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Potentially dilutive securities consist of stock options, 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 three and nine months ended September 30, 2021 and September 30, 2020, 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. For the nine months ended September 30, 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 on extinguishment of debt totaled $7.1 million for the nine months ended September 30, 2021. See Note 11, "Debt," for further discussion. Net of income tax benefit of $0 and $0 for the three and nine months ended September 30, 2021 and September 30, 2020, respectively. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended
September 30, 2021

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)

 

85-1792291

(I.R.S. Employer

Identification No.)

 

150 E. Pierce Road, Itasca, IL 60143

(Address of principal executive offices and zip code)

1-847-871-6408

(Registrant's telephone number, including area code)

 


 

Indicate by checkmark 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 is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

The number of shares, including restricted common shares, outstanding of the registrant's common stock as of November 5, 2021 was 24,026,331.

 

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

   
   

Table Of Contents

PART I - FINANCIAL INFORMATION

3

ITEM 1. FINANCIAL STATEMENTS

3

Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020

3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

4

Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)

8

Notes to Consolidated Financial Statements (unaudited)

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

44

ITEM 4. CONTROLS AND PROCEDURES

44

PART II - OTHER INFORMATION

46

ITEM 1. LEGAL PROCEEDINGS

46

ITEM 1A. RISK FACTORS

46

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

46

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

46

ITEM 4. MINE SAFETY DISCLOSURES

46

ITEM 5. OTHER INFORMATION

46

ITEM 6. EXHIBITS

47

SIGNATURES

48

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Consolidated Balance Sheets

(in thousands, except share data)

 

   

September 30, 2021

   

December 31, 2020

 
   

(unaudited)

         

Assets

               

Investments:

               

Fixed maturities, at fair value (amortized cost of $34,304 and $20,488, respectively)

  $ 34,339     $ 20,716  

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

    187       444  

Limited liability investments

    3,235       3,692  

Limited liability investments, at fair value

    18,180       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

    272       294  

Short-term investments, at cost which approximates fair value

    157       157  

Total investments

    67,822       69,566  

Cash and cash equivalents

    18,139       14,374  

Restricted cash

    18,140       30,571  

Accrued investment income

    951       757  

Service fee receivable, net of allowance for doubtful accounts of $212 and $478, respectively

    6,501       4,834  

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

    12,443       15,417  

Deferred acquisition costs, net

    9,047       8,835  

Property and equipment, net of accumulated depreciation of $23,599 and $24,441, respectively

    92,760       95,015  

Right-of-use asset

    2,358       2,960  

Goodwill

    102,342       121,130  

Intangible assets, net of accumulated amortization of $18,858 and $15,433, respectively

    100,257       84,133  

Other assets

    15,912       4,882  

Total Assets

  $ 446,672     $ 452,474  

Liabilities and Shareholders' Equity

               

Liabilities:

               

Accrued expenses and other liabilities

  $ 41,672     $ 42,502  

Income taxes payable

    256       2,859  

Deferred service fees

    87,518       87,945  

Unpaid loss and loss adjustment expenses

    1,350       1,449  

Bank loan

    22,276       25,303  

Notes payable

    189,601       192,057  

Subordinated debt, at fair value

    59,601       50,928  

Lease liability

    2,600       3,213  

Net deferred income tax liabilities

    28,144       27,555  

Total Liabilities

    433,018       433,811  

Redeemable Class A preferred stock, no par value; 1,000,000 and 1,000,000 authorized at September 30, 2021 and December 31, 2020, respectively; 182,876 and 182,876 issued and outstanding at September 30, 2021 and December 31, 2020, respectively; redemption amount of $6,914 and $6,658 at September 30, 2021 and December 31, 2020, respectively

    6,914       6,504  

Shareholders' Equity:

               

Common stock, no par value; 50,000,000 and 50,000,000 authorized at September 30, 2021 and December 31, 2020, respectively; 22,786,331 and 22,211,069 issued and outstanding at September 30, 2021 and December 31, 2020, respectively

           

Additional paid-in capital

    358,206       355,242  

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

    (492 )     (492 )

Accumulated deficit

    (395,859 )     (394,807 )

Accumulated other comprehensive income

    31,369       38,059  

Shareholders' equity attributable to common shareholders

    (6,776 )     (1,998 )

Noncontrolling interests in consolidated subsidiaries

    13,516       14,157  

Total Shareholders' Equity

    6,740       12,159  

Total Liabilities, Class A preferred stock and Shareholders' Equity

  $ 446,672     $ 452,474  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Revenues:

                               
                                 

Service fee and commission revenue

  $ 17,627     $ 11,995     $ 54,956     $ 33,619  

Rental revenue

    3,341       3,341       10,023       10,023  

Total revenues

    20,968       15,336       64,979       43,642  

Operating expenses:

                               

Claims authorized on vehicle service agreements

    4,951       2,221       14,869       6,948  

Loss and loss adjustment expenses

    2       2       6       17  

Commissions

    1,508       1,418       4,588       4,000  

Cost of services sold

    1,244       1,102       3,176       1,852  

General and administrative expenses

    11,770       9,719       36,279       28,800  

Leased real estate segment interest expense

    1,607       1,484       4,575       4,474  

Total operating expenses

    21,082       15,946       63,493       46,091  

Operating (loss) income

    (114 )     (610 )     1,486       (2,449 )

Other revenues (expenses), net:

                               

Net investment income

    389       625       1,213       2,025  

Net realized gains (losses)

    159       (59 )     397       157  

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

    (39 )     1,177       (235 )     1,069  

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

    1,211       274       1,740       2,050  

Net change in unrealized loss on private company investments

          (74 )           (744 )

Other-than-temporary impairment loss

                      (117 )

Other income (expenses)

    53       152       (2,581 )     398  

Interest expense not allocated to segments

    (1,497 )     (1,813 )     (4,642 )     (5,963 )

Amortization of intangible assets

    (2,432 )     (572 )     (3,425 )     (1,719 )

(Loss) gain on change in fair value of debt

    (412 )     (503 )     (2,169 )     1,940  

Gain on extinguishment of debt

                2,494        

Total other expenses, net

    (2,568 )     (793 )     (7,208 )     (904 )

Loss from continuing operations before income tax benefit

    (2,682 )     (1,403 )     (5,722 )     (3,353 )

Income tax benefit

    (2,456 )     (279 )     (6,139 )     (409 )

(Loss) income from continuing operations

    (226 )     (1,124 )     417       (2,944 )

Gain on disposal of discontinued operations, net of taxes

                      6  

Net (loss) income

    (226 )     (1,124 )     417       (2,938 )

