ITASCA, IL, Feb. 27, 2020 /PRNewswire/ - (NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2018.  The Company also filed today amended Forms 10-Q/A for the quarters ended March 31, 2018, June 30, 2018, and September 30, 2018 that have been restated to reflect adjustments identified during the course of its 2018 audit.

The Company originally issued a press release dated March 14, 2019 reporting certain unaudited 2018 fourth quarter and year-end financial results.  The Company subsequently issued press releases dated April 16, 2019 and May 30, 2019 announcing that its outside independent auditors required more time to complete their work and describing certain adjustments it had identified during the course of its ongoing audit.  Since its May 30, 2019 press release, the Company identified additional adjustments to its previously reported financial results.  The adjustments identified and the effect of such adjustments on the Company's previously reported financial results are described in more detail below.

Cumulative Impact of Adjustments Identified Since March 14, 2019

Summarized below is the cumulative impact on the Company's previously reported consolidated statement of operations and consolidated balance sheet as of and for the year ended December 31, 2018 of the adjustments recorded since its March 14, 2019 press release (inclusive of those announced on April 16, 2019 and May 30, 2019).  


Kingsway Financial Services Inc.

Consolidated Statement of Operations for the year ended December 31, 2018

Amounts in thousands











 Per March 14, 2019
Press Release 

 Adjustments due to

Consolidation of
Limited Liability
Investments 

 Adjustments to
Redeemable Class A
Preferred Stock 

 Adjustments to
Extended
Warranty Segment 

 Adjustment to
Carrying Values of
Investments  

Other
Adjustments

Total
Adjustments

 Per February 27,
2020 Press Release 

Revenues:









Service fee and commission income

38,849

-

-

(563)

-

-

(563)

38,286

Rental income

13,376

-

-

-

-

-

-

13,376

Other income

416

-

-

-

-

-

-

416

Total revenues

52,641

-

-

(563)

-

-

(563)

52,078

Operating expenses:







-


Claims authorized on vehicle service agreements

5,711

-



-

-

-

5,711

Loss and loss adjustment expenses

1,631

-



-

-

-

1,631

Commissions 

3,756

-



-

-

-

3,756

Cost of services sold

7,315

-


55

-

-

55

7,370

General and administrative expenses

29,367

69

(33)

149

-

183

368

29,732

Leased real estate segment interest expense

6,171

-




-

-

6,171

Total operating expenses

53,951

69

(33)

203

-

183

422

54,371

Operating loss

(1,310)

(69)

33

(766)

-

(183)

(985)

(2,293)

Other revenues (expenses), net:







-


Net investment income

(8,876)

1,840

-

-

94

9,899

11,833

2,957

Net realized (losses) gains

(405)

388

-

-

-

-

388

(17)

Gain on change in fair value of equity investments

250

130

-

-

-

-

130

381

(Loss) gain on change in fair value of limited liability investments, at fair value

-

2,715

-

-

-

(10,108)

(7,393)

(7,393)

Net change in unrealized loss on private company investments

-

(1,629)

-

-

-

-

(1,629)

(1,629)

Non-operating other income

1,032

(69)

-

-

-

(932)

(1,001)

30

Interest expense not allocated to segments

(6,091)

(1,316)

-

-

-

-

(1,316)

(7,407)

Amortization of intangible assets

(2,442)

-

-

-

-

66

66

(2,376)

Loss on change in fair value of debt

(1,720)

-

-

-

-

-

-

(1,720)

Gain on disposal of subsidiary

17

-

-

-

-

-

-

17

Equity in net (loss) income of investee

(817)

-

-

-

(1,682)

-

(1,682)

(2,499)

Total other revenues (expenses), net

(19,052)

2,059

-

-

(1,588)

(1,075)

(604)

(19,656)

Loss from continuing operations before income tax expense (benefit) 

(20,362)

1,990

33

(766)

(1,588)

(1,258)

(1,589)

(21,949)

Income tax expense (benefit) 

358

-

-

(53)


10

(43)

315

(Loss) income from continuing operations

(20,720)

1,990

33

(713)

(1,588)

(1,268)

(1,546)

(22,264)

Loss on liquidation of subsidiary, net of taxes

-






-

-

Income (loss) from discontinued operations, net of taxes

1,738

(673)


-

-

-

(673)

1,064

(Loss) gain on disposal of discontinued operations, net of taxes

(7,136)



-

-

-

-

(7,136)

Net loss

(26,118)

1,317

33

(713)

(1,588)

(1,268)

(2,219)

(28,336)

Less: net income attributable to noncontrolling interests in consolidated subsidiaries

468

1,317

-

(21)

-

-

1,295

1,765

Less: dividends on preferred stock, net of tax

96


524

-

-

-

524

620

Net loss attributable to common shareholders

(26,682)

(0)

(491)

(692)

(1,588)

(1,268)

(4,039)

(30,721)



Kingsway Financial Services Inc.

