# KINGSWAY Corp: Form 10-Q for the period ended Sep 30, 2024

- Company: [KINGSWAY Corp](/companies/kwy.md) (CIK 1072627)
- Form: 10-Q
- Filed: 2024-11-06
- Accepted by EDGAR: Nov 6, 2024, 21:34 ET
- Period: 2024-09-30
- Accession: 0001437749-24-033642
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1072627/000143774924033642/kfs20240930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1072627/000143774924033642/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $27.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $79.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2024-07-01 to 2024-09-30 | −$672.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2024-01-01 to 2024-09-30 | $374.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-07-01 to 2024-09-30 | $1.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2024-01-01 to 2024-09-30 | $3.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $21.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $209.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | −$2.3m | us-gaap:ProfitLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | −$6.8m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | −$0.10 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | −$0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | −$0.10 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | −$0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 27,197,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 27,213,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $1.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $2.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-09-30 | $6.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-09-30 | $191.1m | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $171.4m | us-gaap:Liabilities |
| Long-term debt | at 2024-09-30 | $58.5m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-09-30 | $9.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 53,636 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 is deemed to be 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 in 25 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 34 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"), Digital Diagnostics Imaging, Inc. ("DDI") and Image Solutions, LLC ("Image Solutions"). 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 39 states.

Image Solutions provides comprehensive information technology managed services, including equipment sales, service, and helpdesk support to customers primarily in North Carolina, Kansas, Georgia, Kentucky and Tennessee. Since Image Solutions was acquired on September 26, 2024, the consolidated statement of operations for the three and nine months ended September 30, 2024, does not include any revenue, expenses or earnings of Image Solutions, as such items are immaterial.

### 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 20, "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 (benefit) that, in addition to segment operating income, includes net investment income, net realized gains, net gain (loss) on equity investments, gain on change in fair value of limited liability investments, at fair value, net change in unrealized gains on private company investments, impairment losses on investments, 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, gain (loss) on change in fair value of debt, gain on disposal of subsidiary and (loss) gain on extinguishment of debt. A reconciliation of total segment operating income to (loss) income from continuing operations before income tax expense (benefit) for the three and nine months ended September 30, 2024 and September 30, 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 and nine months ended September 30, 2024 and September 30, 2023 is presented in Table 1 below:

### Table 1 Segment Operating Income

(in thousands of dollars)

| Segment operating income: | For the three months ended September 30, 2024 | 2023 | Change | For the nine months ended September 30, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Extended Warranty | $1,704 | $1,778 | $(74) | $4,024 | $4,602 | $(578) |
| Kingsway Search Xcelerator | 1,144 | 1,003 | 141 | 3,928 | 4,196 | (268) |
| Total segment operating income | 2,848 | 2,781 | 67 | 7,952 | 8,798 | (846) |
| Net investment income | 403 | 351 | 52 | 1,037 | 1,419 | (382) |
| Net realized gains | 958 | 206 | 752 | 1,359 | 539 | 820 |
| Net gain (loss) on equity investments | — | 592 | (592) | (3) | 3,374 | (3,377) |
| Gain on change in fair value of limited liability investments, at fair value | 95 | 320 | (225) | 173 | 194 | (21) |
| Net change in unrealized gain on private company investments | — | 63 | (63) | — | 63 | (63) |
| Impairment losses on investments | — | (71) | 71 | — | (166) | 166 |
| Loss on change in fair value of derivative asset option contracts | — | — | — | — | (1,366) | 1,366 |
| Interest expense | (1,173) | (1,061) | (112) | (3,480) | (5,119) | 1,639 |
| Other revenue and expenses not allocated to segments, net | (3,290) | (2,833) | (457) | (7,116) | (9,279) | 2,163 |
| Amortization of intangible assets | (1,437) | (1,424) | (13) | (4,308) | (4,252) | (56) |
| Impairment of intangible assets | (640) | — | (640) | (1,841) | — | (1,841) |
| Gain (loss) on change in fair value of debt | 81 | (165) | 246 | (48) | (195) | 147 |
| Gain on disposal of subsidiary | — | 342 | (342) | — | 342 | (342) |
| (Loss) gain on extinguishment of debt | — | — | — | (160) | 31,616 | (31,776) |
| (Loss) income from continuing operations before income tax expense (benefit) | (2,155) | (899) | (1,256) | (6,435) | 25,968 | (32,403) |
| Income tax expense (benefit) | 21 | (102) | 123 | 209 | 810 | (601) |
| (Loss) income from continuing operations | (2,176) | (797) | (1,379) | (6,644) | 25,158 | (31,802) |
| Income from discontinued operations, net of taxes | 81 | 122 | (41) | 439 | 339 | 100 |
| Loss on disposal of disposal of discontinued operations, net of taxes | (216) | — | (216) | (620) | — | (620) |
| Net (loss) income | $(2,311) | $(675) | $(1,636) | $(6,825) | $25,497 | $(32,322) |

