UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) |
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For Quarterly Period Ended
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or |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Transition Period from _____ to _____
Commission File Number: 001-15204
Kingsway Financial Services Inc.
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) |
85-1792291 (I.R.S. Employer Identification No.) |
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150 E. Pierce Road, Itasca, IL 60143 |
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(Address of principal executive offices and zip code) |
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1-847-871-6408 |
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(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.
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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.
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Table Of Contents |
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PART I - FINANCIAL INFORMATION |
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ITEM 1. FINANCIAL STATEMENTS |
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Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020 |
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Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited) |
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Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited) |
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited) |
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Notes to Consolidated Financial Statements (unaudited) |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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ITEM 4. CONTROLS AND PROCEDURES |
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PART II - OTHER INFORMATION |
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ITEM 1. LEGAL PROCEEDINGS |
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ITEM 1A. RISK FACTORS |
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
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ITEM 4. MINE SAFETY DISCLOSURES |
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ITEM 5. OTHER INFORMATION |
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ITEM 6. EXHIBITS |
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SIGNATURES |
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KINGSWAY FINANCIAL SERVICES INC. |
(in thousands, except share data)
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September 30, 2021 |
December 31, 2020 |
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(unaudited) |
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Assets |
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Investments: |
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Fixed maturities, at fair value (amortized cost of $34,304 and $20,488, respectively) |
$ | 34,339 | $ | 20,716 | ||||
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Equity investments, at fair value (cost of $1,147 and $1,157, respectively) |
187 | 444 | ||||||
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Limited liability investments |
3,235 | 3,692 | ||||||
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Limited liability investments, at fair value |
18,180 | 32,811 | ||||||
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Investments in private companies, at adjusted cost |
790 | 790 | ||||||
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Real estate investments, at fair value (cost of $10,225 and $10,225, respectively) |
10,662 | 10,662 | ||||||
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Other investments, at cost which approximates fair value |
272 | 294 | ||||||
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Short-term investments, at cost which approximates fair value |
157 | 157 | ||||||
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Total investments |
67,822 | 69,566 | ||||||
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Cash and cash equivalents |
18,139 | 14,374 | ||||||
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Restricted cash |
18,140 | 30,571 | ||||||
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Accrued investment income |
951 | 757 | ||||||
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Service fee receivable, net of allowance for doubtful accounts of $212 and $478, respectively |
6,501 | 4,834 | ||||||
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Other receivables, net of allowance for doubtful accounts of $201 and $201, respectively |
12,443 | 15,417 | ||||||
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Deferred acquisition costs, net |
9,047 | 8,835 | ||||||
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Property and equipment, net of accumulated depreciation of $23,599 and $24,441, respectively |
92,760 | 95,015 | ||||||
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Right-of-use asset |
2,358 | 2,960 | ||||||
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Goodwill |
102,342 | 121,130 | ||||||
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Intangible assets, net of accumulated amortization of $18,858 and $15,433, respectively |
100,257 | 84,133 | ||||||
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Other assets |
15,912 | 4,882 | ||||||
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Total Assets |
$ | 446,672 | $ | 452,474 | ||||
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Liabilities and Shareholders' Equity |
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Liabilities: |
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Accrued expenses and other liabilities |
$ | 41,672 | $ | 42,502 | ||||
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Income taxes payable |
256 | 2,859 | ||||||
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Deferred service fees |
87,518 | 87,945 | ||||||
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Unpaid loss and loss adjustment expenses |
1,350 | 1,449 | ||||||
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Bank loan |
22,276 | 25,303 | ||||||
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Notes payable |
189,601 | 192,057 | ||||||
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Subordinated debt, at fair value |
59,601 | 50,928 | ||||||
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Lease liability |
2,600 | 3,213 | ||||||
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Net deferred income tax liabilities |
28,144 | 27,555 | ||||||
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Total Liabilities |
433,018 | 433,811 | ||||||
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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 | ||||||
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Shareholders' Equity: |
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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 |
— | — | ||||||
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Additional paid-in capital |
358,206 | 355,242 | ||||||
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Treasury stock, at cost; 247,450 and 247,450 outstanding at September 30, 2021 and December 31, 2020, respectively |
(492 | ) | (492 | ) | ||||
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Accumulated deficit |
(395,859 | ) | (394,807 | ) | ||||
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Accumulated other comprehensive income |
31,369 | 38,059 | ||||||
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Shareholders' equity attributable to common shareholders |
(6,776 | ) | (1,998 | ) | ||||
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Noncontrolling interests in consolidated subsidiaries |
13,516 | 14,157 | ||||||
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Total Shareholders' Equity |
6,740 | 12,159 | ||||||
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Total Liabilities, Class A preferred stock and Shareholders' Equity |
$ | 446,672 | $ | 452,474 | ||||
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
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Three months ended September 30, |
Nine months ended September 30, |
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2021 |
2020 |
2021 |
2020 |
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Revenues: |
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Service fee and commission revenue |
$ | 17,627 | $ | 11,995 | $ | 54,956 | $ | 33,619 | ||||||||
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Rental revenue |
3,341 | 3,341 | 10,023 | 10,023 | ||||||||||||
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Total revenues |
20,968 | 15,336 | 64,979 | 43,642 | ||||||||||||
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Operating expenses: |
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Claims authorized on vehicle service agreements |
4,951 | 2,221 | 14,869 | 6,948 | ||||||||||||
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Loss and loss adjustment expenses |
2 | 2 | 6 | 17 | ||||||||||||
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Commissions |
1,508 | 1,418 | 4,588 | 4,000 | ||||||||||||
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Cost of services sold |
1,244 | 1,102 | 3,176 | 1,852 | ||||||||||||
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General and administrative expenses |
11,770 | 9,719 | 36,279 | 28,800 | ||||||||||||
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Leased real estate segment interest expense |
1,607 | 1,484 | 4,575 | 4,474 | ||||||||||||
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Total operating expenses |
21,082 | 15,946 | 63,493 | 46,091 | ||||||||||||
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Operating (loss) income |
(114 | ) | (610 | ) | 1,486 | (2,449 | ) | |||||||||
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Other revenues (expenses), net: |
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Net investment income |
389 | 625 | 1,213 | 2,025 | ||||||||||||
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Net realized gains (losses) |
159 | (59 | ) | 397 | 157 | |||||||||||
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(Loss) gain on change in fair value of equity investments |
(39 | ) | 1,177 | (235 | ) | 1,069 | ||||||||||
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Gain on change in fair value of limited liability investments, at fair value |
1,211 | 274 | 1,740 | 2,050 | ||||||||||||
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Net change in unrealized loss on private company investments |
— | (74 | ) | — | (744 | ) | ||||||||||
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Other-than-temporary impairment loss |
— | — | — | (117 | ) | |||||||||||
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Other income (expenses) |
53 | 152 | (2,581 | ) | 398 | |||||||||||
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Interest expense not allocated to segments |
(1,497 | ) | (1,813 | ) | (4,642 | ) | (5,963 | ) | ||||||||
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Amortization of intangible assets |
(2,432 | ) | (572 | ) | (3,425 | ) | (1,719 | ) | ||||||||
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(Loss) gain on change in fair value of debt |
(412 | ) | (503 | ) | (2,169 | ) | 1,940 | |||||||||
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Gain on extinguishment of debt |
— | — | 2,494 | — | ||||||||||||
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Total other expenses, net |
(2,568 | ) | (793 | ) | (7,208 | ) | (904 | ) | ||||||||
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Loss from continuing operations before income tax benefit |
(2,682 | ) | (1,403 | ) | (5,722 | ) | (3,353 | ) | ||||||||
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Income tax benefit |
(2,456 | ) | (279 | ) | (6,139 | ) | (409 | ) | ||||||||
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(Loss) income from continuing operations |
(226 | ) | (1,124 | ) | 417 | (2,944 | ) | |||||||||
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Gain on disposal of discontinued operations, net of taxes |
— | — | — | 6 | ||||||||||||
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Net (loss) income |
(226 | ) | (1,124 | ) | 417 | (2,938 | ) | |||||||||
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Less: net income attributable to noncontrolling interests in consolidated subsidiaries |
782 | 112 | 1,469 | 941 | ||||||||||||
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Less: dividends on preferred stock |
86 | 230 | 409 | 831 | ||||||||||||
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Net loss attributable to common shareholders |
$ | (1,094 | ) | $ | (1,466 | ) | $ | (1,461 | ) | $ | (4,710 | ) | ||||
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Loss per share – continuing operations: |
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Basic: |
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
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Diluted: |
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
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Earnings per share – discontinued operations: |
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Basic: |
$ | — | $ | — | $ | — | $ | — | ||||||||
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Diluted: |
$ | — | $ | — | $ | — | $ | — | ||||||||
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Loss per share – net loss attributable to common shareholders: |
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Basic: |
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
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Diluted: |
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
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Weighted-average shares outstanding (in ‘000s): |
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Basic: |
22,732 | 22,211 | 22,440 | 22,164 | ||||||||||||
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Diluted: |
22,732 | 22,211 | 22,440 | 22,164 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statements of Comprehensive (Loss) Income
(in thousands)
(Unaudited)
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Three months ended September 30, |
Nine months ended September 30, |
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2021 |
2020 |
2021 |
2020 |
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Net (loss) income |
$ | (226 | ) | $ | (1,124 | ) | $ | 417 | $ | (2,938 | ) | |||||
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Other comprehensive (loss) income, net of taxes(1): |
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Unrealized (losses) gains on available-for-sale investments: |
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Unrealized (losses) gains arising during the period |
(107 | ) | (50 | ) | (217 | ) | 130 | |||||||||
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Reclassification adjustment for amounts included in net income (loss) |
11 | (2 | ) | 25 | 64 | |||||||||||
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Change in fair value of debt attributable to instrument-specific credit risk |
(971 | ) | (2,843 | ) | (6,505 | ) | 7,781 | |||||||||
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Other comprehensive (loss) income |
(1,067 | ) | (2,895 | ) | (6,697 | ) | 7,975 | |||||||||
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Comprehensive (loss) income |
(1,293 | ) | (4,019 | ) | (6,280 | ) | 5,037 | |||||||||
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Less: comprehensive income attributable to noncontrolling interests in consolidated subsidiaries |
780 | 109 | 1,462 | 953 | ||||||||||||
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Comprehensive (loss) income attributable to common shareholders |
$ | (2,073 | ) | $ | (4,128 | ) | $ | (7,742 | ) | $ | 4,084 | |||||
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(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. |
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See accompanying notes to unaudited consolidated financial statements
Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
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Three Months Ended September 30, 2021 |
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| Accumulated | Shareholders' | Noncontrolling | ||||||||||||||||||||||||||||||||||
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Additional |
Other |
Equity Attributable |
Interests in |
Total |
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Paid-in |
Treasury |
Accumulated |
Comprehensive |
to Common |
Consolidated |
Shareholders' |
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Common Stock |
Capital |
Stock |
Deficit |
Income |
Shareholders |
Subsidiaries |
Equity |
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Shares |
Amount |
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Balance, June 30, 2021 |
22,365,631 | $ | — | $ | 356,331 | $ | (492 | ) | $ | (394,851 | ) | $ | 32,434 | $ | (6,578 | ) | $ | 14,669 | $ | 8,091 | ||||||||||||||||
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Vesting of restricted stock awards, net of share settlements for tax withholdings |
70,700 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
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Exercise of Series B warrants |
350,000 | — | 1,750 | — | — | — | 1,750 | — | 1,750 | |||||||||||||||||||||||||||
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Net (loss) income |
— | — | — | — | (1,008 | ) | — | (1,008 | ) | 782 | (226 | ) | ||||||||||||||||||||||||
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Preferred stock dividends |
— | — | (86 | ) | — | — | — | (86 | ) | — | (86 | ) | ||||||||||||||||||||||||
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Distributions to noncontrolling interest holders |
— | — | — | — | — | — | — | (1,933 | ) | (1,933 | ) | |||||||||||||||||||||||||
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Other comprehensive loss |
— | — | — | — | — | (1,065 | ) | (1,065 | ) | (2 | ) | (1,067 | ) | |||||||||||||||||||||||
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Stock-based compensation |
— | — | 211 | — | — | — | 211 | — | 211 | |||||||||||||||||||||||||||
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Balance, September 30, 2021 |
22,786,331 | $ | — | $ | 358,206 | $ | (492 | ) | $ | (395,859 | ) | $ | 31,369 | $ | (6,776 | ) | $ | 13,516 | $ | 6,740 | ||||||||||||||||
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Three Months Ended September 30, 2020 |
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Accumulated |
Shareholders' |
Noncontrolling |
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Additional |
Other |
Equity Attributable |
Interests in |
Total |
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Paid-in |
Treasury |
Accumulated |
Comprehensive |
to Common |
Consolidated |
Shareholders' |
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Common Stock |
Capital |
Stock |
Deficit |
Income (Loss) |
Shareholders |
Subsidiaries |
Equity |
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Shares |
Amount |
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Balance, June 30, 2020 |
22,211,069 | $ | — | $ | 354,963 | $ | (492 | ) | $ | (390,725 | ) | $ | 46,202 | $ | 9,948 | $ | 13,881 | $ | 23,829 | |||||||||||||||||
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Net (loss) income |
— | — | — | — | (1,236 | ) | — | (1,236 | ) | 112 | (1,124 | ) | ||||||||||||||||||||||||
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Preferred stock dividends |
— | — | (230 | ) | — | — | — | (230 | ) | — | (230 | ) | ||||||||||||||||||||||||
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Other comprehensive loss |
— | — | — | — | — | (2,892 | ) | (2,892 | ) | (3 | ) | (2,895 | ) | |||||||||||||||||||||||
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Stock-based compensation |
— | — | 120 | — | — | — | 120 | — | 120 | |||||||||||||||||||||||||||
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Balance, September 30, 2020 |
22,211,069 | $ | — | $ | 354,853 | $ | (492 | ) | $ | (391,961 | ) | $ | 43,310 | $ | 5,710 | $ | 13,990 | $ | 19,700 | |||||||||||||||||
| KINGSWAY FINANCIAL SERVICES INC. |
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Nine Months Ended September 30, 2021 |
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| Accumulated | Shareholders' | Noncontrolling | ||||||||||||||||||||||||||||||||||
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Additional |
Other |
Equity Attributable |
Interests in |
Total |
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Paid-in |
Treasury |
Accumulated |
Comprehensive |
to Common |
Consolidated |
Shareholders' |
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Common Stock |
Capital |
Stock |
Deficit |
Income |
Shareholders |
Subsidiaries |
Equity |
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Shares |
Amount |
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Balance, December 31, 2020 |
22,211,069 | $ | — | $ | 355,242 | $ | (492 | ) | $ | (394,807 | ) | $ | 38,059 | $ | (1,998 | ) | $ | 14,157 | $ | 12,159 | ||||||||||||||||
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Vesting of restricted stock awards, net of share settlements for tax withholdings |
225,262 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
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Exercise of Series B warrants |
350,000 | — | 1,750 | — | — | — | 1,750 | — | 1,750 | |||||||||||||||||||||||||||
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Net (loss) income |
— | — | — | — | (1,052 | ) | — | (1,052 | ) | 1,469 | 417 | |||||||||||||||||||||||||
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Preferred stock dividends |
— | — | (409 | ) | — | — | — | (409 | ) | — | (409 | ) | ||||||||||||||||||||||||
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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 |
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Accumulated |
Shareholders' |
Noncontrolling |
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|
Additional |
Other |
Equity Attributable |
Interests in |
Total |
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|
Paid-in |
Treasury |
Accumulated |
Comprehensive |
to Common |
Consolidated |
Shareholders' |
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|
Common Stock |
Capital |
Stock |
Deficit |
Income (Loss) |
Shareholders |
Subsidiaries |
Equity |
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|
Shares |
Amount |
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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
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.
|
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.
|
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 Services—Depository and Lending (Topic 942), and Financial Services—Investment 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.
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 | ||||
|
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.
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 | ||||||||
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
NOTE 8 GOODWILL AND INTANGIBLE ASSETS
(a) Goodwill:
|
(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 | ||||||
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 |
|
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 | ||||||||||||
|
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.
|
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 | ||
|
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) |
September 30, 2021 |
December 31, 2020 |
||||||
|
Land |
$ | 21,120 | $ | 21,120 | ||||
|
Site improvements |
91,308 | 91,308 | ||||||
|
Buildings |
580 | 580 | ||||||
|
Gross property and equipment leased |
113,008 | 113,008 | ||||||
|
Accumulation depreciation |
(21,308 | ) | (18,493 | ) | ||||
|
Net property and equipment leased |
$ | 91,700 | $ | 94,515 | ||||
As of September 30, 2021, future undiscounted cash flows to be received in each of the next five years and thereafter, on non-cancelable operating leases are as follows:
|
(in thousands) |
||||
|
2021 |
$ | 3,053 | ||
|
2022 |
12,371 | |||
|
2023 |
12,649 | |||
|
2024 |
12,934 | |||
|
2025 |
13,225 | |||
|
Thereafter |
123,738 |
NOTE 13 REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers relates to Extended Warranty segment service fee and commission revenue. Service fee and commission revenue represents vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees and homebuilder warranty commissions based on terms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warranty contract or commission product sale, or on terms subject to the Company’s customary credit reviews.
The following table disaggregates revenues from contracts with customers by revenue type:
|
(in thousands) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Vehicle service agreement fees and GAP commissions - IWS, Geminus and PWI |
$ | 12,905 | $ | 7,530 | $ | 42,255 | $ | 23,063 | ||||||||
|
Maintenance support service fees - Trinity |
1,396 | 1,399 | 3,482 | 2,444 | ||||||||||||
|
Warranty product commissions - Trinity |
1,306 | 1,023 | 3,298 | 2,706 | ||||||||||||
|
Homebuilder warranty service fees - PWSC |
1,790 | 1,808 | 5,322 | 4,628 | ||||||||||||
|
Homebuilder warranty commissions - PWSC |
230 | 235 | 599 | 778 | ||||||||||||
|
Service fee and commission revenue |
$ | 17,627 | $ | 11,995 | $ | 54,956 | $ | 33,619 | ||||||||
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
Vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement fees are earned over the duration of the vehicle service agreement contracts as the single performance obligation is satisfied. Vehicle service agreement fees are initially recorded as deferred service fees. The Company compares the remaining deferred service fees balance to the estimated amount of expected future claims under the vehicle service agreement contracts and records an additional accrual if the deferred service fees balance is less than expected future claims costs.
In certain jurisdictions the Company is required to refund to a customer a pro-rata share of the vehicle service agreement fees if a customer cancels the agreement prior to the end of the term. Depending on the jurisdiction, the Company may be entitled to deduct from the refund a cancellation fee and/or amounts for claims incurred prior to cancellation. While refunds vary depending on the term and type of product offered, historically refunds have averaged 6% to 13% of the original amount of the vehicle service agreement fee. Revenues recorded by the Company are net of variable consideration related to refunds and the associated refund liability is included in accrued expenses and other liabilities. The Company estimates refunds based on the actual historical refund rates by warranty type taking into consideration current observable refund trends in estimating the expected amount of future customer refunds to be paid at each reporting period.
GAP commissions include commissions from the sale of GAP products. The Company acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these GAP contracts. The Company receives a single commission fee as its transaction price at the time it sells a GAP contract to a customer. Each GAP contract contains two separate performance obligations - sale of a GAP contract and GAP claims administration. The first performance obligation is related to the sale of a GAP contract and is satisfied upon closing the sale. The second performance obligation is related to the administration of claims during the GAP contract period. The amount of revenue the Company recognizes is based the costs to provide services during the GAP contract period, including an appropriate estimate of profit margin.
Maintenance support service fees include the service fees collected to administer equipment breakdown and maintenance support services and are earned as services are rendered.
Warranty product commissions include the commissions from the sale of warranty contracts for certain new and used heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration equipment. The Company acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. The Company does not guaranty the performance underlying the warranty contracts it sells. Warranty product commissions are earned at the time of the warranty product sales.
Homebuilder warranty service fees include fees collected from the sale of warranties issued by new homebuilders. The Company receives a single warranty service fee as its transaction price at the time it enters into a written contract with each of its builder customers. Each contract contains two separate performance obligations - warranty administrative services and other warranty services. Warranty administrative services include enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product, and is earned at the time the home is enrolled and the warranty product is delivered. Other warranty services include answering builder or homeowner questions regarding the home warranty and dispute resolution services, and is earned as services are performed over the warranty coverage period.
Homebuilder warranty commissions include commissions from the sale of warranty contracts for those builders who have requested and receive insurance backing of their warranty obligations. The Company acts as an agent on behalf of the third-party insurance company that underwrites and guaranties these warranty contracts. Homebuilder warranty commissions are earned on the certification date, which is typically the date of the closing of the sale of the home to the buyer. The Company also earns fees to manage remediation or repair services related to claims on insurance-backed warranty obligations, which are earned when the claims are closed.
The Company's revenue recognition policies are further described in Note 2(p), "Summary of Significant Accounting Policies - Revenue recognition," to the consolidated financial statements in the 2020 Annual Report.
Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at September 30, 2021 and December 31, 2020 were $6.5 million and $4.8 million, respectively.
The Company records deferred service fees resulting from contracts with customers when payment is received in advance of satisfying the performance obligations. Deferred service fees were $87.5 million and $87.9 million at September 30, 2021 and December 31, 2020, respectively. The decrease in deferred service fees between December 31, 2020 and September 30, 2021 is primarily due to the adjustment recorded in the third quarter of 2021 of $3.6 million to reduce PWI’s acquisition date deferred revenue to fair value, that was partially offset by additions to deferred service fees in excess of deferred service fees recognized during the nine months ended September 30, 2021.
The Company expects to recognize within one year as service fee and commission revenue approximately 47.0% of the deferred service fees as of September 30, 2021. Approximately $33.8 million and $16.2 million of service fee and commission revenue recognized during the nine months ended September 30, 2021 and September 30, 2020 was included in deferred service fees as of December 31, 2020 and December 31, 2019, respectively.
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
NOTE 14 INCOME TAXES
Income tax benefit for the three and nine months ended September 30, 2021 and September 30, 2020 varies from the amount that would result by applying the applicable U.S. federal corporate income tax rate of 21% to loss from continuing operations before income tax benefit. The following table summarizes the differences:
|
(in thousands) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Income tax benefit at United States statutory income tax rate |
$ | (563 | ) | $ | (295 | ) | $ | (1,202 | ) | $ | (704 | ) | ||||
|
Valuation allowance |
(2,161 | ) | (155 | ) | (3,039 | ) | (35 | ) | ||||||||
|
Non-deductible compensation |
187 | 25 | 523 | 7 | ||||||||||||
|
Non-taxable income |
— | — | (524 | ) | — | |||||||||||
|
Investment income |
(115 | ) | 1 | (158 | ) | (120 | ) | |||||||||
|
State income tax |
117 | 31 | 287 | 98 | ||||||||||||
|
Change in unrecognized tax benefits(1) |
2 | 56 | (2,813 | ) | 193 | |||||||||||
|
Indemnification receivable |
— | (12 | ) | 591 | (41 | ) | ||||||||||
|
Indefinite life intangibles |
54 | 54 | 161 | 161 | ||||||||||||
|
Other |
23 | 16 | 35 | 32 | ||||||||||||
|
Income tax benefit |
$ | (2,456 | ) | $ | (279 | ) | $ | (6,139 | ) | $ | (409 | ) | ||||
(1) Includes interest and penalty expense related to unrecognized tax benefits.
The Company maintains a valuation allowance for its gross deferred tax assets at September 30, 2021 and December 31, 2020. The Company's operations have generated substantial operating losses in prior years. These losses can be available to reduce income taxes that might otherwise be incurred on future taxable income; however, it is uncertain whether the Company will generate the taxable income necessary to utilize these losses or other reversing temporary differences. This uncertainty has caused management to place a full valuation allowance on its September 30, 2021 and December 31, 2020 net deferred tax asset, excluding the deferred income tax asset and liability amounts set forth in the paragraph below. For the three months ended September 30, 2021 and September 30, 2020, the Company expensed $0.6 million and released into income $0.4 million, respectively (releases into income of $0.6 million and $0.9 million for the nine months ended September 30, 2021 and September 30, 2020, respectively), of its valuation allowance associated with business interest expense carryforwards with an indefinite life. During the three months ended September 30, 2021, the Company released into income $3.3 million of its valuation allowance, as a result of its acquisition of PWI, due to net deferred income tax liabilities that are expected to reverse during the period in which the Company will have deferred income tax assets available.
The Company carries net deferred income tax liabilities of $28.1 million and $27.6 million at September 30, 2021 and December 31, 2020, respectively, that consists of:
|
• |
$7.6 million and $7.6 million of deferred income tax liabilities that are scheduled to reverse in periods after the expiration of the Company's consolidated U.S. net operating loss carryforwards; |
|
• |
$23.0 million and $21.9 million of deferred income tax liabilities related to land and indefinite lived intangible assets; |
|
• |
$1.9 million and $1.3 million of deferred income tax assets associated with business interest expense carryforwards with an indefinite life; and |
|
• |
$0.6 million and $0.6 million of deferred state income tax assets. |
During the nine months ended September 30, 2021, the Company recorded an income tax benefit of $2.8 million for the release of a liability for unrecognized tax benefits (including interest and penalties) that had been included in income taxes payable in the consolidated balance sheets. As of September 30, 2021 and December 31, 2020, the Company carried a liability for unrecognized tax benefits of $0.1 million and $1.4 million, respectively, which is included in income taxes payable in the consolidated balance sheets. The Company classifies interest and penalty accruals, if any, related to unrecognized tax benefits as income tax expense. The Company recorded income tax expense of less than $0.1 million and $0.1 million related to interest and penalty accruals for the three months ended September 30, 2021 and September 30, 2020, respectively (benefit of $1.5 million and expense of $0.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively). At September 30, 2021 and December 31, 2020, the Company carried an accrual for the payment of interest and penalties of $0.1 million and $1.6 million, respectively, included in income taxes payable in the consolidated balance sheets.
