Good day and welcome to Kingsway Third Quarter 2022 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for question-and-comments after the presentation. If you are listeners in the webcast, you will need to dial-in to the number listed in the press release to ask a question or email the address in the press release. With me on the call are J.T. Fitzgerald, Chief Executive Officer, and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses, and future business outlook. Actual results or trends could materially differ from those contemplated by those forward-looking statements. For discussion of such risks and uncertainties that could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report on Form 10-K contained in the subsequent Fields reports on Form 10-Q, as well as in other reports that the company files from time to time with the Securities and Exchange Commission. Please note too that today's call may include the use of non-GAAP numbers that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP numbers to the most comparable GAAP measures is available in our most recent press release, as well as in our periodic filings with the SEC. Now I'd like to turn the call over to J.T. Fitzgerald, CEO of Kingsway. J.T., please proceed.

Thank you, operator. Good day everyone and welcome to Kingsway Financial Services' Q3 2022 conference call. This is our first quarterly call in many years. It's our aim to make these calls a permanent feature of our quarterly reporting going forward. Today, I'd like to focus on a quick recap of our quarter, and then move on to what I hope will be a robust and engaging question-and-answer session. We had a lot of great activity during the quarter and subsequent quarter end, so I expect there will be a lot to talk about. Our results for the third quarter highlight the strength of our operating model and the progress we are making towards our stated organizational priorities. In each of my annual shareholder letters, I have reiterated the strategic priorities of the company. In the past several months, we've made significant headway on advancing these goals. One key priority is a focus on strategic capital allocation to create long-term value for our shareholders. There are three pillars to this objective. First, we aim to grow our portfolio of cash flow positive operating companies. During the quarter, we sold PWSC for $51.2 million in cash with net proceeds to Kingsway of $37.2 million. While this may seem contradictory to our goal of growing our portfolio of great companies, we feel it was a prudent capital allocation exercise. We sold a great asset for a nice price. We can now redeploy that capital in the pursuit of acquiring other great businesses, as well as reducing our debt, which we will talk about later. Subsequent to quarter end, we acquired CSuite Financial Partners in an all-cash transaction for $8.5 million. However, we believe we will be able to recapitalize the loan we took out for the Ravix acquisition in the near future to recoup some of that cash paid. CSuite is the second acquisition completed under the Kingsway Search Accelerator program and will be part of our KSX reportable segment. The Kingsway Search Accelerator is our entrepreneurial framework for growing through acquisitions by backing talented young managers. Timi Okah began as a Searcher in the Accelerator program and now runs Ravix as its President and CEO. Under his leadership, Ravix has been highly successful in its first year, generating more than $2.9 million in operating income and more than $3 million in non-GAAP adjusted EBITDA and achieving nearly 90% of the earn-out related to his gross profit targets, which we have accrued. Timi is further growing this business with our acquisition of CSuite Financial Partners. CSuite fits our acquisition criteria as a business with recurring revenue, low working capital demands, and an impeccable reputation in its industry and a loyal customer base. Based in Manhattan Beach, California, CSuite is a national financial executive services firm providing financial management leadership to companies throughout the United States. Importantly, CSuite's offerings are highly complementary to Ravix and broaden the scope of services these entities can offer. CSuite and Ravix can each go-to-market as a one-stop shop of services for clients. For the 12 months ended July 31, 2022, CSuite had $9.4 million of unaudited revenue, $900,000 of unaudited U.S. GAAP income before income taxes, and $1.8 million of unaudited non-GAAP adjusted EBITDA, making it immediately accretive to Kingsway. Another pillar of our capital allocation focus is to improve our capital structure. We continue to strengthen our balance sheet through deleveraging. As previously announced in August and subsequently in September, we made substantial progress towards eliminating our Trust Preferred debt instruments, or 'TruPs' debt, as we call it, which is described as subordinated debt in our financial statements. By entering into option agreements to repurchase five of the six TruPs for $59.4 million, which represents 83% of the total outstanding principal and accrued interest of our TruPs debt. Those agreements give us the option to purchase 100% of the holder's principal and deferred interest for 63% to 63.75% of the outstanding principal and the deferred interest as of August 2. The option to repurchase a meaningful portion of our outstanding TruPs at such a significant discount is highly accretive to Kingsway and our shareholders. We estimate that at current interest rates, a repurchase of 100% of the amounts currently under agreement would yield an internal rate of return in excess of 20%. The final pillar of our capital allocation focus is to monetize our portfolio of non-strategic passive investments and redeploy the capital. Through the first nine months of 2022, we have generated proceeds of approximately $7.4 million through the sale of non-strategic assets. This includes the September 2022 sale of our investment in the Flower Portfolio of properties, which netted $5.8 million in cash to the company. Due to a one-quarter lag in reporting for this investment, we will fully record this transaction in our fourth quarter 2022 financial statements. We still have a few legacy investments that we view to be non-core to our business. As we move forward, we expect to monetize these investments at a price that would be beneficial to our shareholders. Additionally, we've always viewed our rail yard and VA hospital holdings, which are part of our leased real estate segment, as vehicles to monetize some of our net operating losses, which totaled approximately $792 million as of September 30, 2022. We continue to work on strategies that will allow us to sell these assets at valuations that would be beneficial to our shareholders. If we were able to sell these assets along with our non-strategic real estate holdings, we expect that the debt associated with these assets would no longer be carried on our balance sheet. Debt associated with our real estate holdings, which is non-recourse to the company, totaled $199.6 million, or 70% of the total debt on our balance sheet as of September 30, 2022. We believe this non-recourse debt has created some confusion about our balance sheet, which in turn has been an overhang to our equity valuation. If we were able to sell these assets, we would generate cash while significantly deleveraging our balance sheet and making it easier to understand. And finally, another stated priority we're highly focused on is attracting, developing, and retaining world-class talent. During the quarter, we welcomed Drew Richard to the Kingsway Search Accelerator program. Drew is a graduate of West Point and Harvard Business School and prior to Kingsway served as a Manager at Chevron. With the addition of Drew, we currently have three very talented early career professionals that are actively searching for acquisition targets that fit our defined set of criteria. Businesses that are capital light, have recurring revenue streams, and a sticky customer base. Ideally, we're targeting two new acquisitions per year that will generate annualized non-GAAP adjusted EBITDA in the range of $1.5 million to $3 million each. I'll now turn to Kent for a view of our financial results. Kent?

