KINS

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for DCAP Group, Inc. (also referred to as Kingstone Companies, Inc. in the context of a potential name change). The company is a smaller reporting company. During this period, the company underwent significant restructuring, reclassifying its Retail Business, Franchise Business, and Premium Finance operations as discontinued operations. Continuing operations are now limited primarily to earning placement fees from premium finance contracts and holding surplus notes receivable from Commercial Mutual Insurance Company (CMIC).

Key Financial Metrics

Material Changes vs. Prior Period

• Continuing Operations Profitability: The company swung from a net income of $188,081 in Q1 2008 to a net loss of $155,835 in Q1 2009. This deterioration was primarily driven by a 90% decrease in interest income from notes receivable ($30,469 vs. $307,111), as the accretion of discount on surplus notes was completed in July 2008 and variable interest rates declined.
• Discontinued Operations: Losses from discontinued operations improved significantly, dropping from $417,739 in Q1 2008 to $15,679 in Q1 2009. This improvement is largely due to the cessation of the premium finance portfolio operations (sold in Feb 2008) and cost reductions in the retail and franchise businesses.
• Liquidity: Working capital improved from a deficit of $146,233 at year-end 2008 to a positive $482,473 at March 31, 2009, despite a decrease in cash balances.
• Debt Structure: The company reclassified $780,000 of mandatorily redeemable preferred stock from current to long-term liabilities following an exchange to Series E Preferred Stock.

Outlook, Risks, and Subsequent Events

• Subsequent Sales:
  • Retail Business: On April 17, 2009, the company sold substantially all assets of its 16 New York retail locations for approximately $2,337,000 ($1,786,000 cash at closing, remainder in promissory notes).
  • Franchise Business: On May 6, 2009, the company sold its DCAP franchise business for $200,000 (paid via promissory note).
• Debt Restructuring: On May 12, 2009, the company exchanged $519,231 of notes payable for Series E Preferred Stock and prepaid $686,539 of remaining notes, reducing the outstanding principal balance to $294,230.
• CMIC Conversion: The company holds surplus notes from Commercial Mutual Insurance Company (CMIC). CMIC is undergoing a conversion to a stock company. If approved by policyholders (vote scheduled for June 8, 2009), DCAP Group would exchange its notes for 100% of CMIC's stock, potentially changing the company's name to "Kingstone Companies, Inc."
• Liquidity Outlook: Management believes cash resources, including proceeds from the recent asset sales and promissory notes, are sufficient to fund working capital needs for the next 12 months.

Investor Verification Checklist

• Verify the status of the CMIC conversion vote scheduled for June 8, 2009, as this determines if the company will acquire an insurance carrier or remain a holding company with notes receivable.
• Confirm the collection schedule and creditworthiness of the buyers for the Retail and Franchise businesses, as a significant portion of the purchase price is in promissory notes.
• Monitor the Series E Preferred Stock terms, specifically the 11.5% dividend rate and the July 31, 2011 mandatory redemption date.
• Review the remaining Notes Payable balance ($294,230 as of May 12, 2009) and ensure no further defaults or acceleration clauses are triggered.
• Assess the sustainability of continuing operations revenue, which is now limited to placement fees and interest on CMIC notes, following the divestiture of all major operating segments.