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
NOTE 15 LOSS FROM CONTINUING OPERATIONS PER SHARE
The following table sets forth the reconciliation of numerators and denominators for the basic and diluted loss from continuing operations per share computation for the three and nine months ended September 30, 2021 and September 30, 2020:
|
(in thousands, except per share data) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Numerator: |
||||||||||||||||
|
(Loss) income from continuing operations |
$ | (226 | ) | $ | (1,124 | ) | $ | 417 | $ | (2,944 | ) | |||||
|
Less: net income attributable to noncontrolling interests |
(782 | ) | (112 | ) | (1,469 | ) | (941 | ) | ||||||||
|
Less: dividends on preferred stock |
(86 | ) | (230 | ) | (409 | ) | (831 | ) | ||||||||
|
Loss from continuing operations attributable to common shareholders |
$ | (1,094 | ) | $ | (1,466 | ) | $ | (1,461 | ) | $ | (4,716 | ) | ||||
|
Denominator: |
||||||||||||||||
|
Weighted average basic shares |
||||||||||||||||
|
Weighted average common shares outstanding |
22,732 | 22,211 | 22,440 | 22,164 | ||||||||||||
|
Weighted average diluted shares |
||||||||||||||||
|
Weighted average common shares outstanding |
22,732 | 22,211 | 22,440 | 22,164 | ||||||||||||
|
Effect of potentially dilutive securities (a) |
— | — | — | — | ||||||||||||
|
Unvested restricted stock awards |
— | — | — | — | ||||||||||||
|
Warrants |
— | — | — | — | ||||||||||||
|
Convertible preferred stock |
— | — | — | — | ||||||||||||
|
Total weighted average diluted shares |
22,732 | 22,211 | 22,440 | 22,164 | ||||||||||||
|
Basic loss per share |
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
|
Diluted loss per share |
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
|
(a) |
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. |
Basic loss from continuing operations per share is calculated using weighted-average common shares outstanding. Diluted loss from continuing operations per share is calculated using weighted-average diluted shares. Weighted-average diluted shares is calculated by adding the effect of potentially dilutive securities to weighted-average common shares outstanding.
The following weighted-average potentially dilutive securities are not included in the diluted loss from continuing operations per share calculations above because they would have had an antidilutive effect on the loss per continuing operations per share:
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Unvested restricted stock awards |
1,240,000 | 500,000 | 1,240,000 | 500,000 | ||||||||||||
|
Warrants |
4,573,765 | 4,923,765 | 4,573,765 | 4,923,765 | ||||||||||||
|
Convertible preferred stock |
1,142,975 | 1,142,975 | 1,142,975 | 1,142,975 | ||||||||||||
|
Total |
$ | 6,956,740 | $ | 6,566,740 | $ | 6,956,740 | $ | 6,566,740 | ||||||||
NOTE 16 STOCK-BASED COMPENSATION
(a) Restricted Stock Awards
Under the 2013 Equity Incentive Plan, the Company made grants of restricted common stock awards to certain officers of the Company on March 28, 2014 (the "2014 Restricted Stock Awards"). There are no 2014 Restricted Stock Awards outstanding at September 30, 2021. On February 28, 2020, the Company executed an Employment Separation Agreement and Release ("2020 Separation Agreement") with a former officer. Under the terms of the 2020 Separation Agreement, the former officer forfeited 93,713 shares of the 2014 Restricted Stock Awards. The Company’s accounting policy is to account for forfeitures when they occur. As a result, the Company reversed during the first quarter of 2020 $0.2 million of compensation expense previously recognized from March 28, 2014 through February 28, 2020. The former officer's remaining 135,787 shares of the original 2014 Restricted Stock Awards became fully vested on February 28, 2020.
On September 5, 2018, the Company granted 500,000 restricted common stock awards to an officer (the "2018 Restricted Stock Award"). The 2018 Restricted Stock Award shall become fully vested and the restriction period shall lapse as of March 28, 2024 subject to the officer's continued employment through the vesting date. The 2018 Restricted Stock Award is amortized on a straight-line basis over the requisite service period. The grant-date fair value of the 2018 Restricted Stock Award was determined using the closing price of Kingsway common stock on the date of grant. Total unamortized compensation expense related to unvested 2018 Restricted Stock Award at September 30, 2021 was $0.9 million.
Under the 2020 Equity Incentive Plan, the Company granted 1,060,000 restricted common stock awards to certain officers of the Company during the first quarter of 2021 (the "2021 Restricted Stock Awards"). The 2021 Restricted Stock Awards vest according to a graded vesting schedule and shall become fully vested subject to the officers' continued employment through the applicable vesting dates. The 2021 Restricted Stock Awards are amortized on a straight-line basis over the requisite service periods. The grant-date fair values of the 2021 Restricted Stock Awards were determined using the closing price of Kingsway common stock on the date of grant. During the nine months ended September 30, 2021, 320,000 shares of the 2021 Restricted Stock Awards became fully vested. Total unamortized compensation expense related to unvested 2021 Restricted Stock Awards at September 30, 2021 was $3.3 million.
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
The following table summarizes the activity related to unvested 2021 Restricted Stock Awards and 2018 Restricted Stock Award (collectively "Restricted Stock Awards") for the nine months ended September 30, 2021:
|
Number of |
Weighted-Average |
|||||||
|
Restricted |
Grant Date Fair |
|||||||
|
Stock Awards |
Value (per Share) |
|||||||
|
Unvested at December 31, 2020 |
500,000 | $ | 5.73 | |||||
|
Granted |
1,060,000 | 4.64 | ||||||
|
Vested |
(225,262 | ) | 4.64 | |||||
|
Cancelled for Tax Withholding |
(94,738 | ) | 4.64 | |||||
|
Unvested at September 30, 2021 |
1,240,000 | $ | 5.08 | |||||
The unvested balance at September 30, 2021 in the table above is comprised of 740,000 shares of the 2021 Restricted Stock Awards and 500,000 shares of the 2018 Restricted Stock Award.
(b) Restricted Stock Awards of PWSC
The Company's subsidiary, Professional Warranty Service Corporation ("PWSC"), granted 1,000 restricted Class B common stock awards ("2018 PWSC RSA") to an officer of PWSC pursuant to an agreement dated September 7, 2018. The 2018 PWSC RSA contains both a service and a performance condition that affects vesting. On December 18, 2020, the 2018 PWSC RSA was amended to modify the vesting terms related to the service and performance condition ("Modified PWSC RSA").
PWSC granted 250 restricted Class B common stock awards to an officer of PWSC pursuant to an agreement dated December 18, 2020 ("2020 PWSC RSA"). The 2020 PWSC RSA contains both a service and a performance condition that affects vesting.
The service condition for the Modified PWSC RSA and the 2020 PWSC RSA vest according to a graded vesting schedule and shall become fully vested on February 20, 2022 subject to the officer's continued employment through the applicable vesting dates. The performance condition vests on February 20, 2022 and is based on the internal rate of return of PWSC. The grant-date fair value of the Modified PWSC RSA and the 2020 PWSC RSA were estimated using an internal valuation model. See Note 19, "Fair Value of Financial Instruments," for further discussion related to the valuation of the Modified PWSC RSA and the 2020 PWSC RSA.
The Modified PWSC RSA and the 2020 PWSC RSA include a noncontingent put option that is exercisable between February 20, 2022 and February 20, 2023. Since the put option is exercisable less than six months after the vesting of certain shares, the compensation expense related to these shares is classified as a liability and included in accrued expenses and other liabilities in the consolidated balance sheets. The fair value of the liability classified portion of the Modified PWSC RSA and the 2020 PWSC RSA is re-evaluated each reporting period.
At September 30, 2021, both the service condition and performance condition of the Modified PWSC RSA were probable of vesting. At September 30, 2021, there were 437.5 unvested shares of the Modified PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to unvested equity-classified portion of the Modified PWSC RSA at September 30, 2021 was less than $0.1 million.
At September 30, 2021, both the service condition and performance condition of the 2020 PWSC RSA were probable of vesting. At September 30, 2021, there were 109.38 unvested shares of the 2020 PWSC RSA with a weighted-average grant date fair value of $1,672 per share. Total unamortized compensation expense related to unvested equity-classified portion of the 2020 PWSC RSA at September 30, 2021 was zero.
Total stock-based compensation expense, inclusive of Restricted Stock Awards and Restricted Stock Awards of PWSC described above, net of forfeitures, was $0.5 million and $0.1 million for the three months ended September 30, 2021 and September 30, 2020, respectively ($3.0 million and $0.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively).
NOTE 17 ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below detail the change in the balance of each component of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2021 and September 30, 2020 as relates to shareholders' equity attributable to common shareholders on the consolidated balance sheets.
|
(in thousands) |
Three months ended September 30, 2021 |
|||||||||||||||
| Unrealized Gains | Foreign | Change in Fair Value | Total | |||||||||||||
| (Losses) on | Currency | of Debt Attributable | Accumulated Other | |||||||||||||
|
Available-for-Sale |
Translation |
to Instrument-Specific |
Comprehensive |
|||||||||||||
|
Investments |
Adjustments |
Credit Risk |
Income |
|||||||||||||
|
Balance at June 30, 2021 |
$ | 125 | $ | (3,286 | ) | $ | 35,595 | $ | 32,434 | |||||||
|
Other comprehensive loss arising during the period |
(105 | ) | — | (971 | ) | (1,076 | ) | |||||||||
|
Amounts reclassified from accumulated other comprehensive income |
11 | — | — | 11 | ||||||||||||
|
Net current-period other comprehensive loss |
(94 | ) | — | (971 | ) | (1,065 | ) | |||||||||
|
Balance at September 30, 2021 |
$ | 31 | $ | (3,286 | ) | $ | 34,624 | $ | 31,369 | |||||||
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
|
(in thousands) |
Three months ended September 30, 2020 |
|||||||||||||||
| Unrealized Gains | Foreign | Change in Fair Value | Total | |||||||||||||
| (Losses) on | Currency | of Debt Attributable | Accumulated Other | |||||||||||||
|
Available-for-Sale |
Translation |
to Instrument-Specific |
Comprehensive |
|||||||||||||
|
Investments |
Adjustments |
Credit Risk |
Income |
|||||||||||||
|
Balance at June 30, 2020 |
$ | 290 | $ | (3,286 | ) | $ | 49,198 | $ | 46,202 | |||||||
|
Other comprehensive loss arising during the period |
(47 | ) | — | (2,843 | ) | (2,890 | ) | |||||||||
|
Amounts reclassified from accumulated other comprehensive income |
(2 | ) | — | — | (2 | ) | ||||||||||
|
Net current-period other comprehensive loss |
(49 | ) | — | (2,843 | ) | (2,892 | ) | |||||||||
|
Balance at September 30, 2020 |
$ | 241 | $ | (3,286 | ) | $ | 46,355 | $ | 43,310 | |||||||
|
(in thousands) |
Nine months ended September 30, 2021 |
|||||||||||||||
| Unrealized Gains | Foreign | Change in Fair Value | Total | |||||||||||||
| (Losses) on | Currency | of Debt Attributable | Accumulated Other | |||||||||||||
|
Available-for-Sale |
Translation |
to Instrument-Specific |
Comprehensive |
|||||||||||||
|
Investments |
Adjustments |
Credit Risk |
Income |
|||||||||||||
|
Balance at January 1, 2021 |
$ | 216 | $ | (3,286 | ) | $ | 41,129 | $ | 38,059 | |||||||
|
Other comprehensive loss arising during the period |
(210 | ) | — | (6,505 | ) | (6,715 | ) | |||||||||
|
Amounts reclassified from accumulated other comprehensive income |
25 | — | — | 25 | ||||||||||||
|
Net current-period other comprehensive loss |
(185 | ) | — | (6,505 | ) | (6,690 | ) | |||||||||
|
Balance at September 30, 2021 |
$ | 31 | $ | (3,286 | ) | $ | 34,624 | $ | 31,369 | |||||||
|
(in thousands) |
Nine months ended September 30, 2020 |
|||||||||||||||
| Unrealized Gains | Foreign | Change in Fair Value | Total | |||||||||||||
| (Losses) on | Currency | of Debt Attributable | Accumulated Other | |||||||||||||
|
Available-for-Sale |
Translation |
to Instrument-Specific |
Comprehensive |
|||||||||||||
|
Investments |
Adjustments |
Credit Risk |
Income |
|||||||||||||
|
Balance at January 1, 2020 |
$ | 59 | $ | (3,286 | ) | $ | 38,574 | $ | 35,347 | |||||||
|
Other comprehensive income arising during the period |
118 | — | 7,781 | 7,899 | ||||||||||||
|
Amounts reclassified from accumulated other comprehensive income |
64 | — | — | 64 | ||||||||||||
|
Net current-period other comprehensive income |
182 | — | 7,781 | 7,963 | ||||||||||||
|
Balance at September 30, 2020 |
$ | 241 | $ | (3,286 | ) | $ | 46,355 | $ | 43,310 | |||||||
It should be noted that the unaudited consolidated statements of comprehensive (loss) income present the components of other comprehensive (loss) income, net of tax, only for the three and nine months ended September 30, 2021 and September 30, 2020 and inclusive of the components attributable to noncontrolling interests in consolidated subsidiaries.
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
Components of accumulated other comprehensive income were reclassified to the following lines of the unaudited consolidated statements of operations for the three and nine months ended September 30, 2021 and September 30, 2020:
|
(in thousands) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Reclassification of accumulated other comprehensive income from unrealized gains (losses) on available-for-sale investments to: |
||||||||||||||||
|
Net realized gains (losses) |
$ | (11 | ) | $ | 2 | $ | (25 | ) | $ | (64 | ) | |||||
|
Other-than-temporary impairment loss |
— | — | — | — | ||||||||||||
|
Loss from continuing operations before income tax benefit |
(11 | ) | 2 | (25 | ) | (64 | ) | |||||||||
|
Income tax benefit |
— | — | — | — | ||||||||||||
|
(Loss) income from continuing operations |
(11 | ) | 2 | (25 | ) | (64 | ) | |||||||||
|
Gain on disposal of discontinued operations, net of taxes |
— | — | — | — | ||||||||||||
|
Net (loss) income |
$ | (11 | ) | $ | 2 | $ | (25 | ) | $ | (64 | ) | |||||
NOTE 18 SEGMENTED INFORMATION
The Company conducts its business through the following two reportable segments: Extended Warranty and Leased Real Estate.
Extended Warranty Segment
Extended Warranty includes the following subsidiaries of the Company: IWS, Geminus, PWI, PWSC and Trinity (collectively, "Extended Warranty").
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in 25 states and the District of Columbia to their members.
Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, Penn and Prime. Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a "white label" agreement.
PWSC sells new home warranty products and provides administration services to home builders and homeowners across the United States. PWSC distributes its products and services through an in house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.
Trinity sells HVAC, standby generator, commercial LED lighting and refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.
Leased Real Estate Segment
Leased Real Estate includes the Company's subsidiary, CMC. CMC owns the Real Property that is leased to a third party pursuant to a long-term triple net lease. The Real Property is also subject to the Mortgage and Additional Mortgage. When assessing and measuring the operational and financial performance of the Leased Real Estate segment, interest expense related to the Mortgage and Additional Mortgage is included in Leased Real Estate's segment operating income.
Revenues and Operating Income by Reportable Segment
Results for the Company's reportable segments are based on the Company's internal financial reporting systems and are consistent with those followed in the preparation of the unaudited consolidated interim financial statements. The following tables provide financial data used by management. Segment assets are not allocated for management use and, therefore, are not included in the segment disclosures below.
Revenues by reportable segment reconciled to consolidated revenues for the three and nine months ended September 30, 2021 and September 30, 2020 were:
|
(in thousands) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Revenues: |
||||||||||||||||
|
Extended Warranty: |
||||||||||||||||
|
Service fee and commission revenue |
$ | 17,627 | $ | 11,995 | $ | 54,956 | $ | 33,619 | ||||||||
|
Total Extended Warranty |
17,627 | 11,995 | 54,956 | 33,619 | ||||||||||||
|
Leased Real Estate: |
||||||||||||||||
|
Rental revenue |
3,341 | 3,341 | 10,023 | 10,023 | ||||||||||||
|
Total Leased Real Estate |
3,341 | 3,341 | 10,023 | 10,023 | ||||||||||||
|
Total revenues |
$ | 20,968 | $ | 15,336 | $ | 64,979 | $ | 43,642 | ||||||||
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
The operating income by reportable segment in the following table is before income taxes and includes revenues and direct segment costs. Total segment operating income reconciled to the consolidated (loss) income from continuing operations for the three and nine months ended September 30, 2021 and September 30, 2020 were:
|
(in thousands) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Segment operating income: |
||||||||||||||||
|
Extended Warranty (a) |
$ | 1,400 | $ | 1,205 | $ | 9,310 | $ | 3,340 | ||||||||
|
Leased Real Estate (b) |
1,095 | 799 | 86 | 2,234 | ||||||||||||
|
Total segment operating income |
2,495 | 2,004 | 9,396 | 5,574 | ||||||||||||
|
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 | ) | |||||||||||
|
Interest expense not allocated to segments |
(1,497 | ) | (1,813 | ) | (4,642 | ) | (5,963 | ) | ||||||||
|
Other revenue and expenses not allocated to segments, net |
(2,556 | ) | (2,462 | ) | (8,308 | ) | (7,625 | ) | ||||||||
|
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 not allocated to segments |
— | — | 311 | — | ||||||||||||
|
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 | ) | |||||
|
(a) |
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.
|
|
(b) |
For the nine months ended September 30, 2021, includes $2.9 million expense due to the release of an indemnification receivable, which is exactly offset in net income (loss) (not shown here) by an income tax benefit of $2.9 million for the release of a liability that had been included in income taxes payable in the consolidated balance sheets. |
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity.
The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1:
|
• |
Level 1 – Quoted prices for identical instruments in active markets. |
|
• |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
|
• |
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable. |
The Company classifies its investments in fixed maturities as available-for-sale and reports these investments at fair value. The Company's equity investments, limited liability investments, at fair value, real estate investments, subordinated debt, warrant liability, stock-based compensation liabilities and derivative contracts (interest rate swap) are measured and reported at fair value.
Fixed maturities - Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third party evidence. All classes of the Company’s fixed maturities, primarily consisting of investments in US. Treasury bills and government bonds; obligations of states, municipalities and political subdivisions; mortgage-backed securities; and corporate securities, are classified as Level 2. Level 2 is applied to valuations based upon quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that are inactive; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
The Company engages a third-party vendor who utilizes third-party pricing sources and primarily employs a market approach to determine the fair values of our fixed maturities. The market approach includes primarily obtaining prices from independent third-party pricing services as well as, to a lesser extent, quotes from broker-dealers. Our third-party vendor also monitors market indicators, as well as industry and economic events, to ensure pricing is appropriate. All classes of our fixed maturities are valued using this technique. The Company has obtained an understanding of our third-party vendor’s valuation methodologies and inputs. Fair values obtained from our third-party vendor are not adjusted by the Company.
The following is a description of the significant inputs, by asset class, used by the third-party pricing services to determine the fair values of our fixed maturities included in Level 2:
|
• |
U.S. government, government agencies and authorities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets and maturity. |
|
• |
States, municipalities and political subdivisions are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, new issuances and credit spreads. |
|
• |
Mortgage-backed and asset-backed securities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, expected prepayments, expected credit default rates, delinquencies and issue specific information including, but not limited to, collateral type, seniority and vintage. |
|
• |
Corporate securities are generally priced using the market approach using pricing vendors. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, issuer rating, benchmark yields, maturity and credit spreads. |
Equity investments - Fair values of equity investments, including warrants, reflect quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no active markets exist.
Limited liability investments, at fair value - Limited liability investments, at fair value include the underlying investments of Net Lease and Argo Holdings. Net Lease owns investments in limited liability companies that hold investment properties. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies.
|
• |
The fair value of Net Lease's investments in limited liability companies is based upon the net asset values of the underlying investments in companies as a practical expedient to estimate fair value. The Company applies the net asset value practical expedient to Net Lease's limited liability investments on an investment-by-investment basis unless it is probable that the Company will sell a portion of an investment at an amount different from the net asset value of the investment. Investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy. |
|
• |
The fair value of Argo Holdings' limited liability investments that hold investments in search funds is based on the initial investment in the search funds. The fair value of Argo Holdings' limited liability investments that hold investments in private operating companies is valued using a market approach including valuation multiples applied to corresponding performance metrics, such as earnings before interest, tax, depreciation and amortization; revenue; or net earnings. The selected valuation multiples were estimated using multiples provided by the investees and review of those multiples in light of investor updates, performance reports, financial statements and other relevant information. These investments are categorized in Level 3 of the fair value hierarchy. |
Real estate investments - The fair value of real estate investments involves a combination of the market and income valuation techniques. Under this approach, a market-based capitalization rate is derived from comparable transactions, adjusted for any unique characteristics of each asset, and applied to the asset under consideration. The cap rates used during underwriting and subsequent valuation incorporate the consideration of risks of vacancy and collection loss, administrative costs of owning net leased assets and possible capital expenditures that could be determined a landlord expense. These investments are categorized in Level 3 of the fair value hierarchy.
Subordinated debt - The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. These inputs include credit spread assumptions developed by a third party and market observable swap rates. The subordinated debt is categorized in Level 2 of the fair value hierarchy.
Warrant liability - The Company issued the KWH Warrants on March 1, 2019. On December 1, 2020, the Company repurchased the KWH Warrants. The KWH Warrants were measured and reported at fair value. The fair value of the warrant liability was estimated using an internal model without relevant observable market inputs. The significant inputs used in the model include an enterprise value multiple applied to earnings before interest, tax, depreciation and amortization. The implied enterprise value was reduced by the remaining debt associated with the 2019 KWH Loan to determine an implied equity value. The liability classified warrants are categorized in Level 3 of the fair value hierarchy.
Stock-based compensation liabilities- As described in Note 16, "Stock-Based Compensation," certain of the restricted stock awards granted by PWSC are classified as a liability. Liability-classified awards are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets. The fair value of the restricted stock awards granted by PWSC are estimated using an internal valuation model without relevant observable market inputs. The significant inputs used in the model include a valuation multiple applied to trailing twelve month earnings before interest, tax, depreciation and amortization. Liability-classified restricted stock awards are categorized in Level 3 of the fair value hierarchy.
Derivative contracts- As described in Note 10, "Derivatives," the Company entered into an interest rate swap agreement effective April 1, 2021 to convert the variable interest rate on a portion of the 2020 KWH Loan to a fixed interest rate. 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 fair value of the interest rate swap contract is estimated using inputs which the Company obtains from the counterparty and is determined using a discounted cash flow analysis on the expected cash flows of the derivative. The discounted cash flow valuation technique reflects the contractual term of the derivative contract, including the period to maturity, and uses observable market based inputs, including quoted mid-market prices or third-party consensus pricing, interest rate curves and implied volatilities. The interest rate swap contract is categorized in Level 2 of the fair value hierarchy.