Less: net income attributable to noncontrolling interests in consolidated subsidiaries

    782       112       1,469       941  

Less: dividends on preferred stock

    86       230       409       831  

Net loss attributable to common shareholders

  $ (1,094 )   $ (1,466 )   $ (1,461 )   $ (4,710 )

Loss per share – continuing operations:

                               

Basic:

  $ (0.05 )   $ (0.07 )   $ (0.07 )   $ (0.21 )

Diluted:

  $ (0.05 )   $ (0.07 )   $ (0.07 )   $ (0.21 )

Earnings per share – discontinued operations:

                               

Basic:

  $     $     $     $  

Diluted:

  $     $     $     $  

Loss per share – net loss attributable to common shareholders:

                               

Basic:

  $ (0.05 )   $ (0.07 )   $ (0.07 )   $ (0.21 )

Diluted:

  $ (0.05 )   $ (0.07 )   $ (0.07 )   $ (0.21 )

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

                               

Basic:

    22,732       22,211       22,440       22,164  

Diluted:

    22,732       22,211       22,440       22,164  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

(Unaudited)

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 
                                 

Net (loss) income

  $ (226 )   $ (1,124 )   $ 417     $ (2,938 )

Other comprehensive (loss) income, net of taxes(1):

                               

Unrealized (losses) gains on available-for-sale investments:

                               

Unrealized (losses) gains arising during the period

    (107 )     (50 )     (217 )     130  

Reclassification adjustment for amounts included in net income (loss)

    11       (2 )     25       64  

Change in fair value of debt attributable to instrument-specific credit risk

    (971 )     (2,843 )     (6,505 )     7,781  

Other comprehensive (loss) income

    (1,067 )     (2,895 )     (6,697 )     7,975  

Comprehensive (loss) income

    (1,293 )     (4,019 )     (6,280 )     5,037  

Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries

    780       109       1,462       953  

Comprehensive (loss) income attributable to common shareholders

  $ (2,073 )   $ (4,128 )   $ (7,742 )   $ 4,084  

(1) Net of income tax benefit of $0 and $0 for the three and nine months ended September 30, 2021 and September 30, 2020, respectively.

                               

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Shareholders' Equity

(in thousands, except share data)

 

   

Three Months Ended September 30, 2021

 
                                            Accumulated     Shareholders'     Noncontrolling          
                   

Additional

                   

Other

   

Equity Attributable

   

Interests in

   

Total

 
                   

Paid-in

   

Treasury

   

Accumulated

   

Comprehensive

   

to Common

   

Consolidated

   

Shareholders'

 
   

Common Stock

   

Capital

   

Stock

   

Deficit

   

Income

   

Shareholders

   

Subsidiaries

   

Equity

 
   

Shares

   

Amount

                                                         

Balance, June 30, 2021

    22,365,631     $     $ 356,331     $ (492 )   $ (394,851 )   $ 32,434     $ (6,578 )   $ 14,669     $ 8,091  

Vesting of restricted stock awards, net of share settlements for tax withholdings

    70,700                                                  

Exercise of Series B warrants

    350,000             1,750                         1,750             1,750  

Net (loss) income

                            (1,008 )           (1,008 )     782       (226 )

Preferred stock dividends

                (86 )                       (86 )           (86 )

Distributions to noncontrolling interest holders

                                              (1,933 )     (1,933 )

Other comprehensive loss

                                  (1,065 )     (1,065 )     (2 )     (1,067 )

Stock-based compensation

                211                         211             211  

Balance, September 30, 2021

    22,786,331     $     $ 358,206     $ (492 )   $ (395,859 )   $ 31,369     $ (6,776 )   $ 13,516     $ 6,740  

 

 

   

Three Months Ended September 30, 2020

 
                                           

Accumulated

   

Shareholders'

   

Noncontrolling

         
                   

Additional

                   

Other

   

Equity Attributable

   

Interests in

   

Total

 
                   

Paid-in

   

Treasury

   

Accumulated

   

Comprehensive

   

to Common

   

Consolidated

   

Shareholders'

 
   

Common Stock

   

Capital

   

Stock

   

Deficit

   

Income (Loss)

   

Shareholders

   

Subsidiaries

   

Equity

 
   

Shares

   

Amount

                                                         

Balance, June 30, 2020

    22,211,069     $     $ 354,963     $ (492 )   $ (390,725 )   $ 46,202     $ 9,948     $ 13,881     $ 23,829  

Net (loss) income

                            (1,236 )           (1,236 )     112       (1,124 )

Preferred stock dividends

                (230 )                       (230 )           (230 )

Other comprehensive loss

                                  (2,892 )     (2,892 )     (3 )     (2,895 )

Stock-based compensation

                120                         120             120  

Balance, September 30, 2020

    22,211,069     $     $ 354,853     $ (492 )   $ (391,961 )   $ 43,310     $ 5,710     $ 13,990     $ 19,700  

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

 

   

Nine Months Ended September 30, 2021

 
                                            Accumulated     Shareholders'     Noncontrolling          
                   

Additional

                   

Other

   

Equity Attributable

   

Interests in

   

Total

 
                   

Paid-in

   

Treasury

   

Accumulated

   

Comprehensive

   

to Common

   

Consolidated

   

Shareholders'

 
   

Common Stock

   

Capital

   

Stock

   

Deficit

   

Income

   

Shareholders

   

Subsidiaries

   

Equity

 
   

Shares

   

Amount

                                                         

Balance, December 31, 2020

    22,211,069     $     $ 355,242     $ (492 )   $ (394,807 )   $ 38,059     $ (1,998 )   $ 14,157     $ 12,159  

Vesting of restricted stock awards, net of share settlements for tax withholdings

    225,262                                                  

Exercise of Series B warrants

    350,000             1,750                         1,750             1,750  

Net (loss) income

                            (1,052 )           (1,052 )     1,469       417  

Preferred stock dividends

                (409 )                       (409 )           (409 )

Distributions to noncontrolling interest holders

                                              (2,103 )     (2,103 )

Other comprehensive loss

                                  (6,690 )     (6,690 )     (7 )     (6,697 )

Stock-based compensation, net of forfeitures

                1,623                         1,623             1,623  

Balance, September 30, 2021

    22,786,331     $     $ 358,206     $ (492 )   $ (395,859 )   $ 31,369     $ (6,776 )   $ 13,516     $ 6,740  

 

 

   

Nine Months Ended September 30, 2020

 
                                           

Accumulated

   

Shareholders'

   

Noncontrolling

         
                   

Additional

                   

Other

   

Equity Attributable

   

