Q3 2022 Kingsway Financial Services Inc Earnings Call

Yeah.

Operator: 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.

Address in the press release.

With me on the call are J T Fitzgerald, Chief Executive Officer, and Kent Hansen, Chief Financial Officer before.

Operator: 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 which 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 another reports that the company files from time to time with the Securities and Exchange Commission.

Looking statements include statements regarding the future, including expected revenue operating margins expenses and future business outlook.

<unk> results or trends could materially differ from those contemplated by those forward looking statements.

For a discussion of such risks and uncertainties, which 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 field 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.

Operator: 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.

CEO of Kingsway J T. Please proceed.

John Fitzgerald: 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.

This is our first quarterly call in many years.

I'm going to make these calls a permanent feature of our quarterly reporting going forward.

John Fitzgerald: 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 to quarter end, so I expect there will be a lot to talk about.

John Fitzgerald: 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.

And each of my annual shareholder letters I reiterated the strategic priorities of the company.

In the past several months, we've made significant headway on advancing these goals.

John Fitzgerald: 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.

There are three pillars to this objective.

First we aim to grow our portfolio of cash flow positive operating companies.

John Fitzgerald: 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 to redeploy that capital in the pursuit of acquiring other great businesses, as well as reducing our debt, which we will cover a little later on. 

$1 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.

John Fitzgerald: We sold a great asset for a nice price. We can now to redeploy that capital in the pursuit of acquiring other great businesses, as well as reducing our debt, which we will cover a little later on. 

Yes.

John Fitzgerald: 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 in order to recoup some of that cash paid. CSuite is the second such acquisition completed under the Kingsway search accelerator program and will be part of our KSX reportable segment.

However, we believe we will be able to recapitalize. The loan we took out for the <unk> acquisition in the near future in order to recoup some of that cash paid.

C suite is.

John Fitzgerald: CSuite is the second such acquisition completed under the Kingsway search accelerator program and will be part of our KSX reportable segment.

John Fitzgerald: The Kingsway Search Xcelerator is our entrepreneurial framework for growing through acquisitions by backing talented young managers. Timi Okah began as a Searcher in the Xcelerator program and now run Ravix as its President and CEO.

Backing talented young managers.

Jimmy <unk> began as a searcher and the accelerated program and now run the <unk> as its president and CEO .

John Fitzgerald: 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.

Tim is further growing this business with our acquisition of C suite financial partners.

John Fitzgerald: CSuite fits our acquisition criteria as a business with recurring revenue, low working capital demands and 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.

Based in Manhattan Beach, California, C suite as a national financial Executive services firm, providing financial management leadership to companies throughout the United States.

John Fitzgerald: 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 an unaudited U.S. GAAP income before income taxes and $1.8 million of unaudited non-GAAP adjusted EBITDA, making it immediately accretive to Kingsway.

Sweet and remix can each go to market as a one stop shop of services for clients.

For the 12 months ended July 31, 2022, C suite had $9 $4 million of unaudited revenue.

900000.

Unaudited U S. GAAP income before income taxes, and $1 $8 million of unaudited non-GAAP adjusted EBITDA, making it immediately accretive to Kingsway.

John Fitzgerald: Another pillar of our capital allocation focus is to improve our capital structure. We continue to strengthen our balance sheet through delevering. As previously announced in August and then 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.

Yes.

We continue to strengthen our balance sheet through delevering as.

As previously announced in August .

And then subsequently in September we made substantial progress towards eliminating our trust preferred debt instruments or trups debt as we call it.

Which is described of subordinated debt in our financial statements by.

John Fitzgerald: 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 holders principal and deferred interest for 63% to 63.75% of the outstanding principal and the deferred interest as of August 2.

Of our Trups debt.

Those agreements give us the option to purchase 100% of the holders principal and deferred interest for 63 to 63, 75% of the outstanding principal.

And the deferred interest as of August 2nd.

John Fitzgerald: 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%.

We estimate that at current interest rates.

Repurchase of 100% of the amounts currently under agreement would yield an internal rate of return in excess of 20%.

John Fitzgerald: 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.

Through the first nine months of 2022, we have generated proceeds of approximately $7 $4 million through the sale of non strategic assets.

John Fitzgerald: 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.

Due to a one quarter lag in reporting for this investment we will fully recorded this transaction in our fourth quarter 2022 financial statements.

John Fitzgerald: 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.

These investments at a price that would be beneficial to our shareholders.

Additionally, we have always viewed our rail yard.

And VA 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.

Dollars.

As of September 32022, we continue to work on strategies that will allow us to sell these assets at valuations that would be beneficial to our shareholders.

John Fitzgerald: 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.

Debt associated with our real estate holdings, which is nonrecourse to the company totaled $199 6 million or 70% of the total debt on our balance sheet as of September 32022.

John Fitzgerald: 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 delevering our balance sheet and making it easier to understand.

If we were able to sell these assets, we would generate cash while significantly delevering, our balance sheet and making it easier to understand.

John Fitzgerald: 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 Xcelerator program. Drew is a graduate of West Point and Harvard Business School and prior to Kingsway, served as a Manager at Chevron.

During the quarter, we welcomed drew Richard to the Kingsway search Accelerant accelerator program drew is a graduate of West point, and Harvard business School and priority Kingsway served as a manager at Chevron.

John Fitzgerald: 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 a piece.

<unk> that are capital light have recurring revenue streams, and a sticky customer base.

Ideally we are targeting two new acquisitions per year that will generate annualized non-GAAP adjusted EBITDA in the range of one 5% to $3 million a piece.

John Fitzgerald: I'll now turn to Kent for a review of our financial results. Kent?

Thank you J T.

Kent Hansen: Thank you JT. 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 that 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.

As you May know the legacy investments and that create complexity in our financial statements. Therefore, we use these non-GAAP metrics to help focus on the economic drivers of our business.

Kent Hansen: 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.

non-GAAP adjusted net income was $2 6 million for the third quarter compared to non non-GAAP adjusted net income of $2 1 million in both the year ago quarter and in the second quarter.

Kent Hansen: 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.

$26 $4 million related to the sale of Pwc after taking into account transaction costs that are included in operating expenses and taxes arising from the sale.

Kent Hansen: 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 to be derivative instruments for accounting purposes and we are required to mark these the fair value.

As an asset of $15 8 million.

These options are considered to be derivative instruments for accounting purposes, and we are required to mark these to fair value.

Kent Hansen: 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

We sold Mendota in 2018, we provided certain indemnities for claims outstanding as of June 32018.

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.

Kent Hansen: Also a $1.8 million loss on change in fair value of debt. We hold our TruPs debt at fair value on our balance sheet. Each quarter we update the fair value and the change that is not attributable to instruments specific credit risk is recorded in our statement of operations.

Kent Hansen: And finally, a $1.5 million gain on change in fair value of real estate investments. As JT 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. 

While we received the cash in the third quarter, given we report the results of our on a one quarter lag we recorded an unrealized gain in the quarter.

This will be recorded as a realized gain in the fourth quarter.

Kent Hansen: For the third quarter, our combined operating income for extended warranty in 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 2022.

