Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
1.
Nature of Business
1347
Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or “us”) is a holding
company which previously specialized in providing personal property insurance in coastal markets including those in Louisiana,
Texas and Florida. We were incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings,
Inc., and changed our legal name to 1347 Property Insurance Holdings, Inc. on November 19, 2013. On March 31, 2014, we completed
an initial public offering of our common stock. Prior to the offering, we were a wholly owned subsidiary of Kingsway America Inc.,
which, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc., or KFSI, a publicly owned Delaware holding company.
As of December 31, 2019, KFSI and its affiliates held warrants that, if exercised, would cause KFSI and its affiliates to hold
an approximate 20% ownership interest in our common stock. In addition, as of December 31, 2019, Fundamental Global Investors,
LLC and its affiliates, or FGI, beneficially owned approximately 45% of our outstanding shares of common stock. D. Kyle Cerminara,
Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, Co-Chairman
of our Board of Directors, serves as President, Co-Founder and Partner of FGI.
On
December 2, 2019, we completed the sale of all of the issued and outstanding equity of three of the Company’s wholly-owned
subsidiaries, Maison Insurance Company (“Maison”), Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor”
and, together with Maison and MMI, the “Maison Business”), to FedNat Holding Company, a Florida corporation (“FedNat”),
pursuant to the terms and conditions of the Equity Purchase Agreement, dated as of February 25, 2019 (the “Purchase Agreement”),
by and among the Company and the Maison Business, on the one hand, and FedNat, on the other hand (the “Asset Sale”).
As
consideration for the Asset Sale, FedNat paid the Company $51,000, consisting of $25,500 in cash and $25,500 in FedNat’s
common stock, or 1,773,102 shares of common stock. The stock consideration was determined by dividing $25,500 by the weighted
average closing price per share of FedNat’s common stock on the Nasdaq Stock Market during the 20-trading day period immediately
preceding December 2, 2019. In addition, upon the closing of the Asset Sale, $18,000 of outstanding surplus note obligations payable
by Maison to the Company, plus all accrued but unpaid interest, was repaid to the Company.
On
December 31, 2019, the shares of FedNat common stock issued to the Company were registered under the Securities Act of 1933, as
amended (the “Securities Act”), pursuant to the terms of the Registration Rights Agreement entered into by the Company
and FedNat at the closing of the Asset Sale.
In
addition to the Registration Rights Agreement, the Company and FedNat entered into a Standstill Agreement, a Reinsurance Capacity
Right of First Refusal Agreement (the “Reinsurance Agreement”), an Investment Advisory Agreement and a Transition
Services Agreement at the closing of the Asset Sale.
Standstill
Agreement
The
Standstill Agreement imposes certain limitations and restrictions with respect to the voting securities of FedNat (including shares
of FedNat common stock) that are owned or held beneficially or of record by the Company. Under the Standstill Agreement, the Company
has agreed to vote all of the voting securities of FedNat beneficially owned by the Company in accordance with the recommendation
of the board of directors of FedNat with respect to any matter that is before the stockholders of FedNat for a vote by such stockholders.
The Standstill Agreement imposes limitations on the sale of voting securities of FedNat held by the Company and restricts the
Company from taking certain actions as a holder of voting securities of FedNat. The term of the Standstill Agreement is five years.
For
insurance regulatory purposes, the Company has waived any rights that it may have to exercise control of FedNat.
Reinsurance
Capacity Right of First Refusal Agreement
The
Reinsurance Agreement provides the Company with a right of first refusal to sell reinsurance coverage to the insurance company
subsidiaries of FedNat, providing reinsurance on up to 7.5% of any layer in FedNat’s catastrophe reinsurance program, subject
to the annual reinsurance limit of $15,000, on the terms and subject to the conditions set forth in the Reinsurance Agreement.
All reinsurance sold by the Company pursuant to the right of first refusal, if any, will be memorialized in an agreement in such
form and subject to such terms and conditions as are customary in the property and casualty insurance industry. The Reinsurance
Agreement is assignable by the Company subject to conditions set forth in the agreement. The term of the Reinsurance Agreement
is five years.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement, Fundamental Global Advisors LLC, a wholly-owned subsidiary of the Company (“Advisor”),
was formed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments,
advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding
macro-economic conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay Advisor an annual
fee of $100. FGI Funds Management, LLC will serve as the manager to the Advisor. FGI Funds Management, LLC is an affiliate
of Fundamental Global Investors, LLC, the Company’s largest stockholder. The term of the Investment Advisory Agreement is
five years.
Transition
Services Agreement
To
facilitate the transition following the Asset Sale, the Company and FedNat entered into a Transition Services Agreement, pursuant
to which the Company has agreed to provide certain transition accounting services to FedNat and the Insurance Companies, as requested,
and FedNat will arrange for certain prior employees of the Company who became employees of the FedNat in connection with the Asset
Sale to provide transition accounting services to the Company, as requested, on the terms and conditions set forth in the Transition
Services Agreement.
Business
Going Forward
Going
forward, the Company intends to operate as a diversified holding company of reinsurance and investment management businesses.
Subject to the approval of the Company’s stockholders at the Company’s 2020 Annual Meeting, the Company intends to
change its name to “Fundamental Global Financial Corporation” to align with its future business plans. Fundamental
Global Financial Corporation (“FGFC”) plans to carry out its business through three primary avenues, insurance, asset
management, and real estate. The Company also intends to change the ticker symbols for its common stock and 8.00% cumulative preferred
stock, Series A, and has reserved with Nasdaq the ticker symbols “FGI” and “FGIPP,” respectively.
Insurance:
The
Company is in the process of forming a wholly owned reinsurance subsidiary, Fundamental Global Reinsurance Ltd., to provide specialty
property and casualty reinsurance. Fundamental Global Reinsurance Ltd. is expected to have a Class B (iii) insurer license
in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto and will be subject to regulation by
the Cayman Islands Monetary Authority.
Asset
Management:
The
Company has formed a wholly owned subsidiary, Fundamental Global Advisors, LLC to serve as an investment advisor to FedNat Holding
Company under the investment advisory agreement entered into at the closing of the Asset Sale. In addition, the Company intends
to form a joint venture with Fundamental Global Investors, LLC to sponsor investment advisors that will manage private funds ranging
the full spectrum of alternative equities, fixed income, private equity and real estate. FGFC will seek to benefit from the growth
of the assets under management of the investment advisors it sponsors and the performance of the funds they manage.
Real
Estate:
FGFC
plans to purchase controlling interests in income producing real estate assets. FGFC will seek to benefit from underlying rental
income on long-term leases with high quality tenants as well as the capital appreciation from the underlying real estate assets.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
2.
Significant Accounting Policies
Basis
of Presentation:
These
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Principles
of Consolidation and Discontinued Operations:
Due
to the sale of all of the issued and outstanding equity of Maison, MMI and ClaimCor on December 2, 2019, these operations have
been classified as discontinued operations in the Company’s financial statements presented herein. Certain transactions
between the Company and its subsidiaries, which have historically been eliminated upon consolidation, are shown on a gross basis
in the accompanying financial statements as such transactions have occurred between discontinued operations and those operations
which the Company intends to continue to utilize. These items include surplus notes in the amount of $18,000 plus approximately
$728 in accrued interest, all of which was settled upon the closing of the Asset Sale. These notes, which had been issued by Maison
to the Company, have been reflected as both an asset of continuing operations and liability of discontinued operations on the
Company’s consolidated balance sheet as of December 31, 2018. Interest associated with these surplus notes has been recorded
as part of net investment income from continuing operations as well as interest expense as part of discontinued operations on
the Company’s consolidated statement of operations for the years ended December 31, 2019 and 2018. Similarly, amounts due
from the Company to Maison upon the assignment of certain of Maison’s investments to the Company have been reflected as
an asset of continuing operations under the heading “Limited liability investments”, as well as a corresponding liability
under the heading “Due to affiliates” on the Company’s consolidated balance sheet as of December 31, 2018. Pursuant
to the terms of the Purchase Agreement, this assignment of investments was settled, in cash, prior to closing of the transaction.