Consolidated Balance Sheet as of December 31, 2018

Amounts in thousands











 Per March 14, 2019
Press Release 

 Adjustments due to
Consolidation of
Limited Liability
Investments 

 Adjustments to
Redeemable Class A
Preferred Stock 

 Adjustments to
Extended
Warranty Segment 

 Adjustment to
Carrying Values
of Investments  

 Other
Adjustments 

 Total
Adjustments 

 Per February 27,
2020 Press Release 

Assets









Investments:









Fixed maturities, at fair value (amortized cost of $12,432)

12,260

-

-

-

-

-

-

12,260

Equity investments, at fair value (cost of $2,274)

856

-

-

-

-

-

-

856

Limited liability investments

21,456

(16,065)

-

(699)

94

-

(16,670)

4,790

Limited liability investments, at fair value

206

25,809

-

-

-

-

25,809

26,015

Investments in private companies, at adjusted cost

-

2,391

-

699

-

-

3,090

3,090

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

-

10,662

-

-

-

-

10,662

10,662

Other investments, at cost which approximates fair value

2,079

-

-

-

-

-

-

2,079

Short-term investments, at cost which approximates fair value

152

-

-

-

-

-

-

152

Total investments

37,009

22,798

-

-

94

-

22,892

59,904

Cash and cash equivalents

31,914

443

-

(779)

-

(16,959)

(17,295)

14,619

Restricted Cash

-

-

-

-

-

16,959

16,959

16,959

Investment in investee

2,633

-

-

-

(1,682)

-

(1,682)

951

Accrued investment income

203

219

-

-

-

-

219

420

Service fee receivable, net of allowance for doubtful accounts of $191

4,570

-

-

(1,136)

-

-

(1,136)

3,434

Other receivables, net of allowance for doubtful accounts of $184

8,748

(8)

-

967

-

(183)

776

9,523

Deferred acquisition costs, net

6,904

-

-


-

-

-

6,904

Property and equipment, net of accumulated depreciation of $15,958

103,142

-

-


-

-

-

103,142

Goodwill

73,928

-

-


-

731

731

74,659

Intangible assets, net of accumulated amortization of $10,594

83,816

-

-


-

(550)

(550)

83,266

Other assets

4,472

-

-

(15)

-

-

(15)

4,459

Assets held for sale

-






-

-

Total Assets

357,339

23,452

-

(963)

(1,588)

(2)

20,899

378,240

Liabilities and Shareholders' Equity







-









-


Liabilities:







-


Accrued expenses and other liabilities

17,007

461

(1,706)

(914)

-

(61)

(2,220)

14,786

Income taxes payable

2,431

-

-

(31)

-

-

(31)

2,400

Deferred service fees

46,016

-

-

1,114

-

-

1,114

47,130

Unpaid loss and loss adjustment expenses

2,073

-

-

-

-

-

-

2,073

Bank loan

3,917

-

-

-

-

-

-

3,917

Notes payable

182,548

16,768

-

-

-

-

16,768

199,316

Subordinated debt, at fair value

50,023

-

-

-

-

-

-

50,023

Net deferred income tax liabilities

28,532

-

-

(23)

-

28

5

28,537

Liabilities held for sale

-

-

-

-

-

-

-

-

Total Liabilities

332,547

17,229

(1,706)

145

-

(33)

15,636

348,182








-


Class A preferred stock, no par value; 1,000,000 and unlimited number authorized at December 31,
2018; 222,876  issued and outstanding at December 31, 2018

5,494

-

306

-

-

-

306

5,800








-

-

Shareholders' Equity:







-

-

Additional paid-in capital

354,360

-

(470)




(470)

353,890

Accumulated deficit

(381,203)

-

1,870

(1,048)

(1,588)

(229)

(995)

(382,196)

Accumulated other comprehensive income (loss)