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

In the third quarter of 2024, we reported segment operating income of $2.8 million, an increase of $0.1 million from the same period in 2023 ($8.0 million year to date, a decrease of $0.8 million compared to prior year to date).

In the third quarter of 2024, we reported loss from continuing operations of $2.2 million compared to $0.8 million in the third quarter of 2023. For the nine months ended September 30, 2024, we reported loss from continuing operations of $6.6 million compared to income from continuing operations of $25.2 million for the nine months ended September 30, 2023.

In the third quarter of 2024, we reported a net loss of $2.3 million compared to $0.7 million in the third quarter of 2023 (net loss of $6.8 million year to date compared to net income of $25.5 million prior year to date).

The discussion below highlights the key drivers of the current and prior year results.

### Extended Warranty

The Extended Warranty service fee and commission revenue was $17.8 million for the three months ended September 30, 2024 compared with $17.3 million for the three months ended September 30, 2023 ($51.6 million year to date compared to $51.0 million prior year to date). Service fee and commission revenue was impacted by the following for the three and nine months ended September 30, 2024:

- A $0.3 million increase at Trinity for the three months ended September 30, 2024 (an increase of $0.2 million year to date), primarily driven by an increase in the sale of warranty products;
- A $0.2 million increase at IWS for the three months ended September 30, 2024 (an increase of less than $0.1 million year to date). IWS sells a substantial amount of VSAs for new automobiles but, more importantly, its products are distributed through credit unions at the point of vehicle financing, which has been less impacted by the current macro-economic conditions. Cash sales were up 9.4% and 6.8% over the prior year for the three and nine months ended September 30, 2024, respectively, while the number of contracts sold were up 8.7% and 3.9% over the prior year for the same periods, respectively;
- A $0.1 million increase at Geminus for the three and nine months ended September 30, 2024; Cash sales were up 1.9% but down 3.1% over the prior year for the three and nine months ended September 30, 2024, respectively, while the number of contracts sold were up 16.2% and 9.3% over the prior year for the same periods, respectively; and
- A less than $0.1 million decrease at PWI for the three months ended September 30, 2024 (an increase of $0.3 million year to date); Cash sales were up 1.1% but down 2.2% over the prior year for the three and nine months ended September 30, 2024, respectively, while the number of contracts sold were down 7.5% and 3.6% over the prior year for the same periods, respectively.

The Extended Warranty operating income was $1.7 million for the three months ended September 30, 2024 compared with $1.8 million for the three months ended September 30, 2023 ($4.0 million year to date compared to $4.6 million prior year to date). Total claims expense increased 7.9% and 7.7% for the three and nine months ended September 30, 2024, respectively; however, this is lower than the prior year increase in claims expense of 11.8% and 10.6% for the three and nine months ended September 30, 2023, respectively.

