended December 31, 2022 and December 31, 2021:
(in thousands)
Reclassification of accumulated other comprehensive income from unrealized gains (losses)
on available-for-sale investments to:
Net realized gains
Other-than-temporary impairment loss
Income (loss) from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
(Loss) income from discontinued operations, net of taxes
Net income
Years ended December 31,
2021
2022
$
$
(22 ) $
—
(22 )
—
(22 )
—
(22 ) $
(27 )
—
(27 )
—
(27 )
—
(27 )
NOTE 22 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 two reportable segments: Extended Warranty and Kingsway
Search Xcelerator.
Prior to the fourth quarter of 2022, the Company conducted its business through a third reportable segment, Leased Real Estate. Leased
Real Estate included the following subsidiaries of the Company: CMC and VA Lafayette. As further discussed in Note 5, “Disposal
and Discontinued Operations,” both CMC and VA Lafayette have been classified as discontinued operations and the results of their
operations are reported separately for all periods presented. As such, the Leased Real Estate segment no longer exists and all segmented
information has been restated to exclude the Leased Real Estate segment for all periods presented.
Extended Warranty Segment
Extended Warranty includes the following subsidiaries of the Company: IWS, Geminus, PWI, PWSC and Trinity (collectively, “Extended
Warranty”). As discussed in Note 5, “Disposal and Discontinued Operations,” the Company disposed of PWSC on July 29, 2022. The
earnings of PWSC are included in the consolidated statements of operations and the segment disclosures through the disposal date.
91
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 50 states.
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 39 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 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 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.
Kingsway Search Xcelerator Segment
Kingsway Search Xcelerator includes the Company’s subsidiaries CSuite, Ravix and SNS.
CSuite provides financial executive services, for project and interim-staffing engagements, and search services for full-time placements
for customers throughout the United States.
Ravix provides outsourced financial services and human resources consulting for short or long duration engagements for customers in
several states.
SNS provides healthcare staffing services to acute healthcare facilities on a contract or per diem basis in the United States, primarily
in California.
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 consolidated 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 years ended December 31, 2022 and December 31, 2021 were:
(in thousands)
Revenues:
Years ended December 31,
2021
2022
Service fee and commission revenue - Extended Warranty
Service fee and commission revenue - Kingsway Search Xcelerator
Total revenues
$
$
74,042 $
19,238
93,280 $
74,919
3,482
78,401
92
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 years ended
December 31, 2022 and December 31, 2021 were:
(in thousands)
Segment operating income
Extended Warranty (a)
Kingsway Search Xcelerator
Total segment operating income
Net investment income
Net realized gains
Loss on change in fair value of equity investments
(Loss) 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
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
Gain on extinguishment of debt not allocated to segments
Income (loss) from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
Years ended December 31,
2021
2022
$
$
9,879 $
3,548
13,427
2,305
1,209
(26 )
(1,754 )
1,488
16,730
(8,092 )
(17,206 )
(6,133 )
(4,908 )
37,917
—
34,957
4,825
30,132 $
12,636
484
13,120
1,575
1,809
(242 )
2,391
—
—
(6,161 )
(11,395 )
(4,837 )
(3,201 )
—
311
(6,630 )
(3,916 )
(2,714 )
(a) For the year ended December 31, 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 of extinguishment of debt totaled $10.5 million for the year ended December 31, 2021,
respectively. See Note 12, “Debt” for further discussion.
NOTE 23 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.
93
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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.
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 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.
94
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 liability-classified 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 PWSC
restricted stock awards were categorized in Level 3 of the fair value hierarchy.
Derivative contract interest rate swap - As described in Note 11, “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 December 31, 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.
Derivative contracts - trust preferred debt repurchase options - As described in Note 11, “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 December 31, 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 the Company’s acquisitions of Ravix and CSuite 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. 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 (expense) revenue. The contingent consideration liabilities are categorized in Level 3 of the fair value hierarchy.
• The fair value of Ravix’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.
• The fair value of CSuite’s contingent consideration liability is estimated by applying the Monte Carlo simulation method to
forecast achievement of gross revenue which may result in up to $3.6 million in total payments to the former owners of
CSuite through November 2025. Key inputs in the valuation include forecasted gross revenue, gross revenue volatility,
discount rate and discount term.
