q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark one)
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to _________

Commission File Number 0-1665

KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-2476480
(I.R.S. Employer
Identification Number)
1158 Broadway
Hewlett, NY 11557
(Address of principal executive offices)

(516) 374-7600
(Registrant’s telephone number, including area code)
 
DCAP Group, Inc.
(Former Name, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of  “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o
 
Accelerated filero
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 14, 2009, there were 2,979,582 shares of the registrant’s common stock outstanding.

 
 
 

 


KINGSTONE COMPANIES, INC.
INDEX
                 
           
PAGE
                 
PART I — FINANCIAL INFORMATION
   
4
 
   
Item 1 —
 
 Financial Statements
   
4
 
       
 Condensed Consolidated Balance Sheets at June 30, 2009 (Unaudited) and December 31, 2008
   
4
 
       
 Condensed Consolidated Statements of Operations for the six months ended June 30, 2009 (Unaudited) and 2008 (Unaudited)
   
5
 
       
 Condensed Consolidated Statements of Operations for the three months ended June 30, 2009 (Unaudited) and 2008 (Unaudited)
   
6
 
       
 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 (Unaudited) and 2008  (Unaudited)
   
7
 
       
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
   
8
 
   
Item 2 —
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
23
 
   
Item 3 —
 
 Quantitative and Qualitative Disclosures About Market Risk
   
40
 
   
Item 4T—
 
 Controls and Procedures
   
40
 
                 
PART II — OTHER INFORMATION
   
41
 
   
Item 1 —
 
Legal Proceedings
   
41
 
   
Item 1A —
 
Risk Factors
   
41
 
   
Item 2 —
 
Unregistered Sales of Equity Securities and Use of Proceeds
   
41
 
   
Item 3 —
 
Defaults Upon Senior Securities
   
41
 
   
Item 4 —
 
Submission of Matters to a Vote of Security Holders
   
41
 
   
Item 5 —
 
Other Information
   
41
 
   
Item 6 —
 
Exhibits
   
41
 
Signatures
   
44
 
 EXHIBIT 3(b)        
 EXHIBIT 31(a)
 EXHIBIT 31(b)
 EXHIBIT 32


 
 
 
2

 

Forward-Looking Statements
 
This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws.  The events described in forward-looking statements contained in this Quarterly Report may not occur.  Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results.  The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based.  Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008 under “Factors That May Affect Future Results and Financial Condition”.
 
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
 

 
 
 
3

 
PART I.  FINANCIAL INFORMATION
 
Item 1.                       Financial Statements.
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
 (Formerly DCAP Group, Inc.)
 
Condensed Consolidated Balance Sheets
           
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 167,835     $ 142,949  
Accounts receivable, net of allowance for doubtful accounts
    70,017       67,265  
Notes receivable - sale of businesses, current portion
    345,984       -  
Prepaid expenses and other current assets
    22,312       28,778  
Deferred income taxes
    26,000       -  
Assets from discontinued operations
    6,837       3,178,219  
Total current assets
    638,985       3,417,211  
Property and equipment, net
    74,829       82,617  
Notes receivable - Commercial Mutual Insurance Company
    5,996,461       5,935,704  
Notes receivable - sale of businesses, net of current portion
    758,515       -  
Deposits and other assets
    1,100       1,100  
Total assets
  $ 7,469,890     $ 9,436,632  
                 
Liabilities and Stockholders' Equity
               
Current Liabilities:
               
Accounts payable and accrued expenses
  $ 529,211     $ 812,541  
Current portion of long-term debt
    23,378       1,593,210  
Other current liabilities
    154,200       154,200  
Liabilities from discontinued operations
    79,163       223,493  
Mandatorily redeemable preferred stock
    -       780,000  
Total current liabilities
    785,952       3,563,444  
                 
Long-term debt, net of current portion
    523,763       415,618  
Deferred income taxes
    -       200,000  
Mandatorily redeemable preferred stock
    1,299,231       -  
                 
Commitments
               
                 
Stockholders' Equity:
               
Common stock, $.01 par value; authorized 10,000,000 shares;
               
issued 3,788,771 shares
    37,888       37,888  
Preferred stock, $.01 par value; authorized
               
1,000,000 shares; 0 shares issued and outstanding
    -       -  
Capital in excess of par
    11,976,022       11,962,512  
Deficit
    (5,932,584 )     (5,522,448 )
      6,081,326       6,477,952  
Treasury stock, at cost, 816,025 shares
    (1,220,382 )     (1,220,382 )
Total stockholders' equity
    4,860,944       5,257,570  
Total liabilities and stockholders' equity
  $ 7,469,890     $ 9,436,632  

See notes to condensed consolidated financial statements.
 
