ITASCA, IL, Feb. 27, 2020 /PRNewswire/ - (NYSE: KFS) Kingsway
Financial Services Inc. ("Kingsway" or the "Company") today filed
its Annual Report on Form 10-K for the fiscal year ended
December 31, 2018. The Company
also filed today amended Forms 10-Q/A for the quarters ended
March 31, 2018, June 30, 2018, and September 30, 2018 that have been restated to
reflect adjustments identified during the course of its 2018
audit.
The Company originally issued a press release dated March 14, 2019 reporting certain unaudited 2018
fourth quarter and year-end financial results. The Company
subsequently issued press releases dated April 16, 2019 and May 30,
2019 announcing that its outside independent auditors
required more time to complete their work and describing certain
adjustments it had identified during the course of its ongoing
audit. Since its May 30, 2019
press release, the Company identified additional adjustments to its
previously reported financial results. The adjustments
identified and the effect of such adjustments on the Company's
previously reported financial results are described in more detail
below.
Cumulative Impact of Adjustments Identified Since
March 14, 2019
Summarized below is the cumulative impact on the Company's
previously reported consolidated statement of operations and
consolidated balance sheet as of and for the year ended
December 31, 2018 of the adjustments
recorded since its March 14, 2019
press release (inclusive of those announced on April 16, 2019 and May
30, 2019).
|
Kingsway Financial
Services Inc.
|
Consolidated
Statement of Operations for the year ended December 31,
2018
|
Amounts in
thousands
|
|
|
|
|
|
|
|
|
|
|
Per March
14, 2019
Press Release
|
Adjustments
due to
Consolidation
of
Limited Liability
Investments
|
Adjustments
to
Redeemable Class A
Preferred Stock
|
Adjustments
to
Extended
Warranty Segment
|
Adjustment
to
Carrying Values of
Investments
|
Other
Adjustments
|
Total
Adjustments
|
Per February
27,
2020 Press Release
|
Revenues:
|
|
|
|
|
|
|
|
|
Service fee and
commission income
|
38,849
|
-
|
-
|
(563)
|
-
|
-
|
(563)
|
38,286
|
Rental
income
|
13,376
|
-
|
-
|
-
|
-
|
-
|
-
|
13,376
|
Other
income
|
416
|
-
|
-
|
-
|
-
|
-
|
-
|
416
|
Total
revenues
|
52,641
|
-
|
-
|
(563)
|
-
|
-
|
(563)
|
52,078
|
Operating
expenses:
|
|
|
|
|
|
|
-
|
|
Claims authorized on
vehicle service agreements
|
5,711
|
-
|
|
|
-
|
-
|
-
|
5,711
|
Loss and loss
adjustment expenses
|
1,631
|
-
|
|
|
-
|
-
|
-
|
1,631
|
Commissions
|
3,756
|
-
|
|
|
-
|
-
|
-
|
3,756
|
Cost of services
sold
|
7,315
|
-
|
|
55
|
-
|
-
|
55
|
7,370
|
General and
administrative expenses
|
29,367
|
69
|
(33)
|
149
|
-
|
183
|
368
|
29,732
|
Leased real estate
segment interest expense
|
6,171
|
-
|
|
|
|
-
|
-
|
6,171
|
Total operating
expenses
|
53,951
|
69
|
(33)
|
203
|
-
|
183
|
422
|
54,371
|
Operating
loss
|
(1,310)
|
(69)
|
33
|
(766)
|
-
|
(183)
|
(985)
|
(2,293)
|
Other revenues
(expenses), net:
|
|
|
|
|
|
|
-
|
|
Net investment
income
|
(8,876)
|
1,840
|
-
|
-
|
94
|
9,899
|
11,833
|
2,957
|
Net realized (losses)
gains
|
(405)
|
388
|
-
|
-
|
-
|
-
|
388
|
(17)
|
Gain on change in
fair value of equity investments
|
250
|
130
|
-
|
-
|
-
|
-
|
130
|
381
|
(Loss) gain on change
in fair value of limited liability investments, at fair
