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Section 1: 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________ to _______________________

 

Commission file number 001-36366

 

1347 Property Insurance Holdings, Inc.
(Exact name of registrant as specified in its charter)

 

Delaware   46-1119100
 (State of incorporation)   (I.R.S Employer Identification No.)

 

970 Lake Carillon Dr., Suite 314, Saint Petersburg, FL   33716
(Address of principal executive offices)   (Zip Code)

 

(813)-579-6213

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class   Trading Symbol(s)   Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share   PIH   The Nasdaq Stock Market LLC
8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share   PIHPP   The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large Accelerated Filer [  ] Accelerated Filer [  ]
Non-Accelerated Filer [X] Smaller Reporting Company [X]
Emerging Growth Company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

The aggregate market value of the Registrant’s common stock held by non-affiliates was $16,285,205 on June 28, 2019, computed on the basis of the closing sale price of the Registrant’s common stock on that date.

 

As of March 25, 2020, the total number of common shares outstanding of the Registrant’s common stock was 6,068,106.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

 

 

 
 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Table of Contents
 

PART I 3
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 6
ITEM 1B. UNRESOLVED STAFF COMMENTS 14
ITEM 2. PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. MINE SAFETY DISCLOSURES 14
PART II 14
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 14
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 53
ITEM 9A. CONTROLS AND PROCEDURES 53
ITEM 9B. OTHER INFORMATION 53
PART III 54
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 54
ITEM 11. EXECUTIVE COMPENSATION 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 54
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 54
PART IV 55
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 55
ITEM 16. FORM 10-K SUMMARY 58
SIGNATURES 59

 

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1347 PROPERTY INSURANCE HOLDINGS, INC.

 

PART I

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “can,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “evaluate,” “forecast,” “goal,” “guidance,” “indicate,” “intend,” “likely,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,” “predict,” “probable,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” “view,” “will,” “would,” “will be,” “will continue,” “will likely result” or the negative thereof or other variations thereon or comparable terminology. In particular, discussions and statements regarding the Company’s future business plans and initiatives are forward-looking in nature. We have based these forward-looking statements on our current expectations, assumptions, estimates, and projections. While we believe these to be reasonable, such forward-looking statements are only predictions and involve a number of risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance, or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements, and may impact our ability to implement and execute on our future business plans and initiatives. Management cautions that the forward-looking statements in this Annual Report on Form 10-K are not guarantees of future performance, and we cannot assume that such statements will be realized or the forward-looking events and circumstances will occur. Factors that might cause such a difference include, without limitation: risks associated with our limited business operations since the closing of the Asset Sale; risks associated with our inability to identify and realize business opportunities, and the undertaking of any new such opportunities, following the Asset Sale; our ability to spend or invest the net proceeds from the Asset Sale in a manner that yields a favorable return; general conditions in the global economy, including the impact of health and safety concerns from the current outbreak of the COVID-19 coronavirus; our lack of operating history or established reputation in the reinsurance industry; our inability to obtain or maintain the necessary approvals to operate reinsurance subsidiaries; risks associated with operating in the reinsurance industry, including inadequately priced insured risks, credit risk associated with brokers we may do business with, and inadequate retrocessional coverage; our inability to execute on our investment and investment management strategy, including our strategy to invest in real estate assets; potential loss of value of investments; risk of becoming an investment company; fluctuations in our short-term results as we implement our new business strategy; risks of not having a Chief Executive Officer and being unable to attract and retain qualified management and personnel to implement and execute on our business and growth strategy; failure of our information technology systems, data breaches and cyber-attacks; our ability to establish and maintain an effective system of internal controls; our limited operating history as a publicly traded company; the requirements of being a public company and losing our status as a smaller reporting company or becoming an accelerated filer; any potential conflicts of interest between us and our controlling stockholders and different interests of controlling stockholders; potential conflicts of interest between us and our directors and executive officers; volatility or decline of the shares of FedNat Holding Company common stock received by us as consideration in the Asset Sale or limitations and restrictions with respect to our ownership of such shares; risks of being a minority stockholder of FedNat Holding Company; and risks of our inability to continue to satisfy the continued listing standards of the Nasdaq following completion of the Asset Sale.

 

Our expectations and future plans and initiatives may not be realized. If one of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. You are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included or incorporated by reference to the Form 10-K are made only as of the date hereof and do not necessarily reflect our outlook at any other point in time. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect new information, future events or developments.

 

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1347 PROPERTY INSURANCE HOLDINGS, INC.

 

ITEM 1. BUSINESS

 

Overview

 

1347 Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or “us”) is a holding company which previously specialized in providing personal property insurance in coastal markets including those in Louisiana, Texas and Florida. We were incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings, Inc., and changed our legal name to 1347 Property Insurance Holdings, Inc. on November 19, 2013. On March 31, 2014, we completed an initial public offering of our common stock. Prior to the offering, we were a wholly owned subsidiary of Kingsway America Inc., which, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc., or KFSI, a publicly owned Delaware holding company. As of December 31, 2019, KFSI and its affiliates held warrants that, if exercised, would cause KFSI and its affiliates to hold an approximate 20% ownership interest in our common stock. In addition, as of December 31, 2019, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned approximately 45% of our outstanding shares of common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, Co-Chairman of our Board of Directors, serves as President, Co-Founder and Partner of FGI.

 

Sale of the Maison Business

 

On December 2, 2019, we completed the sale of all of the issued and outstanding equity of three of the Company’s wholly-owned subsidiaries, Maison Insurance Company (“Maison”), Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor” and, together with Maison and MMI, the “Maison Business” or the “Insurance Companies”), to FedNat Holding Company, a Florida corporation (“FedNat”), pursuant to the terms and conditions of the Equity Purchase Agreement, dated as of February 25, 2019 (the “Purchase Agreement”), by and among the Company and each of Maison, MMI and ClaimCor, on the one hand, and FedNat, on the other hand (the “Asset Sale”).

 

The Company has classified the Maison Business as discontinued operations for all periods presented in this report.

 

As consideration for the Asset Sale, FedNat paid the Company $51.0 million, consisting of $25.5 million in cash and $25.5 million in FedNat’s common stock, or 1,773,102 shares of common stock. The stock consideration was determined by dividing $25.5 million by the weighted average closing price per share of FedNat’s common stock on the Nasdaq Stock Market during the 20-trading day period immediately preceding December 2, 2019. In addition, upon the closing of the Asset Sale, $18.0 million of outstanding surplus note obligations payable by Maison to the Company, plus all accrued but unpaid interest, was repaid to the Company.

 

All of the employees of the Company became employees of FedNat as of the closing of the Asset Sale, other than John S. Hill, then serving as Vice President, Chief Financial Officer and Secretary of the Company and now serving as Executive Vice President, Chief Financial Officer and Secretary, and Brian D. Bottjer, then serving as Controller of the Company and now serving as Senior Vice President and Controller. Douglas N. Raucy, the Company’s former President and Chief Executive Officer and a director, and Dean E. Stroud, the Company’s former Vice President and Chief Underwriting Officer, resigned from all positions with the Company, and have entered into employment agreements with FedNat, effective December 2, 2019.

 

On December 31, 2019, the shares of FedNat common stock issued to the Company in connection with the Asset Sale were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the terms of the Registration Rights Agreement entered into by the Company and FedNat at the closing of the Asset Sale.

 

In addition to the Registration Rights Agreement, the Company and FedNat entered into a Standstill Agreement, a Reinsurance Capacity Right of First Refusal Agreement (the “Reinsurance Agreement”), an Investment Advisory Agreement and a Transition Services Agreement at the closing of the Asset Sale.

 

Standstill Agreement

 

The Standstill Agreement imposes certain limitations and restrictions with respect to the voting securities of FedNat (including shares of FedNat common stock) that are owned or held beneficially or of record by the Company. Under the Standstill Agreement, the Company has agreed to vote all of the voting securities of FedNat beneficially owned by the Company in accordance with the recommendation of the board of directors of FedNat with respect to any matter that is before the stockholders of FedNat for a vote by such stockholders. The Standstill Agreement imposes limitations on the sale of voting securities of FedNat held by the Company and restricts the Company from taking certain actions as a holder of voting securities of FedNat. The term of the Standstill Agreement is five years.

 

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1347 PROPERTY INSURANCE HOLDINGS, INC.

 

For insurance regulatory purposes, the Company has waived any rights that it may have to exercise control of FedNat.

 

Reinsurance Capacity Right of First Refusal Agreement

 

The Reinsurance Agreement provides the Company with a right of first refusal to sell reinsurance coverage to the insurance company subsidiaries of FedNat, providing reinsurance on up to 7.5% of any layer in FedNat’s catastrophe reinsurance program, subject to the annual reinsurance limit of $15.0 million, on the terms and subject to the conditions set forth in the Reinsurance Agreement. All reinsurance sold by the Company pursuant to the right of first refusal, if any, will be memorialized in an agreement in such form and subject to such terms and conditions as are customary in the property and casualty insurance industry. The Reinsurance Agreement is assignable by the Company subject to conditions set forth in the agreement. The term of the Reinsurance Agreement is five years.

 

Investment Advisory Agreement

 

Pursuant to the Investment Advisory Agreement, Fundamental Global Advisors LLC, a wholly-owned subsidiary of the Company (“Advisor”), was formed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay Advisor an annual fee of $100,000. FGI Funds Management, LLC will serve as the manager to the Advisor. FGI Funds Management, LLC is affiliated with Fundamental Global Investors, LLC, the Company’s largest stockholder. The term of the Investment Advisory Agreement is five years.

 

Transition Services Agreement

 

To facilitate the transition following the Asset Sale, the Company and FedNat entered into a Transition Services Agreement, pursuant to which the Company has agreed to provide certain transition accounting services to FedNat and the Insurance Companies, as requested, and FedNat has agreed to arrange for certain prior employees of the Company who became employees of the FedNat in connection with the Asset Sale to provide transition accounting services to the Company, as requested, on the terms and conditions set forth in the Transition Services Agreement.

 

Business Going Forward

 

Going forward, the Company intends to operate as a diversified holding company of reinsurance and investment management businesses. Subject to the approval of the Company’s stockholders at the Company’s 2020 Annual Meeting, the Company intends to change its name to “Fundamental Global Financial Corporation” to align with its future business plans. Fundamental Global Financial Corporation (“FGFC”) plans to carry out its business through three primary avenues, insurance, asset management, and real estate. The Company also intends to change the ticker symbols for its common stock and 8.00% cumulative preferred stock, Series A, and has reserved with Nasdaq the ticker symbols “FGI” and “FGIPP,” respectively.

 

Insurance:

 

The Company is in the process of forming a wholly owned reinsurance subsidiary, Fundamental Global Reinsurance Ltd., to provide specialty property and casualty reinsurance. Fundamental Global Reinsurance Ltd. is expected to have a Class B (iii) insurer license in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto and will be subject to regulation by the Cayman Islands Monetary Authority.

 

Asset Management:

 

The Company has formed a wholly owned subsidiary, Fundamental Global Advisors, LLC to serve as an investment advisor to FedNat Holding Company under the investment advisory agreement entered into at the closing of the Asset Sale. In addition, the Company intends to form a joint venture with Fundamental Global Investors, LLC to sponsor investment advisors that will manage private funds ranging the full spectrum of alternative equities, fixed income, private equity and real estate. FGFC will seek to benefit from the growth of the assets under management of the investment advisors it sponsors and the performance of the funds they manage.

 

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1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Real Estate:

 

FGFC plans to purchase controlling interests in income producing real estate assets. FGFC will seek to benefit from underlying rental income on long-term leases with high quality tenants as well as the capital appreciation from the underlying real estate assets.

 

Employees

 

As of December 31, 2019 we had two employees. We are not a party to any collective bargaining agreement and believe that relations with our employees are satisfactory. Each of our employees has entered into confidentiality agreements with us.

 

Website

 

Our corporate website is www.1347pih.com. Our website is provided as an inactive textual reference only.

 

ITEM 1A. RISK FACTORS

 

We have had limited business operations since the closing of the Asset Sale.

 

Since the closing of the Asset Sale, we are no longer engaged in the retail insurance and claims adjustment businesses and have had limited business operations as we evaluate the alternatives for the use of proceeds from the Asset Sale and evaluate our business strategy going forward. Our revenue has also been reduced, as we have limited assets with which to generate revenue. Our failure to secure additional sources of revenue may have a material impact on our results of operations and financial condition. In addition, the uncertainty surrounding our future operations and business prospects may negatively impact the value and liquidity of our common stock.

 

As a result of the Asset Sale, we are a very small public company with a large cash balance relative to our market capitalization.

 

As of December 31, 2019, we had approximately $28.5 million in cash and cash equivalents and $33.5 million in investments. We expect to invest significant funds into the implementation of our new business strategy, which will increase our operating expenses. Until we secure additional revenue streams, we may lose a significant amount of cash, which may have a material adverse effect on our results of operations and financial condition. In addition, the value of our investments may be materially adversely affected by financial market performance, general economic conditions, and other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio and may adversely affect our results of operations.

 

We also remain subject to the listing standards of Nasdaq and SEC rules and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act of 2002, and have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act even though compliance with these reporting requirements is economically burdensome. Unless we decide to deregister our shares and suspend our periodic reporting obligations under the Exchange Act, we will continue to incur ongoing operating expenses related to our status as a reporting issuer. While all public companies face the costs and burdens associated with being publicly traded, given our limited business operations, the costs and burdens of being a public company may be material.

 

The uncertainty regarding the use of proceeds from the Asset Sale and our future operations may negatively impact the value and liquidity of our common stock.

 

Our Board continues to evaluate various alternatives for the use of proceeds from the Asset Sale as it considers and finalizes our business strategy going forward. Our Board has broad discretion in finalizing the use of proceeds, which our investors may not agree with. This uncertainty may negatively impact the value and liquidity of our common stock.

 

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1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Unfavorable global economic conditions, including as a result of health and safety concerns, could adversely affect our business, financial condition or results of operations.

 

Our results of operations and the implementation of our new business strategy could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the current outbreak of the COVID-19 coronavirus. The most recent global financial crisis caused by the coronavirus resulted in extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business and could delay the implementation of our new business strategy.

 

Additionally, adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment could harm our business and our business strategy. While we do not anticipate any material impact to our business operations as a result of the coronavirus, in the event of a major disruption caused by the outbreak of pandemic diseases such as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business.

 

Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry and workforce. Given the daily evolution of the coronavirus and the global responses to curb its spread, the Company is not able to estimate the effects of the coronavirus on its results of operations, financial condition or liquidity for fiscal year 2020.

 

We are subject to non-competition and non-solicitation covenants under the Purchase Agreement, which may limit our operations in certain respects.

