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 March 31, 2020, 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 March 31, 2020, Fundamental Global Investors,
LLC and its affiliates, or FGI, beneficially owned approximately 45% of our outstanding shares of common stock and, as of May
12, 2020, beneficially owned approximately 50% of our outstanding shares of common stock. D. Kyle Cerminara, Chairman of our Board
of Directors and our designated principal executive officer, 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 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 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 $15,000, on the terms and subject to the conditions set forth in the Reinsurance Agreement.
All reinsurance sold by the Company pursuant to the right of first refusal, if any, will be memorialized in an agreement in such
form and subject to such terms and conditions as are customary in the property and casualty insurance industry. The Reinsurance
Agreement is assignable by the Company subject to conditions set forth in the agreement. The term of the Reinsurance Agreement
is five years.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
Investment
Advisory Agreement
Pursuant
to the Investment Advisory Agreement entered into upon closing of the Asset Sale, Fundamental Global Advisors LLC, a wholly-owned
subsidiary of the Company (“Advisor”), was formed to provide investment advisory services to FedNat, which include
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, all of which is paid for the benefit of
the Company. FGI Funds Management, LLC, an affiliate of FGI, serves as the manager to the Advisor but does not receive any fees
for its services other than those outlined in the Shared Services Agreement discussed under Note 9 – “Related Party
Transactions.” 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 Maison, MMI and ClaimCor, 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
The
Company is implementing business plans 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 under
the investment advisory agreement entered into at the closing of the Asset Sale. In addition, the Company has formed Fundamental
Global Asset Management, LLC, a joint venture with Fundamental Global Investors, LLC, which intends 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. See Note 9 – “Related Party Transactions” for more information about the
joint venture.
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 HOLDINGS, 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 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 any of the Company’s
consolidated balance sheets presented prior to December 2, 2019. 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 year ended December 31, 2019. Similarly, amounts due from the
Company to Maison upon the assignment of certain of Maison’s investments to the Company were 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 sheets prior to the closing of the Asset Sale. Pursuant
to the terms of the Purchase Agreement, this assignment of investments was settled, in cash, just 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 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, 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 was recognized, at which point the cumulative unrealized
gains or losses were transferred to the consolidated statements of operations. 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.
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 investments 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, however, the Company 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 – “Investments” for additional information on the Company’s investment in the VIE.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
Realized
gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in net investment income
(loss).
Interest
income is included in net investment income (loss) 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 consolidated statements of operations 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).
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 $250. As of March 31, 2020, the Company held funds
in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The
Company has not incurred losses related to these deposits.
The
Company had not experienced significant losses related to premiums receivable from its policyholders nor from amounts due from
reinsurers prior to the Asset Sale transaction on December 2, 2019.
Revenue
Recognition:
Premium
revenue, up to the date of the Asset Sale transaction, was recognized on a pro rata basis over the term of the respective policy
contract.
Service
charges on installment premiums were recognized as income upon receipt of related installment payments and were reflected in other
income up to the date of the Asset Sale transaction.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
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 an employee and the Company’s 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 March 31, 2020. See Note 7 – “Options, Warrants, and
Restricted Stock Units” for further disclosure.
Fair
Value of Financial Instruments:
The
carrying values of certain financial instruments, including cash, short-term investments, 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 – “Fair Value
of Financial Instruments” for further information on the fair value of the Company’s financial instruments.
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
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 (loss). The Company adopted ASU 2016-01 effective January 1, 2019, resulting in a cumulative-effect adjustment
to retained earnings in the amount of $104, representing the after-tax unrealized holding gains in accumulated other comprehensive
income as of December 31, 2018, related to the Company’s available-for-sale equity securities. Subsequent changes in the
estimated fair value of the Company’s equity securities have now been recognized in the Company’s consolidated statements
of operations rather than in comprehensive income (loss).
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
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.