value
|
-
|
2,715
|
-
|
-
|
-
|
(10,108)
|
(7,393)
|
(7,393)
|
Net change in
unrealized loss on private company investments
|
-
|
(1,629)
|
-
|
-
|
-
|
-
|
(1,629)
|
(1,629)
|
Non-operating other
income
|
1,032
|
(69)
|
-
|
-
|
-
|
(932)
|
(1,001)
|
30
|
Interest expense not
allocated to segments
|
(6,091)
|
(1,316)
|
-
|
-
|
-
|
-
|
(1,316)
|
(7,407)
|
Amortization of
intangible assets
|
(2,442)
|
-
|
-
|
-
|
-
|
66
|
66
|
(2,376)
|
Loss on change in
fair value of debt
|
(1,720)
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,720)
|
Gain on disposal of
subsidiary
|
17
|
-
|
-
|
-
|
-
|
-
|
-
|
17
|
Equity in net (loss)
income of investee
|
(817)
|
-
|
-
|
-
|
(1,682)
|
-
|
(1,682)
|
(2,499)
|
Total other revenues
(expenses), net
|
(19,052)
|
2,059
|
-
|
-
|
(1,588)
|
(1,075)
|
(604)
|
(19,656)
|
Loss from continuing
operations before income tax expense (benefit)
|
(20,362)
|
1,990
|
33
|
(766)
|
(1,588)
|
(1,258)
|
(1,589)
|
(21,949)
|
Income tax expense
(benefit)
|
358
|
-
|
-
|
(53)
|
|
10
|
(43)
|
315
|
(Loss) income from
continuing operations
|
(20,720)
|
1,990
|
33
|
(713)
|
(1,588)
|
(1,268)
|
(1,546)
|
(22,264)
|
Loss on liquidation
of subsidiary, net of taxes
|
-
|
|
|
|
|
|
-
|
-
|
Income (loss) from
discontinued operations, net of taxes
|
1,738
|
(673)
|
|
-
|
-
|
-
|
(673)
|
1,064
|
(Loss) gain on
disposal of discontinued operations, net of taxes
|
(7,136)
|
|
|
-
|
-
|
-
|
-
|
(7,136)
|
Net
loss
|
(26,118)
|
1,317
|
33
|
(713)
|
(1,588)
|
(1,268)
|
(2,219)
|
(28,336)
|
Less: net income
attributable to noncontrolling interests in consolidated
subsidiaries
|
468
|
1,317
|
-
|
(21)
|
-
|
-
|
1,295
|
1,765
|
Less: dividends on
preferred stock, net of tax
|
96
|
|
524
|
-
|
-
|
-
|
524
|
620
|
Net loss
attributable to common shareholders
|
(26,682)
|
(0)
|
(491)
|
(692)
|
(1,588)
|
(1,268)
|
(4,039)
|
(30,721)
|
|
|
Kingsway Financial
Services Inc.
|
Consolidated
Balance Sheet as of December 31, 2018
|
Amounts in
thousands
|
|
|
|
|
|
|
|
|
|
|
Per March
14, 2019
Press Release
|
Adjustments
due to
Consolidation of
Limited Liability
Investments
|
Adjustments
to
Redeemable Class A
Preferred Stock
|
Adjustments
to
Extended
Warranty Segment
|
Adjustment
to
Carrying Values
of Investments
|
Other
Adjustments
|
Total
Adjustments
|
Per February
27,
2020 Press Release
|
Assets
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed maturities, at
fair value (amortized cost of $12,432)
|
12,260
|
-
|
-
|
-
|
-
|
-
|
-
|
12,260
|
Equity investments, at
fair value (cost of $2,274)
|
856
|
-
|
-
|
-
|
-
|
-
|
-
|
856
|
Limited liability
investments
|
21,456
|
(16,065)
|
-
|
(699)
|
94
|
-
|
(16,670)
|
4,790
|
Limited liability
investments, at fair value
|
206
|
25,809
|
-
|
-
|
-
|
-
|
25,809
|
26,015
|
Investments in private
companies, at adjusted cost
|
-
|
2,391
|
-
|
699
|
-
|
-
|
3,090
|
3,090
|
Real estate
investments, at fair value (cost of $10,225)
|
-
|
10,662
|
-
|
-
|
-
|
-
|
10,662
|
10,662
|
Other investments, at
cost which approximates fair value
|
2,079
|
-
|
-
|
-
|
-
|
-
|
-
|
2,079
|
Short-term
investments, at cost which approximates fair value
|
152
|
-
|
-
|
-
|
-
|
-
|
-
|
152
|
Total
investments
|
37,009
|
22,798
|
-
|
-
|
94
|
-
|
22,892
|
59,904
|
Cash and cash
equivalents
|
31,914
|