Operating income was also impacted by the following:

- A $0.2 million increase at Trinity to $0.5 million for the three months ended September 30, 2024 (an increase of $0.2 million year to date to $1.0 million), primarily due to increased revenue from warranty products for the quarter and year to date, which yields a higher margin;
- A less than $0.1 million increase at Geminus to $0.2 million for the three months ended September 30, 2024 (an increase of $0.1 million year to date to $0.4 million) as an increase in revenue and a decrease in general expenses for the quarter and year to date were nearly offset by increased claims expense;
- A $0.2 million decrease at PWI to $0.2 million for the three months ended September 30, 2024 (a decrease of $0.5 million year to date to $0.6 million). The operating income for the three months ended September 30, 2024 was impacted by higher dealer profit sharing expense, while gross profit was essentially flat. The operating income for the nine months ended September 30, 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; and
- A $0.1 million decrease at IWS to $0.8 million for the three months ended September 30, 2024 (a decrease of $0.3 million year to date to $2.1 million). The operating income for the three months ended September 30, 2024 was impacted by higher claims and commission expense, which more than offset the benefits from increased revenue. The operating income for the nine months ended September 30, 2024 was impacted by higher commission expense and slightly higher general and administrative expenses; revenue and claims expense was essentially flat.

### Kingsway Search Xcelerator

The Kingsway Search Xcelerator revenue increased to $9.3 million for the three months ended September 30, 2024 compared to $7.5 million for the three months ended September 30, 2023 (an increase to $28.1 million year to date compared to $26.4 million prior year to date). Kingsway Search Xcelerator operating income was $1.1 million for the three months ended September 30, 2024 compared to $1.0 million for the three months ended September 30, 2023 ($3.9 million year to date compared to $4.2 million prior year to date). Revenue and operating income were primarily impacted by the following:

- Ravix operating income decreased $0.1 million to $0.7 million for the three months ended September 30, 2024 (a decrease of less than $0.1 million year to date to $2.6 million), primarily due to decreased revenue, partially offset by a decrease in costs of services sold for the quarter and year to date, while gross margin for the quarter and year-to-date have improved slightly over prior year;
- SNS operating income decreased by less than $0.1 million to $0.2 million for the three months ended September 30, 2024 (a decrease of $0.9 million year to date to $0.5 million). The operating income for the nine months ended September 30, 2024 was primarily due to a decrease in revenue, partially offset by lower cost of sales; however, the number of travel shifts continues to improve and the number of travel nurses on assignment has more than doubled from the beginning of the year;
- CSuite operating loss was near zero for the three and nine months ended September 30, 2024 (a slight improvement over prior year for the quarter and down $0.2 million year to date). Decreases in revenue, partially offset by lower cost of sales and general and administrative expenses impacted quarter and year to date; 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 $2.4 million and $0.3 million, respectively, during the three months ended September 30, 2024 ($6.7 million and $0.9 million, respectively, for the nine months ended September 30, 2024).

### Net Investment Income

Net investment income was $0.4 million in the third quarter of 2024 and 2023 ($1.0 million year to date compared to $1.4 million prior year to date). The decrease in investment income for the nine months ended September 30, 2024 primarily relates to less income from cash equivalents, as a result of a decrease in the cash equivalents balance (in the first quarter of 2023 the Company was holding cash that was used to repurchase some of its subordinated debt) and more equity pick-up loss related to limited liability investments. These decreases were partially offset by an increase in investment income from fixed maturities and interest income related to the significant financing component for certain SPI contracts.

### Net Realized Gains

Net realized gains were $1.0 million in the third quarter of 2024 compared to $0.2 million in the third quarter of 2023 ($1.4 million year to date compared to $0.5 million prior year to date). The net realized gains for the three and nine months ended September 30, 2024 primarily relate to realized gains recognized by Argo Holdings Fund I, LLC ("Argo Holdings") and a net realized gain related to the sale of one of the private company investments. The net realized gains for the three months ended September 30, 2023 primarily relate to realized gains recognized by Argo Holdings. The net realized gains for the nine months ended September 30, 2023 primarily relate to realized gains recognized by Argo Holdings and net realized gains on sales of limited liability investments.

### Net Gain (Loss) on Equity Investments

Net gain on equity investments was zero in the third quarter of 2024 compared to $0.6 million in the third quarter of 2023 (net loss of less than $0.1 million year to date compared to a net gain of $3.4 million prior year to date). The net gain for the three and nine months ended September 30, 2023 relates to the Company's former investment in Limbach. Prior to the second quarter of 2023, the Company held warrants in 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 at March 31, 2023. During the second quarter of 2023, the Company completed a cashless exercise of its Limbach warrants. During the third quarter of 2023, the Company sold all of its investment in Limbach.