 

We are subject to the non-competition and non-solicitation covenants in the Purchase Agreement until December 2, 2024. During this period of time, subject to certain exceptions, we will generally be prohibited from (i) marketing, selling and issuing residential property and casualty insurance policies to residential consumers anywhere in the States of Alabama, Florida, Georgia, Louisiana, South Carolina and Texas (a “Restricted Business”), and owning the equity securities of, managing, operating or controlling any person that engages in a Restricted Business, (ii) hiring or soliciting certain employees of FedNat or the companies sold under the terms of the Purchase Agreement, and (iii) soliciting or accepting business from certain third parties on any customer, agent or vendor list of Maison, MMI, or ClaimCor in connection with a Restricted Business. The non-competition covenant does not apply to our reinsurance business, and we will be permitted to enter into reinsurance contracts in the States of Alabama, Florida, Georgia, Louisiana, South Carolina and Texas.

 

The limitations set forth in the non-competition and non-solicitation covenants may negatively impact the scope of our future operations, limit our recruitment of key employees, restrict our ability to enter into strategic relationships, and impair our ability to pursue certain business alternatives, which may adversely affect our business, results of operations, financial condition, and stock price.

 

We do not have an operating history or established reputation in the reinsurance industry, and our lack of an established operating history and reputation may make it difficult for us to attract or retain business.

 

As part of our business going forward, we plan to provide specialty property and casualty reinsurance through PIH Re, Ltd., our reinsurance subsidiary domiciled under the laws of Bermuda, and Fundamental Global Reinsurance Ltd., a reinsurance subsidiary we are in the process of forming under the laws of the Cayman Islands. We will not have an operating history on which we can base an estimate of our future earnings prospects. We also do not have an established reputation in the reinsurance industry. Reputation is a very important factor in the reinsurance industry, and competition for business is, in part, based on reputation. Although we expect that our reinsurance policies will be fully collateralized, we will be a relatively newly formed reinsurance company and do not yet have a well-established reputation in the reinsurance industry. Our lack of an established reputation may make it difficult for us to attract or retain business. We will compete with major reinsurers, all of which have substantially greater financial marketing and management resources than we do, which may make it difficult for us to effectively market our products or offer our products at a profit. In addition, we do not have or currently intend to obtain financial strength ratings, which may discourage certain counterparties from entering into reinsurance contracts with us.

 

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1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Our failure to obtain or maintain approval of insurance regulators and other regulatory authorities as required for the operations of our reinsurance subsidiary may have a material adverse effect on our future business, financial condition, results of operations and prospects.

 

Our reinsurance subsidiary, PIH Re, Ltd., as a Bermuda domiciled entity, is required to maintain licenses. PIH Re, Ltd. is registered as a reinsurer only in Bermuda. Bermuda insurance statutes and regulations and policies of the Bermuda Monetary Authority, or “BMA,” require that PIH Re, Ltd., among other things, maintain a minimum level of capital and surplus, satisfy solvency standards, restrict dividends and distributions, obtain prior approval or provide notification to the BMA of certain transactions, maintain a head office, and have certain officers and a director resident in Bermuda, appoint and maintain a principal representative in Bermuda and provide for the performance of certain periodic examinations of itself and its financial conditions. A failure to meet these conditions may result in the suspension or revocation of its license to do business as a reinsurance company in Bermuda, which would mean that PIH Re, Ltd. would not be able to enter into any new reinsurance contracts until the suspension ended or it became licensed in another jurisdiction. For any or a number of reasons, the BMA could revoke or suspend PIH Re, Ltd.’s license. Any such suspension or revocation of its license would negatively impact its and our reputation in the reinsurance marketplace and could have a material adverse effect on our results of operations.

 

We are also in the process of forming a new reinsurance subsidiary, Fundamental Global Reinsurance Ltd., to provide specialty property and casualty reinsurance. We expect that Fundamental Global Reinsurance Ltd. will have a Class B (iii) insurer license in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto, and will be subject to regulation by the Cayman Islands Monetary Authority. Failure to comply with the laws, regulations and requirements applicable to a Cayman Islands-domiciled reinsurance subsidiary could result in consequences which may have a material adverse effect on our business and results of operations.

 

In addition, other reinsurance subsidiaries we may form in other foreign jurisdictions will be subject to the requirements of those jurisdictions, and we may fail to comply with the applicable regulatory requirements.

 

As a reinsurer, we will depend on our clients’ evaluations of the risks associated with their insurance underwriting, which may subject us to reinsurance losses.

 

In the proportional reinsurance business, in which we will assume an agreed percentage of each underlying insurance contract being reinsured, or quota share contracts, we do not plan to separately evaluate each of the original individual risks assumed under these reinsurance contracts. We will therefore be largely dependent on the original underwriting decisions made by ceding companies, which will subject us to the risk that the clients may not have adequately evaluated the insured risks and that the premiums ceded may not adequately compensate us for the risks we assume. We also do not plan to separately evaluate each of the individual claims made on the underlying insurance contracts under quota share arrangements, in which case we will be dependent on the original claims decisions made by our clients.

 

The involvement of reinsurance brokers may subject us to their credit risk.

 

As a standard practice of the reinsurance industry, reinsurers frequently pay amounts owed on claims under their policies to reinsurance brokers, and these brokers, in turn, remit these amounts to the ceding companies that have reinsured a portion of their liabilities with the reinsurer. In some jurisdictions, if a broker fails to make such a payment, the reinsurer might remain liable to the client for the deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions, when the client pays premiums for policies to reinsurance brokers for payment to the reinsurer, these premiums are considered to have been paid and the client will no longer be liable to the reinsurer for these premiums, whether or not the reinsurer has actually received them from the broker. Consequently, as a reinsurer, we expect to assume a degree of credit risk associated with the brokers that we intend to do business with.

 

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1347 PROPERTY INSURANCE HOLDINGS, INC.

 

We may be unable to purchase retrocessional reinsurance for the liabilities we reinsure, and if we successfully purchase such retrocessional reinsurance, we may be unable to collect, which could adversely affect our business, financial condition and results of operations.

 

Retrocessional coverage (reinsurance for the liabilities we reinsure) may not always be available to us or may not always be available at acceptable terms. From time to time, as a reinsurer we expect that we will purchase retrocessional coverage for our own account in order to mitigate the effect of a potential concentration of losses upon our financial condition. The insolvency or inability or refusal of a retrocessional reinsurer to make payments under the terms of its agreement with us could have an adverse effect on us because we will remain primarily liable to our client. From time to time, market conditions have limited, and in some cases have prevented, reinsurers from obtaining the types and amounts of retrocession that they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amounts of retrocessional coverage or negotiate terms that we deem appropriate or acceptable or obtain retrocession from entities with satisfactory creditworthiness. Our failure to establish adequate retrocessional arrangements or the failure of our retrocessional arrangements to protect us from overly concentrated risk exposure could significantly and negatively affect our business, financial condition and results of operations.

 

We may not be successful in carrying out our investment and investment management strategy, and fair value of our investments will be subject to a loss in value.

 

We have formed an investment advisory firm subsidiary, Fundamental Global Advisors LLC (the “Advisor”) which uses an affiliated investment advisor registered with the SEC, to carry out our investment advisory services. We also intend to form a joint venture with Fundamental Global Investors, LLC to sponsor investment advisors that we anticipate will manage private funds ranging the full spectrum of alternative equities, fixed income, private equity and real estate. In exchange for seeding the new funds, we expect to receive a special interest in each new fund (or its general partner). Since we plan to conduct our investment activities through private funds, our contributions made to those funds may be subject to lock-up agreements and our ability to access this capital may be limited for a defined period, which may increase a risk of loss of all or a significant portion of value. Our investments may also become concentrated. A significant decline in the major values of these investments may produce a large decrease in our consolidated shareholders’ equity and can have a material adverse effect on our consolidated book value per share and earnings.

 

As discussed above under Item 1. “Business,” in connection with the Asset Sale, the Advisor and FedNat have entered into an investment advisory agreement in which the Advisor has agreed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. Any fees received for such services may not be commensurate with the services provided. We also may not be able to enter into such advisory management agreements with other entities on favorable terms, or at all. Any of these events could have a material adverse effect on our business.

 

As part of our business going forward, we also plan to purchase controlling interests in income producing real estate assets, and will seek to benefit from underlying rental income on long-term leases with high quality tenants as well as the capital appreciation from the underlying real estate assets. Investments in real estate assets are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly converted to cash, limiting our ability to promptly vary our portfolio in response to changing economic, financial and investment conditions. Investments in real estate assets are also subject to adverse changes in general economic conditions which may reduce the demand for rental space. Moreover, we may not be able to acquire quality, income producing real estate assets or attract high-quality tenants on favorable terms, if at all. We also expect to compete with numerous other persons or entities seeking to buy real estate assets, including real estate investment trusts or other real estate operating companies with greater experience and financial strength. Any of these factors could impact our real estate investment strategy and have a material adverse impact on our business.

 

We will be subject to the risk of possibly becoming an investment company under the Investment Company Act.

 

We will be subject to the risk of inadvertently becoming an investment company, which would require us to register under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Registered investment companies are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which we currently operate and plan to operate our business in the future.

 

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We plan to monitor the value of our investments and structure our operations and transactions to qualify for exemptions under the Investment Company Act. Accordingly, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions due to those concerns. In addition, adverse developments with respect to our ownership of our operating subsidiaries, including significant appreciation or depreciation in the market value of certain of our publicly traded holdings, could result in our inadvertently becoming an investment company. If it were established that we were an investment company, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action brought by the SEC, that we would be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered investment company.

 

Our results of operations will fluctuate from period to period and may not be indicative of our long-term prospects.

 

We anticipate that the performance of our reinsurance operations and our future investment and real estate portfolios will fluctuate from period to period. In addition, because we plan to underwrite products and make investments to achieve favorable return on equity over the long-term, our short-term results of operations may not be indicative of our long-term prospects. Our results of operations may also be adversely impacted by general economic conditions and the conditions and outlook of the reinsurance markets and capital markets.

 

We may be unable to attract and retain key personnel and management, which could adversely impact our ability to successfully implement and execute our business and growth strategy.

 

The successful implementation of our business and growth strategy depends in large part upon the ability and experience of members of our management and other personnel. We experienced a number of personnel changes in connection with the closing of our Asset Sale, including the resignations of Douglas N. Raucy, who served as our President and Chief Executive Officer, and Dean E. Stroud, who served as our Vice President and Chief Underwriting Officer. We currently do not have a Chief Executive Officer, which may be looked upon unfavorably by our investors and could have an adverse impact on our business.

 

We currently have two employees, John S. Hill, who serves as out Executive Vice President and Chief Financial Officer, and Brian D. Bottjer, who serves as our Senior Vice President and Controller. Our performance will be dependent on our ability to identify, hire, train, motivate and retain qualified management and personnel with experience in the reinsurance industry, investment advisory services, and in real estate investments. We may not be able to attract and retain such personnel on acceptable terms, or at all. If we lose the service of qualified management or other personnel or are unable to attract and retain the necessary members of management or personnel, we may not be able to successfully execute on our business strategy, which could have an adverse effect on our business.

 

Our information technology systems may fail or suffer a loss of security which may have a material adverse effect on our business.

 

Our business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. Our operations are dependent upon our ability to process our business timely and efficiently and protect our information systems from physical loss or unauthorized access. In the event that our systems cannot be accessed due to a natural catastrophe, terrorist attack or power outage, or systems and telecommunications failures or outages, external attacks such as computer viruses, malware or cyber-attacks, or other disruptions occur, our ability to perform business operations on a timely basis could be significantly impaired and may cause our systems to be inaccessible for an extended period of time. A sustained business interruption or system failure could adversely impact our ability to perform necessary business operations in a timely manner, hurt our relationships with our business partners and customers and have a material adverse effect our financial condition and results of operations.

 

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Our operations also depend on the reliable and secure processing, storage and transmission of confidential and other information in our computer systems and networks. From time to time, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, systems failures and disruptions. Computer viruses, hackers, phishing attacks, social engineering schemes, ransomware, employee misconduct and other external hazards could expose our data systems to security breaches, cyber-attacks or other disruptions. In addition, we routinely transmit and receive personal, confidential and proprietary information by electronic means. Our systems and networks may be subject to breaches or interference. Any such event may result in operational disruptions as well as unauthorized access to or the disclosure or loss of our proprietary information or our customers’ information or theft of funds and other monetary loss, which in turn may result in legal claims, regulatory scrutiny and liability, damage to our reputation, the incurrence of costs to eliminate or mitigate further exposure, the loss of customers or affiliated advisers or other damage to our business.

 

If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on our business, financial condition and results of operations.

 

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. We currently qualify as a smaller reporting company under the regulations of the Securities and Exchange Commission (the “SEC”). Under new rules recently adopted by the SEC, as a smaller reporting company we are exempt from the requirement to include the auditor’s report of the effectiveness of internal control over financial reporting until such time as we no longer qualify as a smaller reporting company based on our public float and report more than $100 million in annual revenues in a fiscal year. Regardless of our qualification status, we have implemented substantial control systems and procedures in order to satisfy the reporting requirements under the Exchange Act and applicable requirements of Nasdaq, among other items. Maintaining these internal controls is costly and may divert management’s attention.

 

Our evaluation of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC, or violations of Nasdaq’s listing rules. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This may have a material adverse effect on our business, financial condition and results of operations and could also lead to a decline in the price of our common stock.

 

While we currently qualify as a smaller reporting company under SEC regulations, we cannot be certain if we take advantage of the reduced disclosure requirements applicable to these companies that we will not make our common stock less attractive to investors. Once we lose smaller reporting company status, the costs and demands placed upon our management are expected to increase.

 

The SEC’s rules permit smaller reporting companies like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not smaller reporting companies. As long as we qualify as a smaller reporting company, based on our public float, and report less than $100 million in annual revenues in a fiscal year we are permitted, and we intend to, omit the auditor’s attestation on internal control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act.

 

We lost our status as an emerging growth company as of December 31, 2019. While we expect to remain a smaller reporting company and non-accelerated filer, we now face increased disclosure requirements as a non-emerging growth company, such as stockholder advisory votes on executive compensation (“say-on-pay”). Until such time that we lose smaller reporting company status, it is unclear if investors will find our common stock less attractive because we may rely on certain disclosure exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile and could cause our stock price to decline. As a result of the loss of our emerging growth company status, we expect the costs and demands placed upon our management to increase, as we now have to comply with additional disclosure and accounting requirements. In addition, even if we remain a smaller reporting company, if our public float exceeds $75 million and we report $100 million or more in annual revenues in a fiscal year, we will become subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring an independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting, making the public reporting process more costly.

 

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We have directors who also serve as directors and/or executive officers for other public companies or for our controlling stockholders or their affiliates, which may lead to conflicting interests.

 

We have directors who serve as executive officers and/or directors of FGI and its affiliates, which together, as of December 31, 2019, beneficially owned approximately 45% of our outstanding shares of common stock. In addition, FGI and its affiliates beneficially own 4.9% of our outstanding shares of 8.00% cumulative Preferred Stock, Series A. In addition, one of our directors serves as an executive officer and director of Atlas Financial Holdings, Inc. (Nasdaq: AFH) (“Atlas”), a specialty commercial automobile insurance company. Another of our directors also currently serves as director of Limbach Holdings, Inc. (Nasdaq: LMB) (“Limbach”), an affiliate of KFSI (which, together with its affiliates, holds a warrant exercisable for common shares representing 20% of our outstanding shares of common stock).