95
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 December 31, 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)
Fair Value Measurements at the End of the Reporting Period Using
December 31, 2022
Quoted
Prices in
Active
Markets for
Identical
Assets
Total
(Level 1)
Significant
Other
Significant
Observable Unobservable Measured at
Inputs
(Level 3)
Net Asset
Value
Inputs
(Level 2)
Recurring fair value measurements
Assets:
Fixed maturities:
U.S. government, government agencies and
authorities
States, municipalities and political subdivisions
Mortgage-backed
Asset-backed
Corporate
Total fixed maturities
$
Equity investments:
Common stock
Total equity investments
Limited liability investments, at fair value
Derivative contract - interest rate swap
Derivative contract - trust preferred debt
repurchase options
Total assets
Liabilities:
Subordinated debt
Contingent consideration
Total liabilities
$
$
$
15,080 $
2,232
8,412
1,610
10,257
37,591
153
153
17,059
326
— $
—
—
—
—
—
153
153
—
—
15,080 $
2,232
8,412
1,610
10,257
37,591
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
326
—
—
3,196
—
—
—
13,863
—
19,034
74,163 $
—
153 $
—
37,917 $
19,034
22,230 $
—
13,863
67,811 $
3,218
71,029 $
— $
—
— $
67,811 $
—
67,811 $
— $
3,218
3,218 $
—
—
—
96
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
(in thousands)
Fair Value Measurements at the End of the Reporting Period Using
December 31, 2021
Quoted
Prices in
Active
Markets for
Identical
Assets
Total
(Level 1)
Significant
Other
Significant
Observable Unobservable Measured
Inputs
(Level 2)
Inputs
(Level 3)
at Net
Asset Value
Recurring fair value measurements
Assets:
Fixed maturities:
U.S. government, government agencies
and authorities
States, municipalities and political subdivisions
Mortgage-backed
$
Asset-backed
Corporate
Total fixed maturities
Equity investments:
Common stock
Warrants
Total equity investments
Limited liability investments, at fair value
Real estate investments
Total assets
Liabilities:
Subordinated debt
Contingent consideration
Stock-based compensation liabilities
Derivative contract - interest rate swap
Total liabilities
$
$
$
16,223 $
1,878
7,629
445
9,491
35,666
171
8
179
18,826
10,662
65,333 $
60,973 $
2,458
1,402
14
64,847 $
— $
—
—
—
—
—
171
—
171
—
—
171 $
16,223 $
1,878
7,629
445
9,491
35,666
—
8
8
—
—
35,674 $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,022
10,662
14,684 $
—
—
—
14,804
—
14,804
— $
—
—
—
— $
60,973 $
—
—
14
60,987 $
— $
2,458
1,402
—
3,860 $
—
—
—
—
—
97
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the years ended
December 31, 2022 and December 31, 2021:
(in thousands)
Assets:
Limited liability investments, at fair value:
Beginning balance
$
Distributions received
Realized gains included in net income
Change in fair value of limited liability investments, at fair value included in net income
$
Ending balance
Unrealized (gains) losses on limited liability investments, at fair value held at end
of period:
Included in net income
Included in other comprehensive loss
Real estate investments:
Beginning balance
Realized gains on sale of real estate investments included in net income
Sale of real estate investments
Ending balance
Unrealized gains recognized on real estate investments held at end of period:
Included in net income
Included in other comprehensive loss
Derivative - trust preferred debt repurchase options:
Beginning balance
Purchase of options
Initial valuation of options included in net income
Change in fair value of derivative assets included in net income
Ending balance
Unrealized gains recognized on derivative assets held at end of period:
Included in net income
Included in other comprehensive loss
Ending balance - assets
Liabilities:
Contingent consideration:
Beginning balance
Issuance of contingent consideration in connection with acquisition
Settlements of contingent consideration liabilities
Change in fair value of contingent consideration included in net income
Ending balance
Unrealized gains recognized on contingent consideration liabilities held at end of period:
Included in net income
Included in other comprehensive loss
Stock-based compensation liabilities:
Beginning balance
Issuance of stock-based compensation awards
Change in fair value of stock-based compensation liabilities included in net income
Stock-based compensation liabilities disposed of related to PWSC
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Ending balance
$
Unrealized gains recognized on stock-based compensation liabilities held at end of period:
$
$
$
Included in net income
Included in other comprehensive loss
Ending balance - liabilities