4

 

 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
(Formerly DCAP Group, Inc.)
 
             
Condensed Consolidated Statements of Operations (Unaudited)
           
Six Months Ended June 30,
 
2009
   
2008
 
             
Fee revenue
  $ 224,560     $ 218,766  
                 
Operating expenses:
               
General and administrative expenses
    666,896       644,671  
Depreciation and amortization
    8,594       15,372  
Total operating expenses
    675,490       660,043  
                 
Operating loss
    (450,930 )     (441,277 )
                 
Other (expense) income:
               
Interest income
    -       1,809  
Interest income - notes receivable
    67,782       601,722  
Interest expense
    (133,351 )     (130,297 )
Interest expense - mandatorily redeemable preferred stock
    (52,452 )     (27,625 )
Forgiveness of debt
    132,836       -  
Total other income
    14,815       445,609  
                 
(Loss) income from continuing operations before benefit from income taxes
    (436,115 )     4,332  
Benefit from income taxes
    (209,752 )     (279,522 )
(Loss) income from continuing operations
    (226,363 )     283,854  
Loss from discontinued operations, net of income taxes
    (183,773 )     (625,492 )
Net loss
  $ (410,136 )   $ (341,638 )
                 
Basic and Diluted Net (Loss) Income Per Common Share:
               
                 
(Loss) income from continuing operations
  $ (0.08 )   $ 0.10  
Loss from discontinued operations
  $ (0.06 )   $ (0.21 )
Loss per common share
  $ (0.14 )   $ (0.11 )
                 
Number of weighted average shares used in computation
               
 of basic and diluted loss per common share
    2,972,746       2,973,066  

See notes to condensed consolidated financial statements.

 
5

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
(Formerly DCAP Group, Inc.)
 
             
Condensed Consolidated Statements of Operations (Unaudited)
           
Three Months Ended June 30,
 
2009
   
2008
 
             
Fee revenue
  $ 112,523     $ 119,582  
                 
Operating expenses:
               
General and administrative expenses
    384,983       323,632  
Depreciation and amortization
    4,158       10,217  
Total operating expenses
    389,141       333,849  
                 
Operating loss
    (276,618 )     (214,267 )
                 
Other (expense) income:
               
Interest income
    -       211  
Interest income - notes receivable
    37,313       294,611  
Interest expense
    (53,084 )     (58,528 )
Interest expense - mandatorily redeemable preferred stock
    (32,952 )     (17,875 )
Forgiveness of debt
    132,836       -  
Total other income
    84,113       218,419  
                 
(Loss) income from continuing operations before benefit from income taxes
    (192,505 )     4,152  
Benefit from income taxes
    (121,977 )     (91,621 )
(Loss) income from continuing operations
    (70,528 )     95,773  
Loss from discontinued operations, net of income taxes
    (168,094 )     (207,753 )
Net loss
  $ (238,622 )   $ (111,980 )
                 
Basic and Diluted Net (Loss) Income Per Common Share:
               
                 
(Loss) income from continuing operations
  $ (0.02 )   $ 0.03  
Loss from discontinued operations
  $ (0.06 )   $ (0.07 )
Loss per common share
  $ (0.08 )   $ (0.04 )
                 
Number of weighted average shares used in computation
               
 of basic and diluted loss per common share
    2,972,746       2,973,066  

See notes to condensed consolidated financial statements.
 
6

 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
(Formerly DCAP Group, Inc.)
 