Interests in

   

Total

 
                   

Paid-in

   

Treasury

   

Accumulated

   

Comprehensive

   

to Common

   

Consolidated

   

Shareholders'

 
   

Common Stock

   

Capital

   

Stock

   

Deficit

   

Income (Loss)

   

Shareholders

   

Subsidiaries

   

Equity

 
   

Shares

   

Amount

                                                         

Balance, December 31, 2019

    21,866,959     $     $ 354,101     $ (492 )   $ (388,082 )   $ 35,347     $ 874     $ 13,080     $ 13,954  

Vesting of restricted stock awards, net of share settlements for tax withholdings

    94,110                                                  

Conversion of redeemable Class A preferred stock to common stock

    250,000             1,381                         1,381             1,381  

Net (loss) income

                            (3,879 )           (3,879 )     941       (2,938 )

Preferred stock dividends

                (831 )                       (831 )           (831 )

Distributions to noncontrolling interest holders

                                              (43 )     (43 )

Other comprehensive income

                                  7,963       7,963       12       7,975  

Stock-based compensation, net of forfeitures

                202                         202             202  

Balance, September 30, 2020

    22,211,069     $     $ 354,853     $ (492 )   $ (391,961 )   $ 43,310     $ 5,710     $ 13,990     $ 19,700  

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

 

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

   

Nine months ended September 30,

 
   

2021

   

2020

 

Cash provided by (used in):

               

Operating activities:

               

Net (loss) income

  $ 417     $ (2,938 )

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

    (31 )     (31 )

Depreciation and amortization expense

    6,369       5,005  

Stock-based compensation expense, net of forfeitures

    2,955       202  

Net realized gains

    (397 )     (157 )

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

    235       (1,069 )

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

    (1,740 )     (2,050 )

Net change in unrealized loss on private company investments

          744  

Loss (gain) on change in fair value of debt

    2,169       (1,940 )

Loss on change in fair value of derivatives

    65        

Deferred income taxes

    589       (631 )

Other-than-temporary impairment loss

          117  

Amortization of fixed maturities premiums and discounts

    154       98  

Amortization of notes payable premium, discounts and debt issue costs

    (606 )     (669 )

Gain on extinguishment of debt

    (2,494 )      

Changes in operating assets and liabilities:

               

Service fee receivable, net

    (1,667 )     (55 )

Other receivables, net

    2,974       1,055  

Deferred acquisition costs, net

    (212 )     (288 )

Other assets

    (11,030 )     1,081  

Unpaid loss and loss adjustment expenses

    (99 )     (373 )

Deferred service fees

    (427 )     (577 )

Other, net

    (5,268 )     2,890  

Net cash (used in) provided by operating activities

    (8,044 )     408  

Investing activities:

               

Proceeds from sales and maturities of fixed maturities

    4,477       12,685  

Proceeds from sales of equity investments

    23       3,230  

Purchases of fixed maturities

    (18,455 )     (10,518 )

Net proceeds from limited liability investments

    522       133  

Net proceeds from limited liability investments, at fair value

    16,661       109  

Net proceeds from investments in private companies

    151       683  

Net proceeds from other investments

    22       369  

Net purchases of short-term investments

          (3 )

Acquisition of business, net of cash acquired

    (50 )      

Net purchases of property and equipment

    (689 )     (146 )

Net cash provided by investing activities

    2,662       6,542  

Financing activities:

               

Proceeds from exercise of warrants

    1,750        

Distributions to noncontrolling interest holders

    (2,103 )     (43 )

Taxes paid related to net share settlements of restricted stock awards

    (468 )     (83 )

Principal payments on bank loans

    (3,088 )     (812 )

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

    13,270       2,858  

Principal payments on notes payable

    (12,645 )     (3,082 )

Net cash used in financing activities

    (3,284 )     (1,162 )

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

    (8,666 )     5,788  

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

  $ 36,279     $ 31,449  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

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, asset management and real estate industries.

 

 

NOTE 2 BASIS OF PRESENTATION

 

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year.

 

The accompanying unaudited consolidated interim financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included within our Annual Report on Form 10-K ("2020 Annual Report") for the year ended December 31, 2020.

 

The unaudited consolidated interim financial statements include the accounts of the Company and its subsidiaries, as well as certain variable interest entities as further described in Note 6, "Variable Interest Entities," to the consolidated financial statements in the 2020 Annual Report. All material intercompany transactions and balances have been eliminated in consolidation.

 

Certain amounts in the audited consolidated financial statements at December 31, 2020 and the unaudited consolidated interim financial statements as of and for the three and nine months ended September 30, 2020 have been reclassified in order to conform to the 2021 presentation.

 

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 classifications 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 unaudited consolidated interim financial statements include the valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of real estate investments; valuation of deferred income taxes; valuation of mandatorily redeemable preferred stock; accounting for business combinations; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred acquisition costs; fair value assumptions for subordinated debt obligations; fair value assumptions for stock-based compensation liabilities; and revenue recognition.

 

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, warrant liability, stock-based compensation liabilities and derivative contracts 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 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.

 

 

NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Except as set forth below there have been no material changes to our significant accounting policies as reported in our 2020 Annual Report.

 

Derivatives

 

During the second quarter of 2021, 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 measured and reported at fair value and is included in accrued expenses and other liabilities in the consolidated balance sheets.  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 statement of operations.    

 

COVID-19

 

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter in place" and other governmental regulations; and many businesses continue to operate in a work-from-home mode.

 

The near-term impacts of COVID-19 are primarily with respect to the Company’s Extended Warranty segment. Consumer spending was initially impacted, including a decline in the purchase of new and used vehicles, and many businesses through which the Company distributes its products remained closed or were open but with capacity restraints.  More recently, consumer spending has improved but supply-chain issues have caused a shortage of new automobiles which, in turn, has caused demand for used automobiles to increase.  This dynamic has had both positive and negative impacts on the Company’s revenues. With respect to homeowner warranties, the Company experienced an initial reduction in new enrollments in its home warranty programs associated with the impact of COVID-19 on new home sales in the United States.

 

9

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

The Company could experience other potential impacts as a result of COVID-19, including, but not limited to, potential impairment charges to the carrying amounts of goodwill, indefinite-lived intangibles and long-lived assets, the loss in value of investments, as well as the potential for adverse impacts on the Company's debt covenant financial ratios. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. Actual results may differ materially from the Company’s current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than initially anticipated.  There remain many unknowns and the Company continues to monitor the expected trends and related demand for its services and will continue to adjust its operations accordingly.