However, excluding the results of Pwc, which we sold in July of this year pro forma operating income was $3 3 million for the third quarter compared to 900000 in the prior year and $3 1 million in the second quarter 2022.

Kent Hansen: 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.

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 six 4% of segment revenue in the year ago quarter.

Kent Hansen: 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.

For the quarter <unk> cash sales, which is an indicator of current activity grew by about 9% over the prior year.

Kent Hansen: 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 tap Brian Cosgrove, the President of Geminus to oversee both Geminus and PWI. 

However, their combined cash sales were only down about 2% from the prior year.

Earlier this year, we tapped Brian cause growth the president of German us to oversee both germanism BWI.

Kent Hansen: 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.

We have the utmost confidence in Brian's leadership, and we are excited about the future for both Germanism BWI.

Kent Hansen: Non-GAAP adjusted EBITDA for KSX, which as a reminder is just a 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.

Timmy continues to grow the business organically and we've already seen referrals coming in from C suite.

Kent Hansen: 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 PWSC and nonstrategic real estate holdings.

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 and the increase in cash was largely driven by proceeds from the sale of Pwc and non strategic real estate holdings.

Kent Hansen: 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, respectively. This is debt that is secured separately by either our extended warranty companies or Ravix and the cash flows generated by those businesses is more than sufficient to service that debt.

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 32022, and December 31 2021, respectively.

This is debt that is secured separately by either our extended warranty companies or <unk> and the cash flows generated by those businesses is more than sufficient to service that debt.

Kent Hansen: Notes payable where $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 the Kingsway. The mortgage and additional mortgage, which totaled $177.2 million at 9/30/22 relate to CMC, our rail yard in Texas. The LA mortgage $16.4 million at 9/30/'22 relates to our VA Clinic in Lafayette, Louisiana.

This debt relates to our various real estate holdings and is nonrecourse to Kingsway.

The mortgage and additional mortgage which totaled $177 2 million at 930 22 relate to CMC a rail yard in Texas.

The la mortgage $16 $4 million at 930, <unk> 'twenty two relates to our VA clinic in Lafayette, Louisiana.

Kent Hansen: 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.

Which was $6 million at 930 22 relates to our flower portfolio that we sold in September and will no longer be outstanding beginning with our Q4 financials.

Kent Hansen: 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.

This is our trups that 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.

This also excludes the deferred interest that we continue to accrue on a balance sheet of $23 2 million as of September 30.

Kent Hansen: As JT 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.

A significant majority of our subordinated debt.

Kent Hansen: 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 by 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.

Then we would be able to reduce our September 32022 outstanding debt by approximately $251 million or by 89%.

And our deferred interest by $19 2 million.

All while retaining the operating income.

And adjusted EBITDA of our extended warranty and <unk> segments.

Kent Hansen: 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 $10.6 million outflow related to the monetization of a CMC lease stream, but the corresponding inflow is shown in financing activities. 

Compared to cash used in operations of $8 million in the comparable 2021 period.

2021 period was impacted by $10 $6 million outflow related to the monetization of the CMC lease stream.

The corresponding inflow as shown in financing activities.

Kent Hansen: 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.

With that I will turn the call back to the operator to open the call for questions.

Yes.

Operator: The queue is now open for question and answers. If you have a question that you would like to pose, please press star one on your phone at this time. If you are joining us via the webcast, remember to dial in to the number on the press release if you would like to pose a question or email your question to the email address listed on the press release. We will now hold for questions as we poll.

If you have a question that you would like to pose, please press star one on your phone at this time. If you are joining us via the webcast, remember to dial in to the number on the press release if you would like to pose a question or email your question to the email address listed on the press release. We will now hold for questions as we poll.

If you are joining us via the webcast, remember to dial in to the number on the press release if you would like to pose a question or email your question to the email address listed on the press release. We will now hold for questions as we poll.

We will now hold for questions as we poll.

Paul.

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

Adam Patinkin: Hi, JT and Kent, how are you today?

Multiple speakers: [John Fitzgerald] Hey, Adam.  [Kent Hansen] Great, Adam. Thank you.

Adam Patinkin: 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, and 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 the proactive communicating is really appreciated. So I just wanted to start off by thanking you guys for that.

Graduating you on your first earnings call.

It's great that you are sharing the Kingsway story.

For shareholders like myself, the transparency and the proactive communication is really appreciate it. So I just wanted to start off by thanking you guys for that.

Multiple speakers: [Kent Hansen] Thanks, Adam.  [John Fitzgerald] 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.

I'd like to say if the roles were reversed and you were the manager and that was the shareholder I would expect the same so I think having a consistent four.

<unk> for our wonderful supportive shareholders to come together and ask questions of management is really important.

Yes, that's great.

Adam Patinkin: 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 received is, what do these businesses have in common? You've got warranty businesses. You've got Ravix. Why did 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? 

We received is what did these businesses.

Having common you've got warranty businesses, you've got <unk> why do they go together. So maybe it's my first question would you mind sharing what the commonalities or between the businesses that youre seeking to acquire and already have acquired.

Maybe what the business characteristics are that Youre looking for and what your approach is in deciding which businesses to include in King's wastes portfolio.

Yes sure absolutely.

John Fitzgerald: Yes, sure, absolutely. Maybe a little bit of history. When I first came to Kingsway, I came because I was very interested in the extended warranty industry, not because I knew anything about extended warranty or had any experience in there, but I liked the fundamental attributes of the businesses, the unit and the unit economics and the industry. So that's -- I came with an opportunity to Kingsway business that we ended up acquiring, and I originally came to Kingsway to help build out the extended warranty segment.

That's I came with an opportunity to Kingsway business that we ended up acquiring I originally came to kingsway to help build out the extended warranty segment.

John Fitzgerald: And what I liked about it, and what we also liked about the businesses that we're buying within the Search Xcelerator are kind of a handful of things. And I've outlined these in some of those shareholder letters in the past. First, from an industry perspective, we're focused on companies and industries that are large, sort of like greater than a billion or $2 billion of addressable market, growing, and by that we mean, at sort of greater than two times GDP, and are fragmented. And by fragmented, I think we mean, lots of competitive areas to hide, lots of niches, and potentially lots of acquisition targets. So and then, within those industries, we're looking for companies that have a set of attributes.

What we also like about the businesses that we're buying within the search accelerating there are kind of a handful of things.

Outline these in some of those shareholder letters in the past first from an industry perspective, we're focused on companies and industries that are large sort of greater than a $1 billion or $2 billion of addressable market.

Growing and by that we mean it.

Sort of greater than two times GDP.

Got it.

And our fragmented by fragmented I think we mean.

Lots of competitive.

Areas to hide lots of niches and potentially lots of acquisition targets.

So and then within those industries, we're looking for companies that have a set of attributes.

John Fitzgerald: The first would be sort of strong profile of recurring or reoccurring revenue at high margin and low capital intensity, which is all of that sort of shorthand for saying businesses with what we deemed to be sort of predictably high returns on tangible capital. And so, if you look at the acquisitions we've done, in warranty, but also within the Search Xcelerator segment we're looking for businesses and large and growing industries that meet those attributes, sticky customer base, low customer concentration, recurring revenue, high margin, and low or no capital intensity.

