# KINGSWAY Corp: Form 10-Q for the period ended Mar 31, 2024

- Company: [KINGSWAY Corp](/companies/kwy.md) (CIK 1072627)
- Form: 10-Q
- Filed: 2024-05-08
- Accepted by EDGAR: May 8, 2024, 16:01 ET
- Period: 2024-03-31
- Accession: 0001437749-24-015352
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1072627/000143774924015352/kfs20240331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1072627/000143774924015352/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $26.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $767.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $1.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $84.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$2.3m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 27,107,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $249.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $64.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-03-31 | $12.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-03-31 | $198.0m | us-gaap:Assets |
| Total liabilities | at 2024-03-31 | $177.3m | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $47.1m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-03-31 | $23.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,171 characters.

### FORWARD-LOOKING STATEMENTS

Management's Discussion and Analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “seeks” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect Kingsway management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see Kingsway’s securities filings, including its Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 Annual Report"). The Company's securities filings can be accessed on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov, on the Canadian Securities Administrators’ website at www.sedar.com or through the Company’s website at www.kingsway-financial.com. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements because of new information, future events or otherwise.

### FILER STATUS

On the last business day of the second quarter in 2023, the aggregate market value of the Company’s shares of common stock held by non-affiliate stockholders was between $75 million and $250 million and the Company’s revenue for the year ended December 31, 2023 was more than $100 million. As a result, the Company will be deemed an accelerated filer as defined in Rule 12b-2 under the Exchange Act as of January 1, 2024. Due to the change in filer status, the Company will no longer be exempt from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, and the Company’s independent registered public accounting firm will evaluate and report on the effectiveness of internal control over financial reporting.

### OVERVIEW

Kingsway is a Delaware holding company with operating subsidiaries located in the United States. The Company owns or controls subsidiaries primarily in the extended warranty and business services industries. Kingsway conducts its business through two reportable segments: Extended Warranty and Kingsway Search Xcelerator.

Extended Warranty includes the following subsidiaries of the Company: IWS Acquisition Corporation ("IWS"), Geminus Holding Company, Inc. ("Geminus"), PWI Holdings, Inc. ("PWI") and Trinity Warranty Solutions LLC ("Trinity"). Throughout Management's Discussion and Analysis, the term "Extended Warranty" is used to refer to this segment.

IWS is a licensed motor vehicle service agreement company and is a provider of after-market vehicle protection services distributed by credit unions in25 states and the District of Columbia to their members, with customers in all fifty states.

Geminus primarily sells vehicle service agreements to used car buyers across the United States, through its subsidiaries, The Penn Warranty Corporation ("Penn") and Prime Auto Care, Inc. ("Prime"). Penn and Prime distribute these products in 47 and 37 states, respectively, via independent used car dealerships and franchised car dealerships.

PWI markets, sells and administers vehicle service agreements to used car buyers in all fifty states via independent used car and franchise network of approved automobile and motorcycle dealer partners. PWI’s business model is supported by an internal sales and operations team and partners with American Auto Shield in three states with a white label agreement. PWI also sells and administers a guaranteed asset protection product ("GAP"), under the Penn name, in states where Penn is approved.

Trinity sells heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration warranty products and provides equipment breakdown and maintenance support services to companies across the United States. As a seller of warranty products, Trinity markets and administers product warranty contracts for certain new and used products in the HVAC, standby generator, commercial LED lighting and commercial refrigeration industries throughout the United States. Trinity acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. Trinity does not guaranty the performance underlying the warranty contracts it sells. As a provider of equipment breakdown and maintenance support services, Trinity acts as a single point of contact to its clients for both certain equipment breakdowns and scheduled maintenance of equipment. Trinity will provide such repair and breakdown services by contracting with certain HVAC providers.

Kingsway Search Xcelerator includes the Company's subsidiaries, CSuite Financial Partners, LLC ("CSuite"), Ravix Group, Inc. ("Ravix"), Secure Nursing Service LLC ("SNS"), Systems Products International, Inc. ("SPI") and Digital Diagnostics Imaging, Inc. ("DDI"). Throughout Management's Discussion and Analysis, the term the term "Kingsway Search Xcelerator" is used to refer to this segment.

CSuite is a professional services firm that provides experienced chief financial officer and other finance professionals to its clients through a variety of flexible offerings. These offerings include project and interim staffing engagements, and contingent search services for permanent placements for its clients throughout the United States.

Ravix provides outsourced financial services and human resources consulting for short or long duration engagements for customers throughout the United States.

SNS provides healthcare staffing services to acute healthcare facilities on a contract or per diem basis in the United States, primarily in California.