Thank you, J.T. As management, we focus on the following key metrics: net income, non-GAAP adjusted net income, operating income, and non-GAAP adjusted EBITDA. As you may know, legacy investments and debt create complexity in our financial statements. Therefore, we use these non-GAAP metrics to help focus on the economic drivers of our business. Our net income was $37.6 million for the third quarter. This compares to a net loss of $226,000 in the year-ago quarter, and a net loss of $2.4 million in the second quarter. Non-GAAP adjusted net income was $2.6 million for the third quarter, compared to non-GAAP adjusted net income of $2.1 million in both the year-ago quarter and in the second quarter. Significant items impacting the 2022 third quarter were the following: $26.4 million related to the sale of PWSC after taking into account transaction costs that are included in operating expenses and taxes arising from the sale; a $13.5 million unrealized gain on the value of our TruPs options, which we hold on our balance sheet as an asset of $15.8 million. These options are considered derivative instruments for accounting purposes and we are required to mark these to fair value; a $2.5 million loss on disposal of discontinued operations net of taxes. When we sold Mendota in 2018, we provided certain indemnities for claims outstanding as of June 30, 2018. Based on new information provided during the third quarter, we concluded that the maximum amount under the indemnity was probable. Any cash required to be paid is currently held as restricted cash, and no payments are due under the indemnity until late first quarter 2023; and finally, a $1.5 million gain on change in fair value of real estate investments. As J.T. mentioned, in September we sold the real estate underlying our Flower Portfolio. While we received the cash in the third quarter, given we report the results of Flower and one-quarter lag, we recorded an unrealized gain in the quarter. This will be recorded as a realized gain in the fourth quarter. For the third quarter, our combined operating income for extended warranty and KSX was $3.2 million compared to $1.4 million in the prior year quarter and $3.8 million in the second quarter of 2022. However, excluding the results of PWSC, which we sold in July of this year, pro forma operating income was $3.3 million for the third quarter compared to $900,000 in the prior year and $3.1 million in the second quarter of 2022. As a reminder, our 2021 third quarter results were impacted by a $1.9 million charge arising from our finalization of our PWI purchase accounting. Pro Forma non-GAAP adjusted EBITDA for our extended warranty segment was $2.8 million, or 15.7% of segment revenue compared to $1 million or 6.4% of segment revenue in the year-ago quarter. IWS, one of our vehicle service agreements subsidiaries, continues to perform well through its strong relationships with its credit union partners, and continues to grow its volume of contracts sold. For the quarter, IWS's cash sales, which is an indicator of current activity, grew by about 9% over the prior year. Our other vehicle service agreements subsidiaries, Geminus and PWI, continue to be impacted by the supply chain issues within the new and used automobile industry. However, their combined cash sales were only down about 2% from the prior year. Earlier this year, we tapped Brian Cosgrove, the President of Geminus, to oversee both Geminus and PWI. He has already brought expense discipline to both businesses. He is actively working on combining back office functions and is overhauling our sales and go-to-market strategies. We have the utmost confidence in Brian's leadership, and we are excited about the future for both Geminus and PWI. Non-GAAP adjusted EBITDA for KSX, which as a reminder is just the Ravix business as of September 30, 2022, was $800,000, or 20.4% of segment revenue in the third quarter of 2022. Timi continues to grow the business organically and we've already seen referrals coming in from CSuite. Now for a look at the balance sheet. At the end of the quarter, we had cash and cash equivalents of $48.6 million, an increase of nearly $36 million compared to the prior year end. The increase in cash was largely driven by the proceeds from the sale of PWSC and non-strategic real estate holdings. We ended the third quarter with outstanding debt of $283.6 million compared with $292.7 million as of December 31, 2021. We view our debt in three categories: bank loans, notes payable, and subordinated debt. Bank loans were $21.8 million and $26.7 million as of September 30, 2022 and December 31, 2021. This is debt that is secured separately by either our extended warranty companies or Ravix, and the cash flows generated by those businesses are more than sufficient to service that debt. Notes payable were $199.6 million and $205 million as of September 30, 2022 and December 31, 2021, respectively. This debt relates to our various real estate holdings and is non-recourse to Kingsway. The mortgage and additional mortgage, which totaled $177.2 million at 9/30/22 relate to CMC, a rail yard in Texas. The LA mortgage, $16.4 million at 9/30/22 relates to our VA Clinic in Lafayette, Louisiana. And the Flower note, which was $6 million at 9/30/22 relates to our Flower Portfolio that we sold in September, and will no longer be outstanding beginning with our Q4 financials. Finally, the subordinated debt was $62.3 million and $61 million as of September 30, 2022, and December 31, 2021, respectively. This is our TruPs for which we have options to repurchase 83% of the principal and deferred interest. This debt is carried at fair value on our balance sheet, and this also excludes the deferred interest that we continue to accrue on our balance sheet of $23.2 million as of September 30. As J.T. mentioned, we are pursuing strategies to monetize the remaining assets that back the notes payable, and we have options to repurchase a significant majority of our subordinated debt. If we were able to successfully execute these, then we would be able to reduce our September 30, 2022 outstanding debt by approximately $251 million or 89%, and our deferred interest by $19.2 million, all while retaining the operating income and adjusted EBITDA of our extended warranty in KSX segments. Finally, cash from operations for the first nine months of 2022 was $9.3 million compared to cash used in operations of $8 million in the comparable 2021 period. The 2021 period was impacted by a $10.6 million outflow related to the monetization of a CMC lease stream, but the corresponding inflow is shown in financing activities. Even after factoring this into the comparison, 2022 has been a strong operating cash year for the company as a result of our extended warranty and KSX businesses. With that, I will turn the call back to the operator to open the call for questions.