 

Holding Company Liquidity

 

The Company's Extended Warranty subsidiaries fund their obligations primarily through service fee and commission revenue. The Company's Leased Real Estate subsidiary funds its obligations through rental income. 

 

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.

 

Actions available to the holding company to generate liquidity in order to meet its obligations include the sale of passive investments; sale of subsidiaries; issuance of debt or equity securities; exercise of warrants; distributions from the Company’s Extended Warranty subsidiaries, subject to certain restrictions; and giving notice to its Trust Preferred trustees of its intention to exercise its voluntary right to defer interest payments for up to 20 quarters on the six subsidiary trusts of the Company’s subordinated debt, which right the Company exercised during the third quarter of 2018.

 

Historically, dividends from the Leased Real Estate segment are not generally considered a source of liquidity for the holding company, except upon the occurrence of certain events that would trigger payment of service fees. However, as more fully described in Note 21, "Commitments and Contingencies," the holding company is now permitted to receive 20% of the proceeds from the increased rental payments resulting from an earlier amendment to the lease (or any borrowings against such increased rental payments).  In the second quarter of 2021, the Leased Real Estate segment completed a borrowing against the increased rental payments and, as a result, the holding company received a dividend of $2.7 million.  Refer to Note 11, "Debt," for further information about this borrowing.

 

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 $3.7 million (approximately eight months of operating cash outflows) and $1.1 million at September 30, 2021 and December 31, 2020, 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 $18.1 million and $14.4 million reported at September 30, 2021 and December 31, 2020, respectively, on the Company’s consolidated balance sheets. 

 

As of September 30, 2021, there are 182,876 shares of the Company’s Class A Preferred Stock (the "Preferred Shares"), issued and outstanding. The outstanding Preferred Shares were required to be redeemed by the Company on April 1, 2021 ("Redemption Date") at a redemption value of $6.7 million, if the Company had sufficient legally available funds to do so. Additionally, the Company has exercised its right to defer payment of interest on its outstanding subordinated debt ("trust preferred securities") and, because of the deferral which totaled $17.6 million at September 30, 2021, the Company is prohibited from redeeming any shares of its capital stock while payment of interest on the trust preferred securities is being deferred. If the Company was required to pay either the Preferred Shares redemption value or both the deferred interest on the trust preferred securities and redeem all the Preferred Shares currently outstanding, then the Company has determined that it does not have sufficient legally available funds to do so. However, the Company is prohibited from doing so under Delaware law and, as such, (a) the interest on the trust preferred securities remains on deferral as permitted under the indentures and (b) in accordance with Delaware law the Preferred Shares were not redeemed on the Redemption Date and instead remain outstanding with a redemption value of $6.9 million, as of  September 30, 2021, continue to be convertible at the discretion of the holder, and will accrue dividends until such time as the Company has sufficient legally available funds to redeem the Preferred Shares and is not otherwise prohibited from doing so. The Company continues to operate in the ordinary course.

 

The Company notes there are several variables to consider in such a situation, and management is exploring the following opportunities: negotiating with the holders of the Preferred Shares with respect to key provisions, raising additional funds through capital market transactions, as well as the Company’s strategy of working to monetize its non-core investments while attempting to maximize the tradeoff between liquidity and value received.

 

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, excluding the cash that may be required to redeem the Preferred Shares and 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 effects of the COVID-19 pandemic.

 

 

NOTE 4 RECENTLY ISSUED ACCOUNTING STANDARDS

 

(a)    Adoption of New Accounting Standards:

 

Effective January 1, 2021, the Company adopted Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes by eliminating certain exceptions to the guidance in ASC Topic 740, Income Taxes, related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Further, ASU 2019-12 clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. The adoption of ASU 2019-12 did not have a material effect on the Company’s consolidated financial statements.

 

10

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

 

Effective January 1, 2021, the Company adopted ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities (ASC 321), equity method investments (ASC 323), and certain derivatives (ASC815). The adoption of ASU 2020-01 did not have an impact on the Company's consolidated financial statements.

 

(b)    Accounting Standards Not Yet Adopted:

 

In June 2016, the Financial Accounting Standards Board ("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 is currently evaluating ASU 2016-13 to determine the potential impact that adopting this standard will have on its consolidated financial statements.

 

In May 2021, the FASB issued 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 new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2021-04 to determine the potential impact that adopting this standard will have on its consolidated financial statements.

 

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial ServicesDepository and Lending (Topic 942), and Financial ServicesInvestment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants ("ASU 2021-06").  ASU 2021-06 amends the SEC sections of the Codification related to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.  The new guidance is effective upon its addition to the FASB codification. The Company is assessing the impact of ASU 2021-06 and its impact on its disclosure.

 

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08").  ASU 2021-08 requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers ("Topic 606").  Under the new guidance, at the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts.  Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements.  Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date.  The new guidance is effective for annual and interim periods beginning after December 15, 2022, and early adoption is permitted, including adoption in an interim period. The Company intends to adopt ASU 2021-08 effective October 1, 2021 and will apply this guidance prospectively to all business combinations that occur on or after this date.

 

 

NOTE 5 ACQUISITION

 

On December 1, 2020, the Company acquired 100% of the outstanding shares of PWI Holdings, Inc. for cash consideration of $24.4 million. The final purchase price was subject to a working capital true-up that was finalized during the first quarter of 2021 of $0.1 million. PWI Holdings, Inc., through its subsidiaries Preferred Warranties, Inc., Superior Warranties, Inc., Preferred Warranties of Florida, Inc., and Preferred Nationwide Reinsurance Company, Ltd. (collectively, "PWI"), markets, sells and administers vehicle service agreements in all fifty states, primarily through a network of automobile dealer partners. As further discussed in Note 18, "Segmented Information," PWI is included in the Extended Warranty segment. This acquisition allows the Company to grow its portfolio of warranty companies and further expand into the vehicle service agreement business.

 

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.

 

11

 

The Company records measurement period adjustments in the period in which the adjustments occur.  During the three months ended September 30, 2021, the Company recorded a cumulative net measurement period adjustment that decreased goodwill by $18.8 million compared to the amount recorded at December 31, 2020. The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, and the working capital true-up, as follows:

 

 

$19.6 million of separately identifiable intangible assets were recognized resulting from acquired customer relationships ($15.0 million) and trade name ($4.6 million);

 

 

A $3.6 million decrease to deferred service fees;

 

 

Deferred income tax liabilities of $4.2 million were recognized, primarily related to the measurement period adjustments for intangible assets and deferred service fees;

 

 

An increase to accrued expenses and other liabilities of $0.1 million; and

 

 

An increase to the final purchase price of $0.1 million related to the working capital true-up.