All other significant intercompany balances and transactions have been eliminated upon consolidation.
The
Use of Estimates in the Preparation of Consolidated Financial Statements:
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates
of the consolidated financial statements and the reported amounts of revenues and expenses during the period reported. Actual
results could differ from those estimates. Changes in estimates are recorded in the accounting period in which the change is determined.
The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision
for loss and loss adjustment expense reserves, the valuation of fixed income securities and limited liability investments, valuation
of net deferred income taxes, the valuation of various securities we have issued in conjunction with the termination of the management
services agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs, and stock-based compensation expense.
Investments:
Investments in fixed income securities
were classified as available-for-sale and reported at estimated fair value prior to the sale of our fixed income portfolio
to FedNat. Unrealized gains and losses on fixed income securities were included in accumulated other comprehensive
income (loss), net of tax, until sold or an other-than-temporary impairment is recognized, at which point the cumulative unrealized
gains or losses were transferred to the consolidated statement of income. Effective January 1, 2019, we adopted Accounting
Standards Update No. 2016-01, Financial Instruments–Overall, requiring us to recognize unrealized gains and losses
on our equity securities through income. See Note 3 – Recently Adopted and Issued Accounting Standards for additional information.
As of December 31, 2018, our fixed income and equity securities were held by the Company’s insurance subsidiary, Maison,
and accordingly have been listed as part of assets of discontinued operations on the Company’s consolidated balance sheet.
Limited liability investments include investments
in a limited partnership and a limited liability company for which there does not exist a readily determinable fair value.
The Company accounts for these investments at their cost, minus impairment, if any, plus or minus changes resulting from observable
price changes in orderly transactions for identical or similar investment of the same issuer. Any profit distributions the Company
receives on these investments is included in income.
Limited liability investments also include
an investment where the Company is a limited partner in a limited partnership, which we have determined to be a variable interest
entity (VIE), in which the Company is not the primary beneficiary. The Company does not have a controlling financial interest
in the limited partnership, but exerts significant influence over the entity’s operating and financial policies as it owns
an economic interest of approximately 49%. Accordingly, the Company has accounted for this investment under the equity
method of accounting, recognizing any unrealized gains or losses on the investment through income. See Note 5 for
additional information on the Company’s investment in the VIE.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Other
investments consisted of short-term investments, with original maturities between three months and one year, reported at cost,
which approximates estimated fair value due to their short-term nature. Other investments also included a fixed rate certificate
of deposit with an original maturity of 15 months. These investments were held by the Company’s insurance subsidiary, Maison
and accordingly have been listed as part of assets of discontinued operations on the Company’s consolidated balance sheet
as of December 31, 2018.
Realized
gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in net investment income.
Interest
income is included in net investment income and is recorded as it accrues.
The
Company accounts for its investments using trade date accounting.
The
Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment.
Impairment is charged to the statement of income if the fair value of the instrument falls below its amortized cost and the decline
is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length
of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and
the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
Cash
and Cash Equivalents:
Cash
and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.
Reinsurance:
Reinsurance
premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Premiums and losses ceded to other companies have been reported as
a reduction of premium revenue and incurred net losses and loss adjustment expenses. A reinsurance recoverable is recorded for
that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.
Income
Taxes:
The
Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities
are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and
their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits
is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes
will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable
or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any,
related to unrecognized tax benefits in income tax expense (benefit).
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Concentration
of Credit Risk:
Financial
instruments which potentially expose the Company to concentrations of credit risk include investments, cash, and premiums receivable
prior to the Asset Sale transaction. The Company maintains its cash with a major U.S. domestic banking institution which is insured
by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250. As of December 31, 2019 the Company held funds
in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The
Company has not incurred losses related to these deposits.
The
Company had not experienced significant losses related to premiums receivable from its policyholders nor from amounts due from
reinsurers prior to the Asset Sale transaction on December 2, 2019.
Revenue
Recognition:
Premium
revenue, up to the date of the Asset Sale transaction was recognized on a pro rata basis over the term of the respective policy
contract.
Service
charges on installment premiums were recognized as income upon receipt of related installment payments and were reflected in other
income up to the date of the Asset Sale transaction.
Revenue
from policy fees was deferred and recognized over the term of the respective policy period, with revenue reflected in other income
up to the date of the Asset Sale transaction.
Ceded
premiums were charged to income over the applicable term of the various reinsurance contracts with third party reinsurers.
Stock-Based
Compensation:
The
Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – Stock Compensation which
requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others
receive shares of stock or equity instruments. The fair value of each stock option award is estimated on the date of grant using
the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free
interest rate. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the
requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional
paid-in capital.
The
Company has also issued restricted stock units (“RSUs”) to certain of its employees and directors which have been
accounted for as equity-based awards since, upon vesting, they are required to be settled in the Company’s common shares.
We have used the fair value of the Company’s common stock on the date the RSUs were issued to estimate the grant date fair
value of those RSUs which vest solely based upon the passage of time, as well as a Monte Carlo valuation model to estimate the
fair value of those RSUs which vest solely upon market-based conditions. The fair value of each RSU is recorded as compensation
expense over the requisite service period, which is generally the expected period over which the awards will vest. In the case
of those RSUs which vest upon market-based conditions, should the market-based condition be achieved prior to the expiration of
the derived service period, any unrecognized cost will be recorded as compensation expense in the period in which the RSUs actually
vest.
Based
upon the Company’s historical forfeiture rates relating to stock options and RSUs, the Company has not made any adjustment
to stock compensation expense for expected forfeitures as of December 31, 2019. See Note 7 for further disclosure.
Fair
Value of Financial Instruments:
The
carrying values of certain financial instruments, including cash, short-term investments, premiums receivable, accounts payable,
and other accrued expenses approximate fair value due to their short-term nature. The Company measures the fair value of financial
instruments in accordance with GAAP which defines fair value as the exchange price that would be received for an asset (or paid
to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between
market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 12 for further information
on the fair value of the Company’s financial instruments.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Earnings
(loss) Per Common Share:
Basic
earnings (loss) per common share is computed using the weighted average number of shares outstanding during the respective period.
Diluted
earnings (loss) per common share assumes conversion of all potentially dilutive outstanding stock options, restricted stock units,
warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of
diluted earnings (loss) per share if their effect is anti-dilutive.
3.
Recently Adopted and Issued Accounting Standards
Recently
Adopted Accounting Standards
ASU
2014-09: Revenue from Contracts with Customers:
The
Financial Accounting Standards Board (the “FASB”) has issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers, and related amendments ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05
and ASU 2017-13 (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard
that will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer
goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope
of other standards, such as insurance contracts. Topic 606 became effective for annual periods beginning after December 15, 2017,
and interim periods within those fiscal years. The Company adopted Topic 606 on January 1, 2018, but since virtually all of the
Company’s historic revenues related to insurance contracts and investment income, the adoption of Topic 606 did not have
an impact on the Company’s revenues. The Company will continue to monitor and examine transactions that could potentially
fall within the scope of Topic 606 as such transactions are consummated.
ASU
2018-02: Income Statement – Reporting Comprehensive Income:
In
February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income. ASU 2018-02 was issued
to address financial reporting issues that arose as a result of the passage of the Tax Cuts and Jobs Act, enacted into law by
the United States federal government on December 22, 2017. Prior to the issuance of ASU 2018-02, GAAP required that deferred tax
assets and liabilities be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing
operations in the reporting period that includes the enactment date. That guidance was applicable even in situations in which
the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive
income. Under ASU 2018-02, a reclassification from accumulated other comprehensive income to retained earnings is allowed for
stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because ASU 2018-02 only relates to the reclassification
of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax
laws or rates be included in income from continuing operations is not affected. The Company adopted the amendments in this update
on January 1, 2018 and determined that ASU 2018-02 applied to the deferred taxes related to unrealized losses on its investment
portfolio, which had been previously recognized in other comprehensive income. This resulted in the reclassification of $33 from
accumulated other comprehensive income to retained earnings, representing the stranded tax effect on these losses.