We do have questioners. Our first comes from Adam Patinkin from David Capital Partners, LLC.

Hi, J.T. and Kent, how are you today?

Hey, Adam.

Great, Adam. Thank you.

Great. Thank you. Outstanding. Well, first, I want to congratulate you guys on all the progress with Kingsway, and especially in the simplification of the business. I think this is absolutely the right strategy. And I congratulate you, I know there's a lot more to go. But, I congratulate you guys on all the progress so far. And I also want to start off by congratulating you on your first earnings call. I think it's great that you're sharing the Kingsway story and for shareholders like myself, the transparency and proactive communication is really appreciated. So I just wanted to start off by thanking you guys for that.

Thanks, Adam.

Thanks, Adam. Yes, you bet. Look, I like to say if the roles were reversed, and you were the manager and I was the shareholder, I would expect the same. So I think having a consistent forum for our wonderful supportive shareholders to come together and ask questions to management is really important.

Yes, that's great. And I agree, 100%. And thank you for it. So let's see. So I have three questions that I wanted to ask. And I'm going to ask them one at a time if that's all right. So, my first question is on your business acquisition strategy. So when I speak with other shareholders about the company or prospective investors, oftentimes the first question that I receive is, what do these businesses have in common? You've got warranty businesses. You've got Ravix. Why do they go together? So, maybe it's my first question, would you mind sharing what the commonalities are between the businesses that you're seeking to acquire and already have acquired? Maybe what the business characteristics are that you're looking for? And what your approach is in deciding which businesses to include in Kingsway's portfolio?

Yes, absolutely. When I first joined Kingsway, I was drawn to the extended warranty industry because of its fundamental attributes, even though I didn't have prior experience in it. I saw an opportunity within the business that we acquired, and I focused on developing the extended warranty segment. What attracted us to the businesses we're acquiring in the Search Xcelerator is several key factors. From an industry standpoint, we target companies in large markets, typically over a billion or two billion dollars, that are growing at a rate exceeding twice the GDP and are fragmented. This fragmentation means there are many competitive areas and acquisition targets. Within these industries, we seek companies with specific characteristics, including a strong profile of recurring revenue with high margins and low capital requirements. These factors indicate businesses that are expected to deliver predictably high returns on tangible capital. Our acquisitions in warranty and the Search Xcelerator segment aim for businesses that are in large, growing industries and possess attributes like a loyal customer base, low customer concentration, recurring revenue, high margins, and low or no capital intensity.

That's great. And that's really helpful. And that makes sense in terms of why some of these businesses would all fit in the portfolio. So let's move to my next question, which is about how you think about Kingsway's profitability. So, if I just take your adjusted pro forma EBITDA from warranty plus Ravix plus the CSuite acquisition, I'm kind of getting into the high teens millions per year, maybe somewhere between $16 million and $17 million. So you take the $3.6 million of pro forma adjusted EBITDA. You multiply that by four, it's $14.4 million. You add CSuite to that with $1.8 million of EBITDA and you're getting to kind of between that $16 million to $17 million range on an annualized basis. And then hopefully, there's opportunities for organic and inorganic growth from there. Is that the right number to use? Or are there further adjustments that you think that I should be making? And just in general, how do you think about the runway profitability of your operating businesses?