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The balances of the Company's financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2021 and December 31, 2020 are as follows. Certain investments in limited liability companies that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following tables to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets:
|
(in thousands) |
September 30, 2021 |
|||||||||||||||||||
|
Fair Value Measurements at the End of the Reporting Period Using |
||||||||||||||||||||
|
Quoted Prices in |
Significant |
Significant |
||||||||||||||||||
|
Active Markets for |
Other Observable |
Unobservable |
||||||||||||||||||
|
Identical Assets |
Inputs |
Inputs |
Measured at |
|||||||||||||||||
|
Total |
(Level 1) |
(Level 2) |
(Level 3) |
Net Asset Value |
||||||||||||||||
|
Recurring fair value measurements: |
||||||||||||||||||||
|
Assets: |
||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||
|
U.S. government, government agencies and authorities |
$ | 15,247 | $ | — | $ | 15,247 | $ | — | $ | — | ||||||||||
|
States, municipalities and political subdivisions |
1,584 | — | 1,584 | — | — | |||||||||||||||
|
Mortgage-backed |
8,150 | — | 8,150 | — | — | |||||||||||||||
|
Asset-backed |
253 | — | 253 | — | — | |||||||||||||||
|
Corporate |
9,105 | — | 9,105 | — | — | |||||||||||||||
|
Total fixed maturities |
34,339 | — | 34,339 | — | — | |||||||||||||||
|
Equity investments: |
||||||||||||||||||||
|
Common stock |
187 | 187 | — | — | — | |||||||||||||||
|
Warrants |
— | — | — | — | — | |||||||||||||||
|
Total equity investments |
187 | 187 | — | — | — | |||||||||||||||
|
Limited liability investments, at fair value |
18,180 | — | — | 3,744 | 14,436 | |||||||||||||||
|
Real estate investments |
10,662 | — | — | 10,662 | — | |||||||||||||||
|
Total assets |
$ | 63,368 | $ | 187 | $ | 34,339 | $ | 14,406 | $ | 14,436 | ||||||||||
|
Liabilities: |
||||||||||||||||||||
|
Subordinated debt |
$ | 59,601 | $ | — | $ | 59,601 | $ | — | $ | — | ||||||||||
|
Stock-based compensation liabilities |
1,306 | — | — | 1,306 | — | |||||||||||||||
|
Derivative contract - interest rate swap |
65 | — | 65 | — | — | |||||||||||||||
|
Total liabilities |
$ | 60,972 | $ | — | $ | 59,666 | $ | 1,306 | $ | — | ||||||||||
|
(in thousands) |
December 31, 2020 |
|||||||||||||||||||
|
Fair Value Measurements at the End of the Reporting Period Using |
||||||||||||||||||||
|
Quoted Prices in |
Significant |
Significant |
||||||||||||||||||
|
Active Markets for |
Other Observable |
Unobservable |
||||||||||||||||||
|
Identical Assets |
Inputs |
Inputs |
Measured at |
|||||||||||||||||
|
Total |
(Level 1) |
(Level 2) |
(Level 3) |
Net Asset Value |
||||||||||||||||
|
Recurring fair value measurements: |
||||||||||||||||||||
|
Assets: |
||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||
|
U.S. government, government agencies and authorities |
$ | 10,104 | $ | — | $ | 10,104 | $ | — | $ | — | ||||||||||
|
States municipalities and political subdivisions |
1,454 | — | 1,454 | — | — | |||||||||||||||
|
Mortgage-backed |
5,394 | — | 5,394 | — | — | |||||||||||||||
|
Corporate |
3,764 | — | 3,764 | — | — | |||||||||||||||
|
Total fixed maturities |
20,716 | — | 20,716 | — | — | |||||||||||||||
|
Equity investments: |
||||||||||||||||||||
|
Common stock |
155 | 155 | — | — | — | |||||||||||||||
|
Warrants |
289 | 17 | 272 | — | — | |||||||||||||||
|
Total equity investments |
444 | 172 | 272 | — | — | |||||||||||||||
|
Limited liability investments, at fair value |
32,811 | — | — | 3,263 | 29,548 | |||||||||||||||
|
Real estate investments |
10,662 | — | — | 10,662 | — | |||||||||||||||
|
Total assets |
$ | 64,633 | $ | 172 | $ | 20,988 | $ | 13,925 | $ | 29,548 | ||||||||||
|
Liabilities: |
||||||||||||||||||||
|
Subordinated debt |
$ | 50,928 | $ | — | $ | 50,928 | $ | — | $ | — | ||||||||||
|
Stock-based compensation liabilities |
443 | — | — | 443 | — | |||||||||||||||
|
Total liabilities |
$ | 51,371 | $ | — | $ | 50,928 | $ | 443 | $ | — | ||||||||||
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the three and nine months ended September 30, 2021 and September 30, 2020:
|
(in thousands) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Assets: |
||||||||||||||||
|
Limited liability investments, at fair value: |
||||||||||||||||
|
Beginning balance |
$ | 3,302 | $ | 4,290 | $ | 3,263 | $ | 4,392 | ||||||||
|
Distributions received |
(80 | ) | (32 | ) | (313 | ) | (109 | ) | ||||||||
|
Realized gains included in net (loss) income |
80 | 12 | 290 | 98 | ||||||||||||
|
Change in fair value of limited liability investments, at fair value included in net (loss) income |
442 | (340 | ) | 504 | (451 | ) | ||||||||||
|
Ending balance |
$ | 3,744 | $ | 3,930 | $ | 3,744 | $ | 3,930 | ||||||||
|
Unrealized gains on limited liability investments, at fair value held at end of period: |
||||||||||||||||
|
Included in net (loss) income |
$ | 442 | $ | (340 | ) | $ | 504 | $ | (451 | ) | ||||||
|
Included in other comprehensive (loss) income |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Real estate investments: |
||||||||||||||||
|
Beginning balance |
$ | 10,662 | $ | 10,662 | $ | 10,662 | $ | 10,662 | ||||||||
|
Change in fair value of real estate investments included in net (loss) income |
— | — | — | — | ||||||||||||
|
Ending balance |
$ | 10,662 | $ | 10,662 | $ | 10,662 | $ | 10,662 | ||||||||
|
Unrealized gains recognized on real estate investments held at end of period: |
||||||||||||||||
|
Included in net (loss) income |
— | — | — | — | ||||||||||||
|
Included in other comprehensive (loss) income |
— | — | — | — | ||||||||||||
|
Ending balance - assets |
$ | 14,406 | $ | 14,592 | $ | 14,406 | $ | 14,592 | ||||||||
|
Liabilities: |
||||||||||||||||
|
Warrant liability: |
||||||||||||||||
|
Beginning balance |
$ | — | $ | 259 | $ | — | $ | 249 | ||||||||
|
Change in fair value of warrant liability included in net (loss) income |
— | (66 | ) | — | (56 | ) | ||||||||||
|
Ending balance |
$ | — | $ | 193 | $ | — | $ | 193 | ||||||||
|
Unrealized gains recognized on warrant liability held at end of period: |
||||||||||||||||
|
Included in net (loss) income |
$ | — | $ | (66 | ) | $ | — | $ | (56 | ) | ||||||
|
Included in other comprehensive (loss) income |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Stock-based compensation liabilities: |
||||||||||||||||
|
Beginning balance |
$ | 1,134 | $ | — | $ | 443 | $ | — | ||||||||
|
Change in fair value of stock-based compensation liabilities included in net (loss) income |
172 | — | 863 | — | ||||||||||||
|
Ending balance |
$ | 1,306 | $ | — | $ | 1,306 | $ | — | ||||||||
|
Ending balance - liabilities |
$ | 1,306 | $ | 193 | $ | 1,306 | $ | 193 | ||||||||
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at September 30, 2021:
|
Categories |
Fair Value |
Valuation Techniques |
Unobservable Inputs |
Input Value(s) |
||||||
|
Limited liability investments, at fair value |
$ | 3,744 |
Market approach |
Valuation multiples |
3.1x - 8.0x |
|||||
|
Real estate investments |
$ | 10,662 |
Market and income approach |
Cap rates |
7.5 | % | ||||
|
Stock-based compensation liabilities |
$ | 1,306 |
Market approach |
Valuation multiple |
6.0x |
|||||
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at December 31, 2020:
|
Categories |
Fair Value |
Valuation Techniques |
Unobservable Inputs |
Input Value(s) |
||||||
|
Limited liability investments, at fair value |
$ | 3,263 |
Market approach |
Valuation multiples |
3.1x - 8.0x |
|||||
|
Real estate investments |
$ | 10,662 |
Market and income approach |
Cap rates |
7.5 | % | ||||
|
Stock-based compensation liabilities |
$ | 443 |
Market approach |
Valuation multiple |
6.0x |
|||||
Investments Measured Using the Net Asset Value per Share Practical Expedient
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at September 30, 2021:
|
Fair Value |
Redemption |
|||||||||||
|
Category |
(in thousands) |
Unfunded Commitments |
Redemption Frequency |
Notice Period |
||||||||
|
Limited liability investments, at fair value |
$ | 14,436 | n/a | n/a | n/a | |||||||
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at December 31, 2020:
|
Fair Value |
Redemption |
|||||||||||
|
Category |
(in thousands) |
Unfunded Commitments |
Redemption Frequency |
Notice Period |
||||||||
|
Limited liability investments, at fair value |
$ | 29,548 | n/a | n/a | n/a | |||||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are adjusted for observable price changes or written down to fair value as a result of an impairment. 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 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. To determine the fair value of investments in these private companies, the Company considered rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable transactions, trading multiples and changes in market outlook, among other factors. The Company has classified the fair value measurements of these investments in private companies as Level 3 because they involve significant unobservable inputs.
As further discussed in Note 5, "Acquisition," the Company acquired PWI on December 1, 2020 and finalized the related purchase price allocation during the third quarter of 2021. The fair values of intangible assets and deferred service fees associated with the acquisition of PWI were determined to be Level 3 under the fair value hierarchy.
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for these Level 3 measurements:
|
Fair Value |
||||||||||
|
Categories |
(in thousands) |
Valuation Techniques |
Unobservable Inputs |
Input Value(s) |
||||||
|
Customer relationships |
$ | 15,000 |
Multi-period excess earnings |
Growth rate |
3.0 | % | ||||
|
Attrition rate |
12.3 | % | ||||||||
|
Discount rate |
29.5 | % | ||||||||
|
Trade name |
$ | 4,550 |
Relief from royalty |
Royalty rate |
4.0 | % | ||||
|
Discount rate |
29.5 | % | ||||||||
|
Deferred service fees |
$ | 3,626 |
Cost build-up |
Normal profit margin |
17.8%-21.1% | |||||
|
Discount rate |
2.5 | % | ||||||||
NOTE 20 RELATED PARTIES
Related party transactions, including services provided to or received by the Company's subsidiaries, are measured in part by the amount of consideration paid or received as established and agreed by the parties. Except where disclosed elsewhere in these unaudited consolidated interim financial statements, the following is a summary of related party relationships and transactions.
Argo Management Group, LLC
The Company acquired Argo Management Group, LLC ("Argo Management") in April 2016. Argo Management's primary business is to act as Managing Member of Argo Holdings. At September 30, 2021 and December 31, 2020, each of the Company, John T. Fitzgerald ("Fitzgerald"), the Company's Chief Executive Officer and President, and certain of Fitzgerald’s immediate family members owns equity interests in Argo Holdings, all of which interests were acquired prior to the Company’s acquisition of Argo Management. Subject to certain limitations, Argo Holdings' governing documents require all individuals and entities owning an equity interest in Argo Holdings to fund upon request his/her/its pro rata share of any funding requirements of Argo Holdings up to an aggregate maximum amount equal to his/her/its total capital commitment (each request for funds being referred to as a "Capital Call"). Argo Holdings made no Capital Calls during the nine months ended September 30, 2021 and the year ended December 31, 2020.
NOTE 21 COMMITMENTS AND CONTINGENCIES
(a) Legal proceedings:
In April 2018, TRT LeaseCo, LLC ("TRT LeaseCo"), an indirect subsidiary of Kingsway, was named as a defendant in a lawsuit filed in the United States District Court for the Southern District of New York relating to CMC and its subsidiaries. Kingsway indirectly, through its indirect, wholly-owned subsidiary, CMC Acquisition, LLC ("CMCA"), owns 81% of CMC. TRT LeaseCo (an indirect, wholly-owned subsidiary of CMC) entered into a Management Services Agreement (the "MSA") with DGI-BNSF Corp. ("DGI") (an affiliate of CRIC TRT Acquisition, LLC ("CRIC"), the entity that owns the remaining 19% of CMC) in July 2016 pursuant to which, among other things, DGI agreed to provide services to TRT LeaseCo in exchange for the fees specified in the MSA. The complaint filed by DGI alleged that DGI was owed certain fees under the MSA that had not been paid.
|
KINGSWAY FINANCIAL SERVICES INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2021 |
In March 2021, DGI, TRT LeaseCo and various other entities affiliated with each of them entered into a settlement agreement with respect to such litigation and certain other matters ("CMC Settlement Agreement"). Pursuant to the CMC Settlement Agreement, the parties agreed that proceeds from increased rental payments due to an earlier amendment to the lease of the Real Property (or any borrowings against such increased rental payments) would be split 80% to DGI as a management fee under the MSA and 20% to CMCA as a priority distribution on its ownership of CMC, after CMCA received a priority payment of $1.5 million. The parties also agreed that net proceeds from an eventual sale or renewal of the lease of the Real Property (after repayment of outstanding indebtedness and various other fees and expenses) would be split as follows:
(a) if such net proceeds are equal to or greater than $72 million, (i) CMCA would receive the first $40 million as a distribution of a preferred return on its ownership of CMC, (ii) CRIC would receive the next $9.4 million as a distribution on its ownership of CMC, (iii) DGI would receive the next $30.6 million as a management fee under the MSA, and (iv) the remainder of such net proceeds (if any) would be split 48.6% to CMCA as a distribution in respect of its ownership of CMC, 40% to DGI in the form of a management fee under the MSA, and 11.4% to CRIC s a distributions in respect of its ownership of CMC;
or
(b) if such net proceeds are less than $72 million, (i) 55% to CMCA as a distribution of a preferred return on its ownership of CMC, (ii) 12.9% to CRIC as a distribution on its ownership of CMC, and (iii) 32.1% to DGI in the form of a management fee to DGI under the MSA.
On June 2, 2021, TRT, a subsidiary of CMC, borrowed $15.0 million under the Additional Mortgage. The Company distributed $10.6 million to DGI during the second quarter of 2021 as a prepaid management fee, representing 80% of the net proceeds from the Additional Mortgage, and $2.7 million (20%) to CMCA as a priority distribution on its ownership of CMC.
In May 2016, Aegis Security Insurance Company ("Aegis") filed a complaint for breach of contract and declaratory relief against the Company in the Eastern District of Pennsylvania alleging, among other things, that the Company breached a contractual obligation to indemnify Aegis for certain customs bond losses incurred by Aegis under the indemnity and hold harmless agreements provided by the Company to Aegis for certain customs bonds reinsured by Lincoln General Insurance Company ("Lincoln General") during the period of time that Lincoln General was a subsidiary of the Company. Lincoln General was placed into liquidation in November 2015 and Aegis subsequently invoked its rights to indemnity under the indemnity and hold harmless agreements. Effective January 20, 2020, Aegis and the Company entered into a Settlement Agreement with respect to such litigation pursuant to which the Company agreed to pay Aegis a one-time settlement amount of $0.9 million, which the Company reported in its consolidated statement of operations during the first quarter of 2020, and to reimburse Aegis for 60% of future losses that Aegis may sustain in connection with such customs bonds, up to a maximum reimbursement amount of $4.8 million. During the third and fourth quarters of 2020, the Company made reimbursement payments to Aegis of $0.5 million in connection with the Settlement Agreement. The Company reported the payments to Aegis in general and administrative expenses in its consolidated statement of operations for the year ended December 31, 2020. During the third quarter of 2021, the Company made a reimbursement payment to Aegis of $0.1 million in connection with the Settlement Agreement, which is included in general and administrative expenses in its consolidated statement of operations for the three and nine months ended September 30, 2021. The Company’s potential exposure under these agreements was not reasonably determinable at September 30, 2021, and no liability has been recorded in the unaudited consolidated interim financial statements at September 30, 2021.
(b) Guarantees:
As part of the October 18, 2018 transaction to sell Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"), the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018 related to the open claims. The maximum obligation to the Company with respect to the open claims is $2.5 million. Per the purchase agreement, a security interest on the Company’s equity interest in its consolidated subsidiary, Net Lease, as well as any distributions to the Company from Net Lease, was to be collateral for the Company’s payment of obligations with respect to the open claims. During the third quarter of 2021, the purchasers of Mendota and the Company agreed to release the Company's equity interest in Net Lease as collateral and allow Net Lease to make distributions to the Company. In exchange, the Company agreed to deposit $2.0 million into an escrow account and advance $0.5 million to the purchaser of Mendota to satisfy the Company's payment obligation with respect to the open claims. There were no payments made related to the open claims during the nine months ended September 30, 2021 and September 30, 2020. The Company's potential exposure under these agreements was not reasonably determinable at September 30, 2021, and no liability has been recorded in the unaudited consolidated interim financial statements at September 30, 2021.
In conjunction with the Additional Mortgage, TRT paid a guarantee fee of $1.1 million to a third-party during the second quarter of 2021, who is serving as a guarantor or indemnitor with respect to certain obligations between TRT and the holder of the Additional Mortgage. The guarantee fee was recorded as a debt issuance cost related to the Additional Mortgage.
(c) Collateral pledged and restricted cash:
Short-term investments with an estimated fair value of $0.2 million at September 30, 2021 and December 31, 2020, were on deposit with state regulatory authorities.
The Company also has restricted cash of $18.1 million and $30.6 million at September 30, 2021 and December 31, 2020, respectively. Included in restricted cash are:
|
• |
$13.4 million and $27.7 million at September 30, 2021 and December 31, 2020, respectively, held as deposits by IWS, PWSC, Geminus and PWI; |
|
• |
$1.9 million at both September 30, 2021 and December 31, 2020, on deposit with state regulatory authorities; and |
|
• |
$2.8 million and $1.0 million at September 30, 2021 and December 31, 2020, respectively, pledged to third-parties as deposits or to collateralize liabilities. Collateral pledging transactions are conducted under terms that are common and customary to standard collateral pledging and are subject to the Company's standard risk management controls. |
|
KINGSWAY FINANCIAL SERVICES INC. |
(d) Purchase agreement:
In September 2021, the Company entered into an arms-length agreement to acquire 100% of the membership interests in RoeCo Lafayette, LLC ("RoeCo"), from a current holder of the Company’s Preferred Shares. RoeCo owns real property consisting of approximately 6.5 acres and a 29,000 square foot building located in Lafayette, Louisiana. The property serves as a medical and dental clinic for the Department of Veteran Affairs and is subject to a long-term triple net lease agreement.
The purchase price of RoeCo is $15.4 million, including the assumption of existing debt. The property is subject to non-recourse senior indebtedness of $11.9 million and junior indebtedness of $1.9 million. The closing is contingent upon the Company receiving approval from both the current lender and current tenant. If such approvals are not received prior to December 15, 2021 then either party may terminate the agreement.
NOTE 22 SUBSEQUENT EVENT
On October 1, 2021, the Company acquired 100% of the outstanding equity interests of Ravix Financial, Inc. ("Ravix") for aggregate cash consideration of approximately $11.0 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments. The Company will also pay additional contingent consideration, only to the extent earned, in an aggregate amount of up to $4.5 million, which is subject to certain conditions, including the successful achievement of gross profit for Ravix during the three-year period commencing on the first full calendar month following the acquisition date. Ravix, based in San Jose, California, provides outsourced financial services and human resources consulting for short or long duration engagements. Ravix's balance sheet and results of operations will be included in the consolidated financial statements of the Company, beginning with the fourth quarter of 2021.
The acquisition was financed with a combination of debt financing provided by Avidbank, and cash on hand. Ravix Acquisition LLC, a wholly-owned subsidiary of the Company, together with Ravix, borrowed a total of $6.0 million, in the form of a term loan, and established a $1.0 million revolver (together, the "Loan") that was undrawn at close. The Loan has a variable interest rate, with the initial annual interest rate equal to 3.75%. The Loan requires monthly principal and interest payments and the term loan matures on October 1, 2027.
KINGSWAY FINANCIAL SERVICES INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis 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, see Kingsway’s securities filings, including its Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Annual Report"). The Company's securities filings can be accessed on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov, on the Canadian Securities Administrators’ website at www.sedar.com or through the Company’s website at www.kingsway-financial.com. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements because of new information, future events or otherwise.
OVERVIEW
Kingsway is a Delaware 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. Kingsway conducts its business through two reportable segments: Extended Warranty and Leased Real Estate.
Extended Warranty includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS"), Geminus Holding Company, Inc. ("Geminus"), PWI Holdings, Inc. ("PWI"), Professional Warranty Service Corporation ("PWSC") and Trinity Warranty Solutions LLC ("Trinity"). Throughout Management's Discussion and Analysis, the term "Extended Warranty" is used to refer to this segment.
IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in25 states and the District of Columbia to their members.
Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care, Inc. ("Prime"). Penn and Prime distribute these products in 32 and 40 states, respectively, via independent used car dealerships and franchised car dealerships.
PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a white label agreement.
PWSC sells new home warranty products and provides administration services to homebuilders and homeowners across the United States. PWSC distributes its products and services through an in-house sales team and through insurance brokers and insurance carriers throughout all states except Alaska and Louisiana.
Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.
Leased Real Estate includes the Company's subsidiary, CMC Industries, Inc. ("CMC"). CMC owns, through an indirect wholly owned subsidiary (the "Property Owner"), a parcel of real property consisting of approximately 192 acres located in the State of Texas (the "Real Property"), which is subject to a long-term triple net lease agreement. The Real Property is also subject to a mortgage, which is recorded as note payable in the consolidated balance sheets. Throughout Management's Discussion and Analysis, the term "Leased Real Estate" is used to refer to this segment.
Impact of 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 our Extended Warranty segment. Consumer spending was initially impacted, including a decline in the purchase of new and used vehicles, and many businesses through which we distribute our products remained closed or were open but with capacity constraints. 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, we saw an initial reduction in new enrollments in our home warranty programs associated with the impact of COVID-19 on new home sales in the United States.
|
KINGSWAY FINANCIAL SERVICES INC. |
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. We continue to monitor the impact of the COVID-19 outbreak closely. However, the extent to which the COVID-19 outbreak will impact our operations or financial results is uncertain. 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.
NON-U.S. GAAP FINANCIAL MEASURE
Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. Our 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. In addition to the U.S. GAAP presentation of net (loss) income, we present segment operating income as a non-U.S. GAAP financial measure, which we believe is valuable in managing our business and drawing comparisons to our peers. Below is a definition of our non-U.S. GAAP measure and its relationship to U.S. GAAP.
Segment Operating Income
Segment operating income represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from direct segment revenues. Revenues and expenses are presented in the unaudited consolidated statements of operations, but are not subtotaled by segment; however, this information is available in total and by segment in Note 18, "Segmented Information," to the unaudited consolidated interim financial statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure to total segment operating income is loss from continuing operations before income tax benefit that, in addition to segment operating income, includes net investment income, net realized gains (losses), (loss) gain on change in fair value of equity investments, gain on change in fair value of limited liability investments, at fair value, net change in unrealized loss on private company investments, other-than-temporary impairment loss, interest expense not allocated to segments, other revenue and expenses not allocated to segments, net, amortization of intangible assets, (loss) gain on change in fair value of debt and gain on extinguishment of debt not allocated to segments. A reconciliation of total segment operating income to loss from continuing operations before income tax benefit for the three and nine months ended September 30, 2021 and September 30, 2020 is presented in Table 1 of the "Results of Continuing Operations" section of Management's Discussion and Analysis.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES
The preparation of unaudited consolidated interim financial statements in conformity 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 Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The critical accounting policies and judgments 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. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.
The Company’s significant accounting policies and critical estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Annual Report. There has been no material change subsequent to December 31, 2020 to the information previously disclosed in the 2020 Annual Report with respect to these significant accounting policies and critical estimates. The Company has added the following critical accounting policy:
Accounting for Business Combinations:
The acquisition method of accounting is used to account for acquisitions of subsidiaries or other businesses by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. We determine the fair value of such assets and liabilities, often in consultation with third-party valuation advisors. Acquired intangible assets with finite lives are amortized over their estimated useful lives. Adjustments to fair value assessments are recorded to goodwill over the purchase price allocation period.
|
KINGSWAY FINANCIAL SERVICES INC. |
RESULTS OF CONTINUING OPERATIONS
A reconciliation of total segment operating income to net (loss) income for the three and nine months ended September 30, 2021 and September 30, 2020 is presented in Table 1 below:
Table 1 Segment Operating Income
(in thousands of dollars)
|
For the three months ended September 30, |
For the nine months ended September 30, |
|||||||||||||||||||||||
|
2021 |
2020 |
Change |
2021 |
2020 |
Change |
|||||||||||||||||||
|
Segment operating income: |
||||||||||||||||||||||||
|
Extended Warranty |
$ | 1,400 | $ | 1,205 | $ | 195 | $ | 9,310 | $ | 3,340 | $ | 5,970 | ||||||||||||
|
Leased Real Estate |
1,095 | 799 | 296 | 86 | 2,234 | (2,148 | ) | |||||||||||||||||
|
Total segment operating income |
2,495 | 2,004 | 491 | 9,396 | 5,574 | 3,822 | ||||||||||||||||||
|
Net investment income |
389 | 625 | (236 | ) | 1,213 | 2,025 | (812 | ) | ||||||||||||||||
|
Net realized gains (losses) |
159 | (59 | ) | 218 | 397 | 157 | 240 | |||||||||||||||||
|
(Loss) gain on change in fair value of equity investments |
(39 | ) | 1,177 | (1,216 | ) | (235 | ) | 1,069 | (1,304 | ) | ||||||||||||||
|
Gain on change in fair value of limited liability investments, at fair value |
1,211 | 274 | 937 | 1,740 | 2,050 | (310 | ) | |||||||||||||||||
|
Net change in unrealized loss on private company investments |
— | (74 | ) | 74 | — | (744 | ) | 744 | ||||||||||||||||
|
Other-than-temporary impairment loss |
— | — | — | — | (117 | ) | 117 | |||||||||||||||||
|
Interest expense not allocated to segments |
(1,497 | ) | (1,813 | ) | 316 | (4,642 | ) | (5,963 | ) | 1,321 | ||||||||||||||
|
Other revenue and expenses not allocated to segments, net |
(2,556 | ) | (2,462 | ) | (94 | ) | (8,308 | ) | (7,625 | ) | (683 | ) | ||||||||||||
|
Amortization of intangible assets |
(2,432 | ) | (572 | ) | (1,860 | ) | (3,425 | ) | (1,719 | ) | (1,706 | ) | ||||||||||||
|
(Loss) gain on change in fair value of debt |
(412 | ) | (503 | ) | 91 | (2,169 | ) | 1,940 | (4,109 | ) | ||||||||||||||
|
Gain on extinguishment of debt not allocated to segments |
— | — | — | 311 | — | 311 | ||||||||||||||||||
|
Loss from continuing operations before income tax benefit |
(2,682 | ) | (1,403 | ) | (1,279 | ) | (5,722 | ) | (3,353 | ) | (2,369 | ) | ||||||||||||
|
Income tax benefit |
(2,456 | ) | (279 | ) | (2,177 | ) | (6,139 | ) | (409 | ) | (5,730 | ) | ||||||||||||
|
(Loss) income from continuing operations |
(226 | ) | (1,124 | ) | 898 | 417 | (2,944 | ) | 3,361 | |||||||||||||||
|
Gain on disposal of discontinued operations, net of taxes |
— | — | — | — | 6 | (6 | ) | |||||||||||||||||
|
Net (loss) income |
$ | (226 | ) | $ | (1,124 | ) | $ | 898 | $ | 417 | $ | (2,938 | ) | $ | 3,355 | |||||||||
(Loss) Income from Continuing Operations and Net (Loss) Income
During the third quarter of 2021, the Company completed its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWI, which resulted in PWI recording a $3.6 million reduction to deferred service fees that will be amortized over time. As a result, PWI recorded a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue during the three months ended September 30, 2021. Of this amount, $1.4 million relates to the period from acquisition through June 30, 2021 and $0.4 million relates to the period from July 1, 2021 through September 30, 2021.
In the third quarter of 2021, we reported loss from continuing operations of $0.2 million compared to $1.1 million in the third quarter of 2020. The loss from continuing operations for the three months ended September 30, 2021 is primarily due to recording a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting, interest expense not allocated to segments, other revenue and expenses not allocated to segments, net and increased amortization expense as a result of a $1.9 million non-cash, current period cumulative adjustment related to finalizing the PWI purchase accounting, partially offset by operating income in Extended Warranty and Leased Real Estate, gain on change in fair value of limited liability investments, at fair value and income tax benefit. The loss from continuing operations for the three months ended September 30, 2020 is primarily due to interest expense not allocated to segments and other income and expenses not allocated to segments, net, partially offset by operating income in Extended Warranty and Leased Real Estate and gain on change in fair value of equity investments.
|
KINGSWAY FINANCIAL SERVICES INC. |
For the nine months ended September 30, 2021, we reported income from continuing operations of $0.4 million compared to loss from continuing operations of $2.9 million for the nine months ended September 30, 2020. The income from continuing operations for the nine months ended September 30, 2021 is primarily due to operating income in Extended Warranty and Leased Real Estate that was negatively impacted by recording a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service feese as a result of finalizing the purchase accounting, net investment income, gain on change in fair value of limited liability investments, at fair value and income tax benefit, partially offset by interest expense not allocated to segments, other revenue and expenses not allocated to segments, net, increased amortization of intangible assets as a result of a $1.9 million non-cash, current period cumulative adjustment related to finalizing the PWI purchase accounting and loss on change in fair value of debt. 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. See Note 11, "Debt," to the unaudited consolidated interim financial statements, for further discussion. The loss from continuing operations for the nine months ended September 30, 2020 is primarily due to interest expense not allocated to segments and other income and expenses not allocated to segments, net, partially offset by operating income in Extended Warranty and Leased Real Estate, net investment income, gain on change in fair value of equity investments and gain on change in fair value of limited liability investments, at fair value.