ASU
2016-01: Financial Instruments-Overall:
In
January 2016, the FASB issued ASU 2016-01: Financial Instruments-Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for
financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity
method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value
recognized in net income. The Company adopted ASU 2016-01 effective January 1, 2019, resulting in a cumulative-effect adjustment
to retained earnings in the amount of $104, representing the after-tax unrealized holding gains in accumulated other comprehensive
income as of December 31, 2018, related to the Company’s available-for-sale equity securities. Subsequent changes in the
estimated fair value of the Company’s equity securities have now been recognized in the Company’s consolidated statement
of operations rather than in comprehensive income.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
ASU
2016-02: Leases:
In
February 2016, the FASB issued ASU 2016-02: Leases. ASU 2016-02 was issued to improve the financial reporting of leasing
transactions. Under the previous guidance for lessees, leases were only included on the consolidated balance sheet if certain
criteria, classifying the agreement as a capital lease, were met. This update requires the recognition of a right-of-use asset
and a corresponding lease liability, discounted to present value, for all leases that extend beyond 12 months. The Company adopted
this guidance effective January 1, 2019, using the modified retrospective method, under which we elected the package of practical
expedients and transition provisions allowing us to bring our existing operating leases onto the Company’s consolidated
balance sheet without adjusting comparative periods. We previously had operating leases for our facilities, which resulted in
a cumulative-effect adjustment to retained earnings in the amount of $10. We also recognized both a right-of-use asset and lease
liability in the amount of $314. Right-of-use assets are recognized at the lease commencement date at amounts equal to the respective
lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease liabilities
were recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing
rate. Operating lease expense was recognized on a straight-line basis over the lease term, while variable lease payments are expensed
as incurred.
The
Company’s right-of-use assets and lease liabilities were reflected in the Company’s consolidated balance sheet in
assets of discontinued operations and liabilities of discontinued operations, respectively, prior to the Company’s leases
being sold with the insurance operations of the business on December 2, 2019.
Accounting
Standards Pending Adoption
ASU
2016-13: Financial Instruments – Credit Losses:
In
June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 was issued to provide financial statement users with more useful information regarding the expected
credit losses on financial instruments held as assets. Under current GAAP, financial statement recognition for credit losses on
financial instruments was generally delayed until the occurrence of the loss was probable. The amendments of ASU 2016-13 eliminate
this probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses.
The amendments also broaden the information that an entity must consider in developing its expected credit loss estimates for
those assets measured at amortized cost by using forecasted information instead of the current methodology which only considered
past events and current conditions. Under ASU 2016-13, credit losses on available-for-sale debt securities will be measured in
a manner similar to current GAAP; however, the amendments require that credit losses be presented as an allowance against the
investment, rather than as a write-down. The amendments also allow the entity to record reversals of credit losses in current
period net income, which is prohibited under current GAAP. The amendments in this update are effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted, however smaller reporting
companies may delay adoption until January 2023. The Company is currently evaluating the impact of the adoption of ASU 2016-13
on its consolidated financial statements.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
4.
Discontinued Operations
As
previously discussed, on December 2, 2019, we completed the sale of all of the issued and outstanding equity of our three former
wholly-owned subsidiaries, Maison, MMI and ClaimCor. Accordingly, the Company has classified the Maison Business as discontinued
operations for all periods presented in this report as set forth in ASC 205-20 – Discontinued Operations.
The
following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities included in discontinued
operations which are presented separately in the Company’s consolidated balance sheet as of December 31, 2018. On December
2, 2019 the assets and liabilities previously included in discontinued operations had been disposed of in the Asset Sale transaction.
|
|
December
31,
2018
|
|
Carrying amounts of assets included
as part of discontinued operations
|
|
|
|
|
Fixed
income securities, at fair value (amortized cost of $77,366)
|
|
$
|
76,310
|
|
Equity investments,
at fair value (cost of $3,130)
|
|
|
3,263
|
|
Other investments
|
|
|
774
|
|
Cash and cash equivalents
|
|
|
27,236
|
|
Deferred policy
acquisition costs
|
|
|
9,111
|
|
Premiums receivable,
net of allowance of $50
|
|
|
7,720
|
|
Ceded unearned premiums
|
|
|
6,525
|
|
Reinsurance recoverable
on paid losses
|
|
|
530
|
|
Reinsurance recoverable
on loss reserves
|
|
|
5,661
|
|
Current income taxes
recoverable
|
|
|
2,051
|
|
Deferred tax asset,
net
|
|
|
1,014
|
|
Due from affiliate
|
|
|
2,698
|
|
Other
assets
|
|
|
1,676
|
|
Total assets
of discontinued operations included in the Company’s consolidated balance sheet
|
|
$
|
144,569
|
|
|
|
|
|
|
Carrying amounts of liabilities included
as part of discontinued operations
|
|
|
|
|
Loss and loss adjustment
expense reserves
|
|
$
|
15,151
|
|
Unearned premium
reserves
|
|
|
51,907
|
|
Ceded reinsurance
premiums payable
|
|
|
9,495
|
|
Agency commissions
payable
|
|
|
802
|
|
Premiums collected
in advance
|
|
|
1,840
|
|
Surplus notes plus
interest due to affiliate
|
|
|
18,244
|
|
Accrued premium
taxes and assessments
|
|
|
3,059
|
|
Other
liabilities
|
|
|
2,821
|
|
Total liabilities
of discontinued operations included in the Company’s consolidated balance sheet
|
|
$
|
103,319
|
|
The
following table presents a reconciliation of the major classes of line items constituting pretax profit (loss) of discontinued
operations to the after-tax profit (loss) of discontinued operations that are presented in the Company’s consolidated statement
of operations for the years ended December 31, 2019 and 2018.
|
|
Year
ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Gain from sale of the Maison Business
|
|
|
|
|
|
|
|
|
Cash
consideration received from sale
|
|
$
|
25,500
|
|
|
$
|
–
|
|
Stock
consideration received from sale
|
|
|
25,500
|
|
|
|
–
|
|
Total consideration received from sale
|
|
|
51,000
|
|
|
|
–
|
|
Less:
|
|
|
|
|
|
|
|
|
Carrying value of the Maison Business
on December 1, 2019
|
|
|
39,099
|
|
|
|
–
|
|
Transaction
and other sale related costs
|
|
|
2,818
|
|
|
|
50
|
|
Total pre-tax reductions
|
|
|
41,917
|
|
|
|
50
|
|
Pre-tax gain (loss) on sale
|
|
|
9,083
|
|
|
|
(50
|
)
|
Income
tax expense
|
|
|
2,017
|
|
|
|
–
|
|
Net gain (loss) from sale of the Maison
Business
|
|
$
|
7,066
|
|
|
$
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
49,691
|
|
|
$
|
54,357
|
|
Net investment income
|
|
|
4,354
|
|
|
|
1,552
|
|
Other income
|
|
|
2,854
|
|
|
|
2,246
|
|
Net losses and loss
adjustment expenses
|
|
|
(41,634
|
)
|
|
|
(27,413
|
)
|
Amortization of
deferred policy acquisition costs
|
|
|
(15,983
|
)
|
|
|
(15,313
|
)
|
General and administrative
expenses
|
|
|
(9,200
|
)
|
|
|
(12,369
|
)
|
Interest
expense on surplus notes due to affiliate
|
|
|
(1,708
|
)
|
|
|
(1,142
|
)
|
Pretax profit (loss) from the Maison
Business
|
|
|
(11,626
|
)
|
|
|
1,918
|
|
Income tax benefit
|
|
|
(2,488
|
)
|
|
|
(210
|
)
|
Income (loss) from the Maison Business,
net of taxes
|
|
$
|
(9,138
|
)
|
|
$
|
2,128
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss)
from discontinued operations, net of taxes
|
|
$
|
(2,072
|
)
|
|
$
|
2,078
|
|
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
5.