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 the three months ended March 31, 2019 as set forth in ASC 205-20 – Discontinued Operations. On December
2, 2019, the assets and liabilities previously included in discontinued operations had been disposed of in the Asset Sale transaction.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
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 statements
of operations for the three months ended March 31, 2019.
|
|
Three Months Ended
March 31, 2019
|
|
Net premiums earned
|
|
$
|
15,589
|
|
Net investment income
|
|
|
1,024
|
|
Other income
|
|
|
774
|
|
Net losses and loss adjustment expenses
|
|
|
(9,279
|
)
|
Amortization of deferred policy acquisition costs
|
|
|
(4,269
|
)
|
General and administrative expenses
|
|
|
(2,748
|
)
|
Interest expense on surplus notes due to affiliate
|
|
|
(449
|
)
|
Pretax profit from discontinued operations
|
|
|
642
|
|
Income tax expense
|
|
|
115
|
|
Net income from discontinued operations, net of taxes
|
|
$
|
527
|
|
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 May 12, 2020, the estimated fair value of the Company’s 1,773,102 shares of FNHC common stock was
$19,930.
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
March 31, 2020. 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 three months ended March 31, 2020 and 2019, the Company has received profit distributions of $88 and $0 on
these investments, respectively, 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. Mr. Cerminara has also been designated as the principal executive officer of the Company. 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 March 31, 2020, the total
amount invested in the Fund was $2,719, while the carrying amount on the Company’s balance sheet was $3,324, consisting
of $605 in undistributed earnings of the Fund.
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, or approximately $4,200. Accordingly,
these investments have been included on the Company’s consolidated balance sheet as of March 31, 2020 and December 31, 2019
as part of continuing operations. Investment income resulting from the Company’s limited liability investments has also
been included in net investment income (loss) as part of continuing operations, on the Company’s consolidated statements
of operations for the three months ended March 31, 2020 and 2019.
A
summary of the Company’s investments as of March 31, 2020 and December 31, 2019 is as follows.
|
|
Cost Basis
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Carrying Amount
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
FNHC common stock
|
|
$
|
25,500
|
|
|
$
|
–
|
|
|
$
|
(5,145
|
)
|
|
$
|
20,355
|
|
Limited liability investments
|
|
|
3,495
|
|
|
|
605
|
|
|
|
–
|
|
|
|
4,100
|
|
Total investments
|
|
$
|
28,995
|
|
|
$
|
605
|
|
|
$
|
(5,145
|
)
|
|
$
|
24,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
1347
PROPERTY INSURANCE HOLDINGS, 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 payments 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 a write-down for an other-than-temporary impairment on the equity investments listed in the table above.
Net
investment income (loss) for the three months ended March 31, 2020 and 2019 is as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Investment income (loss):
|
|
|
|
|
|
|
|
|
Unrealized holding loss on FNHC common stock
|
|
$
|
(9,132
|
)
|
|
$
|
–
|
|
Dividend income from FNHC common stock
|
|
|
160
|
|
|
|
–
|
|
Income from limited liability investments
|
|
|
182
|
|
|
|
–
|
|
Interest on surplus notes issued by Maison
|
|
|
–
|
|
|
|
449
|
|
Other
|
|
|
84
|
|
|
|
10
|
|
Gross investment income (loss)
|
|
|
(8,706
|
)
|
|
|
459
|
|
Investment expenses
|
|
|
–
|
|
|
|
(3
|
)
|
Net investment income (loss)
|
|
$
|
(8,706
|
)
|
|
$
|
456
|
|
The
Company has also included investment income associated with its fixed income and equity securities portfolio in discontinued operations,
net of income taxes on the Company’s consolidated statement of operations for the three months ended March 31, 2019 as this
portfolio was sold by the Company in connection with the Asset Sale on December 2, 2019. See Note 2 – “Significant
Accounting Policies” for additional information.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
6.