 

Our executive officers and members of our Company’s Board of Directors have fiduciary duties to our stockholders; likewise, persons who serve in similar capacities at Atlas, Limbach and FGI have fiduciary duties to those companies’ investors. We may find, though, the potential for a conflict of interest if our Company and one or more of these other companies pursue acquisitions, investments and other business opportunities that may be suitable for each of us. Our directors who find themselves in these multiple roles may, as a result, have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting more than one of the companies to which they owe fiduciary duties. Furthermore, our directors who find themselves in these multiple roles own stock options, shares of common stock and other securities in some of these entities. These ownership interests could create, or appear to create, potential conflicts of interest when the applicable individuals are faced with decisions that could have different implications for our Company and these other entities. From time to time, we may enter into transactions with or participate jointly in investments with Atlas, Limbach or FGI or its affiliates. We may create new situations in the future in which our directors serve as directors or executive officers in future investment holdings of such entities.

 

We have a limited operating history as a publicly-traded company. Our inexperience as a public company and the requirements of being a public company may strain our resources, divert management’s attention, affect our ability to attract and retain qualified board members and have a material adverse effect on us and our stockholders.

 

We have a limited operating history as a publicly-traded company. As a publicly-traded company, we are required to develop and implement substantial control systems, policies and procedures in order to satisfy our periodic SEC reporting and Nasdaq obligations. Management’s past experience may not be sufficient to successfully develop and implement these systems, policies and procedures and to operate our company. Failure to do so could jeopardize our status as a public company, and the loss of such status may have a material adverse effect on us and our stockholders.

 

In addition, as a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, and Nasdaq rules, including those promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we need to continually commit significant resources, maintain staff and provide additional management oversight. In addition, implementing our new business strategy and sustaining our growth will require us to commit additional management, operational and financial resources to identify new professionals to join our organization and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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As a public company, we incur significant annual expenses related to these steps associated with, among other things, director fees, reporting requirements, transfer agent fees, accounting, legal and administrative personnel, auditing and legal fees and similar expenses. We also incur higher costs for director and officer liability insurance. Any of these factors make it more difficult for us to attract and retain qualified members of our Board of Directors. Finally, we expect to incur additional costs once we lose smaller reporting company status or are required to provide an auditor attestation report on the effectiveness of our internal control over financial reporting.

 

Holders of our outstanding shares of 8.00% Cumulative Preferred Stock, Series A, have dividend, liquidation and other rights that are senior to the rights of the holders of our common shares.

 

As of March 27, 2020, we have issued and outstanding 700,000 shares of preferred stock designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Series A Preferred Stock”). The aggregate liquidation preference with respect to the outstanding shares of Series A Preferred Stock is approximately $17.5 million, and annual dividends on the outstanding shares of Series A Preferred Stock are $1.4 million. Holders of our Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Company or a duly authorized committee thereof, out of lawfully available funds for the payment of dividends, cumulative cash dividends from and including the original issue date at the rate of 8.00% of the $25.00 per share liquidation preference per annum (equivalent to $2.00 per annum per share). Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive a liquidation preference of $25.00 per share plus an amount equal to any accumulated and unpaid dividends to, but not including, the date of payment. This would reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares.

 

Our Board of Directors has the authority to designate and issue additional preferred shares with liquidation, dividend and other rights that are senior to those of our common shares similar to the rights of the holders of our Series A Preferred Stock. Because our decision to issue additional securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings. Thus, our stockholders bear the risk of our future securities issuances reducing the market price of our common shares and diluting their interests.

 

The shares of FedNat common stock we have received as part of the consideration for the Asset Sale are subject to certain limitations and restrictions.

 

The shares of FedNat common stock we have received in the Asset Sale were issued pursuant to the terms of a Standstill Agreement entered into between the Company and FedNat upon the closing of the Asset Sale. The Standstill Agreement imposes certain limitations and restrictions with respect to our ownership of FedNat common stock, including, among other things, requiring us to vote all of the voting securities of FedNat we own in accordance with the recommendation of FedNat’s board of directors and prohibiting us from publicly advising or influencing any person with respect to the voting of any shares of FedNat common stock and taking any action to nominate any person for election to FedNat’s board of directors. Our status as a minority stockholder of FedNat as well as the limitations and restrictions expected to be set forth in the Standstill Agreement may limit our ability to exert significant influence on FedNat’s management and operations and matters requiring approval of FedNat’s stockholders. FedNat’s management and holders of a larger percentage of FedNat’s common stock may also take or encourage actions that decrease the value of our shares of FedNat common stock or are not in our best interests as a minority stockholder.

 

We may fail to satisfy the continued listing standards of Nasdaq and may have to delist our common shares.

 

Even though we currently satisfy the continued listing standards for Nasdaq and expect to continue to do so, we can provide no assurance that we will continue to satisfy the continued listing standards in the future. In the event that we are unable to satisfy the continued listing standards of Nasdaq, our common shares may be delisted from that market. Any delisting of our common shares from Nasdaq could:

 

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  adversely affect our ability to attract new investors;
     
  decrease the liquidity of our outstanding common shares;
     
  reduce our flexibility to raise additional capital;
     
  reduce the price at which our common shares trade; and
     
  increase the transaction costs inherent in trading such common shares with overall negative effects for our stockholders.

 

In addition, delisting of our common shares could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common shares, and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect the price of our common shares and our business, financial condition and results of operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Our executive offices are located at 970 Lake Carillon Drive, Suite 314, St. Petersburg, FL 33716. Our lease term expires in May 2020. The Company is assessing its need for future office space following the sale of the Maison Business. Total minimum rent over the six-month term is expected to be $14,000.

 

In the opinion of the Company’s management, our executive offices are suitable for our current business and are adequately maintained.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims. Any such development will be affected by future court decisions and interpretations. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current reserves.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market for Registrant’s Common Stock

 

Our common stock is traded on the Nasdaq Global Market tier of the Nasdaq Stock Market, LLC under the symbol “PIH.” Our Series A Preferred Stock is also traded on the Nasdaq Global Market tier of the Nasdaq Stock Market under the symbol “PIHPP.”

 

Number of Common Stockholders

 

As of December 31, 2019, we had 6,065,948 common shares outstanding, which were held by 15 stockholders of record including Cede & Co., which holds shares on behalf of the beneficial owners of the Company’s common stock. Because brokers and other institutions hold many of our shares on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

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Dividends

 

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. It is the present policy of our Board of Directors to retain earnings, if any, for use in developing and expanding our business. In the future, our payment of dividends on our common stock will also depend on the amount of funds available, our financial condition, capital requirements and such other factors as our Board of Directors may consider.

 

Holders of our Series A Preferred Stock are entitled to receive cash dividends at a rate of 8.00% per annum of the $25.00 per share liquidation preference (equivalent to $2.00 per annum per share), accruing from February 28, 2018. Dividends are payable to holders of our Series A Preferred Stock quarterly on or about the 15th day of March, June, September and December of each year, commencing on June 15, 2018. The record dates for dividend payment are March 1, June 1, September 1 and December 1 of each year, whether or not a business day, immediately preceding the applicable dividend payment date. The first dividend record date was June 1, 2018. Dividends on the Series A Preferred Stock accumulate whether or not the Company has earnings, whether or not there are funds legally available for the payment of those dividends and whether or not those dividends are declared by the Board of Directors. We intend to declare regular quarterly dividends on the shares of Series A Preferred Stock. As of December 31, 2019, we had approximately $28.5 million available for the payment of future dividends, if declared by the Board of Directors. The declaration, payment and amount of future dividends will be subject to the discretion of our Board of Directors. Our Board of Directors expects to take into account a variety of factors when determining whether to declare any future dividends on the Series A Preferred Stock, including (i) our financial condition, liquidity, results of operations, retained earnings, and capital requirements, (ii) general business conditions, (iii) legal, tax and regulatory limitations, including those placed on our subsidiary companies, and (iv) any other factors that our Board of Directors deems relevant. Accordingly, there can be no assurance that we will declare dividends on our preferred shares in the future.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with our consolidated financial statements and related notes and information included elsewhere in this annual report on Form 10-K. You should review the “Risk Factors” section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Some of the information contained in this discussion and analysis and set forth elsewhere in this annual report on Form 10-K includes forward-looking statements that involve risks and uncertainties.

 

Unless context denotes otherwise, the terms “Company,” “we,” “us,” and “our,” refer to 1347 Property Insurance Holdings, Inc., and its subsidiaries.

 

Overview

 

We are a holding company which previously specialized in providing personal property insurance in coastal markets including those in Louisiana, Texas and Florida. We were incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings, Inc., and changed our legal name to 1347 Property Insurance Holdings, Inc. on November 19, 2013. On March 31, 2014, we completed an initial public offering of our common stock. Prior to the offering, we were a wholly owned subsidiary of Kingsway America Inc., which, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc., or KFSI, a publicly owned Delaware holding company. As of December 31, 2019, KFSI and its affiliates held warrants that, if exercised, would cause KFSI and its affiliates to hold an approximate 20% ownership interest in our common stock. In addition, as of December 31, 2019, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned approximately 45% of our outstanding shares of common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, Co-Chairman of our Board of Directors, serves as President, Co-Founder and Partner of FGI.

 

Sale of Maison Business to FedNat Holding Company

 

On December 2, 2019, we completed the sale of all of the issued and outstanding equity of three of the Company’s wholly-owned subsidiaries, Maison Insurance Company (“Maison”), Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor” and, together with Maison and MMI, the “Maison Business”), to FedNat Holding Company, a Florida corporation (“FedNat”), pursuant to the terms and conditions of the Equity Purchase Agreement, dated as of February 25, 2019 (the “Purchase Agreement”), by and among the Company and each of Maison, MMI and ClaimCor, on the one hand, and FedNat, on the other hand (the “Asset Sale”).

 

As consideration for the Asset Sale, FedNat paid the Company $51.0 million, consisting of $25.5 million in cash and $25.5 million in FedNat’s common stock, or 1,773,102 shares of common stock. The stock consideration was determined by dividing $25.5 million by the weighted average closing price per share of FedNat’s common stock on the Nasdaq Stock Market during the 20-trading day period immediately preceding December 2, 2019. In addition, upon the closing of the Asset Sale, $18.0 million of outstanding surplus note obligations payable by Maison to the Company, plus all accrued but unpaid interest, was repaid to the Company.

 

Going forward, the Company intends to operate as a diversified holding company of reinsurance and investment management businesses. Subject to the approval of the Company’s stockholders at the Company’s 2020 Annual Meeting, the Company intends to change its name to “Fundamental Global Financial Corporation” to align with its future business plans. Fundamental Global Financial Corporation (“FGFC”) plans to carry out its business through three primary avenues, insurance, asset management, and real estate. The Company also intends to change the ticker symbols for its common stock and 8.00% cumulative preferred stock, Series A, and has reserved with Nasdaq the ticker symbols “FGI” and “FGIPP,” respectively.

 

For more information on the Purchase Agreement, Asset Sale, and the Company’s future plans, see “Item 1. Business.”

 

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Coronavirus Impact

 

We continue to monitor the recent outbreak of the novel coronavirus (COVID-19) on our operations. Due to the recent outbreak of the coronavirus reported in many countries worldwide, local and federal governments have issued travel advisories, canceled large scale public events and closed schools. In addition, companies have begun to cancel conferences and travel plans and require employees to work from home. Global financial markets have also experienced extreme volatility and disruptions to capital and credit markets.

 

Adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment could harm our business and our business strategy. While we do not anticipate any material impact to our business operations as a result of the coronavirus, in the event of a major disruption caused by the outbreak of pandemic diseases such as coronavirus, we may lose the services of our employees or experience system interruptions, which could lead to diminishment of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy and we cannot anticipate all the ways in which the current global health crisis and financial market conditions could adversely impact our business.

 

Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry and workforce. Given the daily evolution of the coronavirus and the global responses to curb its spread, the Company is not able to estimate the effects of the coronavirus on its results of operations, financial condition or liquidity for fiscal year 2020.

 

Critical Accounting Estimates and Assumptions

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. 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 critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for loss and loss adjustment expense reserves (as well as the reinsurance recoverable on those reserves), the valuation of fixed income and equity securities, the valuation of net deferred income taxes, the valuation of various securities we have issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs and stock-based compensation expense.

 

Discontinued Operations

 

On December 2, 2019, we sold all of the issued and outstanding equity of Maison, MMI and ClaimCor. As a result, these operations have been classified as discontinued operations in the Company’s financial statements presented herein. Certain transactions between the Company and its subsidiaries, which have historically been eliminated upon consolidation, are shown on a gross basis in the accompanying financial statements as such transactions have occurred between discontinued operations and those operations which the Company intends to continue to utilize. These items include surplus notes in the amount of $18,000 plus approximately $728 in accrued interest, all of which was settled upon the closing of the Asset Sale. These notes, which had been issued by Maison to the Company, have been reflected as both an asset of continuing operations and liability of discontinued operations on the Company’s consolidated balance sheet as of December 31, 2018. Interest associated with these surplus notes has been recorded as part of net investment income from continuing operations as well as interest expense as part of discontinued operations on the Company’s consolidated statement of operations for the years ended December 31, 2019 and 2018. Similarly, amounts due from the Company to Maison upon the assignment of certain of Maison’s investments to the Company have been reflected as an asset of continuing operations under the heading “Limited liability investments”, as well as a corresponding liability under the heading “Due to affiliates” on the Company’s consolidated balance sheet as of December 31, 2018. Pursuant to the terms of the Purchase Agreement, this assignment of investments was settled, in cash, prior to closing of the transaction. All other significant intercompany balances and transactions have been eliminated upon consolidation.

 

Valuation of Fixed Income and Equity Securities

 

The Company’s fixed income and equity securities are recorded at fair value using observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. Any change in the estimated fair value of its investments could impact the amount of unrealized gain or loss the Company has recorded, which could change the amount the Company has recorded for its investments and on its consolidated balance sheets and statements of income.

 

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Gains and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged to the consolidated statements of income and comprehensive income. Premium and discount on investments are amortized and accreted using the interest method and charged or credited to net investment income.

 

The Company performs a quarterly analysis of its investment portfolio to determine if declines in market value are other-than-temporary. Further information regarding its detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within Note 5 - Investments, to the consolidated financial statements.

 

Valuation of Net Deferred Income Taxes

 

The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in the Company’s consolidated financial statements. In determining its provision for income taxes, the Company interprets tax legislation in a variety of jurisdictions and makes assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of net deferred income taxes.

 

The ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the Company’s temporary differences reverse and become deductible. A valuation allowance is established when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized. In determining whether a valuation allowance is needed, management considers all available positive and negative evidence affecting specific deferred income tax asset balances, including the Company’s past and anticipated future performance, the reversal of deferred income tax liabilities, and the availability of tax planning strategies. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statements of income and comprehensive income.