Yes, absolutely. EBITDA is the internal metric we rely on. While some may view EBITDA as a misleading measure, I agree with that perspective to an extent. Our business involves some capital intensity, and in our case, there's minimal depreciation—it's primarily all amortization stemming from purchase accounting, not from asset deterioration. Therefore, I consider EBITDA a solid representation of pre-tax cash flow and, due to our net operating losses, also of after-tax cash flow. We utilize EBITDA as a cash flow indicator. In our warranty sector, we have an internal metric referred to as modified cash EBITDA, which differs from what appears in our financial statements. We cannot share this metric publicly as it diverges from accepted revenue recognition standards under GAAP. Nonetheless, we believe it offers a more accurate reflection of economic value added during a period when there's considerable deferred revenue. You can find the calculation method detailed in our CIBC loan agreement, which was included as an exhibit in our 2020 Form 10-K. I can mention that in warranty holdings, our total outstanding senior debt under the CIBC facility at the end of the quarter was $16.7 million, with a senior leverage ratio under that loan agreement of 1.39 times. So, you can calculate our position in warranty from that information. That's our perspective. As for Ravix, there is no deferred revenue, so GAAP EBITDA serves our internal purposes well, and the same applies to CSuite.

Got it. That makes sense. So if I'm doing the math, that's a little bit more than $12 million on the warranty side plus call it five or six from Ravix plus CSuite. So if I'm thinking about kind of this proxy for economic cash flow, maybe it's a little bit higher than I'd suggested something like $17 million or $18 million, and then hopefully, you'll be able to grow it from there. Is that fair?

I think that's fair. Yes.

Okay. That makes sense. Great. And then, my last question here is maybe more qualitative. So, it really feels like you're building a flywheel where you're continuing to add these wonderful operating businesses, you're generating a lot of cash, that cash allows you to get more of the operating businesses. And one leads into the other and the flywheel kind of runs faster and faster. Can you maybe share a little bit about the opportunity that you have to deploy that capital? So maybe walk through what your strategy is, for growing the operating profitability of your businesses, which again, I think is the key metric to look at. And maybe talk to you a little bit of what the key competitive advantages are, that allow you to continue executing on transactions, like you have in the past; your warranty transactions, Ravix, and CSuite? What allows you to do that, where maybe sellers would find it more attractive to partner with you, relative to others?

Yes. I'll divide this into two parts. The first is the flywheel effect and how we can continue to redeploy capital. I agree there is a flywheel effect here. As we grow, we're currently focused on managing our TruPs debt, but as we expand, the combination of reducing our leverage and the internal cash flow from our businesses provides the capital needed for further acquisitions. This creates the flywheel effect, where the business grows organically and through acquisitions without requiring additional capital. Now, regarding differentiation and our potential for success in a competitive market for acquiring businesses, we have three entrepreneurs in our Kingsway Search Accelerator program actively seeking new acquisition opportunities. We aim to expand that number to around four or five individuals searching for acquisitions at any given time, likely leading to two to three acquisitions in the lower middle market that meet our criteria, typically generating between $1.5 million to $3 million in EBITDA. To differentiate ourselves in this competitive landscape, we can look at the fundamental aspects that have made Search, now often referred to as Entrepreneurship Through Acquisition (ETA), successful. Many operating companies in the lower middle market are still founder-led, and numerous owners are nearing retirement and looking for liquidity for their primary asset. These founders often hesitate to sell to a strategic buyer because they care about their employees and the legacy they have built. In contrast, private equity typically needs to support an existing management team, which doesn't align well with a founder looking to retire. Purchasing a small business from a private equity perspective can be time-consuming and unproductive if it requires replacing the management team. ETA provides a unique solution, addressing the liquidity and management succession challenges faced by founder-led businesses. We consider it succession capital, as we offer both capital and management talent. This allows us to often compete and succeed at lower prices during auctions, thanks to our distinctive approach. Specifically for Kingsway, our involvement as a publicly traded company adds credibility and confidence to the process, enhancing our appeal in deal negotiations.

Great, thank you guys. I'll leave it there. And I'll let the next folk to ask questions. Thank you.

Thanks, Adam.

Our next questioner is Richard Gatward from Freedom Capital Markets.

Hello, guys. Firstly, Adam asked three questions which touched on a number of topics that I wanted to bring up. So thank you for clarifying those things. And I do absolutely want to reiterate the transparency that you are showing in terms of having these earnings calls is very helpful and will ultimately I think grow the value of your enterprise over the long term. So very glad to see that. Just a couple of questions around the Xcelerator. And you highlighted that you have three entrepreneurs that are looking at opportunities. How are these opportunities coming to you? Are you guys proactively going out and looking for them? Or do you have small investment banks or individual business owners actually approaching you with these opportunities?

Yes, the answer is yes, but really both. We adopt a two-pronged business development strategy. Each entrepreneur has pinpointed several industries that align with our criteria. We utilize subscription databases of private companies to source high-level contacts within those industries and conduct a proprietary outbound search campaign. This begins with outbound emails demonstrating our criteria and interest in the industry, followed by direct mail and phone calls. It's a time-intensive and thorough effort to establish direct communication with business owners, regardless of whether they are for sale, in order to connect with them in a more personal manner. Additionally, we maintain a database of 3,000 to 4,000 intermediaries, including brokers, investment bankers, private wealth managers, accountants, and law firms, with whom we conduct a drip marketing campaign to stay top-of-mind for any suitable opportunities that arise. So, we effectively pursue opportunities from both angles.