Income Taxes
Income
tax expense for the three months ended March 31, 2020 and 2019 varies from the amount that would result by applying the applicable
statutory federal income tax rate to income before income taxes as summarized in the following table:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax expense (benefit) at statutory income tax rate of 21%
|
|
$
|
(1,991
|
)
|
|
$
|
30
|
|
Valuation allowance for deferred tax assets deemed unrealizable
|
|
|
1,037
|
|
|
|
–
|
|
Rate differential due to CARES Act
|
|
|
(214
|
)
|
|
|
–
|
|
State income tax (net of federal tax benefit)
|
|
|
–
|
|
|
|
(23
|
)
|
Share-based compensation
|
|
|
–
|
|
|
|
36
|
|
Other
|
|
|
(17
|
)
|
|
|
4
|
|
Income tax expense (benefit)
|
|
$
|
(1,185
|
)
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit–from continuing operations
|
|
$
|
(1,185
|
)
|
|
$
|
(68
|
)
|
Income tax expense–from discontinued operations
|
|
$
|
–
|
|
|
$
|
115
|
|
As
a result of the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company recorded
a credit of $214 against its income tax expense for the quarter ended March 31, 2020, due to a provision in the CARES Act which
allows for the five-year carryback of net operating losses. Prior to the passage of the CARES Act, these net operating losses
were only available to offset future taxable income generated by the Company.
For
the three months ended March 31, 2020, the Company recorded an unrealized loss of $9,132 on its investment of FNHC common stock
and has also recorded a valuation allowance of approximately $1,037 against the deferred tax asset generated from this unrealized
loss due to the uncertain nature surrounding our ability to realize this tax benefit. As a result, the Company carries a net deferred
income tax asset of $520 as of March 31, 2020, all of which the Company believes is more likely than not to be fully realized
based upon management’s assessment of future taxable income. 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. Significant components of the Company’s
net deferred tax assets are as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
219
|
|
|
$
|
463
|
|
Share-based compensation
|
|
|
222
|
|
|
|
214
|
|
Investments
|
|
|
1,108
|
|
|
|
–
|
|
Other
|
|
|
8
|
|
|
|
7
|
|
Deferred income tax assets
|
|
|
1,557
|
|
|
|
684
|
|
Less: Valuation allowance
|
|
|
(1,037
|
)
|
|
|
–
|
|
Deferred income tax assets net of valuation allowance
|
|
$
|
520
|
|
|
$
|
684
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
–
|
|
|
$
|
789
|
|
Other
|
|
|
–
|
|
|
|
1
|
|
Deferred income tax liabilities
|
|
$
|
–
|
|
|
$
|
790
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset (liability)
|
|
$
|
520
|
|
|
$
|
(106
|
)
|
As
of March 31, 2020, the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately
$1,044, which will be available to offset future taxable income. Approximately $525 of the Company’s NOLs will expire on
December 31, 2039, while the remaining $519 of the Company’s NOLs do not expire under current tax law.
As
of March 31, 2020, the Company had no unrecognized tax benefits. The Company analyzed its tax positions in accordance with the
provisions of Accounting Standards Codification Topic 740, Income Taxes, and has determined that there are currently no
uncertain tax positions. The Company generally recognizes interest and penalties, if any, related to unrecognized tax benefits
in income tax expense.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
7.
Options, Warrants, and Restricted Stock Units
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.
As
of March 31, 2020, the Company has awards outstanding under both the 2014 Plan and the 2018 Plan.
Stock
Options issued under the 2014 Plan
For
the three months ended March 31, 2019, a total of 177,456 of the Company’s stock options expired unexercised. The stock
options had a weighted average exercise price of $8.06 per share. The Company has not granted any stock options since April 4,
2014, and as of April 4, 2019, all stock options previously granted by the Company had expired unexercised. As a result, the Company
did not have any employee stock options outstanding as of March 31, 2020.
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.
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 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.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
The
RSUs granted on December 15, 2017 will also vest in full as of the last date of service as a director of the Company should the
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. 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.
