KFS Kingsway Financial Services Inc New

Assets

Investments:

Fixed maturities, at fair value (amortized cost of $21,470 and $20,488, respectively)

$

21,602

$

20,716

Equity investments, at fair value (cost of $1,147 and $1,157, respectively)

225

444

Limited liability investments

3,568

3,692

Limited liability investments, at fair value

20,362

32,811

Investments in private companies, at adjusted cost

790

790

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

10,662

10,662

Other investments, at cost which approximates fair value

288

294

Short-term investments, at cost which approximates fair value

157

157

Total investments

57,654

69,566

Cash and cash equivalents

17,093

14,374

Restricted cash

27,540

30,571

Accrued investment income

900

757

Service fee receivable, net of allowance for doubtful accounts of $258 and $478, respectively

5,021

3,928

Other receivables, net of allowance for doubtful accounts of $201 and $201, respectively

14,144

16,323

Deferred acquisition costs, net

9,106

8,835

Property and equipment, net of accumulated depreciation of $26,557 and $24,441, respectively

93,376

95,015

Right-of-use asset

2,560

2,960

Goodwill

121,289

121,130

Intangible assets, net of accumulated amortization of $16,426 and $15,433, respectively

83,140

84,133

Other assets

15,668

4,882

Total Assets

$

447,491

$

452,474

Liabilities and Shareholders' Equity

Liabilities:

Accrued expenses and other liabilities

$

40,671

$

42,502

Income taxes payable

188

2,859

Deferred service fees

88,446

87,945

Unpaid loss and loss adjustment expenses

1,407

1,449

Bank loan

23,182

25,303

Notes payable

191,143

192,057

Subordinated debt, at fair value

58,218

50,928

Lease liability

2,814

3,213

Net deferred income tax liabilities

26,503

27,555

Total Liabilities

432,572

433,811

Redeemable Class A preferred stock, no par value; 1,000,000 and 1,000,000 authorized at June 30, 2021
and December 31, 2020, respectively; 182,876 and 182,876 issued and outstanding at June 30, 2021 and
December 31, 2020, respectively; redemption amount of $6,828 and $6,658 at June 30, 2021 and
December 31, 2020, respectively

6,828

6,504

Shareholders' Equity:

Common stock, no par value; 50,000,000 and 50,000,000 authorized at June 30, 2021 and December 31,
2020, respectively; 22,365,631 and 22,211,069 issued and outstanding at June 30, 2021 and December
31, 2020, respectively

—

—

Additional paid-in capital

356,331

355,242

Treasury stock, at cost; 247,450 and 247,450 outstanding at June 30, 2021 and December 31, 2020, respectively

(492

(492)

Accumulated deficit

(394,851

(394,807)

Accumulated other comprehensive income

32,434

38,059

Shareholders' equity attributable to common shareholders

(6,578

(1,998)

Noncontrolling interests in consolidated subsidiaries

14,669

14,157

Total Shareholders' Equity

8,091

12,159

Total Liabilities, Class A preferred stock and Shareholders' Equity

$

447,491

$

452,474

Three months ended June 30,

Six months ended June 30,

2021

2020

2021

2020

Revenues:

Service fee and commission revenue

$

18,755

$

10,438

$

37,329

$

21,624

Rental revenue

3,341

3,341

6,682

6,682

Total revenues

22,096

13,779

44,011

28,306

Operating expenses:

Claims authorized on vehicle service agreements

5,251

2,347

9,918

4,727

Loss and loss adjustment expenses

(4)

2

4

15

Commissions

1,576

1,279

3,080

2,582

Cost of services sold

952

347

1,932

750

General and administrative expenses

12,043

8,388

24,509

19,081

Leased real estate segment interest expense

1,500

1,491

2,968

2,990

Total operating expenses

21,318

13,854

42,411

30,145

Operating income (loss)

778

(75)

1,600

(1,839)

Other revenues (expenses), net:

Net investment income

403

681

824

1,400

Net realized gains

187

8

238

216

(Loss) gain on change in fair value of equity investments

(45)

489

(196)

(108)