 

The measurement period adjustment related to the customer relationships intangible asset also resulted in an increase in amortization expense and accumulated amortization of $1.9 million that was recorded during the three months ended September 30, 2021, of which:

 

 

$0.6 million relates to the three months ended September 30, 2021;

 

 

$0.6 million relates to the three months ended June 30, 2021;

 

 

$0.6 million relates to the three months ended March 31, 2021; and

 

 

$0.1 million relates to the year ended December 31, 2020.

 

The measurement period adjustment related to deferred service fees also resulted in a decrease service fee and commission revenue of $1.9 million that was recorded during the three months ended September 30, 2021, of which:

 

  $0.4 million relates to the three months ended September 30, 2021;

 

  $0.5 million relates to the three months ended June 30, 2021;

 

  $0.7 million relates to the three months ended March 31, 2021; and

 

  $0.3 million relates to the year ended December 31, 2020.

 

The Company notes that had ASU 2021-08 (see Note 4, "Recently Issued Accounting Standards") been applicable to the PWI acquisition, the Company would not have recorded the $3.6 million reduction to deferred service fees and would not have recorded the $1.9 million reduction to service fee and commission revenue during the third quarter of 2021.

 

Refer toNote 8, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition.  The goodwill of $20.2 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 warranty companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes.

 

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

The following table summarizes the finalized allocation recorded during the third quarter of 2021 of the PWI assets acquired and liabilities assumed at the date of acquisition:

 

(in thousands)

       
   

December 1, 2020

 
         

Cash and cash equivalents

  $ 90  

Restricted cash

    21,578  

Service fee receivable

    1,459  

Other receivables

    2,748  

Income taxes recoverable

    60  

Property and equipment, net

    175  

Right-of-use asset

    254  

Goodwill

    20,238  

Intangible asset subject to amortization - customer relationships

    15,000  

Intangible asset subject to amortization - trade name

    4,550  

Other assets

    1,321  

Total assets

  $ 67,473  
         

Accrued expenses and other liabilities

  $ 8,165  

Lease liability

    255  

Net deferred income tax liabilities

    4,229  

Deferred service fees

    30,400  

Total liabilities

  $ 43,049  
         

Purchase price

  $ 24,424  

 

 

 

NOTE 6 INVESTMENTS

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's available-for-sale investments at September 30, 2021 and December 31, 2020 are summarized in the tables shown below:

 

(in thousands)

 

September 30, 2021

 
   

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Estimated Fair Value

 

Fixed maturities:

                               

U.S. government, government agencies and authorities

  $ 15,207     $ 49     $ 9     $ 15,247  

States, municipalities and political subdivisions

    1,580       4             1,584  

Mortgage-backed

    8,133       35       18       8,150  

Asset-backed

    253                   253  

Corporate

    9,131       25       51       9,105  

Total fixed maturities

  $ 34,304     $ 113     $ 78     $ 34,339  

 

(in thousands)

 

December 31, 2020

 
   

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Estimated Fair Value

 

Fixed maturities:

                               

U.S. government, government agencies and authorities

  $ 9,999     $ 105     $     $ 10,104  

States, municipalities and political subdivisions

    1,447       7             1,454  

Mortgage-backed

    5,334       66       6       5,394  

Corporate

    3,708       56             3,764  

Total fixed maturities

  $ 20,488     $ 234     $ 6     $ 20,716  

 

The table below summarizes the Company's fixed maturities at September 30, 2021 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)

 

September 30, 2021

 
   

Amortized Cost

   

Estimated Fair Value

 

Due in one year or less

  $ 7,059     $ 7,096  

Due after one year through five years

    18,368       18,404  

Due after five years through ten years

    5,669       5,640  

Due after ten years

    3,208       3,199  

Total

  $ 34,304     $ 34,339  

 

13

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

The following tables highlight the aggregate unrealized loss position, by security type, of available-for-sale investments in unrealized loss positions as of September 30, 2021 and December 31, 2020. The tables segregate the holdings based on the period of time the investments have been continuously held in unrealized loss positions.

 

(in thousands)

 

September 30, 2021

 
   

Less than 12 Months

   

Greater than 12 Months

   

Total

 
   

Estimated Fair Value

   

Unrealized Loss

   

Estimated Fair Value

   

Unrealized Loss

   

Estimated Fair Value

   

Unrealized Loss

 

Fixed maturities:

                                               

U.S. government, government agencies and authorities

  $ 7,334     $ 9     $     $     $ 7,334     $ 9  

States, municipalities and political subdivisions

    100                         100        

Mortgage-backed

    4,741       18                   4,741       18  

Asset-backed

    128                         128        

Corporate

    6,050       51                   6,050       51  

Total fixed maturities

  $ 18,353     $ 78     $     $     $ 18,353     $ 78  

 

 

(in thousands)

 

December 31, 2020

 
   

Less than 12 Months

   

Greater than 12 Months

   

Total

 
   

Estimated Fair Value

   

Unrealized Loss

   

Estimated Fair Value

   

Unrealized Loss

   

Estimated Fair Value

   

Unrealized Loss

 

Fixed maturities:

                                               

U.S. government, government agencies and authorities

  $ 511     $     $     $     $ 511     $  

Mortgage-backed

    834       6                   834       6  

Total fixed maturities

  $ 1,345     $ 6     $     $     $ 1,345     $ 6  

 

There are approximately 104and 5 individual available-for-sale investments that were in unrealized loss positions as of September 30, 2021 and December 31, 2020, 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. See the "Significant Accounting Policies and Critical Estimates" section of Management's Discussion and Analysis of Financial Condition included in the 2020 Annual Report for further information regarding the Company's detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment.

 

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 other investments for the three months ended September 30, 2021 and September 30, 2020 (zero year to date compared to $0.1 million prior year to date).

 

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.

 

Limited liability investments include investments in limited liability companies and limited partnerships. The Company's interests in these investments 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. As of September 30, 2021 and December 31, 2020, the carrying value of limited liability investments totaled $3.2 million and $3.7 million, respectively. 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 in the consolidated statements of operations. At September 30, 2021, the Company had 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 Investment Grade Portfolio LLC ("Net Lease") and Argo Holdings Fund I, LLC ("Argo Holdings"). As of September 30, 2021 and December 31, 2020, the carrying value of the Company's limited liability investments, at fair value was $18.2 million and $32.8 million, respectively.  The decrease in the carrying value is primarily attributable to the sale of two of Net Lease's investment properties during 2021, as further discussed below.  The Company recorded impairments related to limited liability investments, at fair value of less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2021, respectively ($0.1 million for the three and nine months ended September 30, 2020), which are included in gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. At September 30, 2021, the Company had no unfunded commitments to fund 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 the second quarter of 2021, one of Net Lease’s limited liability companies sold their investment property for $14.3 million.  As a result of the three-month lag, the Company recorded this transaction in its third quarter 2021 financial statements.  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 three months ended September 30, 2021.  During the fourth quarter of 2020, one of Net Lease's limited liability companies sold their investment property.  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 nine months ended September 30, 2021.  