SPI provides software products created exclusively to serve the management needs of all types of shared-ownership properties throughout the United States, Europe, Asia, Mexico and the Caribbean.

DDI provides outsourced 24 hours a day and 7 days per week ("24/7") cardiac telemetry services for long-term acute care and inpatient rehabilitation hospitals. Outsourcing cardiac monitoring is intended to allow hospitals to eliminate personnel callouts and human resources issues, remove distractions from onsite operations, and free up facility staff to assist directly with patient care. DDI has been operating for over 10 years and currently has a presence in 42 states.

### NON-U.S. GAAP FINANCIAL MEASURE

Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. Our unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. In addition to the U.S. GAAP presentation of net (loss) income, we present segment operating income as a non-U.S. GAAP financial measure, which we believe is valuable in managing our business and drawing comparisons to our peers. Below is a definition of our non-U.S. GAAP measure and its relationship to U.S. GAAP.

### Segment Operating Income

Segment operating income represents one measure of the pretax profitability of our segments and is derived by subtracting direct segment expenses from direct segment revenues. Revenues and expenses are presented in the unaudited consolidated statements of operations, but are not subtotaled by segment; however, this information is available in total and by segment in Note 19, "Segmented Information," to the unaudited consolidated interim financial statements, regarding reportable segment information. The nearest comparable U.S. GAAP measure to total segment operating income is (loss) income from continuing operations before income tax expense that, in addition to segment operating income, includes net investment income, net realized gains, net (loss) gain on equity investments, loss on change in fair value of limited liability investments, at fair value, loss on change in fair value of derivative asset option contracts, interest expense, other revenue and expenses not allocated to segments, net, amortization of intangible assets, impairment of intangible assets, (loss) gain on change in fair value of debt and gain on extinguishment of debt. A reconciliation of total segment operating income to (loss) income from continuing operations before income tax expense for the three months ended March 31, 2024 and March 31, 2023 is presented below in Table 1 of the "Results of Continuing Operations" section of Management's Discussion and Analysis.

### SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

The preparation of unaudited consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined.

The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and that require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The critical accounting policies and judgments in the accompanying unaudited consolidated interim financial statements include revenue recognition; valuation of fixed maturities and equity investments; impairment assessment of investments; valuation of limited liability investments, at fair value; valuation of deferred income taxes; accounting for business combinations; contingent consideration; valuation and impairment assessment of intangible assets; goodwill recoverability; deferred contract costs; fair value assumptions for subordinated debt obligations; fair value assumptions for subsidiary stock-based compensation awards; and fair value assumptions for derivative financial instruments. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions.

The Company’s significant accounting policies and critical estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2023 Annual Report. There has been no material change subsequent to December 31, 2023 to the information previously disclosed in the 2023 Annual Report with respect to these significant accounting policies and critical estimates.

### RESULTS OF CONTINUING OPERATIONS

A reconciliation of total segment operating income to net (loss) income for the three months ended March 31, 2024 and March 31, 2023 is presented in Table 1 below:

### Table 1 Segment Operating Income

(in thousands of dollars)

| Segment operating income: | For the three months ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Extended Warranty | $1,076 | $1,432 | $(356) |
| Kingsway Search Xcelerator | 1,343 | 1,577 | (234) |
| Total segment operating income | 2,419 | 3,009 | (590) |
| Net investment income | 326 | 738 | (412) |
| Net realized gains | 124 | 210 | (86) |
| Net (loss) gain on equity investments | (3) | 1,075 | (1,078) |
| Loss on change in fair value of limited liability investments, at fair value | (8) | (130) | 122 |
| Loss on change in fair value of derivative asset option contracts | — | (1,366) | 1,366 |
| Interest expense | (1,145) | (2,972) | 1,827 |
| Other revenue and expenses not allocated to segments, net | (1,739) | (2,640) | 901 |
| Amortization of intangible assets | (1,414) | (1,418) | 4 |
| Impairment of intangible assets | (511) | — | (511) |
| (Loss) gain on change in fair value of debt | (80) | 309 | (389) |
| Gain on extinguishment of debt | — | 31,616 | (31,616) |
| (Loss) income from continuing operations before income tax expense | (2,031) | 28,431 | (30,462) |
| Income tax expense | 84 | 699 | (615) |
| (Loss) income from continuing operations | (2,115) | 27,732 | (29,847) |
| Income from discontinued operations, net of taxes | 191 | 107 | 84 |
| Loss on disposal of disposal of discontinued operations, net of taxes | (404) | — | (404) |
| Net (loss) income | $(2,328) | $27,839 | $(30,167) |

### Segment Operating Income, (Loss) Income from Continuing Operations and Net (Loss) Income

In the first quarter of 2024 , we reported segment operating income of $2.4 million, a decrease of $0.6 million from the same period in 2023. See further discussion below related to the decrease for the three months ended March 31, 2024.