             
Condensed Consolidated Statements of Cash Flows (Unaudited)
           
Six Months Ended June 30,
 
2009
   
2008
 
             
Cash Flows from Operating Activities:
           
Net loss
  $ (410,136 )   $ (341,638 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    8,594       15,372  
Accretion of discount on notes receivable
    -       (493,909 )
Amortization of warrants
    -       11,820  
Stock-based payments
    13,510       74,999  
Deferred income taxes
    (226,000 )     (348,000 )
Changes in operating assets and liabilities:
               
Decrease (increase) in assets:
               
Accounts receivable
    (2,752 )     (47,827 )
Prepaid expenses and other current assets
    6,466       29,276  
Deposits and other assets
    -       11,536  
Increase (decrease) in liabilities:
               
Accounts payable, accrued expenses and taxes payable
    (283,330 )     52,885  
Net cash used in operating activities of continuing operations
    (893,648 )     (1,035,486 )
Operating activities of discontinued operations
    109,851       (22,445 )
Net Cash Used in Operating Activities
    (783,797 )     (1,057,931 )
                 
Cash Flows from Investing Activities:
               
Increase in notes receivable and accrued interest - Commercial Mutual Insurance Company
    (60,757 )     (107,813 )
Increase in notes receivable and accrued interest - Sale of businesses
    (106,926 )     -  
Collections of notes receivable and accrued interest - Sale of businesses
    50,000       -  
Purchase of property and equipment
    (806 )     -  
Net cash used in investing activities of continuing operations
    (118,489 )     (107,813 )
Investing activities of discontinued operations
    1,869,628       1,156,532  
Net Cash Provided by Investing Activities
    1,751,139       1,048,719  
                 
Cash Flows from Financing Activities:
               
Proceeds from long term debt
    500,000       -  
Principal payments on long-term debt
    (1,442,456 )     (233,227 )
Net cash used in financing activities of continuing operations
    (942,456 )     (233,227 )
Financing activities of discontinued operations
    -       (562,177 )
Net Cash Used in Financing Activities
    (942,456 )     (795,404 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    24,886       (804,616 )
Cash and Cash Equivalents, beginning of period
    142,949       1,030,822  
Cash and Cash Equivalents, end of period
  $ 167,835     $ 226,206  
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
               
Notes receivable issued in connection with sale of businesses
  $ 1,047,573     $ -  
Notes payable exchanged for mandatorily redeemable preferred stock
  $ 519,231     $ -  
Liabilties assumed by purchaser of premium finance portfolio
  $ -     $ 11,229,060  
Reserve held by purchaser of premium finance portfolio
  $ -     $ 261,363  

See notes to condensed consolidated financial statements.
 
7

 
 

KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
FORMERLY DCAP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2009 AND 2008

1. Basis of Presentation
 
The Condensed Consolidated Balance Sheet as of June 30, 2009, Condensed Consolidated Statements of Operations for the six months and three months ended June 30, 2009 and 2008 and Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 have been prepared by us without audit.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly in all material respects our financial position as of June 30, 2009, results of operations for the six months and three months ended June 30, 2009 and 2008 and cash flows for the six months ended June 30, 2009 and 2008. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008. The consolidated balance sheet at December 31, 2008 was derived from the audited financial statements as of that date.
 
The results of operations and cash flows for the six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year.
 
Organization and Nature of Business
 
The consolidated financial statements consist of Kingstone Companies, Inc. (formerly known as DCAP Group, Inc.) and its wholly-owned subsidiaries (referred to herein as "we" or "us"). Effective as of July 1, 2009, we changed the name of our company from DCAP Group, Inc. to Kingstone Companies, Inc.
 
Until December 2008, our continuing operations primarily consisted of the ownership and operation of a network of retail offices engaged in the sale of retail auto, motorcycle, boat, business, and homeowner's insurance.
 
In December 2008, due to declining revenues and profits, we made a decision to restructure our network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of our least profitable locations during the month of December 2008 and the entry into negotiations to sell the remaining 19 locations in our Retail Business. On April 17, 2009, we sold substantially all of the assets, including the book of business, of our 16 remaining Retail Business locations that we owned in New York State (the “New York Sale”) (see Note 11). Effective June 30, 2009, we sold all of the outstanding stock of the subsidiary that operated our three remaining Retail Locations in Pennsylvania (the “Pennsylvania Sale”) (see Note 11).  As a result of the restructuring in December 2008, the New York Sale on April 17, 2009 and the Pennsylvania Sale effective June 30, 2009, our Retail Business has been presented as discontinued operations and prior periods have been restated.
 
Until May 2009, we operated a DCAP franchise business.  Effective May 1, 2009, we sold all of the outstanding stock of the subsidiaries that operated such DCAP franchise business (see Note 11).  As a result of the sale, our franchise business has been presented as discontinued operations and prior periods have been restated.
 