98
Years ended December 31,
2021
2022
4,022 $
(621 )
607
(812 )
3,196 $
(812 ) $
— $
10,662 $
1,488
(12,150 )
— $
— $
—
— $
2,304
11,412
5,318
19,034 $
16,730 $
—
22,230 $
2,458 $
—
(750 )
1,510
3,218 $
1,510 $
— $
1,402 $
—
2,780
(4,182 )
— $
2,780 $
— $
3,218 $
3,263
(658 )
631
786
4,022
786
—
10,662
—
—
10,662
—
—
—
—
—
—
—
—
—
14,684
—
2,195
—
263
2,458
263
—
443
—
959
—
1,402
959
—
3,860
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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, 2022:
Categories
Fair Value
Valuation Techniques
Limited liability investments, at fair value $
Derivative - trust preferred debt
repurchase options
$
3,196 Market approach
19,034 Binomial lattice option approach
Contingent consideration
$
3,218 Option-based income approach
Unobservable
Inputs
Valuation multiples
Input Value(s)
1.0x - 9.0x
Credit spread
Interest rate volatility
Debt coupon
interest rate
Time to maturity
(in years)
Discount rate
Risk-free rate
Expected volatility
8.95 %
2.3 %
8.72%-8.87%
10.4 - 10.59
8.25 %
4.44 %
13.0 %
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
Limited liability investments, at fair value $
$
Real estate investments
$
Contingent consideration
4,022 Market approach
10,662 Market and income approach
2,458 Option-based income approach
Stock-based compensation liabilities
$
1,402 Market approach
Investments Measured Using the Net Asset Value per Share Practical Expedient
Unobservable
Inputs
Valuation multiples
Cap rates
Discount rate
Risk-free rate
Expected volatility
Valuation multiple
Input Value(s)
1.0x - 8.0x
7.5 %
4.0 %
0.49 %
15.0 %
6.0x
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at
December 31, 2022:
Limited liability investments, at fair value
Category
thousands) Unfunded Commitments Redemption Frequency
n/a
13,863
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:
Limited liability investments, at fair value
Category
thousands) Unfunded Commitments Redemption Frequency
n/a
14,804
n/a
$
Redemption
Notice
Period
n/a
Redemption
Notice
Period
n/a
Fair Value
(in
Fair Value
(in
99
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 years ended December 31, 2022 and December 31, 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 years ended December 31, 2022 and
December 31, 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.
As further discussed in Note 4, “Acquisitions,” the Company acquired Ravix on October 1, 2021 and allocated the purchase price to the
assets acquired and liabilities assumed. The fair values of intangible assets associated with the acquisition of Ravix were determined to
be Level 3 under the fair value hierarchy.
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for
these Level 3 measurements:
Categories
Customer relationships
Fair Value
$
Valuation Techniques
4,000 Multi-period excess earnings
Trade name
$
2,500 Relief from royalty
Unobservable Inputs Input Value(s)
Growth rate
Attrition rate
Discount rate
Royalty rate
Discount rate
3.0 %
15.0 %
21.0 %
3.0 %
21.0 %
As further discussed in Note 4, “Acquisitions,” the Company acquired CSuite on November 1, 2022 and provisionally allocated the
purchase price to the assets acquired and liabilities assumed. The fair values of intangible assets associated with the acquisition of
CSuite were determined to be Level 3 under the fair value hierarchy.
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for
these Level 3 measurements:
Categories
Customer relationships
Fair Value
$
Valuation Techniques
2,500 Multi-period excess earnings
Trade name
$
1,500 Relief from royalty
Unobservable Inputs
Input Value(s)
Growth rate
Attrition rate
Discount rate
Royalty rate
Discount rate
3.0 %
25.0 %
16.5 %
2.5 %
15.5 %
As further discussed in Note 4, “Acquisitions,” the Company acquired SNS on November 18, 2022 and provisionally allocated the
purchase price to the assets acquired and liabilities assumed. The fair values of intangible assets associated with the acquisition of SNS
were determined to be Level 3 under the fair value hierarchy.
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for
these Level 3 measurements:
Categories
Customer relationships
Fair Value
$
Valuation Techniques
3,600 Multi-period excess earnings
Trade name
$
3,100 Relief from royalty
Unobservable Inputs
Input Value(s)
Growth rate
Attrition rate
Discount rate
Royalty rate
Discount rate
3.0 %
10.0 %
21.0 %
3.0 %
21.0 %
100
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
NOTE 24 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 consolidated
financial statements, the following is a summary of related party relationships and transactions.