Sort of strong profile of recurring or reoccurring revenue.

At high margin.

And low capital intensity, which is all of that sort of shorthand for saying businesses with what we deem to be predictably high returns on tangible capital.

And so if you look at the acquisitions we've done.

And warranty, but also within the search accelerator segment.

Looking for for businesses in large and growing industries that meet those attributes stick.

Sticky customer base low customer concentration recurring revenue high margin and low or no capital intensity.

Adam Patinkin: That's great. And that's really helpful. And that makes sense in terms of maybe 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?

<unk> plus <unk> plus the C suite acquisition.

I'm kind of getting into the high teens millions per year.

To be somewhere between 16 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 C suite to that with $1 8 million of EBITDA and youre getting kind of between that $16 million to $17 million range on an annualized basis and then hopefully there is.

Opportunities for organic and inorganic growth from there is that the right number to use.

Or are there further adjustments that you would think that I should be making and just in general how do you think about the run rate profitability of your operating businesses.

John Fitzgerald: Yes, definitely. Right. So EBITDA sort of the internal metric that we use. Some people call EBITDA bullshit metric. I think that's true. We're in businesses where there is some capital intensity. In our case, to depreciate -- there's very little depreciation and A, all amortization. It all comes from purchase accounting. It's not the wasting of an asset. So I think EBITDA is a very good proxy for pre tax cash flow. In our case, because of our NOLS also after tax cash flow. So we use EBITDA as a proxy for cash flow. In the warranty businesses, we use something internally called modified cash EBITDA. And it's a little different than what you would see in our financial statements. And we're not permitted to disclose it, because it deviates from accepted revenue recognition rules under GAAP.

Some people call EBITA bullshit metric.

I think thats true we're in businesses, where there is some capital intensity in our case, the depreciate theres very little depreciation in the a is all amortization it all comes from <unk>.

Purchase accounting it's not.

Wasting of an asset so I think EBITDA is a very good proxy for pre tax cash flow in our case because of our Nols also after tax cash flow. So we use EBITDA as a proxy for cash flow.

In the warranty businesses, we use something internally called modified cash EBITDA.

And it's a little different than what you would see in our financial statements and we're not permitted to disclose it because it deviates from accepted revenue recognition rules under GAAP.

John Fitzgerald: But we think that it is a better proxy for economic value added in the period in a business where there is significant deferred revenue. You can find the method for calculating that in our CIBC loan agreement, which was filed as an exhibit to our 2020 Form 10-K and what I believe I can say, Adam, is that at warranty holdings, our total outstanding senior debt under the CIBC facility at quarter end was $16.7 million. And our senior leverage ratio under that loan agreement was 1.39 times. So you can do the math, that's sort of where we are on warranty. That's how we think about it. Right. That's all I probably can say. Ravix does not have deferred revenue. And so GAAP EBITDA works for our internal purposes. And the same will be true of C-Suite. 

Proxy for economic value added in the period in a business, where there is significant deferred revenue.

Yeah.

You can find the method for calculating that in our CIBC loan agreement, which was filed as an exhibit to our 2002.

<unk> Form 10-K.

And what I believe I can say Adam is that at warranty holdings, our total outstanding senior debt under the CIBC facility at quarter end was $16 7 million.

And our senior leverage ratio under that loan agreement.

Was 139 times.

So you can do the math, that's sort of where we are on warranty.

How do we think about it right that's all I probably can say.

<unk> does not have deferred revenue and so GAAP.

GAAP EBITDA works for.

Our internal purposes, and the same will be true of C suite.

Sure.

Adam Patinkin: 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 C-Suite. 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?

On the warranty side plus call it five or six from <unk> plus C suite. So if I'm thinking about kind of this proxy for economic cash flow, maybe it's a little bit higher than I had suggested something like 17 or $18 million and then hopefully youll be able to grow it from there.

Is that fair I think that's fair.

John Fitzgerald: I think that's fair.

Adam Patinkin: Okay. That makes sense. Great. And then, my last question here, is maybe more a qualitative question. 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, C-Suite? What allows you to do that, where maybe sellers would find it more attractive to partner with you, relative to others?

It really feels like you are building, a flywheel, where you're continuing to add.

These wonderful operating businesses you are generating a lot of cash that cash allows you to get more of the operating businesses.

<unk> and <unk>.

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.

We're growing the operating profitability of your businesses, which again I think is the key metric to look at and May be talk to 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 Rayovac C suite, what allows you to do that.

There may be.

<unk> would find it more attractive to partner with you relative to others.

John Fitzgerald: Yes. Okay. So I'll break that kind of into two parts. The first is sort of the flywheel effect, and how can we -- what's the size of the opportunity set to continue to redeploy the capital? So I agree, there is a flywheel effect here, right. And as we grow, obviously, right now, we're focused on getting out from under the TruPs debt and things, but as we grow a combination of the delevering of the businesses we own, and the internal cash flow that they generate, auto provide all of the capital that we need to continue to do more acquisitions, right. And so that, I think that's the flywheel that you were speaking to, right. So the business continue to grow organically and the acquisition without needing any additional capital.

The size of the opportunity set to continue to redeploy the capital. So I agree there is a flywheel effect here right and as we grow.

Obviously right now we're focused on getting out from under the Trups debt and things.

But.

As we grow.

A combination of the delevering of the businesses we own.

The internal cash flow that they generate.

Or to provide all of the capital that we need to continue to do more acquisitions right.

And so that I think that's the flywheel that you were speaking to right. So the business continue to grow organically and via acquisition without needing any additional capital.

John Fitzgerald: And, so why do we think that we can differ? Or how can we differentiate to be successful with that and what do we think the scale of that looks like? So right now, we have three entrepreneurs in our Kingsway Search Xcelerator program actively looking for new acquisition opportunities. We hope to add to that. I'd say kind of, at any given time, we would expect to probably have more like four or five people actively searching for new acquisitions. And that would probably translate into two to three acquisitions of lower middle market businesses that fit our criteria. That if history is a tell, would sort of be generating in that $1.5 million to $3 million of EBITDA range.

And what do we think the scale of that looks like so right now we have three entrepreneurs and our Kingsway search accelerated program actively looking for new acquisition opportunities.

We hope to add to that I think kind of.

At any given time, we would expect to probably have more like four or five people actively searching for new acquisitions and that would probably translate into two to three acquisitions of lower middle market businesses that fit our criteria that if history is a tell would sort of be generating in that one 5% to $3 million.

The EBITDA range.

John Fitzgerald: And then I think like the final part is how do we differentiate? Why do we think that we can be successful competing in what is a very competitive market for buying great businesses, right. And I think that comes back to Adam, just sort of some of the fundamental characteristics of what has made Search, what's now more commonly referred to as ETA, Entrepreneurship Through Acquisition would made it successful. And if you think about the universe of operating companies in the lower middle market, a large percentage of them are still founder-led owner operator. And a lot of those owner operators are reaching the age where they're thinking about retirement and getting liquidity for what is often the largest asset that they have.

How do we differentiate.

Why do we think that we can be successful competing in what is a very competitive market for buying great businesses right.