8

Until February 2008, we provided premium financing of insurance policies for customers of our offices as well as customers of non-affiliated entities. On February 1, 2008, we sold our outstanding premium finance loan portfolio (see Note 11). As a result of the sale, our premium financing operations have been classified as discontinued operations and prior periods have been restated. The purchaser of the premium finance portfolio has agreed that, during the five year period ending January 31, 2013 (subject to automatic renewal for successive two year terms under certain circumstances), it will purchase, assume and service premium finance contracts originated by us in the states of New York and Pennsylvania. In connection with such purchases, we will be entitled to receive a fee generally equal to a percentage of the amount financed.  Our continuing operations of the premium financing business will consist of the revenue earned from placement fees and any related expenses.
 
Our Retail Business also provided automobile club services and certain of our franchisees provided tax preparation services.
 
2. Summary of Significant Accounting Policies
 
Principles of consolidation
 
The accompanying consolidated financial statements include the accounts of our subsidiaries, all of which are wholly-owned by us.  All significant intercompany accounts and transactions have been eliminated.
 
Critical Accounting Policies
 
See Item 2 of this Form 10-Q for a discussion of critical accounting policies and recent accounting pronouncements.
 
3. Notes Receivable – Commercial Mutual Insurance Company
 
Purchase of Notes Receivable
 
On January 31, 2006, we purchased from Eagle Insurance Company (“Eagle”) two surplus notes issued by Commercial Mutual Insurance Company (“CMIC”) in the aggregate principal amount of $3,750,000 (the “Surplus Notes”), plus accrued interest of $1,794,688. The aggregate purchase price for the Surplus Notes was $3,075,141, of which $1,303,434 was paid to Eagle by delivery of a six month promissory note which provided for interest at the rate of 7.5% per annum.  The promissory note was paid in full on July 28, 2006.  CMIC was a New York property and casualty insurer. As of June 30, 2009, the Surplus Notes acquired by us were past due and provided for interest at the prime rate or 8.5% per annum, whichever is less.  Payments of principal and interest on the Surplus Notes could only be made out of the surplus of CMIC and required the approval of the New York State Department of Insurance.  We did not receive any interest payments during the six months ended June 30, 2009 and 2008. The discount on the Surplus Notes and the accrued interest at the time of acquisition were accreted over a 30 month period through July 31, 2008, the estimated period to collect such amounts. Such accretion amount, together with interest on the Surplus Notes for the six months ended June 30, 2009 and 2008 are included in our consolidated statement of operations as “Interest income-notes receivable.”
 
9

Exchange of Notes Receivable
 
See Note 12 for a discussion of the exchange of the Surplus Notes into 100% of the equity of CMIC (renamed Kingstone Insurance Company).
 
4. Notes Receivable – Sale of Businesses
 
Retail Business
 
New York Stores: On April 17, 2009, our wholly-owned subsidiaries that owned and operated our 16 Retail Business locations in New York State sold substantially all of their assets, including their book of business (the “New York Assets”). The purchase price for the New York Assets was approximately $2,337,000, of which approximately $1,786,000 was paid at closing.  Promissory notes in the aggregate approximate principal amount of $551,000 (the “New York Notes”) were also delivered at the closing.  The New York Notes are payable in installments of approximately $275,500 on each of March 31, 2010 and September 30, 2010 and provide for interest at the rate of 5.25% per annum.
 
Pennsylvania Stores:  Effective June 30, 2009, we sold all of the outstanding stock of the subsidiary that operated our three remaining Pennsylvania stores (the “Pennsylvania Stock”).  The purchase price for the Pennsylvania Stock was approximately $397,000 which was paid by delivery of two promissory notes, one in the approximate principal amount of $238,000 and payable with interest at the rate of 9.375% per annum in 120 equal monthly installments, and the other in the approximate principal amount of $159,000 and payable with interest at the rate of 6% per annum in 60 monthly installments commencing August 10, 2011 (with interest only being payable prior to such date).
 
Franchise Business
 
Effective May 1, 2009, we sold all of the outstanding stock of the subsidiaries that operated our DCAP franchise business (collectively, the “Franchise Stock”).  The purchase price for the Franchise Stock was $200,000 which was paid by delivery of a promissory note in such principal amount (the “Franchise Note”).  The Franchise Note is payable in installments of $50,000 on May 15, 2009, $50,000 on May 1, 2010 and $100,000 on May 1, 2011 and provides for interest at the rate of 5.25% per annum.  A principal of the buyer is the son-in-law of Morton L. Certilman, one of our principal shareholders.
 