In the first quarter of 2024, we reported loss from continuing operations of $2.1 million compared to income from continuing operations of $27.7 million in the first quarter of 2023. The loss from continuing operations for the three months ended March 31, 2024is primarily due to:

- Interest expense;
- Other revenue and expenses not allocated to segments, net; and
- Amortization of intangible assets; partially offset by
- Segment operating income.

The income from continuing operations for the three months ended March 31, 2023 is primarily due:

- A gain on extinguishment of debt of $31.6 million, related to the repurchase of the trust preferred debt; which was partially offset by
- Loss on change in fair value of derivative asset option contracts of $1.4 million, related to the trust preferred debt repurchase options; and
- Other revenue and expenses not allocated to segments, net.

See Note 11, "Debt" and Note 10, "Derivatives," to the unaudited consolidated interim financial statements, for further discussion of the repurchase of the trust preferred debt and trust preferred debt repurchase options.

In the first quarter of 2024, we reported anet lossof $2.3 million compared to net income of $27.8 million in the first quarter of 2023. In addition to the items described above impacting (loss) income from continuing operations, the net (loss) income includes:

- Income from discontinued operations, net of taxes of $0.2 million and $0.1 million for the three months ended March 31, 2024 and March 31, 2023, respectively, related to the operations of VA Lafayette; and
- A loss on disposal of discontinued operations, net of taxes of $0.4 million and zero for the three months ended March 31, 2024 and March 31, 2023, respectively,

For the three months ended March 31, 2024, the loss on disposal of discontinued operations is the result of adjusting the net carrying value of VA Lafayette to be equal to the estimated selling price. As discussed in Note 5, "Acquisitions and Discontinued Operations," to the unaudited consolidated interim financial statements, during the fourth quarter of 2022, the Company committed to a plan sell VA Lafayette. During the second quarter of 2024, the Company entered into a letter of intent for the sale of VA Lafayette. As part of recognizing the business as held for sale, the Company is required to measure VA Lafayette at the lower of its carrying amount or fair value less cost to sell. As a result of this analysis, during the first quarter of 2024, the Company recognized an estimated non-cash, loss on disposal of $0.4 million, which is included in loss on disposal of discontinued operations, net of taxes in the consolidated statements of operations. The loss was determined by comparing the expected cash consideration received for the sale of VA Lafayette with the net assets of VA Lafayette.

### Extended Warranty

The Extended Warranty service fee and commission revenue was $16.7 million for the three months ended March 31, 2024 compared with $16.7 million for the three months ended March 31, 2023.

The Extended Warranty operating income was $1.1 million for the three months ended March 31, 2024 compared with $1.4 million for the three months ended March 31, 2023. We saw an increase in claims paid at our auto Extended Warranty companies – both sequentially and year over year – primarily due to continued inflationary pressures on the cost of parts and labor.

Operating income was primarily impacted by the following:

- A $0.1 million increase at IWS to $0.8 million for the three months ended March 31, 2024, primarily due to an increase in revenue;
- A $0.3 million decrease at PWI to $0.1 million for the three months ended March 31, 2024. The operating income for the three months ended March 31, 2024 was impacted by higher claims expense and commission expense, which more than offset the benefits from lower general and administrative expenses and increased revenue;
- A $0.2 million decrease at Geminus to $0.1 million for the three months ended March 31, 2024, due to an increase in claims authorized on vehicle service agreements. General and administrative expenses were down slightly quarter to date; and
- A less than $0.1 million decrease at Trinity to $0.1 million for the three months ended March 31, 2024.

### Kingsway Search Xcelerator

The Kingsway Search Xcelerator revenue decreased to $9.5 million for the three months ended March 31, 2024 compared to $9.7 million for the three months ended March 31, 2023. Kingsway Search Xcelerator operating income was $1.3 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023. Revenue and operating income were primarily impacted by the following:

- Ravix operating income increased less than $0.1 million to $0.9 million for the three months ended March 31, 2024. A decrease in cost of sales was partially offset by a decrease in revenue;
- SNS operating income decreased $0.5 million to $0.1 million for the three months ended March 31, 2024, primarily due to a decrease in revenue, partially offset by lower cost of sales;
- CSuite operating income decreased $0.1 million to less than $0.1 million for the three months ended March 31, 2024, primarily due to a decrease in revenue, partially offset by lower cost of sales; and
- The revenue and operating income derived from SPI and DDI, which were acquired September 7, 2023 and October 26, 2023, respectively. SPI and DDI had combined revenue and operating income of $2.1 million and $0.3 million, respectively, during the three months ended March 31, 2024.