Investments
On
December 2, 2019, the Company received 1,773,102 shares of FedNat Holding Company common stock (NASDAQ: FNHC), along with $25,500
cash as consideration for the Asset Sale. The stock consideration was determined by dividing $25,500 by the weighted average closing
price per share of FedNat’s common stock on the Nasdaq Stock Market during the 20-trading day period immediately preceding
December 2, 2019. As of March 26, 2020, the estimated fair value of the Company’s 1,773,102 shares of FNHC common
stock was $20,320.
The Company’s limited liability
investments are comprised of investments in a limited partnership and a limited liability company which seek to provide equity
and asset-backed debt investment in a variety of privately-owned companies. The Company had a total potential commitment of $935
related to these investments, of which the two entities have drawn down approximately $776 through December 31, 2019. The limited
liability company is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI. The Company has accounted
for these two investments at cost minus impairment, if any, as the investments do not have readily determinable fair values.
For the year ended December 31, 2019, the Company has received profit distributions of $91 on these investments which has been
included in income.
Additionally, on June 18, 2018, Maison
invested $2,219 in FGI Metrolina Property Income Fund, LP (the “Fund”), which invests in real estate through a real
estate investment trust which is wholly owned by the Fund. The general partner of the Fund, FGI Metrolina GP, LLC, is managed,
in part, by Messrs. Cerminara and Johnson, the Chairman and Co-Chairman of the Board of Directors of the Company, respectively.
The Company, a limited partner of the Fund, does not have a controlling financial interest in the Fund, but exerts significant
influence over the entity’s operating and financial policies as it owns an economic interest of approximately 49%.
Accordingly, the Company has accounted for this investment under the equity method of accounting, recognizing any unrealized
holding gains or losses in income. The Company has committed to a total potential investment of up to $4,000 in the Fund.
As of December 31, 2019, the total amount invested in the Fund was $2,719, while the carrying amount on the Company’s balance
sheet was $3,229. The Company recognized an unrealized holding gain of $518 on this investment for the year ended December
31, 2019, and an unrealized holding loss of $8 on this investment for the year ended December 31, 2018.
Pursuant
to the terms of the Purchase Agreement, Maison assigned all of its right, title and interest in each of the limited liability
investments to the Company in exchange for the statutory carrying value of each investment (approximately $4,200). Accordingly,
these investments have been included on the Company’s consolidated balance sheet as of December 31, 2019 and 2018 as part
of continuing operations. Investment income resulting from the Company’s limited liability investments has also been included
in net investment income as part of continuing operations, on the Company’s consolidated statement of operations for the
years ended December 31, 2019 and 2018.
A
summary of the Company’s investments as of December 31, 2019 and 2018 is as follows.
|
|
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Carrying
Amount
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNHC
common stock
|
|
$
|
25,500
|
|
|
$
|
3,987
|
|
|
$
|
–
|
|
|
$
|
29,487
|
|
Limited
liability investments
|
|
|
3,495
|
|
|
|
510
|
|
|
|
–
|
|
|
|
4,005
|
|
Total investments
|
|
$
|
28,995
|
|
|
$
|
4,497
|
|
|
$
|
–
|
|
|
$
|
33,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited liability
investments
|
|
$
|
2,995
|
|
|
$
|
–
|
|
|
$
|
(8
|
)
|
|
$
|
2,987
|
|
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Other-than-Temporary
Impairment:
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.
The analysis includes some or all of the following procedures as deemed appropriate by the Company:
|
●
|
considering
the extent, and length of time during which the market value has been below cost;
|
|
●
|
identifying
any circumstances which management believes may impact the recoverability of the unrealized loss positions;
|
|
●
|
obtaining
a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their
knowledge and experience combined with market-based valuation techniques;
|
|
●
|
reviewing
the historical trading volatility and trading range of the investment and certain other similar investments;
|
|
●
|
assessing
if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from
third-party credit rating agencies;
|
|
●
|
assessing
the timeliness and completeness of principal and interest payment due from the investee; and
|
|
●
|
assessing
the Company’s ability and intent to hold these investments until the impairment may be recovered.
|
The
risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary
include, but may not be limited to, the following:
|
●
|
the
opinions of professional investment managers could be incorrect;
|
|
●
|
the
past trading patterns of investments may not reflect their future valuation trends;
|
|
●
|
the
credit ratings assigned by credit rating agencies may be incorrect due to unforeseen events or unknown facts related to the
investee company’s financial situation; and
|
|
●
|
the
historical debt service record of an investment may not be indicative of future performance and may not reflect a company’s
unknown underlying financial problems.
|
We
have not recorded any write-downs for an other-than-temporary impairment on the equity investments listed in the table above.
The Company did however record a write-down for an other-than-temporary impairment on a single equity investment resulting in
a charge of $215 for the year ended December 31, 2018. As this investment was held by our former insurance subsidiary, Maison,
this charge has been included as part of income from discontinued operations for the year ended December 31, 2018. We recorded
this write-down as a result of our analysis of the investment’s operating losses for 2018, which showed a considerable decline
when compared to its results for 2017.
Net
investment income for the years ended December 31, 2019 and 2018 is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Investment income:
|
|
|
|
|
|
|
|
|
Unrealized
holding gains on FNHC common stock
|
|
$
|
3,987
|
|
|
$
|
–
|
|
Interest on surplus
notes issued by Maison
|
|
|
1,708
|
|
|
|
1,142
|
|
Income from limited
liability investments
|
|
|
101
|
|
|
|
–
|
|
Loss on assignment
of limited liability investments
|
|
|
(239
|
)
|
|
|
–
|
|
Other
|
|
|
55
|
|
|
|
82
|
|
Gross investment income
|
|
|
5,612
|
|
|
|
1,224
|
|
Investment
expenses
|
|
|
(25
|
)
|
|
|
(16
|
)
|
Net investment
income
|
|
$
|
5,587
|
|
|
$
|
1,208
|
|
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
6.
Income Taxes
A
summary of income tax expense (benefit) is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current income tax expense
(benefit) – from continuing operations
|
|
$
|
–
|
|
|
$
|
(282
|
)
|
Current income
tax expense (benefit) – from discontinued operations
|
|
|
(894
|
)
|
|
|
832
|
|
Total current income tax expense (benefit)
|
|
|
(894
|
)
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
– from continuing operations
|
|
|
738
|
|
|
|
(26
|
)
|
Deferred income
tax expense (benefit) – from discontinued operations
|
|
|
423
|
|
|
|
(1,042
|
)
|
Total deferred income tax expense (benefit)
|
|
|
1,161
|
|
|
|
(1,068
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) –
from continuing operations
|
|
|
738
|
|
|
|
(308
|
)
|
Total income
tax expense (benefit) – from discontinued operations
|
|
|
(471
|
)
|
|
|
(210
|
)
|
Total income tax expense (benefit)
|
|
$
|
267
|
|
|
$
|
(518
|
)
|
Actual
income tax expense (benefit) differs from the income tax expense computed by applying the applicable effective federal and state
tax rates to income before income tax expense as follows:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes at U.S.