And I think that comes back to Adam just sort of some of the fundamental characteristics of that.

Of what has made search or whats now more commonly referred to as Eth entrepreneurship through acquisition would have made it successful.

And if you think about the universe of opt.

Operating companies in the lower middle market.

A large percentage of them are still.

Founder led owner operator.

Out of those owner operators are reaching the age where theyre thinking about retirement.

In getting liquidity for what is often the largest asset that they have.

John Fitzgerald: A lot of those founders are one, very leery about selling to a strategic. They value their employees, they value their legacy, their brand, their products, and so they're a little nervous about selling to strategic acquirers for fear of what might happen to their employees and the thing that they built. And then on the other hand, if you think about other players in the lower middle market, like private equity, typically private equity has to back an incumbent management team. And for a founder who wants to retire, it's not a perfect fit. And in small businesses, from private equity perspective, it's also pretty -- it's not a great return on time to buy a business and then have to go kind of reload the management team.

Selling to a strategic.

The value of their employees they value their legacy their brand their products and so Nate.

They are a little nervous about selling two strategic requires for fear of what might happen to their employees and they're in there and the thing that they built.

And then on the other hand, if you think about other players in the lower middle market private equity.

Typically private equity has to back an incumbent management team.

And for our founder who wants to retire its not a perfect fit.

And in small businesses from private Equity's perspective, it's also a pretty it's not a great return on time to buy a business and then have to go kind of reload the management team.

John Fitzgerald: So that's where ETA I think, is a very uniquely shaped key to solve the problem that a lot of founder-led businesses have, which is liquidity and management succession. So we like to think of it as we call it succession capital, we provide capital, and we provide management talent. And I think that because of those two things, we can often differentiate and compete and win even at an auction process at a lower price, because we have a really unique solution. When I say we, I mean, ETA broadly. And I think that's what's made it successful. I think with specific to Kingsway, we bring an extra sort of level of confidence and imprimatur of our entrepreneurs are backed by a publicly traded company. And so that just lends a lot of credibility in a deal process.

And I think that because of those two things, we can often differentiate and compete and win even in an auction process at a lower price because we havent really unique solution when.

When I say, we I mean.

Broadly and I think that's what's made it successful.

I think with.

Specific to Kingsway.

We bring an extra sort of level of confidence.

And imprimatur of our entrepreneurs are back.

Publicly traded company and so that just lends a lot of credibility in a deal process.

Adam Patinkin: Great, thank you guys. I'll leave it there. And I'll let the next folks ask questions. Thank you. 

Thanks Pat.

Multiple speakers: [Kent Hansen] Thanks, Adam. [Operator] Our next questioner is Richard Gatward from Freedom Capital Markets.

Hello, guys.

Richard Gatward: Hello, guys. Firstly, Adams actually -- 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 as 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? 

Adam asked three questions, which touch on a number of.

Topics that I wanted to bring up so thank you Kurt.

Clarify on those things and I do absolutely want to.

Reiterate.

The transparency that you are selling in terms of having needs.

Earnings calls.

Very helpful and will ultimately I think.

The valley of your enterprise over the long term.

Very glad to see that.

Just a couple of questions around the.

<unk>.

The accelerator and you highlighted that you have three entrepreneurial looking at opportunities.

om

How are these opportunities coming to you guys proactively going out looking for them or do you have.

Small investment banks or.

Our individual business on is actually approaching you with these opportunities.

John Fitzgerald: Yes. I mean, I guess the quick answer is yes. But really both, right? And so -- we sort of run a two pronged business development approach. So each one of the entrepreneurs has identified a handful of industries that meet our criteria. And then, we use subscriptions to databases of private companies to mine for contacts -- high level contacts at those companies and we run a proprietary outbound search campaign in target industries. And that starts with outbound emails that show our criteria and our interest in the industry, snail mail, follow up a phone call. So there's a very kind of time consuming and robust effort to make direct contact with business owners in an industry, whether or not they're for sale in a way to try to engage with that owner in a non-processed situation. 

We sort of run a two pronged business development approach. So each one of the entrepreneurs has identified.

Handful of industries that meet our criteria.

And then we use.

Subscriptions to databases of private companies to mind for.

Contacts high level contacts at those companies and we run.

Our proprietary outbound.

Search campaign in targeted industries.

And that starts with starts with outbound E mails that show our criteria and our interest in the industry snail, mail follow up with phone calls. So there is a very.

Time consuming and robust effort to make direct contact with business owners in an industry, whether or not they're for sale.

In a way to try to engage with that owner in a non processed.

Situation, but.

John Fitzgerald: But we also have a database of 3,000, maybe 4,000 intermediaries, everything from brokers and investment bankers to private wealth management, accountants, law firms that we do sort of a drip marketing campaign with that continue to stay on top of their radar if they have an opportunity that fits our criteria. So we kind of run it both ways.

4000 inner.

Intermediaries.

Everything from brokers and investment bankers to private wealth management Accountants law firms that we do sort of a drip marketing campaign with that continue to stay on top of their radar if they have an opportunity that fits our criteria. So we kind of run it both ways.

Richard Gatward: 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 props at an average cost of $0.65 on $1, including deferred interest, is that accurate?

Deleveraging the balance sheet I think as all of his insight and the bleeding obvious for Easter.

Key to success going forward for you guys. So.

<unk>.

<unk>.

I just wanted to be clear so you have effectively retire.

Five of the six.

At an average cost of $65, including.

Interest is that accurate.

John Fitzgerald: 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 showing as deferred on our balance sheet at 9/30. 

Nitpick, a little bit we have we have options to retire the trups debt.

Hi.

On five of the six series.

For between 63% and 63, 75% of the cumulative outstanding principal and the interest that was deferred up until August 2nd.

Mhm.

Okay, which is slightly slightly less than what it's showing is deferred on our balance sheet at 930.

Okay.

Richard Gatward: Okay. And in terms of the real estate assets, have the non-recourse debt on your balance sheet -- is there -- 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 of?

Have the non recourse.

Debt on your balance sheet is there.

What is the process for executing a sale of note is that in process is that something you're thinking about is that something that you've engaged with potential buyers of.

John Fitzgerald: 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.

Richard Gatward: 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 give 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 IR firm? Or are you really just focused on growing the business first?

I understand that.

And just finally do you feel that you're in the position.

I know that you guys are focused on running your business.

But the fact that you guys are having the first conference call in discussing the results for the first time in quite a while.

Sure.

I think give you the opportunity to talk about the story more to investments you guys have a pretty narrow shareholder base do you do you see that as a.

A priority in terms of getting out and talking to your story engaging with.

Ill.

Or are you really just focus on growing the business for us.

John Fitzgerald: 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 come to the calls with great questions. And 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 a high quality shareholder. 

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 come to the calls with great questions.

And so we're in the process of.

Developing.

Our campaign, if you will to try to get out and tell our story to what we.

We believe would be a high quality shareholder.

Okay Alright.

Richard Gatward: Okay, JT. Alright. I appreciate the answers on that. Thank you very much.

Kent Hansen: 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 repurchase.

And those options expire may.

<unk>, so we have until that time to execute repurchase.

Yes.

