ITASCA, Ill., Nov. 4, 2021 /PRNewswire/ - (NYSE: KFS) Kingsway Financial Services Inc. ("Kingsway" or the "Company") today announced its operating results for the three and nine months ended September 30, 2021, which includes the following highlights:

• Net loss improved to ($0.2) million for the three months ended September 30, 2021, from a net loss of ($1.1) million for the same period in 2020, despite the fact the Company recorded a non-cash, current period cumulative adjustment to net loss of $0.5 million in the September 2021 quarter relating to its finalization of the purchase accounting for PWI (see further discussion below)
• Non-GAAP adjusted income grew to $2.1 million for the three months ended September 30, 2021, compared to a non-GAAP adjusted loss of ($0.4) million for the same period in 2020
• Extended Warranty segment operating income increased to $1.4 million for the three months ended September 30, 2021 compared to $1.2 million for the same period in 2020, despite the fact the Company recorded a non-cash, current period cumulative reduction to revenue of $1.9 million in the September 2021 quarter relating to its finalization of the purchase accounting for PWI (see further discussion below)
• Extended Warranty segment non-GAAP adjusted EBITDA improved to $1.5 million for the three months ended June 30, 2021, from $1.4 million for the same period in 2020, despite the fact the Company recorded a non-cash, current period cumulative reduction to service fee and commission revenue of $1.9 million in the September 2021 quarter relating to its finalization of the purchase accounting for PWI (see further discussion below)
• Cash provided by operating activities was $3.5 million for the three months ended September 30,2021, compared to $1.4 million for the three months ended September 30,2020.

The Company's non-GAAP metrics do not adjust for the service fee and commission revenue impacts of the finalization of the PWI purchase accounting as discussed below.

John T. Fitzgerald, Chief Executive Officer, stated, "We reported a strong quarter highlighted by operating improvements within our extended warranty businesses. Subsequent to the quarter end, we added another high-quality, asset-light business with the acquisition of Ravix Financial Inc. through our CEO accelerator program. We have made considerable progress in growing our business while simultaneously monetizing legacy assets and reducing non-strategic expenses."

Financial Review for the Three Months Ended September 30, 2021

Finalization of PWI Purchase Accounting

During the September 30, 2021 quarter, the Company finalized its purchase accounting for the acquisition of PWI, which resulted in a number of one-time charges, including a reduction to service fee and commission revenue and an increase in amortization expense, both of which were partially offset by an associated tax benefit.

The acquisition of a company that carries deferred service fees (aka "deferred revenue") usually results in a reduction of that deferred revenue once it is fair valued under U.S. GAAP purchase accounting.  The resulting reduction in deferred revenue reduces the amount of revenue recognized post acquisition. 

The Company recorded the following during the current quarter relating to the final purchase accounting for PWI:

• A non-cash current period cumulative reduction to service fee and commission revenue of $1.9 million, resulting from a $3.6 million reduction to the amount of deferred revenue acquired from PWI
• The remainder of the $3.6 million reduction will result in lower service fee and commission revenue being recognized in future periods
• $19.6 million of separately identifiable intangible assets relating to acquired customer relationships ($15 million) and trade name ($4.6 million), as well as a non-cash, current period cumulative charge of $1.9 million for the amortization relating to the acquired customer relationships
• A $3.3 million tax benefit due to the recognition of deferred tax liabilities and the resulting release of the Company's valuation allowance on its overall deferred tax assets
• Goodwill of $20.6 million

To summarize, the non-cash, current period cumulative adjustments recorded during the quarter were:

• Reduction to service fee and commission revenue and operating income: $1.9 million (not added back to non-GAAP metrics)
• Increase in amortization expense: $1.9 million (added back to non-GAAP adjusted income)
• Income tax benefit: $3.3 million (not added back to non-GAAP adjusted income)
• Additional net loss: $0.5 million (sum of above three items)

Refer to the attached schedules for a summary of the income statement impacts.