### Net Investment Income

Net investment income was $0.3 million in the first quarter of 2024 compared to $0.7 million in the first quarter of 2023. The decrease in net investment income for the three months ended March 31, 2024 primarily relates to the decrease in investment income from cash equivalents, as a result of a decrease in the cash equivalents balance.

### Net Realized Gains

Net realized gains were $0.1 million in the first quarter of 2024 compared to $0.2 million in the first quarter of 2023. The net realized gains for the three months ended March 31, 2024 primarily relate to realized gains recognized by Argo Holdings Fund I, LLC ("Argo Holdings"). The net realized gains for the three months ended March 31, 2023 primarily relate to realized gains recognized by Argo Holdings and distributions received from one of the Company’s investments in private companies in which its carrying value previously had been written down to zero as a result of prior distributions.

### Net (Loss) Gain on Equity Investments

Loss on equity investments was less than $0.1 million in the first quarter of 2024 compared to a gain of $1.1 million in the first quarter of 2023 . The gain for the three months ended March 31, 2023 relates to unrealized gains on equity investments held. During the first quarter of 2023, the Company held warrants in Limbach Holdings, Inc. ("Limbach"). During the first quarter of 2023, the underlying common stock price of Limbach increased, resulting in an increase in the fair value of the warrants held. During the third quarter of 2023, the Company sold all of its investment in Limbach.

### Loss on Change in Fair Value of Limited Liability Investments, at Fair Value

Loss on change in fair value of limited liability investments, at fair value was less than $0.1 million in the first quarter of 2024 compared to $0.1 million in the first quarter of 2023. The loss for the three months ended March 31, 2024 represents a decrease in fair value related to Argo Holdings. The loss for the three months ended March 31, 2023 represents a decrease in fair value of $0.3 million related to Net Lease Investment Grade Portfolio LLC ("Net Lease"), partially offset by an increase in fair value of $0.2 million related to Argo Holdings.

During the second quarter of 2023, the Company recorded the sale of Net Lease's final investment property. As a result of the sale, the Company's investment in Net Lease was zero at December 31, 2023.

### Loss on Change in Fair Value of Derivative Asset Option Contracts

Loss on change in fair value of derivative asset option contracts was zero i n the first quarter of 2024 compared to $1.4 million in the first quarter of 2023 . The derivative contract related to three trust preferred debt repurchase option agreements the Company entered into during the third quarter of 2022. The Company exercised the repurchase options during the first quarter of 2023.

Refer to Note 10, "Derivatives," to the unaudited consolidated interim financial statements, for further information on the option agreements.

### Interest Expense

Interest expense for the first quarter of 2024 was $1.1 million compared to $3.0 million in the first quarter of 2023. The decrease for the three months ended March 31, 2024 is primarily attributable to:

- A decrease of $1.9 million on the Company’s subordinated debt. On March 22, 2023, the Company repurchased TruPs debt having a principal amount of $75.5 million. As a result, the interest expense for the first quarter of 2024 relates only to the one remaining TruPs debt instrument outstanding. The Company's subordinated debt bore interest at the rate of LIBOR, plus spreads ranging from 3.85% to 4.20%. Effective July 3, 2023, the index used for determining the interest rate for the remaining trust preferred debt instrument converted from LIBOR to CME Term SOFR;
- A decrease of less than $0.1 million related to the 2020 KWH Loan, as a result of a decrease in fair value of the interest rate swap related to the 2020 KWH bank loan;
- A decrease of less than $0.1 million related to the SNS Loan, which has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 9.00%);
- A decrease of less than $0.1 million related to the 2022 Ravix Loan, which has an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 9.25%); and
- An increase of $0.1 million related to the DDI Loan, which was effective October 26, 2023, and has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 5.00% (current rate of 9.00%).

See Note 11, "Debt," to the Consolidated Financial Statements for further details.

### Other Revenue and Expenses not Allocated to Segments, Net

Other revenue and expenses not allocated to segments, net was a net expense of $1.7 million in the first quarter of 2024 compared to $2.6 million in the first quarter of 2023. Included are revenue and expenses associated with our various other investments that are accounted for on a consolidated basis and expenses associated with our corporate holding company.