 

Due to the sale of the Maison Business on December 2, 2019, the December 31, 2019 financial statements show a net deferred tax liability in the amount of $106. Given the Company’s deferred tax assets can be fully offset with deferred tax liabilities within the expiration window of the deferred tax assets, the Company has determined that it is more likely than not that its deferred tax assets will be utilized. As such, the Company has not set up a valuation allowance for its deferred tax assets as of December 31, 2019.

 

Securities issued to 1347 Advisors, LLC

 

Pursuant to the termination of the Management Services Agreement with 1347 Advisors, LLC (“Advisors,” a wholly-owned subsidiary of KFSI), the Company issued Series B Preferred Shares, Warrants, and entered into a Performance Share Grant Agreement with Advisors on February 24, 2015. On January 2, 2018, the Company entered into a stock purchase agreement with Advisors and IWS Acquisition Corporation, also an affiliate of KFSI, pursuant to which the Company agreed to repurchase all 60,000 Series B Preferred Shares held by Advisors and all 60,000 Series B Preferred Shares held by IWS Acquisition Corporation. The Company completed the repurchase of the shares held by Advisors on January 2, 2018 and the repurchase of the shares held by IWS Acquisition Corporation on February 28, 2018. In connection with the stock purchase agreement, the Performance Share Grant Agreement, dated February 24, 2015, between the Company and Advisors was terminated. No common shares were issued to Advisors under the Performance Share Grant Agreement. Advisors has subsequently transferred the warrants to its affiliate, Kingsway America Inc.

 

Because the Series B Preferred Shares had a redemption provision requiring mandatory redemption on February 24, 2020, the Company was required to classify the shares as a liability on its balance sheet. The resulting liability was recorded at a discount to the $4,200 ultimate redemption amount which included all dividends to be paid on the Series B Preferred Shares based upon an analysis of the timing and amounts of cash payments expected to occur under the terms of the shares discounted for the Company’s estimated cost of equity (13.9%).

 

18

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

The Company estimated the fair value of the Warrants on grant date based upon the Black-Scholes option pricing model while it utilized a Monte Carlo model to determine the fair value of the Performance Share Grant Agreement due to the fact that the underlying shares are only issuable based upon the achievement of certain market conditions.

 

Stock-Based Compensation Expense

 

The Company uses the fair-value method of accounting for stock-based compensation awards granted. The Company determines the fair value of the stock options on their grant date using the Black-Scholes option pricing model and determines the fair value of restricted stock units (“RSUs”) on their grant date using the fair value of the Company’s common stock on the date the RSUs were issued (for those RSU which vest solely based upon the passage of time), as well as using multiple Monte Carlo simulations for those RSUs with market-based vesting conditions. The fair value of these awards is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest, with a corresponding increase to additional paid-in capital. When the stock options are exercised, or correspondingly, when the restricted stock units vest, the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in shareholders’ equity.

 

Recent Accounting Pronouncements

 

See Item 8, Note 3 – Recently Issued Accounting Standards in the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.

 

Analysis of Financial Condition

 

As of December 31, 2019 compared to December 31, 2018

 

Dollar amounts included in the “Analysis of Financial Condition” are presented in thousands, except as otherwise specified.

 

Discontinued Operations

 

As previously discussed, on December 2, 2019, we completed the sale of all of the issued and outstanding equity of our three former wholly-owned subsidiaries, Maison, MMI and ClaimCor. Accordingly, the Company has classified the Maison Business as discontinued operations for all periods presented in this report as set forth in ASC 205-20 – Discontinued Operations.

 

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities included in discontinued operations which are presented separately in the Company’s consolidated balance sheet as of December 31, 2018. On December 2, 2019 the assets and liabilities previously included in discontinued operations had been disposed of in the Asset Sale transaction.

 

   December 31, 2018 
Carrying amounts of assets included as part of discontinued operations     
Fixed income securities, at fair value (amortized cost of $77,366)  $76,310 
Equity investments, at fair value (cost of $3,130)   3,263 
Other investments   774 
Cash and cash equivalents   27,236 
Deferred policy acquisition costs   9,111 
Premiums receivable, net of allowance of $50   7,720 
Ceded unearned premiums   6,525 
Reinsurance recoverable on paid losses   530 
Reinsurance recoverable on loss reserves   5,661 
Current income taxes recoverable   2,051 
Deferred tax asset, net   1,014 
Due from affiliate   2,698 
Other assets   1,676 
Total assets of discontinued operations included in the Company’s consolidated balance sheet  $144,569 
      
Carrying amounts of liabilities included as part of discontinued operations     
Loss and loss adjustment expense reserves  $15,151 
Unearned premium reserves   51,907 
Ceded reinsurance premiums payable   9,495 
Agency commissions payable   802 
Premiums collected in advance   1,840 
Surplus notes plus interest due to affiliate   18,244 
Accrued premium taxes and assessments   3,059 
Other liabilities   2,821 
Total liabilities of discontinued operations included in the Company’s consolidated balance sheet  $103,319 

 

19

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Investments

 

On December 2, 2019, the Company received 1,773,102 shares of FedNat Holding Company common stock (Nasdaq: FNHC), along with $25,500 cash as consideration for the Asset Sale. The stock consideration was determined by dividing $25,500 by the weighted average closing price per share of FedNat’s common stock on the Nasdaq Stock Market during the 20-trading day period immediately preceding December 2, 2019.

 

The table below summarizes, by type, the Company’s investments as of December 31, 2019 and 2018.

 

   December 31, 2019   December 31, 2018 
Type of Investment   Carrying Amount    Percent of Total    Carrying Amount    Percent of Total 
Equity securities:                    
FNHC common stock  $29,487    88.0%  $    %
Limited liability investments   4,005    12.0%   2,987    3.6%
Equity securities included in discontinued operations       %   3,263    4.0%
Total equity securities   33,492    100.0%        7.6%
                     
Fixed income securities included in discontinued operations       %   76,310    92.4%
Total investments  $33,492    100.0%  $82,560    100.0%

 

As of March 26, 2020, the estimated fair value of the Company’s 1,773,102 shares of FedNat common stock was $20,320.

 

The Company’s limited liability investments are comprised of investments in a limited partnership and a limited liability company which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company had a total potential commitment of $935 related to these investments, of which the two entities have drawn down approximately $776 through December 31, 2019. The limited liability company is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI. The Company has accounted for these two investments at cost, as the investments do not have readily determinable fair values and the Company does not exercise significant influence over the operations of the investments or the underlying privately-owned companies. For the year ended December 31, 2019, the Company received profit distributions of $91 on these investments.

 

Additionally, on June 18, 2018, Maison invested $2,219 in FGI Metrolina Property Income Fund, LP (the “Fund”), which invests in real estate through a real estate investment trust which is wholly owned by the Fund. The general partner of the Fund, FGI Metrolina GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the Chairman and Co-Chairman of the Board of Directors of the Company, respectively. The Company, a limited partner of the Fund, does not have a controlling financial interest in the Fund, but exerts significant influence over the entity’s operating and financial policies as it owns an economic interest of approximately 49%. Accordingly, the Company has accounted for this investment under the equity method of accounting, with any unrealized gains or losses on the investment recorded in income. The Company has committed to a total potential investment of up to $4,000 in the Fund. As of December 31, 2019, the total amount invested in the Fund was $2,719, while the carrying amount on the Company’s balance sheet was $3,229.

 

Pursuant to the terms of the Purchase Agreement, Maison assigned all of its right, title and interest in each of the limited liability investments to the Company in exchange for the statutory carrying value of each investment (approximately $4,200). Accordingly, these investments have been included on the Company’s consolidated balance sheet as of December 31, 2019 and 2018 as part of continuing operations. Investment income resulting from the Company’s limited liability investments has also been included in net investment income as part of continuing operations, on the Company’s consolidated statement of operations for the years ended December 31, 2019 and 2018.

 

20

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Other-Than-Temporary Impairment

 

The Company performs a quarterly analysis of its investments to determine if declines in market value are other-than-temporary. Further information regarding the Company’s detailed analysis and factors considered in establishing an other-than-temporary impairment on an investment is discussed within Note 4 - “Investments,” to the consolidated financial statements in Item 8 of this report.

 

As a result of the analysis performed by the Company, we recorded a write-down for an other-than-temporary impairment on a single equity investment resulting in a charge of $215 against net investment income for the year ended December 31, 2018. As this investment was held by our prior insurance subsidiary, Maison, this charge has been included as part of income from discontinued operations for the year ended December 31, 2018. We recorded this write-down as a result of our analysis of the investment’s operating losses for 2018, which showed a considerable decline when compared to its results for 2017. There were no write-downs for other-than-temporary impairment on our investments for the year ended December 31, 2019.

 

As of December 31, 2019, the Company did not hold any investments with estimated fair values less than their carrying amounts.

 

Current Income Taxes Recoverable/Payable

 

Current income taxes recoverable were $1,265 as of December 31, 2019, compared to a payable of $932 as of December 31, 2018, representing the estimate of both the Company’s state and federal income taxes due as of each date, less estimated payments made.

 

Net Deferred Taxes

 

The Company’s net deferred tax asset decreased from $265 as of December 31, 2018 to a net deferred liability of $106 as of December 31, 2019, due, in large, to the sale of the Maison Business on December 2, 2019. Net deferred income taxes are comprised of approximately $684 of deferred tax assets, net of approximately $790 of deferred tax liabilities as of December 31, 2019, compared to $3,228 of deferred tax assets, net of $1,949 of deferred tax liabilities as of December 31, 2018. The balance of our deferred tax liabilities as of December 31, 2019 primarily related to the unrealized holding gains on the common shares of FedNat, which we received at the closing of the Asset Sale.

 

Other Assets

 

Other assets increased $121, to $188 as of December 31, 2019 from $67 as of December 31, 2018. The major components of other assets, and the change therein, are shown below.

 

   December 31,     
    2019    2018    Change 
Amount due under Investment Advisory Agreement with FedNat  $35   $   $35 
Amount due under Transition Services Agreement with FedNat   8        8 
Prepaid expenses   142    65    77 
Other receivables   3    2    1 
Total  $188   $67   $121 

 

Accounts Payable

 

Accounts payable increased $334, to $400 as of December 31, 2019, compared to $66 as of December 31, 2018 largely as a result of unpaid professional fees associated with the closing of Asset Sale.

 

Related Party Transactions

 

Termination of Performance Share Grant Agreement

 

On July 24, 2018, the Company entered into a Termination Agreement with Kingsway America, Inc. (“KAI”, a wholly owned subsidiary of KFSI), pursuant to which KAI agreed to terminate the Performance Share Grant Agreement (“PSGA”) dated March 26, 2014, between the Company and KAI in exchange for a payment of $1,000 from the Company, which has been recorded as a charge under the heading “Loss on repurchase of Series B Preferred Shares and Performance Shares” on the Company’s statement of income for the year ended December 31, 2018. As a result of the Termination Agreement, KAI has no further rights to any of the performance share grants contemplated by the PSGA. Under the PSGA, KAI was entitled to receive up to an aggregate of 375,000 shares of our common stock upon achievement of certain milestones regarding our stock price. Mr. Larry G. Swets, Jr., who is a director of the Company, also served as Chief Executive Officer and Director of KFSI on the date the Company entered into the Termination Agreement. The Company did not issue any shares under the PSGA while the PSGA was outstanding. The Termination Agreement was approved by a special committee of the Board of Directors of the Company consisting solely of independent directors.

 

21

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Termination of Management Services Agreement and Repurchase of Series B Preferred Shares

 

On February 24, 2015, we terminated our Management Services Agreement with 1347 Advisors, LLC (“1347 Advisors”), a wholly owned subsidiary of KFSI. In connection with the termination, we entered into a Performance Shares Grant Agreement, dated February 24, 2014, with 1347 Advisors pursuant to which we agreed to issue 100,000 shares of our common stock to 1347 Advisors subject to the achievement of certain events specified in the agreement. We also issued to 1347 Advisors 120,000 shares of our Series B preferred stock having a liquidation amount per share equal to $25.00 (the “Series B Preferred Shares”). 1347 Advisors subsequently transferred 60,000 of the Series B Preferred Shares to IWS Acquisition Corporation, an affiliate of KFSI.

 

On January 2, 2018, the Company entered into a Stock Purchase Agreement with 1347 Advisors and IWS Acquisition Corporation, pursuant to which the Company repurchased 60,000 Series B Preferred Shares from 1347 Advisors for an aggregate purchase price of $1,740, representing (i) the par value of the Series B Preferred Shares, or $1,500; and (ii) declared and unpaid dividends with respect to the dividend payment due on February 23, 2018, or $240. Also, in connection with the Stock Purchase Agreement, the Performance Shares Grant Agreement, dated February 24, 2015, between the Company and 1347 Advisors was terminated. No shares of common stock were issued to 1347 Advisors under the Performance Shares Grant Agreement. In connection with the termination of the Performance Shares Grant Agreement, the Company made a cash payment of $300 to 1347 Advisors. Upon termination of the MSA Agreement, the Company recorded an increase of approximately $54 to additional paid in capital, representing the estimated fair value of the Performance Shares Grant Agreement on the grant date. Upon the termination of the Performance Shares Grant Agreement, we compared the amount previously recorded in additional paid in capital to the amount paid to terminate the agreement, resulting in a reversal of the $54 originally recorded to additional paid in capital as well as a charge of $246 recorded to “Loss on repurchase of Series B Preferred Shares and Performance Shares” on the Company’s statement of income for the year ended December 31, 2018.

 

Pursuant to the Stock Purchase Agreement, the Company also agreed to repurchase the remaining 60,000 Series B Preferred Shares from IWS Acquisition Corporation for an aggregate purchase price of $1,500, upon the completion of a capital raise resulting in the Company receiving net proceeds in excess of $5,000. On February 28, 2018, the Company purchased the remaining 60,000 Series B Preferred Shares from IWS Acquisition Corporation for $1,500 with the proceeds from the Company’s 8.00% Cumulative Preferred Stock, Series A (the “Series A Preferred Stock”) offering (discussed under the heading “Shareholders’ Equity” below).

 

The Company applied the guidance outlined in ASC 480 – Distinguishing Liabilities from Equity in recording the issuance of the Series B Preferred Shares. Due to the fact that the shares had a mandatory redemption date of February 24, 2020, applicable guidance required that we classify the shares as a liability on our consolidated balance sheet, rather than recording the value of the shares in equity. The resulting liability was recorded at a discount to the $4,200 redemption amount plus dividends expected to be paid on the shares while outstanding, discounted for the Company’s estimated cost of equity (13.9%). As a result, total amortization in the amount of $33 has been charged to continuing operations for the year ended December 31, 2018. Upon our repurchase of the Series B Preferred Shares in both January and February 2018, we compared the amortized carrying amount of the liability to the amount paid to repurchase the shares, resulting in a charge of $366 to “Loss on repurchase of Series B Preferred Shares and Performance Shares” on the Company’s statement of income for the year ended December 31, 2018.

 

Investment in Limited Partnership and Limited Liability Company

 

On April 21, 2016, KFSI completed the acquisition of Argo Management Group LLC (“Argo”). Argo’s primary business is to act as the Managing Member of Argo Holdings Fund I, LLC, an investment fund in which the Company has committed to invest $500, of which the Company has invested $341 as of December 31, 2019. The managing member of Argo, Mr. John T. Fitzgerald, was appointed as President and Chief Executive Officer of KFSI on September 5, 2018 and has served on its board of directors since April 21, 2016.