statutory marginal income tax rate of 21%
|
|
$
|
121
|
|
|
|
21.0
|
%
|
|
$
|
60
|
|
|
|
21.0
|
%
|
Net operating loss carryback
|
|
|
(213
|
)
|
|
|
(36.9
|
)%
|
|
|
–
|
|
|
|
–
|
%
|
State income tax (net of federal benefit)
|
|
|
265
|
|
|
|
45.9
|
%
|
|
|
(632
|
)
|
|
|
(221.0
|
)%
|
Share-based compensation
|
|
|
77
|
|
|
|
13.3
|
%
|
|
|
35
|
|
|
|
12.2
|
%
|
Other
|
|
|
17
|
|
|
|
3.0
|
%
|
|
|
19
|
|
|
|
6.7
|
%
|
Income tax expense
(benefit)
|
|
$
|
267
|
|
|
|
46.2
|
%
|
|
$
|
(518
|
)
|
|
|
(181.1
|
)%
|
Deferred
income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial
reporting purposes as compared to the amounts used for income tax purposes. Significant components of the Company’s net
deferred tax assets are as follows:
|
|
As
of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
463
|
|
|
$
|
–
|
|
Loss and loss adjustment
expense reserves
|
|
|
–
|
|
|
|
87
|
|
Unearned premium
reserves
|
|
|
–
|
|
|
|
1,983
|
|
Share-based compensation
|
|
|
214
|
|
|
|
257
|
|
Deferred fee income
|
|
|
–
|
|
|
|
357
|
|
State deferred taxes
|
|
|
–
|
|
|
|
247
|
|
Investments
|
|
|
–
|
|
|
|
216
|
|
Other
|
|
|
7
|
|
|
|
81
|
|
Deferred income
tax assets
|
|
$
|
684
|
|
|
$
|
3,228
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
789
|
|
|
$
|
–
|
|
Deferred policy
acquisition costs
|
|
|
–
|
|
|
|
1,913
|
|
State deferred taxes
|
|
|
–
|
|
|
|
–
|
|
Other
|
|
|
1
|
|
|
|
36
|
|
Deferred income
tax liabilities
|
|
$
|
790
|
|
|
$
|
1,949
|
|
|
|
|
|
|
|
|
|
|
Net deferred
income tax asset (liability)
|
|
$
|
(106
|
)
|
|
$
|
1,279
|
|
As
of December 31, 2019, the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of
approximately $2,204, which will be available to offset future taxable income. Approximately $2,069 of the Company’s NOLs
will expire on December 31, 2039, while the remaining $135 of the Company’s NOLs do not expire under current tax law.
Due
to the sale of the Maison Business on December 2, 2019, the December 31, 2019 financial statements show a net deferred tax liability
in the amount of $106. Given that the Company’s deferred tax assets can be fully offset with deferred tax liabilities within
the expiration window of the deferred tax assets, the Company has determined that it is more likely than not that its deferred
tax assets will be utilized. As such, the Company has not set up a valuation allowance for its deferred tax assets as of December
31, 2019.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Based
upon the results of the Company’s analysis and the application of ASC 740-10, management has determined that all material
tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and
unambiguous tax law, and the Company is confident that the full amount of each tax position will be sustained upon possible examination.
Accordingly, the full amount of the tax positions is anticipated to be recognized in the financial statements.
The
Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal
and state income tax returns for the years 2015 - 2018 are open for review by the Internal Revenue Service (“IRS”)
and the various state taxing authorities.
7.
Equity Incentive Plans
In
April 2014, the Company established an equity incentive plan for employees and directors of the Company (the “2014 Plan”).
The purpose of the Plan was to create incentives designed to motivate recipients to significantly contribute toward the Company’s
growth and success, to attract and retain persons of outstanding competence, and to provide such persons with an opportunity to
acquire an equity interest in the Company.
The
Plan allowed for the issuance of non-qualified stock options, restricted stock, restricted stock units (“RSUs”), performance
shares, performance cash awards, and other stock-based awards and provided for the issuance of 354,912 shares of common stock.
On May 31, 2018, the 2014 Plan was terminated with the adoption of the 2018 Plan, as discussed below.
On
May 31, 2018, our shareholders approved the 1347 Property Insurance Holdings, Inc., 2018 Equity Incentive Plan (the “2018
Plan”). The purpose of the 2018 Plan is to attract and retain directors, consultants, and other key employees of the Company
and its subsidiaries and to provide to such persons incentives and rewards for superior performance. The 2018 Plan is administered
by the Compensation and Management Resources Committee of the Board, and has a term of ten years. The 2018 Plan allows for the
issuance of both incentive stock options and non-qualified stock options, stock appreciation rights, RSUs, and other stock-based,
as well as cash-based awards, and provides for a maximum of 300,000 shares available for issuance.
Stock
Options Issued under the 2014 Plan
The
following table summarizes stock option activity for the two years ended December 31, 2019. The following options were issued
pursuant to the 2014 Plan.
Common
Stock Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Ave
Remaining
Contractual
Term
(Years)
|
|
|
Weighted
Ave
Grant
Date
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January
1, 2018
|
|
|
177,456
|
|
|
$
|
8.06
|
|
|
|
1.25
|
|
|
$
|
1.07
|
|
|
$
|
–
|
|
Exercisable, January 1, 2018
|
|
|
156,160
|
|
|
$
|
8.06
|
|
|
|
1.25
|
|
|
$
|
1.07
|
|
|
$
|
–
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
21,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
177,456
|
|
|
$
|
8.06
|
|
|
|
0.25
|
|
|
$
|
1.07
|
|
|
$
|
–
|
|
Exercisable, December 31, 2018
|
|
|
177,456
|
|
|
$
|
8.06
|
|
|
|
0.25
|
|
|
$
|
1.07
|
|
|
$
|
–
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(177,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Exercisable, December 31, 2019
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Restricted
Stock Units Issued under both the 2014 and 2018 Plans
On
May 29, 2015, the Company’s Board of Directors granted 20,500 RSUs to certain of its executive officers under the 2014 Plan.
Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs
vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per
share and; (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share.
Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock.
The RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or
disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued. In connection with the Asset Sale
and pursuant to the employment and resignation agreements entered into between the Company and its former executive officers,
Douglas N. Raucy, and Dean E. Stroud, a total of 16,500 RSUs issued under this grant to Messrs. Raucy and Stroud were cancelled
and forfeited on December 2, 2019.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
In
connection with the Company’s appointment of Dan Case as Chief Operating Officer effective May 23, 2017, we entered into
an offer letter with Mr. Case, which provided Mr. Case with the opportunity to purchase up to 68,027 shares of the Company’s
common stock on the open market or in direct purchases from the Company through June 15, 2018. At the end of the purchase period,
the Company agreed to match any such shares purchased by Mr. Case with a grant of RSUs of the Company equal to two RSUs for each
share purchased by Mr. Case. Through the purchase period, Mr. Case had purchased 68,027 shares of the Company’s common stock
pursuant to this arrangement, 28,000 of which shares were purchased directly from the Company at a purchase price of $8.00 per
share on September 14, 2017, resulting in a grant of 136,054 RSUs to Mr. Case on June 15, 2018. This arrangement was entered into
outside the 2014 Plan which was in effect at the time, and was approved by the Compensation Committee of the Board of Directors
as an inducement material to Mr. Case entering into employment with the Company in reliance on Nasdaq listing rule 5635(c)(4).
On December 31, 2018, the effective date of Mr. Case’s resignation from the Company, all of the RSUs granted under the arrangement
were forfeited prior to their vesting.
On
May 29, 2015, the Company’s Board of Directors granted RSUs to certain of its executive officers under the 2014 Plan. Each
RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs vest
as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per share;
and (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share. Prior
to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The
RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or disability,
all unvested RSUs will be deemed forfeited on the date employment is discontinued.
On
May 31, 2017, the Compensation Committee of the Company’s Board of Directors approved a share matching arrangement resulting
in the issuance of 108,330 RSUs to the Company’s officers and non-employee directors then serving under the 2014 Plan. The
RSUs were issued on December 15, 2017, and entitle each grantee to one share of the Company’s common stock upon the vesting
date of the RSU, which will vest 20% per year over a period of five years following the date granted, subject to each officer’s
continued employment with the Company, or each director’s continued service on the Board. Prior to the vesting of the RSUs,
the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire; however,
should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will
be deemed forfeited on the date employment is discontinued. The Board of Directors may, in its discretion, accelerate vesting
in the event of early retirement. In connection with the Asset Sale, the Compensation and Management Resources Committee (the
“Compensation Committee”) of the Board previously approved the accelerated vesting of the RSUs granted to the Company’s
former executive officers, Douglas N. Raucy and Dean E. Stroud, under the share-matching arrangement. Accordingly, pursuant to
the employment and resignation agreements entered into between the Company and Messrs. Raucy and Stroud, a total of 34,400 unvested
RSUs issued to Messrs. Raucy and Stroud vested in full on December 2, 2019.
