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Debt | 9 Months Ended
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Sep. 30, 2024
Debt Disclosure [Abstract] |
Debt | Debt Federal Home Loan Bank In July 2017, KICO became a member of, and invested in, the FHLBNY. KICO is required to maintain an investment in the capital stock of FHLBNY. Based on redemption provisions of FHLBNY, the stock has no quoted market value and is carried at cost. At its discretion, FHLBNY may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in the stock. At September 30, 2024 and December 31, 2023, no impairment has been recognized. FHLBNY members have access to a variety of flexible, low cost funding through FHLBNY’s credit products, enabling members to customize advances, which are to be fully collateralized. Eligible collateral to pledge to FHLBNY includes residential and commercial mortgage-backed securities, along with U.S. Treasury and agency securities. See Note 3 – Investments for eligible collateral held in a designated custodian account available for future advances. Advances are limited to 5% of KICO’s net admitted assets as of the previous quarter. On July 6, 2023, A.M. Best withdrew KICO’s ratings as KICO requested to no longer participate in A.M. Best’s interactive rating process. As a result of the withdrawal of A.M. Best ratings, KICO is currently only able to borrow on an overnight basis. If KICO has sufficient available collateral (as discussed below), based on KICO’s net admitted assets, the maximum allowable advance as of September 30, 2024 and December 31, 2023 was approximately $12,907,000 and $12,813,000, respectively. Available collateral as of September 30, 2024 and December 31, 2023 was approximately $10,944,000 and $11,412,000, respectively. Advances are limited to 85% of the amount of available collateral. There were no borrowings under this facility during the nine months ended September 30, 2024 and 2023. Debt Debt as of September 30, 2024 and December 31, 2023 consists of the following:
| September 30, 2024 |  | December 31, 2023
13.75% Senior Notes due 2026, net | $ | 11,339,350 |  |  | $ | — |
12.0% Senior Notes due 2024, net | — |  |  | 18,426,247 |
Equipment financing | 5,958,237 |  |  | 6,817,283 |
Balance at end of period | $ | 17,297,587 |  |  | $ | 25,243,530 |
Exchange Agreements On December 9, 2022, the Company entered into a Note and Warrant Exchange Agreement (the “2022 Exchange Agreement”) with several holders (the “2022 Exchanging Noteholders”) of the Company’s outstanding 5.50% Senior Notes due 2022 (the “2017 Notes”). On the date of the 2022 Exchange Agreement, the 2022 Exchanging Noteholders held 2017 Notes in the aggregate principal amount of $21,545,000 of the $30,000,000 aggregate principal amount of the 2017 Notes then outstanding. Pursuant to the 2022 Exchange Agreement, on December 15, 2022, the 2022 Exchanging Noteholders exchanged their respective 2017 Notes for the following: (i) new 12.0% Senior Notes due December 30, 2024 of the Company in the aggregate principal amount of $19,950,000 (the “2022 Notes”); (ii) cash in the aggregate amount of $1,595,000, together with accrued interest on the 2017 Notes; and (iii) three-year warrants for the purchase of an aggregate of 969,525 shares of Common Stock of the Company, exercisable until December 30, 2025 at an exercise price of $1.00 per share (the “Warrants”). The remaining $8,455,000 principal amount of the 2017 Notes, together with accrued interest thereon, was paid on the maturity date of the 2017 Notes of December 30, 2022. On August 30, 2024, the Company entered into a Note Exchange Agreement (the “2024 Exchange Agreement”) with the holders (the “2024 Exchanging Noteholders”) of the Company’s outstanding 2022 Notes in the aggregate principal amount of $19,950,000. Pursuant to the 2024 Exchange Agreement, on September 12, 2024, the 2024 Exchanging Noteholders exchanged their respective 2022 Notes for the following: (i) new 13.75% Senior Notes due June 30, 2026 of the Company in the aggregate principal amount of $14,950,000 (the “2024 Notes”); and (ii) cash in the aggregate amount of $5,000,000, together with accrued interest on the 2022 Notes. See “2024 Notes” below for a discussion of a change in the expiration date of the Warrants. The Company analyzed the 2024 Exchange Agreement under ASC 470–50 Debt—Modifications and Extinguishments. The Company determined that extinguishment accounting was applicable, as the present value of the cash flows of the 2024 Notes differed by more than 10% from the 2022 Notes, making it a substantial change in terms. As a result, the 2022 Notes have been derecognized and the 2024 Notes recorded at fair value. No gain or loss was recognized on the 2024 Exchange. Unamortized debt issue costs of $296,533 related to extinguished debt were expensed at the time the 2022 Notes were extinguished and recorded as loss on extinguishment of debt in the condensed consolidated statements of operations and comprehensive income (loss) within other operating expenses. Fees paid to third parties of $203,381 have been capitalized and are being amortized as debt issuance costs associated with the 2024 Notes. 2024 Notes As discussed above, on September 12, 2024, the Company issued the 2024 Notes in the aggregate principal amount of $14,950,000 pursuant to the 2024 Exchange Agreement. Interest is payable semi-annually in arrears on June 30 and December 30 of each year at the rate of 13.75% per annum. Pursuant to the 2024 Exchange Agreement, the expiration date of the Warrants to purchase 969,525 shares of Common Stock of the Company was extended to June 30, 2026 from December 30, 2025 (see Note 8 – Stockholders’ Equity) and transaction costs were $203,381, for an effective yield of 14.35% per annum. The balance of the 2024 Notes as of September 30, 2024 and December 31, 2023 is as follows:
| September 30, 2024 |  | December 31, 2023
13.75% Senior Notes due 2026 | $ | 11,950,000 |  |  | $ | — |
Warrants | (411,999) |  |  | — |
Issuance costs | (198,651) |  |  | — |
2024 Notes, net | $ | 11,339,350 |  |  | $ | — |
The 2024 Exchange Agreement provides for mandatory prepayments of principal. The 2024 Exchange Agreement provides for a first mandatory pro rata partial prepayment of principal on the 2024 Notes in the aggregate amount of $3,000,000 on June 30, 2025, less the principal amount of any optional prepayments of the 2024 Note made prior to June 30, 2025, pursuant to the 2024 Exchange Agreement. The Company made optional prepayments of $3,000,000 on September 30, 2024 and $2,000,000 on November 13, 2024 (see Subsequent Events - Note 13), and accordingly, has satisfied its obligation to make the mandatory prepayment of principal of $3,000,000 due on June 30, 2025. The 2024 Exchange Agreement provides for a second mandatory pro rata partial prepayment of principal on the 2024 Notes in the aggregate amount of $3,000,000 on December 30, 2025, less the principal amount of (i) any optional prepayments of the 2024 Notes made from June 30, 2025 to December 29, 2025 pursuant to the 2024 Note Exchange Agreement and (ii) any optional prepayments of the 2024 Notes in excess of $3,000,000 made prior to June 30, 2025 pursuant to 2024 Note Exchange Agreement. Based on the November 13, 2024 optional prepayment of principal of $2,000,000, the Company’s mandatory prepayment of principal obligation on December 30, 2025 has been reduced to $1,000,000. Each prepayment of principal shall also include accrued and unpaid interest thereon. The 2024 Notes are unsecured obligations of the Company and are not the obligations of or guaranteed by any of the Company’s subsidiaries. The 2024 Notes rank senior in right of payment to any of the Company’s existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the 2024 Notes. The Notes rank equally in right of payment to all of the Company’s existing and future senior indebtedness, but are effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the 2024 Notes are structurally subordinated to the indebtedness and other obligations of the Company’s subsidiaries. The 2024 Notes are redeemable, at the Company’s option, in whole or in part, at any time or in part from time to time, on and after September 12, 2024, upon not less than fifteen (15) and not more than sixty (60) days’ notice, equal to 100.0% of the principal amount of the 2024 Notes, plus, in each case, accrued and unpaid interest, if any, to the date of redemption subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). As of the end of each calendar quarter, commencing with the calendar quarter ending September 30, 2024, the Company is subject to a leverage maintenance test (“Leverage Maintenance Test”), which requires that the Total Consolidated Indebtedness (as defined below) of the Company not be greater than 30% of Total Consolidated Capitalization (as defined below). As of September 30, 2024 and December 31, 2023, the ratio as defined under the Leverage Maintenance Test was 14.8% and 29.9%, respectively. “Total Consolidated Indebtedness” is the aggregate principal amount (or accreted value in the case of any Indebtedness issued with more than de minimis original issue discount) of all outstanding long-term debt of the Company except for the sale-leaseback transaction described below under “Equipment Financing”, any refinancing or any future sale-leaseback transaction. “Total Consolidated Capitalization” is the amount equal to the sum of (x) Total Consolidated Indebtedness outstanding as of such date and (y) the total consolidated shareholders’ equity of the Company, excluding accumulated other comprehensive (loss) income, as recorded on the Company’s consolidated balance sheet. 2022 Notes As discussed above, on December 15, 2022, the Company issued the 2022 Notes in the aggregate principal amount of $19,950,000 pursuant to the 2022 Exchange Agreement. Interest was payable semi-annually in arrears on June 30 and December 30 of each year, which commenced on June 30, 2023 at the rate of 12.0% per annum. Warrants were issued with a fair value of $993,200 (see Note 8 – Stockholders’ Equity) and transaction costs were $1,758,112, for an effective yield of 13.92% per annum. As discussed above, the 2022 Notes were satisfied pursuant to the 2024 Exchange Agreement. The balance of the 2022 Notes as of September 30, 2024 and December 31, 2023 is as follows:
| September 30, 2024 |  | December 31, 2023
12.0% Senior Notes due 2024 | $ | — |  |  | $ | 19,950,000 |
Warrants | — |  |  | (653,123) |
Issuance costs | — |  |  | (870,630) |
2022 Notes, net | $ | — |  |  | $ | 18,426,247 |