The decrease in net expense for the three months ended March 31, 2024 is primarily attributable to a management fee paid to the external manager of a previously consolidated entity in the first quarter of 2023 and lower salary and acquisition related expenses, partially offset by expense related to the Ravix contingent consideration liability during the three months ended March 31, 2024 compared to the same period in 2023.

### Impairment of Intangible Assets

Impairment of intangible assets was $0.5 million in the first quarter of 2024 compared to zero in the first quarter of 2023 . The Company's indefinite-lived intangible assets consist of trade names, which are assessed for impairment annually as of November 30, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. At March 31, 2024, the Company determined that certain of its trade name intangible assets should be further examined under a quantitative approach. Based upon this assessment, the Company recorded an impairment charge of $0.5 million related to the SNS and CSuite indefinite-lived trade names. The reduction in value is primarily due to higher discount rates and reduction in projected revenue.

### (Loss) Gain on Change in Fair Value of Debt

Loss on change in fair value of debt was $0.1 million in the first quarter of 2024 compared to a gain of $0.3 million in the first quarter of 2023. During the first quarter of 2023, the Company repurchased TruPs debt having a principal amount of $75.5 million. The change in fair value related to the repurchased TruPs debt was a gain of $0.3 million and the change in fair value related to the remaining TruPs debt instrument was less than $0.1 million during the three months ended March 31, 2023.

The (loss) gain for three months ended March 31, 2024 and March 31, 2023 reflects changes in the fair value of the subordinated debt resulting primarily from changes in interest rates used (not related to instrument-specific credit risk). The following summarizes the impacts:

| Impact of Rate Change on Fair Value | Three months ended March 31, 2024 | Three months ended March 31, 2023 |
| --- | --- | --- |
|  | **Result** | **Result** |
| LIBOR: |  |  |
| increase causes fair value to increase; decrease causes fair value to decrease | Increase to fair value | Decrease to fair value |
| Risk free rate: |  |  |
| increase causes fair value to decrease; decrease causes fair value to increase | Decrease to fair value | Increase to fair value |

See "Debt" section below for further information.

### Gain on Extinguishment of Debt

For the three months ended March 31, 2023, gain on extinguishment of debt consists of a $31.6 million gain related to the repurchase of TruPs debt having a principal amount of $75.5 million. The gain on extinguishment of debt results from removing the fair value of the debt, trust preferred debt repurchase options, deferred interest payable and accumulated other comprehensive income related to the repurchased TruPs from the Company's consolidated balance sheet at the repurchase date. See Note 11 "Debt," to the unaudited consolidated interim financial statements, for further discussion.

### Income Tax Expense

Income tax expense for the first quarter of 2024 was $0.1 million compared to $0.7 million in the first quarter of 2023. For the three months ended March 31, 2024 and March 31, 2023, the Company reported income tax expense primarily due to state tax expense. See Note 14, "Income Taxes," to the unaudited consolidated interim financial statements, for additional detail of the income tax expense recorded for the three months ended March 31, 2024 and March 31, 2023.

### INVESTMENTS

### Portfolio Composition

See Note 2(d), "Summary of Significant Accounting Policies - Investments," to the consolidated financial statements in the 2023 Annual Report for an overview of how we account for our various investments.

At March 31, 2024, we held cash and cash equivalents, restricted cash and investments with a carrying value of $61.9 million. Our U.S. operations typically invest in U.S. dollar-denominated instruments to mitigate their exposure to currency rate fluctuations.

Table 2 below summarizes the carrying value of investments, including cash and cash equivalents and restricted cash, at the dates indicated.

### TABLE 2 Carrying value of investments, including cash and cash equivalents and restricted cash

(in thousands of dollars, except for percentages)

| Type of investment Fixed maturities: | March 31, 2024 | % of Total | December 31, 2023 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| U.S. government, government agencies and authorities | 13,339 | 21.6% | 12,997 | 21.9% |
| States, municipalities and political subdivisions | 2,778 | 4.5% | 2,783 | 4.7% |
| Mortgage-backed | 9,076 | 14.7% | 9,253 | 15.6% |
| Asset-backed | 1,444 | 2.3% | 1,210 | 2.0% |
| Corporate | 9,948 | 16.1% | 10,230 | 17.2% |
| Total fixed maturities | 36,585 | 59.1% | 36,473 | 61.4% |
| Equity investments | — | —% | 79 | 0.1% |
| Limited liability investments | 753 | 1.2% | 812 | 1.4% |
| Limited liability investments, at fair value | 3,488 | 5.6% | 3,496 | 5.9% |
| Investments in private companies | 854 | 1.4% | 854 | 1.4% |
| Other investments | — | —% | 6 | 0.0% |
| Short-term investments | 163 | 0.3% | 161 | 0.3% |
| Total investments | 41,843 | 67.6% | 41,881 | 70.5% |
| Cash and cash equivalents | 12,112 | 19.6% | 9,098 | 15.4% |
| Restricted cash | 7,909 | 12.8% | 8,400 | 14.1% |
| Total | 61,864 | 100.0% | 59,379 | 100.0% |