40,507

-

-



260

260

40,768

Shareholders' equity attributable to common shareholders

13,664

-

1,400

(1,048)

(1,588)

31

(1,204)

12,462

Noncontrolling interests in consolidated subsidiaries

5,634

6,223

-

(60)

-

-

6,162

11,796

Total Shareholders' Equity

19,298

6,223

1,400

(1,108)

(1,588)

31

4,958

24,258

Total Liabilities, Class A preferred stock and Shareholders' Equity

357,339

23,452

-

(963)

(1,588)

(2)

20,899

378,240

 

Certain of the adjustments identified above affect years prior to 2018, which results in a different impact to 2018 net loss than to 2018 shareholders' equity. The Company has restated its 2017 financial statements for those adjustments, as appropriate, which are described in Note 3 to the consolidated financial statements within its Annual Report on Form 10-K for the year ended December 31, 2018. 

Summary Description of Adjustments Identified Since March 14, 2019

Adjustments due to Consolidation of Limited Liability Investments

The Company identified five limited liability investments, previously accounted for under the equity method of accounting, that are now accounted for on a consolidated basis.  The Company now reports the gross assets and related non-recourse liabilities carried on the balance sheets of these limited liability investments and, in some cases, records noncontrolling interests in the consolidated limited liability investments.

Adjustments to Redeemable Class A Preferred Stock

The Company determined that some of the proceeds from its redeemable Class A Preferred Stock issued on February 3, 2014 should have been allocated to the Series C warrants issued on such date and to a beneficial conversion feature related to the embedded conversion option in the redeemable Class A Preferred Stock. The allocated proceeds should have been recorded as additional paid in capital in shareholders' equity with an offsetting discount to the carrying value of the redeemable Class A Preferred Stock, which discount would then have been amortized as dividend expense and reported as part of net loss attributable to common shareholders through the mandatory redemption date of April 1, 2021.

Adjustments to Extended Warranty Segment

The Company increased deferred service fees by $0.6 million, with offsetting reductions of $0.5 million to service fee and commission income recorded for the year ended December 31, 2018 and $0.1 million to accumulated deficit, for adjustments due to the adoption, effective January 1, 2018, of Accounting Standards Update 2014-09, Revenue from Contracts with Customers.  The Company also identified several adjustments within the consolidated balance sheet, which had no effect on shareholders' equity, primarily including to (i) reclassify $0.7 million from limited liability investments to investments in private companies, at adjusted cost to conform to current presentation; (ii) reclassify $0.8 million from cash and cash equivalents to service fee receivable; and (iii) record offsetting reductions of $1.3 million to service fee receivable and accrued expenses and other liabilities.

Adjustments to Carrying Values of Investments

The Company adjusted the carrying values of some of the underlying investments held by its limited liability investments that will now be accounted for on a consolidated basis.  In addition, the Company concluded that the carrying value of its investment in investee, which is accounted for using the equity method, had an other than temporary impairment as of December 31, 2018.  As such, the Company decreased the carrying value of its investment in investee as of December 31, 2018 by $1.7 million to reflect the published closing common stock price of the investee, Itasca Capital Ltd.

Other Adjustments

The Company recorded other adjustments that were identified in the course of the Company's continued review or as a result of further audit procedures performed by the Company's external auditors, including:

  • Reclassifying to prior periods $1.0 million of non-operating other income recorded during 2018 due to the reversal of escheat liabilities related to the Company's voluntary runoff property-casualty insurance operation;
  • Reclassifying $10.1 million of net investment loss to loss on change in fair value of limited liability investments, at fair value in order to conform to the current presentation of the Company's investment in 1347 Investors LLC;
  • A $17.0 million reclassification from cash and cash equivalents into restricted cash; and
  • A $0.7 million increase to goodwill, with offsetting decreases to intangible assets, amortization of intangible assets and accumulated deficit, related to the Company's acquisition of Argo Management in 2016, including the related tax impact of these adjustments, resulting in an increase to net deferred income tax liabilities, with offsetting decreases to income tax benefit and accumulated deficit.

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 New York Stock Exchange under the trading symbol "KFS."

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 2018 Annual Report on Form 10-K. 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 2018 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.

Cision View original content:http://www.prnewswire.com/news-releases/kingsway-provides-further-update-on-2018-form-10-k-filing-301013067.html

SOURCE Kingsway Financial Services Inc.

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