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

731

(123)

529

1,776

Net change in unrealized loss on private company investments

—

—

—

(670)

Other-than-temporary impairment loss

—

—

—

(117)

Other (expenses) income

(2,741)

65

(2,634)

246

Interest expense not allocated to segments

(1,593)

(1,997)

(3,145)

(4,150)

Amortization of intangible assets

(496)

(573)

(993)

(1,147)

(Loss) gain on change in fair value of debt

(738)

(202)

(1,757)

2,443

Gain on extinguishment of debt

—

—

2,494

—

Total other expenses, net

(4,292)

(1,652)

(4,640)

(111)

Loss from continuing operations before income tax benefit

(3,514)

(1,727)

(3,040)

(1,950)

Income tax benefit

(3,258)

(300)

(3,683)

(130)

(Loss) income from continuing operations

(256)

(1,427)

643

(1,820)

Gain on disposal of discontinued operations, net of taxes

—

6

—

6

Net (loss) income

(256)

(1,421)

643

(1,814)

Less: net income attributable to noncontrolling interests in consolidated subsidiaries

428

108

687

829

Less: dividends on preferred stock

85

224

323

601

Net loss attributable to common shareholders

$

(769)

$

(1,753)

$

(367)

$

(3,244)

Loss per share – continuing operations:

Basic:

$

(0.03)

$

(0.08)

$

(0.02)

$

(0.15)

Diluted:

$

(0.03)

$

(0.08)

$

(0.02)

$

(0.15)

Earnings per share – discontinued operations:

Basic:

$

—

$

—

$

—

$

—

Diluted:

$

—

$

—

$

—

$

—

Loss per share – net loss attributable to common shareholders:

Basic:

$

(0.03)

$

(0.08)

$

(0.02)

$

(0.15)

Diluted:

$

(0.03)

$

(0.08)

$

(0.02)

$

(0.15)

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

Basic:

22,366

22,211

22,292

22,140

Diluted:

22,366

22,211

22,292

22,140

Six months ended June 30,

2021

2020

Cash provided by (used in):

Operating activities:

Net income (loss)

$

643

$

(1,814)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Gain on disposal of discontinued operations, net of taxes

—

(6)

Equity in net income of limited liability investments

(45)

(12)

Depreciation and amortization expense

3,138

3,335

Stock-based compensation expense, net of forfeitures

2,407

82

Net realized gains

(238)

(216)

Loss on change in fair value of equity investments

196

108

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

(529)

(1,776)

Net change in unrealized loss on private company investments

—

670

Loss (gain) on change in fair value of debt

1,757

(2,443)

Loss on change in fair value of derivatives

73

—

Deferred income taxes

(1,052)

(272)

Other-than-temporary impairment loss

—

117

Amortization of fixed maturities premiums and discounts

88

58

Amortization of notes payable premium, discounts and debt issue costs

(430)

(447)

Gain on extinguishment of debt

(2,494)

—

Changes in operating assets and liabilities:

Service fee receivable, net

(1,093)

118

Other receivables, net

2,179

1,776

Deferred acquisition costs, net

(271)

(146)

Other assets

(10,786)

62

Unpaid loss and loss adjustment expenses

(42)

(277)

Deferred service fees

501

(887)

Other, net

(5,510)

954

Net cash used in operating activities

(11,508)

(1,016)

Investing activities:

Proceeds from sales and maturities of fixed maturities

2,894

10,269

Proceeds from sales of equity investments

23

—

Purchases of fixed maturities

(3,952)

(7,405)

Net proceeds from limited liability investments

168

134

Net proceeds from limited liability investments, at fair value

13,188

77

Net proceeds from investments in private companies

89

60

Net proceeds from other investments

6

103

Net purchases of short-term investments

—

(2)

Acquisition of business, net of cash acquired

(50)

—

Net purchases of property and equipment

(506)

(105)

Net cash provided by investing activities

11,860

3,131

Financing activities:

Distributions to noncontrolling interest holders

(170)

(43)

Taxes paid related to net share settlements of restricted stock awards

(323)

(83)

Principal payments on bank loans

(2,161)