Notes receivable arising from the sale of businesses as of June 30, 2009 consists of:
 
10


 
         
Less
       
   
Total
   
Current
       
   
Note
   
Maturities
   
Long-Term
 
Sale of NY stores
  $ 550,543     $ 275,272     $ 275,271  
Sale of Pennsylvania stores
    397,030       13,786       383,244  
Sale of Franchise business
    150,000       50,000       100,000  
      1,097,573       339,058       758,515  
Accrued interest
    6,926       6,926       -  
Total
  $ 1,104,499     $ 345,984     $ 758,515  
 
5. Employee Stock Compensation
 
In November 1998, we adopted the 1998 Stock Option Plan (the “1998 Plan”), which provided for the issuance of incentive stock options and non-statutory stock options. Under this plan, options to purchase not more than 400,000 shares of our Common Stock were permitted to be granted, at a price to be determined by our Board of Directors or the Stock Option Committee at the time of grant. During 2002, we increased the number of shares of Common Stock authorized to be issued pursuant to the 1998 Plan to 750,000. Incentive stock options granted under the 1998 Plan expire no later than ten years from date of grant (except no later than five years for a grant to a 10% stockholder). Our Board of Directors or the Stock Option Committee determined the expiration date with respect to non-statutory options granted under the 1998 Plan. The 1998 Plan terminated in November 2008.
 
In December 2005, our shareholders ratified the adoption of the 2005 Equity Participation Plan (the “2005 Plan” and together with the 1998 Plan, the “Plans”), which provides for the issuance of incentive stock options, non-statutory stock options and restricted stock. Under the 2005 Plan, a maximum of 300,000 shares of Common Stock may be issued pursuant to options granted and restricted stock issued. Incentive stock options granted under the 2005 Plan expire no later than ten years from date of grant (except no later than five years for a grant to a 10% stockholder). Our Board of Directors or the Stock Option Committee will determine the expiration date with respect to non-statutory options, and the vesting provisions for restricted stock, granted under the 2005 Plan.
 
Our results for the six months and three months ended June 30, 2009 include share-based compensation expense related to stock options totaling approximately $14,000 and $7,000, respectively. Our results for the six months and three months ended June 30, 2008 include share-based compensation expense totaling approximately $48,000 and $24,000, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within general and administrative expenses.
 
Stock option compensation expense in 2009 and 2008 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. No stock options were granted during the six months ended June 30, 2009 and 2008.
 
A summary of option activity under the Plans as of June 30, 2009, and changes during the six months then ended, is as follows:
 
 
11


 
Stock Options
 
Number of Shares
   
Weighted Average Exercise Price per Share
   
Weighted Average Remaining Contractual Term
   
Aggregate Intrinsic Value
 
                         
Outstanding at December 31, 2008
    177,400     $ 2.40       -       -  
                                 
Granted
    -     $ -       -       -  
Exercised
    -     $ -       -       -  
Forfeited
    (12,400 )   $ 5.40       -       -  
                                 
Outstanding at June 30, 2009
    165,000     $ 2.17       2.98     $ 28,000  
                                 
Vested and Exercisable at June 30, 2009
    119,792     $ 2.22       2.86     $ 19,823  
 
The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2009 is calculated as the difference between the exercise price of the underlying options and the market price of our common shares for the shares that had exercise prices that were lower than the $2.24 closing price of our common shares on June 30, 2009.  No options were exercised in the six months ended June 30, 2009 and 2008.
 
As of June 30, 2009, the fair value of unamortized compensation cost related to unvested stock option awards was approximately $16,000. Unamortized compensation cost as of June 30, 2009 is expected to be recognized over a remaining weighted-average vesting period of 1.29 years.
 
6. Net (Loss) Income Per Common Share
 
Basic net earnings per common share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options, warrants and conversion of mandatorily redeemable preferred shares.  The computation of diluted earnings per share excludes those options and warrants with an exercise price in excess of the average market price of our common shares during the periods presented. During the six and three months ended June 30, 2009, we recorded a loss available to common shareholders and, as a result, the weighted average number of common shares used in the calculation of basic and diluted loss per common share is the same, and have not been adjusted for the effects of 814,615 potential common shares from unexercised stock options and the conversion of convertible preferred shares, which were anti-dilutive for such period. During the six and three months ended June 30, 2008, we recorded a loss available to common shareholders and, as a result, the weighted average number of common shares used in the calculation of basic and diluted loss per common share is the same, and have not been adjusted for the effects of 655,324 potential common shares from unexercised stock options and warrants, and the conversion of convertible preferred shares, which were anti-dilutive for such period.
 
