Business Context and Reporting Period
Company: DCAP Group, Inc. (filing as Kingstone Companies, Inc. pending conversion)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: The company operates as a franchisor of storefront insurance agencies (DCAP brand) and earns placement fees from premium finance contracts. In December 2008, the company restructured its wholly-owned retail insurance offices ("Retail Business") due to declining revenues, closing seven locations and entering into an agreement to sell the remaining 19. Consequently, the Retail Business and the previously sold premium finance loan portfolio (sold Feb 1, 2008) are classified as discontinued operations.
Strategic Pivot: The company holds surplus notes in Commercial Mutual Insurance Company (CMIC). A pending conversion of CMIC to a stock company could result in DCAP Group acquiring 100% ownership of CMIC, changing the company's name to Kingstone Companies, Inc.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Revenue (Continuing Ops) | $911,000 | $649,000 |
| Net Loss (Total) | $(977,000) | $(47,000) |
| Loss from Continuing Ops | $(196,000) | $(465,000) |
| Loss from Discontinued Ops | $(781,000) | $(418,000) Income |
| Cash and Equivalents | $143,000 | $1,031,000 |
| Working Capital | $(175,000) Deficit | $(1,603,000) Deficit |
| Total Debt (Current + Long-term) | $2,009,000 | $2,598,000 |
| Preferred Stock (Mandatorily Redeemable) | $780,000 | $780,000 |
Material Changes vs. Prior Period
- Net Loss Expansion: Net loss increased significantly from $47,000 in 2007 to $977,000 in 2008. This was driven primarily by a $781,000 loss from discontinued operations (Retail Business and Premium Finance) compared to a $418,000 profit in 2007.
- Continuing Operations Improvement: Despite the overall loss, the loss from continuing operations improved by 58% (from $465,000 to $196,000). This was due to new placement fee revenue ($427,000) offsetting a drop in franchise fees and a decrease in interest income from surplus notes.
- Discontinued Operations Decline: The Retail Business shifted from a $147,000 profit in 2007 to a $472,000 loss in 2008. This was caused by a 21% revenue drop due to market competition and a $394,000 goodwill impairment charge.
- Liquidity: Cash reserves decreased by approximately $888,000, primarily due to operating losses and debt repayments, though the working capital deficit improved significantly.
Guidance, Outlook, Risks, and Contingencies
- Asset Sale: On March 30, 2009, the company executed an agreement to sell 16 New York retail locations for approximately $2.34 million ($1.79M cash at closing, $0.55M in notes). Proceeds are expected in April 2009 but are insufficient to fully satisfy current debt maturities.
- Debt Maturities:
- Notes Payable: $1.5 million principal due July 10, 2009 (or 90 days after CMIC conversion). Extension requires incentive payments of $10,000/month.
- Preferred Stock: $780,000 Series D preferred stock mandatorily redeemable on July 31, 2009.
- Commercial Mutual Conversion: The company's future strategy hinges on the conversion of Commercial Mutual Insurance Company. If successful, DCAP Group would acquire 100% of CMIC. However, no assurances are given that the conversion will occur or its timing.
- Going Concern: Management believes it can fund operations for the next 12 months only if the asset sale closes and debt maturities are successfully extended or refinanced. No definitive arrangements for refinancing are currently in place.
- Internal Controls: The company identified material weaknesses in IT controls regarding access to financial reporting applications, which were remediated in January 2009.
Investor Verification Checklist
- Debt Refinancing Status: Verify if the $1.5M Notes Payable and $780K Preferred Stock have been extended or refinanced, as proceeds from the asset sale are insufficient to cover these obligations.
- Asset Sale Closing: Confirm the closing of the $2.34M sale of New York retail locations and the collection of the $551,000 promissory notes.
- CMIC Conversion Progress: Monitor the status of the New York State Insurance Department's approval for the conversion of Commercial Mutual Insurance Company, which is critical to the company's long-term strategy.
- Continuing Operations Viability: Assess the sustainability of the franchise model and placement fee revenue without the support of the discontinued retail and financing operations.