KINS

Business Context and Reporting Period

Company: Kingstone Companies, Inc. (formerly DCAP Group, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The company underwent a significant restructuring during the period, exiting its primary historical operations. The Retail Business (insurance storefronts), Franchise Business (DCAP), and Premium Finance operations have been classified as discontinued operations. Continuing operations now consist primarily of earning placement fees from premium finance contracts and holding notes receivable. Effective July 1, 2009, the company acquired 100% equity in Kingstone Insurance Company (formerly Commercial Mutual Insurance Company) in exchange for surplus notes.

Key Financial Metrics (Six Months Ended June 30, 2009)

Material Changes vs. Prior Period

• Discontinued Operations: The company sold its New York retail assets (April 2009), Pennsylvania retail stock (June 2009), and DCAP franchise business (May 2009). Consequently, revenue from these segments is now reported as discontinued.
  • Retail Business: Revenue dropped 52% to $1.03 million due to the sale of 16 NY locations.
  • Franchise Business: Revenue dropped 18% to $214,000 prior to the May 1 sale.
• Interest Income: Interest income from notes receivable plummeted 89% to $67,782 (from $601,722 in 2008). This was caused by the full accretion of discounts on surplus notes in July 2008 and a reduction in variable interest rates.
• Debt Restructuring: Total long-term debt decreased significantly from ~$2.0 million to ~$547,000. The company prepaid $1.44 million in principal on existing notes and exchanged $519,231 of notes for Series E Preferred Stock.
• Unusual Items: The company recorded $132,836 in "Forgiveness of debt" income, primarily from settlements with vendors regarding disputed prior-period amounts.

Guidance, Outlook, and Risks

• Strategic Shift: The company has pivoted from operating retail insurance agencies to a holding company structure focused on notes receivable and placement fees.
• Subsequent Event (Acquisition): On July 1, 2009, the company acquired 100% of Kingstone Insurance Company (KICO) by exchanging $3.75 million in surplus notes and forgiving $2.25 million in accrued interest.
• Liquidity Constraints: The company has a working capital deficit of approximately $147,000. Due to regulatory restrictions preventing KICO from paying dividends for two years, the company is actively seeking debt or equity financing to meet working capital requirements.
• Preferred Stock Obligations: The company holds $1.3 million in mandatorily redeemable preferred stock (Series E), which carries a dividend rate of 11.5% and is redeemable on July 31, 2011.
• Risk Factors: The filing notes that forward-looking statements are subject to uncertainties. The company's ability to generate cash flow is heavily dependent on the collection of notes receivable and the success of the new insurance subsidiary.

Investor Verification Checklist

• Debt Maturity: Verify the repayment schedule for the new $500,000 "2009 Notes" (due July 2011) and the $1.3 million Series E Preferred Stock (due July 2011).
• Collection Risk: Assess the collectability of the ~$1.1 million in notes receivable from the sale of businesses (NY, PA, and Franchise), as these are the primary near-term cash inflows.
• Regulatory Restrictions: Confirm the impact of the two-year dividend ban on KICO on the parent company's liquidity.
• Valuation of KICO: The filing states the fair value of the acquired insurance company (KICO) is not yet estimable pending appraisal; investors should monitor the upcoming Form 8-K/A for pro forma financials.
• Working Capital: Monitor cash burn rates given the $147,000 working capital deficit and the cessation of major operating revenue streams.