 

14

 

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. The Company's investments in private companies do not have readily determinable fair values. The Company has elected to record investments in private companies at cost, adjusted for observable price changes and impairments. As of September 30, 2021 and December 31, 2020, the carrying value of the Company's investments in private companies totaled $0.8 million. For the three and nine months ended September 30, 2021 and September 30, 2020, 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 three and nine months ended September 30, 2021 (zero million and $0.7 million for the three and nine months ended September 30, 2020, respectively), which are included in net change in unrealized loss on private company investments in the consolidated statements of operations.  The impairments recorded for the three and nine months ended September 30, 2020 are a result of the impact of COVID-19 on the investments' underlying business.

 

The Company previously had issued promissory notes (the "Notes") to five former employees (the "Debtors"), which were recorded as other investments in the consolidated balance sheets prior to December 31, 2020.  During the third and fourth quarters of 2020, the Company agreed to accept partial payment from the Debtors as full satisfaction of the Debtors' obligations under the Notes and recognized a loss of $0.2 million for the year ended December 31, 2020. During the nine months ended September 30, 2020, the Company recorded a write-down of $0.1 million for other-than-temporary impairment related to the Notes for one of the Debtors.  The remaining principal amount outstanding on the Notes was zero as of September 30, 2021 and December 31, 2020.

 

Net investment income for the three and nine months ended September 30, 2021 and September 30, 2020 is comprised as follows:

 

(in thousands)

 

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Investment income:

                               

Interest from fixed maturities

  $ 62     $ 69     $ 160     $ 250  

Dividends

    31       34       94       121  

(Loss) income from limited liability investments

    (14 )     19       31       31  

Income from limited liability investments, at fair value

    25       234       106       702  

Income from real estate investments

    200       200       600       600  

Other

    94       88       274       365  

Gross investment income

    398       644       1,265       2,069  

Investment expenses

    (9 )     (19 )     (52 )     (44 )

Net investment income

  $ 389     $ 625     $ 1,213     $ 2,025  

 

Gross realized gains and losses on available-for-sale investments, limited liability investments, at fair value and investments in private companies for the three and nine months ended September 30, 2021 and September 30, 2020 are comprised as follows:

 

(in thousands)

 

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Gross realized gains

  $ 193     $ 164     $ 505     $ 380  

Gross realized losses

    (34 )     (223 )     (108 )     (223 )

Net realized gains (losses)

  $ 159     $ (59 )   $ 397     $ 157  

 

(Loss) gain on change in fair value of equity investments for the three and nine months ended September 30, 2021 and September 30, 2020 is comprised as follows:

 

(in thousands)

 

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Net gains recognized on equity investments sold during the period

  $     $ 1,505     $ 13     $ 1,505  

Change in unrealized losses on equity investments held at end of the period

    (39 )     (328 )     (248 )     (436 )

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

  $ (39 )   $ 1,177     $ (235 )   $ 1,069  

 

Impact of COVID-19 on Investments

 

The Company continues to assess the impact that the COVID-19 pandemic may have on the value of its various investments, which could result in future material decreases in the underlying investment values. Such decreases may be considered temporary or could be deemed to be other-than-temporary, and management may be required to record write-downs of the related investments in future reporting periods.

 

 

NOTE 7 DEFERRED ACQUISITION COSTS

 

Deferred acquisition costs consist primarily of commissions and agency expenses incurred directly related to the acquisition of vehicle service agreements and are amortized over the period, and using the same pattern, in which the related revenues are earned.

 

The components of deferred acquisition costs and the related amortization expense for the three and nine months ended September 30, 2021 and September 30, 2020 are comprised as follows:

 

(in thousands)

 

Three months ended September 30,

   

Nine months ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Beginning balance, net

  $ 9,106     $ 8,750     $ 8,835     $ 8,604  

Additions

    1,297       1,390       4,335       3,644  

Amortization

    (1,356 )     (1,248 )     (4,123 )     (3,356 )

Balance at September 30, net

  $ 9,047     $ 8,892     $ 9,047     $ 8,892  

 

15

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

 

NOTE 8 GOODWILL AND INTANGIBLE ASSETS

 

(a)    Goodwill:

 
The following table summarizes goodwill activity for the nine months ended September 30, 2021:

 

(in thousands)

     

Extended Warranty

   

Leased Real Estate

   

Corporate

   

Total

 

Balance, December 31, 2020

     

$ 59,415

   

$ 60,983

   

$ 732

   

$ 121,130

 

Measurement period adjustment

     

(18,788)

   

   

   

(18,788)

 

Balance, September 30, 2021

     

$ 40,627

   

$ 60,983

   

$ 732

   

$ 102,342

 

 

As further discussed in Note 5, "Acquisition," 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.  

 

The Company performed a Step 1 impairment assessment for Leased Real Estate at June 30, 2021 based on the sensitivity of interest rates in determining fair value and the impact that the additional borrowing may have on the determination of fair value.  The results of this assessment indicated the fair value exceeded carrying value for Leased Real Estate. See Note 11, "Debt," for further information regarding the additional borrowing.

 

(b)    Intangible Assets:

 

Intangible assets at September 30, 2021 and December 31, 2020 are comprised as follows:

 

(in thousands)

 

September 30, 2021

 
   

Gross Carrying Value

   

Accumulated Amortization

   

Net Carrying Value

 

Intangible assets subject to amortization:

                       

Database

  $ 4,918     $ 4,365     $ 553  

Vehicle service agreements in-force

    3,680       3,680        

Customer relationships

    27,645       10,274       17,371  

In-place lease

    1,125       328       797  

Non-compete

    266       211       55  

Intangible assets not subject to amortization:

                       

Tenant relationship

    73,667             73,667  

Trade names

    7,814             7,814  

Total

  $ 119,115     $ 18,858     $ 100,257  

 

(in thousands)

 

December 31, 2020

 
   

Gross Carrying Value

   

Accumulated Amortization

   

Net Carrying Value

 

Intangible assets subject to amortization:

                       

Database

  $ 4,918     $ 3,997     $ 921  

Vehicle service agreements in-force

    3,680       3,680        

Customer relationships

    12,646       7,305       5,341  

In-place lease

    1,125       281       844  

Non-compete

    266       170       96  

Intangible assets not subject to amortization:

                       

Tenant relationship

    73,667             73,667  

Trade names

    3,264             3,264  

Total

  $ 99,566     $ 15,433     $ 84,133  

 

As further discussed in Note 5 , " Acquisition ," during the third quarter of 2021, the Company completed and finalized its fair value analysis of the assets acquired and liabilities assumed related to the Company's acquisition of PWI on December 1, 2020.  As a result, during the third quarter of 2021, the Company recorded $19.6 million of separately identifiable intangible assets, related to acquired customer relationships and trade name, as part of the acquisition of PWI. The customer relationships intangible asset of $15.0 million is being amortized over nine 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 $4.6 million is deemed to have an indefinite useful life and is  not amortized.  