Richard Gatward: Okay, yes. Okay, thank you. 

Yes.

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

Christian Solberg: Hey, JT. Hey, Ken, how are you?

John Fitzgerald: Christian, great. Thank you. 

Excellent first.

Christian Solberg: Excellent. First question. Churn is a really important metric. Obviously, it has many different definitions, 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?

<unk> is a really important metric.

Obviously it has many different definitions 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.

John Fitzgerald: 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. And so we think about churn a lot. We don't publish it, because there's a lot of different definitions for churn. And so, we kind of look at it three ways. The first is just sort of logo churn. And by that we mean like 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. And we kind of look at this at the individual company level. But we also like -- I'll kind of walk through that real quickly for you. Company like IWS, which has long standing relation, 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.

So we think about churn a lot.

We don't publish it because there's a lot of different definitions for churn rate and so we kind of look at it three ways. The first is just sort of logo churn and by that we mean like what.

Whats the number of total customers that you lost in any given year as a percentage of.

The total number of customers you started the year with right.

And we kind of look at this at the individual company level, but OXXO kind of walk through that real quickly for you.

Companies like AWS, which has long standing relation 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.

Were they switcher or.

Acquired.

Sure.

John Fitzgerald: And kind of the result of that is kind of 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. And at IWS basically have, even though they may lose 1% of customers, that customer, usually a small one. And so you have essentially no gross revenue churn. And then I will stick on IWS, just kind of walk through it.

And at AWS to basically have them even.

Even though they may lose 1% of customers that customer usually a small one.

And so you have essentially no gross revenue churn.

And then I'll stick on IDB W asked just kind of walk through it.

John Fitzgerald: And then we look at net revenue churn, which is sort of the revenue from your -- the customers you maintained or kept as a percentage of their prior year revenue and to make sure that they are like, continuing to -- you're growing those relationships. And so, 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. And so their logo churn is actually pretty high. Dealers are always switching. These aren't exclusive relationships. They hop around to different product providers. And so the logo churn in those businesses is 30%, 35%.

Revenue from your customers you maintained or kept as a percentage of their prior year revenue.

Prior year revenue and to make sure that they are continuing to.

You're growing those relationships and so at AWS, we have negative net revenue churn negative being a good thing they are growing.

Like eight 7%.

PW I and <unk>, it's a little bit different story right. They have.

<unk> and hundreds of auto dealerships all over the country and so their logo churn is actually pretty high dealers are always switching these arent exclusive relationships they hop around to different product providers and so the logo churn in those businesses is 30% 35%.

John Fitzgerald: 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 kind of high teens percent of gross revenue. And then 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. And we talked about that a little bit with some of the challenges in the used car market with inventory.

High teens percent of gross revenue.

And then on a net churn basis.

PW I actually.

Has churned about 5% of its net revenue, which means its existing customers are doing less business. This year I think we talked about that a little bit with some of the challenges in the used car market with inventory.

John Fitzgerald: PAN, their 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 just 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 about 2.5% to 3%. And then net revenue churn is negative again, by about 8.5%. So their existing customers are growing this year. So I think those dynamics really speak to the power of the attributes of extended warranty. These great recurring revenue profile with low to no gross and net churn.

And then and then at Trinity, which is our other sort of warranty business and I'll talk just about the warranty side, which is where we focus on the churn metrics logo churn is about 14% gross revenue churn is very small customers. They lose again, our small customers. So gross revenue churn about two 5% to 3% and then.

Net revenue churn.

As negative again by about eight 5% so theyre existing customers are growing this year.

So I think.

<unk> dynamics really speak to the power.

Of the attributes of extended warranty.

Great recurring revenue profile with with.

Low to low to no growth in net churn.

Christian Solberg: That's great. That's really helpful. Thanks for breaking it down like that. How about for businesses like Ravix and C-Suite?

John Fitzgerald: Yes. So Ravix about 20% logo churn. Their gross revenue churn is about 6.8%. So I guess that just speaks to the logos that churn out are typically smaller. And then again, at Ravix this year, the net revenue churn is actually negative 8.5% to 9%. So the customers that they retained are growing. I don't -- we haven't been able to do the full deep dive to dissect this the way that we like at C-Suite, but I will report back.

Their gross revenue churn is about six 8%. So I guess that just speaks to the logos that churn out are typically smaller and then again at <unk>. This year. The net revenue churn is actually negative.

Eight 5% to 9% so the customers that they retained are growing.

I don't we haven't been able to do the full deep dives to dissect. This the way that we like at C suite, but.

I will report back.

Multiple speakers: [Christian Solberg] Right, well, it sounds like a similar type of business. So, that will definitely -- [John Fitzgerald] I would expect similar.

I would expect I would expect similar.

Yes.

Christian Solberg: 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? 

Christian Solberg: 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?

How do you think about that hurdle rate.

Yes so.

John Fitzgerald: 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. And so, when we're looking at investments, I like to think about an unlevered return on invested capital. And we use a 20% hurdle. And so, not surprisingly, the calculated IRR on our TruPS repurchase 20%, which is how one of the ways that we arrived at the percentage we were willing to pay as a discount, right.

That's not a forecast.

<unk> goal, but I think it informs where we how we think about our internal hurdle rate and so when we're looking at investments.

I like to think about an unlevered return on invested capital and we use a 20% hurdle.

And so.

Not surprisingly the calculated IRR on our trups repurchase 20%.

Which is.

One of the ways that we arrived at the percentage, we were willing to pay us 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 would be willing to pay more for a growing business. And then within the Search Xcelerator, we also look at it come through an LBO model and look at a sort of a minimum 35% IRR target as well.

You just kind of quick math, if you are 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 would be willing to pay more for a growing business right.

And then within the search accelerator. We also look at it come through an LBO model in and look at a sort of a minimum 35% IRR target as well.

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

That said these in the search accelerated model, we're talking about 35% hurdle because those are levered returns.

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

And that ought to equate to a 35% levered.

Okay great.

Christian Solberg: 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?

John Fitzgerald: Yes. And then they also, like, what -- PWSC we sold it for $51.2 million, which you guys see coming through the income statement, kind of TTM at the time we sold, it was probably around $2.2 million of EBITDA -- GAAP basis EBITDA, it looks like we sold over 25 times kind of thing, right? TTM to us modified cash was higher about 3.3, 3.4. And then the buyer then -- so then, so $51.2 million on $3.3 million trailing, still a very juicy multiple. The buyer gave us credits pro forma for run rate new business that we had acquired, that we expected to come on, had already come on, and then kind of annualized that. So, I would say that they were thinking about paying 12 times to 13 times forward.

Like what.

Pwc, we sold it for $51 $2 million, which you guys see coming through the income statement kind of TTM at the time, we sold it was probably around $2 2 million of EBITDA GAAP GAAP basis EBITDA. It looks like we sold over 25 times kind of thing right.

TTM to us.

Modified cash was.

Higher about 3334 and then the buyer then so then.

$51 $2 million on $3 3 million trailing still.

Still a very juicy multiple.

The buyer gave us credits pro forma for run rate new business that we had acquired that we expected to come on it already come on and then kind of annualize that.

No.