Similarly,
should a director make himself available and consent to be nominated by the Company for continued service but is not nominated
by the Board for election by the shareholders, other than for good reason as determined by the Board in its discretion, then such
director’s RSU grant will vest in full as of his last date of service as a director with the Company. Accordingly, since
Mr. Joshua Horowitz’s term as a director did not continue following the Company’s annual meeting of stockholders held
on May 31, 2018, Mr. Horowitz’ 6,666 RSUs shares vested in full on May 31, 2018. Directors are required to maintain ownership
of the shares purchased through the full five-year vesting period, except as set forth above.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
On
August 22, 2018, the Compensation Committee granted 1,000 shares of the Company’s common stock (the “Bonus Shares”)
and 1,000 RSUs to the Company’s Chief Financial Officer, John S. Hill, under the 2018 Plan. Each RSU represents a contingent
right to receive one share of the Company’s common stock. These RSUs vest in five equal annual installments beginning with
the first anniversary of the grant date, subject to continued employment, with vesting subject to Mr. Hill maintaining ownership
of the Bonus Shares through the full five-year vesting period.
Also
on August 22, 2018, the Company modified its compensation program for all non-employee directors of the Company, effective September
1, 2018. The modified compensation program allows for an annual grant of RSUs with a value of $40, vesting in five equal annual
installments, beginning with the first anniversary of the grant date. Accordingly, on August 22, 2018 and again on August 13,
2019, the Board issued RSUs to each of the Company’s then serving non-employee directors, representing a value of $40 per
director. The total number of RSUs granted were 34,284 on August 22, 2018 and 61,776 on August 13, 2019. Furthermore, on January
11, 2019, the Company’s Board appointed two new directors to the Board, Ambassador Rita Hayes and Dr. Marsha G. King, resulting
in the issuance of 5,397 RSUs to each of these two directors, representing their pro-rata share of the RSU grant issued to each
of the Company’s non-employee directors on an annual basis. The following table summarizes RSU activity for the years ended
December 31, 2019 and 2018.
Restricted
Stock Units
|
|
Number
of
Units
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Non-vested units, January
1, 2018
|
|
|
128,830
|
|
|
$
|
6.27
|
|
Granted
|
|
|
171,338
|
|
|
|
7.48
|
|
Vested
|
|
|
(26,998
|
)
|
|
|
7.20
|
|
Forfeited
|
|
|
(136,054
|
)
|
|
|
7.60
|
|
Non-vested units, December 31, 2018
|
|
|
137,116
|
|
|
$
|
6.27
|
|
Granted
|
|
|
72,570
|
|
|
|
5.14
|
|
Vested
|
|
|
(53,184
|
)
|
|
|
7.17
|
|
Forfeited
|
|
|
(16,500
|
)
|
|
|
1.34
|
|
Non-vested units, December 31, 2019
|
|
|
140,002
|
|
|
$
|
5.93
|
|
Total
stock-based compensation expense for the years ended December 31, 2019 and 2018 was $413 and $337, respectively. As of December
31, 2019, total unrecognized stock compensation expense of $768 remains, which will be recognized through September 30, 2023.
Warrants
For
the year ended December 31 30, 2019, a total of 406,875 warrants expired having a weighted average exercise price of $9.69. Warrants
were neither granted nor exercised during the two years ended December 31, 2019. As of December 31, 2019, the Company had 1,500,000
warrants outstanding with an exercise price of $15.00 which expire on February 24, 2022.
8.
Shareholders’ Equity
Grant
of Bonus Shares to Chief Financial Officer
On
August 22, 2018, the Company’s Board of Directors granted 1,000 shares of the Company’s common stock to the Company’s
Chief Financial Officer, John S. Hill, as previously discussed in Note 7.
Offering
of 8.00% Cumulative Preferred Stock, Series A
On
February 28, 2018, we completed the underwritten public offering of 640,000 shares of the Preferred Stock designated as 8.00%
Cumulative Preferred Stock, Series A, par value $25.00 per share. Also, on March 26, 2018, we issued an additional 60,000 shares
of Preferred Stock pursuant to the exercise of the underwriters’ over-allotment option. Dividends on the Preferred Stock
are cumulative from the date of original issue and are payable quarterly on the 15th day of March, June, September and December
of each year, when, as and if declared by our Board of Directors or a duly authorized committee thereof. The first dividend record
date for the Preferred Stock was on June 1, 2018. For the years ended December 31, 2019 and 2018, the Company declared dividends
totaling $1,400 and $1,108, respectively, on the Preferred Stock. Dividends are payable out of amounts legally available therefor
at a rate equal to 8.00% per annum per $25.00 of stated liquidation preference per share, or $2.00 per share of Preferred Stock
per year.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
The
Preferred Stock is not redeemable prior to February 28, 2023. On and after that date, the Preferred Stock will be redeemable at
our option, for cash, in whole or in part, at a redemption price of $25.00 per share of Preferred Stock, plus all accumulated
and unpaid dividends to, but not including, the date of redemption. The Preferred Stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption. The Preferred Stock will generally have no voting rights except as provided
in the Certificate of Designations or as from time to time provided by law. The affirmative vote of the holders of at least two-thirds
of the outstanding shares of Preferred Stock and each other class or series of voting parity stock will be required at any time
for us to authorize, create or issue any class or series of our capital stock ranking senior to the Preferred Stock with respect
to the payment of dividends or the distribution of assets on liquidation, dissolution or winding up, to amend any provision of
our Certificate of Incorporation so as to materially and adversely affect any rights of the Preferred Stock or to take certain
other actions.
Trading
of the shares commenced on March 22, 2018 on the Nasdaq Stock Market under the symbol “PIHPP”. Net proceeds received
by the Company were approximately $16,500. The Company used $1,500 of the net proceeds to repurchase 60,000 shares of its Series
B Preferred Stock from IWS Acquisition Corporation, as discussed under Note 9 – Related Party Transactions.
A
fund managed by Fundamental Global Investors, LLC, one of the Company’s significant shareholders, purchased an aggregate
of 34,620 shares of the Series A Preferred Stock in the Company’s public offering of the shares, at the public offering
price of $25.00 per share, including 31,680 shares purchased for a total of approximately $792 on February 28, 2018, the closing
date of the offering, and 2,940 shares purchased for a total of approximately $74 on March 26, 2018 in connection with the underwriters’
exercise of their over-allotment option. In addition, CWA Asset Management Group, LLC, of which 50% is owned by Fundamental Global
Investors, LLC, holds 56,846 shares of the Series A Preferred Stock for customer accounts (including 44 shares of the Series A
Preferred Stock held by Mr. Cerminara in a joint account with his spouse) purchased at the public offering price in connection
with the underwriters’ exercise of their over-allotment option. No discounts or commissions were paid to the underwriters
on the purchase of these shares.
9.
Related Party Transactions
Related
party transactions are carried out in the normal course of operations and are measured in part by the amount of consideration
paid or received as established and agreed by the parties. Management believes that consideration paid for such services in each
case approximates fair value. Except where disclosed elsewhere in these consolidated financial statements, the following is a
summary of related party transactions.