(687)

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

13,270

2,858

Principal payments on notes payable

(11,280)

(2,012)

Net cash (used in) provided by financing activities

(664)

33

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

(312)

2,148

Cash and cash equivalents and restricted cash at beginning of period

44,945

25,661

Cash and cash equivalents and restricted cash at end of period

$

44,633

$

27,809

Twelve
Months
Ended

For the Three Months Ended

6/30/2021

6/30/2021

3/31/2021

12/31/2020

9/30/2020

GAAP Net (Loss) Income

$

(2,957)

$

(256)

$

899

$

(2,478)

$

(1,124)

Non-GAAP Adjustments:

(Gain) Loss on sale of non-core investments (1)

(21)

(71)

-

(51)

101

Change in fair value of investments (2)

(3,903)

(686)

353

(2,193)

(1,377)

Change in fair value of debt (3)

3,027

738

1,019

767

503

Litigation expenses (5)

1,876

-

344

997

535

Acquisition and disposition related expenses (6)

377

-

-

238

139

Employee termination and recruiting expenses (7)

171

-

160

-

11

Stock-based compensation expense (8)

3,667

735

1,699

1,106

127

Extraordinary audit and audit-related expenses (10)

76

-

-

-

76

Loss on extinguishment of debt (11)

851

-

-

851

-

CMC Settlement (12)

958

-

(645)

1,603

-

Amortization expense

2,137

496

497

572

572

Total Non-GAAP Adjustments

9,216

1,212

3,427

3,890

687

Non-GAAP Adjusted Income (Loss) (13)

$

6,259

$

956

$

4,326

$

1,414

$

(437)

Twelve
Months
Ended

For the Three Months Ended

6/30/2020

6/30/2020

3/31/2020

12/31/2019

9/30/2019

GAAP Net Loss

$

(8,919)

$

(1,421)

$

(393)

$

(3,098)

$

(4,006)

Non-GAAP Adjustments:

(Gain) Loss on sale of non-core investments (1)

(353)

-

(60)

-

(293)

Change in fair value of investments (2)

934

(366)

(632)

(1,803)

3,736

Change in fair value of debt (3)

(2,001)

202

(2,645)

1,052

(610)

Equity in net (gain) loss of investee (4)

(1)

-

-

(127)

126

Litigation expenses (5)

1,349

19

1,141

124

65

Acquisition and disposition related expenses (6)

58

-

35

-

23

Employee termination and recruiting expenses (7)

1,119

46

295

715

63

Stock-based compensation expense (8)

592

131

171

145

145

Net loss from discontinued operations, net of taxes (9)

1,538

(6)

-

1,544

-

Extraordinary audit and audit-related expenses (10)

1,203

305

390

149

359

Impairment of assets

117

-

117

-

-

Amortization expense

2,498

573

573

676

675

Total Non-GAAP Adjustments

7,053

904

(615)

2,475

4,289

Non-GAAP Adjusted (Loss) Income

$

(1,866)

$

(518)

$

(1,009)

$

(623)

$

283

(1)

Represents realized gains and losses on the Company's non-core investments. The Company has determined that realized gains and losses relating to its Argo investment fund are core to its strategic operations; therefore, Argo realized gains and losses have been removed from this line item, resulting in immaterial increases to prior period amounts.

(2)

The Company has investments in several entities that are not essential to the ongoing operations and strategy of the Company. The investments are recorded at fair value and changes to fair value are recorded as unrealized gains or losses.

Twelve
Months Ended

For the Three Months Ended

6/30/2021

6/30/2021

3/31/2021

12/31/2020

9/30/2020

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

$

(2,798)

$

(731)

$

202

$

(1,995)

$

(274)

Net change in unrealized (gain) loss on private company investments

74

-

-

-

74

(Gain) loss on change in fair value of equity securities

(1,179)

45

151

(198)

(1,177)

Total

$

(3,903)

$

(686)

$

353

$

(2,193)

$

(1,377)

Twelve
Months Ended

For the Three Months Ended

6/30/2020

6/30/2020

3/31/2020

12/31/2019

9/30/2019

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

$

361

$

123

$

(1,899)

$

(1,219)

$

3,356

Net change in unrealized (gain) loss on private company investments

1,013

-

670

-

343

(Gain) loss on change in fair value of equity securities

(439)

(489)

597

(584)

37

Total

$

935

$

(366)

$

(632)

$

(1,803)

$

3,736

(3)

The Company records its subordinated debt at fair value and changes to fair value (net of the portion of the change attributable to instrument-specific credit risk) are recorded as unrealized gains or losses.