Extended Warranty
The Extended Warranty service fee and commission revenue increased 46.7% (or $5.6 million) to $17.6 million for the three months ended September 30, 2021 compared with $12.0 million for the three months ended September 30, 2020 ($55.0 million year to date compared to $33.6 million prior year to date). The increase in service fee and commission revenue is primarily due to the inclusion of PWI for the three and nine months ended September 30, 2021 following its acquisition effective December 1, 2020. PWI service fee and commission revenue was $5.5 million and $20.3 million for the three and nine months ended September 30, 2021, respectively, after recording a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue in the three months ended September 30, 2021 relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting.
The Extended Warranty operating income was $1.4 million for the three months ended September 30, 2021 compared with $1.2 million for the three months ended September 30, 2020 ($9.3 million year to date compared to $3.3 million prior year to date). The 2021 operating income results include a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting.
The increase in operating income is primarily due to the following:
|
• |
Inclusion of Paycheck Protection Program ("PPP") loan forgiveness related to Extended Warranty companies of $2.2 million for the nine months ended September 30, 2021; |
|
• |
A $1.0 million operating loss (operating income of $1.0 million year to date) due to the inclusion of PWI in 2021 following its acquisition effective December 1, 2020. Current year results include a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue relating to the decrease in PWI acquired deferred service fees as a result of finalizing the purchase accounting; |
|
• |
A $0.7 million increase at IWS to $0.8 million for the three months ended September 30, 2021 due to an increase in revenue, a decrease in claims authorized on vehicle service agreements and lower general and administrative expenses compared with the three months ended September 30, 2020 (an increase of $2.1 million year to date to $3.0 million, due to a decrease in claims authorized on vehicle service agreements and lower general and administrative expenses that was partially offset by a decrease in revenue compared with the nine months ended September 30, 2020); |
|
• |
A $0.2 million increase at Trinity to $0.5 million for the three months ended September 30, 2021 driven by increased revenues in its equipment breakdown and maintenance support services, as well as increased revenue and gross profit on the extended warranty services product compared with the three months ended September 30, 2020 (an increase of $0.6 million year to date to $1.1 million, driven by increased revenues, partially offset by a related increase in cost of services sold compared with the nine months ended September 30, 2020); |
|
• |
A less than $0.1 million increase at PWSC to $0.5 million for the three months ended September 30, 2021 (an increase of $1.1 million year to date to $2.0 million, due to an increase in revenue compared with the nine months ended September 30, 2020); and |
|
• |
A $0.3 million increase at Geminus to $0.6 million for the three months ended September 30, 2021 (an increase of $1.1 million year to date to $2.2 million), due to a decrease in claims authorized on vehicle service agreements and lower general and administrative expenses that was partially offset by a decrease in revenue. |
|
KINGSWAY FINANCIAL SERVICES INC. |
Leased Real Estate
Leased Real Estate rental revenue was $3.3 million for each of the three months ended September 30, 2021 and September 30, 2020 ($10.0 million for each of the nine months ended September 30, 2021 and September 30, 2020). The rental income is derived from CMC's long-term triple net lease.
Leased Real Estate operating income was $1.1 million for the three months ended September 30, 2021 compared with $0.8 million for the three months ended September 30, 2020 ($0.1 million year to date compared to $2.2 million prior year to date). The increase in operating income for the three months ended September 30, 2021 is primarily attributable to lower litigation expenses compared to the same period in 2020. The decrease in operating income for the nine months ended September 30, 2021 is primarily the result of a $2.9 million expense recorded during the second quarter of 2021 to write-off an indemnification receivable (which is exactly offset by a tax benefit of $2.9 million in net (loss) income) and management expense of $0.5 million for the nine months ended September 30, 2021 as a result of the March settlement agreement, partially offset by lower litigation expenses and a $0.6 million benefit recorded in 2021 related to the finalization of management fees and legal expenses associated with the settlement of CMC litigation (see Note 21, "Commitments and Contingencies," to the unaudited consolidated interim financial statements, for further information on the settlement) compared to the nine months ended September 30, 2020. Leased Real Estate operating income includes interest expense of $1.6 million and $1.5 million for the three months ended September 30, 2021 and September 30, 2020, respectively ($4.6 million and $4.5 million for the nine months ended September 30, 2021 and September 30, 2020, respectively).
Net Investment Income
Net investment income was $0.4 million in the third quarter of 2021 compared to $0.6 million in the third quarter of 2020 ($1.2 million year to date compared to $2.0 million prior year to date). The decrease in net investment income for the three months ended September 30, 2021 relates primarily to lower investment income from the Company's limited liability investments, at fair value. The decrease in net investment income for the nine months ended September 30, 2021 relates primarily to lower investment income from the Company's limited liability investments, at fair value and fixed maturities as a result of general changes in market conditions.
Net Realized Gains (Losses)
Net realized gains were $0.2 million in the third quarter of 2021 compared to net realized losses of $0.1 million in the third quarter of 2020 (net realized gains of $0.4 million year to date compared to net realized gains of $0.2 million prior year to date). The net realized gains for the three and nine months ended September 30, 2021 primarily relate to realized gains recognized by Argo Holdings Fund I, LLC ("Argo Holdings") and distributions received from one of the Company’s investments in private companies in which its carrying value previously had been written down to zero as a result of prior distributions.
The net realized losses for the three months ended September 30, 2020 primarily relate to loss on the settlement of other investments, partially offset by a gain on the sale of one of the Company's investments in private companies. The net realized gains for the nine months ended September 30, 2020 also include realized gains from sales of fixed maturities and distributions received from one of the Company’s investments in which its carrying value previously had been written down to zero as a result of prior distributions.
(Loss) Gain on Change in Fair Value of Equity Investments
Loss on change in fair value of equity investments was less than $0.1 million in the third quarter of 2021 compared to a gain of $1.2 million in the third quarter of 2020 (loss of $0.2 million year to date compared to a gain of $1.1 million prior year to date). Significant drivers include:
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• |
Unrealized losses of less than $0.1 million and $0.3 million on equity investments held during the three months ended September 30, 2021 and September 30, 2020, respectively (unrealized losses of $0.2 million and $0.4 million, respectively, year to date and prior year to date); and |
|
• |
Net realized gains of zero and $1.5 million on equity investments sold during the three months ended September 30, 2021 and September 30, 2020, respectively (less than $0.1 million and $1.5 million year to date and prior year to date). The net realized gains for the three and nine months ended September 30, 2020 relate to the sale of the Company's shares of Limbach Holdings, Inc. ("Limbach") common stock. During the third quarter of 2020, the Company sold all of its shares of Limbach common stock for cash proceeds totaling $3.2 million.
|
Gain on Change in Fair Value of Limited Liability Investments, at Fair Value
Gain on change in fair value of limited liability investments, at fair value was $1.2 million in the third quarter of 2021 compared to $0.3 million in the third quarter of 2020 ($1.7 million year to date compared to $2.1 million prior year to date). The gain for the three months ended September 30, 2021 represents an increase in fair value of $0.8 million related to Net Lease Investment Grade Portfolio LLC ("Net Lease") due to net cash proceeds received in excess of the carrying value from the sale of one of the properties and a reduction in debt at one of the underlying LLC's, and an increase in fair value of $0.4 million related to Argo Holdings. The gain for the three months ended September 30, 2020 represents an increase in fair value of $0.6 million related to Net Lease, partially offset by a decrease in fair value of $0.3 million related to Argo Holdings.
The gain for the nine months ended September 30, 2021 represent increases in fair value of $1.2 million related to Net Lease and $0.5 million related to Argo Holdings. The gain for the nine months ended September 30, 2020 represents an increase in fair value of $2.5 million related to Net Lease, partially offset by a decrease in fair value of $0.5 million related to Argo Holdings.
Net Change in Unrealized Loss on Private Company Investments
Net change in unrealized loss on private company investments was zero in the third quarter of 2021 compared with $0.1 million in the third quarter of 2020 (zero year to date compared to $0.7 million prior year to date). 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. Also, as part of the Company’s quarterly impairment analysis of its investments in private companies, the Company determined it should write down two of its investments for other-than-temporary impairment of zero million and $0.7 million for the three and nine months ended September 30, 2020, respectively, as a result of the impacts of COVID-19 on the investments' underlying business.
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KINGSWAY FINANCIAL SERVICES INC. |
Interest Expense not Allocated to Segments
Interest expense not allocated to segments for the third quarter of 2021 was $1.5 million compared to $1.8 million in the third quarter of 2020 ($4.6 million year to date compared to $6.0 million prior year to date). The decrease for the three and nine months ended September 30, 2021 is primarily attributable to lower interest expense at Net Lease as a result of repaying their existing financing during the first quarter of 2021, as well as lower interest expense related to the Company’s subordinated debt, which resulted from generally lower London interbank offered interest rates for three-month U.S. dollar deposits ("LIBOR") during the three and nine months ended September 30, 2021 compared to the same periods in 2020. The Company's subordinated debt bears interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. See "Debt" section below for further details.
Other Revenue and Expenses not Allocated to Segments, Net
Other revenue and expenses not allocated to segments, net was a net expense of $2.6 million in the third quarter of 2021 compared to $2.5 million in the third quarter of 2020 ($8.3 million year to date compared to $7.6 million prior year to date).
The increase in net expense for the three months ended September 30, 2021 is primarily attributable higher expense related to restricted stock awards, partially offset by a decrease in audit professional services fees incurred during the three months ended September 30, 2021 compared to the same period in 2020.
The increase in net expense for the nine months ended September 30, 2021 is primarily attributable higher expense related to restricted stock awards, partially offset by a $1.2 million decrease in expense recorded pursuant to outstanding litigation between the Company and Aegis Security Insurance Company ("Aegis") and a decrease in audit professional services fees incurred during the nine months ended September 30, 2021 compared to the same period in 2020.
See Note 21, "Commitments and Contingencies," to the unaudited consolidated interim financial statements, for further discussion related to Aegis.
Amortization of Intangible Assets
Amortization of intangible assets was $2.4 million in the third quarter of 2021 compared to $0.6 million in the third quarter of 2020 ($3.4 million year to date compared to $1.7 million prior year to date). The higher amortization expense for the three and nine months ended September 30, 2021 is related to amortization of intangible assets recorded in conjunction with the Company's acquisition of PWI effective December 1, 2020. During the third quarter of 2021, the Company finalized its fair value analysis of the assets acquired and liabilities assumed in its acquisition of PWI, which resulted in the Company recording (i) $1.3 million of amortization expense during the third quarter of 2021 for the period from the date of acquisition through June 30, 2021 and (ii) $0.6 million of amortization expense during the third quarter of 2021 for the period July 1, 2021 through September 30, 2021 related to the intangible assets identified. See Note 5, "Acquisition," to the unaudited consolidated interim financial statements for further details on the Company’s acquisition of PWI.
(Loss) Gain on Change in Fair Value of Debt
Loss on change in fair value of debt was $0.4 million in the third quarter of 2021 compared to $0.5 million in the third quarter of 2020 (loss of $2.2 million year to date compared to a gain of $1.9 million prior year to date). The loss for the three and nine months ended September 30, 2021 and the three months ended September 30, 2020 reflect increases in the fair value of the subordinated debt resulting from changes in inputs, other than the instrument-specific credit risk, to the Company’s fair value model which was primarily the result of decreases in the risk-free rate and lower overall LIBOR rates. The gain for the nine months ended September 30, 2020 reflects a decrease in the fair value of the subordinated debt resulting from changes in inputs, other than the instrument-specific credit risk, to the Company’s fair value model which were primarily a result of lower overall LIBOR rates. See "Debt" section below for further information.
Gain on Extinguishment of Debt not Allocated to Segments
For the nine months ended September 30, 2021, gain on extinguishment of debt not allocated to segments consists of a $0.3 million gain (recorded in the first quarter) on forgiveness of the balance of the holding company's loan obtained through the PPP. See Note 11, "Debt," to the unaudited consolidated interim financial statements, for further discussion.
Income Tax Benefit
Income tax benefit for the third quarter of 2021 was $2.5 million compared to $0.3 million in the third quarter of 2020 ($6.1 million year to date compared to $0.4 million prior year to date). During the three months ended September 30, 2021, the Company released into income $3.3 million of its deferred income tax asset valuation allowance, as a result of its acquisition of PWI, due to net deferred income tax liabilities that are expected to reverse during the period in which the Company will have deferred income tax assets available. During the nine months ended September 30, 2021, the Company recorded an income tax benefit of $2.8 million for the release of a liability that had been included in income taxes payable in the consolidated balance sheets. See Note 14, "Income Taxes," to the unaudited consolidated interim financial statements, for additional detail of the income tax benefit recorded for the three and nine months ended September 30, 2021 and September 30, 2020.
|
KINGSWAY FINANCIAL SERVICES INC. |
INVESTMENTS
Portfolio Composition
The following is an overview of how we account for our various investments:
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• |
Investments in fixed maturities are classified as available-for-sale and are reported at fair value. |
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• |
Equity investments are reported at fair value. |
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• |
Limited liability investments are accounted for under the equity method of accounting. The most recently available financial statements of the limited liability investments are used in applying the equity method. The difference between the end of the reporting period of the limited liability investments and that of the Company is no more than three months. |
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• |
Limited liability investments, at fair value represent the underlying investments of the Company’s consolidated entities Net Lease and Argo Holdings. The difference between the end of the reporting period of the limited liability investments, at fair value and that of the Company is no more than three months. |
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• |
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. These investments do not have readily determinable fair values and, therefore, are reported at cost, adjusted for observable price changes and impairments. |
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• |
Real estate investments are reported at fair value. |
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Other investments include collateral loans and are reported at their unpaid principal balance. |
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Short-term investments, which consist of investments with original maturities between three months and one year, are reported at cost, which approximates fair value. |
At September 30, 2021, we held cash and cash equivalents, restricted cash and investments with a carrying value of $104.1 million.
Investments held by our insurance subsidiary, Kingsway Amigo Insurance Company ("Amigo"), must comply with domiciliary state regulations that prescribe the type, quality and concentration of investments. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations.
Table 2 below summarizes the carrying value of investments, including cash and cash equivalents and restricted cash, at the dates indicated.
TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cash
(in thousands of dollars, except for percentages)
|
Type of investment |
September 30, 2021 |
% of Total |
December 31, 2020 |
% of Total |
||||||||||||
|
Fixed maturities: |
||||||||||||||||
|
U.S. government, government agencies and authorities |
15,247 | 14.7 | % | 10,104 | 8.8 | % | ||||||||||
|
States, municipalities and political subdivisions |
1,584 | 1.5 | % | 1,454 | 1.3 | % | ||||||||||
|
Mortgage-backed |
8,150 | 7.8 | % | 5,394 | 4.7 | % | ||||||||||
|
Asset-backed |
253 | 0.2 | % | — | — | % | ||||||||||
|
Corporate |
9,105 | 8.7 | % | 3,764 | 3.3 | % | ||||||||||
|
Total fixed maturities |
34,339 | 32.9 | % | 20,716 | 18.1 | % | ||||||||||
|
Equity investments: |
||||||||||||||||
|
Common stock |
187 | 0.2 | % | 155 | 0.1 | % | ||||||||||
|
Warrants |
— | — | % | 289 | 0.3 | % | ||||||||||
|
Total equity investments |
187 | 0.2 | % | 444 | 0.4 | % | ||||||||||
|
Limited liability investments |
3,235 | 3.1 | % | 3,692 | 3.2 | % | ||||||||||
|
Limited liability investments, at fair value |
18,180 | 17.5 | % | 32,811 | 28.7 | % | ||||||||||
|
Investments in private companies |
790 | 0.8 | % | 790 | 0.7 | % | ||||||||||
|
Real estate investments |
10,662 | 10.2 | % | 10,662 | 9.3 | % | ||||||||||
|
Other investments |
272 | 0.3 | % | 294 | 0.2 | % | ||||||||||
|
Short-term investments |
157 | 0.2 | % | 157 | 0.1 | % | ||||||||||
|
Total investments |
67,822 | 65.2 | % | 69,566 | 60.7 | % | ||||||||||
|
Cash and cash equivalents |
18,139 | 17.4 | % | 14,374 | 12.6 | % | ||||||||||
|
Restricted cash |
18,140 | 17.4 | % | 30,571 | 26.7 | % | ||||||||||
|
Total |
104,101 | 100.0 | % | 114,511 | 100.0 | % | ||||||||||
Other-Than-Temporary Impairment
The Company performs a quarterly analysis of its investments classified as available-for-sale to determine if declines in market value are other-than-temporary. Further information regarding our detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within the "Significant Accounting Policies and Critical Estimates" section of Management's Discussion and Analysis of Financial Condition included in the 2020 Annual Report.
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KINGSWAY FINANCIAL SERVICES INC. |
As a result of the analysis performed, the Company recorded the following write downs for other-than-temporary impairment:
|
• |
Other investments: zero for the three months ended September 30, 2021 and September 30, 2020 (zero and $0.1 million for the nine months ended September 30, 2021 and September 30, 2020, respectively). |
|
• |
Limited liability investments, at fair value: less than $0.1 million and $0.1 million for the three months ended September 30, 2021 and September 30, 2020, respectively ($0.1 million and $0.1 million for the nine months ended September 30, 2021 and September 30, 2020, respectively), which are included in gain on change in fair value of limited liability investments, at fair value in the consolidated statements of operations. |
|
• |
Investments in private companies: zero and $0.1 million for the three months ended September 30, 2021 and September 30, 2020, respectively (zero and $0.7 million for the nine months ended September 30, 2021 and September 30, 2020, respectively), which are included in net change in unrealized loss on private company investments in the consolidated statements of operations. |
There were no write-downs recorded for other-than-temporary impairments related to available-for sale investments or limited liability investments for the three and nine months ended September 30, 2021 and September 30, 2020.
The length of time a fixed maturity investment may be held in an unrealized loss position may vary based on the opinion of the investment manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In the case of a fixed maturity investment where the investment manager determines that there is little or no risk of default prior to the maturity of a holding, we would elect to hold the investment in an unrealized loss position until the price recovers or the investment matures. In situations where facts emerge that might increase the risk associated with recapture of principal, the Company may elect to sell a fixed maturity investment at a loss.
At September 30, 2021 and December 31, 2020, the gross unrealized losses for fixed maturities amounted to $0.1 million and less than $0.1 million, respectively, and there were no unrealized losses attributable to non-investment grade fixed maturities. At each of September 30, 2021 and December 31, 2020, all unrealized losses on individual investments were considered temporary.
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.
DEBT
Bank Loans
On October 12, 2017, the Company borrowed a principal amount of $5.0 million from a bank to partially finance its acquisition of PWSC (the "PWSC Loan"). The PWSC Loan was scheduled to mature on October 12, 2022; however, the principal was fully repaid on January 30, 2020.
In 2019, the Company formed KWH, whose subsidiaries include IWS, Geminus and Trinity. On March 1, 2019, KWH borrowed a principal amount of $10.0 million from a bank to finance its acquisition of Geminus (the "2019 KWH Loan"). The 2019 KWH Loan had an annual interest rate equal to LIBOR, having a floor of 2.00%, plus 9.25%. The 2019 KWH Loan was scheduled to mature on March 1, 2024; however, the principal was fully repaid on December 1, 2020.
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 to partially finance its acquisition of PWI and to fully repay the prior outstanding loan at KWH (the "2020 KWH Loan"). The 2020 KWH Loan has an annual interest rate equal to LIBOR, having a floor of 0.75%, plus 3.00% and 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 2020 KWH Loan matures on December 1, 2025. See Note 11, "Debt," to the unaudited consolidated interim financial statements for further details.
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.
Notes Payable
As part of its acquisition of CMC in July 2016, the Company assumed a mortgage ("the Mortgage") and recorded the Mortgage 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.
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," to the unaudited consolidated interim financial statements for further discussion of the CMC litigation settlement agreement. The Additional Mortgage matures on May 15, 2034 and has a fixed interest rate of 3.20%. 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. See Note 11, "Debt," to the unaudited consolidated interim financial statements for further details.
On January 5, 2015, Flower Portfolio 001, LLC assumed a $9.2 million mortgage in conjunction with the purchase of investment real estate properties ("the Flower Note"). The Flower Note matures on December 10, 2031 and has a fixed interest rate of 4.81%. The Flower Note is carried in the consolidated balance sheets at its unpaid principal balance.
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KINGSWAY FINANCIAL SERVICES INC. |
On October 15, 2015, Net Lease assumed a $9.0 million mezzanine debt in conjunction with the purchase of investment real estate properties ("the Net Lease Note"). The Net Lease Note matured on November 1, 2020 and had a fixed interest rate of 10.25%. The Net Lease Note is carried in the consolidated balance sheet at December 31, 2020 at its unpaid principal balance. 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.
In April 2020, certain subsidiaries of the Company received loan proceeds under the PPP, totaling $2.9 million with a stated annual interest rate of 1.00%. The PPP, established as part of the CARES 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 we were to be audited and receive an adverse outcome in such an audit, we 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 represents its unpaid principal balance.
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 Kingsway America Inc. 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.
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 our 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.
The Company's subordinated debt is measured and reported at fair value. At September 30, 2021, the carrying value of the subordinated debt is $59.6 million. The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. For a description of the market observable inputs and inputs developed by a third party used in determining fair value of debt, see Note 19, "Fair Value of Financial Instruments," to the unaudited consolidated interim financial statements.
During the nine months ended September 30, 2021, the market observable swap rates changed, and the Company experienced a decrease in the credit spread assumption developed by the third-party. Changes in the market observable swap rates affect the fair value model in different ways. An increase in the LIBOR swap rates has the effect of increasing the fair value of the Company's subordinated debt while an increase in the risk-free swap rates has the effect of decreasing the fair value. The increase in the credit spread assumption has the effect of decreasing the fair value of the Company's subordinated debt while a decrease in the credit spread assumption has the effect of increasing the fair value. The other primary variable affecting the fair value of debt calculation is the passage of time, which will always have the effect of increasing the fair value of debt. The changes to the credit spread and swap rate variables during the nine months ended September 30, 2021, along with the passage of time, contributed to the $8.7 million increase in fair value of the Company’s subordinated debt between December 31, 2020 and September 30, 2021.
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 unaudited consolidated statements of comprehensive (loss) income and $2.2 million is reported as loss on change in fair value of debt in the Company’s unaudited consolidated statements of operations.
Though changes in the market observable swap rates will continue to introduce some volatility each quarter to the Company’s reported gain or loss on change in fair value of debt, changes in the credit spread assumption developed by the third party does not introduce volatility to the Company’s consolidated statements of operations. The fair value of the Company’s subordinated debt will eventually equal the principal value totaling $90.5 million of the subordinated debt by the time of the stated redemption date of each trust, beginning with the trust maturing on December 4, 2032 and continuing through January 8, 2034, the redemption date of the last of the Company’s outstanding trusts.
For a description of each of the Company's six subsidiary trusts, see Note 11, "Debt", to the unaudited consolidated interim financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
SeeNote 4, "Recently Issued Accounting Standards," to the unaudited consolidated interim financial statements, for discussion of certain accounting standards that may be applicable to the Company's current and future consolidated financial statements.
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KINGSWAY FINANCIAL SERVICES INC. |
LIQUIDITY AND CAPITAL RESOURCES
The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations, capital raising, disposal of discontinued operations, investment maturities and income and other returns received on investments or from the sale of investments. Cash provided from these sources is used primarily for making investments and for warranty expenses and loss and loss adjustment expense payments, debt servicing and other operating expenses. The timing and amount of payments for loss and loss adjustment expenses may differ materially from our provisions for unpaid loss and loss adjustment expenses, which may create increased liquidity requirements.
Cash Flows
During the nine months ended September 30, 2021, the Company reported $8.0 million of net cash used in operating activities, primarily due to $10.6 million prepaid management fees recorded during the second quarter of 2021. The $10.6 million was only paid because of the gross proceeds received under the Additional Mortgage (see explanation of cash provided by financing activities below), of which the Company retained $2.7 million.
During the nine months ended September 30, 2021, the net cash provided by investing activities was $2.7 million. This source of cash was primarily attributed to distributions received by Net Lease from two of its limited liability investment companies of $16.3 million during 2021, partially offset by purchases of fixed maturities in excess of proceeds from sales and maturities of fixed maturities.
During the nine months ended September 30, 2021, the net cash used in financing activities was $3.3 million. This use of cash was primarily attributed to principal repayment on bank loan of $3.1 million, principal repayments of $12.6 million on the notes payable, of which $9.0 million relates to the repayment of Net Lease's $9.0 million mezzanine loan and $3.6 million relating to principal paydowns on the Mortgage, Additional Mortgage and the Flower Note and distributions to noncontrolling interest holders of $2.1 million; partially offset by net proceeds from notes payable of $13.3 million related to the Additional Mortgage and proceeds from the exercise of warrants of $1.8 million.
Receipt of dividends from the Company's insurance subsidiaries has not generally been considered a source of liquidity for the holding company. The insurance subsidiaries have required regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. At September 30, 2021, Amigo was restricted from making any dividend payments to the holding company without regulatory approval pursuant to domiciliary insurance regulations.
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 revenue.
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; 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, as further described below; 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.