 

The Company's 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 5 to 18 years. Amortization of intangible assets was $2.4 million and $0.6 million for the three months ended September 30, 2021 and September 30, 2020, respectively ($3.4 million and $1.7 million for the nine months ended September 30, 2021and  September 30, 2020, respectively). 

 

The measurement period adjustment recorded during the third quarter of 2021 related to the PWI customer relationships intangible asset resulted in an increase in amortization expense of $1.9 million that was recorded during the three months ended September 30, 2021, of which:

  $0.6 million relates to the three months ended September 30, 2021;

 

  $0.6 million relates to the three months ended June 30, 2021;

 

  $0.6 million relates to the three months ended March 31, 2021; and

 

16

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

  $0.1 million relates to the year ended December 31, 2020.

 

The tenant relationship and trade names intangible assets have indefinite useful lives and are not amortized. No impairment charges were recorded during the three and nine months ended September 30, 2021 and September 30, 2020.

 

NOTE 9 PROPERTY AND EQUIPMENT

 

Property and equipment at September 30, 2021 and December 31, 2020 are comprised as follows:

 

(in thousands)

 

September 30, 2021

 
   

Cost

   

Accumulated Depreciation

   

Carrying Value

 

Land

  $ 21,120     $     $ 21,120  

Site improvements

    91,308       21,232       70,076  

Buildings

    580       76       504  

Leasehold improvements

    289       157       132  

Furniture and equipment

    579       446       133  

Computer hardware

    2,483       1,688       795  

Total

  $ 116,359     $ 23,599     $ 92,760  

 

(in thousands)

 

December 31, 2020

 
   

Cost

   

Accumulated Depreciation

   

Carrying Value

 

Land

  $ 21,120     $     $ 21,120  

Site improvements

    91,308       18,428       72,880  

Buildings

    580       65       515  

Leasehold improvements

    296       125       171  

Furniture and equipment

    1,223       1,074       149  

Computer hardware

    4,929       4,749       180  

Total

  $ 119,456     $ 24,441     $ 95,015  

 

For the three months ended September 30, 2021 and September 30, 2020, depreciation expense on property and equipment of $0.8 million and $1.1 million, respectively ($2.9 million and $3.3 million for the nine months ended September 30, 2021 and  September 30, 2020, respectively), is included in general and administrative expenses in the consolidated statements of operations.

 

NOTE 10 DERIVATIVES

 

On April 1, 2021, the Company entered into an interest rate swap agreement with CIBC Bank USA to convert the variable LIBOR interest rate on a portion of its 2020 KWH Loan (as defined below in Note 11, "Debt") to a fixed interest rate of 1.18%.  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 sheet 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 $11.0 million at September 30, 2021.  At September 30, 2021, the fair value of the interest rate swap contract was a liability of $0.1 million, which is included in accrued expenses and other liabilities in the consolidated balance sheet.  During the three and nine months ended September 30, 2021, the Company recognized a gain of less than $0.1 million and a loss of $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 statement of operations and within cash flows from operating activities in the consolidated statement of cash flows.  Net cash payments of less than $0.1 million were made during each of the three and nine months ended September 30, 2021, to settle a portion of the liabilities related to the interest rate swap agreement.  These payments are reflected as cash outflows in the consolidated statements of cash flows within net cash used in operating activities.

 

NOTE 11 DEBT

 

Debt consists of the following instruments at September 30, 2021 and December 31, 2020:

 

(in thousands)

 

September 30, 2021

   

December 31, 2020

 
   

Principal

   

Carrying Value

   

Fair Value

   

Principal

   

Carrying Value

   

Fair Value

 

Bank loan:

                                               

2020 KWH Loan

  $ 22,613     $ 22,276     $ 25,046     $ 25,700     $ 25,303     $ 25,893  

Total bank loan

    22,613       22,276       25,046       25,700       25,303       25,893  

Notes payable:

                                               

Mortgage

    163,066       170,009       182,621       166,106       173,696       194,158  

Additional Mortgage

    14,704       13,060       15,244                    

Flower Note

    6,532       6,532       7,294       6,885       6,885       7,863  

Net Lease Note

                      9,000       9,000       9,054  

PPP

                      2,476       2,476       2,476  

Total notes payable

    184,302       189,601       205,159       184,467       192,057       213,551  

Subordinated debt

    90,500       59,601       59,601       90,500       50,928       50,928  

Total

  $ 297,415     $ 271,478     $ 289,806     $ 300,667     $ 268,288     $ 290,372  

 

17

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

Subordinated debt mentioned above consists of the following trust preferred debt instruments:

 

Issuer

 

Principal (in thousands)

 

Issue date

Interest

Redemption date

Kingsway CT Statutory Trust I

  $ 15,000  

12/4/2002

annual interest rate equal to LIBOR, plus 4.00% payable quarterly

12/4/2032

Kingsway CT Statutory Trust II

  $ 17,500  

5/15/2003

annual interest rate equal to LIBOR, plus 4.10% payable quarterly

5/15/2033

Kingsway CT Statutory Trust III

  $ 20,000  

10/29/2003

annual interest rate equal to LIBOR, plus 3.95% payable quarterly

10/29/2033

Kingsway DE Statutory Trust III

  $ 15,000  

5/22/2003

annual interest rate equal to LIBOR, plus 4.20% payable quarterly

5/22/2033

Kingsway DE Statutory Trust IV

  $ 10,000  

9/30/2003

annual interest rate equal to LIBOR, plus 3.85% payable quarterly

9/30/2033

Kingsway DE Statutory Trust VI

  $ 13,000  

12/16/2003

annual interest rate equal to LIBOR, plus 4.00% payable quarterly

1/8/2034

 