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 three months
ended March 31, 2020 and 2019.
Restricted Stock Units
|
|
Number of Units
|
|
|
Weighted Average Grant Date Fair Value
|
|
Non-vested units, January 1, 2019
|
|
|
137,116
|
|
|
$
|
6.27
|
|
Granted
|
|
|
10,794
|
|
|
|
4.94
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non-vested units, March 31, 2019
|
|
|
147,910
|
|
|
$
|
6.18
|
|
|
|
|
|
|
|
|
|
|
Non-vested units, January 1, 2020
|
|
|
140,002
|
|
|
$
|
5.93
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Vested
|
|
|
(2,158
|
)
|
|
|
4.94
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non-vested units, March 31, 2020
|
|
|
137,844
|
|
|
$
|
5.94
|
|
Total
stock-based compensation expense for each of the three months ended March 31, 2020 and 2019 was $52. As of March 31, 2020, total
unrecognized stock compensation expense of $715 remains, which will be recognized through September 30, 2024. Stock compensation
expense has been reflected in the Company’s financial statements as part of general and administrative expense and has been
included in net loss from continuing operations.
Warrants
For
the quarter ended March 31, 2019, a total of 406,875 warrants expired having a weighted average exercise price of $9.69. For the
quarters ended March 31, 2020 and 2019, warrants were neither granted nor exercised. As of March 31, 2020 the Company had 1,500,000
warrants outstanding with an exercise price of $15.00 which expire on February 24, 2022.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
8.
Shareholders’ Equity
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, commencing on June 15, 2018 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 each of the quarters ended March 31, 2020 and
2019, the Company declared dividends of $350, representing all quarterly amounts due 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. The Company’s Board of Directors declared the second quarter 2020 dividend
on the shares of Series A Preferred Stock on May 14, 2020.
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,”
with the remainder of the proceeds to be used to support organic growth, including spending for business development, sales and
marketing and working capital, and for future potential acquisition opportunities.
A
fund managed by Fundamental Global Investors, LLC, the Company’s largest shareholder, 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 33,519 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.
Investment
in Limited Liability Company and Limited Partnership
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 March 31, 2020. 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 March 31, 2020, the Company has invested $2,719 as a limited partner 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. Mr. Cerminara has also been designated as the Company’s principal executive officer.
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 principals of FGI waived their share of fees associated with the Company’s investment
in Metrolina. In 2018 and 2019, the principals of FGI waived $118 and $37 of fees that were owed by the Company. The Company’s
investment represents an approximate 49% ownership stake in the Fund.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
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 March 31, 2020. 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”), was formed to provide investment advisory services to FedNat, which include
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, all of which is paid for the benefit of
the Company. FGI Funds Management, LLC, an affiliate of FGI, serves as the manager to the Advisor but does not receive any fees
for its services other than those outlined in the Shared Services Agreement below. The term of the Investment Advisory Agreement
is five years.
Shared
Services Agreement
On
March 31, 2020, the Company entered into a Shared Services Agreement (the “Shared Services Agreement”) with Fundamental
Global Management, LLC (“FGM”), an affiliate of FGI, pursuant to which FGM will provide the Company with certain services
related to the day-to-day management of the Company, including assisting with regulatory compliance, evaluating the Company’s
financial and operational performance, providing a management team to supplement the executive officers of the Company, and such
other services consistent with those customarily performed by executive officers and employees of a public company (collectively,
the “Services”). In exchange for the Services, the Company will pay FGM a fee of $456 per quarter (the “Shared
Services Fee”), commencing in the second quarter of 2020, plus reimbursement of expenses incurred by FGM in connection with
the performance of the Services, subject to certain limitations approved by the Company’s Board of Directors or Compensation
Committee from time to time. On April 3, 2020, the Company made its initial quarterly payment of $456 under the Shared Services
Agreement.