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

Gain on change in fair value of limited liability investments, at fair value was $0.1 million in the third quarter of 2024 compared to $0.3 million in the third quarter of 2023 ($0.2 million for each of the year to date and prior year to date).

The gain for the three months and nine months ended September 30, 2024 and the three months ended September 30, 2023 represents an increase in fair value related to Argo Holdings. The gain for the nine months ended September 30, 2023 represents an increase in fair value related to Argo Holdings, partially offset by a decrease in fair value related to Net Lease. During the second quarter of 2023, the Company recorded the sale of Net Lease's final investment property.

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

Loss on change in fair value of derivative asset option contracts was zero for the three months ended September 30, 2024 and September 30, 2023 (zeroyear to date compared to $1.4 million prior year to date). 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 third quarter of 2024 was $1.2 million compared to $1.1 million in the third quarter of 2023 ($3.5 million year to date compared to $5.1 million prior year to date). Interest expense was impacted by the following for the three and nine months ended September 30, 2024:

- A decrease of less than $0.1 million on the Company’s subordinated debt (decrease of $1.9 million year to date). 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 three and nine months ended September 30, 2024 and the third quarter of 2023 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 for the three months ended September 30, 2024 (decrease of $0.1 million year to date) related to the 2022 Ravix Loan, which has an annual interest rate equal to the Prime Rate plus 0.75% (current rate of 8.75%);
- A decrease of less than $0.1 million for the three months ended September 30, 2024 (decrease of $0.1 million year to date) 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 8.50%);
- An increase of $0.1 million for each of the three and nine months ended September 30, 2024 related to the 2020 KWH Loan. During the first quarter of 2024, KWH borrowed $3.5 million under the KWH DDTL and an additional $0.5 million under the KWH Revolver. Also during the first quarter of 2024, the KWH swap expired. During the second quarter of 2024, KWH entered into an amendment to the 2020 KWH Loan whereby KWH borrowed $15.0 million and used the proceeds to repay the existing loan balances. During the third quarter of 2024, KWH borrowed $5.5 million under the KWH DDTL and $1.0 million under the KWH Revolver. These events resulted in higher interest expense related to the KWH Loan for the three and nine months ended September 30, 2024 compared to the same periods in 2023; and
- An increase of $0.1 million for the three months ended September 30, 2024 (increase of $0.4 million year to date) 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 8.50%).

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 $3.3 million in the third quarter of 2024 compared to $2.8 million in the third quarter of 2023 ($7.1 million year to date compared to $9.3 million prior year to date). 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 increase in net expense for the three months ended September 30, 2024 is primarily attributable to higher acquisition related expenses and stock-based compensation expenses, partially offset by a decrease in general expenses during the three months ended September 30, 2024 compared to the same period in 2023, as the corporate holding company continues to scrutinize its spending.

The decrease in net expense for the nine months ended September 30, 2024 is primarily attributable to management fees paid to the external managers of two previously consolidated entities during the nine months ended September 30, 2023; as well as lower general expenses, partially offset by higher acquisition related expenses, stock-based compensation expenses, and more expense related to the Ravix contingent consideration liability during the nine months ended September 30, 2024 compared to the same period in 2023.

### Impairment of Intangible Assets

Impairment of intangible assets was $0.6 million in the third quarter of 2024 compared to zero in the third quarter of 2023 ($1.8 million year to date compared to zero prior year to date). 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, June 30, 2024 and September 30, 2024, the Company determined that certain of its trade name intangible assets should be further examined under a quantitative approach due to actual revenue coming in lower than previous projections. Based upon this assessment, the Company recorded an impairment charge of $0.6 million during the third quarter of 2024 related to the CSuite and Ravix indefinite-lived trade names ($1.8 million for the year to date, related to the SNS, CSuite and Ravix indefinite-lived trade names). The reduction in value is primarily due to higher discount rates and a reduction in projected revenue. The valuation of these assets is not dependent on the underlying profit or loss generated by the respective business. Therefore, even if a change in revenue does not have a significant impact on operating results, it could significantly impact the fair value of the trade name.