 

22

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

As of December 31, 2019, the Company has invested $2,719 as a limited partner in Metrolina Property Income Fund, LP (the “Fund”). The general partner of the Fund, FGI Metrolina GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the Chairman and Co-Chairman of the Board of Directors of the Company, respectively. As of December 31, 2019, the Company’s investment represents a 49% ownership stake in the Fund.

 

Public Offering of Preferred Stock

 

A fund managed by Fundamental Global Investors, LLC, one of the Company’s significant stockholders, purchased an aggregate of 34,620 shares of the Series A Preferred Stock in the Company’s public offering of the shares, at the public offering price of $25.00 per share, including 31,680 shares purchased for a total of approximately $792 on February 28, 2018, the closing date of the offering, and 2,940 shares purchased for a total of approximately $74 on March 26, 2018 in connection with the underwriters’ exercise of their over-allotment option. In addition, CWA Asset Management Group, LLC, of which 50% is owned by Fundamental Global Investors, LLC, holds 56,846 shares of the Series A Preferred Stock for customer accounts (including 44 shares of the Series A Preferred Stock held by Mr. Cerminara in a joint account with his spouse) purchased at the public offering price in connection with the underwriters’ exercise of their over-allotment option. No discounts or commissions were paid to the underwriters on the purchase of these shares.

 

Investment Advisory Agreement

 

Pursuant to the Investment Advisory Agreement entered into upon closing of the Asset Sale, Fundamental Global Advisors LLC, a wholly-owned subsidiary of the Company (“Advisor”), was formed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay Advisor an annual fee of $100. FGI Funds Management, LLC will serve as the manager to the Advisor. FGI Funds Management, LLC is an affiliate of Fundamental Global Investors, LLC, the Company’s largest stockholder. The term of the Investment Advisory Agreement is five years.

 

Off Balance Sheet Arrangements

 

None.

 

Shareholders’ Equity

 

Offering of 8.00% Cumulative Preferred Stock, Series A

 

On February 28, 2018, we completed the underwritten public offering of 640,000 preferred shares designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Series A Preferred Stock”). Also, on March 26, 2018, we issued an additional 60,000 shares of Series A Preferred Stock pursuant to the exercise of the underwriters’ over-allotment option. Dividends on the Series A Preferred Stock are cumulative from the date of original issue and will be payable quarterly on the 15th day of March, June, September and December of each year, commencing on June 15, 2018, when, as and if declared by our Board of Directors or a duly authorized committee thereof. The first dividend record date for the Series A Preferred Stock was on June 1, 2018. For the years ended December 31, 2019 and 2018, the Board of Directors declared dividends totaling $1,400 and $1,108, respectively, representing all quarterly amounts due for the Preferred Stock. Dividends are payable out of amounts legally available therefor at a rate equal to 8.00% per annum per $25.00 of stated liquidation preference per share, or $2.00 per share of Preferred Stock per year.

 

The Series A Preferred Stock is not redeemable prior to February 28, 2023. On and after that date, the stock will be redeemable at our option, for cash, in whole or in part, at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends to, but not including, the date of redemption. The Series A Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption. The stock will generally have no voting rights except as provided in the Certificate of Designations or as from time to time provided by law. The affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock and each other class or series of voting parity stock will be required at any time for us to authorize, create or issue any class or series of our capital stock ranking senior to the Series A Preferred Stock with respect to the payment of dividends or the distribution of assets on liquidation, dissolution or winding up, to amend any provision of our Certificate of Incorporation so as to materially and adversely affect any rights of the Series A Preferred Stock or to take certain other actions.

 

23

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

The shares of Series A Preferred Stock are listed on the Nasdaq Stock Market under the symbol “PIHPP”, and trading of the shares commenced on March 22, 2018. Net proceeds received by Company were approximately $16,500. The Company used $1,500 of the net proceeds to repurchase 60,000 shares of its Series B Preferred Shares from IWS Acquisition Corporation, as previously discussed under the heading “Related Party Transactions”.

 

The table below presents the primary drivers behind the changes to total shareholders’ equity for the years ended December 31, 2019 and 2018.

 

   Preferred Shares Outstanding   Common Shares Outstanding   Treasury Shares   Total Shareholders’ Equity 
Balance, January 1, 2018   120,000    5,984,766    151,359   $46,802 
                     
Redemption of Series B Preferred Shares   (120,000)            
Issuance of Series A Preferred Stock   700,000            16,493 
Repurchase of Performance Shares               (54)
Dividends declared on Series A Preferred Stock               (1,108)
Stock compensation expense        27,998        337 
Net income               804 
Unrealized loss on investment portfolio (net of income taxes)               (527)
Balance, December 31, 2018   700,000    6,012,764    151,359    62,747 
                     
Adoption of new accounting standards               10 
Dividends declared on Series A Preferred Stock ($2.00 per share)               (1,400)
Stock compensation expense       53,184        414 
Net income               311 
Gains on investment portfolio (net of income taxes)               833 
Balance, December 31, 2019   700,000    6,065,948    151,359    62,915 

 

24

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Results of Operations

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

Dollar amounts included in the “Results of Operations” are presented in thousands, except as otherwise specified. Net Investment Income

 

Net investment income increased from $1,208 to $5,587 for the years ended December 31, 2018 and 2019, respectively, primarily as a result of the unrealized holding gains on the 1,773,102 shares of FNHC common stock which the Company received upon the closing of the Asset Sale. Net investment income for the years ended December 31, 2019 and 2018 is as follows:

 

   Year Ended December 31, 
   2019   2018 
Investment income:          
Unrealized holding gains on FNHC common stock  $3,987   $ 
Interest on surplus notes issued by Maison   1,708    1,142 
Income from limited liability investments   101     
Loss on assignment of limited liability investments   (239)    
Other   55    82 
Gross investment income   5,612    1,224 
Investment expenses   (25)   (16)
Net investment income  $5,587   $1,208 

 

As of March 26, 2020, the estimated fair value of the Company’s 1,773,102 shares of FNHC common stock was $20,320, resulting in an unrealized, pre-tax holding loss of $5,180 as of that date.

 

Other Income

 

Other income was $10 compared to $0 for the years ended December 31, 2019 and 2018, respectively and is comprised solely of fees earned under the Investment Advisory Agreement between our wholly-owned subsidiary, Fundamental Global Advisors, LLC and FedNat Holding Company.

 

General and Administrative Expenses

 

General and administrative expenses increased $1,331 to $2,476 for the year ended December 31, 2019, compared to $1,145 for the year ended December 31, 2018. The increase was primarily due to professional fees associated with developing our new business plan following the closing of the Asset Sale along with the fees associated with forming our new investment advisory and reinsurance subsidiaries.

 

Series B Preferred Shares and Performance Shares

 

As previously discussed under the heading “Related Party Transactions,” we recorded amortization charges of $33 as well as a charge of $1,612 for the year ended December 31, 2018, which were related to our issuance and repurchase of our Series B Preferred Shares and our Performance Shares.

 

Income Tax Expense (Benefit)

 

Our actual effective tax rate varies from the statutory federal income tax rates as shown in the following table.

 

   Year Ended December 31, 
   2019   2018 
   Amount   %   Amount   % 
                 
Provision for taxes at U.S. statutory marginal income tax rate of 21%  $121    21.0%  $60    21.0%
Net operating loss carryback   (213)   (36.9)%       %
State income tax (net of federal benefit)   265    45.9%   (632)   (221.0)%
Share-based compensation   77    13.3%   35    12.2%
Other   17    3.0%   19    6.7%
Income tax expense (benefit)  $267    46.2%  $(518)   (181.1)%
                     
Income tax expense (benefit) – from continuing operations  $738        $(308)     
Income tax benefit – from discontinued operations   (471)        (210)     
Total income tax expense (benefit)  $267    46.2%  $(518)   (181.1)%

 

25

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

Discontinued Operations

 

As previously discussed, on December 2, 2019, we completed the sale of all of the issued and outstanding equity of our three former wholly-owned subsidiaries, Maison, MMI and ClaimCor. Accordingly, the Company has classified the Maison Business as discontinued operations for all periods presented in this report as set forth in ASC 205-20 – Discontinued Operations.

 

The following table presents a reconciliation of the major classes of line items constituting pretax profit (loss) of discontinued operations to the after-tax profit (loss) of discontinued operations that are presented in the Company’s consolidated statement of operations for the years ended December 31, 2019 and 2018.

 

   Year ended December 31, 
   2019   2018 
Gain from sale of the Maison Business          
Cash consideration received from sale  $25,500   $ 
Stock consideration received from sale   25,500     
Total consideration received from sale   51,000     
Less:          
Carrying value of the Maison Business on December 1, 2019   39,099     
Transaction and other sale related costs   2,818    50 
Total pre-tax reductions   41,917    50 
Pre-tax gain (loss) on sale   9,083    (50)
Income tax expense   2,017     
Net gain (loss) from sale of the Maison Business  $7,066   $(50)
           
Net premiums earned  $49,691   $54,357 
Net investment income   4,354    1,552 
Other income   2,854    2,246 
Net losses and loss adjustment expenses   (41,634)   (27,413)
Amortization of deferred policy acquisition costs   (15,983)   (15,313)
General and administrative expenses   (9,200)   (12,369)
Interest expense on surplus notes due to affiliate   (1,708)   (1,142)
Pretax profit (loss) from the Maison Business   (11,626)   1,918 
Income tax benefit   (2,488)   (210)
Income (loss) from the Maison Business, net of taxes  $(9,138)  $2,128 
           
Net profit (loss) from discontinued operations, net of taxes  $(2,072)  $2,078 

 

Net Income

 

Net income for the years ended December 31, 2019 and 2018 is as shown in the following table.

 

  

Year ended

December 31,

 
   2019   2018 
Net income (loss) from continuing operations  $2,383   $(1,274)
Income (loss) from discontinued operations, net of income taxes   (2,072)   2,078 
Net income  $311   $804 
           
Diluted earnings (loss) per common share          
Continuing operations  $0.16   $(0.40)
Discontinued operations   (0.34)   0.35 
Loss attributable to common shareholders  $(0.18)  $(0.05)

 

Liquidity and Capital Resources

 

Dollar amounts included in the “Liquidity and Capital Resources” are presented in thousands, except as otherwise specified.

 

The purpose of liquidity management is to ensure that 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 from the cash proceeds of the Asset Sale, by funds generated from operations, and from the proceeds from the sales of our common and preferred stock. Cash provided from these sources has historically been used for loss and loss adjustment expense payments as well as other operating expenses.

 

26

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC.

 

On February 28, 2018, we completed the underwritten public offering of preferred shares designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share (the “Preferred Stock”), as previously discussed under the heading “Shareholders Equity”. In addition, on March 26, 2018, we issued an additional 60,000 shares of Preferred Stock in connection with the underwriters’ exercise of their over-allotment option. Net proceeds received by the Company were approximately $16,400. The Company used $1,500 of the net proceeds to repurchase 60,000 shares of its Series B Preferred Stock from IWS Acquisition Corporation, as previously discussed under the heading “Related Party Transactions.

 

On April 23, 2018, the Company and MMI executed a Commercial Business Loan Agreement and related Promissory Note with Hancock Bank, a trade name for Whitney Bank (n/k/a Hancock Whitney Bank) (the “Lender”). The agreements provided for a revolving line of credit of $5,000. The line of credit expired pursuant to its terms on April 19, 2019. The Company and MMI did not draw down funds under the Loan Agreement during the period it was outstanding.

 

On August 20, 2019, the Company entered into a $7,000 Loan Agreement and a related Commercial Note (collectively, the “Loan Agreement”) with the Lender. The Loan Agreement provided for a non-revolving line of credit of $7,000.

 

On November 29, 2019, the Company entered into an Amended and Restated Loan Agreement and a related Amended and Restated Commercial Note (collectively, the “Amended and Restated Loan Agreement”) with Lender, which increased the existing non-revolving line of credit by an additional $10,000 (the “Line of Credit Increase”), resulting in an amended and restated non-revolving line of credit loan in the aggregate principal amount of up to $17,000. Immediately prior to the closing of the Asset Sale, the Company drew $7,000 under the line of credit, which was repaid to the Lender as of the closing of the Asset Sale. Upon repayment, the line of credit was terminated. Borrowings under the Loan Agreement bore interest at a rate per annum equal to 5.25%.

 

Upon the closing of the Asset Sale, the Company received cash consideration from FedNat in the amount of $25,500 as well as $18,728 representing the repayment of surplus notes and accrued interest due from Maison to the Company. Pursuant to the terms of the Purchase Agreement, at the closing, the Maison Business was required to have a consolidated net GAAP book value of at least $42,000 and was also required to settle any balances between the Company and the Maison Business. Additionally, prior to the closing of the Asset Sale, Maison was a limited partner in two limited partnerships and also had a limited interest in a limited liability company (collectively, the “Funds”). Pursuant to the terms of the Purchase Agreement, Maison assigned its interests in the Funds to the Company in exchange for the statutory carrying value of the Funds, paid in cash, at the closing of the Asset Sale. This resulted in net cash proceeds to the Company of $24,778, as shown in the table below.

 

Cash consideration from FedNat  $25,500 
Cash from FedNat to repay outstanding surplus note obligations   18,728 
Capital contribution from the Company to the Maison Business to meet GAAP book value requirement   (9,057)
Transaction bonuses paid to current and former executive officers of the Company   (605)
Company acquisition of the Funds from Maison   (3,218)
Payment of intercompany federal tax obligations   (3,702)
Payment of transaction expenses directly associated with the Asset Sale   (2,868)
Net cash proceeds  $24,778 

 

Cash Flows

 

The following table summarizes the Company’s consolidated cash flows for the years ended December 31, 2019 and 2018.

 

   Year ended December 31, 
Summary of Cash Flows  2019   2018 
Cash and cash equivalents – beginning of period  $30,902   $23,575 
           
Net cash provided (used) by operating activities   (20,638)   24,794 
Net cash provided (used) by investing activities   19,684    (29,247)
Net cash provided (used) by financing activities   (1,439)   11,780 
Net increase (decrease) in cash and cash equivalents   (2,393)   7,327 
           
Cash and cash equivalents – end of period  $28,509   $30,902 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable.

 

27

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to the Consolidated Financial Statements   
    
Report of Independent Registered Public Accounting Firm  29
Consolidated Balance Sheets as of December 31, 2019 and 2018  30
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2019 and 2018  31
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2019 and 2018  32
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018  33
Notes to the Consolidated Financial Statements  34

 

28

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Shareholders and Board of Directors

1347 Property Insurance Holdings, Inc.

St. Petersburg, FL

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of 1347 Property Insurance Holdings, Inc. (the “Company”) and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Emphasis of Matter – Sale of Substantially All Business Operations

 

As discussed in Notes 1 and 4 to the consolidated financial statements, the Company completed the sale of all of the issued and outstanding equity of its three former wholly-owned subsidiaries, which represented substantially all of the Company’s 2019 and 2018 business operations. Accordingly, these three former wholly-owned subsidiaries have been presented as discontinued operations for all periods presented.