The
Shared Services Agreement has an initial term of three years, and thereafter renews automatically for successive one-year terms
unless terminated in accordance with its terms. The Shared Services Agreement may be terminated by FGM or by the Company, by a
vote of the Company’s independent directors, at the end of the initial or automatic renewal term upon 120 days’ notice,
subject to payment by the Company of certain costs incurred by FGM to wind down the provision of Services and, in the case of
a termination by the Company without cause, payment of a termination fee equal to the Shared Services Fee paid for the two quarters
preceding termination.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
Joint
Venture Agreement
On
March 31, 2020, the Company entered into the Limited Liability Company Agreement (the “LLC Agreement”) of Fundamental
Global Asset Management, LLC (“FGAM”), a newly-formed joint venture owned 50% by each of the Company and FGI Funds
Management, LLC, an affiliate of FGI (“FGIFM” and together with the Company, each a “Member” and collectively,
the “Members”). The purpose of FGAM is to sponsor, capitalize and provide strategic advice to investment managers
(“Underlying Managers”) in connection with the launch and/or growth of their asset management business and the investment
products they sponsor (each, a “Sponsored Fund”).
FGAM
is governed by a Board of Managers consisting of four managers, two of which have been appointed by each Member. The Company has
appointed two of its independent directors to the Board of Managers of FGAM. Certain major actions, including any decision to
sponsor a new investment manager, will require the prior consent of both Members.
The
LLC Agreement provides that each Member will contribute its proportionate interest of the amount of capital determined by the
Board of Managers to be required to operate FGAM (“Operating Capital”). Unless otherwise agreed, the Company will
contribute the capital required to be contributed to a Sponsored Fund (“Seed Capital”), as well as any amounts required
to be contributed to an Underlying Manager for working capital purposes (“Working Capital”). Proceeds attributable
to a contribution, directly or indirectly through an Underlying Manager, to a Sponsored Fund will be distributed to the Members
in proportion to their capital contributions in respect of Seed Capital. All other proceeds received by FGAM attributable to a
Sponsored Fund, including proceeds from revenue shares or ownership interests in Underlying Managers, will be distributed as follows:
(i) first, to the Members until they have received cumulative distributions up to an amount of the Operating Capital funded by
them; (ii) second, to the Members until they have received cumulative distributions up to an amount of Working Capital previously
funded by them, plus a return of 5% per annum; and (iii) third, to the Members in proportion to their percentage interests.
In
addition, neither FGIFM nor any of its affiliates may participate in a Sponsored Fund Transaction other than through FGAM unless
FGIFM has first presented the opportunity to FGAM and either the Board of Managers or the Company has rejected such opportunity.
Notwithstanding the foregoing, if such opportunity requires in excess of $5,000, FGIFM may offer amounts in excess of $5,000 to
a third party, subject to certain conditions.
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 three months ended March 31, 2020 and 2019.
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
Net income (loss) (in thousands)
|
|
$
|
(8,297
|
)
|
|
$
|
98
|
|
Less: dividends declared on Series A Preferred Shares
|
|
|
(350
|
)
|
|
|
(350
|
)
|
Loss attributable to common shareholders
|
|
$
|
(8,647
|
)
|
|
$
|
(252
|
)
|
Weighted average common shares outstanding
|
|
|
6,067,845
|
|
|
|
6,012,764
|
|
Loss per share attributable to common shareholders
|
|
$
|
(1.43
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(8,297
|
)
|
|
$
|
(429
|
)
|
Less: dividends declared on Series A Preferred Shares
|
|
|
(350
|
)
|
|
|
(350
|
)
|
Loss from continuing operations attributable to common shareholders
|
|
$
|
(8,647
|
)
|
|
$
|
(779
|
)
|
Weighted average common shares outstanding
|
|
|
6,067,845
|
|
|
|
6,012,764
|
|
Loss per common share from continuing operations
|
|
$
|
(1.43
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of income taxes
|
|
$
|
–
|
|
|
$
|
527
|
|
Weighted average common shares outstanding
|
|
|
–
|
|
|
|
6,012,764
|
|
Earnings per common share from discontinued operations
|
|
$
|
–
|
|
|
$
|
0.09
|
|
1347
PROPERTY INSURANCE HOLDINGS, 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 March 31, 2020 and 2019 have been excluded from the computation of
diluted weighted-average shares outstanding as their effect would be anti-dilutive.