443
|
-
|
(779)
|
-
|
(16,959)
|
(17,295)
|
14,619
|
Restricted
Cash
|
-
|
-
|
-
|
-
|
-
|
16,959
|
16,959
|
16,959
|
Investment in
investee
|
2,633
|
-
|
-
|
-
|
(1,682)
|
-
|
(1,682)
|
951
|
Accrued investment
income
|
203
|
219
|
-
|
-
|
-
|
-
|
219
|
420
|
Service fee
receivable, net of allowance for doubtful accounts of
$191
|
4,570
|
-
|
-
|
(1,136)
|
-
|
-
|
(1,136)
|
3,434
|
Other receivables,
net of allowance for doubtful accounts of $184
|
8,748
|
(8)
|
-
|
967
|
-
|
(183)
|
776
|
9,523
|
Deferred acquisition
costs, net
|
6,904
|
-
|
-
|
|
-
|
-
|
-
|
6,904
|
Property and
equipment, net of accumulated depreciation of $15,958
|
103,142
|
-
|
-
|
|
-
|
-
|
-
|
103,142
|
Goodwill
|
73,928
|
-
|
-
|
|
-
|
731
|
731
|
74,659
|
Intangible assets,
net of accumulated amortization of $10,594
|
83,816
|
-
|
-
|
|
-
|
(550)
|
(550)
|
83,266
|
Other
assets
|
4,472
|
-
|
-
|
(15)
|
-
|
-
|
(15)
|
4,459
|
Assets held for
sale
|
-
|
|
|
|
|
|
-
|
-
|
Total
Assets
|
357,339
|
23,452
|
-
|
(963)
|
(1,588)
|
(2)
|
20,899
|
378,240
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
-
|
|
Accrued expenses and
other liabilities
|
17,007
|
461
|
(1,706)
|
(914)
|
-
|
(61)
|
(2,220)
|
14,786
|
Income taxes
payable
|
2,431
|
-
|
-
|
(31)
|
-
|
-
|
(31)
|
2,400
|
Deferred service
fees
|
46,016
|
-
|
-
|
1,114
|
-
|
-
|
1,114
|
47,130
|
Unpaid loss and loss
adjustment expenses
|
2,073
|
-
|
-
|
-
|
-
|
-
|
-
|
2,073
|
Bank loan
|
3,917
|
-
|
-
|
-
|
-
|
-
|
-
|
3,917
|
Notes
payable
|
182,548
|
16,768
|
-
|
-
|
-
|
-
|
16,768
|
199,316
|
Subordinated debt, at
fair value
|
50,023
|
-
|
-
|
-
|
-
|
-
|
-
|
50,023
|
Net deferred income
tax liabilities
|
28,532
|
-
|
-
|
(23)
|
-
|
28
|
5
|
28,537
|
Liabilities held for
sale
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total
Liabilities
|
332,547
|
17,229
|
(1,706)
|
145
|
-
|
(33)
|
15,636
|
348,182
|
|
|
|
|
|
|
|
-
|
|
Class A preferred
stock, no par value; 1,000,000 and unlimited number authorized at
December 31,
2018; 222,876 issued and outstanding at December 31,
2018
|
5,494
|
-
|
306
|
-
|
-
|
-
|
306
|
5,800
|
|
|
|
|
|
|
|
-
|
-
|
Shareholders'
Equity:
|
|
|
|
|
|
|
-
|
-
|
Additional paid-in
capital
|
354,360
|
-
|
(470)
|
|
|
|
(470)
|
353,890
|
Accumulated
deficit
|
(381,203)
|
-
|
1,870
|
(1,048)
|
(1,588)
|
(229)
|
(995)
|
(382,196)
|
Accumulated other
comprehensive income (loss)
|
40,507
|
-
|
-
|
|
|
260
|
260
|
40,768
|
Shareholders' equity
attributable to common shareholders
|
13,664
|
-
|
1,400
|
(1,048)
|
(1,588)
|
31
|
(1,204)
|
12,462
|
Noncontrolling
interests in consolidated subsidiaries
|
5,634
|
6,223
|
-
|
(60)
|
-
|
-
|
6,162
|
11,796
|
Total Shareholders'
Equity
|
19,298
|
6,223
|
1,400
|
(1,108)
|
(1,588)
|
31
|
4,958
|
24,258
|
Total Liabilities,
Class A preferred stock and Shareholders' Equity
|
357,339
|
23,452
|
-
|
(963)
|
(1,588)
|
(2)
|
20,899
|
378,240
|
Certain of the adjustments identified above affect years prior
to 2018, which results in a different impact to 2018 net loss than
to 2018 shareholders' equity. The Company has restated its 2017
financial statements for those adjustments, as appropriate, which
are described in Note 3 to the consolidated financial statements
within its Annual Report on Form 10-K for the year ended
December 31, 2018.