Okay. And just a couple of questions on the retirement. Firstly, deleveraging the balance sheet I think is obvious. I mean, stating the bleed and obvious. But that's key to success going forward for you guys. So, I just want to be clear. So you have effectively retired five of the six TruPs at an average cost of $0.65 on $1, including deferred interest, is that accurate?

Generally accurate. Let me just maybe just kind of nitpick a little bit. We have options to retire the TruPs debt on five of the six series for between 63% and 63.75%, of the cumulative sort of outstanding principal and the interest that was deferred up until August 2nd, which is slightly less than what is shown as deferred on our balance sheet at 9/30.

Okay. And in terms of the real estate assets, have the non-recourse debt on your balance sheet, what is the process for executing a sale of those? Is that in process? Is that something you're thinking about? Is that something that you've engaged with potential buyers about?

I guess, Richard, maybe all I can say right now is that we're working on our strategies to achieve the best return we can, right. Yes.

Alright. I understand that. And just finally, do you feel that you're in the position, I mean, I know that you guys are focused on running your business. But the fact that you guys are having the first conference call and discussing your results for the first time in quite a while, I think it gives you the opportunity to talk about your story more to investors, and you guys have a pretty narrow shareholder base. Do you see that as a priority in terms of getting out and talking to your story engaging with an IR firm? Or are you really just focused on growing the business first?

No. It's a great question, Richard. And I know we talked about this a little bit a month or so ago. We recently switched IR firms. James is on the call now. And so, we are at the point now in addition to doing these quarterly earnings calls, where, like you said, we want to expand the group of high-quality shareholders at Kingsway. And by high quality, I mean, both long-term, not focused on the short term, but really in it for the long haul. And very engaged. Do their work, understand the company and come to the calls with great questions. So, we're in the process of developing a campaign, if you will, to try to get out and tell our story to what we believe would be high-quality shareholders.

Yes, Richard. I just wanted to clarify. We haven't repurchased any debt under the options yet, and those options expire May 2nd, so we have until that time to execute the repurchase.

Okay, yes. Okay, thank you.

Our next question comes from Christian Solberg from Sun Mountain Partners.

Hey, JT, hey, Kent, how are you?

Christian, great.

Thank you.

Excellent. First question. Churn is a really important metric. Obviously, it has many different definitions, and ways to look at it. Are you able to provide any color on churn for your various businesses, the best way to look at it? What rough levels of churn are for those businesses?

Yes. So for everyone else listening, when you buy a recurring revenue business, one of the things that you want to focus on is how recurring is it and do you have a leaky bucket or not. We think about churn a lot. We don't publish it because there are a lot of different definitions for churn. We kind of look at it three ways. The first is just sort of logo churn. By that we mean, what's the number of your total customers that you lost in any given year, as a percentage of the total number of customers you started the year with. We look at this at the individual company level. However, I'll kind of walk through that real quickly for you. A company like IWS, which has long-standing relationships, like 15-year relationships with credit union customers that are both exclusive and contractual, they have basically no logo churn, like 1% a year. They might lose one credit union a year, kind of thing, where they switch or get acquired. The result of that is the next type of churn. We look at gross revenue churn, which is just sort of the revenue dollars that are lost from a lost customer as a percentage of the total revenue. At IWS, basically, we have, even though they may lose 1% of customers, that customer is usually a small one. And so you have essentially no gross revenue churn. I will stick on IWS, just to kind of walk through it. And then we look at net revenue churn, which is sort of the revenue from your customers you maintained or kept as a percentage of their prior year revenue to make sure that they are continuing to grow those relationships. At IWS, we have negative net revenue churn, negative being a good thing they're growing of like 8.7%. PWI and PAN, it's a little bit different story, right. They have hundreds and hundreds of auto dealerships all over the country. Their logo churn is actually pretty high. Dealers are always switching. These aren't exclusive relationships. They hop around from different to different product providers. Their logo churn in those businesses is 30%, 35%. But a lot of the customers that they churn out are still the smaller ones, and so their gross revenue churn is anywhere from eight to high teens percent of gross revenue. On a net churn basis, PWI actually has churned about 5% of its net revenue, which means its existing customers are doing less business this year. We talked about that a little bit with some of the challenges in the used car market with inventory. PAN's net churn is basically zero. Their existing customers are doing about the same level of business that they did last year. And then at Trinity, which is our other sort of warranty business. And I'm talking about the warranty side, which is where we focus on the churn metrics. Logo churn is about 14%. Gross revenue churn is very small. The customers they lose again are small customers. So gross revenue churn is about 2.5% to 3%. Net revenue churn is negative again by about 8.5%. Their existing customers are growing this year. These dynamics really speak to the power of the attributes of extended warranty. These great recurring revenue profiles with low to no gross and net churn.

That's great. That's really helpful. Thanks for breaking it down like that. How about for businesses like Ravix and CSuite?

Ravix has a logo churn rate of about 20%, while the gross revenue churn stands at approximately 6.8%. This indicates that the customers lost are generally smaller ones. Additionally, this year, Ravix has seen a net revenue churn of negative 8.5% to 9%, meaning that the customers they have retained are experiencing growth. We haven't conducted a comprehensive analysis to fully understand this at CSuite, but I will provide an update later.