I would say that they were thinking about paying 12 times.

<unk> 13 times forward.

Christian Solberg: 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?

Yes, it's incredible.

Seeing multiples in that arena with private transactions remaining that high in this environment or are you starting to see them comparable transactions starting to tick down.

John Fitzgerald: I don't have any tangible evidence yet. I would -- and so -- and what I'm hearing is that there's a great sorting out going on. So deals that we're about to get closed or maybe on pause, I don't know that things have reset yet. I would say that there's going to be some movement. That said, for really high quality assets like in the MGA space, like PWSC, there's still a lot of capital out there looking to be deployed. And so, I don't -- obviously, it's part of -- it's a function of the availability of leverage, but, and the pricing of that leverage, but high quality assets, I think are still going to be pretty dear to people, and there's still a lot of capital out looking for them. So I hope they reset in warranty so that we have some opportunities to buy good assets at prices we would be willing to pay, but haven't seen it yet. 

Good.

And what Im hearing.

Is that.

There is a great sorting out going on so deals that were about to get close or may be on pause and I don't know that things have reset yet I would say that there's going to be some movement that said for really high quality assets like like in the MGA space like Pwc Theres still a lot of capital.

Out there looking to be deployed and so obviously as part of it's a function of the availability of leverage but in the pricing of that leverage but high quality assets I think are still.

We're still going to be.

Pretty gear to people and Theres still a lot of capital out.

Looking for them so I.

I hope they reset.

Yep.

In warranty right.

So that we have some opportunities to buy good assets at prices, we would be willing to Pat.

But.

Haven't seen it yet.

Got it.

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

Pwc.

Potentially.

Hopefully, but put those proceeds into redeeming the trups so yes.

Yes, great work and thanks for putting together this call.

John Fitzgerald: Yes, thank. 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, young talented guy that we brought into a business that he didn't know to transition out management and run it and grow it. And so, our motivations were probably threefold. One was 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.

Test case for the search accelerators segment. He was our first sort of entrepreneur young young talented guide that we brought into a business that he didn't know to to transition out management and run it and grow it.

So our motivations were probably three or four one was.

Demonstrate the power of the model.

To 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.

Operator: We now turn to James Carbonara who has questions from email.

James Carbonara: 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?

So we did have some questions come in on E Mail.

First one it looks like a two parter can you talk about the synergies between <unk> and C suite and do you envision additional acquisitions over time for.

For the <unk>.

John Fitzgerald: 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, HR services, including fractional CFOs. But a lot of additional accounting support at lower levels from controller all the way down to bookkeeper. And their customers are predominantly portfolio companies and venture capital firms. And Ravix often can't find CFO talent when a customer or prospect is looking for an interim CFO or permanent CFO resource.

Often paid for rarely materialized. So we definitely didn't go into the deal.

With synergies in mind, but that said I think that theyre very complementary businesses.

Maybe maybe start with how they are different.

As most of you know <unk> provides outsourced accounting HR services, including fractional CFO .

But a lot of additional accounting support at lower levels from control or all the way down to bookkeeper.

And their customers are predominantly portfolio companies of venture capital.

Firms.

And <unk>, often can't find CFO talent when customer a prospect is looking for an interim CFO or permanent CFO resource.

John Fitzgerald: On the other hand, CSuite offers only interim CFO services and CFO placement. And 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. And CSuites customers are often portfolio companies of private equity firms. So 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 sort of industry verticals, venture capital and private equity. And so, 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.

And they refer out all of the lower level of accounting from controller level on down and HR work at their clients to other firms.

Our competitors.

Yes.

And C suites customers are often portfolio companies of private equity firms. So.

The combination of these two businesses is very complimentary and that each one of them can now provide a very comprehensive service offering across each one of their sort of industry verticals venture capital and private equity.

And so any historical leakage from C suites.

The lower level of accounting and HR.

Referral work.

That they used to refer to other competitors will come to <unk> and then likewise in return.

CFO placement opportunities that <unk> has been referring to other outside staffing firms can be referred to C suite.

John Fitzgerald: So that's sort of the complimentary service and sort of 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? 

Timmy will be running both businesses, so I think that.

Eliminates one redundancy, but.

We don't really model cost synergies.

<unk>.

And approach the acquisition.

As if it was a standalone.

And then James I think part two was additional acquisitions for <unk> did I get that right.

That's correct.

James Carbonara: Yes, that's correct.

John Fitzgerald: 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. And several months out, 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 -- and be prudent and patient, so I'll leave it there.

Companies and making sure that transition goes very smoothly and Timmy.

<unk> arms around that group of folks and executes their growth plan.

And.

Several months out to a year out after some de levering we can we can look at other.

Inorganic opportunities I know, Tim and Arthur the former owner of identified north of 200 potential.

Acquisition targets. So it's certainly something we're thinking about but in my experience business is often more often than not die of indigestion not starvation. So you got to you got to get through the one that you just.

Just took down.

Then.

And be prudent and patient.

I'll leave it there.

James Carbonara: 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?

The next question is your press release mentioned, how <unk> has achieved most of their earn out earn.

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.

John Fitzgerald: Yes. So I think it's different. I think it's important to distinguish between achieved and accrued. So the earn-out doesn't actually -- well, there was one xcelerators. Two accelerated payment timelines where a portion of your net can be actually achieved. The first one happened at the end of September, and we paid the first accelerated payment of $750,000 at the end of October. And so -- but just coming back to accrued versus achieved. We have accrued through the third quarter, about $4 million of a $4.5 million earn-out liability. And the earn-out is based upon the achievement of cumulative gross profit in excess of a hurdle over the three years after closing with the maximum payout cap at $4.5 million and it there's some math and a multiplier and things like that. But think about that, the gross profit that the company delivers in excess of a hurdle and that hurdle was based on management's projections at the time of closing. So it would be paying for outsized growth in excess of what they were projecting.

While there were there was one accelerators to accelerated payment timelines, where a portion of the or not can be actually achieved the first one happened.

At the.

End of September .

And we. We paid the first accelerated payment of 750000. At the end of October and so. But just coming back to accrued versus achieve. We have accrued through the third quarter about $4 million of a $4 5 million earn out liability. And the earn out is based upon the achievement of cumulative gross profit in excess of our hurdle over the three years after closing. With the maximum payout capped at $4 5 million and if there is some math in a multiplier and things like that but think about that the gross profit that the company delivers in excess of our hurdle and that hurdle was based on management's projections at the time of closing so this would be paying for outsized growth. We are projecting.

We paid the first accelerated payment of 750000.

At the end of October and so.

But just coming back to accrued versus achieve.

We have accrued through the third quarter about $4 million of a $4 5 million earn out liability.

And the earn out is based upon the achievement of cumulative gross profit in excess of our hurdle over the three years after closing.

With the maximum payout capped at $4 5 million and if there is some math in a multiplier and things like that but think about that the gross profit that the company delivers in excess of our hurdle and that hurdle was based on management's projections at the time of closing so this would be paying for outsized growth.

We are projecting.

