Note 5 - Acquisitions and Discontinued Operations

3 Months Ended

Mar. 31, 2024

Business Combination, Disposal and Discontinued Operations Disclosure [Text Block]

NOTE 5 ACQUISITIONS AND DISCONTINUED OPERATIONS

(a)

Business Combinations

Systems Products International, Inc.

On September 7, 2023, the Company acquired 100% of the outstanding equity interests of Systems Products International, Inc. ("SPI") for aggregate cash consideration of $2.8 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments. SPI, based in Miami, Florida, is a vertical market software company, created exclusively to serve the management needs of all types of shared-ownership properties. As further discussed in Note 19, "Segmented Information," SPI is included in the Kingsway Search Xcelerator segment. This acquisition was the Company’s fourth acquisition under its novel CEO Accelerator program and its first in the vertical market software space and further expands the Company’s portfolio of businesses with recurring revenue and low capital intensity.

This acquisition was accounted for as a business combination using the acquisition method of accounting. The purchase price was provisionally allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition and are subject to adjustment during a measurement period subsequent to the acquisition date, not to exceed one year as permitted under U.S. GAAP. The Company expects to complete its purchase price allocation during the first half of 2024. These estimates, allocations and calculations are subject to change as we obtain further information; therefore, the final fair values of the assets acquired and liabilities assumed could change from the estimates included in these consolidated financial statements.

The Company records measurement period adjustments in the period in which the adjustments occur. During the three months ended March 31, 2024, the Company recorded a measurement period adjustment that increased goodwill by $0.1 million compared to the amount recorded at December 31, 2023. The measurement period adjustment reflects changes in the estimated fair value of the contract asset of $0.1 million.

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

(in thousands)
	September 7, 2023
Cash and cash equivalents	$	121
Restricted cash		6
Service fee receivable		381
Goodwill		175
Intangible asset not subject to amortization - trade name		120
Intangible asset subject to amortization - customer relationships		1,000
Intangible asset subject to amortization - developed technology		600
Other assets		1,705
Total assets	$	4,108

Accrued expenses and other liabilities	$	125
Deferred service fees		423
Net deferred income tax liabilities		760
Total liabilities	$	1,308

Purchase price	$	2,800

Digital Diagnostics Imaging, Inc.

On October 26, 2023, the Company acquired 100% of the outstanding equity interests of Digital Diagnostics Imaging, Inc. ("DDI") for aggregate cash consideration of approximately $11.0 million, less certain escrowed amounts for purposes of indemnification claims and working capital adjustments. DDI, based in Wall, New Jersey, is a provider of fully managed outsourced cardiac telemetry services. As further discussed in Note 19, "Segmented Information," DDI is included in the Kingsway Search Xcelerator segment. This acquisition was the Company’s fifth acquisition under its novel CEO Accelerator program and further expands the Company’s portfolio of businesses with recurring revenue and low capital intensity.

The Company records measurement period adjustments in the period in which the adjustments occur. During the three months ended March 31, 2024, the Company recorded a measurement period adjustment that increased goodwill by less than $0.1 million compared to the amount recorded at December 31, 2023.

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

(in thousands)
	October 26, 2023
Cash and cash equivalents	$	124
Service fee receivable		496
Property and equipment, net		1,183
Right-of-use asset		145
Goodwill		4,788
Intangible asset not subject to amortization - trade name		260
Intangible asset subject to amortization - customer relationships		6,500
Other assets		7
Total assets	$	13,503

Accrued expenses and other liabilities	$	214
Income taxes payable		141
Lease liability		145
Net deferred income tax liabilities		2,013
Total liabilities	$	2,513

Purchase price	$	10,990

(b)

Discontinued Operations

Leased Real Estate Segment

The Company’s subsidiaries, VA Lafayette, LLC ("VA Lafayette") and CMC Industries Inc. ("CMC"), which includes CMC’s subsidiaries Texas Rail Terminal LLC and TRT Leaseco, LLC ("TRT"), comprised the Company's entire Leased Real Estate segment prior to the fourth quarter of 2022. Each of CMC, through indirect wholly owned subsidiary, TRT, and VA Lafayette own a single asset, which is real estate property. On December 29, 2022, TRT sold its assets and at December 31, 2022, VA Lafayette was classified as held for sale.