Right, well, it sounds like a similar type of business. So, that will definitely -

I would expect similar.

Excellent. I've got two more quick ones. First is, how do you think about your internal hurdle rates when you're thinking about where to invest the incremental dollar or cash? So if you want to invest in the Search Xcelerator in a new deal, or in redeeming the TruPs or share repurchases? How do you think about that hurdle rate?

Yes. So, going all the way back to some of the first sort of goals we set internally, we set this sort of big, hairy, audacious goal of compounding capital at 20% per year for 20 years, right. That would be kind of a 50x type of thing. That's not a forecast. That's an audacious goal. But I think it informs how we think about our internal hurdle rate. When we're looking at investments, I like to think about an unlevered return on invested capital. We use a 20% hurdle. Not surprisingly, the calculated IRR on our TruPs repurchase is 20%, which is how one of the ways that we arrived at the percentage we were willing to pay as a discount. Right, and when we're buying operating businesses, just kind of quick math, if you're buying a business with no growth and we don't have leakage for tax, then we would be willing to pay five times cash flow to hit that 20% unlevered target. We'd be willing to pay more for a growing business. Within the Search Xcelerator, we also look at it through an LBO model and look at a sort of minimum 35% IRR target.

And so that, in the Search Xcelerator model, we're talking 35% hurdle, because those are levered returns.

I look at it both ways. I want a 20% unlevered. And that ought to equate to a 35% levered.

Yes, okay, great. And final one here. How did the buyer of PWSC look at the earnings in the business? Was it that modified cash EBITDA metric that you mentioned earlier?

Yes. We sold PWSC for $51.2 million, which will be reflected in the income statement. At the time of the sale, the trailing twelve months EBITDA was around $2.2 million on a GAAP basis. This means we sold it for more than 25 times that amount. On a modified cash basis, the trailing twelve months EBITDA was higher, about 3.3 to 3.4 million. So, for $51.2 million, based on 3.3 million trailing EBITDA, that's still a very attractive multiple. The buyer also considered credits for expected new business that we had already acquired and annualized those figures. They were likely contemplating paying 12 to 13 times forward EBITDA.

That's incredible. Are you seeing multiples in that arena with private transactions remaining that high in this environment? Are you starting to see them comparable transactions starting to tick down?

I don't have any tangible evidence yet. What I'm hearing is that there's a significant sorting out happening. So deals that we are about to close may be on pause. I don't think things have reset yet. I believe there will be some movement, and for really high-quality assets like in the MGA space, such as PWSC, there is still a lot of capital available looking to be deployed. Obviously, this depends on the availability and pricing of leverage, but high-quality assets are still going to be very valuable to people, and there is still significant capital searching for them. I hope there is a reset in warranty so that we can find opportunities to acquire good assets at prices we are willing to pay, but I haven't seen that happen yet.

Got it. Very, very helpful. And it seems like it was a rational decision to sell PWSC and put those proceeds into redeeming the TruPS. Yes, great work and thanks for putting together this call. I'll jump back.

Yes, thank you. Yes. we were sad to see PWSC go. We had an amazing relationship with Tyler. He was really sort of the test case for the Search Xcelerator segment. He was our first sort of entrepreneur, a young talented guy that we brought into a business that he didn't know to transition out management and run it and grow it. Our motivations were probably threefold. One was to demonstrate the power of the model. Two, take advantage of some pretty aggressive inbound interest. And then three, we had an immediate use for that capital at returns in excess of our internal hurdle rate.

We now turn to James who has questions from email.

Hey, guys. So we did have some questions coming in on email. First one looks like a two-part. Can you talk about the synergies between Ravix and CSuite? And do you envision additional acquisitions over time for the Ravix team?

Yes, sure. So synergies, first of all, I hate that word; often paid for, rarely materialized. So we definitely didn't go into the deal with synergies in mind. But that said, I think that they're very complementary businesses. Maybe start with how they're different. As most of you know, Ravix provides outsourced accounting and HR services, including fractional CFOs. But a lot of additional accounting support at lower levels from controller all the way down to bookkeeper. Their customers are predominantly portfolio companies and venture capital firms. Ravix often can't find CFO talent when a customer or prospect is looking for an interim CFO or permanent CFO resource. On the other hand, CSuite offers only interim CFO services and CFO placement. They refer out all of the lower-level accounting from controller level on down and HR work at their clients to other firms, competitors of Ravix. CSuite's customers are often portfolio companies of private equity firms. The combination of these two businesses is very complementary in that each one of them can now provide a very comprehensive service offering across each one of their industry verticals, venture capital and private equity. Any historical leakage from CSuite's lower-level accounting and HR referral work that they used to refer to other competitors will come to Ravix. And then likewise, in return, the CFO placement opportunities that Ravix has been referring to other outside staffing firms can be referred to CSuite. That's sort of the complementary service and product and revenue opportunity. On the cost side, Timi will be running both businesses. So I think that sort of eliminates one redundancy, but we don't really model cost synergies and approach the acquisition as if it was a standalone. And then, James, I think part two was additional acquisitions for Ravix. So did I get that right?