On December 1, 2020, the Company closed on the acquisition of PWI, a full-service provider of vehicle service agreements. Related to the PWI acquisition, the Company secured the 2020 KWH Loan with IWS, Trinity, Geminus and PWI as borrowers under the 2020 KWH Loan. Pursuant to satisfying the covenants under the 2020 KWH Loan, IWS, Trinity, Geminus and PWI are permitted to make distributions to the holding company in an aggregate amount not to exceed $1.5 million in any 12-month period (which is the same amount as under the predecessor loan).
Separately, pursuant to covenants under the PWSC Loan secured to partially finance the acquisition of PWSC on October 12, 2017, PWSC was not permitted to make distributions to the holding company without the consent of the lender. The PWSC Loan was scheduled to mature on October 12, 2022; however, the remaining principal totaling $0.3 million was fully repaid on January 30, 2020 and, as such, PWSC is no longer subject to such restrictions.
Historically, dividends from the Leased Real Estate segment were not generally considered a source of liquidity for the holding company. However, as more fully described in Note 21, "Commitments and Contingencies," to the unaudited consolidated interim financial statements, 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," to the unaudited consolidated interim financial statements, for further information about this borrowing.
On July 16, 2018, the Company announced it had entered into a definitive agreement to sell its non-standard automobile insurance companies Mendota Insurance Company, Mendakota Insurance Company and Mendakota Casualty Company (collectively "Mendota"). On October 18, 2018, the Company completed the previously announced sale of Mendota. As part of the transaction, the Company will indemnify the buyer for any loss and loss adjustment expenses with respect to open claims and certain specified claims in excess of Mendota's carried unpaid loss and loss adjustment expenses at June 30, 2018. The maximum obligation to the Company with respect to the open claims is $2.5 million. Per the purchase agreement, a security interest on the Company’s equity interest in its consolidated subsidiary, Net Lease, as well as any distributions to the Company from Net Lease, was to be collateral for the Company’s payment of obligations with respect to the open claims. During the third quarter of 2021, the purchasers of Mendota and the Company agreed to release the Company's equity interest in Net Lease as collateral and allow Net Lease to make distributions to the Company. In exchange, the Company agreed to deposit $2.0 million into an escrow account and advance $0.5 million to the purchaser of Mendota to satisfy the Company's payment obligation with respect to the open claims. There is no maximum obligation to the Company with respect to the specified claims.
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.
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KINGSWAY FINANCIAL SERVICES INC. |
The holding company’s liquidity at September 30, 2021 represents only actual cash on hand and does not include cash that would be made available to the holding company from the sale of investments owned by the holding company. In addition, the holding company has access to some of the operating cash generated by the Extended Warranty subsidiaries as described above. While these sources do not represent cash of the holding company, they do represent future sources of liquidity.
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 the 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.
Regulatory Capital
In the United States, a risk-based capital ("RBC") formula is used by the National Association of Insurance Commissioners ("NAIC") to identify property and casualty insurance companies that may not be adequately capitalized. In general, insurers reporting surplus as regards policyholders below 200% of the authorized control level, as defined by the NAIC, at December 31 are subject to varying levels of regulatory action, including discontinuation of operations. As of December 31, 2020, surplus as regards policyholders reported by Amigo exceeded the 200% threshold.
During the fourth quarter of 2012, the Company began taking steps to place all of Amigo into voluntary run-off. In April 2013, Kingsway filed a comprehensive run-off plan with the Florida Office of Insurance Regulation, which outlines plans for Amigo's run-off. Amigo remains in compliance with that plan.
Kingsway Reinsurance Corporation ("Kingsway Re"), our reinsurance subsidiary domiciled in Barbados, is required by the regulator in Barbados to maintain minimum statutory capital of $125,000. Kingsway Re is currently operating with statutory capital near the regulatory minimum, requiring us to periodically contribute capital to fund operating expenses. Kingsway Re incurs operating expenses of approximately $0.1 million per year.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has off-balance sheet arrangements related to guarantees, which are further described in Note 21, "Commitments and Contingencies," to the unaudited consolidated interim financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); therefore, pursuant to Regulation S-K, we are not required to make disclosures under this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2021. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, the Company’s management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints that require the Company’s management to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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KINGSWAY FINANCIAL SERVICES INC. |
Based on the evaluation of our disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2021, the Company’s disclosure controls and procedures were not effective as a result of unremediated material weaknesses in the Company's internal control over financial reporting that were discovered during the course of the 2018 external audit of the accounts, relating to the accounting for and disclosure of certain complex and nonrecurring transactions; monitoring the collectability of accounts receivable balances; and certain account reconciliations; as well as the result of a material weakness in the Company's internal control over financial reporting that was discovered during the course of the 2019 external audit of the accounts, relating to the accounting for certain investments at fair value (collectively, "Identified Material Weaknesses"). Not all material weaknesses necessarily present the same risks from period to period as a result of differing events and transactions which have occurred or may occur in current and future periods.
Material Weaknesses in Internal Control over Financial Reporting
A material weakness is defined as a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
With respect to the inadequate design accounting for and operation of internal disclosure of certain complex and nonrecurring transactions, the execution of the controls over the application of accounting literature did not operate effectively with respect to:
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the reclassification of investment income, related to the accounting for equity method investments, from loss from discontinued operations, net of taxes to net investment income in the consolidated statement of operations; |
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the identification, accounting and disclosure of investments demonstrating characteristics of variable interest entities, including the consolidation of certain investments; |
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the adoption and application of ASU 2014-09; |
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identification, disclosure and accounting for equity-classified warrants; and |
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purchase accounting, as it relates to the identification and valuation of intangible assets and goodwill. |
Regarding the collectability of accounts receivable balances, the Company did not have adequate controls and procedures with respect to evaluating balances for collectability, including the lack of a formal policy governing the review of accounts, as well as calculating and documenting necessary reserves.
With respect to the lack of adequate procedures regarding certain account reconciliations, there were errors in the reconciliation of account balances as they were not performed timely and/or at a level of precision to identify errors and incorrect balance sheet and income statement classification for certain cash, receivable, deposit, accounts payable, deferred revenue, escheat liability and investment income accounts.
Finally, with respect to the accounting for certain investments at fair value, the Company did not properly update the fair value of certain limited liability investments, at fair value as of December 31, 2019.
These matters were discovered during the course of the external audits of the accounts and were reviewed with the Company's Audit Committee. Certain of the 2018 material weaknesses resulted in the restatement described in Note 3, "Restatement of Previously Issued Financial Statements," to the Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 27, 2020.
As a result of the Identified Material Weaknesses, the Company’s management directed a comprehensive review of its consolidated financial statements to assess the possibility of further material misstatements that may remain unidentified. As a result of such review, and notwithstanding the material weaknesses described above, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, believes that the unaudited consolidated financial statements contained in this Form 10-Q for the three and nine months ended September 30, 2021 and September 30, 2020 fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
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KINGSWAY FINANCIAL SERVICES INC. |
Remediation Process
The Company has been evaluating the material weaknesses and is in process of executing its plan to strengthen the effectiveness of the design and operation of its internal control environment. The remediation plan includes the following actions:
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Perform a comprehensive assessment of all existing accounting policies and revise existing policies and/or introduce new policies, as needed; |
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Enhance the formality of its review procedures with respect to its accounting for any new investments, as well as the periodic evaluation of existing investments; |
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Implement additional review procedures with respect to its accounting under ASC 606 to ensure the Company’s accounting will continue to be in accordance with that standard on a go-forward basis; |
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Implement additional identification, accounting and review controls with respect to complex and nonrecurring transactions, as well as augment existing staff with outside skilled accounting resources, as appropriate, and strengthen the review process to improve the operation of financial reporting and corresponding internal controls; |
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Enhance the formality and rigor of review with respect to the collectability of accounts receivable balances and the account reconciliation procedures; |
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Update its policy for accounting for limited liability investments, at fair value to include calculating and reviewing the fair value of such investments on a quarterly basis. |
The actions that the Company is taking are subject to ongoing senior management review as well as Audit Committee oversight. The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in its controls.
The Company has started to implement these steps but notes that a substantial portion of resources during 2020 were dedicated to getting the Company current on its SEC filings; however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the Identified Material Weaknesses described above will continue to exist.
The Company has enhanced and revised the design of its controls and procedures over its accounting for and disclosure of restricted cash and cash and cash equivalents on the consolidated balance sheets, the disclosure of related parties and the application of accounting literature when determining other-than-temporary impairment on equity method investments over the past several quarters. These enhancements include introducing additional review procedures and formalizing certain documentation processes. As a result of these enhanced and revised controls and procedures, the Company believes that the following material weaknesses have been remediated as of September 30, 2021: accounting for and disclosure of restricted cash and cash and cash equivalents on the consolidated balance sheets, the disclosure of related parties; and the application of accounting literature when determining other-than-temporary impairment on equity method investments.
Changes in Internal Control over Financial Reporting
Other than processes and controls that may have been put in place as a result of our remediation of the identified material weaknesses in internal control over financial reporting, there have been no changes in the Company's internal control over financial reporting during the period beginning July 1, 2021, and ending September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Information concerning pending legal proceedings is incorporated herein by reference to Note 21, "Commitments and Contingencies," to the unaudited consolidated interim financial statements in Part I of this Form 10-Q.
There have been no material changes with respect to those risk factors previously disclosed in our 2020 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
None
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KINGSWAY FINANCIAL SERVICES INC. |
| 4.7 | Second Amended and Restated Kingsway Financial Services Inc. Common Stock Series B Warrant Agreement | |
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS |
Inline XBRL Instance Document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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KINGSWAY FINANCIAL SERVICES INC. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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KINGSWAY FINANCIAL SERVICES INC. |
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Date: |
November 5, 2021 |
By: |
/s/ John T. Fitzgerald |
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John T. Fitzgerald, President, Chief Executive Officer and Director |
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(principal executive officer) |
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Date: |
November 5, 2021 |
By: |
/s/ Kent A. Hansen |
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Kent A. Hansen, Chief Financial Officer and Executive Vice President |
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(principal financial officer) |
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EXHIBIT 4.7
SECOND AMENDED AND RESTATED
KINGSWAY FINANCIAL SERVICES INC.
COMMON STOCK SERIES B WARRANT AGREEMENT
This Second Amended and Restated Common Stock Warrant Agreement (this “Agreement”), dated as of __________ ____, 2021, between Kingsway Financial Services Inc., a Delaware corporation (the “Company”), Computershare Inc., a Delaware corporation (“Co-Agent”), and its wholly owned subsidiary, Computershare Trust Company, N.A., a federally chartered trust company (collectively, and together with any successor appointed pursuant to the terms of this Agreement, the “Warrant Agent”).
WHEREAS, the Company previously entered in to a Common Stock Series B Warrant Agreement with Computershare Trust Company of Canada on September 16, 2013 (the “Original Agreement”), whereby Computershare Trust Company of Canada acted as Warrant Agent and Computershare Inc. acted as Co-Agent;
WHEREAS, the Company previously issued warrants (each a “Warrant” and collectively, the “Warrants”) initially exercisable to purchase one share of the common stock of the Company, no par value per share (each, a “Common Share”) pursuant to the Original Agreement;
WHEREAS, the Warrants were issued in connection with a rights offering by the Company (the “Offering”) in which the Company offered transferable subscription rights (the “Subscription Rights”) entitling the holders thereof to purchase units (“Units”), each consisting of one Common Share and one Series A Warrant (as defined below) and one Series B Warrant (as defined below), each to purchase one Common Share per each Warrant;
WHEREAS, the exercise price for one series of the Warrants (the “Series A Warrants”) is the greater of US$4.50 and 120% of the volume weighted average price of the Common Shares (“VWAP”) over the twenty trading day period on the NYSE ending on the trading day prior to the issuance date of the Series A Warrants, and the exercise price of the second series of Warrants (the “Series B Warrants”) is the greater of US$5.00 and 120% of the VWAP over the twenty trading day period on the NYSE ending on the trading day prior to the issuance date of the Series B Warrants;
WHEREAS, the Company entered into an Amended and Restated Common Stock Series B Warrant Agreement with Computershare Trust Company of Canada on July 8, 2014 (the “Existing Agreement”);
WHEREAS, effective December 31, 2018, the Company changed its jurisdiction of incorporation from the province of Ontario, Canada to the State of Delaware, U.S.A. (the “Domestication”);
WHEREAS, as a result of the Domestication, Computershare Trust Company of Canada delivered a letter of resignation as Warrant Agent;
WHEREAS, the Company and the Warrant Agent now desire (i) to amend and restate the Existing Agreement to replace Computershare Trust Company of Canada as the Warrant Agent and to make certain additional clarifying changes necessary to reflect the Domestication and (ii) the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, registration, transfer, exchange, exercise and cancellation of the Series B Warrants and other matters as expressly provided herein.
The foregoing recitals are made as representations and statements of fact by the Company and not by the Warrant Agent;
NOW THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 Definition of Terms. As used in this Agreement, the following capitalized terms shall have the following respective meanings:
(a) “Applicable Securities Laws” shall mean the Securities Act, the Exchange Act (as defined below), applicable U.S. state securities laws and the securities laws of applicable Canadian provinces and territories;
(b) “Authenticated” means (a) with respect to the issuance of a Warrant Certificate (as defined in this Agreement), one which has been duly signed by the Company and authenticated by manual or facsimile signature of an authorized officer of the Warrant Agent, (b) with respect to the issuance of an Uncertificated Warrant (as defined below), one in respect of which the Warrant Agent has completed all Internal Procedures (as defined below) such that the particulars of such Uncertificated Warrant as required by Section 3.2 are entered in the register of holders of Series B Warrants, “Authenticate”, “Authenticating” and “Authentication” have the appropriate correlative meanings;
(c) “Beneficial Holder” shall mean any person or entity that holds beneficial interests in a Warrant Certificate (as defined in this Agreement) or an Uncertificated Warrant;
(d) “Business Day” shall mean day other than a Saturday, Sunday or other day on which banks in the State of New York are authorized by law to remain closed;
(e) “Certificated Warrant” means a Series B Warrant evidenced by a writing or writings substantially in the form of Schedule “A” attached hereto;
(f) “Clearing Agency” means CDS Clearing and Depository Services Inc., its successors and permitted assigns (“CDS”), the Depository Trust Company or any other organization registered as a “clearing agency” pursuant to the Section 17A of the Securities Exchange Act of 1934, as amended, or any of the foregoing, as the context may require, all as may be designated by the Company from time to time;
(g) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended;
(h) “Expiration Date” shall mean 5:00 p.m., Eastern time, on September 15, 2023 or such earlier date as may be specified by the Company, or if such day is not a Business Day, the next succeeding day which is a Business Day;
(i) “Internal Procedures” means procedures internal to the Warrant Agent necessary to carry out its duties as warrant agent under this Agreement;
(j) “Participant” means a broker, dealer, bank or other financial institution or other person who maintains an account for clearing and holding securities, including Series B Warrants, with a Clearing Agency and on whose behalf a Clearing Agency or its nominee holds Series B Warrant;
(k) “Person” shall mean any individual, partnership, joint venture, limited liability company, firm, corporation, unincorporated association or organization, trust or other entity, and shall include any successor (by merger or otherwise) of any such Person.
(l) “SEC” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act or the Exchange Act;
(m) “Uncertificated Warrant” means any Series B Warrant which is not a Certificated Warrant;
(n) “Warrant Shares” shall mean Common Shares and any other securities purchased or purchasable upon exercise of the Series B Warrants (and, if the context requires, securities which may thereafter be issued by the Company in respect of any such securities so purchased, by means of any subdivisions or combinations of its capital stock, or recapitalizations, reclassifications or the like); and
(o) “Warrantholders”, “Holders” or “holders” means the persons for the time being entered in a register of holders described in Section 3.3(f) hereof as holders of Series B Warrants.
ARTICLE II.
APPOINTMENT OF WARRANT AGENT
Section 2.1 Appointment. The Company hereby appoints the Warrant Agent to act as agent for the Company for the Series B Warrants in accordance with the express terms and conditions hereinafter set forth in this Agreement, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with such terms and conditions.
ARTICLE III.
WARRANTS
Section 3.1 Issuance of Warrants. The Series B Warrants were originally issued on the terms and subject to the conditions of the Original Agreement, as amended by the Existing Agreement and this Agreement, on September 16, 2013 (the “Issue Date”) in the amounts and to the Holders determined pursuant to the terms of the Offering. The maximum number of Warrant Shares issuable pursuant to the Series B Warrants shall be 3,287,242 Common Shares, as such amount may be adjusted from time to time pursuant to this Agreement. All Series B Warrants will rank pari passu, whatever may be the actual dates of the issuance thereof
Section 3.2 Form of Warrant.
(a) The Series B Warrants may be issued in both certificated and uncertificated form. All Series B Warrants issued in certificated form shall be evidenced by a warrant certificate (including all replacements issued in accordance with this Agreement), substantially in the form attached hereto as Schedule “A” or in such other form as may be approved by the Company and the Warrant Agent (a “Warrant Certificate”), which shall be dated as of the Issue Date, shall bear such distinguishing letters, numbers and legends as the Company may, with the approval of the Warrant Agent, prescribe, and shall be issuable in any whole number denomination. Such distinguishing letters, numbers and legends shall not be inconsistent with the provisions of this Agreement and shall not affect the rights, duties, liabilities or responsibilities of the Warrant Agent. Series B Warrants issued to the Clearing Agency may be in uncertificated form and shall be evidenced on the register of Warrantholders to be maintained by the Warrant Agent.
(b) Each Warrant Certificate may be engraved, lithographed or printed (the expression “printed” including for purposes hereof both original typewritten material as well as mimeographed, mechanically, photographically, photostatically or electronically reproduced, typewritten or other written material), or partly in one form and partly in another, as the Company may determine.
Section 3.3 Execution of Warrant Certificates.
(a) The Warrant Certificates shall be signed on behalf of the Company by its Chief Executive Officer, its President or any Executive Vice President (each, an “Appropriate Officer”). Each such signature upon the Warrant Certificates may be in the form of a facsimile signature of any such Appropriate Officer and may be imprinted or otherwise reproduced on the Warrant Certificates and for that purpose the Company may adopt and use the facsimile signature of any Appropriate Officer.
(b) If any Appropriate Officer who shall have signed any of the Warrant Certificates shall cease to be such Appropriate Officer before the Warrant Certificates so signed shall have been countersigned by the Warrant Agent or disposed of by the Company, such Warrant Certificates nevertheless may be countersigned and delivered or disposed of as though such Appropriate Officer had not ceased to be such Appropriate Officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper Appropriate Officer of the Company to sign such Warrant Certificate, although at the date of the execution of this Agreement any such person was not such Appropriate Officer.
(c) Authentication of Warrant Certificates. No Warrant Certificate will be issued or, if issued, such Warrant Certificate will not be valid or entitle the holder to the benefits hereof until it has been Authenticated on behalf of the Warrant Agent substantially in the form of the certificate attached hereto as Schedule “A” or in such other form as may be approved by the Company and the Warrant Agent. Such Authentication shall be conclusive evidence that such Warrant Certificate has been duly issued hereunder and that the holder or holders are entitled to the benefits of this Agreement.
(d) The Warrant Agent shall Authenticate Uncertificated Warrants (whether upon original issuance, exchange, registration of transfer, or otherwise) by completing its Internal Procedures and the Company shall, and hereby acknowledges that it shall, thereupon be deemed to have duly and validly issued such Uncertificated Warrants under this Agreement. Such Authentication shall be conclusive evidence that such Uncertificated Warrant has been duly issued hereunder and that the holder or holders are entitled to the benefits of this Agreement. The register shall be final and conclusive evidence as to all matters relating to Uncertificated Warrants with respect to which this Agreement requires the Warrant Agent to maintain records or accounts. In case of differences between the register at any time and any other time the register at the later time shall be controlling, absent manifest error.
(e) Authentication Not Representation. The Authentication by the Warrant Agent of any Warrant Certificate or Uncertificated Warrants issued hereunder will not be construed as a representation or warranty by the Warrant Agent as to the validity of this Agreement or such Warrant Certificate or Uncertificated Warrants (except with respect to the due Authentication thereof) or as to the performance by the Company of its obligations under this Agreement and the Warrant Agent will in no respect be liable or answerable for the use made of any Warrant Certificate or of the consideration therefor.
(f) The Warrant Agent shall keep, at its office designated for such purpose, books (the “Warrant Register”) in which, subject to such reasonable regulations as it may prescribe, it shall register the Series B Warrants and exchanges and transfers of outstanding Series B Warrants in accordance with the procedures set forth in Section 6.1 of this Agreement, all in form satisfactory to the Company and the Warrant Agent. No service charge shall be made for any exchange or registration of transfer of the Series B Warrants, but the Company may require payment of a sum sufficient to cover any stamp or other tax or other governmental charge that may be imposed on the Registered Holder (as defined below) in connection with any such exchange or registration of transfer. The Warrant Agent shall have no obligation to effect an exchange or register a transfer unless and until any payments required by the immediately preceding sentence have been made.
(g) Prior to due presentment for registration of transfer or exchange of any Series B Warrant in accordance with the procedures set forth in this Agreement, the Company and the Warrant Agent may deem and treat the person in whose name any Series B Warrant is registered upon the Warrant Register (the “Registered Holder” of such Series B Warrant) as the absolute owner of such Series B Warrant (notwithstanding any notation of ownership or other writing on a Warrant Certificate made by anyone other than the Company or the Warrant Agent), for the purpose of any exercise thereof, any distribution to the holder thereof and for all other purposes, and neither the Warrant Agent nor the Company shall be affected by notice to the contrary.
(h) Once an Uncertificated Warrant has been Authenticated, the information set forth in the Warrant Register with respect thereto at the time of Authentication may be altered, modified, amended, supplemented or otherwise changed only to reflect exercise or proper instructions to the Warrant Agent from the holder as provided herein, except that the Warrant Agent may act unilaterally to make purely administrative changes internal to the Warrant Agent and changes to correct errors. Each person who becomes a holder of an Uncertificated Warrant, by his, her or its acquisition thereof shall be deemed to have irrevocably (i) consented to the foregoing authority of the Warrant Agent to make such error corrections and (ii) agreed to pay to the Warrant Agent, promptly upon written demand, the full amount of all loss and expense including without limitation reasonable legal fees of the Company and the Warrant Agent plus interest, at an appropriate then prevailing rate of interest to the Warrant Agent, sustained by the Company or the Warrant Agent as a proximate result of such error if but only if and only to the extent that such present or former holder realized any benefit as a result of such error and could reasonably have prevented, forestalled or minimized such loss and expense by prompt reporting of the error or avoidance of accepting benefits thereof whether or not such error is or should have been detected in a timely fashion and corrected by the Warrant Agent; provided, that no person who is a bona fide purchaser shall have any such obligation to the Company or to the Warrant Agent.
Section 3.4 Uncertificated Warrants issued to Clearing Agency.
(a) No Warrant Certificate shall be issued in respect of Uncertificated Warrants held in the name of the Clearing Agency, except where physical certificates evidencing ownership in such securities are required or as set out herein or as may be requested by the Clearing Agency, as determined by the Company, from time to time. Such Uncertificated Warrants will initially be registered on the Warrant Register maintained by the Warrant Agent in the name of the Clearing Agency.
(b) Re-registrations of interests in, and transfers of, Uncertificated Warrants by the beneficial owners thereof shall be made only through and in accordance with the procedures of the Clearing Agency and any person transferring Series B Warrant in such manner shall be deemed to have transferred to the transferee all of such person’s rights and obligations in respect thereof; all transferees of such Series B Warrants shall be deemed to have received and accepted such transfer and be deemed to have agreed to be bound by the provisions of this Agreement.
(c) The Company may terminate the application of this Section 3.4 in its sole discretion in which case all Uncertificated Warrants shall as soon as reasonably practicable thereafter be evidenced in certificated form and registered in the name of a person other than a Clearing Agency. The procedures contemplated in Sections 3.1 through 3.3 shall thereafter apply.
(d) The Company and the Warrant Agent may deal with the Clearing Agency for all purposes (including the making of payments and the delivery of any notice, report or other communication) as the registered holder of the Uncertificated Warrants and as the authorized representative of the respective beneficial holders of such Warrants.
(e) To the extent that the provisions of this Section 3.4 conflict with any other provisions of this Agreement, the provisions of this Section 3.4 shall prevail.
(f) Transfers of beneficial ownership in any Uncertificated Warrant will be effected only (i) with respect to the interest of a Participant, through records maintained by the Clearing Agency or its nominee for such Uncertificated Warrants and in accordance with the procedures of the Clearing Agent or its nominee, and (ii) with respect to the interest of any person other than a Participant, through records maintained by Participants. Beneficial owners of Uncertificated Warrants who are not Participants but who desire to sell or otherwise transfer ownership of or any other interest in such Uncertificated Warrants may do so only through a Participant.
(g) The rights of beneficial owners of Uncertificated Warrants shall be limited to those established by applicable law and agreements between the Clearing Agency and Participants and between such Participants and such beneficial owners and must be exercised through a Participant in accordance with the rules and procedures of the Clearing Agency.
(h) Subject to Subsection 3.4(i), neither the Company nor the Warrant Agent shall be under any obligation to deliver to any Participant or beneficial owner of Uncertificated Warrants, nor shall any Participant or beneficial owner of Uncertificated Warrants have any right to require the delivery of, a certificate or other instrument evidencing any interest in Series B Warrants.
(i) If there are Uncertificated Warrants and any of the following events occur:
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the Clearing Agency or the Company has notified the Warrant Agent that (i) the Clearing Agency is unwilling or unable to continue as the depository or (ii) the Clearing Agency ceases to be a clearing agency in good standing under applicable laws and, in either case, the Company is unable to locate a qualified successor depository within 90 days of delivery of such notice; or |
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the Company or the Clearing Agency is required by applicable law, or otherwise determines, to take the action contemplated in this Subsection 3.4(i); |
then one or more definitive fully registered Warrant Certificates shall be, in exchange for such Uncertificated Warrants, issued and delivered by the Warrant Agent in accordance with the instructions provided by the Clearing Agency pursuant to Subsection 3.4(j).