John Fitzgerald: Like I said, there are two intermediate accelerated payment dates; the first one was paid $750. The next one is next October. And the sellers have an opportunity to earn an extra $375,000 if we're still in excess of the hurdle at that point. And then the final one is in October of 2024. And at that time, whatever the maximum they were able to earn would be 4.5 million minus whatever was paid in any accelerated payments. I don't know if I did -- if I fully answered the question there or not, James, but do you think it captured the email question? I kind of lost the thread there.

And the sellers have an opportunity to earn an extra $375000. If we're still in excess of the hurdle at that point and then the final one is in October of 2024.

<unk>.

At that time, whatever the Maxim we are able to earn would be $4 5 million minus whatever was paid in any accelerated payments.

So I don't know if I did.

I fully answered the question there are not James that you think are captured the email question I kind of lost the thread there.

James Carbonara: Yes. No. It was a three-parter. 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?

It's a three parter you hit them all.

The next one says.

Continue the CEO of <unk> was the first part.

<unk>.

How was the C suite deal sourced how did it end up with <unk>.

<unk> Standalone company.

John Fitzgerald: 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, and 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. And after digging in into CSuite, the opportunity became pretty evident that this would be a really great fit for Ravix. And Charles handed that relationship with Arthur over to Timi, and Timi and Arthur hit it off and continue to progress towards the closing and now post closing and working together. But it was originally sourced through one of our other search entrepreneurs. Interesting question. 

Yes.

It was actually sourced by another searcher on the search accelerated platform Charles <unk>, who I think we introduced at the shareholder day last year.

And I think maybe speaks to the power of the search accelerator model to find new opportunities for portfolio companies that we already have.

Charles found this opportunity developed a relationship with Arthur the seller.

And after digging in.

Indices sweeten the opportunity became pretty evident.

This would be a really great fit for <unk>.

And Charles handed that relationship.

With Arthur over to Timmy, and Timmy and Arthur hit it off in and continue to progress.

Towards the closing and now post closing working together so.

But it was originally sourced through one of our other <unk>.

Search entrepreneurs, it's an interesting question.

Great.

James Carbonara: Great. 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?

John Fitzgerald: 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 it 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 allocators standpoint, we would continue to allocate that capital to that business to maximize its organic growth. But generally, there's often inorganic growth thesis to a lot of these acquisitions. So yes, I think that's right. 

More broadly I think that each one of the acquisitions we do. Under the search accelerate has the potential to be a platform for follow on acquisitions Tuck ins. Again, right that it would have to be part of the original investment thesis if it's a high growth business with that can use all of its capital to grow at really high rates of return. I think we would. From a capital Allocators standpoint, we would continue to allocate that capital to that business to maximize its organic growth but. Generally there is theres often. The inorganic growth thesis two out of these acquisitions. So so yes, I think thats right.

Under the search accelerate has the potential to be a platform for follow on acquisitions Tuck ins.

Again, right that it would have to be part of the original investment thesis if it's a high growth business with that can use all of its capital to grow at really high rates of return.

I think we would.

From a capital Allocators standpoint, we would continue to allocate that capital to that business to maximize its organic growth but.

Generally there is theres often.

The inorganic growth thesis two out of these acquisitions. So so yes, I think thats right.

Like I said.

John Fitzgerald: 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. And that might take a year or more even two years and they hit that flywheel point where through the combination of deleveraging and internally generated cash flow, they have now the resources to do a follow on acquisition with no additional capital required. So that's kind of the model.

And 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.

Also work on that organic growth before they start looking for new acquisitions.

That might take a year or more.

I mean two years.

And they hit that flywheel point, where through the combination of Delevering and internally generated cash flow. They have now the resources to do a follow on acquisition with no additional capital required. So that's kind of the kind of the model.

James Carbonara: 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?

Things were uses its nols against taxable income of the subsidiary companies.

Well this is Mike.

John Fitzgerald: Well, this is like cash flow plumbing and then among all of our complicated structures, I'll flip that over to Kent. Do you want to -- how do we use our NOLs for our --

Flip that over to Kevin you want to yes.

Use our Nols.

For our operating I'll give <unk> a break here.

Kent Hansen: I give JT a break here to grab a cup of water or something. So yes, usually when we talk about our NOLs it's federal NOLs. We have just under $800 million available as of the end of September. And 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. And so what we'll do is we'll calculate their federal tax too as if they were their own standalone company and so 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 subs. And so, in that regard, we're much like IRS for our companies because 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. But by way of sort of remitting that capital up to hold co, it's sort of burning off those NOLs and monetizing those and then as a side benefit is providing an additional cash flow stream for the holding company. 

So usually when we talk about our Nols Federal Nols.

We have just under $800 million available as of the end of September .

And what we do is when we look at each of our individual companies that we own. We we view each of those has sort of standalone entities for federal tax purposes, and so what we'll do is we'll we'll catch.

<unk> their federal tax too as if they were their own Standalone company.

So 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 subs and so in that regard we're much like the IRS.

For our for our companies because 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 benefit them will room at that back but by way of sort of remaining that capital up to the holdco, it's sort of burning off those Nols and monetizing those and then as a side benefit is providing an additional cash flow stream for the holding company.

Great.

John Fitzgerald: And 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.

B L.

Eric quote receiving distributions from our operating businesses and compliant with our.

With our bank agreement, so because if it had been.

Kent Hansen: 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.

James Carbonara: 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.

Kent Hansen: Yes. So much of the NOLs originated in the late 2000s and early 2010s. And so, at that time, they had a 20 year life to them. So, we actually have a schedule in our 10 -- if you look at our last 10-K, we do schedule those out, so people can see those. But I think it might be note 15 or somewhere around there. But they begin to expire in 2027. But 2029 is the big year where we have almost 500 million of NOLs expiring in that year. And then 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.

And so at that time, they had a 20 year life to them. So we.

We actually have a schedule in our 10, if you look at our last 10-K, we do schedule those out so people can see those but.

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 where we have almost $500 million of.

Nols expiring in that year, and then in 2030 and the following years.

Just various amounts that.

That expired in each of those years through I think it's about $1 37 I believe.

James Carbonara: 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? 

Three more here the first of the last three years 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 you can continue to find qualified professionals.

Yes.

John Fitzgerald: Yeah, 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 and we remain active in that ecosystem, not only through the Search Xcelerator, but through Argo partners, our sort of investment management firm that makes investments in search funds. So we are sort of plugged in to that universe, so to speak. And there's a lot of word of mouth and information sharing there.

Yes.

I think the way that we source from us.

Probably several different ways first of all the Eth entrepreneurship through acquisition, which I mentioned earlier community and ecosystem is it's pretty close knit and we remain active in that ecosystem not only through the search accelerator, but through argot partners are sort of an investment management firm that makes investments in search funds. So we.

Sort of plugged in.

To that universe, so to speak.

There's a lot of word of mouth.

And information sharing there.

We also.

John Fitzgerald: We also actively recruit on the campuses of the top tier business school. So we recently did a lunch and learn at HBS, Universe Chicago, Northwestern, Wharton. And we've done that at Stanford and hope to do one here this spring. And we post the sort of the operator and residents job description on their internal job board. So we get a lot of sort of inbound interest through those lunch and learns and presentations and through the job postings. And then there's just a lot of overlap in people's personal networks. So we get a lot of referrals from our existing OIRs.