Yes. That's correct.

Okay. Yes. I think that's reasonable to expect. I mean, we don't have any view on timing. I think the first order of business here is to do a really good job of bringing CSuite into the Kingsway family of companies and making sure that transition goes very smoothly and Timi gets his arms around that group of folks and executes their growth plan. Several months to a year out, after some delevering, we can look at other inorganic opportunities. I know Timi and Arthur, the former owner have identified north of 200 potential acquisition targets. So it's certainly something they're thinking about. But in my experience, businesses often, more often than not, die of indigestion, not starvation. So you got to get through the one that you just took down and then be prudent and patient. That's all. I'll leave it there.

Great. The next question is your press release mentioned how Ravix has achieved most of their earn-out from this acquisition. Can you provide more color on how the earn-out works? And when the money is due to the seller? What targets do they have to meet?

Yes, I think it's important to clarify the difference between achieved and accrued. The earn-out doesn't occur all at once, but there were some accelerated payment timelines where part of your net can actually be achieved. The first instance happened at the end of September, and we made the first accelerated payment of $750,000 at the end of October. Regarding accrued versus achieved, we have accrued approximately $4 million of a $4.5 million earn-out liability through the third quarter. This earn-out is contingent on achieving cumulative gross profit that exceeds a certain hurdle over the three years following the closing, with a maximum payout of $4.5 million. There are specific calculations and a multiplier involved. Essentially, it relates to the gross profit the company generates above a predetermined hurdle based on management's projections at the time of closing. This incentivizes growth that surpasses those projections. There are two intermediate accelerated payment dates; the first was the $750,000 already paid. The next opportunity is next October, where the sellers can potentially earn an additional $375,000 if we still exceed the hurdle. The final payment will be in October 2024, and at that point, the maximum amount the sellers can earn will be $4.5 million minus any accelerated payments made. I'm not sure if I fully addressed your question, James, but do you think that covered the inquiry from the email? I kind of lost track there.

Yes. No. It was a three-part there. You hit them all. The next one says, Timi, the CEO of Ravix was the first search CEO. How was the CSuite deal sourced? How did it end up with Ravix and not a standalone company?

That's an interesting question. Yes, it's actually sourced by another searcher on the Search Xcelerator platform, Charles Mokuolu, who I think we introduced at the shareholder day last year. I think maybe speaks to the power of the Search Xcelerator model to find new opportunities for portfolio companies that we already have. Charles found this opportunity, developed a relationship with Arthur, the seller. After digging into CSuite, the opportunity became pretty evident that this would be a really great fit for Ravix. Charles handled that relationship with Arthur over to Timi, and Timi and Arthur hit it off and continued to progress towards the closing and now post-closing working together. It was originally sourced through one of our other search entrepreneurs. It's an interesting question.

Right. And the next one is, as Kingsway grows, do you think the existing CEOs like Timi at Ravix will continue to make potential additional acquisitions in addition to the new search entrepreneurs?

Yes. I mean, obviously, the Ravix one is evidence of that. More broadly, I think that each one of the acquisitions we do under the Search Xcelerator has the potential to be a platform for follow-on acquisitions, tuck-ins. Again, right, that would have to be part of the original investment thesis. If it's a high growth business that can use all of its capital to grow at really high rates of return, I think we would, from a capital allocator's standpoint, continue to allocate that capital to that business to maximize its organic growth. Generally, there's often inorganic growth thesis to a lot of these acquisitions. Yes, I think that's right. Like I said in the answer to an earlier question, our general feeling is that a new CEO should get into the business, learn the company and the industry, delever, and also work on that organic growth before they start looking for new acquisitions. That might take a year or more, even two years, until they hit that flywheel point where through the combination of deleveraging and internally generated cash flow, they have the resources to do a follow-on acquisition with no additional capital required. So that's kind of the model.

Got it. Okay. And then the next one is, can you talk about how Kingsway uses its NOLs against taxable income of the subsidiary companies?

This is like managing cash flow within all of our complex structures. I'll pass that over to Kent. How do we utilize our NOLs for our needs?

I give J.T. a break here to have a sip of water since so, Yes. So usually when we talk about our NOLs, it's federal NOLs. We have just under 800 million available as of the end of September. What we do is when we look at each of our individual companies that we own, we view each of those as sort of standalone entities for federal tax purposes. What we'll do is we'll calculate their federal tax as if they were their own standalone company. That way, even though we do a consolidated return for Kingsway at the end of the day, we start with calculating tax at each of the subsidiaries. In that regard, we're much like IRS for our companies. If they owe money as a result of that, then they'll pay that up to the holding company. But if they have some sort of tax benefits, then we'll remit that back. By way of remitting that capital up to holdco, it's sort of burning off those NOLs and monetizing those and providing an additional cash flow stream for the holding company.

Great.

I would just add that those payments for the consumption of NOLs and the cashback to Kingsway is allowed under our credit agreement. So it's a way to be air quote receiving distributions from our operating businesses as well as being compliant with our bank agreement.

Because if it had been a standalone entity with a bank loan, they would have been paying that money to the IRS instead of just paying it to the parent co, right.

Got it. Okay. And then the next one looks like a follow-up. But please remind us how long the NOLs last before they expire?