### Investment Impairment

The Company performs a quarterly analysis of its investments to determine if declines in fair value may result in the recognition of impairment losses in net (loss) income. Factors considered in the determination of whether or not an impairment loss is recognized in net (loss) income include a current intention or need to sell the security or an indication that a credit loss exists. See the "Significant Accounting Policies and Critical Estimates" section of Management's Discussion and Analysis of Financial Condition included in the 2023 Annual Report for further information regarding the Company's detailed analysis and factors considered in establishing an impairment loss on an investment.

The Company's fixed maturities are subject to declines in fair value below amortized cost that may result in the recognition of impairment losses in net (loss) income. If the decline in fair value is due to credit factors and the Company does not expect to receive cash flows sufficient to support the entire amortized cost basis, the credit loss is reported in the consolidated statements of operations in the period that the declines are evaluated. Significant judgment is required in the determination of whether a credit loss has occurred for a security. The Company considers all available evidence when determining whether a security requires a credit allowance to be recorded, including the financial condition and expected near-term and long term prospects of the issuer, whether the issuer is current with interest and principal payments, credit ratings on the security or changes in ratings over time, general market conditions, industry, sector or other specific factors and whether the Company expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company performs a quarterly analysis of its available-for-sale fixed maturity investments and other investments to determine if an impairment loss has occurred.

There were no impairment losses recorded related to investments during the three months ended March 31, 2024 and March 31, 2023.

At March 31, 2024 and December 31, 2023, the gross unrealized losses for fixed maturities amounted to $1.7 million and $1.7 million, respectively, and there were no unrealized losses attributable to non-investment grade fixed maturities.

### DEBT

The principal and carrying value of the Company's debt instruments at March 31, 2024 and December 31, 2023 are as follows:

*(in thousands)*

| Bank loan: | March 31, 2024 Principal | Carrying Value | December 31, 2023 Principal | Carrying Value |
| --- | ---: | ---: | ---: | ---: |
| 2021 Ravix Loan | $4,425 | $4,425 | $4,650 | $4,650 |
| 2022 Ravix Loan | 4,775 | 4,628 | 4,925 | 4,769 |
| SNS Loan | 5,017 | 4,942 | 5,142 | 5,063 |
| DDI Loan | 5,600 | 5,537 | 5,600 | 5,534 |
| 2020 KWH Loan | 14,052 | 13,878 | 10,979 | 10,806 |
| Total bank loans | 33,869 | 33,410 | 31,296 | 30,822 |
| Subordinated debt | 15,000 | 13,651 | 15,000 | 13,594 |
| Total | $48,869 | $47,061 | $46,296 | $44,416 |

See Note 11, "Debt," to the Consolidated Financial Statements for a detailed discussion of the Company’s debt instruments. Changes related to the Company’s debt during the first quarter of 2024 are further described below.

#### Bank Loans

During the first quarter of 2024, the Company borrowed $3.5 million under the KWH Delayed Draw Term Loan ("DDTL"), $0.5 million under the KWH Loan revolver and $0.2 million under the SNS Loan Revolver.

The SNS Loan contains a number of covenants, including, but not limited to, a leverage ratio and a fixed charge ratio and limits on annual capital expenditures, all of which are as defined in and calculated pursuant to the SNS Loan that, among other things, restrict SNS’s ability to incur additional indebtedness, create liens, make dividends and distributions, engage in mergers, acquisitions and consolidations, make certain payments and investments and dispose of certain assets. At March 31, 2024 the Company is in default under the SNS Loan due to debt covenant violations related to the leverage and fixed charge ratios. The Company has received an amendment to the SNS Loan that waives the events of default for the fiscal quarter ended March 31, 2024. As of the report date, there is some uncertainty as to whether the Company will be in compliance with the covenants in future periods, and if not, when the Company will be able to cure any potential violations. A default may permit the lender to declare the amounts owed under the SNS Loan immediately due and payable, exercise their rights with respect to collateral securing the obligation, and/or exercise any other rights and remedies available.

#### Subordinated Debt

The Company's subordinated debt is measured and reported at fair value. At March 31, 2024, the carrying value of the subordinated debt is $13.7 million. The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. For a description of the market observable inputs and inputs developed by a third party used in determining fair value of debt, see Note 20, "Fair Value of Financial Instruments," to the unaudited consolidated interim financial statements.

