TORONTO, Nov. 8, 2018 /CNW/ - (TSX: KFS, NYSE: KFS)
Kingsway Financial Services Inc. ("Kingsway" or the "Company")
today announced its operating results for the third quarter and
nine months ended September 30,
2018. All amounts are in U.S. dollars unless indicated
otherwise.
Operating Results
The Company reported loss from
continuing operations of $3.6
million, or $0.18 per diluted
share, in the third quarter of 2018, compared to loss from
continuing operations of $3.0
million, or $0.14 per diluted
share, in the third quarter of 2017.
The loss from continuing operations for the third quarter of
2018 reflects the following:
- Operating income of $0.9
million
- Interest expense not allocated to segments of $1.6 million
- Amortization of intangible assets of $1.4 million
- Loss on change in fair value of debt of $1.5 million
Following are highlights of Kingsway's third quarter 2018
operating income. Operating income reflects the Company's
core operating activities, including its reportable segments,
passive investment portfolio and corporate operating
expenses.
- Operating income was $0.9 million
for the third quarter of 2018 compared to $0.8 million for the third quarter of 2017.
-
- Extended Warranty segment operating income was $0.4 million for the third quarter of 2018
compared to $0.8 million for the
third quarter of 2017.
- Leased Real Estate segment operating income was $0.5 million for the third quarter of 2018
compared to $0.5 million for the
third quarter of 2017.
- Net investment loss of $0.1
million was reported for the third quarter of 2018 compared
to net investment income of $1.3
million for the third quarter of 2017.
- Gain on change in fair value of equity investments was
$0.3 million for the third quarter of
2018 compared to zero for the third quarter of 2017.
- Other operating income and expense was a net expense of
$0.2 million for the third quarter of
2018 compared to $1.8 million for the
third quarter of 2017.
- Book value decreased to $1.24 per
share at September 30, 2018 from
$2.02 per share at December 31, 2017. The Company also carries a
valuation allowance, estimated to be approximately $8.28 per share at September 30, 2018, subject to final accounting
following the close on October 18,
2018 of the previously announced sale of Mendota Insurance
Company, Mendakota Insurance Company and Mendakota Casualty Company
(collectively "Mendota"), against the deferred tax asset, primarily
related to its loss carryforwards.
The following non-recurring items contributed to Kingsway's
third quarter 2018 results.
CEO Transition
On September 5,
2018, the Company entered into a series of agreements
related to the separation of its former CEO from the Company and
the appointment of Mr. John T.
Fitzgerald as President and Chief Executive Officer.
As a result of this transition, (i) other income and expenses not
allocated to segments included a stock-based compensation benefit
of $2.5 million, which reflects the
reversal of compensation expense previously recognized from
March 28, 2014 through June 30, 2018 as a result of forfeitures of
restricted stock grants by certain former officers of the Company;
and $0.4 million of payroll tax
expense and $0.2 million of other
expense recorded by the Company related to these arrangements with
its former officers; and (ii) net realized losses in the third
quarter of 2018 included a realized loss of $0.4 million resulting from the sale of a limited
liability investment to an investment group that includes the
former officers.
Adoption of ASU 2014-09
The Company corrected its
initial adoption of Accounting Standards Update 2014-09, Revenue
from Contracts with Customers, as relates to revenue
recognition for Professional Warranty Service Corporation ("PWSC"),
which the Company acquired on October
12, 2017. During the third quarter of 2018, PWSC
adopted a different methodology to allocate the transaction price
it receives from the sale of its homebuilder warranty
contracts. As a result, the Company recorded an adjustment
during the third quarter of 2018 to decrease service fee and
commission income by $1.0 million
related to the correction of our prior accounting for PWSC's
homebuilder warranty service fees during the six months ended
June 30, 2018. The different
methodology also resulted in service fee and commission income
recorded by PWSC during the third quarter of 2018 being lower by an
additional $0.5 million compared to
what would have been recognized during the third quarter under
PWSC's previous revenue recognition model. This approach will
result in PWSC recognizing homebuilder warranty service fees more
slowly compared to the previously calculated revenue recognition
pattern initially utilized during the six months ended June 30, 2018.
