Note 4 - Acquisitions

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Business Combination Disclosure [Text Block]

(a) Business Combinations

During the years ended December 31, 2021 and December 31, 2020, the Company incurred acquisition expenses related to business combinations of $0.4 million and $0.4 million, respectively, which are included in general and administrative expenses in the consolidated statements of operations.

PWI Holdings, Inc.

On December 1, 2020, the Company acquired 100% of the outstanding shares of PWI Holdings, Inc. for cash consideration of $24.4 million. The final purchase price was subject to a working capital true-up that was finalized during the first quarter of 2021 of $0.1 million. PWI Holdings, Inc., through its subsidiaries Preferred Warranties, Inc., Superior Warranties, Inc., Preferred Warranties of Florida, Inc., and Preferred Nationwide Reinsurance Company, Ltd. (collectively, "PWI"), markets, sells and administers vehicle service agreements in all fifty states, primarily through a network of automobile dealer partners. As further discussed inNote 22, "Segmented Information," PWI is included in the Extended Warranty segment. This acquisition allows the Company to grow its portfolio of warranty companies and further expand into the vehicle service agreement business.

This acquisition was accounted for as a business combination using the acquisition method of accounting.  The purchase price was provisionally allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and were subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one-year as permitted under U.S. GAAP.   During the third quarter of 2021, the Company finalized its fair value analysis of the assets acquired and liabilities assumed with the assistance of a third-party.

The Company records measurement period adjustments in the period in which the adjustments occur.  During the third quarter of 2021, the Company recorded a cumulative net measurement period adjustment that decreased goodwill by $18.8 million compared to the amount recorded at December 31, 2020. The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, and the working capital true-up, as follows:

• $19.6 million of separately identifiable intangible assets were recognized resulting from acquired customer relationships ($15.0 million) and trade name ($4.6 million);

• A $3.6 million decrease to deferred service fees;

• Deferred income tax liabilities of $4.2 million were recognized, primarily related to the measurement period adjustments for intangible assets and deferred service fees;

• An increase to accrued expenses and other liabilities of $0.1 million; and

• An increase to the final purchase price of $0.1 million related to the working capital true-up.

The measurement period adjustment related to the customer relationships intangible asset also resulted in an increase in amortization expense and accumulated amortization of $1.9 million that was recorded during the third quarter of 2021, of which:

• $0.6 million relates to the three months ended September 30, 2021;

• $0.6 million relates to the three months ended June 30, 2021;

• $0.6 million relates to the three months ended March 31, 2021; and

• $0.1 million relates to the year ended December 31, 2020.

The measurement period adjustment related to deferred service fees also resulted in a decrease service fee and commission revenue of $1.9 million that was recorded during the third quarter of 2021, of which:

• $0.4 million relates to the three months ended September 30, 2021;

• $0.5 million relates to the three months ended June 30, 2021;

• $0.7 million relates to the three months ended March 31, 2021; and

• $0.3 million relates to the year ended December 31, 2020.

The Company notes that had ASU 2021-08 (see Note 3, "Recently Issued Accounting Standards") been applicable to the PWI acquisition, the Company would not have recorded the $3.6 million reduction to deferred service fees and would not have recorded the $1.9 million reduction to service fee and commission revenue during the third quarter of 2021.

Refer toNote 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition.  The goodwill of $20.2 million represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company paid to grow its portfolio of warranty companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes.

The following table summarizes the finalized allocation recorded during the third quarter of 2021 of the PWI assets acquired and liabilities assumed at the date of acquisition:

(in thousands)
	December 1, 2020
Cash and cash equivalents	$	90
Restricted cash		21,578
Service fee receivable		1,459
Other receivables		2,748
Income taxes recoverable		60
Property and equipment, net		175
Right-of-use asset		254
Goodwill		20,238
Intangible asset subject to amortization - customer relationships		15,000
Intangible asset subject to amortization - trade name		4,550
Other assets		1,321
Total assets	$	67,473
Accrued expenses and other liabilities	$	8,165
Lease liability		255
Net deferred income tax liabilities		4,229
Deferred service fees		30,400
Total liabilities	$	43,049
Purchase price	$	24,424

Ravix Financial, Inc.

On October 1, 2021, the Company acquired 100% of the outstanding equity interests of Ravix Financial, Inc. ("Ravix").  Ravix, based in San Jose, California, provides outsourced financial services and human resources consulting for short or long duration engagements.  As further discussed in Note 22, "Segmented Information," Ravix is included in the Kingsway Seach Xcelerator segment, which was created as a result of the Ravix acquisition.  This acquisition was the Company’s first acquisition under its novel CEO Accelerator program and further expands the Company’s portfolio of businesses with recurring revenue and low capital intensity.

The Company acquired Ravix for aggregate cash consideration of approximately $10.9 million, less certain escrowed amounts for purposes of indemnification claims.  The final purchase price is subject to a working capital true-up of $0.1 million that will be settled during the first quarter of 2022. The Company will also pay additional contingent consideration, only to the extent earned, in an aggregate amount of up to $4.5 million, which is subject to certain conditions, including the successful achievement of gross profit for Ravix during the three-year period commencing on the first full calendar month following the acquisition date. 