Yes. So much of the NOLs originated in the late 2000s and early 2010s. At that time, they had a 20-year life to them. We actually have a schedule in our 10-K. If you look at our last 10-K, we do schedule those out so people can see those. I think it might be note 15 or somewhere around there. They begin to expire in 2027, but 2029 is the big year where we have almost $500 million of NOLs expiring in that year. In 2030, and the following years, there's just various amounts that expire in each of those years through I think it's about 2037, I believe.

Great. Thank you. And looks like there's just three more here. The first of the last three is the search entrepreneur so far has very strong educational credentials. Can you talk about how you are identifying these candidates? And what gives you confidence that you can continue to find qualified professionals?

Yes. Well, I hope we can continue to find them. Hope is not a strategy, obviously. I think the way that we source them is probably several different ways. First of all, the ETA, Entrepreneurship Through Acquisition, which I mentioned earlier, community and ecosystem is pretty close-knit. We remain active in that community, not only through the Search Xcelerator but through our Argo Partners, our investment management firm that makes investments in search funds. So we are sort of plugged into that universe, so to speak. A lot of word of mouth and information sharing happens there. We also actively recruit on the campuses of top-tier business schools. We recently did a lunch and learn at HBS, University of Chicago, and Northwestern, Wharton. We've also done that at Stanford and hope to do one here this spring. We post the operator and residents job description on their internal job board. We get a lot of inbound interest through those lunch and learns and presentations and through the job postings. There’s a lot of overlap in people's personal networks. We get a lot of referrals from our existing OIRs. Drew came to us through Tyler. They both went to West Point and HBS. Prospective searchers, people that are interested in doing Entrepreneurship Through Acquisition often reach out to people that have a shared background and have been successful in ETA to get the lowdown. That often ends up in being referral into our program. I think we've got something that is a little bit differentiated within the broader universe of ETA. It doesn't mean we're better, but I think we're unique and for the right person, I think Kingsway is a really good model. People tend to gravitate towards it. There’s a lot of interest in ETA on business school campuses these days. It's become kind of a real thing that people want to do postgraduate school early in their career.

Great. And last two here. First of which is a multi-part. Can you talk about the process for financing the search business? What multiple leverage do you hope to place? What is the condition of those lenders? Are the lenders open for business? And are they being competitive on their terms?

Okay. So a three-part here. So generally, we're targeting a 50/50 debt-to-equity capital structure. We feel like this is the right balance. On the one hand, you make your equity sweat, the discipline through debt, enhancing your equity returns through leverage, while on the other hand, not introducing the risk of insolvency. We think that's the right balance of discipline through debt and enhancing equity returns without somehow adding capital structure risk to the equity. What that means is, we're typically given the multiples we're paying, looking for like two and a half to three turns of leverage. Thus far up in through what we're working on with Ravix, we've been able to get those kinds of terms from traditional senior lenders on pretty attractive terms and pricing. We have in our sort of Rolodex, if you will, although no one uses that anymore, several lenders that work with, or are familiar with us, and/or the ETA space more broadly. We've got a handful of firms that we go out to and solicit term sheets. The third part is open for business and being competitive. Yes, I think they're open for business. I think the terms are competitive. The pricing is changing, obviously, within a rising interest rate environment. But for now, anyway, I can't predict what the future will hold, but they seem to be open for business.

Great. And the final question here is, can you talk about your pipeline for potential additional acquisitions?

Certainly. Let's break that down into two parts: extended warranty and the Search Xcelerator. I’ve mentioned this a few times before, but I’ll elaborate a bit more. When it comes to extended warranty, as I’ve noted, the pool of appealing candidates is relatively small. Although it’s a vast and fragmented industry with numerous companies, the number of high-quality ones is limited in my opinion. We have identified opportunities, including several this year that Kent and I have focused on, but often they don’t align well with our distribution channels, their service contracts do not fit our product line, or, more importantly, they are priced significantly higher than we would prefer. However, given the current macroeconomic conditions, particularly with rising interest rates, there might be some adjustments in the market, potentially leading to more favorable valuations that we find appealing. Nonetheless, since the pool of high-quality assets is limited, our success in this area will likely always be intermittent. In contrast, for the Search Xcelerator, each of our operators maintains an ongoing pipeline of opportunities. We are consistently engaged with dozens of potential acquisitions at various stages of discussion. Following the principle that to secure one excellent acquisition, you need to start with 100 opportunities, we are continually reaching out to business owners, brokers, bankers, and intermediaries to enhance our pipeline. At this moment, we are likely working through around 30 non-disclosure agreements.

Excellent. Thank you so much. Operator?

No. I really appreciate everyone that took the time out of their day to come in and listen. For those of you who asked questions, that was really great and really engaging. Hopefully, you learned more. We are really excited to make this a permanent feature of our quarterly investor communication going forward and really encourage a great dialogue with our supportive shareholders. If anyone wants to follow up with questions from either me or Kent directly, happy to answer those and just reach out to me via my email, which I believe is on the website or our filings. Sometimes people will shy away from asking a question in front of a group. So if you want to talk to me directly, don't hesitate.

This does conclude today's conference. Thank you for your participation and you may disconnect your lines at this time. Have a good day.