Finalizing PWSC Purchase Accounting
The Company
finalized its fair value analysis of the assets acquired and
liabilities assumed in its acquisition of PWSC, which resulted in
the Company recording $0.8 million of
amortization expense, related to the intangible assets identified
in the fair value analysis, for the period from the date of
acquisition through June 30, 2018 in
addition to $0.3 million of
amortization expense recorded for the period from July 1, 2018 through September 30, 2018.
Sale of Mendota
The Company closed on October 18, 2018 its previously announced sale of
Mendota. Included in the Company's net loss for the
three months ended September 30, 2018
is income from discontinued operations, net of tax of $0.7 million and a loss on disposal of
discontinued operations of $1.2
million. As a result of the Company's sale of Mendota,
its financial statements for the third quarter and nine months
ended September 30, 2018 reflect an
estimated loss on disposal as well as the classification of
Mendota, previously disclosed as part of the Insurance Underwriting
segment, as a discontinued operation at September 30, 2018 with its assets and
liabilities being classified as held for sale. The results of
Kingsway Amigo Insurance Company, which has been in runoff for five
years, will continue to be reported as part of continuing
operations; however, the Company will no longer report a separate
Insurance Underwriting segment.
Change in Jurisdiction of Incorporation
During the
third quarter of 2018, the Company announced it had filed a
registration statement, which includes a management proxy circular,
with the Securities and Exchange Commission ("SEC") pursuant to
which the Company proposes to change its jurisdiction of
incorporation from the province of Ontario to the State
of Delaware in the United States
of America (the "Domestication"). Following SEC
clearance of the Company's registration statement, the Company will
hold a special meeting of shareholders to seek shareholder approval
for the change in its jurisdiction of incorporation.
The Company believes the Domestication will enable it to
eliminate a number of potentially material income tax
inefficiencies it believes it would inevitably encounter,
particularly now that the Company has closed the sale of
Mendota. The Company believes the Domestication will also
reduce operating expenses and transactional inefficiencies that
currently result from being subject to Canadian corporate laws
despite having no operations in Canada.
Strategic Focus
As part of its CEO Transition, the
Company has defined its strategy to focus intently on organic and
inorganic growth of its Extended Warranty segment while
simultaneously pursuing additional opportunities in its Leased Real
Estate segment. The Company's former Chief Executive Officer
has been retained as a Senior Advisor to assist in structuring
additional NOL utilization transactions in our Leased Real Estate
segment and maximizing the value of the portfolio of equity,
limited liability and other investments received as consideration
for the sale of Mendota.
About the Company
Kingsway is a holding company that
owns or controls subsidiaries primarily in the extended warranty,
asset management and real estate industries. The common shares of
Kingsway are listed on the Toronto Stock Exchange and the New York
Stock Exchange under the trading symbol "KFS."
|
Consolidated
Statements of Operations
|
|
(in thousands,
except per share data)
|
|
(Unaudited)
|
|
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
Service fee and
commission income
|
$
|
9,104
|
$
|
7,670
|
$
|
28,938
|
$
|
20,738
|
|
Rental
income
|
3,341
|
3,345
|
10,033
|
10,041
|
|
Net investment (loss)
income
|
(84)
|
1,289