(j) Fully registered Warrant Certificates issued pursuant to Subsection 3.4(i), shall be registered in such names and in such denominations as the Clearing Agency shall instruct the Warrant Agent, provided that the aggregate number of Series B Warrants represented by such Warrant Certificates shall be equal to the aggregate number of the Uncertificated Warrants exchanged. Neither the Company nor the Warrant Agent shall be liable for any delay in delivery of such instructions and may conclusively act and rely on, and shall be protected in acting and relying on, such instructions. Upon exchange of an Uncertificated Warrant for one or more Warrant Certificates in definitive form, such Uncertificated Warrant shall be cancelled by the Warrant Agent.
(k) If definitive Warrant Certificates have been issued and thereafter the Company advises the Warrant Agent of the availability of book-based entry or other electronic issuance with a Clearing Agency in regard to such Series B Warrants, the Warrant Agent and the Company may agree to allow for the re-registration of such definitive Warrant Certificates under such procedure. Upon surrender by any such Warrantholder of its definitive Warrant accompanied by instructions for re-registration of the Warrant under such procedure, such Warrant shall thereafter be re-registered under such procedure and be subject to the foregoing provisions of this Section 3.4 and Subsection 3.4(m), mutatis mutandis. The Company shall pay all expenses incurred by the Warrant Agent and the reasonable fees of the Warrant Agent associated with any termination of the use of such procedure and of any such re-registration of the definitive Series B Warrants under such procedure.
(l) Notwithstanding anything herein or in the terms of the Series B Warrants to the contrary, neither the Company nor the Warrant Agent nor any agent thereof shall have any responsibility or liability for (i) the records maintained by the Clearing Agency or Participants relating to the Series B Warrants or the accounts maintained by them, (ii) maintaining, supervising or reviewing any records relating to such Series B Warrants, (iii) any advice or representation made or given by the Clearing Agency or Participants with respect to the rules and regulations of the Clearing Agency or the Participants, or (iv) any action to be taken by the Clearing Agency or the Participants or any failure by the Clearing Agency or the Participants to take any action.
(m) The provisions of Section 6.1 with respect to the transfer of Series B Warrants are subject to the provisions of this Section 3.4.
ARTICLE IV.
TERMS AND EXERCISE OF WARRANTS
Section 4.1 Exercise Period and Expiration. Subject to the provisions of the Series B Warrants and this Agreement and regardless of the Issue Date, Series B Warrants may be exercised by the Holder thereof at any time and from time to time during the period commencing on the first day of the thirty-seventh month after the Issue Date and terminating at 5:00 p.m., Eastern time, on the Expiration Date. Any Series B Warrant not exercised prior to 5:00 p.m., Eastern time, on the Expiration Date, shall become permanently and irrevocably null and void at 5:00 p.m., Eastern time, on the Expiration Date, and all rights thereunder and all rights in respect thereof under this Agreement shall cease at such time.
Section 4.2 Exercise of Warrants.
(a) Exercise of Certificated Warrants. The holder of any Certificated Warrant may at any time and from time to time during the period commencing on the first day of the thirty-seventh month after the Issue Date and terminating at 5:00 p.m., Eastern time, on the Expiration Date, exercise the right thereby conferred, to be issued Warrant Shares by surrendering to the Warrant Agent at its office designated for such purpose, during normal business hours on a Business Day, the Warrant Certificate evidencing such Series B Warrant and a properly completed and duly executed notice of exercise substantially in the form set out in such Warrant Certificate, together with a certified cheque, bank draft or money order in lawful money of the United States, payable to or to the order of the Company in an amount equal to the Exercise Price (as the same may be hereafter adjusted pursuant to Article V, the “Exercise Price”) multiplied by the number of Warrant Shares subscribed for.
Any notice of exercise referred to in this section, shall be signed by the Warrantholder, or its executors or administrators or other legal representatives or an attorney of the Warrantholder, duly appointed by an instrument in writing satisfactory to the Warrant Agent.
(b) Exercise of Uncertificated Warrants. The beneficial owner of Uncertificated Warrants who desires to exercise Series B Warrants must do so by causing a Participant to deliver to the Clearing Agency on behalf of the entitlement holder, notice of the owner’s intention to exercise Series B Warrants in a manner acceptable to the Clearing Agency. Forthwith, upon receipt by the Clearing Agency of such notice, as well as payment for the Exercise Price multipled by the number of Warrant Shares subscribed for, the Clearing Agency shall deliver to the Warrant Agent confirmation of its intention to exercise Series B Warrants (“Confirmation”) in a manner acceptable to the Warrant Agent, including by electronic means through the book entry registration system.
Payment representing the Exercise Price multiplied by the number of Warrant Shares subscribed for must be provided to the appropriate office of the Participant in a manner acceptable to it. A notice in the form acceptable to the Participant and payment for such beneficial holder should be provided to the Participant sufficiently in advance so as to permit the Participant to deliver notice and payment to the Clearing Agency and for the Clearing Agency in turn to deliver notice and payment to the Warrant Agent prior to the Expiration Date. The Clearing Agency will initiate the exercise by way of Confirmation and forward the Exercise Price multiplied by the number of Warrant Shares subscribed for electronically to the Warrant Agent and the Warrant Agent will execute the exercise by issuing to the Clearing Agent through the book entry registration system the Common Shares to which the exercising Warrantholder is entitled pursuant to the exercise. Any expense associated with the exercise process will be for the account of the entitlement holder exercising the Series B Warrants and/ or the Participant exercising the Series B Warrants on its behalf.
By causing a Participant to deliver notice to the Clearing Agency, a Warrantholder shall be deemed to have irrevocably surrendered its, his or her Series B Warrants so exercised and appointed such Participant to act as its, his or her exclusive settlement agent with respect to the exercise and the receipt of Warrant Shares in connection with the obligations arising from such exercise.
Any notice which the Clearing Agency determines to be incomplete, not in proper form or not duly executed shall for all purposes be void and of no effect and the exercise to which it relates shall be considered for all purposes not to have been exercised thereby. A failure by a Participant to exercise or to give effect to the settlement thereof in accordance with the Warrantholder’s instructions will not give rise to any obligations or liability on the part of the Company or Warrant Agent to the Participant or the Warrantholder.
(c) Any exercise referred to in this section, shall require that the entire Exercise Price for Warrant Shares subscribed must be paid at the time of subscription and such Exercise Price and original exercise notice executed by the Registered Holder the Confirmation from the Clearing Agency must be received by the Warrant Agent prior to the Expiration Date.
(d) Notwithstanding the foregoing in this Section 4.2, Series B Warrants may only be exercised pursuant to this Section 4.2 by or on behalf of a Registered Holder, except the Clearing Agency or Warrantholder, as applicable, who makes the certifications set forth on the exercise notice.
(e) The Warrant Agent shall forward funds received for warrant exercises in a given month by the 5th business day of the following month by wire transfer to an account designated by the Company.
Section 4.3 Intentionally Deleted.
Section 4.4 Effect of Exercise.
(a) Effect of Exercise. Upon the exercise of any Certificated Warrants or Uncertificated Warrants in accordance with Section 4.2 hereof, the Warrant Shares thereby issuable shall be deemed to have been issued, and the person or persons to whom such Warrant Shares are to be issued shall be deemed to have become the holder or holders of record thereof, on the Business Day on which such Series B Warrant is validly exercised (or deemed to be validly exercised in accordance with Article IV hereof), unless the transfer registers for the Warrant Shares are closed on that date, in which case such Warrant Shares shall be deemed to have been issued and such person or persons shall be deemed to have become the holder or holders of record thereof on the date on which such transfer registers are reopened, but such Warrant Shares shall be issued on the basis of the number of Warrant Shares to which such person or persons were entitled on such exercise date.
(b) Exercise of Certificated Warrants. As soon as reasonably practicable, and in any event not later than five (5) Business Days after the surrender to the Warrant Agent of Warrant Certificates and instructions received in good order in accordance with Section 4.2, the Warrant Agent shall mail by way of first class insured mail to the person or persons in whose name or names the Warrant Shares thereby issued have been issued, at his, her, its or their respective addresses, reflected in the Warrant Register or, if so specified, cause to be delivered to such person or persons at the place where the Warrant Certificates evidencing such Series B Warrants were surrendered, certificates representing the Warrant Shares so issued.
(c) Exercise of Uncertificated Warrants. As soon as reasonably practicable, and in any event not later than five (5) Business Days after the Clearing Agency has initiated the exercise by way of Confirmation and has delivered the Exercise Price multiplied by the number of Warrant Shares subscribed for electronically to the Warrant Agent, the Warrant Agent will execute the exercise by issuing to the Clearing Agent through the book entry registration system the Common Shares to which the exercising Warrantholder is entitled pursuant to the exercise, the Warrant Agent shall cause the share position of the Clearing Agency on the register of Common Shares to be increased by the number of Warrant Shares issued in connection with the exercise of such Uncertificated Warrants.
(d) Issue to Other than Holder. If any Warrant Shares issuable pursuant to any Series B Warrants are to be issued to a person or persons other than the Warrantholder, the Warrantholder must pay to the Company or to the Warrant Agent on its behalf an amount equal to all exigible transfer taxes or other government charges, and neither the Company nor the Warrant Agent will be required to issue or deliver any such Warrant Shares unless or until such amount has been so paid or the Warrantholder has established to the satisfaction of the Company that such taxes and charges have been paid or that no such taxes or charges are owing.
Section 4.5 Reservation of Shares. The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of Series B Warrants such number of Warrant Shares as may be from time to time issuable upon exercise in full of the Series B Warrants, such that the Company may validly and legally issue all Warrant Shares in compliance with this Section. All Warrant Shares shall be duly authorized, and when issued upon such exercise, shall be validly issued, fully paid and non-assessable. If at any time prior to the Expiration Date the number and kind of authorized but unissued shares of the Company’s capital stock shall not be sufficient to permit exercise in full of the Series B Warrants, the Company will promptly take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares to such number of shares as shall be sufficient for such purposes. The Company agrees that its issuance of Series B Warrants shall constitute full authority to its officers who are charged with the issuance of Warrant Shares to issue Common Shares upon the exercise of the Series B Warrants. Without limiting the generality of the foregoing, the Company will not increase the stated or par value per share, if any, of the Common Shares above the Exercise Price in effect immediately prior to such increase in stated or par value.
Section 4.6 Listing. Prior to the issuance of any Warrant Shares upon exercise of the Series B Warrants, the Company shall use reasonable best efforts to secure the listing of such Common Shares or other Warrant Shares upon each national securities exchange, stock market or automated quotation system, if any, upon which Common Shares (or securities of the same class as such other Warrant Shares, if applicable) are then listed (subject to official notice of issuance upon exercise of the Series B Warrants) and shall use reasonable best efforts to maintain, so long as any other Common Shares (or, as applicable, other securities) shall be so listed, such listing of all Warrant Shares from time to time issuable upon the exercise of the Series B Warrants.
Section 4.7 Compliance with Law.
(a) If any Warrant Shares are required under any federal or state law or applicable governing rule or regulation of any national securities exchange, to be registered with or approved by any governmental authority or listed on any such national securities exchange before such shares may be issued upon exercise, the Company will use its reasonable best efforts to cause such shares to be duly registered or approved by such governmental authority or listed on the relevant national securities exchange, as the case may be.
(b) The Series B Warrants shall not be exercisable and the Company shall not be obligated to issue Warrant Shares unless, at the time a holder seeks to exercise the Series B Warrants, a prospectus relating to Warrant Shares is current and a registration statement for the Warrant Shares is effective or qualified or the issuance of Warrant Shares is deemed to be exempt under the securities laws of the jurisdiction of residence of the holder of the Series B Warrants.
Section 4.8 Partial Exercise of Warrants; Fractions.
(a) Partial Exercise. The holder of any Series B Warrants may exercise its, his or her right to acquire a number of whole Common Shares less than the aggregate number which the holder is entitled to acquire. In the event of any exercise of a number of Series B Warrants less than the number which the holder is entitled to exercise, the holder of Series B Warrants upon such exercise shall, in addition, be entitled to receive, without charge therefor, a new Warrant Certificate(s), bearing the same legend, if applicable, or other appropriate evidence of Series B Warrants, in respect of the balance of the Series B Warrants held by such holder and which were not then exercised.
(b) Fractions. The Company shall not be required to issue fractional Warrant Shares in satisfaction of its obligations hereunder and no cash or other consideration will be paid in lieu of fractional Warrant Shares. Any subscription for fractional Warrant Shares will be deemed to be a subscription for the next lowest whole number of Warrant Shares.
ARTICLE V.
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be subject to adjustment from time to time upon the happening of certain events as provided in this Article V.
Section 5.1 Adjustment of Exercise Price and Warrant Shares. The Exercise Price and number of Warrant Shares purchasable under the Series B Warrants are subject to adjustment from time to time as set forth in this Section 5.1.
(a) In case the Company shall at any time:
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subdivide the outstanding Common Shares into a larger number of shares other than pursuant to Section 5.1(b), the Exercise Price in effect immediately prior to such subdivision shall be proportionately decreased, effective from and after the record date of such subdivision; and |
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combine the outstanding Common Shares into a smaller number of shares by a reverse split or otherwise, the Exercise Price in effect immediately prior to such combination shall be proportionately increased, effective from and after the record date of such combination. |
Upon any adjustment in the Exercise Price pursuant to this Section 5.1(a), the holder of any Series B Warrant shall thereafter be entitled to purchase, at the adjusted Exercise Price, the number of Warrant Shares, rounded down to the nearest whole share, obtained by multiplying the number of Warrant Shares purchasable hereunder immediately prior to such adjustment by the Exercise Price in effect immediately prior to such adjustment, and dividing the product thereof by the Exercise Price resulting from such adjustment.
(b) In case the Company shall issue additional Common Shares as a special dividend on the Common Shares (a “Special Dividend”), from and after the day which is the record date for the determination of shareholders entitled to such Special Dividend, the holder of any Series B Warrant shall, until a further adjustment, be entitled to purchase the number of Warrant Shares, rounded down to the nearest whole share, obtained by multiplying the number of Warrant Shares purchasable hereunder immediately prior to said record date by a fraction, the numerator of which is the total number of Common Shares outstanding after the issuance of the Special Dividend, calculated on a fully diluted basis assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options, warrants or other rights (including those with respect to convertible securities), and the denominator of which is the number of Common Shares outstanding immediately prior to said record date, calculated on a fully diluted basis assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options, warrants, or other rights (including those with respect to convertible securities). Upon each adjustment pursuant to this Section 5.1(b), the Exercise Price in effect immediately prior to such adjustment shall be reduced to an amount determined by dividing the product obtained by multiplying such Exercise Price by the number of Warrant Shares purchasable hereunder immediately prior to such adjustment by the number of Warrant Shares purchasable hereunder immediately following such adjustment.
Section 5.2 Reorganization or Reclassification. If at any time while there are Series B Warrants outstanding there shall be any reorganization or reclassification of the Common Shares of the Company (other than a subdivision or combination of shares provided for in Section 5.1, or a Fundamental Transaction (as defined below)), the Holder shall thereafter be entitled to receive, upon exercise of its Series B Warrant(s) prior to the Expiration Date and upon payment of the Exercise Price, the number of shares of stock or other securities or property of the Company resulting from such reorganization or reclassification, as the case may be, to which a holder of the Common Shares, deliverable upon the exercise of a Series B Warrant, would have been entitled upon such reorganization or reclassification if such Series B Warrant had been exercised immediately prior to such reorganization or reclassification, and in any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions with respect to the rights and interest thereafter of the Holder to the end that the provisions set forth herein (including the adjustment of the Exercise Price and the number of shares issuable upon the exercise of a Series B Warrant) shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon exercise. The provisions of this Section 5.2 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers, other dispositions or similar transactions.
Section 5.3 Form of Warrant After Adjustments. The form of the Warrant Certificate need not be changed because of any adjustments in the Exercise Price or the number or kind of the Warrant Shares, and Series B Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Series B Warrants, as initially issued. The Company, however, may at any time in its sole discretion make any change in the form of Warrant Certificate that it may deem appropriate to give effect to such adjustments and that does not affect the substance of the Warrant Certificate (including the rights, duties or obligations of the Warrant Agent), and any Warrant Certificate thereafter issued, whether in exchange or substitution for an outstanding Warrant Certificate, may be in the form so changed.
Section 5.4 Fundamental Transactions. If any (i) capital reorganization, reclassification of the Company Securities, consolidation, amalgamation or merger of the Company with another entity in which the issued and outstanding stock of the Company (excluding treasury shares) immediately prior to such transaction represents less than 50% of the voting power of the surviving entity immediately after such transaction, (ii) sale, transfer or other disposition of all or substantially all of the Company’s assets to another entity, or (iii) similar transaction requiring shareholder approval shall be effected (any such transaction being hereinafter referred to as a “Fundamental Transaction”), then the holders shall be permitted to exercise any Series B Warrants with the provisions of Section 4.2 immediately prior to the consummation of such Fundamental Transaction. If a holder does not exercise a Series B Warrant prior to the consummation of a Fundamental Transaction, then such Series B Warrant shall not at any time be, or become, exercisable and shall expire (and become null and void) automatically with no further action required on behalf of the Company upon consummation of the Fundamental Transaction.
Section 5.5 Notice to Warrant Holders.
(a) Notice of Adjustment. Whenever the number and/or kind of Warrant Shares or the Exercise Price is adjusted as herein provided, the Company shall (i) prepare and deliver, or cause to be prepared and delivered, forthwith to the Warrant Agent a statement setting forth the adjusted number and/or kind of Common Shares purchasable upon the exercise of the Series B Warrants and the Exercise Price of such Common Shares after such adjustment, the facts requiring such adjustment and the computation by which adjustment was made, and (ii) cause the Warrant Agent to give written notice to each Holder in the manner provided in Section 9.2 below, of the record date or the effective date of the event. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event.
(b) Notice of Fundamental Transactions. In the event that the Company shall propose to effect a Fundamental Transaction, then the Company shall send to the Warrant Agent a notice and the shall cause the Warrant Agent within five days after receipt by the Warrant Agent to give written notice (in such form as shall be furnished to the Warrant Agent by the Company) to each Holder in the manner provided in Section 9.2 of such Fundamental Transaction. Such notice shall specify (i) the record date, if any, for the Fundamental Transaction, (ii) the date such Fundamental Transaction is expected to take place, and (iii) the effect, if any, of such action on the Common Shares, if any. Such notice shall be given to Holders at least 15 days prior to the date of the consummation of the Fundamental Transaction, but in no event shall the Company be required to give notice prior to public announcement if the Company has in good faith determined that the matters relating to such notice constitute material, nonpublic information relating to the Company or its Subsidiaries. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event.
Section 5.6 No Adjustment. No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of Warrant Shares purchasable upon the exercise of each Series B Warrant; provided, however, that any adjustments that by reason of this Section 5.6 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest cent and to the nearest one-hundredth of a Common Share, as the case may be.
ARTICLE VI.
TRANSFER AND EXCHANGE OF WARRANTS AND WARRANT SHARES
Section 6.1 Registration of Transfers and Exchanges.
(a) Transfer. No transfer of any Warrant by a Warrantholder will be valid unless entered on the register of transfers referred to in Subsection 3.3(J) hereof upon surrender to the Warrant Agent of the Warrant Certificate evidencing such Warrant, duly endorsed by, and accompanied by a written instrument of transfer in form satisfactory to the Warrant Agent properly completed and duly executed by the registered holder or his, her or its executors, administrators or other legal representatives or his, her or its or their attorney duly appointed by an instrument in writing in form and duly executed in a manner satisfactory to the Warrant Agent, and, upon compliance with such requirements and the provision of evidence of authority that may be required by the Warrant Agent, including but not limited to, a signature guarantee from an eligible guarantor institution participating in a signature guarantee program approved by the Securities Transfer Association and such other reasonable requirements as the Warrant Agent and the Company may prescribe, such transfer will be duly noted on one of such registers of transfers by the Warrant Agent.
(b) Register of Transfers. The transferee of any Series B Warrant pursuant to Subsection 6.1(a) hereof will, after surrender to the Warrant Agent of the Warrant Certificate evidencing such Series B Warrant as required by Subsection 6.1(a) hereof and upon compliance with all other conditions in respect thereof required by this Agreement or by law, be entitled to be entered on the register of holders referred to in Subsection 3.3(f) hereof as the owner of such Series B Warrant free from all equities or rights of set-off or counterclaim between the Company and the transferor or any previous holder of such Series B Warrant, except in respect of equities of which the Company is required to take notice by statute or by order of a court of competent jurisdiction.
(c) Refusal of Registration. The Company will be entitled, and may direct the Warrant Agent, to refuse to recognize any transfer, or enter the name of any transferee, of any Series B Warrant on the registers referred to in Subsection 3.3(f) hereof, if such transfer would constitute a violation of the securities laws of any jurisdiction or the rules, regulations or policies of any regulatory authority having jurisdiction. The Warrant Agent is entitled to assume compliance with all applicable securities legislation unless otherwise notified in writing by the Company. No duty will rest with the Warrant Agent to determine compliance of the transferee or transferor of any Series B Warrant with applicable securities legislation. The Warrant Agent may, but assumes no obligation to, contact the Company or counsel to confirm the validity of any transfer of Series B Warrants prior to completing same.
(d) No Notice of Trusts. Subject to applicable law, neither the Company nor the Warrant Agent will be bound to take notice of or see to the execution of any trust, whether express, implied or constructive, in respect of any Series B Warrant, and may transfer any Series B Warrant on the direction of the person registered as the holder thereof, whether named as trustee or otherwise, as though that person were the beneficial owner thereof.
(e) Inspection. The register of Warrantholders shall be available for inspection by the Company and or any Warrantholder during the Warrant Agent’s regular business hours on a Business Day and upon payment to the Warrant Agent of its reasonable fees. Any Warrantholder exercising such right of inspection shall first provide an affidavit in form satisfactory to the Company and the Warrant Agent stating the name and address of the Warrantholder and agreeing not to use the information therein except in connection with an effort to call a meeting of Warrantholders or to influence the voting of Warrantholders at any meeting of Warrantholders.
(f) Restrictions on Transfer. No Series B Warrant or Warrant Shares shall be sold, exchanged or otherwise transferred in violation of Applicable Securities Laws.
Section 6.2 Exchange of Warrants Certificates.
(a) Exchange. One or more Warrant Certificates may, on compliance with the reasonable requirements of the Warrant Agent, be exchanged for one or more Warrant Certificates of different denominations evidencing in the aggregate an equal number of Series B Warrants as the Warrant Certificate or Warrant Certificates being exchanged.
(b) Place of Exchange. Warrant Certificates may be exchanged only at the Warrant Agent’s office designated for such purposes.
(c) Cancellation. Any Warrant Certificate tendered for exchange pursuant to this Section 6.2 shall be surrendered to the Warrant Agent and cancelled.
(d) Authentication of Exchanged Warrant Certificates. The Warrant Agent shall Authenticate all Warrant Certificates necessary to carry out exchanges pursuant to this Section 6.2.
(e) Charges. The Warrant Agent may charge Warrantholders requesting an exchange of Warrant Certificates a reasonable sum for each Warrant Certificate issued; and payment of such charges and reimbursement of the Warrant Agent or the Company for any and all taxes or governmental or other charges required to be paid shall be made by the party requesting such exchange as a condition precedent to such exchange.
ARTICLE VII.
OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS
Section 7.1 No Rights or Liability as Shareholder; Notice to Registered Holders. Nothing contained in the Series B Warrants shall be construed as conferring upon the Holder or his, her or its transferees the right to vote or to receive dividends or to consent or to receive notice as a shareholder in respect of any meeting of shareholders for the election of directors of the Company or of any other matter, or any rights whatsoever as shareholders of the Company. No provision thereof and no mere enumeration therein of the rights or privileges of the Holder shall give rise to any liability of such holder for the Exercise Price hereunder or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
Section 7.2 Lost, Stolen, Mutilated or Destroyed Warrant Certificates. If any Warrant Certificate is lost, stolen, mutilated or destroyed, the Company shall issue, and the Warrant Agent shall countersign and deliver, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Series B Warrants, but only upon receipt of evidence and an affidavit reasonably satisfactory to the Company and the Warrant Agent of the loss, theft or destruction of such Warrant Certificate, and an indemnity of the Company and Warrant Agent for any losses in connection therewith, if requested by either the Company or the Warrant Agent, also satisfactory to them. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company or the Warrant Agent may prescribe and as required by applicable law.
Section 7.3 Restrictive Legends. Any legends which are stamped or imprinted on certificates of Common Shares shall also be stamped or imprinted on any stock certificate for Warrant Shares issued upon the exercise of any Series B Warrant and or stock certificate issued upon the direct or indirect transfer of any such Warrant Shares.
Section 7.4 Cancellation of Warrants. If the Company shall purchase or otherwise acquire Series B Warrants, the Warrant Certificates and any Uncertificated Warrants representing such Series B Warrants shall thereupon be delivered to the Warrant Agent, if applicable, and be cancelled by it and retired. The Warrant Agent shall cancel all Warrant Certificates surrendered for exchange, substitution, transfer or exercise in whole or in part. Such cancelled Warrant Certificates shall thereafter be disposed of in a manner satisfactory to the Company (at the Company’s expense) provided in writing to the Warrant Agent.
Section 7.5 Intentionally Omitted.
Section 7.6 Right to Convene Meetings.
(a) Convening of Meeting. The Company may at any time and from time to time convene a meeting of the Warrantholders.
(b) Location of Meeting. Every such meeting shall be held in a location as is approved or determined by the Company.
(c) Notice. At least twenty-one (21) Business Days’ prior written notice of any meeting must be given to the Warrantholders.
(d) Contents. The notice of the meeting must state the time, date and location of the meeting and must state briefly the general nature of the business to be transacted thereat, but it shall not be necessary for the notice to set out the terms of any resolution to be proposed or any of the provisions of this Section 7.6.
(e) Chairman. Some person (who need not be a Warrantholder) designated in writing by the Company shall be chairman of the meeting or, if no person is so designated or the person so designated is not present within 30 minutes after the time fixed for the holding of the meeting, the Warrantholders present in person or by proxy may choose some person present to be chairman
(f) Quorum. Subject to the provisions of Section 7.6(s) hereof, at any meeting of Warrantholders a quorum shall consist of Warrantholders present either in person or by proxy at the commencement of the meeting holding in the aggregate not less than 10% of the total number of Series B Warrants then outstanding.