|
|
As of March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Options to purchase common stock
|
|
|
–
|
|
|
|
177,456
|
|
Warrants to purchase common stock
|
|
|
1,500,000
|
|
|
|
1,906,875
|
|
Restricted stock units
|
|
|
137,844
|
|
|
|
146,591
|
|
|
|
|
1,637,844
|
|
|
|
2,230,922
|
|
11.
Accumulated Other Comprehensive Income (Loss)
The
table below details the change in the balance of each component of accumulated other comprehensive income (loss), net of tax,
for the three months ended March 31, 2020 and 2019.
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
–
|
|
|
$
|
(729
|
)
|
Other comprehensive income before reclassifications
|
|
|
–
|
|
|
|
1,105
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
–
|
|
|
|
21
|
|
Income taxes
|
|
|
–
|
|
|
|
(215
|
)
|
Net current-period other comprehensive income
|
|
|
–
|
|
|
|
911
|
|
Reclassifications due to adoption of new accounting standards
|
|
|
–
|
|
|
|
(104
|
)
|
Balance, March 31
|
|
$
|
–
|
|
|
$
|
78
|
|
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
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:
|
●
|
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 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 are unobservable and significant to the measurement of fair value.
|
Financial
instruments measured at fair value as of March 31, 2020 and December 31, 2019 in accordance with this guidance are as follows.
1347
PROPERTY INSURANCE HOLDINGS, INC.
Notes
to Financial Statements
($
amounts presented in thousands, except share and per share data and as otherwise specified)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
20,355
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
20,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
29,487
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
29,487
|
|
13.
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 $7 and $122 for the three months ended March 31, 2020 and 2019, respectively. The entirety of rent expense for the three months
ended March 31, 2019 has been included as part of net income from discontinued operations, as it was associated with the operations
of the Maison Business, sold on December 2, 2019.
Impact
of the Coronavirus (COVID-19) Pandemic:
We
continue to monitor the impact of the coronavirus (COVID-19) global pandemic on our operations. In the United States, many state
and local governmental authorities (including the state of Florida, where our principal executive office is located) have, based
on local conditions, either mandated or recommended actions to slow the transmission of COVID-19. These measures range from limitations
on social gatherings, together with closures of non-essential businesses, to prohibitions or restrictions on travel and mandatory
shelter-in-place orders. Governments in non-U.S. jurisdictions have also implemented shelter-in-place orders, quarantines, work
restrictions and significant restrictions on travel.
The
pandemic and associated responsive measures have resulted in significant disruption of the global economy, leading to extreme
volatility in global financial markets and disruptions to capital and credit markets. Economists are forecasting that the economic
downturn resulting from the pandemic may be of an extended duration and lead to a global recession. There is also uncertainty
surrounding when and how the global economy may be fully reopened.
Given
the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our
business. 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. In addition, we may experience significant
losses related to the value of our investment in shares of FedNat common stock to the extent the pandemic negatively impacts FedNat’s
business. While we do not anticipate any material impact to our business operations as a result of the pandemic, in the event
of a major disruption caused by the pandemic, we may lose the services of our employees, experience system interruptions or face
challenges accessing the capital or credit markets, 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. Management is actively monitoring the impact of
the pandemic on the Company’s financial condition, liquidity, operations, industry and workforce. Given the daily evolution
of the pandemic and the global responses to curb the spread of COVID-19, the Company is not able to estimate the effects of COVID-19
on its results of operations, financial condition or liquidity for fiscal year 2020 and beyond.
1347
PROPERTY INSURANCE HOLDINGS, INC.