It is important to note that deferred revenue acquired as part of future acquisitions will not incur a reduction as a result of applying purchase accounting (assuming the deferred revenue was previously accounted for in accordance with U.S. GAAP). This is due to the fact that on October 28, 2021, the FASB issued Accounting Standards Update No. 2021-08 (the "ASU"), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.  Among other things, the ASU would result in acquiring companies recording deferred revenue acquired at its book value, assuming the deferred revenue had been recorded in accordance with U.S. GAAP prior to the acquisition. The ASU will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and early adoption is permitted. The Company intends to adopt this ASU during the fourth quarter of 2021.

The Company notes that had the ASU been applicable to the PWI acquisition, the Company would not have recorded the $3.6 million reduction to deferred revenue and would not have recorded the $1.9 million reduction to service fee and commission revenue during the third quarter of 2021.

Non-GAAP Adjusted Income Loss

For the three months ended September 30, 2021, non-GAAP adjusted income (loss) improved to income of $2.1 million in 2021, from a loss of ($0.4) million in 2020. For the twelve months ended September 30, 2021, non-GAAP adjusted income (loss) improved to income of $8.8 million in 2021, from a loss of ($2.6) million in 2020. Included in 2021 are nine months of PWI results following its acquisition effective December 1, 2020.

Reconciliations of net (loss) income to non-GAAP adjusted income (loss) are presented in the attached schedules. The Company's non-GAAP metrics do not adjust for the revenue impacts of the finalization of the PWI purchase accounting as discussed above.

Third Quarter Cash Flows

The Company generated cash provided by operating activities of $3.5 million for the three months ended September 30, 2021, compared to $1.4 million for the three months ended September 30, 2020.

However, the Company reported year-to-date cash used in operating activities of $8.0 million primarily due to a $10.6 million payment made related to the monetization of future rental proceeds from the Company's Leased Real Estate segment, as the corresponding inflow is recorded in cash provided by financing activities. During the second quarter of 2021, the Company borrowed $15.0 million, at an interest rate of 3.2%, against future rental proceeds that were not being used to service the existing mortgage, which is recorded as a cash inflow from financing activities. As a result of this borrowing, the Company paid $11.7 million in management and guarantee fees as per the settlement of CMC litigation, of which $10.6 million is shown as cash used in operating activities. Had the Company not executed the borrowing, this amount would not have been due or paid. See Note 27, "Commitments and Contingent Liabilities", to our 2020 Annual Report on Form 10-K, for further information on the settlement.

As a result of this monetization, the Company retained $2.7 million, which it believes it can deploy and earn a return in excess of the stated interest rate on the borrowed funds. 

Operating Review for the Three Months Ended September 30, 2021

Extended Warranty

The Extended Warranty service fee and commission revenue increased 46.7% (or $5.6 million) to $17.6 million for the three months ended September 30, 2021 compared with $12.0 million for the three months ended September 30, 2020. The increase is primarily due to the inclusion of PWI for the three months ended September 30, 2021 following its acquisition effective December 1, 2020. PWI service fee and commission revenue was $5.5 million for the three months ended September 30, 2021, after recording a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue in the three months ended September 30, 2021 relating to the finalization of the PWI purchase accounting as discussed above.

The Extended Warranty operating income was $1.4 million for the three months ended September 30, 2021 compared with $1.2 million for the three months ended September 30, 2020. The 2021 operating income results include a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue relating to the finalization of the PWI purchase accounting as discussed above.

The increase in operating income is primarily due to the following:

• A $0.7 million increase at IWS to $0.8 million due to an increase in revenue, a decrease in claims authorized on vehicle service agreements and lower general and administrative expenses compared with the three months ended September 30, 2020;
• A $0.3 million increase at Geminus to $0.6 million, due to a decrease in claims authorized on vehicle service agreements and lower general and administrative expenses that was partially offset by a decrease in revenue;
• A $0.2 million increase at Trinity to $0.5 million, driven by increased revenues in its equipment breakdown and maintenance support services, as well as increased revenue and gross profit on the extended warranty services product compared with the three months ended September 30, 2020;
• A less than $0.1 million increase at PWSC to $0.5 million; all of which were partially offset by
• A $1.0 million operating loss at PWI in 2021, which includes a $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue relating to the finalization of the PWI purchase accounting as discussed above.