(g) No Quorum. If a quorum of Warrantholders is not present within 30 minutes after the time fixed for holding a meeting, the meeting, subject to Section 7.6(s) hereof, shall be adjourned to the date that is the fifth Business Day following the initial meeting date and shall be at the same time and location and no notice of the adjournment need be given.
(h) Adjourned Meeting. At the adjourned meeting, two Warrantholders present in person or by proxy shall form a quorum and may transact any business for which the meeting was originally convened notwithstanding the number of Series B Warrants that they hold.
(i) Power to Adjourn. The chairman of a meeting at which a quorum of the Warrantholders is present may, with the consent of the meeting, adjourn the meeting, and no notice of such adjournment need be given except as the meeting prescribes.
(j) Show of Hands. Every question submitted to a meeting, other than an Extraordinary Resolution (as defined below), shall be decided in the first place by a majority of the votes given on a show of hands and, unless a poll is duly demanded as herein provided, a declaration by the chairman that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. In the case of an equality of votes on a show of hands, the chairman shall not have a casting vote.
(k) Extraordinary Resolution. On every Extraordinary Resolution (as defined below), and on every other question submitted to a meeting on which a poll is directed by the chairman or requested by one or more Warrantholders acting in person or by proxy, a poll shall be taken in such manner as the chairman directs.
(l) Poll. Questions other than those required to be determined by Extraordinary Resolution (as defined below) shall be decided by a majority of the votes cast on the poll.
(m) Voting. On a show of hands each person present and entitled to vote, whether as a Warrantholder or as proxy for one or more absent Warrantholders, or both, shall have one vote, and on a poll each Warrantholder present in person or represented by a proxy duly appointed by instrument in writing shall be entitled to one vote, in respect of each Warrant held by such holder. A proxy need not be a Warrantholder. The chairman of any meeting shall be entitled to vote in respect of any Series B Warrants and proxies held by him or her.
(n) Ability to Make Regulations. The Company may from time to time make or vary such regulations not contrary to the provisions of this Agreement (in form satisfactory to the Warrant Agent (as applicable)), as it thinks fit:
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for the form of instrument appointing a proxy, the manner in which it must be executed and verification of the authority of a person who executes it on behalf of a Warrantholder; |
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governing the locations at which and the times by which voting certificates or instruments appointing proxies must be deposited; |
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generally for the calling of meetings of Warrantholders and the conduct of business thereat; and |
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for the deposit of instruments appointing proxies at some approved location or locations other than the location at which the meeting is to be held and enabling particulars of such instruments appointing proxies to be sent by mail, facsimile or other means of prepaid, transmitted or recorded communication before the meeting to the Company or to the Warrant Agent at the location where the meeting is to be held and for voting pursuant to instruments appointing proxies so deposited as though the instruments themselves were produced at the meeting. |
Any regulations so made shall be binding and effective and the votes given in accordance therewith shall be valid and shall be counted.
(o) Recognition. Except as such regulations provide, the only persons who shall be recognized at a meeting as the holders of any Series B Warrants, or as entitled to vote or, subject to Subsection 7.6(p) hereof, to be present at the meeting in respect thereof, shall be the registered holders of such Series B Warrants or persons holding proxies on their behalf.
(p) The Company and Warrant Agent may be Represented. The Company and the Warrant Agent by their respective employees, officers or directors, and the counsel of the Company and the Warrant Agent, may attend any meeting of Warrantholders, but shall have no vote as such.
(q) Powers Exercisable by Extraordinary Resolution. Subject to any required stock exchange approval, in addition to all other powers conferred on them by the other provisions of this Agreement or by law, the Warrantholders at a meeting shall (without limiting any of the rights and immunities or expanding the duties and obligations of the Warrant Agent) have the power, exercisable from time to time by Extraordinary Resolution (as defined below):
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to approve or sanction any amendment, modification, abrogation, alteration, compromise or arrangement of any right of the Warrantholders or, with the consent of the Warrant Agent, of the Warrant Agent in its capacity as Warrant Agent hereunder, whether such right arises under this Agreement or otherwise, which may be agreed to by the Company, and to authorize the Warrant Agent to concur in and execute any agreement supplemental hereto in connection therewith; |
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to amend, alter or repeal any Extraordinary Resolution (as defined below) previously passed; |
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subject to arrangements as to financing and indemnity satisfactory to the Warrant Agent, to direct or authorize the Warrant Agent to enforce any obligation of the Company under this Agreement; |
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to direct or authorize the Warrant Agent to refrain from enforcing any obligation or right referred to in clause (c) of this Section 7.6; |
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to waive and direct the Warrant Agent to waive any default by the Company in complying with any provision of this Agreement, either unconditionally or on any condition specified in the Extraordinary Resolution (as defined below); |
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to appoint a committee with power and authority to exercise such of the powers of the Warrantholders as are exercisable by Extraordinary Resolution (as defined below); |
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to restrain any Warrantholder from taking or instituting any suit, action or proceeding against the Company for the enforcement of any obligation of the Company under this Agreement or to enforce any right of the Warrantholders; |
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to direct any Warrantholder who, as such, has brought any suit, action or proceeding, to stay or discontinue or otherwise deal therewith on payment of the costs, charges and expenses reasonably and properly incurred by him, her or it in connection therewith; |
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to approve any change in or omission from the provisions contained in the Warrant Certificates and this Agreement or any ancillary or supplemental instrument which may be agreed to by the Company, and to authorize the Warrant Agent to concur in and execute any ancillary or supplemental agreement embodying the change or omission; |
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to approve any compromise or arrangement made by the Company with all or substantially all of its creditors or any class or classes of creditors, whether secured or otherwise, and with all or substantially all of the holders of any shares or other securities of the Company; and |
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with the consent of the Company, not to be unreasonably withheld, from time to time and at any time to remove the Warrant Agent and appoint a successor Warrant Agent. |
(r) Meaning of “Extraordinary Resolution”. The expression “Extraordinary Resolution” when used in this Agreement means, subject to the provisions of this Section 7.6 and of Subsections 7.6(z) and 7.6(aa) hereof, a motion proposed at a meeting of Warrantholders duly convened for that purpose and held in accordance with the provisions of this Article VII at which there are present in person or by proxy Warrantholders holding in the aggregate more than 25% of the total number of Series B Warrants then outstanding and passed by the affirmative votes of Warrantholders who hold in the aggregate not less than 66 2/3% of the total number of Series B Warrants represented at the meeting and voted on the motion.
(s) Quorum for “Extraordinary Resolution”. If, at a meeting called for the purpose of passing an Extraordinary Resolution, the quorum required by Subsection 7.6(r) hereof is not present within 30 minutes after the time appointed for the meeting, the meeting shall stand adjourned to such day, being not less than five (5) Business Days or more than ten (10) Business Days later, and to such location and time, as is appointed by the chairman.
(t) Notice. Not less than three (3) Business Days’ notice must be given to the Warrantholders of the time, date and location of such adjourned meeting.
(u) Form of Notice. The notice must state that at the adjourned meeting two Warrantholders present in person or by proxy shall form a quorum but it shall not be necessary to set forth the purposes for which the meeting was originally called or any other particulars.
(v) Quorum at Adjourned Meeting. At the adjourned meeting, two Warrantholders present in person or by proxy shall form a quorum and may transact any business for which the meeting was originally convened, and a motion proposed at such adjourned meeting and passed by the requisite vote as provided in Subsection 7.6(r) hereof shall be an Extraordinary Resolution within the meaning of this Agreement.
(w) Poll. Votes on an Extraordinary Resolution must always be given on a poll and no demand for a poll on an Extraordinary Resolution shall be necessary.
(x) Powers Cumulative. Any one or more of the powers, and any combination of the powers, in this Agreement stated to be exercisable by the Warrantholders by Extraordinary Resolution or otherwise, may be exercised from time to time, and the exercise of any one or more of such powers or any combination of such powers from time to time shall not prevent the Warrantholders from exercising such power or powers or combination of powers thereafter from time to time.
(y) Minutes. Minutes of all resolutions passed and proceedings taken at every meeting of the Warrantholders shall be made and duly entered in books from time to time provided for such purpose by the Company, and any such minutes, if signed by the chairman of the meeting at which such resolutions were passed or such proceedings were taken, shall be prima facie evidence of the matters therein stated, and, until the contrary is proved, every such meeting in respect of the proceedings of which minutes have been so made, entered and signed shall be deemed to have been duly convened and held, and all resolutions passed and proceedings taken thereat to have been duly passed and taken.
(z) Instruments in Writing. Any action that may be taken and any power that may be exercised by Warrantholders at a meeting held as provided in this Article VII may also be taken and exercised by Warrantholders who hold in the aggregate not less than 50% of the total number of Series B Warrants at the time outstanding or in the case of an Extraordinary Resolution, Warrantholders who hold in the aggregate not less than 66 2/3% of the total number of Series B Warrants at the time outstanding, by their signing, each in person or by attorney duly appointed in writing, an instrument in writing in one or more counterparts, and the expression “Extraordinary Resolution” when used in this Agreement includes a resolution embodied in an instrument so signed.
(aa) Binding Effect of Resolutions. Every resolution and every Extraordinary Resolution passed in accordance with the provisions of this Article VII at a meeting of Warrantholders shall be binding on all Warrantholders, whether present at or absent from the meeting and whether voting for or against the resolution or abstaining, and every instrument in writing signed by Warrantholders in accordance with Subsection 7.6(z) hereof shall be binding on all Warrantholders, whether signatories thereto or not, and every Warrantholder and the Warrant Agent (without limiting any of the rights and immunities or expending the duties and obligations of the Warrant Agent and subject to the provisions for its indemnity herein contained) shall be bound to give effect accordingly to every such resolution and instrument in writing.
(bb) Holdings by the Company and Subsidiaries Disregarded. In determining whether Warrantholders holding the required total number of Series B Warrants are present in person or by proxy for the purpose of constituting a quorum, or have voted or consented to a resolution, Extraordinary Resolution, consent, waiver, Warrantholders’ Request or other action under this Agreement, a Series B Warrant held by the Company or by a Subsidiary of the Company shall be deemed to be not outstanding. The Company shall provide the Warrant Agent with a Certificate of the Company providing details of any Series B Warrants held by the Company or by a Subsidiary of the Company upon the written request of the Warrant Agent.
ARTICLE VIII.
CONCERNING THE WARRANT AGENT AND OTHER MATTERS
Section 8.1 Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of the Warrant Shares upon the exercise of Series B Warrants, but any taxes or charges in connection with the issuance of Series B Warrants or Warrant Shares in any name other than that of the Holder of the Series B Warrants shall be paid by such Holder; and in any such case, the Company shall not be required to issue or deliver any Series B Warrants or Warrant Shares until such taxes or charges shall have been paid or it is established to the Company’s and the Warrant Agent’s satisfaction that no tax or charge is due.
Section 8.2 Resignation, Consolidation or Merger of Warrant Agent.
(a) Appointment of Successor Warrant Agent. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities hereunder after giving sixty (60) days’ notice in writing to the Company. If the office of the Warrant Agent becomes vacant by resignation or incapacity to act or otherwise, the Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of sixty (60) days after it has been notified in writing of such resignation or incapacity by the Warrant Agent or by the Registered Holder of a Series B Warrant (who shall, with such notice, submit his Series B Warrant for inspection by the Company), then the Warrant Agent or any such Registered Holder may petition a court to approve a successor Warrant Agent at the Company’s cost. Any successor Warrant Agent, whether appointed by the Company or by such a court, shall be (a) a Person, other than a natural Person, organized and doing business under the laws of the United States, in good standing, which is authorized under such laws to exercise stock transfer powers and is subject to supervision or examination by federal or state authority and which has, along with its affiliates, at the time of its appointment as Warrant Agent a combined capital and surplus of at least $50 million, or (b) an affiliate of a Person described in clause (a) of this sentence. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities, duties and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed; but if for any reason it becomes necessary or appropriate, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, rights, immunities, duties and obligations of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent, the Company shall make, execute, acknowledge and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties and obligations.
(b) Notice of Successor Warrant Agent. In the event a successor Warrant Agent shall be appointed, the Company shall (i) give notice thereof to the predecessor Warrant Agent and the transfer agent for the Common Shares not later than the effective date of any such appointment, and (ii) cause written notice thereof to be delivered to each Registered Holder at such holder’s address appearing on the Warrant Register. Failure to give any notice provided for in this Section 8.2(b) or any defect therein shall not affect the legality or validity of the removal of the Warrant Agent or the appointment of a successor Warrant Agent, as the case may be.
(c) Merger, Consolidation or Name Change of Warrant Agent.
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Any Person into which the Warrant Agent may be merged or with which it may be converted, consolidated or any Person resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party shall be the successor Warrant Agent under this Agreement, without any further act or deed, if such Person would be eligible for appointment as a successor Warrant Agent under the provisions of Section 8.2(a). If any of the Warrant Certificates have been countersigned but not delivered at the time such successor to the Warrant Agent succeeds under this Agreement, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent; and if at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. |
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If at any time the name of the Warrant Agent is changed and at such time any of the Warrant Certificates have been countersigned but not delivered, the Warrant Agent whose name has changed may adopt the countersignature under its prior name; and if at that time any of the Warrant Certificates have not been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. |
Section 8.3 Fees and Expenses of Warrant Agent. The Company agrees to pay the Warrant Agent reasonable remuneration for its services as Warrant Agent hereunder in accordance with a fee schedule to be mutually agreed upon and will reimburse the Warrant Agent upon demand for all of its reasonable expenses and counsel fees and other disbursements incurred in the preparation, delivery, negotiation, amendment, administration and execution of this Agreement and the exercise and performance of its duties hereunder. Any amount owing under this Section 8.3 and unpaid thirty (30) days after request for such payment will bear interest from the expiration of such thirty (30) days at a rate per annum equal to the then current rate charged by the Warrant Agent.
Section 8.4 Liability of Warrant Agent.
(a) Reliance on Company Statement. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a statement signed by the Chief Executive Officer or Executive Vice President and delivered to the Warrant Agent. The Warrant Agent may rely upon such statement and shall not be liable for any action taken or suffered in the absence of bad faith by it pursuant to the provisions of this Agreement. The Warrant Agent shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Company.
(b) Indemnity. The Company covenants and agrees to indemnify and to hold the Warrant Agent and its officers, directors, employees, agents, successors and assigns harmless against any costs, expenses (including reasonable fees of its legal counsel), losses, liability, judgment, fine, penalty, claim, demand, settlement or damages, which may be paid, incurred or suffered by or to which it may become subject, arising from or out of, directly or indirectly, any claims or liability for any action taken, suffered, or omitted to be taken by the Warrant Agent in connection with the execution, acceptance, administration, exercise and performance of its duties under this Agreement, including the costs and expenses of defending against any claim of liability arising therefrom, directly or indirectly, or enforcing its rights hereunder; provided, that such covenant and agreement does not extend to, and the Warrant Agent shall not be indemnified with respect to, such costs, expenses, losses, liability, judgment, fine, penalty, claim, demand, settlement or damages incurred or suffered by the Warrant Agent and its officers, directors, employees, agents, successors and assigns as a result of, or arising out of, its gross negligence, bad faith, or willful misconduct (which gross negligence, bad faith, or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction). Notwithstanding the foregoing, the Company shall not be responsible for any settlement made without its prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. No provision in this Agreement shall be construed to relieve the Warrant Agent from liability for its own gross negligence, willful misconduct or bad faith (which gross negligence, bad faith, or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction).
(c) Exclusions. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature thereof) or be required to verify the same, and all such statements and recitals are and shall be deemed to have been made by the Company only. The Warrant Agent shall have no responsibility with respect to the validity of this Agreement or with respect to the validity or execution of any Series B Warrant (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Series B Warrant; nor shall it be responsible to make any adjustments required under the provisions of Article V hereof or responsible for the manner, method or amount of any such adjustment or other calculation contemplated herein or the ascertaining of the existence of facts that would require any such adjustment or calculation; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Warrant Shares to be issued pursuant to this Agreement or any Series B Warrant or as to whether any Warrant Shares will, when issued, be valid and fully paid and non-assessable.
(d) Experts. The Warrant Agent may employ such counsel, accountants, engineers, appraisers, other experts, agents, agencies and advisors as it may reasonably require for the purpose of discharging its duties under this Agreement, and the Warrant Agent shall not be answerable or accountable for any act, omission, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company, to the holders of the Warrants or any other Person resulting from any such act, omission, default, neglect or misconduct, absent gross negligence or bad faith in the selection, reliance and continued employment thereof (which gross negligence or bad faith must be determined by a final, non-appealable judgment of a court of competent jurisdiction). The reasonable costs of such services shall be added to and be part of the Warrant Agent’s fee hereunder.
(e) Funding. No provision of this Agreement shall require the Warrant Agent to expend or risk its own funds or otherwise incur financial liability in the performance of its duties or the exercise of any of its rights or powers unless indemnified as provided for herein, other than as a result of its own gross negligence, willful misconduct or bad faith (which gross negligence, bad faith, or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction).
(f) Miscellaneous.
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The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. |
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The Warrant Agent may rely on and shall be held harmless and protected and shall incur no liability for or in respect of any action taken, suffered or omitted to be taken by it in reliance upon any certificate, statement, instrument, opinion, notice, letter, facsimile transmission, telegram or other document, or any security delivered to it, and believed by it to be genuine and to have been made or signed by the proper party or parties, or upon any written or oral instructions or statements from the Company with respect to any matter relating to its acting as Warrant Agent hereunder. |
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The Warrant Agent shall not be liable or responsible for any failure of the Company to comply with any of its obligations relating to any registration statement filed with the Securities and Exchange Commission or this Agreement, including without limitation obligations under applicable regulation or law. |
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The Warrant Agent shall not be accountable or under any duty or responsibility for the use by the Company of any Warrants authenticated by the Warrant Agent and delivered by it to the Company pursuant to this Agreement or for the application by the Company of the proceeds of the issue and sale, or exercise, of the Warrants. |
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(v) |
In the event the Warrant Agent believes any ambiguity or uncertainty exists hereunder or in any notice, instruction, direction, request or other communication, paper or document received by the Warrant Agent hereunder, the Warrant Agent, may, in its sole discretion, refrain from taking any action, and shall be fully protected and shall not be liable in any way to Company or the holder of any Warrant or any Person for refraining from taking such action, unless the Warrant Agent receives written instructions signed by the Company which eliminates such ambiguity or uncertainty to the satisfaction of Warrant Agent. |
Section 8.5 Acceptance of Agency. The Warrant Agent hereby accepts the agency established by this Agreement and agrees to perform the same upon the express terms and conditions (and no implied terms or conditions) herein set forth and, among other things, shall account promptly to the Company with respect to Series B Warrants exercised and concurrently account for and pay to the Company all moneys received by the Warrant Agent for the purchase of Warrant Shares through the exercise of Series B Warrants. The Warrant Agent shall act hereunder solely as agent for the Company, and shall not assume any obligations or relationship of agency or trust with any of the owners or holders of the Warrants. The Warrant Agent shall not have any duty or responsibility in the case of the receipt of any written demand from any holder of Warrants with respect to any action or default by the Company, including, without limiting the generality of the foregoing, any duty or responsibility to initiate or attempt to initiate any proceedings at law or otherwise or to make any demand upon the Company.
Section 8.6 Limitation on Liability. Notwithstanding anything contained herein to the contrary (except in the case of gross negligence, willful misconduct or bad faith (which gross negligence, bad faith, or willful misconduct must be determined by a final, non-appealable judgment of a court of competent jurisdiction), the Warrant Agent’s aggregate liability during any term of this Agreement with respect to, arising from, or arising in connection with this Agreement, or from all services provided or omitted to be provided under this Agreement, whether in contract, or in tort, or otherwise, is limited to, and shall not exceed, the amount of annual fees paid hereunder (but not including reimbursable expenses) by the Company to the Warrant Agent during the twelve (12) months immediately preceding the event for which recovery from the Warrant Agent is being sought.
ARTICLE IX.
SUPPLEMENTAL WARRANT AGREEMENTS
Section 9.1 Provision for Supplemental Warrant Agreements for Certain Purposes. From time to time the Company (when authorized by action of the directors) and the Warrant Agent may, subject to the provisions of this Agreement, and they shall, when so directed in accordance with the provisions of this Agreement, execute and deliver by their proper officers, agreements or instruments supplemental hereto, which hereafter shall form part hereof, for any one or more or all of the following purposes:
(a) setting forth any adjustments resulting from the application of the provisions of Article 4;
(b) adding to the provisions hereof such additional covenants and enforcement provisions as, in the opinion of counsel, are necessary or advisable in the circumstances, provided that the same are not in the opinion of the Warrant Agent prejudicial to the interests of the Warrantholders;
(c) giving effect to any extraordinary resolution passed as provided in Section 7.6;
(d) making such provisions not inconsistent with this Agreement as may be necessary or desirable with respect to matters or questions arising hereunder or for the purpose of obtaining a listing or quotation of the Series B Warrants on any stock exchange, provided that such provisions are not, in the opinion of the Warrant Agent, prejudicial to the interests of the Warrantholders;
(e) adding to or altering the provisions hereof in respect of the transfer of Series B Warrants, making provision for the exchange of Warrant Certificates, and making any modification in the form of the Warrant Certificates which does not affect the substance thereof;
(f) modifying any of the provisions of this Agreement, including relieving the Company from any of the obligations, conditions or restrictions herein contained, provided that such modification or relief shall be or become operative or effective only if, in the opinion of the Warrant Agent, such modification or relief in no way prejudices any of the rights of the Warrantholders or of the Warrant Agent, and provided further that the Warrant Agent may in its sole discretion decline to enter into any such supplemental agreement which in its opinion may not afford adequate protection to the Warrant Agent when the same shall become operative; and
(g) for any other purpose not inconsistent with the terms of this Agreement, including the correction or rectification of any ambiguities, defective or inconsistent provisions, errors, mistakes or omissions herein, provided that in the opinion of the Warrant Agent the rights of the Warrant Agent and of the Warrantholders are in no way prejudiced thereby.
The Warrant Agent shall execute such supplement upon the delivery of a certificate from an Appropriate Officer which states that the proposed supplement is in compliance with the terms of this Section 9.1. Notwithstanding anything in this Agreement to the contrary, the Warrant Agent shall not be required to execute any supplement to this Agreement that it has determined would adversely affect its own rights, duties, obligations or immunities under this Agreement. No supplement to this Agreement shall be effective unless duly executed by the Warrant Agent.
ARTICLE X.
MISCELLANEOUS PROVISIONS
Section 10.1 Binding Effects; Benefits. This Agreement shall inure to the benefit of and shall be binding upon the Company, the Warrant Agent and the Holders and their respective heirs, legal representatives, successors and assigns. Nothing in this Agreement, expressed or implied, is intended to or shall confer on any person other than the Company, the Warrant Agent and the Holders, or their respective heirs, legal representatives, successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.
Section 10.2 Notices. Any notice or other communication required or which may be given hereunder shall be in writing and shall be sent by certified or registered mail, by overnight courier service (return receipt requested, postage prepaid), by personal delivery or by facsimile transmission. Such notice or communication shall be deemed given when sent, in each case as follows:
if to the Warrant Agent, to:
Computershare Trust Company, N.A.
Computershare Inc.
150 Royall Street
Canton, MA 02021
Attention: Client Services
if to the Company, to:
Kingsway Financial Services Inc.
150 Pierce Road, 6th Floor
Itasca, IL 60143
if to Registered Holders, at their addresses as they appear in the Warrant Register.
Section 10.3 Funds. All funds received by Co-Agent under this Agreement that are to be distributed or applied by Co-Agent in the performance of services hereunder (the “Funds”) shall be held by Co-Agent as agent for the Company and deposited in one or more bank accounts to be maintained by Co-Agent in its name as agent for the Company. Until paid pursuant to the terms of this Agreement, Co-Agent will hold the Funds through such accounts in: deposit accounts of commercial banks with Tier 1 capital exceeding $1 billion or with an average rating above investment grade by S&P (LT Local Issuer Credit Rating), Moody’s (Long Term Rating) and Fitch Ratings, Inc. (LT Issuer Default Rating) (each as reported by Bloomberg Finance L.P.). Co-Agent may from time to time receive interest, dividends or other earnings in connection with such deposits. Co-Agent shall not be obligated to pay such interest, dividends or earnings to the Company, any holder or any other party. Co-Agent shall have no responsibility or liability for any diminution of the Funds that may result from any deposit made by Co-Agent in accordance with this paragraph, including any losses resulting from a default by any bank, financial institution or other third party.
Section 10.4 Persons Having Rights under this Agreement. Nothing in this Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any Person other than the parties hereto and the Holders, any right, remedy, or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise, or agreement hereof. All covenants, conditions, stipulations, promises, and agreements contained in this Agreement shall be for the sole and exclusive benefit of the parties hereto, their successors and assigns and the Holders.
Section 10.5 Examination of this Agreement. A copy of this Agreement shall be available at all reasonable times at the office of the Warrant Agent designated for such purpose, for examination by the Holder of any Series B Warrant. Prior to such examination, the Warrant Agent may require any such holder to submit his Series B Warrant for inspection by it.
Section 10.6 Counterparts. This Agreement may be executed in any number of original or facsimile counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. A signature to this Agreement transmitted electronically shall have the same authority, effect, and enforceability as an original signature.
Section 10.7 Effect of Headings. The section headings herein are for convenience only and are not part of this Agreement and shall not affect the interpretation hereof.
Section 10.8 Amendments. All and any provisions of this Agreement and the Warrant Certificates may from time to time be amended by agreement between the Company and the Warrant Agent, without the need for any additional consent by or on behalf of the Warrantholders, for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provisions contained herein or in any manner which the Company and the Warrant Agent may deem necessary or expedient and any such amendments are binding on all Warrantholders from and after the effective date thereof. The Warrant Agent shall execute such amendment upon the delivery of a certificate from an Appropriate Officer which states that the proposed amendment is in compliance with the terms of this Section 10.8 and/or Section 7.6. Notwithstanding anything in this Agreement to the contrary, the Warrant Agent shall not be required to execute any amendment to this Agreement that it has determined would adversely affect its own rights, duties, obligations or immunities under this Agreement. No amendment to this Agreement shall be effective unless duly executed by the Warrant Agent. If this Agreement is so amended, reference herein to this Agreement is, unless the context otherwise requires, construed, as and from the date from which such amendment is expressed to be made, as references to this Agreement as so amended.
