Kingsway(KFS) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended September 30, 2019, show total assets increasing to $402.4 million, a net loss improving to $1.2 million, and minimal operating cash flow of $9 thousand Consolidated Balance Sheets As of September 30, 2019, total assets increased to $402.4 million due to acquisitions, while total liabilities rose to $375.7 million, and shareholders' equity decreased to $20.2 million Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $402,394 | $378,240 | | Cash and cash equivalents | $13,078 | $14,619 | | Total investments | $64,464 | $59,904 | | Goodwill | $82,104 | $74,659 | | Intangible assets, net | $87,100 | $83,266 | | Total Liabilities | $375,656 | $348,182 | | Deferred service fees | $63,312 | $47,130 | | Notes payable | $195,841 | $199,316 | | Subordinated debt, at fair value | $50,565 | $50,023 | | Total Shareholders' Equity | $20,183 | $24,258 | Consolidated Statements of Operations For the nine months ended September 30, 2019, total revenues increased to $44.9 million, with a net loss of $1.2 million and a basic loss per share of ($0.12), showing significant improvement year-over-year Operating Results (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Total revenues | $44,882 | $38,720 | | Operating income (loss) | ($1,277) | ($394) | | Loss from continuing operations | ($1,213) | ($9,472) | | Net loss | ($1,213) | ($15,875) | | Net loss attributable to common shareholders | ($2,640) | ($17,369) | | Basic Loss Per Share (Net Loss) | ($0.12) | ($0.80) | Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, operating activities provided $9 thousand in cash, investing activities used $1.6 million, and financing activities provided $3.9 million Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $9 | ($15,296) | | Net cash (used in) provided by investing activities | ($1,601) | $16,378 | | Net cash provided by (used in) financing activities | $3,854 | ($3,633) | Notes to Consolidated Financial Statements The notes detail business operations, accounting policies, the $8.4 million Geminus acquisition, adoption of new lease accounting standards, and the expected adverse impact of the COVID-19 pandemic - The company primarily operates in the extended warranty, asset management, and real estate industries through its US-based subsidiaries[25] - On March 1, 2019, the company acquired Geminus Holding Company, Inc. for $8.4 million cash, resulting in $7.4 million of goodwill[53][56] - The company adopted ASU 2016-02 on January 1, 2019, recognizing right-of-use assets of approximately $2.7 million and lease liabilities of $2.9 million[49][127] - The COVID-19 pandemic, a subsequent event in March 2020, is expected to adversely impact general economic conditions and the Extended Warranty segment due to reduced consumer spending[270] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses segment performance, noting growth in Extended Warranty due to the Geminus acquisition, stable Leased Real Estate, and liquidity concerns regarding the holding company's $1.9 million cash and ability to redeem Preferred Shares - The company operates through two reportable segments: Extended Warranty and Leased Real Estate, following the classification of its non-standard auto insurance business as a discontinued operation in 2018[275][276] - Extended Warranty segment operating income increased to $1.6 million in Q3 2019 from $1.2 million in Q3 2018, primarily due to the Geminus acquisition[296] - The holding company's liquidity was $1.9 million at September 30, 2019, representing approximately four months of operating expenses, with deferred interest payments on trust preferred securities[357][358] - Management projects insufficient legally available funds to redeem all outstanding Preferred Shares on April 1, 2021, leading to continued accrual of dividends[360] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and credit risks, with a high-quality fixed-income portfolio and potential $1.0 million increase in annual interest expense from a 100 basis point LIBOR rise - The company's primary market risk is interest rate risk, where a 100 basis point increase would decrease the fair value of its fixed maturities portfolio by an estimated $0.17 million as of September 30, 2019[374] - Exposure to variable interest rates through LIBOR-based debt means a 100 basis point LIBOR increase would raise annual interest expense by approximately $1.0 million[374] Credit Ratings of Fixed Maturities (as a % of total) | Rating (S&P/Moody's) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | AAA/Aaa | 69.3% | 72.0% | | AA/Aa | 16.8% | 16.1% | | A/A | 13.9% | 10.9% | | Percentage rated A/A2 or better | 100.0% | 99.0% | Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2019, due to material weaknesses in internal control over financial reporting, for which a remediation plan is being developed - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2019[381] - Ineffectiveness stems from material weaknesses in internal control over financial reporting, including accounting for complex transactions, variable interest entities, and revenue recognition (ASU 2014-09)[381][383] - Additional weaknesses include monitoring accounts receivable collectability, impairment analysis on equity method investments, and timely account reconciliations[384][385][386] - A remediation plan is under development to address these weaknesses, focusing on assessing accounting policies, enhancing review procedures, and implementing additional controls[389] PART II - OTHER INFORMATION Legal Proceedings The company is involved in legal proceedings, including a lawsuit against TRT LeaseCo, LLC and a $0.9 million settlement with Aegis Security Insurance Company in January 2020 - The company is a defendant in a lawsuit by DGI-BNSF Corp. against TRT LeaseCo, LLC, concerning unpaid Management Services Agreement fees, which could materially impact financial results[266] - A breach of contract complaint by Aegis Security Insurance Company was settled in January 2020 for a $0.9 million payment and 60% reimbursement of future losses up to $4.8 million[267] Risk Factors New material risks, primarily the COVID-19 pandemic, are expected to adversely impact business operations, financial condition, and cash flows, exacerbating existing economic and market volatility risks - A new significant risk is the adverse impact of the COVID-19 pandemic, expected to decrease consumer demand and disrupt operations[393][394] - The pandemic has caused significant sales declines due to business closures and may materially increase costs, negatively impacting operations and liquidity[394][395] - General economic difficulties and market volatility, exacerbated by the pandemic, could lead to substantial investment losses and hinder investment valuation or financing access[396][397] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None Defaults Upon Senior Securities No defaults upon senior securities occurred during the period - None Other Information No other information is reported for the period - None Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[402]