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

Gain on change in fair value of debt was $0.1 million in the third quarter of 2024 compared to a loss of $0.2 million in the third quarter of 2023 (loss of less than $0.1 million year to date compared to a loss of $0.2 million prior year to date).

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 a loss of $0.5 million during the nine months ended September 30, 2023.

The gain or loss for the three and nine months ended September 30, 2024 and September 30, 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). See "Debt" section below for further information.

### Gain on Disposal of Subsidiary

On July 29, 2022, the Company sold its 80% majority-owned subsidiary, Professional Warranty Service Corporation ("PWSC"). At the time of the sale, the Company recognized a net gain on disposal. During three and nine months ended September 30, 2023, the Company recorded an additional gain on disposal of PWSC of $0.3 million related to the working capital true-up and release of indemnity funds that were held in escrow. The sale of PWSC did not represent a strategic shift that will have a major effect on the Company's operations or financial results; therefore, PWSC is not presented as a discontinued operation.

### (Loss) Gain on Extinguishment of Debt

During the second quarter of 2024, there was a modification to the 2020 KWH Loan. For the nine months ended September 30, 2024, loss on extinguishment of debt of $0.2 million relates to the write-down of the unamortized debt discount and issuance costs from the 2020 KWH Loan at the modification date, since the original debt was fully repaid as part of the modification.

For the nine months ended September 30, 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 (Benefit)

Income tax expense for the third quarter of 2024 was less than $0.1 million compared to a benefit of $0.1 million in the third quarter of 2023 (expense of $0.2 million year to date compared to expense of $0.8 million prior year to date). For the three and nine months ended September 30, 2024 and the nine months ended September 30, 2023, the Company reported income tax expense primarily due to state tax expense. For the three months ended September 30, 2023, the Company reported income tax benefit primarily due to the partial release of its valuation allowance related to deferred tax liabilities from acquisitions. See Note 14, "Income Taxes," to the unaudited consolidated interim financial statements, for additional detail of the income tax (benefit) expense recorded for the three and nine months ended September 30, 2024 and September 30, 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 September 30, 2024, we held cash and cash equivalents, restricted cash and investments with a carrying value of $56.2 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: | September 30, 2024 | % of Total | December 31, 2023 | % of Total |
| --- | ---: | ---: | ---: | ---: |
| U.S. government, government agencies and authorities | 12,767 | 22.7% | 12,997 | 21.9% |
| States, municipalities and political subdivisions | 2,790 | 5.0% | 2,783 | 4.7% |
| Mortgage-backed | 9,747 | 17.3% | 9,253 | 15.6% |
| Asset-backed | 1,314 | 2.3% | 1,210 | 2.0% |
| Corporate | 10,238 | 18.2% | 10,230 | 17.2% |
| Total fixed maturities | 36,856 | 65.6% | 36,473 | 61.4% |
| Equity investments | — | —% | 79 | 0.1% |
| Limited liability investments | 651 | 1.2% | 812 | 1.4% |
| Limited liability investment, at fair value | 2,691 | 4.8% | 3,496 | 5.9% |
| Investments in private companies | 696 | 1.2% | 854 | 1.4% |
| Other investments | — | —% | 6 | 0.0% |
| Short-term investments | 166 | 0.3% | 161 | 0.3% |
| Total investments | 41,060 | 73.1% | 41,881 | 70.5% |
| Cash and cash equivalents | 6,508 | 11.6% | 9,098 | 15.4% |
| Restricted cash | 8,630 | 15.4% | 8,400 | 14.1% |
| Total | 56,198 | 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.

As a result of the analysis performed, the Company recorded an impairment loss related to other investments of zero for the three and nine months ended September 30, 2024 ($0.1 million and $0.2 million for the three and nine months ended September 30, 2023, respectively). There were no impairment losses recorded related to available for-sale fixed maturity investments during the three and nine months ended September 30, 2024 and September 30, 2023.