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7. Long-Term Debt
 
Long-term debt and capital lease obligations consist of:
 
   
June 30, 2009
   
December 31, 2008
 
         
Less
               
Less
       
   
Total
   
Current
   
Long-Term
   
Total
   
Current
   
Long-Term
 
   
Debt
   
Maturities
   
Debt
   
Debt
   
Maturities
   
Debt
 
Capitalized lease
  $ 47,141     $ 23,378     $ 23,763     $ 58,133     $ 22,338     $ 35,795  
Note payable,
                                               
Accurate acquisition
    -       -       -       450,695       70,872       379,823  
Notes payable
    500,000       -       500,000       1,500,000       1,500,000       -  
    $ 547,141     $ 23,378     $ 523,763     $ 2,008,828     $ 1,593,210     $ 415,618  
 
Note Payable, Accurate Acquisition
 
On April 17, 2009, we paid the balance of the note payable incurred in connection with the Accurate acquisition.
 
Notes Payable
 
As of December 31, 2008, the outstanding principal balance of Notes Payable was $1,500,000. On May 12, 2009, three of the holders of the notes exchanged an aggregate of $519,231 of note principal for Series E Preferred Stock having an aggregate redemption amount equal to such aggregate principal amount of notes (see Note 8). Concurrently, we paid $49,543 to the three holders, which amount represents all accrued and unpaid interest and incentive payments through the date of exchange.  As part of the transaction, a retirement trust established for the benefit of Jack Seibald, one of our directors and principal stockholders, exchanged its note in the approximate principal amount of $288,000  for shares of Series E Preferred Stock.  In addition, a limited liability company of which Barry Goldstein, our Chief Executive Officer and one of our directors and principal stockholders, is a minority member exchanged its note in the approximate principal amount of $115,000 for shares of Series E Preferred Stock.
 
On May 12, 2009, we prepaid $686,539 in principal of the Notes Payable to the remaining five note holders, together with $81,200, which amount represents accrued and unpaid interest and incentive payments on such prepayment.
 
On June 29, 2009, we prepaid the remaining $294,230 in principal of the Notes Payable to such remaining note holders, together with $19,400, which amount represents accrued and unpaid interest and incentive payments on such prepayment.
 
In June 2009, we borrowed $500,000 and issued promissory notes in such aggregate principal amount (the “2009 Notes”).  The 2009 Notes provide for interest at the rate of 12.625% per annum and are payable on July 10, 2011. The 2009 Notes are prepayable by us without premium or penalty; provided, however, that, under any circumstances, the holders of the 2009 Notes are entitled to receive an aggregate of six months interest from the issue date of the 2009 Notes with respect to the amount prepaid.
 
13

A limited liability company of which Mr. Goldstein is a minority member purchased a 2009 Note in the principal amount of $120,000.
 
8. Exchange and Issuance of Preferred Stock
 
Effective April 16, 2008, AIA Acquisition Corp. (“AIA”), the holder of our Series B Preferred Stock exchanged such shares for an equal number of shares of Series C Preferred Stock, the terms of which were substantially identical to those of the shares of Series B Preferred Stock, except that the outside date for mandatory redemption was April 30, 2009 and the Series C Preferred Stock provided for dividends at the rate of 10% per annum.
 
Effective August 23, 2008, AIA exchanged the Series C Preferred Stock for an equal number of shares of Series D Preferred Stock, the terms of which were substantially identical to those of the shares of Series C Preferred Stock, except that the outside date for mandatory redemption was July 31, 2009.