(4)

Represents the Company's investment in the common stock of Itasca Capital Ltd. ("ICL"). The Company fully disposed of its investment in ICL during Q4 2019.

(5)

Legal expenses associated with the Company's defense against significant litigation matters.

(6)

Expenses related to legal, accounting and other expenses associated with completed and contemplated acquisitions and disposals.

(7)

Includes charges relating to severance and consulting agreements pertaining to former key employees. 2019 also includes key employee recruiting expenses.

(8)

Non-cash expense arising from the grant and modification of stock-based awards to employees. Q1 2021 includes new grants to certain officers of the Company, a portion of which vested upon grant. In Q4 2020, the Company modified an award previously granted to the President of one of its subsidiaries, resulting in additional non-cash compensation expense associated with the change in fair value of the award.

(9)

Includes losses relating to the October 2018 completed sale of the Mendota group of companies. Refer to Note 5, Disposal and Discontinued Operations, to the Company's 2020 Annual Report on Form 10-K for further information.

(10)

Extraordinary audit and audit-related expenses incurred as a result of the delayed filing of the 2018 and 2019 Kingsway audited financial statements and related quarterly filings.

(11)

Early termination fees and write-off of unamortized debt issuance costs and discount associated with the early extinguishment of the 2019 KWH loan as part of the Company's purchase of PWI.

(12)

In March 2021, DGI, TRT LeaseCo, LLC and various other entities affiliated with each of them entered into a settlement agreement with respect to such litigation and certain other matters ("CMC Settlement Agreement"). As part of the settlement, the Company made a one-time fee payment to DGI of which $1.6 million relates to rental income collected in periods prior to 2020. In 2021, the Company recorded a benefit related to the finalization of management fees and legal expenses associated with the settlement of CMC litigation.

(13)

Includes a benefit of $2.5 million and $0.4 million from PPP loan forgiveness for the three months ended March 31, 2021 and December 31, 2020, respectively.

Twelve
Months
Ended

For the Three Months Ended

6/30/2021

6/30/2021

3/31/2021

12/31/2020

9/30/2020

GAAP Operating Income for Extended Warranty
segment (1)

$

12,378

$

2,600

$

5,309

$

3,264

$

1,205

Non-GAAP Adjustments:

Investment income (2)

236

42

43

51

100

Gain (loss) on sale of core investments (3)

39

1

12

(3)

29

Depreciation

234

53

12

112

58

Total Non-GAAP Adjustments

509

95

67

160

187

Non-GAAP adjusted EBITDA for Extended Warranty
segment

$

12,887

$

2,695

$

5,376

$

3,424

$

1,392

PWI operating income (4)

2,010

-

-

914

1,096

PWI depreciation (4)

43

-

-

30

13

Pro forma Non-GAAP adjusted EBITDA for Extended
Warranty segment

$

14,940

$

2,695

$

5,376

$

4,368

$

2,501

Twelve
Months
Ended

For the Three Months Ended

6/30/2020

6/30/2020

3/31/2020

12/31/2019

9/30/2019

GAAP Operating Income for Extended Warranty
segment (1)

$

5,144

$

1,285

$

850

$

1,431

$

1,579

Non-GAAP Adjustments:

Investment income (2)

584

100

144

177

163

Gain (loss) on sale of core investments (3)

70

8

61

4

(3)

Impairment of assets

117

-

117

-

-

Depreciation

222

55

55

55

57

Total Non-GAAP Adjustments

993

163

377

236

217

Non-GAAP adjusted EBITDA for Extended Warranty
segment

$

6,137