|
(697)
|
126
|
|
Net realized
losses
|
(414)
|
—
|
(405)
|
(1)
|
|
Gain on change in fair
value of equity investments
|
337
|
—
|
951
|
—
|
|
Other
income
|
15
|
692
|
1,323
|
1,261
|
|
Total
revenues
|
12,299
|
12,996
|
40,143
|
32,165
|
|
Operating
expenses:
|
|
|
|
|
|
Claims authorized on
vehicle service agreements
|
1,442
|
1,387
|
4,206
|
4,066
|
|
Loss and loss
adjustment expenses
|
(19)
|
266
|
1,628
|
266
|
|
Commissions
|
971
|
525
|
2,843
|
2,154
|
|
Cost of services
sold
|
2,033
|
1,951
|
5,749
|
4,546
|
|
General and
administrative expenses
|
5,410
|
6,515
|
20,078
|
18,740
|
|
Leased real estate
segment interest expense
|
1,540
|
1,563
|
4,638
|
4,706
|
|
Total operating
expenses
|
11,377
|
12,207
|
39,142
|
34,478
|
|
Operating income
(loss)
|
922
|
789
|
1,001
|
(2,313)
|
|
Other expenses
(revenues), net:
|
|
|
|
|
|
Interest expense not
allocated to segments
|
1,571
|
1,261
|
4,476
|
3,636
|
|
Amortization of
intangible assets
|
1,356
|
286
|
1,899
|
866
|
|
Contingent
consideration benefit
|
—
|
—
|
—
|
(212)
|
|
Loss on change in fair
value of debt
|
1,450
|
1,178
|
2,511
|
5,769
|
|
Gain on disposal of
subsidiary
|
—
|
—
|
(17)
|
—
|
|
Equity in net loss
(income) of investee
|
339
|
897
|
623
|
(1,343)
|
|
Total other expenses,
net
|
4,716
|
3,622
|
9,492
|
8,716
|
|
Loss from continuing
operations before income tax (benefit) expense
|
(3,794)
|
(2,833)
|
(8,491)
|
(11,029)
|
|
Income tax (benefit)
expense
|
(147)
|
120
|
291
|
1,636
|
|
Loss from
continuing operations
|
(3,647)
|
(2,953)
|
(8,782)
|
(12,665)
|
|
Income from
discontinued operations, net of taxes
|
740
|
1,391
|
2,069
|
960
|
|
(Loss) gain on
disposal of discontinued operations, net of taxes
|
(1,172)
|
—
|
(7,800)
|
1,017
|
|
Net
loss
|
(4,079)
|
(1,562)
|
(14,513)
|
(10,688)
|
|
Less: net income
attributable to noncontrolling interests in
consolidated subsidiaries
|
110
|
79
|
353
|
284
|
|
Less: dividends on
preferred stock, net of tax
|
132
|
(115)
|
391
|
213
|
|
Net loss attributable
to common shareholders
|
$
|
(4,321)
|
$
|
(1,526)
|
$
|
(15,257)
|
$
|
(11,185)
|
|
Loss per share -
continuing operations:
|
|
|
|
|
|
Basic:
|
$
|
(0.18)
|
$
|
(0.14)
|
$
|
(0.44)
|
$
|
(0.61)
|
|
Diluted:
|
$
|
(0.18)
|
$
|
(0.14)
|
$
|
(0.44)
|
$
|
(0.61)
|
|
(Loss) earnings per
share - discontinued operations:
|
|
|
|
|
|
Basic:
|
$
|
(0.02)
|
$
|
0.06
|
$
|
(0.26)
|
$
|
0.09
|
|
Diluted:
|
$
|
(0.02)
|
$
|
0.06
|
$
|
(0.26)
|
$
|
0.09
|
|
Loss per share – net
loss attributable to common shareholders:
|
|
|
|
|
|
Basic:
|
$
|
(0.20)
|
$
|
(0.07)
|
$
|
(0.70)
|
$
|
(0.52)
|
|
Diluted:
|
$
|
(0.20)
|
$
|
(0.07)
|
$
|
(0.70)
|
$
|
(0.52)
|
|
Weighted-average
shares outstanding (in '000s):
|
|
|
|
|
|
Basic:
|
21,708
|
21,559
|
21,708
|
21,492
|
|
Diluted:
|
21,708
|
21,559
|
21,708
|
21,492
|
|
Consolidated
Balance Sheets
|
|
(in
thousands, except share data)
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
Investments:
|
|
|
|
|
Fixed maturities, at
fair value (amortized cost of $11,316 and $14,707,
respectively)
|
$
|
11,076
|
|
$
|
14,541
|
|
Equity investments, at
fair value (cost of $2,038 and $4,854, respectively)
|
1,334
|
|
4,476
|
|
Limited liability
investments
|
6,230
|
|
4,922
|
|
Limited liability
investment, at fair value
|
4,529
|
|
5,771
|
|
Other investments, at
cost which approximates fair value
|
1,917
|
|
2,321
|
|
Short-term
investments, at cost which approximates fair value
|
151
|
|
151
|
|
Total
investments
|
25,237
|
|
32,182
|
|
Cash and cash
equivalents
|
23,591
|
|
20,774
|
|
Investment in
investee
|
2,827
|
|
5,230
|
|
Accrued investment
income
|
194
|
|
331
|
|
Service fee
receivable, net of allowance for doubtful accounts of $331 and
$318, respectively
|
6,747
|
|