This acquisition was accounted for as a business combination using the acquisition method of accounting.  The purchase price was provisionally allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition and are subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one-year as permitted under U.S. GAAP.  The Company expects to complete its purchase price allocation in early 2022.  These estimates, allocations and calculations are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed could change from the estimates included in these consolidated financial statements.

Refer to Note 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition.  The goodwill of $7.9 million represents the premium paid over the fair value of the net tangible and intangible assets acquired, which the Company paid to grow its portfolio of companies and acquire an assembled workforce. The goodwill is not deductible for tax purposes.  The estimated fair value of the contingent consideration obligation at the acquisition date of $2.2 million was determined using a Monte Carlo simulation based on forecasted future results, and is recorded in accrued expenses and other liabilities on the consolidated balance sheets. See Note 23, "Fair Value of Financial Instruments," for further discussion related to the contingent consideration.

The following table summarizes the purchase price of Ravix:

(in thousands)
Purchase price:	October 1, 2021
Cash paid at closing	$	10,930
Working capital adjustment		83
Contingent consideration		2,195
Total purchase price	$	13,208

The following table summarizes the preliminary estimated allocation of the Ravix assets acquired and liabilities assumed at the date of acquisition:

(in thousands)
	October 1, 2021
Cash and cash equivalents	$	225
Restricted cash		752
Service fee receivable		1,031
Other receivables		17
Right-of-use asset		116
Goodwill		7,905
Intangible asset subject to amortization - customer relationships		4,000
Intangible asset not subject to amortization - trade name		2,500
Other assets		133
Total assets	$	16,679
Accrued expenses and other liabilities	$	1,546
Income taxes payable		13
Lease liability		116
Net deferred income tax liabilities		1,796
Total liabilities	$	3,471
Purchase price	$	13,208

The consolidated statements of operations include the earnings of Ravix from the date of acquisition. From the date of acquisition through December 31, 2021, Ravix earned revenue of $3.5 million and net loss of $0.2 million.

Unaudited Pro Forma Summary

The following unaudited pro forma summary presents the Company's consolidated financial statements for the year ended December 31, 2021 and December 31, 2020 as if Ravix and PWI had been acquired on January 1 of the year prior to the acquisitions. The pro forma summary is presented for illustrative purposes only and does not purport to represent the results of our operations that would have actually occurred had the acquisitions occurred as of the beginning of the period presented or project our results of operations as of any future date or for any future period, as applicable. The pro forma results primarily include purchase accounting adjustments related to the acquisition of Ravix, interest expense and the amortization of debt issuance costs and discount associated with the related financing obtained in connection with the Ravix and PWI acquisitions (see Note 12, "Debt"), tax related adjustments and acquisition-related expenses. Purchase accounting adjustments related to the acquisition of PWI were not  included in the pro forma information below for the year ended December 31, 2020 since the fair value analysis of the assets acquired and liabilities assumed was not finalized until the third quarter of 2021.

(in thousands, except per share data)	Years ended December 31,
	2021	2020
Revenues	$ 101,662	$ 100,458
Loss from continuing operations attributable to common shareholders	$ (770)	$ (3,554)
Basic loss per share - continuing operations	$ (0.03)	$ (0.16)
Diluted loss per share - continuing operations	$ (0.03)	$ (0.16)

(b) Asset Acquisition

RoeCo Lafayette, LLC 

On December 30, 2021, the Company acquired 100% of the outstanding membership interests of RoeCo Lafayette, LLC ("RoeCo") from a current holder of the Company’s Preferred Shares, for cash consideration of approximately $2.4 million.  Refer toNote 24, "Related Parties," for further disclosure.  RoeCo owns real property consisting of approximately 6.5 acres and a 29,224 square foot single-tenant medical office building located in the State of Louisiana (the "LA Real Property"). The LA Real Property serves as a medical and dental clinic for the Department of Veteran Affairs and is subject to a long-term lease.  The LA Real Property is also subject to a mortgage in the principal amount of $13.5 million (the "RoeCo Mortgage") at the date of acquisition plus a premium of $3.5 million.  As further discussed in Note 22, "Segmented Information" RoeCo is included in the Leased Real Estate segment.

This transaction was accounted for as an asset acquisition as substantially all the fair value of the gross assets acquired is concentrated in a single asset comprised of land,  building and improvements.  The total purchase price, including the transaction costs, has been allocated to the individual net assets acquired based on their relative fair values.  In connection with the acquisition, the Company recorded an above-market lease intangible asset of $0.8 million and in-place and other lease intangible assets of $2.1 million. Refer to Note 9, "Intangible Assets," for further disclosure of the intangible assets related to this acquisition.  

The following table summarizes the allocation of the purchase price to the net assets of RoeCo at the date of acquisition: 

(in thousands)
Purchase price:	December 30, 2021
Cash	$	2,386
Acquisition costs		249
Liabilities assumed		16,983
Total purchase price	$	19,618
Fair value of net assets acquired:	December 30, 2021
Cash and cash equivalents	$	365
Other receivables		133
Property and equipment, net		16,466
Intangible asset subject to amortization - Above-market lease		835
Intangible asset subject to amortization - In-place and other lease assets		2,114
Accrued expenses and other liabilities		(50	)
Net deferred income tax liabilities		(245	)
Total fair value of net assets acquired	$	19,618

Since RoeCo was acquired on December 30, 2021, the consolidated statement of operations does not include any revenue or earnings of RoeCo, as such items are immaterial.