Good day and welcome to Kingsway First Quarter 2023 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. [Operator Instructions] With me on the call are J.T. Fitzgerald, Chief Executive Officer; and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results or trends could materially differ from those contemplated by those forward-looking statements. For discussion of such risks and uncertainties 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 as well as other reports that the Company files from time-to-time with the Securities and Exchange Commission. Please note too, that today's call may include the use of non-GAAP metrics that management utilizes to analyze the Company's performance. A reconciliation of such non-GAAP metrics to the most comparable GAAP metrics is available in our most recent press release, as well as it's in our periodic filings with the SEC. Now, I'd like to turn the call over to J.T. Fitzgerald, CEO of Kingsway. J.T., please proceed.

Thank you, Tom. Good afternoon and welcome to the Kingsway first quarter 2023 earnings call. Thank you for joining us. Let me begin by saying we were very pleased with our start to 2023 with solid financial performance and operating results that generally met our expectations, despite an environment of macro uncertainty regarding interest rates and inflation. Importantly, we further simplified and strengthened our balance sheet with the repurchase of nearly all our trust preferred debt and recorded a nice gain. With a cleaned up balance sheet and the liquidity and capital resources we have available. We are poised to execute on our strategy for future growth. As of March 31, 2023, our trailing 12 months consolidated adjusted EBITDA was 11.5 million, an increase of nearly 80% over the comparable year ago period. Our trailing 12 months adjusted EBITDA run rate of our operating businesses continues to be in the 18 million to 19 million range. Turning first to our extended warranty segment. On a pro forma basis, first quarter warranty revenues increased 3% over last year, and pro forma adjusted EBITDA increased by 17%. Please note that our pro forma results exclude PWSC, which was sold in Q3 of 2022. And our auto focus warranty businesses higher used car prices and increasing financing costs continue to have a modest impact on industry wide demand. Despite these macro conditions, our warranty businesses continue to execute and find opportunities for growth. As used car prices begin to normalize, particularly at the older end of the spectrum where our products are most relevant, we continue to expect that declining used car prices will offset some of the impact of higher borrowing costs. And our mechanical and HVAC focus warranty business ongoing supply chain backlogs for new equipment continue to pose challenges. As…

Thank you, J.T. Before I get started as a reminder, during the fourth quarter of 2022, we began executing a plan to sell one of our subsidiaries, VA Lafayette as part of our strategic shift away from the leased real estate, assets and to simplify our capital structure. The VA Lafayette is included in discontinued operations, and its assets and liabilities are reported as held for sale. The results of its operations are reported separately and not included in the results I'm about to discuss. Income from continuing operations was $27.7 million for the first quarter of 2023, compared to a loss from continuing operations of $4 million in the first quarter of 2022. The current period includes a $31.6 million gain on the extinguishment of debt related to the repurchase of our TruPs, as well as interest expense on all six tranches through the date of repurchase. Consolidated adjusted EBITDA was $2.4 million for the first quarter of 2023 a $1.4 million or 135% increased compared to consolidate adjusted EBITDA of $1 million in the first quarter of last year. Combined operating income for extended warranty and KSX was $3 million for the first quarter 2023, compared to $2.5 million in the prior year. Combined pro forma adjusted EBITDA, which excludes the results of PWSC that we sold in July of 2022 was 3.5 million in the first quarter of 2023 and $2.4 million in the first quarter of last year or an increase of 44%. Breaking this down by reportable segment. In extended warranty first quarter 2023 pro forma adjusted EBITDA was $1.8 million, or 10.9% of pro forma extended warranty revenue, compared to $1.6 million, or 9.6% of pro forma revenue in the first quarter of last year. The first quarter of 2023 was impacted by the…

[Operator Instructions] We have a question from Adam Patinkin. Adam, your line is live. Please proceed.

So I guess, I've just a few quick questions. So my first one is, I was interested in the hiring of Charlie Joyce. Can you expand on his role and what you expect him to bring to the team? And what that might mean for your ability to maybe attract additional OIRs and to conclude purchases of businesses in the KSX segment?

So Charlie, great background, was doing a self-funded search. And so understands the ETA community very broadly. And the thought process here is to really lean into our sourcing process here at KSX to allow our OIRs to focus on more direct sourcing in specific industries of interest. So Charlie will be predominantly focused on building out our database of intermediaries, brokers and investment bankers, and enhancing our outreach process to describe the search accelerator, our acquisition criteria, and the solution that we provide to lots of business owners who are looking to transition into retirement. And so the hope is that we will be able to see a lot more opportunities that are coming through traditional broker and intermediary channel with someone single point of contact at the search accelerator, they can focus on that, that will also provide continuity in that sourcing engine, as new OIRs come onto the platform, and other wires leave when they get an acquisition done. He'll also spend some time focused on our recruiting efforts. He's very plugged in, in the ETA community, as I said. And so he will be a point of presence for the search accelerator, at ETA conferences, on business school campuses, et cetera. So, I think it really enhances our product offering for OIRs to come on board, if they can step into a very vibrant and powerful pipeline of ongoing deal flow through that channel. And I think it also helped that he's out getting the word out in the community.