At September 30, 2024 and December 31, 2023, the gross unrealized losses for fixed maturities amounted to $1.0 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 September 30, 2024 and December 31, 2023 are as follows:

*(in thousands)*

| Bank loan: | September 30, 2024 Principal | Carrying Value | December 31, 2023 Principal | Carrying Value |
| --- | ---: | ---: | ---: | ---: |
| 2021 Ravix Loan | $2,490 | $2,490 | $4,650 | $4,650 |
| 2022 Ravix Loan | 4,475 | 4,349 | 4,925 | 4,769 |
| 2022 Ravix Revolver | 500 | 500 | — | — |
| SNS Loan | 4,167 | 4,100 | 5,142 | 5,063 |
| DDI Loan | 5,600 | 5,543 | 5,600 | 5,534 |
| Image Solutions Loan | 7,750 | 7,586 | — | — |
| 2020 KWH Term Loan | — | — | 10,479 | 10,306 |
| 2024 KWH Term Loan | 13,875 | 13,785 | — | — |
| 2024 KWH DDTL | 5,425 | 5,425 | — | — |
| KWH Revolver | 1,000 | 1,000 | 500 | 500 |
| Total bank loans | 45,282 | 44,778 | 31,296 | 30,822 |
| Subordinated debt | 15,000 | 13,681 | 15,000 | 13,594 |
| Total | $60,282 | $58,459 | $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 nine months ended September 30, 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") and $0.5 million under the KWH Revolver.

On May 24, 2024, KWH entered into a third amendment to the 2020 KWH Loan that provides for: (1) a new 2024 term loan in the principal amount of $15.0 million, with a maturity date of May 24, 2029 (the “2024 KWH Loan”); and (2) a new 2024 delayed draw term loan in a principal amount of up to $6.0 million, with a maturity date of May 24, 2029 (the “2024 KWH DDTL”). All or any portion of the 2024 KWH DDTL, subject to a $2.0 million minimum draw amount, could be requested at any time in up to three advances through May 24, 2026. In connection with the third amendment, KWH used the proceeds from the 2024 KWH Loan to repay the following outstanding balances under the 2020 KWH Loan: (1) $9.6 million related to the original 2020 term loan; (2) $1.0 million related to the KWH Revolver; and (3) $3.1 million related to the KWH DDTL.

The 2020 KWH Loan and the 2024 KWH Loan were not deemed to be substantially different; therefore, the 2024 KWH Loan is accounted for as a modification of the 2020 KHW Loan. The unamortized debt discount and issuance costs from the 2020 KWH Loan at the modification date of $0.2 million were recorded as loss on extinguishment of debt during the nine months ended September 30, 2024 since the original debt was fully repaid as part of the modification.

During the third quarter of 2024, the Company borrowed $5.5 million under the 2024 KWH DDTL and $1.0 million under the KWH Revolver.

During the first quarter of 2024, the Company borrowed $0.2 million under the SNS Loan Revolver. During the second quarter of 2024, the SNS Loan Revolver of $0.2 million was repaid.

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 September 30, June 30 and March 31, 2024, the Company was in default under the SNS Loan due to debt covenant violations related to the leverage and fixed charge ratios. The Company has entered into an amendment to the SNS Loan that waives the events of default for the fiscal quarter ended September 30, 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.

On July 23, 2024, Ravix and Ravix LLC entered into a second amendment to the 2021 Ravix Loan that provides for: (1) a principal prepayment of the 2021 Ravix term loan of $1.5 million, partially financed by borrowing $0.5 million under the 2022 Revolver and the remainder to be paid with available cash; and (2) amending the loan amortization payment schedule to provide for equal monthly payments through the loan maturity date. The original 2021 Ravix Loan and the amended 2021 Ravix Loan were not deemed to be substantially different; therefore, the amended 2021 Ravix Loan is accounted for as a modification of the original 2021 Ravix Loan.