(a)
Argo Management Group, LLC
The Company acquired Argo Management in April 2016. Argo Management’s primary business is to act as Managing Member of Argo
Holdings. At December 31, 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 years ended
December 31, 2022 and December 31, 2021.
(b)
VA Lafayette
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 4, “Acquisitions”, 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 25 COMMITMENTS AND CONTINGENT LIABILITIES
(a)
Legal proceedings:
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, which the Company reported in its consolidated statement of operations during
the first quarter of 2020, 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 2022 and 2021, the Company made reimbursement payments to Aegis
of $0.4 million and $0.1 million, respectively, in connection with the Settlement Agreement, which is included in general and
administrative expenses in its consolidated statements of operations for the years ended December 31, 2022 and December 31, 2021,
respectively. The Company’s potential exposure under these agreements was not reasonably determinable at December 31, 2022, and
no liability has been recorded in the in the consolidated financial statements at December 31, 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.
101
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
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 during the
third quarter of 2022, which is included in accrued expenses and other liabilities in the consolidated balance sheet at December 31, 2022
and loss on disposal of discontinued operations in the consolidated statement of operations for the year ended December 31, 2022. There
were no payments made by the Company related to the open claims during the years ended December 31, 2022 and December 31,
2021. During the first quarter of 2023, the $2.0 million that had been previously deposited into an escrow account was released and
remitted to the buyer to satisfy the Company’s payment with respect to the open claims.
VA Lafayette
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 December 31, 2022 and December 31, 2021, were on deposit with
state regulatory authorities.
The Company also has restricted cash of $13.1 million and $17.3 million at December 31, 2022 and December 31, 2021, respectively.
Included in restricted cash are:
•
•
•
$7.6 million and $12.6 million at December 31, 2022 and December 31, 2021, respectively, held as deposits by IWS, Geminus,
PWI, PWSC (December 31, 2021 only), Ravix and CSuite;
$1.9 million at December 31, 2022 and December 31, 2021, on deposit with state regulatory authorities; and
$3.5 million and $2.8 million at December 31, 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 26 SUBSEQUENT EVENTS
Exercise of TruPs Repurchase Options and Payment of Deferred Interest
In February 2023, the Company entered into amendments to the repurchase agreements described in Note 11, “Derivatives,”, that would
give the Company an additional discount on the total repurchase price if the Company effected a 100% repurchase on or before March
15, 2023. On March 2, 2023, the Company gave notice to the holders that it intends to exercise its options to repurchase 100% of the
principal no later than March 15, 2023. The total amount to be paid will be $56.5 million, which includes a credit for the $2.3 million
that the Company previously paid at the time of entering into the repurchase agreements. As a result, the Company will have repurchased
$75.5 million of principal and $21.2 million of deferred interest (valued as of December 31, 2022). The Company intends to use currently
available funds from working capital to fund the repurchases.
In order to execute the repurchase, the Company will have to pay an estimated $4.7 million of deferred interest to the remaining trust
preferred debt instrument for which the Company did not have the right to repurchase. After the repurchase is completed, the Company
will continue to have $15 million of principal outstanding related to remaining trust preferred debt instrument.
102
KINGSWAY FINANCIAL SERVICES INC.
Notes to Consolidated Financial Statements
Notice of Redemption of Class A Preferred Stock
On March 1, 2023, the Company notified holders of its Preferred Shares of its intention to redeem all the outstanding Class A Preferred
Stock on March 15, 2023 (the “Anticipated Redemption Date”). The Company anticipates redeeming all Class A Preferred Stock that
remain outstanding on, and is not converted by, the Anticipated Redemption Date for the price of $25.00 per Preferred Share, plus
accrued and unpaid dividends thereon, whether or not declared, up to and including the Anticipated Redemption Date.
In the event 100% of the Preferred Shares are redeemed by the Company on the Anticipated Redemption Date, the Company estimates
that the aggregate amount required to redeem will be approximately $6.1 million, which would be paid using cash on hand. However,
based on discussions with the holders of the Preferred Shares, the Company anticipates that 100% of the Preferred Shares would be
converted and, in that case, there would be no cash outlay by the Company.