Section 10.9 No Inconsistent Agreements; No Impairment. The Company will not, on or after the date hereof, enter into any agreement with respect to its securities which conflicts with the rights granted to the Holders in the Series B Warrants or the provisions hereof. The Company represents and warrants to the Holders that the rights granted hereunder do not in any way conflict with the rights granted to holders of the Company’s securities under any other agreements. The Company will not, by amendment of its organizational documents or through any reorganization, transfer of assets, consolidation, amalgamation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of the Series B Warrants and in the taking of all such action as may be necessary in order to preserve the exercise rights of the Holders against impairment.
Section 10.10 Integration/Entire Agreement. This Agreement, together with the Series B Warrants, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the Company, the Warrant Agent and the Holders in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein, with respect to the Series B Warrants. This Agreement and the Series B Warrants supersede all prior agreements and understandings between the parties with respect to such subject matter.
Section 10.11 Governing Law, Etc. This Agreement and each Series B Warrant issued hereunder shall be deemed to be a contract made under the laws of the Province of Ontario provided, however, that all provisions regarding the rights, duties, liabilities and obligations of the Warrant Agent shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York. Each party hereto consents and submits to the jurisdiction of the courts of the Province of Ontario in connection with any action or proceeding brought against it that arises out of or in connection with, that is based upon, or that relates to this Agreement or the transactions contemplated hereby; except that each party irrevocably agrees that any action or proceeding with respect to this Agreement and the rights and obligations of the Warrant Agent arising hereunder, or for recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations of the Warrant Agent arising hereunder brought by any other party hereto or its successors or assigns shall be brought and determined exclusively in the Supreme Court, State of New York, County of New York, or any federal court sitting in the State of New York, County of New York. In connection with any such action or proceeding in any such court, each party hereto hereby waives personal service of any summons, complaint or other process and hereby agrees that service thereof may be made in accordance with the procedures for giving notice set forth in Section 9.2 hereof. Each party hereto hereby waives any objection to jurisdiction or venue in any such court in any such action or proceeding and agrees not to assert any defense based on forum non conveniens or lack of jurisdiction or venue in any such court in any such action or proceeding.
Section 10.12 Termination. This Agreement shall terminate on the Expiration Date. Notwithstanding the foregoing, this Agreement will terminate on any earlier date when all Series B Warrants have been exercised. The obligations, rights, immunities and protections contained in Article VIII and this Article IX shall survive the expiration of the Warrants, such termination and the resignation, replacement or removal of the Warrant Agent.
Section 10.13 Severability. In the event that any one or more of the provisions contained herein or in the Series B Warrants, or the application thereof in any circumstances, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provisions in every other respect and of the remaining provisions contained herein and therein shall not be affected or impaired thereby; provided, however, that if such excluded provision shall materially affect the rights, immunities, liabilities, duties or obligations of the Warrant Agent, the Warrant Agent shall be entitled to resign immediately upon written notice to the Company.
Section 10.14 Attorneys’ Fees. In any action or proceeding brought to enforce any provisions of this Agreement or any Series B Warrant, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys’ fees and disbursements in addition to its costs and expenses and any other available remedy.
Section 10.15 Force Majeure. Notwithstanding anything to the contrary contained herein, neither party hereto will be liable for any delays or failures in performance resulting from acts beyond its reasonable control including, without limitation, acts of God, terrorist acts, epidemics, pandemics, shortage of supply, breakdowns or malfunctions, interruptions or malfunction of computer facilities, or loss of data due to power failures or mechanical difficulties with information storage or retrieval systems, labor difficulties, war, or civil unrest.
Section 10.16 Confidentiality. The Warrant Agent and the Company agree that all books, records, information and data pertaining to the business of the other party, including inter alia, personal, non-public Holder information, which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement, including the fees for services provided hereunder shall remain confidential, and shall not be voluntarily disclosed to any other person, except as may be required by law, rule or regulation. However, each party may disclose relevant aspects of the other party's confidential information to its officers, affiliates, agents, subcontractors and employees to the extent reasonably necessary to perform its duties and obligations under this Agreement and such disclosure is not prohibited by applicable law; provided, further, that such disclosing party shall be responsible for any breach of this Section 9.16 by any of its officers, affiliates, agents, subcontractors or employees that receive confidential information.
Section 10.17 Further Assurances. Each party hereto shall perform, acknowledge and deliver or cause to be performed, acknowledged and delivered all such further and other acts, documents, instruments and assurances as may be reasonably required by the other party for the carrying out or performing by such party of the provisions of this Agreement.
Section 10.18 Consequential Damages. Neither party to this Agreement shall be liable to the other party for any consequential, indirect, punitive, special or incidental damages under any provisions of this Agreement or for any consequential, indirect, punitive, special or incidental loss or damages of any kind whatsoever (including, without limitation, lost profits) arising out of any act or failure to act hereunder even if that party has been advised of or has foreseen the possibility of such damages.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the day and year first above written.
KINGSWAY FINANCIAL SERVICES INC., as Company
By:
Name:
Title:
COMPUTERSHARE TRUST COMPANY, N.A,
COMPUTERSHARE INC.,
Collectively, as Warrant Agent
By:
Name:
Title:
SCHEDULE “A”
Form of Warrant Certificate
SERIES B WARRANT
to acquire Common Shares of
KINGSWAY FINANCIAL SERVICES INC.
CUSIP: 496904137
ISIN: CA4969041371
Warrant Certificate No. 20__ – B● Certificate for _______________________ Series B Warrants, each entitling the holder to acquire one Common Share (subject to adjustment as provided for in the Series B Warrant Agreement (as defined below))
THIS IS TO CERTIFY THAT, for value received, ________________________________ (the “Warrantholder”) is the registered holder of the number of Series B common share purchase warrants (the “Series B Warrants”) of Kingsway Financial Services Inc. (the “Corporation”) specified above, and is entitled, on exercise of these Series B Warrants upon and subject to the terms and conditions set forth herein and in the Series B Warrant Agreement, to purchase at any time starting on the first day of the thirty-seventh month after the date of the issuance of the Series B Warrants until any time before 5:00 p.m. (Eastern time) (the “Expiry Time”) on ●, 2023 (the “Expiry Date”), one common share in the capital of the Corporation (a “Common Share”) for each Series B Warrant, subject to adjustment in accordance with the terms of the Series B Warrant Agreement.
The right to purchase Common Shares may only be exercised by the Warrantholder within the time set forth above by:
(a) duly completing and executing the exercise form (the “Exercise Form”) attached hereto; and
(b) surrendering this warrant certificate (the “Warrant Certificate”), with the Exercise Form to Computershare Trust Company, N.A. and Computershare Inc. (collectively, the “Warrant Agent”) at the designated office of the Warrant Agent, together with a certified cheque drawn against a U.S. or Canadian bank, U.S. or Canadian bank draft or U.S. or Canadian postal money order in the lawful money of the United States payable to the order of the Company in an amount equal to the aggregate Exercise Price (as defined below) for the Common Shares so subscribed for.
The surrender of this Warrant Certificate, the duly completed Exercise Form and payment as provided above will be deemed to have been effected only on personal delivery thereof to the Warrant Agent at its office designated for such purpose.
Subject to adjustment thereof in the events and in the manner set forth in the Series B Warrant Agreement, the exercise price payable for each Common Share upon the exercise of each Series B Warrant is US$ ● per Common Share (the “Exercise Price”).
Certificates for the Common Shares subscribed for will be mailed to the persons specified in the Exercise Form at their respective addresses specified therein or, if so specified in the Exercise Form, delivered to such persons at the office of the Warrant Agent where this Warrant Certificate is surrendered. If fewer Common Shares are purchased than the number that can be purchased pursuant to this Warrant Certificate, the holder hereof will be entitled to receive without charge a new Warrant Certificate in respect of the balance of the Series B Warrants not so exercised. No fractional Common Shares will be issued upon exercise of any Warrant.
This Warrant Certificate evidences Series B Warrants issued or issuable under the provisions of a warrant agreement (which agreement together with all other instruments supplemental or ancillary thereto is herein referred to as the “Series B Warrant Agreement”) dated as of ●, 2021 between the Corporation and the Warrant Agent, to which Series B Warrant Agreement reference is hereby made for particulars of the rights of the holders of Series B Warrants, the Corporation and the Warrant Agent in respect thereof and the terms and conditions on which the Series B Warrants are issued and held, all to the same effect as if the provisions of the Series B Warrant Agreement were herein set forth, to all of which the Warrantholder, by acceptance hereof, assents. The Corporation will furnish to the Warrantholder, on request and without charge, a copy of the Series B Warrant Agreement.
On presentation at the designated office of the Warrant Agent as set out above, subject to the provisions of the Series B Warrant Agreement and on compliance with the reasonable requirements of the Warrant Agent, one or more Warrant Certificates may be exchanged for one or more Warrant Certificates entitling the holder thereof to purchase in the aggregate an equal number of Common Shares as are purchasable under the Warrant Certificates so exchanged.
The Series B Warrant Agreement contains provisions for the adjustment of the Exercise Price and the number of Common Shares issuable upon the exercise of Series B Warrants, in the events and in the manner set forth therein.
The Series B Warrant Agreement also contains provisions making binding on all holders of Series B Warrants outstanding thereunder resolutions passed at meetings of holders of Series B Warrants held in accordance with the provisions of the Series B Warrant Agreement and instruments in writing signed by holders of Series B Warrants representing a specific majority of the then outstanding Series B Warrants.
Nothing contained in this Warrant Certificate, the Series B Warrant Agreement or elsewhere shall be construed as conferring upon the holder hereof any right or interest whatsoever as a holder of Common Shares or any other right or interest except as herein and in the Series B Warrant Agreement expressly provided. In the event of any discrepancy between anything contained in this Warrant Certificate and the terms and conditions of the Series B Warrant Agreement, the terms and conditions of the Series B Warrant Agreement shall govern.
Series B Warrants may only be transferred in compliance with the conditions of the Series B Warrant Agreement on the register to be kept by the Warrant Agent at its offices designated for such purposes, upon surrender of this Warrant Certificate to the Warrant Agent accompanied by a written instrument of transfer in form and execution satisfactory to the Warrant Agent and upon compliance with the terms and conditions prescribed in the Series B Warrant Agreement and with such reasonable requirements as the Warrant Agent or other registrar may prescribe and upon the transfer being duly noted thereon by the Warrant Agent or other registrar. Time is of the essence hereof.
This Warrant Certificate will not be valid for any purpose until it has been countersigned by or on behalf of the Warrant Agent from time to time under the Series B Warrant Agreement.
The parties hereto have declared that they have required that this Series B Warrant Agreement and all other documents related hereto be in the English language only.
IN WITNESS WHEREOF the Corporation has caused this Warrant Certificate to be duly executed as of _________________, 20___.
KINGSWAY FINANCIAL SERVICES INC.
By:
Name: .
Title:
By:
Name:
Title:
COMPUSHARE TRUST COMPANY, N.A.
COMPUTERSHARE INC.
Per:
Name:
Title:
FORM OF TRANSFER
TO: Computershare Trust Company, N.A.
OR TO: Computershare Inc.
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers to
(print name and address)
______ (number) Series B Warrants represented by this Warrant Certificate and hereby irrevocably constitutes and appoints ____________________________ as its attorney with full power of substitution to transfer the said securities on the appropriate register of the Warrant Agent.
In the case of a Warrant Certificate that contains a U.S. restrictive legend, the undersigned hereby represents, warrants and certifies that (one (only) of the following must be checked):
(A) the transfer is being made only to the Corporation;
(B) the transfer is being made outside the United States in accordance with Rule 904 of Regulation S under the U.S. Securities Act, and in compliance with any applicable local securities laws and regulations and the holder has provided herewith the Declaration for Removal of Legend attached as Schedule “C” to the Series B Warrant Agreement;
(C) the transfer is being made within the United States or to, or for the account or benefit of, a U.S. Person or a person in the United States, in accordance with Rule 144A under the U.S. Securities Act; or
(D) the transfer is being made within the United States or to, or for the account or benefit of, a U.S. Person or a person in the United States, in accordance with another transaction that does not require registration under the U.S. Securities Act or any applicable state securities laws and the undersigned has furnished to the Corporation and the Warrant Agent an opinion of counsel of recognized standing or such other documentation in form and substance reasonably satisfactory to the Corporation and the Warrant Agent to such effect.
In the case of a Warrant Certificate that does not contain a U.S. restrictive legend, if the proposed transfer is to, or for the account or benefit of, a U.S. Person or a person in the United States, the undersigned hereby represents, warrants and certifies that the transfer of the Series B Warrants is being completed pursuant to an exemption from the registration requirements of the U.S. Securities Act and any applicable state securities laws, in which case the undersigned has furnished to the Corporation and the Warrant Agent an opinion of counsel of recognized standing or such other documentation in form and substance reasonably satisfactory to the Corporation and the Warrant Agent to such effect. The undersigned further acknowledges and agrees that the Warrant Certificate to be issued to the transferee will contain a U.S. restrictive legend in the manner required by the Series B Warrant Agreement.
If the Warrant Certificate does not contain a U.S. restrictive legend and the transfer is to, or for the account or benefit of, a U.S. Person or a person in the United States, check this box.
DATED this ____ day of ______________, 20
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Guarantor’s Signature/Stamp ) Name of Transferor
CERTAIN REQUIREMENTS RELATING TO TRANSFERS — READ CAREFULLY
The signature(s) of the transferor(s) must correspond with the name(s) as written upon the face of the Warrant Certificate(s), in every particular, without alteration or enlargement, or any change whatsoever. The signature(s) on this form must be guaranteed in accordance with the Warrant Agent’s then current guidelines and requirements at the time of transfer. Notarized or witnessed signatures are not acceptable as guaranteed signatures. As at the time of transfer, you may choose one of the following methods (although subject to change in accordance with industry practice and standards):
● Canada and the USA: A Medallion Signature Guarantee obtained from a member of an acceptable Medallion Signature Guarantee Program (STAMP, SEMP, NYSE MSP). Many commercial banks, savings banks, credit unions, and all broker dealers participate in a Medallion Signature Guarantee Program. The Guarantor must affix a stamp bearing the actual words “Medallion Guaranteed”, with the correct prefix covering the face value of the certificate.
● Canada: A Signature Guarantee obtained from the Guarantor must affix a stamp bearing the actual words “Signature Guaranteed”. Signature Guarantees are not accepted from Treasury Branches, Credit Unions or Caisse Populaires unless they are members of a Medallion Signature Guarantee Program. For corporate holders, corporate signing resolutions, including certificate of incumbency, are also required to accompany the transfer, unless there is a “Signature & Authority to Sign Guarantee” Stamp affixed to the transfer (as opposed to a “Signature Guarantee” Stamp) obtained from an authorized officer of a major Canadian Schedule 1 chartered bank.
● Outside North America: For holders located outside North America, present the certificates(s) and/or document(s) that require a guarantee to a local financial institution that has a corresponding Canadian or American affiliate which is a member of an acceptable Medallion Signature Guarantee Program. The corresponding affiliate will arrange for the signature to be over-guaranteed.
SCHEDULE “B”
EXERCISE FORM
TO: Kingsway Financial Services Inc.
AND TO: Computershare Trust Company, N.A,
Computershare Inc.
150 Royall Street
Canton, MA 02021
Attention: Voluntary, Corporate Actions
AND TO: Computershare Inc.
C/O: Voluntary, Corporate Actions
P.O. Box 43011
Providence, RI 02940-301
The undersigned holder of the Series B Warrants evidenced by this Warrant Certificate hereby exercises the right to acquire ________________ (A) Common Shares of Kingsway Financial Services Inc.
Aggregate Exercise Price Payable:
((A) multiplied by US$ ●, subject to adjustment)
The undersigned hereby exercises the right of such holder to be issued, and hereby subscribes for, Common Shares that are issuable pursuant to the exercise of such Series B Warrants on the terms specified in such Warrant Certificate and in the Series B Warrant Agreement.
The undersigned hereby acknowledges that the undersigned is aware that the Common Shares received on exercise may be subject to restrictions on resale under applicable securities legislation.
Any capitalized term in this Warrant Certificate that is not otherwise defined herein, shall have the meaning ascribed thereto in the Series B Warrant Agreement.
The undersigned represents, warrants and certifies as follows (one (only) of the following must be checked):
(A) the undersigned holder at the time of exercise of the Series B Warrants (i) is not in the United States, (ii) is not a U.S. Person, (iii) is not exercising the Series B Warrants for the account or benefit of a U.S. Person or a person in the United States, (iv) did not execute or deliver this exercise form in the United States, and (v) delivery of the underlying Common Shares will not be to an address in the United States; OR
(B) the undersigned holder (a) is the original U.S. purchaser who purchased the Series B Warrants pursuant to the Corporation’s Unit Offering, (b) is exercising the Series B Warrants for its own account or for the account of a disclosed principal that was named in the agreement pursuant to which it purchased such Units, (c) is, and such disclosed principal, if any, is either (i) an “accredited investor” as defined in Rule 501(a) of Regulation D under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”) or (ii) a “qualified institutional buyer” within the meaning of Rule 144A under the U.S. Securities Act, at the time of exercise of these Series B Warrants, and (d) the undersigned holder has delivered to the Corporation and the Warrant Agent a completed and executed U.S. Purchaser Certification in substantially the form attached to the Series B Warrant Agreement as Schedule “D”; OR
(C) the undersigned holder is not an original U.S. purchaser who purchased the Series B Warrants pursuant to the Company’s Unit Offering, is either (i) a holder in the United States, (ii) a U.S. Person, (iii) a person exercising for the account or benefit of a U.S. Person or a person in the United States, (iv) executing or delivering this exercise form in the United States or (v) requesting delivery of the underlying Common Shares in the United States, and the undersigned holder has delivered to the Corporation and the Warrant Agent (a) a completed and executed U.S. Purchaser Certification in substantially the form attached to the Series B Warrant Agreement as Schedule “D”, or (b) an opinion of counsel of recognized standing in form and substance reasonably satisfactory to the Corporation and the Warrant Agent that the exercise is exempt from the registration requirements of applicable securities laws of any state of the United States and the U.S. Securities Act.
It is understood that the Corporation and Warrant Agent may require evidence to verify the foregoing representations.
Notes: (1) Certificates will not be registered or delivered to an address in the United States unless either Box B or C above is checked.
(2) If Box C above is checked, holders are encouraged to consult with the Corporation and the Warrant Agent in advance to determine that U.S. Purchaser Certification or the legal opinion tendered in connection with the exercise will be satisfactory in form and substance to the Corporation and the Warrant Agent.
“United States” and “U.S. Person” are as defined in Rule 902 of Regulation S under the U.S. Securities Act.
The undersigned hereby irrevocably directs that the said Common Shares be issued, registered and delivered as follows:
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Please print full name in which certificates representing the Common Shares are to be issued. If any Common Shares are to be issued to a person or persons other than the registered holder, the registered holder must pay to the Warrant Agent all eligible transfer taxes or other government charges, if any, and the Form of Transfer must be duly executed.
Once completed and executed, this Exercise Form must be mailed or delivered to Computershare Inc., 150 Royall Street Canton, MA 02021 Attention: Client Services, Corporate Trust Department or to Computershare Inc., CIO: Voluntary Corporate Actions, P.O. Box 43011, Providence, RI 02940-3011.
DATED this ______ day of ________________, 20 __.
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Please check if the certificates representing the Common Shares are to be delivered at the office where this Warrant Certificate is surrendered, failing which such certificates will be mailed to the address set out above. Certificates will be delivered or mailed as soon as practicable after the surrender of this Warrant Certificate to the Warrant Agent.
SCHEDULE “C”
DECLARATION FOR REMOVAL OF LEGEND
TO: Computershare Inc.
150 Royall Street
Canton, MA 02021
Attention: Client Services
The undersigned (A) acknowledges that the sale of the Series B Warrants of the Kingsway Financial Services Inc. (the “Issuer”) represented by certificate number(s) _______________________, to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”), and (B) certifies that (1) it is not an “affiliate” (as defined in Rule 405 under the U.S. Securities Act) of the Issuer (2) the offer of such securities was not made to a person in the United States and either (a) at the time the buy order was originated, the buyer was outside the United States, or the seller and any person acting on its behalf reasonably believed that the buyer was outside the United States or (b) the transaction was executed on or through the facilities of an applicable Canadian stock exchange designated in Regulation S or any other designated offshore securities market and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States, (3) neither the seller nor any affiliate of the seller nor any person acting on its behalf engaged or will be engaged in any directed selling efforts in the United States in connection with the offer and sale of such securities (4) the sale is bona fide and not for the purpose of “washing off” the resale restrictions imposed because the securities are “restricted securities” (as such term is defined in Rule 144(a)(3) under the U.S. Securities Act), (5) the seller does not intend to replace such securities with fungible unrestricted securities, and (6) the contemplated sale is not a transaction, or part of a series of transactions which, although in technical compliance with Regulation S, is part of a plan or scheme to evade the registration provisions of the U.S. Securities Act. Terms used herein have the meanings given to them by Regulation S under the U.S. Securities Act.
Dated: ________________________
___________________________
(Name of Holder - please print)
___________________________
(Authorized Signature)
___________________________
(Official Capacity - please print)
__________________________ (please print here the name of the individual whose signature
appears above, if different from the name of holder printed above)
SCHEDULE “D”
U.S. PURCHASER CERTIFICATE
TO: KINGSWAY FINANCIAL SERVICES INC. (the “Company”)
TO: COMPUTERSHARE TRUST COMPANY, N.A and COMPUTERSHARE INC., collectively as (the “Warrant Agent”)
All capitalized terms used herein, unless otherwise defined, have the meanings ascribed thereto in the Amended and Restated Series B Warrant Agreement, dated July 8, 2014, between the Company and Computershare Trust Company of Canada (the “Agreement”) to which this U.S. Purchaser Certificate is attached.
The undersigned Purchaser covenants, represents and warrants to the Company and the Warrant Agent that the Purchaser:
(a) is an “accredited investor”, as defined in Rule 501(a) of Regulation D under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”); Securities Act, or a “qualified institutional buyer” within the meaning of Rule 144A under the U.S. Securities Act;
(b) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment and it is able to bear the economic risk of loss of the investment;
(c) has had the opportunity to receive adequate information concerning the legal, business and financial conditions of the Company to make an informed decision regarding an investment in the Warrant Shares;
(d) is purchasing the Warrant Shares for investment only and not with a view to resale or distribution and in particular, the Purchaser will not distribute either directly or indirectly any of the Warrant Shares in the United States or to a “U.S. Person” (as that term is defined in Regulation S under the U.S. Securities Act) unless such Warrant Shares are registered under the U.S. Securities Act and any applicable state securities laws, including, without limitation, any regulation under the U.S. Securities Act, or in reliance on and pursuant to an exemption from such requirements.
(e) understands that the Warrant Shares have not been registered under the U.S. Securities Act, or the applicable securities laws of any state, and that the purchase and sale contemplated hereby is being made in reliance on an exemption from registration contained in Section 4(2) of the U.S. Securities Act and/or Regulation D promulgated under the U.S. Securities Act, based in part upon the Purchaser’s representations contained herein, including without limitation that the Purchaser is an “accredited investor” within the meaning or Rule 501 of Regulation D promulgated under the U.S. Securities Act;
(f) has not purchased the Warrant Shares as a result of any form of general solicitation or general advertising including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media (including any press release of the Company) or broadcast over the internet, radio, or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising;
(g) understands and acknowledges that upon the issuance thereof, and until such time as the same is no longer required under the applicable requirements of the U.S. Securities Act or applicable state securities laws and regulations, in addition to any legend that may be required by the New York Stock Exchange, the certificates representing the Warrant Shares may bear a legend in substantially the following form:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. SUCH SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY OTHER APPLICABLE SECURITIES LAWS, UNLESS THE HOLDER SHALL HAVE OBTAINED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”
and that any certificate representing any securities issuable in exchange for any of the Warrant Shares or in substitution thereof may bear the same legend.
(h) consents to the Company making a notation on its records or giving instructions to the registrar and transfer agent of the Company in order to implement the restrictions on transfer set forth and described herein;
(i) certifies that the offer, sale and issuance of the Warrant Shares is not a transaction, or part of a chain of transactions that is part of a plan or scheme to evade the registration requirements of the U.S. Securities Act; and
(j) certifies that, if the Purchaser is an entity or organization, the Purchaser was not formed for the specific purpose of acquiring the Warrant Shares.
IN WITNESS WHEREOF, the undersigned has executed this U.S. Purchaser Certificate as of the ______ day of ______________, 20__.
If a Corporation, Partnership or Other Entity:
NAME OF ENTITY: _________________
By:_________________________________
Name:
Title:
If an Individual:
By:_________________________________
Name:
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John T. Fitzgerald, certify that:
1. I have reviewed this report on Form 10-Q of Kingsway Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 5, 2021 |
| By /s/ John T. Fitzgerald |
| John T. Fitzgerald, President and Chief Executive Officer |
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kent A. Hansen, certify that:
1. I have reviewed this Form 10-Q of Kingsway Financial Services Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 5, 2021 |
| By /s/ Kent A. Hansen |
| Kent A. Hansen, Chief Financial Officer and Executive Vice President |
| (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Kingsway Financial Services Inc. (the “Company”) for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned John T. Fitzgerald, the President and Chief Executive Officer and Principal Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned's knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: November 5, 2021 |
| By /s/ John T. Fitzgerald |
| John T. Fitzgerald, President and Chief Executive Officer |
| (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Kingsway Financial Services Inc. (the “Company”) for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Kent A. Hansen, the Chief Financial Officer and Principal Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned's knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: November 5, 2021 |
| By /s/ Kent A. Hansen |
| Kent A. Hansen, Chief Financial Officer and Executive Vice President |
| (Principal Financial Officer) |