In accordance with ASU No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal is categorized as a discontinued operation if the disposal group is a component of an entity or group of components that meets the held for sale criteria, is disposed of by sale, or is disposed of other than by sale, and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.

Leased Real Estate is a component of Kingsway since its operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the reporting entity. A component of an entity may consist of multiple disposal groups and does not need to be disposed of in a single transaction. The disposal of the Leased Real Estate segment represents a strategic shift that will have a major effect on the Company's operations and financial results, as the disposal of the Leased Real Estate assets was in excess of 20% of the entity's total assets. As a result, the assets, liabilities, operating results and cash flows related to Leased Real Estate have been classified as discontinued operations in the consolidated financial statements for all periods presented.

VA Lafayette

During the fourth quarter of 2022, the Company began executing a plan to sell its subsidiary, VA Lafayette. VA Lafayette owns the LA Real Property, that is subject to a long-term lease and the LA Mortgage. During the second quarter of 2024, the Company entered into a letter of intent for the sale of VA Lafayette. As part of recognizing the business as held for sale, the Company is required to measure VA Lafayette at the lower of its carrying amount or fair value less cost to sell. As a result of this analysis, during the first quarter of 2024, the Company recognized an estimated non-cash, loss on disposal of $0.4 million, which is included in loss on disposal of discontinued operations, net of taxes in the consolidated statements of operations. The loss is a result of adjusting the net carrying value of VA Lafayette to be equal to the estimated selling price and was determined by comparing the expected cash consideration received for the sale of VA Lafayette with the net assets of VA Lafayette.

As discussed above, VA Lafayette is part of the Leased Real Estate disposal group. In conjunction with the sale of the CMC Real Property on December 29, 2022, the sale of the Leased Real Estate's assets represents a strategic shift that will have a major effect on the Company's operations and financial results. As a result, VA Lafayette has been classified as a discontinued operation and the results of its operations are reported separately for all periods presented. The assets and liabilities of VA Lafayette are presented as held for sale in the consolidated balance sheets at March 31, 2024 and December 31, 2023.

Summary financial information for Leased Real Estate included in income from discontinued operations, net of taxes in the unaudited consolidated statements of operations for the three months ended March 31, 2024 and March 31, 2023 is presented below:

(in thousands)	Three months ended March 31,
	2024		2023
Income from discontinued operations, net of taxes:
Revenues:
Rental revenue	$	373	$	319
Total revenues		373		319
Expenses:
Cost of services sold		53		47
General and administrative expenses		60		77
Leased real estate segment interest expense		88		91
Total expenses		201		215
Non-operating other revenue		19		3
Income from discontinued operations before income tax expense		191		107
Income tax expense		—		—
Income from discontinued operations, net of taxes	$	191	$	107

For the three months ended March 31, 2024 and March 31, 2023, all of the pre-tax income from discontinued operations disclosed in the table above is attributable to the controlling interest.

The carrying amounts of the major classes of assets and liabilities of Leased Real Estate presented as held for sale at March 31, 2024 and December 31, 2023 are as follows:

(in thousands)	March 31, 2024			December 31, 2023
Assets
Cash and cash equivalents	$	526		$	612
Other receivables, net		61			—
Property and equipment, net		16,171			16,171
Intangible assets, net		2,748			2,748
Loss on write-down of disposal group		(2,197	)		(1,779	)
Assets held for sale	$	17,309		$	17,752
Liabilities
Accrued expenses and other liabilities	$	905		$	885
Notes payable		15,031			15,229
Liabilities held for sale	$	15,936		$	16,114

Loss on disposal of discontinued operations, net of taxes, related to Leased Real Estate, in the unaudited consolidated statement of operations for the three months ended March 31, 2024 is comprised of $0.4 million of loss on disposal of discontinued operations before income tax benefit and income tax benefit of zero.