Correction of Immaterial Error in Previously Issued Financial Statements

9 Months Ended

Sep. 30, 2021

Correction of Immaterial Error in Previously Issued Financial Statements

NOTE 2 - Correction of Immaterial Error in Previously Issued Financial Statements

NOTE 2 - Correction of Immaterial Error in Previously Issued Financial Statements

In the course of preparing the Company’s third quarter 2021 unaudited consolidated financial statements and as a result of the Independent Investigation as explained above in Note 1, the Company evaluated its historical disclosures related to restricted funds and restricted cash and identified certain errors in its historic audited annual and unaudited quarterly financial statements, as detailed in this Note 2. Based on consideration of both the quantitative and qualitative factors within the provisions of SEC Staff Accounting Bulletin No. 99, Materiality, and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company determined that the errors detailed in this Note 2 were not material to its previously issued annual and interim condensed consolidated financial statements. Furthermore, the Company determined that correcting the errors in the third quarter of 2021 would not materially misstate its audited or unaudited condensed consolidated financial statements and therefore, no restatement of its prior period audited, or unaudited condensed consolidated financial statements was required.

Restricted Cash Disclosure

Accounting Standards Codification (“ASC”) 230, Statement of Cash Flows, became effective in 2018, which required restricted cash to be included in the caption disclosures in the balance sheet and statements of cash flows and required restricted cash to be disclosed in a reconciliation of cash, cash equivalents and restricted cash. Accordingly, Note 2 to the Company’s 2020 annual audited financial statements (“Note 2”), which was titled “Cash and Cash Equivalents” should have been titled “Cash, Cash Equivalents and Restricted Cash” and references to “cash” elsewhere in Note 2 should include “cash and restricted cash.” Finally, the table included in Note 2 should have had an additional line item captioned “Restricted Cash,” and the amounts historically presented in the line item captioned “Cash and cash equivalents” should have been separated between the “Cash, Cash Equivalents, and Restricted Cash” line items. The December 31, 2020 disclosure should have been presented in the respective Annual Reports on Form 10-K:

	Period Ended
	December 31		September 30
	2020		2021
Cash	$	2,747,737	$	15,367,821
Restricted Cash		1,210,243		422,949
Total		3,957,980		15,790,770

Restricted Funds Disclosure

Note 1 to the Company’s historic annual audited financial statements (“Note 1”) disclosed a heading titled “Restricted Funds” with a tabular presentation and explanatory footnotes (the “Note 1 Disclosure”), which was included in the Note 1 Disclosure in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and for prior fiscal year periods. The Note 1 Disclosure appears only in the Company’s Annual Reports on Form 10-K and does not appear in the Company’s Quarterly Reports on Form 10-Q. The Company determined that the Note 1 Disclosure was incorrectly presented in that (i) the amount presented as “Premium trust funds” did not reflect amounts actually held by Unifax as restricted trust funds in the account that was designated in Unico’s records as the “Unifax Premium Trust Account” (the “Premium Trust Account”); (ii) the footnote disclosure to the Note 1 table should have disclosed a deficiency (the “Premium Trust Account Deficiency”) in the amount of funds required to be held in trust by Unifax for the benefit of Crusader; and (iii) the footnote disclosure to the Note 1 table should have disclosed that the funds deposited into the Premium Trust Account were not held in separate accounts or segregated in accordance with the requirements of the California Insurance Code. Below is the Note 1 Disclosure as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, followed by corrective disclosure.

Restricted Funds

Restricted funds are as follows:

	Year ended
	December 31
	2020
Premium trust funds (1)	$	1,595,135
Assigned to state agencies (2)		710,000
Funds held as collateral (3)		787,653
Total restricted funds	$	3,092,788

(1)	As required by law, the Company segregates from its operating accounts the premium collected from insureds that are payable to insurance companies into separate trust accounts.
(2)	$510,000 included in fixed maturity investments as of December 31, 2020, and $200,000 included in short-term investments as of December 31, 2020, are statutory deposits assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission in states other than California.
(3)	Funds held as collateral by Comerica Bank & Trust, N.A. (“Comerica”) included in available-for-sale fixed maturities pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“USIC”) and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance agreement with USIC.

 Restricted Funds

 Restricted funds are as follows:

	Year ended
	December 31,  2020
Premium trust funds (1)(2)	$	1,210,243
Assigned to state agencies (3)		998,000
Funds held as collateral (4)		787,653
Total restricted funds	$	2,995,896

(1)	The Company is required by law to segregate from its operating accounts the premium collected from insureds that are payable to insurance companies into separate trust accounts. As disclosed in further detail in Note 1 above under “Supervision Agreement” and “Independent Investigation,” during the year ended December 31, 2020. Unifax did not comply with the requirements of the California Insurance Code to hold such funds in separate accounts or segregate such funds in accordance with the CIC.
(2)	At December 31, 2020, there was a deficiency (the “Premium Trust Account Deficiency”) in the amount of funds required to be held in trust by Unifax for the benefit of Crusader. The amount of the Premium Trust Account Deficiency was $1,595,135 at December 31, 2020.
(3)	$510,000 included in fixed maturity, and $200,000 included in short-term investments as of December 31, 2020 are statutory deposits assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission in states other than California.
(4)	Funds held as collateral by Comerica Bank & Trust, N.A. (“Comerica”) included in available-for-sale fixed maturities pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“USIC”) and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance agreement with USIC.

Premium Trust Account Deficiency Disclosure

Additionally, a Premium Trust Account Deficiency should have been disclosed in the Company’s Quarterly Reports on Form 10-Q and the Year-End on Form 10-K. The following amounts should have been disclosed:

Premium Trust Deficiency
September 30, 2021	$	2,452,835
December 31, 2020	$	1,595,135