Termination
of Performance Share Grant Agreement
On
July 24, 2018, the Company entered into a Termination Agreement with Kingsway America, Inc. (“KAI”, a wholly owned
subsidiary of KFSI) pursuant to which KAI agreed to terminate the Performance Share Grant Agreement (“PSGA”) dated
March 26, 2014, between the Company and KAI in exchange for a payment of $1,000 from the Company, which has been recorded as a
charge under the heading “Loss on repurchase of Series B Preferred Shares and Performance Shares” on the Company’s
consolidated statement of operations for year ended December 31, 2018. As a result of the Termination Agreement, KAI has no further
rights to any of the performance share grants contemplated by the PSGA. Under the PSGA, KAI was entitled to receive up to an aggregate
of 375,000 shares of our common stock upon achievement of certain milestones regarding our stock price. Mr. Larry G. Swets, Jr.,
who is a director of the Company, served as Chief Executive Officer and Director of KFSI on the date the Company entered into
the Termination Agreement. The Company did not issue any shares under the PSGA while the PSGA was outstanding. The Termination
Agreement was approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Termination
of Management Services Agreement and Repurchase of Series B Preferred Shares
On
February 24, 2015, we terminated our Management Services Agreement with 1347 Advisors, LLC (“1347 Advisors”), a wholly
owned subsidiary of KFSI. In connection with the termination, we entered into a Performance Shares Grant Agreement, dated February
24, 2014, with 1347 Advisors pursuant to which we agreed to issue 100,000 shares of our common stock to 1347 Advisors subject
to the achievement of certain events specified in the agreement. We also issued to 1347 Advisors 120,000 shares of our Series
B preferred stock having a liquidation amount per share equal to $25.00 (the “Series B Preferred Shares”) and a warrant
to purchase 1,500,000 shares of our common stock at an exercise price of fifteen dollars per share. The warrant expires seven
years from the date of issuance. 1347 Advisors subsequently transferred 60,000 of the Series B Preferred Shares to IWS Acquisition
Corporation, an affiliate of KFSI.
On
January 2, 2018, the Company entered into a Stock Purchase Agreement with 1347 Advisors and IWS Acquisition Corporation, pursuant
to which the Company repurchased 60,000 Series B Preferred Shares from 1347 Advisors for an aggregate purchase price of $1,740,
representing (i) the par value of the Series B Preferred Shares, or $1,500; and (ii) declared and unpaid dividends with respect
to the dividend payment due on February 23, 2018, or $240. Also, in connection with the Stock Purchase Agreement, the Performance
Shares Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors was terminated. In connection with the
termination, the Company made a cash payment of $300 to 1347 Advisors. Upon termination of the MSA Agreement, the Company recorded
an increase of approximately $54 to additional paid in capital, representing the estimated fair value of the Performance Share
Grant Agreement on the grant date. Upon the termination of the Performance Share Grant Agreement, we compared the amount previously
recorded in additional paid in capital to the amount paid to terminate the agreement, resulting in a reversal of the $54 originally
recorded to additional paid in capital as well as a charge of $246 recorded to Loss on repurchase of Series B Preferred Shares
and Performance Shares on the Company’s consolidated statement of operations for the year ended December 31, 2018.
Pursuant
to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series B Preferred Shares from IWS
Acquisition Corporation for an aggregate purchase price of $1,500, upon the completion of a capital raise resulting in the Company
receiving net proceeds in excess of $5,000. On February 28, 2018, the Company purchased the remaining 60,000 Series B Preferred
Shares from IWS Acquisition Corporation for $1,500 with the proceeds from the offering of the Company’s 8.00% Cumulative
Preferred Stock, Series A (the “Preferred Stock”) offering (discussed under Note 8 – Shareholders’ Equity).
The
Company applied the guidance outlined in ASC 480 – Distinguishing Liabilities from Equity in recording the issuance
of the Series B Preferred Shares. Because the shares had a mandatory redemption date of February 24, 2020, applicable guidance
required that we classify the shares as a liability on our consolidated balance sheet, rather than recording the value of the
shares in equity. The resulting liability was recorded at a discount to the $4,200 redemption amount plus dividends expected to
be paid on the shares while outstanding, discounted for the Company’s estimated cost of equity (13.9%). As a result, total
amortization in the amount of $33 has been charged to continuing operations for the year ended December 31, 2018. Upon our repurchase
of the Series B Preferred Shares in both January and February 2018, we compared the amortized carrying amount of the liability
to the amount paid to repurchase the shares, resulting in a charge of $366 to Loss on repurchase of Series B Preferred Shares
and Performance Shares on the Company’s consolidated statement of operations for the year ended December 31, 2018.
Investment
in Limited Partnership and Limited Liability Company
On
April 21, 2016, KFSI completed the acquisition of Argo Management Group LLC (“Argo”). Argo’s primary business
is to act as the Managing Member of Argo Holdings Fund I, LLC, an investment fund in which the Company has committed to invest
$500, of which the Company has invested $341 as of December 31, 2019. The managing member of Argo, Mr. John T. Fitzgerald, was
appointed as President and Chief Executive Officer of KFSI on September 5, 2018 and has served on its board of directors since
April 21, 2016.
As
of December 31, 2019, the Company has invested $2,719 as a limited partner in FGI Metrolina Property Income Fund, LP (the “Fund”).
The general partner of the Fund, FGI Metrolina GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the Chairman and
Co-Chairman of the Board of Directors of the Company, respectively. The Fund’s investment program is managed by FGI Funds
Management LLC, an affiliate of FGI, which, with its affiliates, is the largest stockholder of the Company. The Company’s
investment represents an approximate 49% ownership stake in the Fund.
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
Upon
analysis of the Fund’s capital structure, related contractual relationships and terms, nature of the Fund’s operations
and purpose, as well as our involvement with the entity, we have determined that the Fund represents a variable interest entity
(VIE) investment of the Company. Applicable guidance requires us to consolidate those VIEs where we are determined to be the primary
beneficiary. The primary beneficiary is the entity that has both 1) the power to direct the activities of the VIE which most significantly
affect the VIE’s economic performance; and 2) the obligation to absorb losses or the right to receive the benefits that
could be potentially significant to the VIE. The Company’s investment in the Fund is that of a limited partner with an approximate
49% ownership interest. As limited partners in the Fund do not have the authority to direct the operations of the Fund,
we have determined we are not the primary beneficiary of the VIE, and, accordingly, have accounted for this investment under the
equity method of accounting.
As
of December 31, 2019, the total assets of the Fund were approximately $6,849. Our maximum exposure to loss associated with
our investment in the Fund was $2,719 as of December 31, 2019. The Company’s maximum exposure to loss associated with the
Fund is limited to our investment; however, the Company has committed to invest up to $4,000 in the Fund. Our investment is reflected
on our consolidated balance sheet under the heading Limited liability investments. Although it is not the Company’s intent,
should the Company’s ownership percentage in the Fund exceed 50% of the total ownership interest in the Fund, we would be
required to consolidate the Fund’s financial statements with our results in future periods as we would be deemed to have
a controlling interest in the Fund.
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement entered into upon closing of the Asset Sale, Fundamental Global Advisors LLC, a wholly-owned
subsidiary of the Company (“Advisor”), has agreed to provide investment advisory services to FedNat, including identifying,
analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending
investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory
services, FedNat has agreed to pay Advisor an annual fee of $100. FGI Funds Management, LLC will serve as the manager to the Advisor.
Both Advisor and FGI Funds Management, LLC are affiliates of Fundamental Global Investors, LLC, the Company’s largest stockholder.
The term of the Investment Advisory Agreement is five years.
10.
Net Earnings Per Share
Net
earnings per share is computed by dividing net income by the weighted average number of common shares and common share equivalents
outstanding during the periods presented. In calculating diluted earnings per share, those potential common shares that are found
to be anti-dilutive are excluded from the calculation. The table below provides a summary of the numerators and denominators used
in determining basic and diluted earnings per share for the years ended December 31, 2019 and 2018.