Second Amendment to 2020 KWH Loan
On February 28, 2023, KWH entered into a second amendment to the 2020 KWH Loan (the “KWH DDTL”) that provides for an
additional delayed draw term loan in the principal amount of up to $10 million, with a maturity date of December 1, 2025. All or any
portion of the KWH DDTL, subject to a $2 million minimum draw amount, may be requested at any time through February 27,
2024. The proceeds are evidenced by an intercompany loan and guarantee between KAI and KWH. The principal amount shall be
repaid in quarterly installments in an amount equal to 3.75% of the original amount of the drawn DDTL. Proceeds from certain assets
dispositions, as defined, may be required to be used to repay outstanding draws under the DDTL. The KWH DDTL also increases the
senior cash flow leverage ratio maximum permissible for certain periods.
103
KINGSWAY FINANCIAL SERVICES INC.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 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 this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31,
2022, the Company’s disclosure controls and procedures are 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 (“ASU 2014-09”). 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.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s management evaluated the effectiveness of its internal control
over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework). Based on that evaluation, the Company’s management has concluded
that, as of December 31, 2022, our internal controls over financial reporting are not effective because of the existence of one
unremediated material weakness in 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.
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 audited consolidated financial statements contained in this 2022 Annual Report on Form
10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented in
conformity with U.S. GAAP.
104
KINGSWAY FINANCIAL SERVICES INC.
Remediation Process
In 2022, the Company directed its internal audit department to conduct a thorough review of the material revenue processes. The review
is in its final stages, which has preliminarily indicated no material issues. The Company expects to use the final results of this review
in early 2023 to implement a remediation plan for this final material weakness.
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
On November 1, 2022, the Company acquired 100% of the outstanding equity interests of CSuite and on November 18, 2022, the
Company acquired substantially all of the assets and assumed certain specified liabilities of SNS. Since the dates of these acquisitions,
the Company has been analyzing and evaluating procedures and controls to determine their effectiveness and to make them consistent
with our disclosure controls and procedures. As permitted by the SEC, CSuite and SNS have been excluded from the scope of our
quarterly discussion of material changes in internal control over financial reporting below.
There have been no changes in the Company’s internal control over financial reporting during the period beginning October 1, 2022,
and ending December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting, except with respect to CSuite and SNS.
Item 9B. Other Information
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable
105
KINGSWAY FINANCIAL SERVICES INC.
PART III.
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2022 Annual Meeting of
Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.
We have adopted a Code of Business Conduct and Ethics that is applicable to all employees, including our chief executive officer, chief
financial officer and other senior financial personnel, as well as our directors. A copy of the Code of Business Conduct and Ethics is
posted in the “Corporate Governance” section of our website at www.kingsway-financial.com. Any future amendments to the Code of
Business Conduct and Ethics and any grant of waiver from a provision of the code requiring disclosure under applicable SEC rules will
be disclosed in the “Corporate Governance” section of our website.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2022 Annual Meeting of
Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2022 Annual Meeting of
Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2022 Annual Meeting of
Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the Proxy Statement for our 2022 Annual Meeting of
Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year ended December 31, 2022.
106
KINGSWAY FINANCIAL SERVICES INC.
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Report
(1) Financial Statements. We have filed the following documents, which are included in Part II, Item 8 of this 2022 Annual
Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. The following financial statement schedules are filed as a part hereof along with the related
reports of the Independent Registered Public Accounting Firm included in Part II, Item 8. Schedules not listed here have been
omitted because they are not applicable or the required information is included in the Consolidated Financial Statements.
Schedule I Condensed Financial Information of the Registrant (Parent Company)
(3) Exhibits. The exhibits listed in the accompanying “Index to Exhibits” that follow the signature pages of this report are filed
or incorporated by reference as part of this Form 10-K.
(b) Exhibits. Included in Item 15(a)(3) above
(c) Financial Statement Schedules. Included in Item 15(a)(2) above
107
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company)
Parent Company Balance Sheets
(in thousands)
Assets
Investments in subsidiaries
Cash and cash equivalents
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Liabilities:
Accrued expenses and other liabilities
Total Liabilities
Redeemable Class A preferred stock
Shareholders’ Equity:
Common stock
Additional paid-in capital
Treasury stock, at cost
Accumulated deficit
Accumulated other comprehensive income
Shareholders’ equity attributable to common shareholders
Total Liabilities, Class A preferred stock and Shareholders’ Equity
See accompanying report of independent registered accounting firm.