Though changes in the market observable swap rates will continue to introduce some volatility each quarter to the Company’s reported gain or loss on change in fair value of debt, changes in the credit spread assumption developed by the third party does not introduce volatility to the Company’s consolidated statements of operations. The fair value of the Company’s subordinated debt will eventually equal the principal value totaling $15.0 million of the subordinated debt by the time of the stated redemption date of the remaining trust, which matures on May 22, 2033.

Of the $0.1 million increase in fair value of the Company’s subordinated debt between December 31, 2023 and March 31, 2024, less than $0.1 million is reported as decrease in fair value of debt attributable to instrument-specific credit risk in the Company's unaudited consolidated statements of comprehensive (loss) income and $0.1 million is reported as loss on change in fair value of debt in the Company’s unaudited consolidated statements of operations.

### RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 4, "Recently Issued Accounting Standards," to the unaudited consolidated interim financial statements, for discussion of certain accounting standards that may be applicable to the Company's current and future consolidated financial statements.

### LIQUIDITY AND CAPITAL RESOURCES

The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they fall due. The liquidity requirements of the Company and its subsidiaries have been met primarily by funds generated from operations, capital raising, disposal of subsidiaries, investment maturities and investment income, and other returns received on investments and from the sale of investments.

A significant portion of the cash provided by our Extended Warranty companies is required to be placed into restricted trust accounts, as determined by the insurers who back-up our service contracts, in order to fund future expected claims. On a periodic basis (quarterly or annually), we may be required to contribute more into the restricted accounts or we may be permitted to draw additional funds from the restricted accounts, dependent upon actuarial analyses performed by the insurers regarding sufficiency of funds to cover future expected claims. A substantial portion of the restricted trust accounts are invested in fixed maturities and other instruments that have durations similar to the expected future claim projections.

Cash provided from these sources is used primarily for warranty expenses, business service expenses, debt servicing, acquisitions and operating expenses of the holding company.

The Company's Extended Warranty and Kingsway Search Xcelerator subsidiaries fund their obligations primarily through service fee and commission revenue.

### Cash Flows from Continuing Operations

During the three months ended March 31, 2024, the Company reported $0.2 million of net cash provided by operating activities from continuing operations, primarily due to operating income from the Extended Warranty and Kingsway Search Xcelerator segments. During the three months ended March 31, 2023, the Company reported $22.8 million of net cash used in operating activities from continuing operations, primarily due to payment of deferred interest on the trust preferred debt instruments that were repurchased during the first quarter of 2023 ($16.1 million), payment of deferred interest on the remaining trust preferred debt instrument ($5.0 million), partially offset by operating income from the Extended Warranty and Kingsway Search Xcelerator segments.

During the three months ended March 31, 2024, the net cash used in investing activities from continuing operations was $0.2 million. This use of cash is primarily attributed to purchases of fixed maturities and property and equipment, net in excess of proceeds from sales and maturities of fixed maturities and sales of equity securities. During the three months ended March 31, 2023, the net cash provided by investing activities from continuing operations was $6.3 million. This source of cash was primarily attributed to a distribution received by Net Lease from one of its limited liability investment companies of $5.2 million, as well as proceeds from sales and maturities of fixed maturities in excess of purchases of fixed maturities.

During the three months ended March 31, 2024, the net cash provided by financing activities from continuing operations was $2.5 million. This source of cash was primarily attributed to principal proceeds from bank loans of $4.2 million, partially offset by principal repayment on bank loans of $1.6 million. During the three months ended March 31, 2023, the net cash used in financing activities from continuing operations was $40.9 million. This use of cash was primarily attributed to the repurchase of five of the TruPs for $40.3 million, principal repayment on bank loans of $3.3 million and distributions to noncontrolling interest holders of $3.6 million, partially offset by cash proceeds from the exercise of warrants of $6.3 million.

### Holding Company Liquidity

The liquidity of the holding company is managed separately from its subsidiaries. The obligations of the holding company primarily consist of holding company operating expenses; transaction-related expenses; investments; stock repurchases; and any other extraordinary demands on the holding company.

Pursuant to satisfying the covenants under the 2020 KWH Loan, distributions to the holding company in an aggregate amount not to exceed $1.5 million in any 12-month period are permitted. Also, beginning in 2022, the holding company is permitted to receive a portion of the excess cash flow (as defined in the 2020 KWH Loan document) generated by the KWH Subs in the previous year.