That’s great. That's a really exciting person to bring on board and it sounds like a really nice fit. Maybe to kind of transition to something you touched on there. Now you have four OIRs and I know you reiterated during your prepared remarks that you're still targeting two to three acquisitions per year. Can you maybe talk about, what you're seeing out there in the market, how your pipeline looks maybe compared to last quarter a few months ago? Just would love any update on, the progress around the OIR and making business acquisitions?

Yes, look, you know, I think broadly, the general M&A environment was a little slow. In the first quarter we certainly saw that at CSuite and Ravix, and I think you've probably read about it. At the lower end of the lower middle market, I think that it remained pretty solid. Credit conditions tightened up a bit, valuation expectations probably are a little mismatch between sort of buyers cost of capital and sellers expectations, but I fully expect that that to kind of revert and the broader sort of M&A environment to unthaw here as we head into the summer. Our pipeline looks pretty strong. Peter and Drew are up to sort of full speed and cranking along. We have Peter Hearne just joined us, so expect to get him up and going. And then obviously, the things that Charlie is doing will only enhance that. We did part ways with one OIR subsequent to quarter end, so we're still at a total of three OIRs with the addition of Peter.

That's helpful to know. And then maybe just one final question on a slightly different topic, which is, I was just scanning through the 10-Q, after you guys released it, and notice that you had a $1.1 million gain or an unrealized gain, and it looks like it's related to Limbach shares. And I noticed that the Limbach, stock price was up a whole bunch today. Can you maybe comment on what that is? And what you plan to do with that? And obviously, anytime you see a million dollar gain that seems like a positive thing. But we'd love to understand kind of a little bit more about what's going on there?

Yes, so that gain is related to warrants that we received in Limbach, as part of this back sponsorship, that Kingsway sponsored, all the way back in 2016, when Limbach went public via a reverse merger. There are $400,015 strike warrants in Limbach. And they're available to cashless exercise and they expire in July. And so, provided the stock price is higher than the strike price, we will cashless exercise for Limbach shares. Those shares will be restricted for six months, I believe. And then we would be able to monetize that that asset.

So have you already exercise that or how does that work in terms of, so I guess that's a really good thing that the stock was up 17% today, but yes, maybe if you could give a little bit more color on whether you've exercised it or not or what your plans are?

We went through a process to just test the extra the cashless exercise to make sure that we had all of the machinations of that understood and could do it timely. So we exercised a small portion of them in the last week or so. And I think the thinking was, we would wait to get through earnings and the potential that they would get added to the rustle and see what the momentum in the stock is heading into the expiration, and so we'll continue to monitor that with a view to maximizing the value, you get a little leverage by not exercising them if the stock price continues to go up, so we're keeping an eye on it.

[Operator Instructions] And there are no further questions in queue at this time. I would now like to turn the floor back to management for closing remarks.

James, did you have any questions that were sent via email? I want to make sure that if people submitted questions via email that we had an opportunity to address those?

Absolutely. Yes, three did come in. The first question that came in was. Is there a targeted hold exit period for investments in the accelerator segment? Are these investments entered into with the expectation of holding indefinitely unless for a compelling external bid?

I think that what I would say is that our general preference would be to hold a great asset indefinitely. We don't go into an investment with a preconceived idea of an exit. That said, if like, like the question, asked if we got to a compelling external bid that allowed us to realize a return and redeploy that capital at a higher rate of return, than we would certainly do that. But I think that our goal here is to build and compound with the great businesses that we're buying with sort of an indefinite horizon.

And the second question that came in was. Can J.T. or Kent comment on the run rate operating costs of the Holdco? What are those currently, and what level of consolidated EBITDA is required for KFS to cash flow?

Yes, thanks James. This is Kent. So, I think I'll talk about the Holdco runway run rate expenses. And when I say Holdco, it means that the corporate team as well as the KSX team, and that hasn't sort of migrated to one of the operations yet. So, if we look at sort of like the cash only spend and not taking into account interest expense, because that's variable, and it's only a small part of our TruPs that are left. So, we're targeting the runway cash expenses, say 1 million to 1.2-ish per quarter.

And the third and final question that came in online was. What would the management team need to see, to engage in buybacks? What are the targets that would trigger them? It does close with saying looking forward to discussion and next week's investor day?

I think I touched a little bit on that in the in the in my comments, presentation. I think that our goal would be to do buybacks in a way that is accretive to our view of intrinsic value per share. And so any buybacks we do would be at a discount to that view. And so that's where we would be looking to repurchase shares.

That does conclude the questions that came in online, J.T., to throw it back to you for any closing comments.

Thanks, everyone for participating in the call this afternoon. Really appreciate your attendance. And I look forward to seeing all of you next week in New York for our Investor Day. Thanks and have a great afternoon.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.