December 31,
2022
December 31,
2021
$
$
$
$
23,545 $
32
1,313
24,890 $
3,206 $
3,206
6,013
—
359,985
(492 )
(370,427 )
26,605
15,671
24,890 $
1,944
56
447
2,447
1,674
1,674
6,497
—
359,138
(492 )
(395,149 )
30,779
(5,724 )
2,447
108
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company)
Parent Company Statements of Operations
(in thousands)
Other revenue (expenses), net:
General and administrative expenses
Non-operating other expense
Total other expenses, net
Loss from continuing operations before income tax benefit and equity in income
of subsidiaries
Income tax benefit
Equity in income of subsidiaries
Net income
See accompanying report of independent registered accounting firm.
Years ended December 31,
2021
2022
$
$
(2,081 ) $
(8 )
(2,089 )
(2,089 )
(314 )
16,840
15,065 $
(3,287 )
(2 )
(3,289 )
(3,289 )
(340 )
4,809
1,860
109
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company)
Parent Company Statements of Comprehensive Loss
Years ended December 31,
2021
2022
$
15,065 $
1,860
—
—
—
(4,238 )
(4,238 )
10,827 $
—
—
—
(7,295 )
(7,295 )
(5,435 )
(in thousands)
Net income
Other comprehensive loss, net of taxes(1):
Unrealized losses on available-for-sale investments:
Unrealized losses arising during the period
Reclassification adjustment for amounts included in net loss
Other comprehensive loss - parent only
Equity in other comprehensive loss of subsidiaries
Other comprehensive loss
Comprehensive income (loss)
(1) Net of income tax expense (benefit) of $0 and $0 in 2022 and 2021, respectively
$
See accompanying report of independent registered accounting firm.
110
KINGSWAY FINANCIAL SERVICES INC.
SCHEDULE I. Condensed Financial Information of the Registrant (Parent Company)
Parent Company Statements of Cash Flows
(in thousands)
Cash provided by (used in):
Operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Equity in net income of subsidiaries
Stock-based compensation expense, net of forfeitures
Other, net
Net cash used in operating activities
Investing activities:
Net cash from investing activities
Financing activities:
Proceeds from exercise of warrants
Capital contribution to subsidiary
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See accompanying report of independent registered accounting firm.
Years ended December 31,
2021
2022
$
15,065 $
1,860
(16,840 )
589
667
(519 )
(4,809 )
1,620
(551 )
(1,880 )
—
—
545
(50 )
495
(24 )
56
32 $
1,750
—
1,750
(130 )
186
56
$
111
KINGSWAY FINANCIAL SERVICES INC.
Item 16. Form 10-K Summary
None.
Exhibit Description
EXHIBIT INDEX
2.1
2.2
2.3
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Stock Purchase Agreement By and Among Premier Holdings, LLC, Advantage Auto MGA, LLC, Mendota Insurance
Company, Kingsway America Inc. and Kingsway Financial Services Inc., Dated as of July 16, 2018 (included as Exhibit
2.1 to the Form 8-K, filed July 20, 2018, and incorporated herein by reference).
Stock Purchase Agreement, dated as of October 12, 2020, by and among Kingsway Warranty Holdings LLC,Kingsway
America Inc., PWI Holdings, Inc., and ADESA Dealer Services, LLC (included as Exhibit 2.1 to Form 8-K, filed
October 13, 2020, and incorporated herein by reference).
Stock Purchase Agreement, dated July 29, 2022, by and among Professional Warranty Service Corporation, a Virginia
corporation (the “Company”) Tyler Gordy, an individual (“Gordy”); Professional Warranty Services LLC, a Delaware
limited liability company (“Parent” and together with Gordy, each a “Seller” and collectively “Sellers”); and PCF Insurance
Services of the West, LLC, a Delaware limited liability company (“Buyer”) (included as Exhibit 2.1 to the Form 10-Q,
filed August 4, 2022, and incorporated herein by reference).
Certificate of Incorporation of Kingsway Financial Services Inc. (included as Exhibit 3.1 to the Form 8-K, filed December
31, 2018, and incorporated herein by reference).
By-laws of Kingsway Financial Services Inc. (included as Exhibit 3.2 to the Form 8-K, filed December 31, 2018, and
incorporated herein by reference).
Indenture dated December 4, 2002 between Kingsway America Inc. and State Street Bank and Trust Company of
Connecticut, National Association (included as Exhibit 4.3 to the Form 10-K, filed March 30, 2012, and incorporated herein
by reference).