The 2022 Exchange Agreement provided for a mandatory redemption of the 2022 Notes on December 30, 2023, in an amount such that the aggregate principal amount of the 2022 Notes to be redeemed plus accrued and unpaid interest thereon was to be equal to the amount by which the maximum Ordinary Dividend Paying Capacity of KICO (as defined below) measured as of December 15, 2023 exceeded the Company’s Holding Company Expenses (as defined below) for the calendar year ended December 31, 2023. “Ordinary Dividend Paying Capacity” means the sum, as measured on December 15, 2023, of (i) the maximum allowable amount of dividends that KICO is permitted to pay without seeking any regulatory approval in accordance with New York insurance regulations based on its statutory annual and quarterly financial statements filed with the National Association of Insurance Commissioners as of and for the thirty-six (36) month period ended September 30, 2023 plus (ii) any dividends paid by KICO to the Company during the period beginning January 1, 2023 and ending September 30, 2023. “Holding Company Expenses” means the sum of (i) cash interest expense paid during the calendar year ended December 31, 2023 on the 2022 Notes, intercompany loans and any other indebtedness of the holding company on a stand-alone basis and (ii) other cash operating expenses, including taxes, paid by the holding company during the calendar year ended December 31, 2023. The amount of other operating expenses paid in cash in the preceding clause (ii) shall not exceed $2.5 million. Holding Company Expenses was determined based on the actual Holding Company Expenses for the nine months ended September 30, 2023, and an estimate of Holding Company Expenses for the three months ended December 30, 2023. The Ordinary Dividend Paying Capacity of KICO as defined above as of December 31, 2023 was zero and, accordingly, the Company was not required to make a mandatory redemption of the 2022 Notes on December 30, 2023. The 2022 Notes were unsecured obligations of the Company and were not the obligations of or guaranteed by any of the Company’s subsidiaries. The 2022 Notes ranked senior in right of payment to any of the Company’s existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the 2022 Notes. The 2022 Notes ranked equally in right of payment to all of the Company’s existing and future senior indebtedness, but were effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the 2022 Notes were structurally subordinated to the indebtedness and other obligations of the Company’s subsidiaries. The 2022 Notes were redeemable, at the Company’s option, in whole or in part, at any time or in part from time to time, on and after December 30, 2022, upon not less than fifteen (15) and not more than sixty (60) days’ notice, at the following redemption prices (“Redemption Prices” ) (expressed as percentages of the principal amount thereof) if redeemed during the respective period set forth below, plus, in each case, accrued and unpaid interest, if any, to the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date):
Period: |  | Percentage
December 30, 2022 to December 29, 2023 |  | 102.00 | %
December 30, 2023 to September 29, 2024 |  | 101.00 | %
September 30, 2024 to December 29, 2024 |  | 100.00 | %
As of the end of each calendar quarter, commencing with the calendar quarter ending December 31, 2022, the Company was subject to a leverage maintenance test (“Leverage Maintenance Test”), which required that the Total Consolidated Indebtedness of the Company not be greater than 30% of Total Consolidated Capitalization. As of December 31, 2023, the ratio as defined under the Leverage Maintenance Test was 29.9%. Equipment Financing On October 27, 2022, KICO entered into a sale-leaseback transaction, whereby KICO sold $8,096,824 of fixed assets to a bank. Under GAAP, the sale-leaseback transaction is recorded as equipment financing (“Financing”). The provisions of the Financing require KICO to pay a monthly payment of principal and interest at the rate of 5.86% per annum totaling $126,877 for a term of 60 months, which commenced on October 27, 2022. The terms of the Financing provide buyout options to KICO at the end of the 60 month term, which are as follows: •At the end of the lease, KICO may purchase the fixed assets for a purchase price of $2,024,206, which is 25% of the original fixed asset cost of $8,096,824; or •KICO may renew the lease for 16 months at the same rental rate, which totals $2,030,036. A provision of the Financing requires KICO to pledge collateral for the lease obligation. As of September 30, 2024 and December 31, 2023, the amount of required collateral was approximately $5,731,000 and $6,999,000, respectively. As of September 30, 2024, the fair value of KICO’s pledged collateral was approximately $5,997,000 in United States Treasury securities. As of December 31, 2023, the fair value of KICO’s pledged collateral was approximately $11,960,000 in United States Treasury securities. Future contractual payment obligations under the Financing as of September 30, 2024 are as follows:
For the Years Ending December 31, |  | Total
Remainder of 2024 |  | $ | 294,816 |
2025 |  | 1,223,293 |
2026 |  | 1,296,901 |
2027 |  | 1,119,021 |
|  | 3,934,031 |
2027 purchase price |  | 2,024,206 |
Total |  | $ | 5,958,237 |

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