4,286
|
|
Other receivables,
net of allowance for doubtful accounts of zero and zero,
respectively
|
7,877
|
|
6,536
|
|
Deferred acquisition
costs, net
|
6,899
|
|
6,325
|
|
Property and
equipment, net of accumulated depreciation of $14,875 and $11,683,
respectively
|
104,196
|
|
108,008
|
|
Goodwill
|
73,928
|
|
80,112
|
|
Intangible assets,
net of accumulated amortization of $10,232 and $8,333,
respectively
|
84,359
|
|
80,062
|
|
Other
assets
|
2,560
|
|
4,302
|
|
Assets held for
sale
|
133,365
|
|
136,452
|
|
Total
Assets
|
$
|
471,780
|
|
$
|
484,600
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
Liabilities:
|
|
|
|
|
Property and casualty
unpaid loss and loss adjustment expenses
|
$
|
2,292
|
|
$
|
1,329
|
|
Note
payable
|
183,561
|
|
186,469
|
|
Bank loan
|
4,167
|
|
4,917
|
|
Subordinated debt, at
fair value
|
53,614
|
|
52,105
|
|
Net deferred income
tax liabilities
|
28,472
|
|
28,745
|
|
Deferred service
fees
|
46,275
|
|
42,257
|
|
Income taxes
payable
|
2,501
|
|
2,644
|
|
Accrued expenses and
other liabilities
|
11,492
|
|
10,924
|
|
Liabilities held for
sale
|
107,076
|
|
105,900
|
|
Total
Liabilities
|
439,450
|
|
435,290
|
|
Class A preferred
stock, no par value; unlimited number authorized; 222,876 and
222,876 issued and
outstanding at September 30, 2018 and December 31, 2017,
respectively; redemption amount of $5,572
|
5,486
|
|
5,461
|
|
Shareholders'
Equity:
|
|
|
|
|
Common stock, no par
value; unlimited number authorized; 21,708,190 and 21,708,190
issued and
outstanding at September 30, 2018 and December 31, 2017,
respectively
|
—
|
|
—
|
|
Additional paid-in
capital
|
354,141
|
|
356,021
|
|
Accumulated
deficit
|
(369,771)
|
|
(313,487)
|
|
Accumulated other
comprehensive income (loss)
|
36,961
|
|
(3,852)
|
|
Shareholders' equity
attributable to common shareholders
|
21,331
|
|
38,682
|
|
Noncontrolling
interests in consolidated subsidiaries
|
5,513
|
|
5,167
|
|
Total Shareholders'
Equity
|
26,844
|
|
43,849
|
|
Total Liabilities,
Class A preferred stock and Shareholders' Equity
|
$
|
471,780
|
|
$
|
484,600
|
Forward-Looking Statements
This press release includes
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that are not historical facts, and involve
risks and uncertainties that could cause actual results to differ
materially from those expected and projected. Words such as
"expects," "believes," "anticipates," "intends," "estimates,"
"seeks" and variations and similar words and expressions are
intended to identify such forward-looking statements. Such
forward-looking statements relate to future events or future
performance, but reflect Kingsway management's current beliefs,
based on information currently available. A number of factors
could cause actual events, performance or results to differ
materially from the events, performance and results discussed in
the forward-looking statements. For information identifying
important factors that could cause actual results to differ
materially from those anticipated in the forward-looking
statements, please refer to the section entitled "Risk Factors" in
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2018. Except as
expressly required by applicable securities law, 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.
Additional Information
Additional information about
Kingsway, including a copy of its 2017 Annual Report and filings on
Forms 10-Q and 8-K, can be accessed on the Canadian Securities
Administrators' website at www.sedar.com, on the EDGAR section of
the U.S. Securities and Exchange Commission's website at
www.sec.gov or through the Company's website at
www.kingsway-financial.com.
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SOURCE Kingsway Financial Services Inc.