 

/s/ BDO USA, LLP

 

We have served as the Company’s auditor since 2012.

Grand Rapids, Michigan

March 30, 2020

 

29

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

($ in thousands, except share and per share data)

 

  

December 31,

2019

  

December 31,

2018

 
ASSETS          
Equity securities, at fair value (cost basis of $25,500 and $0)  $29,487   $ 
Limited liability investments   4,005    2,987 
Cash and cash equivalents   28,509    3,666 
Current income taxes recoverable   1,265     
Deferred tax asset, net       265 
Surplus notes receivable from affiliate       18,244 
Other assets   188    67 
Assets of discontinued operations (Note 4)       144,569 
Total assets  $63,454   $169,798 
           
LIABILITIES          
Accounts payable  $400   $66 
Current income taxes payable       932 
Deferred tax liability, net   106     
Due to affiliates       2,698 
Other liabilities   33    36 
Liabilities of discontinued operations (Note 4)       103,319 
Total liabilities  $539   $107,051 
           
Commitments and contingencies (Note 15)          
           
SHAREHOLDERS’ EQUITY          
Series A Preferred Shares, $25.00 par value, 1,000,000 shares authorized; 700,000 shares issued and outstanding as of both periods  $17,500   $17,500 
Common stock, $0.001 par value; 10,000,000 shares authorized; 6,217,307 and 6,164,123 shares issued as of December 31, 2019 and 2018, respectively and, 6,065,948 and 6,012,764 shares outstanding as of December 31, 2019 and 2018, respectively   6    6 
Additional paid-in capital   46,754    46,340 
Retained earnings (accumulated deficit)   (336)   639 
Accumulated other comprehensive loss, net of tax       (729)
    63,924    63,756 
Less: treasury stock at cost, 151,359 shares as of December 31, 2019 and 2018   (1,009)   (1,009)
Total shareholders’ equity   62,915    62,747 
Total liabilities and shareholders’ equity  $63,454   $169,798 

 

See accompanying notes to consolidated financial statements.

 

30

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income

($ in thousands, except share and per share data)

 

   Year ended December 31, 
   2019   2018 
Revenue:        
Net investment income  $5,587   $1,208 
Other income   10     
Total revenue   5,597    1,208 
           
Expenses:          
General and administrative expenses   2,476    1,145 
Accretion of discount on Series B Preferred Shares       33 
Loss on repurchase of Series B Preferred Shares and Performance Shares       1,612 
Total expenses   2,476    2,790 
           
Income (Loss) from continuing operations before income tax expense   3,121    (1,582)
Income tax expense (benefit)   738    (308)
Net income (loss) from continuing operations   2,383    (1,274)
Discontinued operations (Note 4):          
Gain (Loss) from sale of the Maison Business, net of taxes   7,066    (50)
Income (Loss) from the Maison Business, net of taxes   (9,138)   2,128 
Net profit (loss) from discontinued operations, net of taxes   (2,072)   2,078 
Net income  $311   $804 
           
Dividends declared on Series A Preferred Shares   1,400    1,108 
Income (loss) attributable to common shareholders  $(1,089)  $(304)
           
Basic and diluted net earnings (loss) per common share:          
Continuing operations  $0.16   $(0.40)
Discontinued operations  $(0.34)  $0.35 
Loss per share attributable to common shareholders  $(0.18)  $(0.05)
           
Weighted average common shares outstanding:          
Basic and diluted   6,018,542    5,989,742 
           
Consolidated Statements of Comprehensive Income          
           
Net income  $311   $804 
Unrealized gains (losses) on investments available for sale, net of income taxes   1,342    (527)
Comprehensive income  $1,653   $277 

 

See accompanying notes to consolidated financial statements.

 

31

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

($ in thousands, except share amounts)

 

                                   Accumulated     
                                   Other   Total 
   Preferred Stock   Common Stock   Treasury Stock   Paid-in   Retained   Comprehensive   Shareholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Earnings   Loss   Equity 
January 1, 2018      $    5,984,766   $6    151,359   $(1,009)  $47,064   $910   $(169)  $46,802 
                                                   
Stock based compensation           27,998                337            337 
Issuance of Series A Cumulative Preferred Stock   700,000    17,500                    (1,007)           16,493 
Repurchase of Performance Shares                           (54)           (54)
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018                               33    (33)    
Dividends declared on Series A Preferred Shares ($1.58 per share)                               (1,108)       (1,108)
Net income                               804        804 
Other comprehensive loss                                   (527)   (527)
Balance, December 31, 2018   700,000   $17,500    6,012,764   $6    151,359   $(1,009)  $46,340   $639   $(729)  $62,747 
                                                   
Cumulative effect of adoption of ASU 2016-01                               104    (104)    
Cumulative effect of adoption of Topic 842                               10        10 
Stock based compensation           53,184                414            414 
Dividends declared on Series A Preferred Shares ($2.00 per share)                               (1,400)       (1,400)
Net income                               311        311 
Other comprehensive income                                   1,342    1,342 
Unrealized gains realized upon sale of Maison Business                                   (509)   (509)
Balance, December 31, 2019   700,000   $17,500    6,065,948   $6    151,359   $(1,009)  $46,754   $(336)  $   $62,915 

 

See accompanying notes to consolidated financial statements

 

32

 

 

1347 PROPERTY INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

($ in thousands)

 

   Year ended December 31, 
   2019   2018 
Cash provided by (used in):          
Operating activities:          
Net income  $311   $804 
Net (income) loss from discontinued operations, net of income taxes   2,072    (2,078)
Adjustments to reconcile net income to net cash provided by operating activities:          
Unrealized holding gains on equity investments   (3,998)    
Accretion of discount on Series B Preferred Shares       33 
Loss on repurchase of Series B Preferred Shares and Performance Shares       612 
Net deferred income taxes   371    (26)
Stock compensation expense   414    337 
Changes in operating assets and liabilities:          
Accrued interest on surplus notes due from affiliate   244    (22)
Other assets   (121)   1 
Accounts payable and other accrued expenses   331    (44)
Current income taxes payable   (2,197)   (107)
Amounts due to affiliates   (2,698)   2,647 
Net cash provided (used) by operating activities – continuing operations   (5,271)   2,157 
Net cash provided (used) by operating activities – discontinued operations   (15,367)   22,637 
Net cash provided (used) by operating activities   (20,638)   24,794 
           
Investing activities:          
Proceeds from repayment of surplus notes due from affiliates   18,000    1,100 
Issuance of surplus notes to affiliates       (8,450)
Net purchases of furniture and equipment   (3)    
Purchase of limited liability investments from affiliates   (1,007)   (2,987)
Net cash provided (used) by investing activities – continuing operations   16,990    (10,337)
Net cash provided (used) by investing activities – discontinued operations   2,694    (18,910)
Net cash provided (used) by investing activities   19,684    (29,247)
           
Financing activities:          
Net proceeds from the issuance of Series A Preferred Stock       16,493 
Repurchase of Series B Preferred Shares and Performance Shares       (3,300)
Payment of dividends on preferred shares   (1,400)   (1,348)
Net cash provided (used) by financing activities – continuing operations   (1,400)   11,845 
Net cash used by financing activities – discontinued operations   (39)   (65)
Net cash provided (used) by financing activities   (1,439)   11,780 
           
Net increase (decrease) in cash and cash equivalents   (2,393)   7,327 
Cash and cash equivalents at beginning of period   30,902    23,575 
Cash and cash equivalents at end of period  $28,509   $30,902 
           
Supplemental disclosure of cash flow information:          
Net cash paid (refunds received) during the period for income taxes  $(628)  $1,606 
Non-cash financing activities:          
Obligation for the acquisition of vehicles under lease agreements  $   $118 

 

See accompanying notes to consolidated financial statements.

 

33

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

1. Nature of Business

 

1347 Property Insurance Holdings, Inc. (“PIH”, the “Company”, “we”, or “us”) is a holding company which previously specialized in providing personal property insurance in coastal markets including those in Louisiana, Texas and Florida. We were incorporated on October 2, 2012 in the State of Delaware under the name Maison Insurance Holdings, Inc., and changed our legal name to 1347 Property Insurance Holdings, Inc. on November 19, 2013. On March 31, 2014, we completed an initial public offering of our common stock. Prior to the offering, we were a wholly owned subsidiary of Kingsway America Inc., which, in turn, is a wholly owned subsidiary of Kingsway Financial Services Inc., or KFSI, a publicly owned Delaware holding company. As of December 31, 2019, KFSI and its affiliates held warrants that, if exercised, would cause KFSI and its affiliates to hold an approximate 20% ownership interest in our common stock. In addition, as of December 31, 2019, Fundamental Global Investors, LLC and its affiliates, or FGI, beneficially owned approximately 45% of our outstanding shares of common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FGI, and Lewis M. Johnson, Co-Chairman of our Board of Directors, serves as President, Co-Founder and Partner of FGI.

 

On December 2, 2019, we completed the sale of all of the issued and outstanding equity of three of the Company’s wholly-owned subsidiaries, Maison Insurance Company (“Maison”), Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor” and, together with Maison and MMI, the “Maison Business”), to FedNat Holding Company, a Florida corporation (“FedNat”), pursuant to the terms and conditions of the Equity Purchase Agreement, dated as of February 25, 2019 (the “Purchase Agreement”), by and among the Company and the Maison Business, on the one hand, and FedNat, on the other hand (the “Asset Sale”).

 

As consideration for the Asset Sale, FedNat paid the Company $51,000, consisting of $25,500 in cash and $25,500 in FedNat’s common stock, or 1,773,102 shares of common stock. The stock consideration was determined by dividing $25,500 by the weighted average closing price per share of FedNat’s common stock on the Nasdaq Stock Market during the 20-trading day period immediately preceding December 2, 2019. In addition, upon the closing of the Asset Sale, $18,000 of outstanding surplus note obligations payable by Maison to the Company, plus all accrued but unpaid interest, was repaid to the Company.

 

On December 31, 2019, the shares of FedNat common stock issued to the Company were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the terms of the Registration Rights Agreement entered into by the Company and FedNat at the closing of the Asset Sale.

 

In addition to the Registration Rights Agreement, the Company and FedNat entered into a Standstill Agreement, a Reinsurance Capacity Right of First Refusal Agreement (the “Reinsurance Agreement”), an Investment Advisory Agreement and a Transition Services Agreement at the closing of the Asset Sale.

 

Standstill Agreement

 

The Standstill Agreement imposes certain limitations and restrictions with respect to the voting securities of FedNat (including shares of FedNat common stock) that are owned or held beneficially or of record by the Company. Under the Standstill Agreement, the Company has agreed to vote all of the voting securities of FedNat beneficially owned by the Company in accordance with the recommendation of the board of directors of FedNat with respect to any matter that is before the stockholders of FedNat for a vote by such stockholders. The Standstill Agreement imposes limitations on the sale of voting securities of FedNat held by the Company and restricts the Company from taking certain actions as a holder of voting securities of FedNat. The term of the Standstill Agreement is five years.

 

For insurance regulatory purposes, the Company has waived any rights that it may have to exercise control of FedNat.

 

Reinsurance Capacity Right of First Refusal Agreement

 

The Reinsurance Agreement provides the Company with a right of first refusal to sell reinsurance coverage to the insurance company subsidiaries of FedNat, providing reinsurance on up to 7.5% of any layer in FedNat’s catastrophe reinsurance program, subject to the annual reinsurance limit of $15,000, on the terms and subject to the conditions set forth in the Reinsurance Agreement. All reinsurance sold by the Company pursuant to the right of first refusal, if any, will be memorialized in an agreement in such form and subject to such terms and conditions as are customary in the property and casualty insurance industry. The Reinsurance Agreement is assignable by the Company subject to conditions set forth in the agreement. The term of the Reinsurance Agreement is five years.

 

34

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

Investment Advisory Agreement

 

Pursuant to the Investment Advisory Agreement, Fundamental Global Advisors LLC, a wholly-owned subsidiary of the Company (“Advisor”), was formed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay Advisor an annual fee of $100. FGI Funds Management, LLC will serve as the manager to the Advisor. FGI Funds Management, LLC is an affiliate of Fundamental Global Investors, LLC, the Company’s largest stockholder. The term of the Investment Advisory Agreement is five years.

 

Transition Services Agreement

 

To facilitate the transition following the Asset Sale, the Company and FedNat entered into a Transition Services Agreement, pursuant to which the Company has agreed to provide certain transition accounting services to FedNat and the Insurance Companies, as requested, and FedNat will arrange for certain prior employees of the Company who became employees of the FedNat in connection with the Asset Sale to provide transition accounting services to the Company, as requested, on the terms and conditions set forth in the Transition Services Agreement.

 

Business Going Forward

 

Going forward, the Company intends to operate as a diversified holding company of reinsurance and investment management businesses. Subject to the approval of the Company’s stockholders at the Company’s 2020 Annual Meeting, the Company intends to change its name to “Fundamental Global Financial Corporation” to align with its future business plans. Fundamental Global Financial Corporation (“FGFC”) plans to carry out its business through three primary avenues, insurance, asset management, and real estate. The Company also intends to change the ticker symbols for its common stock and 8.00% cumulative preferred stock, Series A, and has reserved with Nasdaq the ticker symbols “FGI” and “FGIPP,” respectively.

 

Insurance:

 

The Company is in the process of forming a wholly owned reinsurance subsidiary, Fundamental Global Reinsurance Ltd., to provide specialty property and casualty reinsurance. Fundamental Global Reinsurance Ltd. is expected to have a Class B (iii) insurer license in accordance with the terms of The Insurance Law, 2010 and underlying regulations thereto and will be subject to regulation by the Cayman Islands Monetary Authority.

 

Asset Management:

 

The Company has formed a wholly owned subsidiary, Fundamental Global Advisors, LLC to serve as an investment advisor to FedNat Holding Company under the investment advisory agreement entered into at the closing of the Asset Sale. In addition, the Company intends to form a joint venture with Fundamental Global Investors, LLC to sponsor investment advisors that will manage private funds ranging the full spectrum of alternative equities, fixed income, private equity and real estate. FGFC will seek to benefit from the growth of the assets under management of the investment advisors it sponsors and the performance of the funds they manage. 

 

Real Estate:

 

FGFC plans to purchase controlling interests in income producing real estate assets. FGFC will seek to benefit from underlying rental income on long-term leases with high quality tenants as well as the capital appreciation from the underlying real estate assets. 