The amount of excess cash flow the Company is entitled to retain is dependent upon the leverage ratio (as defined in the 2020 KWH Loan document):

| If leverage ratio is | Percent of excess cash flow retained by the Company |
| --- | ---: |
| Greater than 1.75:1.00 | 50% |
| Less than 1.75:1.00 but greater than 0.75:1.00 | 75% |
| Less than 0.75:1.0 | 100% |

The holding company’s liquidity, defined as the amount of cash in the bank accounts of Kingsway Financial Services Inc. and Kingsway America Inc., was $2.3 millionand $4.3 million at March 31, 2024 and December 31, 2023, respectively, which excludes future actions available to the holding company that could be taken to generate liquidity. Such future actions include, but are not limited to, distributions from the Extended Warranty and Kingsway Search Xcelerator operating companies subject to certain loan covenants that may be in place at each operating company. The holding company cash amounts are reflected in the cash and cash equivalents of $12.1 million and $9.1 million reported at March 31, 2024 and December 31, 2023, respectively, on the Company’s consolidated balance sheets.

Based on the Company’s current business plan and revenue prospects, existing cash, cash equivalents, investment balances and anticipated cash flows from operations are expected to be sufficient to meet the Company’s working capital and operating expenditure requirements, for the next twelve months. However, the Company’s assessment could also be affected by various risks and uncertainties, including, but not limited to, the developing macro-economic environment.

### Regulatory Capital

Kingsway Reinsurance Corporation ("Kingsway Re"), our reinsurance subsidiary domiciled in Barbados, is required by the regulator in Barbados to maintain minimum statutory capital of $125,000. Kingsway Re is currently operating with statutory capital near the regulatory minimum, requiring us to periodically contribute capital to fund operating expenses. Kingsway Re incurs operating expenses of approximately $0.1 million per year.

## Market risk

As filed, 228 characters.

We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); therefore, pursuant to Regulation S-K, we are not required to make disclosures under this Item.

## Controls and procedures

As filed, 6,338 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of March 31, 2024.

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures.

In designing and evaluating our disclosure controls and procedures, the Company’s management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints that require the Company’s management to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on the evaluation of our disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2024, there were two control deficiencies in our internal control over financial reporting which constituted material weaknesses, and accordingly the Company’s disclosure controls and procedures were not effective.

### Management's Report on Internal Control over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's management evaluated the effectiveness of its internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), or COSO. Based on that evaluation and the discovery of the errors described in the following paragraphs, the Company’s management has concluded that, as of March 31, 2024, our internal control over financial reporting was not effective based on the COSO framework. We describe the material weaknesses in the following paragraphs.

### Material Weaknesses in Internal Control over Financial Reporting

A material weakness is defined as a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

A. *Spreadsheet Calculation Error.* The Company did not correctly calculate the fair value of its subordinated debt as of December 31, 2023, due to a spreadsheet calculation error that resulted in an adjustment to the financial statements of approximately $1.2 million. The Company has a mitigating control in place, but this control did not operate during the fourth quarter timely as the fair value calculation was provided to the Company’s auditors prior to this control activity taking place. The fair value of the remaining tranche of subordinated debt was calculated, without error, as of March 31, 2023, June 30, 2023, and September 30, 2023. The spreadsheet calculation error as of December 31, 2023 has been corrected.

B. *Cash Flow Statement Classification Error.* The Company did not correctly present the amount related to the repurchase of the deferred interest on its subordinated debt as a cash outflow from operating activities (the entire repurchase amount was presented as a cash outflow from financing activities).

As a result of these identified material weaknesses, the Company considered whether other calculations and conclusions with respect to presentation could be impacted. Notwithstanding the material weaknesses described above, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, believes that these were isolated incidents, have been corrected, and that the consolidated financial statements contained in this Form 10-Q for the three months ended March 31, 2024 and March 31, 2023 fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented in conformity with U.S. GAAP.

### Remediation of 2023 Material Weakness

We have corrected all errors discovered during our review process for fiscal 2023.

In addition, the Company has developed the following plan of remediation:

A. *The Spreadsheet Calculation Error*. The Company will implement a policy whereby alterations to workpapers pertaining to material financial items require an additional layer of review to ensure such alterations were correctly calculated.

B. *Cash Flow Statement Classification Error.* The Company failed to consult on the cash flow presentation aspect of the transaction. The Company will modify its existing policy that requires it to consult with third party experts on significant and/or unusual transactions to explicitly state that such consultations need to include all accounting aspects, including presentation and disclosure.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the period beginning January 1, 2024, and ending March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Filed May 8, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-015352. Last ingested by Listed: Nov 3, 2026, 21:55 ET. No prices; not investment advice.