Indenture dated May 15, 2003 between Kingsway America Inc. and U.S. Bank National Association (included as Exhibit
4.4 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Indenture dated October 29, 2003 between Kingsway America Inc. and U.S. Bank National Association (included as
Exhibit 4.5 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Indenture dated May 22, 2003 between Kingsway America Inc., Kingsway Financial Services Inc., and Wilmington Trust
Company (included as Exhibit 4.6 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Junior Subordinated Indenture dated September 30, 2003 between Kingsway America Inc. and J.P Morgan Chase
Bank (included as Exhibit 4.7 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Indenture dated December 16, 2003 between Kingsway America Inc., Kingsway Financial Services Inc., and Wilmington
Trust Company (included as Exhibit 4.8 to the Form 10-K, filed March 30, 2012, and incorporated herein by reference).
Amended and Restated Common Stock Series B Warrant Agreement, dated July 8, 2014 (included as Exhibit 4.1 to the
Form 8-K, filed July 10, 2014, and incorporated herein by reference).
Form of Stock Certificate (included as Exhibit 4.1 to the Form 8-K, filed December 31, 2018, and incorporated herein by
reference).
Second Amended and Restated Kingsway Financial Services Inc. Common Stock Series B Warrant Agreement (included
as Exhibit 4.7 to the Form 10-Q, filed August 5, 2021, and incorporated herein by reference).
10.1
Kingsway Financial Services Inc. 2013 Equity Incentive Plan (included as Schedule B to the Definitive Proxy Statement
on Schedule 14A filed with the SEC on April 11, 2013, and incorporated herein by reference). *
112
KINGSWAY FINANCIAL SERVICES INC.
Exhibit Description
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Subscription Agreement (included as Exhibit 10.1 to the Form 8-K, filed December 27, 2013, and incorporated
herein by reference).
Registration Rights Agreement, dated February 3, 2014, by and among the Company and the other parties signatory
thereto (included as Exhibit 10.2 to the Form 8-K, filed February 4, 2014, and incorporated herein by reference).
Kingsway America Inc. Employee Share Purchase Plan (included as Schedule B to the Definitive Proxy Statement on
Schedule 14A filed with the SEC on April 30, 2014 and incorporated herein by reference). *
Registration Rights Agreement, dated as of November 16, 2016 by and among the Company, GrizzlyRock Institutional
Value Partners, LP and W.H.I. Growth Fund Q.P., L.P. (included as Exhibit 10.4 to Form 8-K, filed November 16, 2016,
and incorporated herein by reference).
Registration Rights Agreement, dated as of November 16, 2016 by and between the Company and Yorkmont Capital
Partners, LP. (included as Exhibit 10.5 to Form 8-K, filed November 16, 2016, and incorporated herein by reference).
Right of First Offer Agreement, dated as of November 16, 2016 by and between the Company and GrizzlyRock Institutional
Value Partners, LP. (included as Exhibit 10.6 to Form 8-K, filed November 16, 2016, and incorporated herein by reference).
Right of First Offer Agreement, dated as of November 16, 2016 by and between the Company and W.H.I. Growth Fund
Q.P., L.P. (included as Exhibit 10.7 to Form 8-K, filed November 16, 2016, and incorporated herein by reference).
Amendment No. 1 to the Kingsway Financial Services Inc. 2013 Equity Incentive Plan (included as Exhibit 10.1 to Form
10-Q, filed August 8, 2018, and incorporated herein by reference).
10.10 Offer Letter, dated September 5, 2018, between the Company and John T. Fitzgerald (included as Exhibit 10.2 to Form 8-
K, filed September 10, 2018, and incorporated herein by reference).
10.11
Severance Agreement, dated September 5, 2018, between the Company and John T. Fitzgerald (included as Exhibit 10.3
to Form 8-K, filed September 10, 2018, and incorporated herein by reference).
10.12 Restricted Stock Agreement, dated September 5, 2018, between the Company and John T. Fitzgerald (included as Exhibit
10.4 to Form 8-K, filed September 10, 2018, and incorporated herein by reference).
10.13 Form of Indemnification Agreement for Directors and Officers (included as Exhibit 10.5 to Form 8-K, filed September 10,
2018, and incorporated herein by reference).
10.14 Employment Offer Letter, dated as of October 23, 2019, by and between Kent A. Hansen and Kingsway America
Inc.(included as Exhibit 10.2 to Form 8-K, filed February 28, 2020, and incorporated herein by reference).