The top tier business school so.

Recently did a lunch and learn at H B S University Chicago Northwestern.

Gordon.

And.

We've done that at Stanford and hope to do one here this spring and we post post.

The.

Operator, and residents job description on their internal job board. So we get a lot of sort of inbound interest through those lunch and learns and presentations.

And through the job postings.

And then Theres just a lot of <unk>.

Overlap in People's personal networks, so we get a lot of referrals from our existing <unk>.

John Fitzgerald: So, Drew came to us through Tyler. They were both went to West Point. They both went to 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. And that often ends up in being referral into our program. And 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 and so people tend to gravitate towards it. And there's just 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.

Prospective searchers people that are interested in doing entrepreneurship through acquisition often reach out too.

People that.

Have a shared background and have been successful in Etfs.

To get.

Get the get the low down in that often ends up in being a referral into our program and I think we've got something that is there is a little bit differentiated within the broader universe of EPA.

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 and so people tend to gravitate towards it and Theres just a lot of interest in DTA on business school campuses. These days, it's become kind of a real thing that people want to do.

Post graduate school in early in their career.

James Carbonara: 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? And what is the condition of those lenders? Are the lenders open for business? And are they being competitive on their terms?

Last two here.

First of which is a multi part or can you talk about the process for financing the search business.

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.

John Fitzgerald: Okay. So a three parter here. So generally, we're targeting a 50/50 debt-to-equity capital structure. And we feel like this is the right balance. On the one hand, you make your equity sweat, the discipline through debt, while on the other hand -- and also enhancing your equity returns through leverage, while on the other hand, not introducing the risk of insolvency. And so we think that's the right balance of discipline through debt and enhancing equity returns without somehow adding capital structure risk to the equity.

So generally we're targeting a 50 50 debt to equity capital structure and we feel like this is the right balance.

On the one hand, you make your equity sweat right disciplined through debt.

While on the other hand.

And also enhancing your equity returns through leverage while on the other hand.

Not introducing the risk of insolvency and so we think that's the right balance of.

Disciplined through debt and enhancing equity returns without somehow adding capital structure risk to the equity right.

John Fitzgerald: And so 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. And 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 anymore. Several lenders that work with or are familiar with us and/ or the ETA space more broadly. And so, we've got a handful of firms that we go out to and solicit term sheets. And so, I guess the third part is open for business and being competitive. I think, yes, I think they're open for business. And I think the terms are competitive. The pricing is changing, obviously, with 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.

Looking for like two 5% to three turns of leverage and thus.

Thus far.

Up in through.

What we're working on with <unk>, we've been able to get those kind of terms from traditional senior lenders.

Im pretty attractive terms and pricing right.

We have in our sort of rolodex, if you will although no one uses them anymore.

Lenders that work with or are familiar with us <unk> the ETF space more broadly.

And so we've got.

A handful of firms that we go out to and solicit term sheets.

I guess the third part is open for business as being competitive.

I think yes, I think they are open for business.

And I think the terms are competitive the pricing is changing obviously with the rising interest rate environment, but for now anyway.

Predict what the future will hold but.

We seem to be open for business.

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

John Fitzgerald: Yes. Maybe break that apart into extended warranty, and then the Search Xcelerator. I think I've touched on this a couple times here through the questions, but I'll be a little bit more extensive. So within extended warranty as I said before, the universe of attractive candidates is actually pretty small. It's a large and fragmented industry, lots of companies, but the number of high quality companies in my view is actually quite small. And we do see opportunities including several this year that Kent and I really spent a lot of time on. But they've either been not a great fit for us in terms of distribution channel, or the product set that they're providing service contracts on or probably more importantly, they're selling for valuations that are just a lot higher than what we would be comfortable with.

High quality companies in my view is actually quite small.

And we do see opportunities, including several this year that Kevin I really spent a lot of time on but.

They've either been not a great fit for us in terms of distribution channel or the or the product set that they are providing.

Service contracts on or probably more importantly, they are selling for valuations that are just a lot higher than what we would be comfortable with so.

John Fitzgerald: So that said, I suspect given some of the new macro backdrop that I was talking about with Christian in the higher interest rate environment that there may be a period of sorting out here, and then things may sort of trade at better multiples, which get us sort of interested in excited and be able to hit our internal IRR targets. But in any event, given the smaller universe of high quality assets I think it will always be somewhat episodic. Contrast that with the Search Xcelerator, each one of our -- we call them a searchers, we call them OIRs - operators and residents, but so each one of OIRs maintains a very active pipeline of opportunities. And we are at any given time at various stages with dozens of potential acquisitions.

And the higher interest rate environment that there may be a period of sorting out here and then things may sort of trade it at better multiples get us sort of interested and excited to be able to hit our internal IRR targets.

But in any event given the smaller universe of high quality assets I think it will always be somewhat episodic.

Contrast that with search accelerator each one of our what we call the searches we call them <unk> operators and residents but.

So each one of our <unk>.

It maintains a very active pipeline of opportunities and we are at any given time at various stages with dozens of potential acquisitions.

John Fitzgerald: It's sort of like the 100 to one principle where if you want to end up with one great acquisition, you need to start with 100 opportunities at the top of the funnel. And so, when Richard was talking about how you do the outreach, we're constantly talking to business owners, constantly reaching out to brokers and bankers and other intermediaries and fill in that pipeline and are at any given time I don't know, how many NDAs? Kent, what do you think? Probably NDA with 30 companies at a time kind of thing it feels like?

So Richard was talking about how you do the outreach.

We're constantly talking to business owners.

Constantly reaching out to.

Brokers and bankers and other intermediaries and filling that pipeline and are at any given time I don't know how many NDA as Kent, what do you think.

NDA with 30 companies at a time kind of thing it feels like it's a lot yes.

Kent Hansen: A lot.

John Fitzgerald: Yes, a lot. With the goal of there are no called strikes and investing. We're going to be disciplined and wait for a fat pitch, but we got to see a lot of pitches in order to see the fat one.

There are no called strikes and investing we're going to be disciplined and wait for a fat pitch and but we got to see a lot of pitches in order to see that one.

James Carbonara: Excellent. Thank you so much. Operator?

Operator?

Operator: There appear to be no further questions in the queue. Do you have any closing thoughts at this time? 

Yes.

John Fitzgerald: No. I really appreciate everyone that took the time out of their day to come in and listen and for those of you asked questions, that was really great and really engaging. Hopefully, you learn more. And like I said at the outset, we're 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.

For those of you.

Questions that was really great really engaging hopefully you learn more.

I said at the outset, we're 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.

John Fitzgerald: 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 in our filings. So sometimes people will shy about asking a question in front of a group, so if you want to talk to me directly, don't hesitate.

Follow up with questions from either me or Kent directly.

Happy to happy to answer those and just reach out to me via E Mail.

I believe is on the website or in our <unk>.

Filings so.

Sometimes people are a little shy about asking a question in front of a group. So if you want to talk to me directly don't hesitate.

Operator: This does conclude today's conference. Thank you for your participation and you may disconnect your lines at this time. 

Have a good day.