 

35

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

2. Significant Accounting Policies

 

Basis of Presentation:

 

These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

Principles of Consolidation and Discontinued Operations:

 

Due to the sale of all of the issued and outstanding equity of Maison, MMI and ClaimCor on December 2, 2019, these operations have been classified as discontinued operations in the Company’s financial statements presented herein. Certain transactions between the Company and its subsidiaries, which have historically been eliminated upon consolidation, are shown on a gross basis in the accompanying financial statements as such transactions have occurred between discontinued operations and those operations which the Company intends to continue to utilize. These items include surplus notes in the amount of $18,000 plus approximately $728 in accrued interest, all of which was settled upon the closing of the Asset Sale. These notes, which had been issued by Maison to the Company, have been reflected as both an asset of continuing operations and liability of discontinued operations on the Company’s consolidated balance sheet as of December 31, 2018. Interest associated with these surplus notes has been recorded as part of net investment income from continuing operations as well as interest expense as part of discontinued operations on the Company’s consolidated statement of operations for the years ended December 31, 2019 and 2018. Similarly, amounts due from the Company to Maison upon the assignment of certain of Maison’s investments to the Company have been reflected as an asset of continuing operations under the heading “Limited liability investments”, as well as a corresponding liability under the heading “Due to affiliates” on the Company’s consolidated balance sheet as of December 31, 2018. Pursuant to the terms of the Purchase Agreement, this assignment of investments was settled, in cash, prior to closing of the transaction. All other significant intercompany balances and transactions have been eliminated upon consolidation.

 

The Use of Estimates in the Preparation of Consolidated Financial Statements:

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in estimates are recorded in the accounting period in which the change is determined. The critical accounting estimates and assumptions in the accompanying consolidated financial statements include the provision for loss and loss adjustment expense reserves, the valuation of fixed income securities and limited liability investments, valuation of net deferred income taxes, the valuation of various securities we have issued in conjunction with the termination of the management services agreement with 1347 Advisors, LLC, the valuation of deferred policy acquisition costs, and stock-based compensation expense.

 

Investments:

 

Investments in fixed income securities were classified as available-for-sale and reported at estimated fair value prior to the sale of our fixed income portfolio to FedNat. Unrealized gains and losses on fixed income securities were included in accumulated other comprehensive income (loss), net of tax, until sold or an other-than-temporary impairment is recognized, at which point the cumulative unrealized gains or losses were transferred to the consolidated statement of income. Effective January 1, 2019, we adopted Accounting Standards Update No. 2016-01, Financial Instruments–Overall, requiring us to recognize unrealized gains and losses on our equity securities through income. See Note 3 – Recently Adopted and Issued Accounting Standards for additional information. As of December 31, 2018, our fixed income and equity securities were held by the Company’s insurance subsidiary, Maison, and accordingly have been listed as part of assets of discontinued operations on the Company’s consolidated balance sheet.

 

Limited liability investments include investments in a limited partnership and a limited liability company for which there does not exist a readily determinable fair value. The Company accounts for these investments at their cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer. Any profit distributions the Company receives on these investments is included in income.

 

Limited liability investments also include an investment where the Company is a limited partner in a limited partnership, which we have determined to be a variable interest entity (VIE), in which the Company is not the primary beneficiary. The Company does not have a controlling financial interest in the limited partnership, but exerts significant influence over the entity’s operating and financial policies as it owns an economic interest of approximately 49%. Accordingly, the Company has accounted for this investment under the equity method of accounting, recognizing any unrealized gains or losses on the investment through income. See Note 5 for additional information on the Company’s investment in the VIE.

 

36

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

Other investments consisted of short-term investments, with original maturities between three months and one year, reported at cost, which approximates estimated fair value due to their short-term nature. Other investments also included a fixed rate certificate of deposit with an original maturity of 15 months. These investments were held by the Company’s insurance subsidiary, Maison and accordingly have been listed as part of assets of discontinued operations on the Company’s consolidated balance sheet as of December 31, 2018.

 

Realized gains and losses on sales of investments are determined on a first-in, first-out basis, and are included in net investment income.

 

Interest income is included in net investment income and is recorded as it accrues.

 

The Company accounts for its investments using trade date accounting.

 

The Company conducts a quarterly review to identify and evaluate investments that show objective indications of possible impairment. Impairment is charged to the statement of income if the fair value of the instrument falls below its amortized cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

 

Cash and Cash Equivalents:

 

Cash and cash equivalents include cash and highly liquid investments with original maturities of 90 days or less.

 

Reinsurance:

 

Reinsurance premiums, losses, and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and losses ceded to other companies have been reported as a reduction of premium revenue and incurred net losses and loss adjustment expenses. A reinsurance recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies.

 

Income Taxes:

 

The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit).

 

37

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

Concentration of Credit Risk:

 

Financial instruments which potentially expose the Company to concentrations of credit risk include investments, cash, and premiums receivable prior to the Asset Sale transaction. The Company maintains its cash with a major U.S. domestic banking institution which is insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250. As of December 31, 2019 the Company held funds in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses related to these deposits.

 

The Company had not experienced significant losses related to premiums receivable from its policyholders nor from amounts due from reinsurers prior to the Asset Sale transaction on December 2, 2019.

 

Revenue Recognition:

 

Premium revenue, up to the date of the Asset Sale transaction was recognized on a pro rata basis over the term of the respective policy contract.

 

Service charges on installment premiums were recognized as income upon receipt of related installment payments and were reflected in other income up to the date of the Asset Sale transaction.

 

Revenue from policy fees was deferred and recognized over the term of the respective policy period, with revenue reflected in other income up to the date of the Asset Sale transaction.

 

Ceded premiums were charged to income over the applicable term of the various reinsurance contracts with third party reinsurers.

 

Stock-Based Compensation:

 

The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – Stock Compensation which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional paid-in capital.

 

The Company has also issued restricted stock units (“RSUs”) to certain of its employees and directors which have been accounted for as equity-based awards since, upon vesting, they are required to be settled in the Company’s common shares. We have used the fair value of the Company’s common stock on the date the RSUs were issued to estimate the grant date fair value of those RSUs which vest solely based upon the passage of time, as well as a Monte Carlo valuation model to estimate the fair value of those RSUs which vest solely upon market-based conditions. The fair value of each RSU is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest. In the case of those RSUs which vest upon market-based conditions, should the market-based condition be achieved prior to the expiration of the derived service period, any unrecognized cost will be recorded as compensation expense in the period in which the RSUs actually vest.

 

Based upon the Company’s historical forfeiture rates relating to stock options and RSUs, the Company has not made any adjustment to stock compensation expense for expected forfeitures as of December 31, 2019. See Note 7 for further disclosure.

 

Fair Value of Financial Instruments:

 

The carrying values of certain financial instruments, including cash, short-term investments, premiums receivable, accounts payable, and other accrued expenses approximate fair value due to their short-term nature. The Company measures the fair value of financial instruments in accordance with GAAP which defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 12 for further information on the fair value of the Company’s financial instruments.

 

38

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

Earnings (loss) Per Common Share:

 

Basic earnings (loss) per common share is computed using the weighted average number of shares outstanding during the respective period.

 

Diluted earnings (loss) per common share assumes conversion of all potentially dilutive outstanding stock options, restricted stock units, warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of diluted earnings (loss) per share if their effect is anti-dilutive.

 

3. Recently Adopted and Issued Accounting Standards

 

Recently Adopted Accounting Standards

 

ASU 2014-09: Revenue from Contracts with Customers:

 

The Financial Accounting Standards Board (the “FASB”) has issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, and related amendments ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-05 and ASU 2017-13 (collectively, “Topic 606”). Topic 606 creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Topic 606 became effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted Topic 606 on January 1, 2018, but since virtually all of the Company’s historic revenues related to insurance contracts and investment income, the adoption of Topic 606 did not have an impact on the Company’s revenues. The Company will continue to monitor and examine transactions that could potentially fall within the scope of Topic 606 as such transactions are consummated.

 

ASU 2018-02: Income Statement – Reporting Comprehensive Income:

 

In February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income. ASU 2018-02 was issued to address financial reporting issues that arose as a result of the passage of the Tax Cuts and Jobs Act, enacted into law by the United States federal government on December 22, 2017. Prior to the issuance of ASU 2018-02, GAAP required that deferred tax assets and liabilities be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance was applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income. Under ASU 2018-02, a reclassification from accumulated other comprehensive income to retained earnings is allowed for stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because ASU 2018-02 only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Company adopted the amendments in this update on January 1, 2018 and determined that ASU 2018-02 applied to the deferred taxes related to unrealized losses on its investment portfolio, which had been previously recognized in other comprehensive income. This resulted in the reclassification of $33 from accumulated other comprehensive income to retained earnings, representing the stranded tax effect on these losses.

 

ASU 2016-01: Financial Instruments-Overall:

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. Most significantly, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income. The Company adopted ASU 2016-01 effective January 1, 2019, resulting in a cumulative-effect adjustment to retained earnings in the amount of $104, representing the after-tax unrealized holding gains in accumulated other comprehensive income as of December 31, 2018, related to the Company’s available-for-sale equity securities. Subsequent changes in the estimated fair value of the Company’s equity securities have now been recognized in the Company’s consolidated statement of operations rather than in comprehensive income.

 

39

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

ASU 2016-02: Leases:

 

In February 2016, the FASB issued ASU 2016-02: Leases. ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under the previous guidance for lessees, leases were only included on the consolidated balance sheet if certain criteria, classifying the agreement as a capital lease, were met. This update requires the recognition of a right-of-use asset and a corresponding lease liability, discounted to present value, for all leases that extend beyond 12 months. The Company adopted this guidance effective January 1, 2019, using the modified retrospective method, under which we elected the package of practical expedients and transition provisions allowing us to bring our existing operating leases onto the Company’s consolidated balance sheet without adjusting comparative periods. We previously had operating leases for our facilities, which resulted in a cumulative-effect adjustment to retained earnings in the amount of $10. We also recognized both a right-of-use asset and lease liability in the amount of $314. Right-of-use assets are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease liabilities were recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense was recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

 

The Company’s right-of-use assets and lease liabilities were reflected in the Company’s consolidated balance sheet in assets of discontinued operations and liabilities of discontinued operations, respectively, prior to the Company’s leases being sold with the insurance operations of the business on December 2, 2019.

 

Accounting Standards Pending Adoption

 

ASU 2016-13: Financial Instruments – Credit Losses:

 

In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to provide financial statement users with more useful information regarding the expected credit losses on financial instruments held as assets. Under current GAAP, financial statement recognition for credit losses on financial instruments was generally delayed until the occurrence of the loss was probable. The amendments of ASU 2016-13 eliminate this probable initial recognition threshold and instead reflect an entity’s current estimate of all expected credit losses. The amendments also broaden the information that an entity must consider in developing its expected credit loss estimates for those assets measured at amortized cost by using forecasted information instead of the current methodology which only considered past events and current conditions. Under ASU 2016-13, credit losses on available-for-sale debt securities will be measured in a manner similar to current GAAP; however, the amendments require that credit losses be presented as an allowance against the investment, rather than as a write-down. The amendments also allow the entity to record reversals of credit losses in current period net income, which is prohibited under current GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted, however smaller reporting companies may delay adoption until January 2023. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

 

40

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

4. Discontinued Operations

 

As previously discussed, on December 2, 2019, we completed the sale of all of the issued and outstanding equity of our three former wholly-owned subsidiaries, Maison, MMI and ClaimCor. Accordingly, the Company has classified the Maison Business as discontinued operations for all periods presented in this report as set forth in ASC 205-20 – Discontinued Operations.

 

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities included in discontinued operations which are presented separately in the Company’s consolidated balance sheet as of December 31, 2018. On December 2, 2019 the assets and liabilities previously included in discontinued operations had been disposed of in the Asset Sale transaction.

 

  

December 31,

2018

 
Carrying amounts of assets included as part of discontinued operations     
Fixed income securities, at fair value (amortized cost of $77,366)  $76,310 
Equity investments, at fair value (cost of $3,130)   3,263 
Other investments   774 
Cash and cash equivalents   27,236 
Deferred policy acquisition costs   9,111 
Premiums receivable, net of allowance of $50   7,720 
Ceded unearned premiums   6,525 
Reinsurance recoverable on paid losses   530 
Reinsurance recoverable on loss reserves   5,661 
Current income taxes recoverable   2,051 
Deferred tax asset, net   1,014 
Due from affiliate   2,698 
Other assets   1,676 
Total assets of discontinued operations included in the Company’s consolidated balance sheet  $144,569 
      
Carrying amounts of liabilities included as part of discontinued operations     
Loss and loss adjustment expense reserves  $15,151 
Unearned premium reserves   51,907 
Ceded reinsurance premiums payable   9,495 
Agency commissions payable   802 
Premiums collected in advance   1,840 
Surplus notes plus interest due to affiliate   18,244 
Accrued premium taxes and assessments   3,059 
Other liabilities   2,821 
Total liabilities of discontinued operations included in the Company’s consolidated balance sheet  $103,319 

 

The following table presents a reconciliation of the major classes of line items constituting pretax profit (loss) of discontinued operations to the after-tax profit (loss) of discontinued operations that are presented in the Company’s consolidated statement of operations for the years ended December 31, 2019 and 2018.

 

   Year ended December 31, 
   2019   2018 
Gain from sale of the Maison Business          
Cash consideration received from sale  $25,500   $ 
Stock consideration received from sale   25,500     
Total consideration received from sale   51,000     
Less:          
Carrying value of the Maison Business on December 1, 2019   39,099     
Transaction and other sale related costs   2,818    50 
Total pre-tax reductions   41,917    50 
Pre-tax gain (loss) on sale   9,083    (50)
Income tax expense   2,017     
Net gain (loss) from sale of the Maison Business  $7,066   $(50)
           
Net premiums earned  $49,691   $54,357 
Net investment income   4,354    1,552 
Other income   2,854    2,246 
Net losses and loss adjustment expenses   (41,634)   (27,413)
Amortization of deferred policy acquisition costs   (15,983)   (15,313)
General and administrative expenses   (9,200)   (12,369)
Interest expense on surplus notes due to affiliate   (1,708)   (1,142)
Pretax profit (loss) from the Maison Business   (11,626)   1,918 
Income tax benefit   (2,488)   (210)
Income (loss) from the Maison Business, net of taxes  $(9,138)  $2,128 
           
Net profit (loss) from discontinued operations, net of taxes  $(2,072)  $2,078 

 

41

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

5. Investments

 

On December 2, 2019, the Company received 1,773,102 shares of FedNat Holding Company common stock (NASDAQ: FNHC), along with $25,500 cash as consideration for the Asset Sale. The stock consideration was determined by dividing $25,500 by the weighted average closing price per share of FedNat’s common stock on the Nasdaq Stock Market during the 20-trading day period immediately preceding December 2, 2019. As of March 26, 2020, the estimated fair value of the Company’s 1,773,102 shares of FNHC common stock was $20,320.

 

The Company’s limited liability investments are comprised of investments in a limited partnership and a limited liability company which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company had a total potential commitment of $935 related to these investments, of which the two entities have drawn down approximately $776 through December 31, 2019. The limited liability company is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI. The Company has accounted for these two investments at cost minus impairment, if any, as the investments do not have readily determinable fair values. For the year ended December 31, 2019, the Company has received profit distributions of $91 on these investments which has been included in income.