Extended Warranty Non-GAAP adjusted EBITDA improved to $1.5 million for the three months ended September 30, 2021, compared with $1.4 million for the same period in 2020.  For the twelve months ended September 30, 2021, Extended Warranty pro forma Non-GAAP adjusted EBITDA improved to $13.9 million in 2021, from a $11.4 million in 2020.  The 2021 results are not adjusted for the $1.9 million non-cash, current period cumulative reduction to service fee and commission revenue finalization of the PWI purchase accounting as discussed above.  The increase year-over-year is due to the increases in operating income described above.

Reconciliations of Extended Warranty operating income to Extended Warranty non-GAAP adjusted EBITDA are presented in the attached schedules.

Leased Real Estate

The Leased Real Estate contractually-fixed rental income was $3.3 million for the three months ended September 30, 2021 and 2020.

Leased Real Estate operating income was $1.1 million for the three months ended September 30, 2021 compared with $0.8 million for the three months ended September 30, 2020.  The increase is primarily attributable to lower litigation expenses compared to the same period in 2020. Leased Real Estate operating income includes interest expense of $1.6 million and $1.5 million for the three months ended September 30, 2021 and September 30, 2020, respectively.

As a result of the monetization explained above, future management fees have been prepaid and will be a non-cash expense going forward. See Note 27, "Commitments and Contingent Liabilities", to our 2020 Annual Report on Form 10-K, for further information on the settlement.

About the Company

Kingsway is a holding company that owns or controls subsidiaries primarily in the extended warranty, asset management and real estate industries. The common shares of Kingsway are listed on the New York Stock Exchange under the trading symbol "KFS."

Non U.S. GAAP Financial Measure

The Company believes that non-GAAP adjusted net income (loss) and non-GAAP adjusted EBITDA, when presented in conjunction with comparable GAAP measures, provide useful information about the Company's operating results and enhances the overall ability to assess the Company's financial performance. The Company uses non-GAAP adjusted net income (loss) and non-GAAP adjusted EBITDA, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted net income (loss) and non-GAAP adjusted EBITDA allow investors to make a more meaningful comparison between the Company's core business operating results over different periods of time. The Company believes that non-GAAP adjusted net income (loss) and non-GAAP adjusted EBITDA, when viewed with the Company's results under GAAP and the accompanying reconciliations, provide useful information about the Company's business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by the factors listed in the attached schedules, the Company believes that non-GAAP adjusted net income (loss) and non-GAAP adjusted EBITDA can provide useful additional basis for comparing the current performance of the underlying operations being evaluated. Investors should consider these non GAAP measures in addition to, not as a substitute for or as superior to, financial reporting measures prepared in accordance with GAAP. Investors are encouraged to review the Company's financial results prepared in accordance with GAAP to understand the Company's performance taking into account all relevant factors.

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Words such as "expects," "believes," "anticipates," "intends," "estimates," "seeks" and variations and similar words and expressions are intended to identify such forward-looking statements; however, the absence of any such words does not mean that a statement is a not a forward-looking statement. 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, including as a result of the COVID 19 pandemic. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the section entitled "Risk Factors" in the Company's 2020 Annual Report on Form 10-K and subsequent Form 10-Qs and Form 8-Ks filed with the Securities and Exchange Commission. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Additional Information

Additional information about Kingsway, including a copy of its Annual Reports 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.

Kingsway Financial Services Inc.Consolidated Balance Sheets(in thousands, except share data)

Kingsway Financial Services Inc.Consolidated Statements of Operations(in thousands, except per share data)(Unaudited)

Kingsway Financial Services Inc.Consolidated Statements of Cash Flows(in thousands)(Unaudited)

Kingsway Financial Services Inc.Reconciliation of GAAP Net (Loss) Income to Non-GAAP Adjusted Income (Loss)(in thousands)(UNAUDITED)

Kingsway Financial Services Inc.Reconciliation of Extended Warranty Segment Operating Income to Non-GAAP Adjusted EBITDA and Pro Forma Non-GAAP Adjusted EBITDA(in thousands)(UNAUDITED)

Kingsway Financial Services Inc.Impact of Purchase Accounting on the Consolidated Statements of Operations(in thousands)(UNAUDITED)

Note:  the reduction in service fee and commission revenue recognized in the above table is not added back to the Company's non-GAAP metrics.

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SOURCE Kingsway Financial Services Inc.