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
Net
income (in thousands)
|
|
$
|
311
|
|
|
$
|
804
|
|
Less:
dividends declared on Series A Preferred Shares
|
|
|
(1,400
|
)
|
|
|
(1,108
|
)
|
Loss attributable
to common shareholders
|
|
|
(1,089
|
)
|
|
|
(304
|
)
|
Weighted average
common shares outstanding
|
|
|
6,018,542
|
|
|
|
5,989,742
|
|
Loss attributable
to common shareholders
|
|
$
|
(0.18
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
from continuing operations
|
|
$
|
2,383
|
|
|
$
|
(1,274
|
)
|
Less: dividends
declared on Series A Preferred Shares
|
|
|
(1,400
|
)
|
|
|
(1,108
|
)
|
Income (Loss) from
continuing operations attributable to common shareholders
|
|
|
983
|
|
|
|
(2,382
|
)
|
Weighted average
common shares outstanding
|
|
|
6,018,542
|
|
|
|
5,989,742
|
|
Earnings (Loss) per common share from
continuing operations
|
|
$
|
0.16
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
from discontinued operations, net of income taxes
|
|
$
|
(2,072
|
)
|
|
$
|
2,078
|
|
Weighted average
common shares outstanding
|
|
|
6,018,542
|
|
|
|
5,989,742
|
|
Earnings (Loss) per common share from
discontinued operations
|
|
$
|
(0.34
|
)
|
|
$
|
0.35
|
|
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
The
following potentially dilutive securities outstanding as of December 31, 2019 and 2018 have been excluded from the computation
of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
|
|
As
of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common
stock
|
|
|
–
|
|
|
|
177,456
|
|
Warrants to purchase common stock
|
|
|
1,500,000
|
|
|
|
1,906,875
|
|
Restricted stock
units
|
|
|
140,002
|
|
|
|
211,054
|
|
|
|
|
1,640,002
|
|
|
|
2,295,385
|
|
11.
Accumulated Other Comprehensive Loss
The
table below details the change in the balance of each component of accumulated other comprehensive loss, net of tax, for the years
ended December 31, 2019 and 2018.
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Unrealized gains
(losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
(729
|
)
|
|
$
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss) before reclassifications
|
|
|
1,093
|
|
|
|
(496
|
)
|
Amounts reclassified
from accumulated other comprehensive income (loss)
|
|
|
695
|
|
|
|
(138
|
)
|
Income
tax (benefit) expense
|
|
|
(446
|
)
|
|
|
107
|
|
Net current-period
other comprehensive income (loss)
|
|
|
1,342
|
|
|
|
(527
|
)
|
Reclassification
of certain tax effects from accumulated other comprehensive loss
|
|
|
(104
|
)
|
|
|
(33
|
)
|
Unrealized
gains realized upon sale of Maison Business, net of taxes
|
|
|
(509
|
)
|
|
|
–
|
|
Balance, December 31
|
|
$
|
–
|
|
|
$
|
(729
|
)
|
12.
Fair Value of Financial Instruments
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 classifies its investments in fixed income and equity securities as available-for-sale and reports these investments at
fair value. Fair values of fixed income securities for which no active market exists are derived from quoted market prices of
similar instruments or other third-party evidence.
The
FASB has issued guidance that defines fair value as the exchange price that would be received for an asset (or paid to transfer
a liability) in the principal, or most advantageous market in an orderly transaction between market participants. This guidance
also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The guidance categorizes assets and liabilities at fair value into one of three
different levels depending on the observation of the inputs employed in the measurements, as follows:
1347
PROPERTY INSURANCE HOLDING, INC.
Notes
to Financial Statements
(amounts
presented in thousands, except share and per share data and as otherwise specified)
|
●
|
Level
1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets providing
the most reliable measurement of fair value since it is directly observable.
|
|
|
|
|
●
|
Level
2 – inputs to the valuation methodology which include quoted prices for similar assets or liabilities in active markets.
These inputs are observable, either directly or indirectly, for substantially the full-term of the financial instrument.
|
|
|
|
|
●
|
Level
3 – inputs to the valuation methodology which are unobservable and significant to the measurement of fair value.
|
Financial
instruments measured at fair value as of December 31, 2019 and 2018 in accordance with this guidance are as follows.
As of December
31, 2019
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
29,487
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
29,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities included in
discontinued operations
|
|
|
-
|
|
|
|
76,310
|
|
|
|
-
|
|
|
|
76,310
|
|
Equity securities
included in discontinued operations
|
|
|
3,263
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,263
|
|
Total fixed income
and equity securities include in discontinued operations
|
|
$
|
3,263
|
|
|
$
|
76,310
|
|
|
$
|
-
|
|
|
$
|
79,573
|
|
13.
Commercial Line of Credit Facility
On
April 23, 2018, the Company and MMI executed a Commercial Business Loan Agreement and related Promissory Note with Hancock Bank,
a trade name for Whitney Bank (the “Lender”). The agreements provided for a revolving line of credit of $5,000. The
line of credit expired pursuant to its terms on April 19, 2019. The Company and MMI did not draw down funds under the Loan Agreement
during the period it was outstanding.
On
August 20, 2019, the Company entered into a $7,000 Loan Agreement and a related Commercial Note (collectively, the “Loan
Agreement”) with the Lender. The Loan Agreement provided for a non-revolving line of credit of $7,000. Borrowings under
the Loan Agreement bore interest at a rate per annum equal to 5.25%.
On
November 29, 2019, the Company entered into an Amended and Restated Loan Agreement and a related Amended and Restated Commercial
Note (collectively, the “Amended and Restated Loan Agreement”) with Lender, which increased the existing non-revolving
line of credit by an additional $10,000 (the “Line of Credit Increase”), resulting in an amended and restated non-revolving
line of credit loan in the aggregate principal amount of up to $17,000. Immediately prior to the closing of the Asset Sale, the
Company drew $7,000 under the line of credit, which was repaid to the Lender as of the closing of the Asset Sale. Upon repayment,
the line of credit was terminated.
14.
Retirement plans
The
1347 Property Insurance Holdings, Inc. 401(k) Plan (the “Retirement Plan”) was established effective January 1, 2015,
as a defined contribution plan. The Retirement Plan is subject to the provisions of the Employee Retirement Income Security Act
of 1974 (“ERISA”); eligible employees of the Company and its subsidiaries may participate in the plan. Employees who
have completed one month of service are eligible to participate and are permitted to make annual pre and post-tax salary reduction
contributions not to exceed the limits imposed by the Internal Revenue Code of 1986, as amended. Contributions are invested at
the direction of the employee participant in various money market and mutual funds. The Company matches contributions up to 100%
of each participant’s contribution, limited to contributions up to 4% of a participant’s eligible earnings. The Company
may also elect to make a profit-sharing contribution to the Retirement Plan based upon discretionary amounts and percentages authorized
by the Company’s Board of Directors. For the years ended December 31, 2019 and 2018, the Company made matching contributions
to the Retirement Plan in the amount of $97 and $128, respectively, but did not make any profit-sharing contributions to the Retirement
Plan in either year.
15.
Commitments and Contingencies
Legal
Proceedings:
From
time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is
not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected
by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in
excess of the Company’s current reserves.
Operating
Lease Commitments:
On
November 21, 2019, the Company entered into a lease agreement for office space in St. Petersburg, FL. The lease commenced on December
1, 2019 for a term of six months as the Company assesses its need for future office space following the sale of the Maison Business.
Total minimum rent over the six-month term is expected to be $14.
Rent
expense for the Company’s office leases is recognized on a straight-line basis over the term of the lease. Rent expense
was $443 and $441 for the years ended December 31, 2019 and 2018, respectively.
16.
Subsequent Events
Coronavirus
Impact
We
continue to monitor the recent outbreak of the novel coronavirus (COVID-19) on our operations. Due to the recent outbreak of the
coronavirus reported in many countries worldwide, local and federal governments have issued travel advisories, canceled large
scale public events and closed schools. In addition, companies have begun to cancel conferences and travel plans and require employees
to work from home. Global financial markets have also experienced extreme volatility and disruptions to capital and credit markets.
Adverse
events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general
work environment could harm our business and our business strategy. While we do not anticipate any material impact to our business
operations as a result of the coronavirus, in the event of a major disruption caused by the outbreak of pandemic diseases such
as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment
of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy
and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely
impact our business.
Management
is actively monitoring the global situation on its financial condition, liquidity, operations, industry and workforce. Given the
daily evolution of the coronavirus and the global responses to curb its spread, the Company is not able to estimate the effects
of the coronavirus on its results of operations, financial condition or liquidity for fiscal year 2020.
Unrealized
Holding Losses on Common Stock
As of March 26, 2020, the estimated fair
value of the Company’s 1,773,102 shares of FNHC common stock was $20,320, representing an unrealized, pre-tax holding loss
of $5,180.