 

Additionally, on June 18, 2018, Maison invested $2,219 in FGI Metrolina Property Income Fund, LP (the “Fund”), which invests in real estate through a real estate investment trust which is wholly owned by the Fund. The general partner of the Fund, FGI Metrolina GP, LLC, is managed, in part, by Messrs. Cerminara and Johnson, the Chairman and Co-Chairman of the Board of Directors of the Company, respectively. The Company, a limited partner of the Fund, does not have a controlling financial interest in the Fund, but exerts significant influence over the entity’s operating and financial policies as it owns an economic interest of approximately 49%. Accordingly, the Company has accounted for this investment under the equity method of accounting, recognizing any unrealized holding gains or losses in income. The Company has committed to a total potential investment of up to $4,000 in the Fund. As of December 31, 2019, the total amount invested in the Fund was $2,719, while the carrying amount on the Company’s balance sheet was $3,229. The Company recognized an unrealized holding gain of $518 on this investment for the year ended December 31, 2019, and an unrealized holding loss of $8 on this investment for the year ended December 31, 2018.

 

Pursuant to the terms of the Purchase Agreement, Maison assigned all of its right, title and interest in each of the limited liability investments to the Company in exchange for the statutory carrying value of each investment (approximately $4,200). Accordingly, these investments have been included on the Company’s consolidated balance sheet as of December 31, 2019 and 2018 as part of continuing operations. Investment income resulting from the Company’s limited liability investments has also been included in net investment income as part of continuing operations, on the Company’s consolidated statement of operations for the years ended December 31, 2019 and 2018.

 

A summary of the Company’s investments as of December 31, 2019 and 2018 is as follows.

 

   Cost Basis  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Carrying

Amount

 
As of December 31, 2019                    
FNHC common stock  $25,500   $3,987   $   $29,487 
Limited liability investments   3,495    510        4,005 
Total investments  $28,995   $4,497   $   $33,492 
                     
As of December 31, 2018                    
Limited liability investments  $2,995   $   $(8)  $2,987 

 

42

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

Other-than-Temporary Impairment:

 

The establishment of an other-than-temporary impairment on an investment requires a number of judgments and estimates. The Company performs a quarterly analysis of the individual investments to determine if declines in market value are other-than-temporary. The analysis includes some or all of the following procedures as deemed appropriate by the Company:

 

  considering the extent, and length of time during which the market value has been below cost;
  identifying any circumstances which management believes may impact the recoverability of the unrealized loss positions;
  obtaining a valuation analysis from a third-party investment manager regarding the intrinsic value of these investments based upon their knowledge and experience combined with market-based valuation techniques;
  reviewing the historical trading volatility and trading range of the investment and certain other similar investments;
  assessing if declines in market value are other-than-temporary for debt instruments based upon the investment grade credit ratings from third-party credit rating agencies;
  assessing the timeliness and completeness of principal and interest payment due from the investee; and
  assessing the Company’s ability and intent to hold these investments until the impairment may be recovered.

 

The risks and uncertainties inherent in the assessment methodology used to determine declines in market value that are other-than-temporary include, but may not be limited to, the following:

 

  the opinions of professional investment managers could be incorrect;
the past trading patterns of investments may not reflect their future valuation trends;
  the credit ratings assigned by credit rating agencies may be incorrect due to unforeseen events or unknown facts related to the investee company’s financial situation; and
  the historical debt service record of an investment may not be indicative of future performance and may not reflect a company’s unknown underlying financial problems.

 

We have not recorded any write-downs for an other-than-temporary impairment on the equity investments listed in the table above. The Company did however record a write-down for an other-than-temporary impairment on a single equity investment resulting in a charge of $215 for the year ended December 31, 2018. As this investment was held by our former insurance subsidiary, Maison, this charge has been included as part of income from discontinued operations for the year ended December 31, 2018. We recorded this write-down as a result of our analysis of the investment’s operating losses for 2018, which showed a considerable decline when compared to its results for 2017.

 

Net investment income for the years ended December 31, 2019 and 2018 is as follows:

 

   Year Ended December 31, 
   2019   2018 
Investment income:          
Unrealized holding gains on FNHC common stock  $3,987   $ 
Interest on surplus notes issued by Maison   1,708    1,142 
Income from limited liability investments   101     
Loss on assignment of limited liability investments   (239)    
Other   55    82 
Gross investment income   5,612    1,224 
Investment expenses   (25)   (16)
Net investment income  $5,587   $1,208 

 

43

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

6. Income Taxes

 

A summary of income tax expense (benefit) is as follows:

 

   Year Ended December 31, 
   2019   2018 
Current income tax expense (benefit) – from continuing operations  $   $(282)
Current income tax expense (benefit) – from discontinued operations   (894)   832 
Total current income tax expense (benefit)   (894)   550 
           
Deferred income tax expense (benefit) – from continuing operations   738    (26)
Deferred income tax expense (benefit) – from discontinued operations   423    (1,042)
Total deferred income tax expense (benefit)   1,161    (1,068)
           
Total income tax expense (benefit) – from continuing operations   738    (308)
Total income tax expense (benefit) – from discontinued operations   (471)   (210)
Total income tax expense (benefit)  $267   $(518)

 

Actual income tax expense (benefit) differs from the income tax expense computed by applying the applicable effective federal and state tax rates to income before income tax expense as follows:

 

   Year Ended December 31, 
   2019   2018 
   Amount   %   Amount   % 
                 
Provision for taxes at U.S. statutory marginal income tax rate of 21%  $121    21.0%  $60    21.0%
Net operating loss carryback   (213)   (36.9)%       %
State income tax (net of federal benefit)   265    45.9%   (632)   (221.0)%
Share-based compensation   77    13.3%   35    12.2%
Other   17    3.0%   19    6.7%
Income tax expense (benefit)  $267    46.2%  $(518)   (181.1)%

 

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes as compared to the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets are as follows:

 

   As of December 31, 
   2019   2018 
Deferred income tax assets:          
Net operating loss carryforward  $463   $ 
Loss and loss adjustment expense reserves       87 
Unearned premium reserves       1,983 
Share-based compensation   214    257 
Deferred fee income       357 
State deferred taxes       247 
Investments       216 
Other   7    81 
Deferred income tax assets  $684   $3,228 
           
Deferred income tax liabilities:          
Investments  $789   $ 
Deferred policy acquisition costs       1,913 
State deferred taxes        
Other   1    36 
Deferred income tax liabilities  $790   $1,949 
           
Net deferred income tax asset (liability)  $(106)  $1,279 

 

As of December 31, 2019, the Company had net operating loss carryforwards (“NOLs”) for federal income tax purposes of approximately $2,204, which will be available to offset future taxable income. Approximately $2,069 of the Company’s NOLs will expire on December 31, 2039, while the remaining $135 of the Company’s NOLs do not expire under current tax law.

 

Due to the sale of the Maison Business on December 2, 2019, the December 31, 2019 financial statements show a net deferred tax liability in the amount of $106. Given that the Company’s deferred tax assets can be fully offset with deferred tax liabilities within the expiration window of the deferred tax assets, the Company has determined that it is more likely than not that its deferred tax assets will be utilized. As such, the Company has not set up a valuation allowance for its deferred tax assets as of December 31, 2019.

 

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1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

Based upon the results of the Company’s analysis and the application of ASC 740-10, management has determined that all material tax positions meet the recognition threshold and can be considered as highly certain tax positions. This is based on clear and unambiguous tax law, and the Company is confident that the full amount of each tax position will be sustained upon possible examination. Accordingly, the full amount of the tax positions is anticipated to be recognized in the financial statements.

 

The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for the years 2015 - 2018 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.

 

7. Equity Incentive Plans

 

In April 2014, the Company established an equity incentive plan for employees and directors of the Company (the “2014 Plan”). The purpose of the Plan was to create incentives designed to motivate recipients to significantly contribute toward the Company’s growth and success, to attract and retain persons of outstanding competence, and to provide such persons with an opportunity to acquire an equity interest in the Company.

 

The Plan allowed for the issuance of non-qualified stock options, restricted stock, restricted stock units (“RSUs”), performance shares, performance cash awards, and other stock-based awards and provided for the issuance of 354,912 shares of common stock. On May 31, 2018, the 2014 Plan was terminated with the adoption of the 2018 Plan, as discussed below.

 

On May 31, 2018, our shareholders approved the 1347 Property Insurance Holdings, Inc., 2018 Equity Incentive Plan (the “2018 Plan”). The purpose of the 2018 Plan is to attract and retain directors, consultants, and other key employees of the Company and its subsidiaries and to provide to such persons incentives and rewards for superior performance. The 2018 Plan is administered by the Compensation and Management Resources Committee of the Board, and has a term of ten years. The 2018 Plan allows for the issuance of both incentive stock options and non-qualified stock options, stock appreciation rights, RSUs, and other stock-based, as well as cash-based awards, and provides for a maximum of 300,000 shares available for issuance.

 

Stock Options Issued under the 2014 Plan

 

The following table summarizes stock option activity for the two years ended December 31, 2019. The following options were issued pursuant to the 2014 Plan.

 

Common Stock Options  Shares  

Weighted

Average

Exercise Price

  

Weighted

Ave

Remaining

Contractual

Term (Years)

  

Weighted

Ave Grant

Date Fair

Value

  

Aggregate

Intrinsic

Value

 
Outstanding, January 1, 2018   177,456   $8.06    1.25   $1.07   $               – 
Exercisable, January 1, 2018   156,160   $8.06    1.25   $1.07   $ 
Granted                        
Exercised                        
Vested   21,296                     
Cancelled                        
Outstanding, December 31, 2018   177,456   $8.06    0.25   $1.07   $ 
Exercisable, December 31, 2018   177,456   $8.06    0.25   $1.07   $ 
Granted                        
Exercised                        
Vested                        
Cancelled   (177,456)                    
Outstanding, December 31, 2019      $       $   $ 
Exercisable, December 31, 2019      $       $   $ 

 

Restricted Stock Units Issued under both the 2014 and 2018 Plans

 

On May 29, 2015, the Company’s Board of Directors granted 20,500 RSUs to certain of its executive officers under the 2014 Plan. Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per share and; (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued. In connection with the Asset Sale and pursuant to the employment and resignation agreements entered into between the Company and its former executive officers, Douglas N. Raucy, and Dean E. Stroud, a total of 16,500 RSUs issued under this grant to Messrs. Raucy and Stroud were cancelled and forfeited on December 2, 2019.

 

45

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

In connection with the Company’s appointment of Dan Case as Chief Operating Officer effective May 23, 2017, we entered into an offer letter with Mr. Case, which provided Mr. Case with the opportunity to purchase up to 68,027 shares of the Company’s common stock on the open market or in direct purchases from the Company through June 15, 2018. At the end of the purchase period, the Company agreed to match any such shares purchased by Mr. Case with a grant of RSUs of the Company equal to two RSUs for each share purchased by Mr. Case. Through the purchase period, Mr. Case had purchased 68,027 shares of the Company’s common stock pursuant to this arrangement, 28,000 of which shares were purchased directly from the Company at a purchase price of $8.00 per share on September 14, 2017, resulting in a grant of 136,054 RSUs to Mr. Case on June 15, 2018. This arrangement was entered into outside the 2014 Plan which was in effect at the time, and was approved by the Compensation Committee of the Board of Directors as an inducement material to Mr. Case entering into employment with the Company in reliance on Nasdaq listing rule 5635(c)(4). On December 31, 2018, the effective date of Mr. Case’s resignation from the Company, all of the RSUs granted under the arrangement were forfeited prior to their vesting.

 

On May 29, 2015, the Company’s Board of Directors granted RSUs to certain of its executive officers under the 2014 Plan. Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per share; and (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued.

 

On May 31, 2017, the Compensation Committee of the Company’s Board of Directors approved a share matching arrangement resulting in the issuance of 108,330 RSUs to the Company’s officers and non-employee directors then serving under the 2014 Plan. The RSUs were issued on December 15, 2017, and entitle each grantee to one share of the Company’s common stock upon the vesting date of the RSU, which will vest 20% per year over a period of five years following the date granted, subject to each officer’s continued employment with the Company, or each director’s continued service on the Board. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued. The Board of Directors may, in its discretion, accelerate vesting in the event of early retirement. In connection with the Asset Sale, the Compensation and Management Resources Committee (the “Compensation Committee”) of the Board previously approved the accelerated vesting of the RSUs granted to the Company’s former executive officers, Douglas N. Raucy and Dean E. Stroud, under the share-matching arrangement. Accordingly, pursuant to the employment and resignation agreements entered into between the Company and Messrs. Raucy and Stroud, a total of 34,400 unvested RSUs issued to Messrs. Raucy and Stroud vested in full on December 2, 2019.

 

Similarly, should a director make himself available and consent to be nominated by the Company for continued service but is not nominated by the Board for election by the shareholders, other than for good reason as determined by the Board in its discretion, then such director’s RSU grant will vest in full as of his last date of service as a director with the Company. Accordingly, since Mr. Joshua Horowitz’s term as a director did not continue following the Company’s annual meeting of stockholders held on May 31, 2018, Mr. Horowitz’ 6,666 RSUs shares vested in full on May 31, 2018. Directors are required to maintain ownership of the shares purchased through the full five-year vesting period, except as set forth above.

 

46

 

 

1347 PROPERTY INSURANCE HOLDING, INC.

Notes to Financial Statements

(amounts presented in thousands, except share and per share data and as otherwise specified)

 

On August 22, 2018, the Compensation Committee granted 1,000 shares of the Company’s common stock (the “Bonus Shares”) and 1,000 RSUs to the Company’s Chief Financial Officer, John S. Hill, under the 2018 Plan. Each RSU represents a contingent right to receive one share of the Company’s common stock. These RSUs vest in five equal annual installments beginning with the first anniversary of the grant date, subject to continued employment, with vesting subject to Mr. Hill maintaining ownership of the Bonus Shares through the full five-year vesting period.

 

Also on August 22, 2018, the Company modified its compensation program for all non-employee directors of the Company, effective September 1, 2018. The modified compensation program allows for an annual grant of RSUs with a value of $40, vesting in five equal annual installments, beginning with the first anniversary of the grant date. Accordingly, on August 22, 2018 and again on August 13, 2019, the Board issued RSUs to each of the Company’s then serving non-employee directors, representing a value of $40 per director. The total number of RSUs granted were 34,284 on August 22, 2018 and 61,776 on August 13, 2019. Furthermore, on January 11, 2019, the Company’s Board appointed two new directors to the Board, Ambassador Rita Hayes and Dr. Marsha G. King, resulting in the issuance of 5,397 RSUs to each of these two directors, representing their pro-rata share of the RSU grant issued to each of the Company’s non-employee directors on an annual basis. The following table summarizes RSU activity for the years ended December 31, 2019 and 2018.

 

Restricted Stock Units 

Number of

Units

  

Weighted

Average Grant

Date Fair Value

 
Non-vested units, January 1, 2018   128,830   $6.27 
Granted   171,338    7.48 
Vested   (26,998)   7.20 
Forfeited   (136,054)   7.60 
Non-vested units, December 31, 2018   137,116   $6.27 
Granted   72,570    5.14 
Vested   (53,184)   7.17 
Forfeited   (16,500)