Summary Description of Adjustments Identified Since
March 14, 2019
Adjustments due to Consolidation of Limited Liability
Investments
The Company identified five limited liability investments,
previously accounted for under the equity method of accounting,
that are now accounted for on a consolidated basis. The
Company now reports the gross assets and related non-recourse
liabilities carried on the balance sheets of these limited
liability investments and, in some cases, records noncontrolling
interests in the consolidated limited liability investments.
Adjustments to Redeemable Class A Preferred Stock
The Company determined that some of the proceeds from its
redeemable Class A Preferred Stock issued on February 3, 2014 should have been allocated to
the Series C warrants issued on such date and to a beneficial
conversion feature related to the embedded conversion option in the
redeemable Class A Preferred Stock. The allocated proceeds should
have been recorded as additional paid in capital in shareholders'
equity with an offsetting discount to the carrying value of the
redeemable Class A Preferred Stock, which discount would then have
been amortized as dividend expense and reported as part of net loss
attributable to common shareholders through the mandatory
redemption date of April 1, 2021.
Adjustments to Extended Warranty Segment
The Company increased deferred service fees by $0.6 million, with offsetting reductions of
$0.5 million to service fee and
commission income recorded for the year ended December 31, 2018 and $0.1
million to accumulated deficit, for adjustments due to the
adoption, effective January 1, 2018,
of Accounting Standards Update 2014-09, Revenue from Contracts
with Customers. The Company also identified several
adjustments within the consolidated balance sheet, which had no
effect on shareholders' equity, primarily including to (i)
reclassify $0.7 million from limited
liability investments to investments in private companies, at
adjusted cost to conform to current presentation; (ii) reclassify
$0.8 million from cash and cash
equivalents to service fee receivable; and (iii) record offsetting
reductions of $1.3 million to service
fee receivable and accrued expenses and other
liabilities.
Adjustments to Carrying Values of Investments
The Company adjusted the carrying values of some of the
underlying investments held by its limited liability investments
that will now be accounted for on a consolidated basis. In
addition, the Company concluded that the carrying value of its
investment in investee, which is accounted for using the equity
method, had an other than temporary impairment as of December 31, 2018. As such, the Company
decreased the carrying value of its investment in investee as of
December 31, 2018 by $1.7 million to reflect the published closing
common stock price of the investee, Itasca Capital Ltd.
Other Adjustments
The Company recorded other adjustments that were identified in
the course of the Company's continued review or as a result of
further audit procedures performed by the Company's external
auditors, including:
- Reclassifying to prior periods $1.0
million of non-operating other income recorded during 2018
due to the reversal of escheat liabilities related to the Company's
voluntary runoff property-casualty insurance operation;
- Reclassifying $10.1 million of
net investment loss to loss on change in fair value of limited
liability investments, at fair value in order to conform to the
current presentation of the Company's investment in 1347 Investors
LLC;
- A $17.0 million reclassification
from cash and cash equivalents into restricted cash; and
- A $0.7 million increase to
goodwill, with offsetting decreases to intangible assets,
amortization of intangible assets and accumulated deficit, related
to the Company's acquisition of Argo Management in 2016, including
the related tax impact of these adjustments, resulting in an
increase to net deferred income tax liabilities, with offsetting
decreases to income tax benefit and accumulated deficit.
About the Company
Kingsway is a holding company that owns or controls subsidiaries
primarily in the extended warranty, asset management and real
estate industries. The common shares of Kingsway are listed
on the New York Stock Exchange under the trading symbol "KFS."
Forward-Looking Statements
This press release includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 that are not
historical facts, and involve risks and uncertainties that could
cause actual results to differ materially from those expected and
projected. Words such as "expects," "believes," "anticipates,"
"intends," "estimates," "seeks" and variations and similar words
and expressions are intended to identify such forward-looking
statements. Such forward-looking statements relate to future events
or future performance, but reflect Kingsway management's current
beliefs, based on information currently available. A number of
factors could cause actual events, performance or results to differ
materially from the events, performance and results discussed in
the forward-looking statements. For information identifying
important factors that could cause actual results to differ
materially from those anticipated in the forward-looking
statements, please refer to the section entitled "Risk Factors" in
the Company's 2018 Annual Report on Form 10-K. Except as expressly
required by applicable securities law, the Company disclaims any
intention or obligation to update or revise any forward-looking
statements whether as a result of new information, future events or
otherwise.
Additional Information
Additional information about Kingsway, including a copy of its
2018 Annual Report and filings on Forms 10-Q and 8-K, can be
accessed on the Canadian Securities Administrators' website at
www.sedar.com, on the EDGAR section of the U.S. Securities and
Exchange Commission's website at www.sec.gov or through the
Company's website at www.kingsway-financial.com.
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SOURCE Kingsway Financial Services Inc.