As part of the acquisition of Image Solutions on September 26, 2024, Image Solutions became a wholly owned subsidiary of Steel Bridge Acquisition, LLC ("SB LLC"), and together they borrowed from a bank a principal amount of $7.75 million in the form of a term loan, and established a $0.5 million revolver to finance the acquisition of Image Solutions (together, the "Image Solutions Loan"). The Image Solutions Loan has an annual interest rate equal to the greater of the Prime Rate plus 0.5%, or 7.25%. At September 30, 2024, the interest rate was 8.50%. The revolver matures on September 26, 2026 and the term loan matures on September 26, 2030. As of September 30, 2024, there was no draw down on the Image Solutions Loan revolver.

#### Subordinated Debt

The Company's subordinated debt is measured and reported at fair value. At September 30, 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 21, "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.

### 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 nine months ended September 30, 2024, the Company reported $0.7 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 nine months ended September 30, 2023, the Company reported $25.7 million of net cash used in operating activities from continuing operations, primarily due to outflows related to the payment of management fees to the managers of Net Lease and Flowers ($1.8 million), an indemnity payment to the buyer of Mendota related to loss and loss adjustment expenses ($2.0 million) and payment of deferred interest on the remaining trust preferred debt instrument; partially offset by gain on equity investments and operating income from the Extended Warranty and Kingsway Search Xcelerator segments.

During the nine months ended September 30, 2024, the net cash used in investing activities from continuing operations was $16.4 million. This use of cash is primarily attributed to the acquisition of Image Solutions, net of cash acquired and purchases of fixed maturities in excess of proceeds from sales and maturities of fixed maturities, distributions received by Argo Holdings from three of its underlying limited liability investment companies, proceeds from the sale of a private company investment and proceeds from the sale of VA Lafayette. During the nine months ended September 30, 2023, the net cash provided by investing activities from continuing operations was $16.7 million. This source of cash is primarily attributed to distributions received by Net Lease from one of its limited liability investment companies of $13.3 million, as well as proceeds from sales and maturities of fixed maturities and sales of equity securities in excess of purchases of fixed maturities and acquisition of business, net of cash acquired.

During the nine months ended September 30, 2024, the net cash provided by financing activities from continuing operations was $13.3 million. This source of cash was primarily attributed to principal proceeds from bank loans of $33.7 million and proceeds from the issuance of Class B preferred stock of $8.3 million, partially offset by principal repayment on bank loans of $20.0 million, taxes paid related to net share settlements of restricted stock awards of $2.2 million, cash paid for repurchases of common stock of $2.5 million, cash paid to acquire the IWS noncontrolling interest of $2.5 million and distributions to noncontrolling interest holders of $1.4 million. During the nine months ended September 30, 2023, the net cash used in financing activities from continuing operations was $39.0 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 $6.1 million, distributions to noncontrolling interest holders of $4.0 million and cash paid for repurchase of warrants of $4.0 million, partially offset by cash proceeds from the exercise of warrants of $16.7 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 $1.4 million and $4.3 million at September 30, 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 $6.5 million and $9.1 million reported at September 30, 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.

## 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, 7,050 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 September 30, 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 September 30, 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 September 30, 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 and nine months ended September 30, 2024 and September 30, 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 implemented a control during the third-quarter to compare the change in the significant inputs to the subordinated debt fair value calculation with those from the prior period calculation to determine whether the resulting current change in fair value appears reasonable, given the change in the significant inputs.

B. *Cash Flow Statement Classification Error.* The Company failed to consult on the cash flow presentation aspect of the transaction. In the third quarter, the Company modified 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

On September 26, 2024, the Company acquired 100% of the outstanding membership interests of Image Solutions. Since the date of this acquisition, the Company has been analyzing and evaluating procedures and controls to determine their effectiveness and to make them consistent with our disclosure controls and procedures. As permitted by the SEC, Image Solutions has been excluded from the scope of our quarterly discussion of material changes in internal control over financial reporting below.

There have been no changes in the Company's internal control over financial reporting during the period beginning July 1, 2024, and ending September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting, except with respect to Image Solutions.

Filed Nov 6, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-033642. Last ingested by Listed: Oct 24, 2026, 15:04 ET. No prices; not investment advice.