(a)          Bank loan:

 

In 2019, the Company formed Kingsway Warranty Holdings LLC ("KWH"), whose subsidiaries include 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 has an annual interest rate equal to the London interbank offered interest rate for three-month U.S. dollar deposits ("LIBOR"), having a floor of 0.75%, plus 3.00%. At September 30, 2021, the interest rate was 3.75%. The 2020 KWH Loan matures on December 1, 2025. 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:

 

As part of the acquisition of CMC Industries, Inc. ("CMC") in July 2016, the Company assumed a mortgage, which is recorded as note payable in the consolidated balance sheets ("the Mortgage").  The Mortgage was recorded at its estimated fair value of $191.7 million, which included the unpaid principal amount of $180.0 million as of the date of acquisition plus a premium of $11.7 million. The Mortgage matures on May 15, 2034 and has a fixed interest rate of 4.07%. The Mortgage 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 premium using the effective interest rate method. The fair value of the Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

On June 2, 2021, TRT Leaseco ("TRT"), a subsidiary of CMC, entered into an amendment to the Mortgage to borrow an additional $15.0 million, which is recorded as note payable in the consolidated balance sheets ("the Additional Mortgage").  The net proceeds from the Additional Mortgage were used to advance increased rental payments to the parties that had entered into a legal settlement agreement reached during the first quarter of 2021, including the Company which received $2.7 million.  See Note 21(a), "Commitments and Contingencies - Legal proceedings," for further discussion of the CMC litigation settlement agreement.  In the consolidated statement of cash flows for the nine months ended September 30, 2021, the additional borrowing of $15.0 million is shown as a cash inflow in the net cash used in financing activities and the prepayment of the management fee, net of amortization, of $10.4 million is shown as an outflow in the net cash used in operating activities.

 

The Additional Mortgage matures on May 15, 2034 and has a fixed interest rate of 3.20%.  The Company recorded as a discount to the carrying value of the Additional Mortgage issuance costs of $1.7 million specifically related to the Additional Mortgage. The Additional Mortgage 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 fair value of the Additional Mortgage disclosed in the table above is derived from quoted market prices of A-rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

Both the Mortgage and the Additional Mortgage are nonrecourse indebtedness with respect to CMC and its subsidiaries, and the Mortgage and Additional Mortgage are not, nor will it be, guaranteed by Kingsway or its affiliates. The Mortgage and Additional Mortgage are collateralized by a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property") and the assignment of leases and rents related to a long-term triple net lease agreement with an unrelated third-party.

 

On January 5, 2015, Flower Portfolio 001, LLC ("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 sheets ("the Flower Note"). The Flower Note requires monthly payments of principal and interest and is secured by certain investments of Flower. The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. The carrying value of the Flower Note at September 30, 2021 of $6.5 million 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 plus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

On October 15, 2015, Net Lease assumed a $9.0 million mezzanine debt in conjunction with the purchase of investment real estate properties, which is recorded as note payable in the consolidated balance sheets ("the Net Lease Note") at December 31, 2020. The Net Lease Note required monthly payments of interest and was secured by certain investments of Net Lease. The Net Lease Note matured on November 1, 2020 and had a fixed interest rate of 10.25%. In conjunction with the maturity of the Net Lease Note on November 1, 2020, Net Lease explored alternatives to maximize the value of its investment portfolio. As a result of this process, Net Lease elected to sell one of its three investment real estate properties while refinancing the remaining properties and the existing financing was repaid. Each of these transactions closed on October 30, 2020; however, because the Company reports Net Lease on a three-month lag, the consolidated balance sheet at December 31, 2020 continued to report the $9.0 million mezzanine debt, which represents its unpaid principal balance. The fair value of the Net Lease Note disclosed in the table above is derived from quoted market prices of B and B minus rated industrial bonds with similar maturities and is categorized within Level 2 of the fair value hierarchy.

 

18

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

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.

 

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, 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. The carrying value of the PPP at December 31, 2020 of $2.5 million represents its unpaid principal balance.

 

(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 19, "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) income. Of the $8.7 million increase in fair value of the Company’s subordinated debt between December 31, 2020 and September 30, 2021, $6.5 million is reported as increase in fair value of debt attributable to instrument-specific credit risk in the Company's consolidated statements of comprehensive (loss) income and $2.2 million 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 September 30, 2021 and December 31, 2020, deferred interest payable of $17.6 million and $14.1 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 12 LEASES

 

(a)          Lessee 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 three months ended September 30, 2021 were $0.2 million and less than $0.1 million, respectively ($0.7 million and $0.1 million for the nine months ended September 30, 2021).

 

The annual maturities of lease liabilities as of September 30, 2021 were as follows:

 

(in thousands)

 

Lease Commitments

 

2021

  $ 251  

2022

    899  

2023

    624  

2024

    550  

2025

    381  

2026 and thereafter

    165  

Total undiscounted lease payments

    2,870  

Imputed interest

    270  

Total lease liabilities

  $ 2,600  

 

19

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

 

The weighted-average remaining lease term for our operating leases was 3.95 years as of September 30, 2021. The weighted average discount rate of our operating leases was 5.26% as of September 30, 2021. Cash paid for amounts included in the measurement of lease liabilities was $0.7 million and $0.6 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.

 

(b)          Lessor leases:

 

The Company owns the Real Property that is subject to a long-term triple net lease agreement with an unrelated third-party. The lease provides for future rent escalations and renewal options. The initial lease term ends in May 2034. The lessee bears the cost of maintenance and property taxes. Rental income from operating leases is recognized on a straight-line basis, based on contractual lease terms with fixed and determinable increases over the non-cancellable term of the related lease when collectability is reasonably assured. Rental revenue includes a de minimus amount of amortization of below market lease liabilities for the three and nine months ended September 30, 2021 and September 30, 2020. The estimated aggregate future amortization of below market lease liabilities is $0.1 million for 2021, $0.1 million for 2022, $0.1 million for 2023, $0.1 million for 2024 and $0.1 million for 2025. Realization of the residual values of the assets under lease is dependent on the future ability to market the assets under prevailing market conditions. The lease is classified as an operating lease and the underlying leased assets are included in property and equipment in the consolidated balance sheets. Refer to Note 9, "Property and Equipment".

 

Lease revenue related to operating leases was $3.3 million for each of the three months ended  September 30, 2021 and September 30, 2020 ($10.0 million year to date and prior year to date).  

 

The following table provides the net book value of operating lease property included in property and equipment in the consolidated balance sheets at September 30, 2021 and December 31, 2020:

 

(in thousands)