10.15 Kingsway Financial Services Inc. 2020 Equity Incentive Plan (included as Schedule A to the Definitive Proxy Statement on
Schedule 14A filed with the SEC on August 20, 2020, and incorporated herein by reference). *
10.16 Loan and Security Agreement, dated as of December 1, 2020, among Kingsway Warranty Holdings LLC, Trinity Warranty
Solutions LLC, Geminus Holding Company, Inc., IWS Acquisition Corporation and PWI Holdings, Inc., as Borrowers, the
other Loan Parties party thereto, and CIBC Bank USA, as Lender and as Issuing Lender (included as Exhibit 10.1 to Form
8-K, filed December 2, 2020, and incorporated herein by reference).
10.17 Letter Agreement, effective as of December 31, 2020, by and among Kingsway Warranty Holdings LLC, Trinity Warranty
Solutions LLC, Geminus Holding Company, Inc., IWS Acquisition Corporation, and PWI Holdings, Inc., as Borrowers, the
other Loan Parties party thereto, and CIBC Bank USA, as Lender.
10.18 Form of Restricted Stock Agreement. *
113
KINGSWAY FINANCIAL SERVICES INC.
Exhibit Description
10.19 Employment Separation Agreement and Release, by and between Kingsway America, Inc. and Paul R. Hogan, dated as of
March 31, 2021 (included as Exhibit 10.1 to Form 8-K, filed April 2, 2021, and incorporated herein by reference).
10.20 Stock Purchase Agreement by and among, Ravix Acquisition, LLC, The Shareholders of Ravix Financial, Inc., Ravix
Financial, Inc., Kingsway America, Inc. (solely with respect to Section 9.21), and Dan Saccani, as the Seller Representative,
dated October 1, 2021 (included as Exhibit 10.1 to Form 8-K, filed October 4, 2021, and incorporated herein by reference).
10.21 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).
10.22 Asset purchase agreement by and among Pegasus acquirer LLC, as buyer, Secure Nursing Service, Inc., as seller and Rafael
Gofman, Ella Gofman And Zhanna Weiss, as the shareholders (included as Exhibit 10.1 to the Form 8-K, filed November
21, 2022, and incorporated herein by reference).
10.23 Purchase and Sale Agreement dated December 22, 2022, by and between TRT Leaseco, LLC, as Seller, and BNSF Dayton
LLC, as Purchaser (included as Exhibit 10.1 to the Form 8-K, filed December 23, 2022, and incorporated herein by
reference).
10.24 Second Amendment to Loan and Security Agreement, dated as of February 28, 2023, among Kingsway Warranty Holdings
LLC, Trinity Warranty Solutions LLC, Geminus Holding Company, Inc., IWS Acquisition Corporation and PWI Holdings,
Inc., as Borrowers, the other Loan Parties party thereto, and CIBC Bank USA, as Lender and as Issuing Lender.
14
21
23
Kingsway Financial Services Inc. Code of Business Conduct & Ethics Inc. Code of Business Conduct & Ethics (included
as Exhibit 14 to form 10-K, Filed March 16, 2018, and incorporated herein by reference.
Subsidiaries of Kingsway Financial Services Inc.
Consent of Plante & Moran, PLLC
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
32.1 Certification of Chief 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 Chief 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 (embedded within the Inline XBRL Document and include in Exhibit 101)
* Management contract or compensatory plan or arrangement.
114
KINGSWAY FINANCIAL SERVICES INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 8, 2023
KINGSWAY FINANCIAL SERVICES INC.
/s/ John T. Fitzgerald
By:
Name: John T. Fitzgerald
Title: Chief Executive Officer, President and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ John T. Fitzgerald
John T. Fitzgerald
/s/ Kent A. Hansen
Kent A. Hansen
/s/ Terence Kavanagh
Terence Kavanagh
/s/ Charles Frischer
Charles Frischer
/s/ Gregory Hannon
Gregory Hannon
/s/ Doug Levine
Doug Levine
/s/ Corissa Porcelli
Corissa Porcelli
/s/ Joseph Stilwell
Joseph Stilwell
Chief Executive Officer, President and Director
March 8, 2023
Chief Financial Officer and Executive Vice President
(principal financial officer and principal accounting officer)
March 8, 2023
Chairman of the Board and Director
March 8, 2023
March 8, 2023
March 8, 2023
March 8, 2023
March 8, 2023
March 8, 2023
Director
Director
Director
Director
Director
115