Effective May 12, 2009, AIA exchanged the Series D Preferred Stock for an equal number of shares of Series E Preferred Stock.  The terms of the Series E Preferred Stock vary from those of the Series D Preferred Stock as follows: (i) the Series E Preferred Stock is mandatorily redeemable on July 31, 2011 (as compared to July 31, 2009 for the Series D Preferred Stock), (ii) the Series E Preferred Stock provides for dividends at the rate of 11.5% per annum (as compared to 10% per annum for the Series D Preferred Stock), (iii) the Series E Preferred Stock is convertible into our Common Stock at a price of $2.00 per share (as compared to $2.50 per share for the Series D Preferred Stock), (iv) our obligation to redeem the Series E Preferred Stock is not accelerated based upon a sale of substantially all of our assets or certain of our subsidiaries (as compared to the Series D Preferred Stock which provided for such acceleration) and (v) our obligation to redeem the Series E Preferred Stock is not secured by the pledge of the outstanding stock of our subsidiary, AIA-DCAP Corp. (as compared to the Series D Preferred Stock which provided for such pledge). The current aggregate redemption amount for the Series E Preferred Stock held by AIA is $780,000, plus accumulated and unpaid dividends.  Members of Mr. Goldstein’s family are principal stockholders of AIA.

On May 12, 2009, three holders of our Notes Payable exchanged $519,231 of the principal balance of such notes for shares of Series E Preferred Stock having an aggregate redemption amount of $519,231 (see Note 7).

As of June 30, 2009, there were 1,299 shares outstanding of Series E Preferred Stock, convertible into 649,615 shares of Common Stock.

In accordance with SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", the various series of Preferred Stock have been reported as a liability, and the preferred dividends have been classified as interest expense.

9. Employment Agreement
 
Our President, Chairman of the Board and Chief Executive Officer, Barry B. Goldstein, is employed pursuant to an employment agreement dated October 16, 2007 (the “Employment Agreement”) that expires on June 30, 2010.  Pursuant to the Employment Agreement, Mr. Goldstein is entitled to receive an annual base salary of $350,000 (which base salary has been in effect since January 1, 2004) (“Base Salary”) and annual bonuses based on our net income.  On August 25, 2008, we and Mr. Goldstein entered into an amendment (the “Amendment”) to the Employment Agreement. The Amendment entitles Mr. Goldstein to devote certain time to Kingstone Insurance Company (“KICO”) (formerly known as Commercial Mutual Insurance Company) to fulfill his duties and responsibilities as its Chairman of the Board and Chief Investment Officer. Such permitted activity is subject to a reduction in Base Salary under the Employment Agreement on a dollar-for-dollar basis to the extent of the salary payable by KICO to Mr. Goldstein pursuant to his KICO employment contract, which, effective July 1, 2009, is $157,500 per year. KICO is a New York property and casualty insurer. On July 1, 2009, we acquired 100% of the stock of KICO.

14

 
10. Disclosures about Fair Value of Financial Instruments
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
 
Cash and short-term investments
 
The carrying amount approximates fair value because of the short maturity of those instruments.
 
Notes receivable
 
The carrying amount of notes receivable related to the sale of businesses approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty. For “Notes receivable – Commercial Mutual Insurance Company” (now known as Kingstone Insurance Company or “KICO”), we acquired a 100% equity interest in KICO on July 1, 2009 in exchange for our relinquishing our rights to any unpaid principal and interest under the notes receivable. We are in the process of obtaining an appraisal of KICO and cannot make a reasonable estimate of fair value until such appraisal is completed.
 
Long-term debt and mandatorily redeemable preferred stock
 
For the fair value of our long-term debt and mandatorily redeemable preferred stock for which there are no quoted market prices, we estimate that the carrying amount of notes payable and mandatorily redeemable preferred stock approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty.
 
The estimated fair values of our financial instruments are as follows:
 
15

 
   
June 30, 2009
   
December 31, 2008
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
Cash and short-term investments
  $ 167,835     $ 167,835     $ 142,949     $ 142,949  
Notes receivable - sale of businesses
    345,984       345,984       -       -  
Notes receivable - Commercial Mutual Insurance Company
    5,996,461      
(1)
      5,935,704      
(1)
 
Long-term debt
    547,141       547,141       2,008,828       2,008,828  
Mandatorily redeemable preferred stock
    1,299,231       1,299,231       780,000       780,000  
 
      (1) Not practicable to estimate fair value.
 
11. Discontinued Operations
 
Premium Financing

On February 1, 2008, our wholly-owned subsidiary, Payments Inc. (“Payments”), sold its outstanding premium finance loan portfolio to Premium Financing Specialists, Inc. (“PFS”). Under the terms of the sale, Payments was entitled to receive an amount based upon the net earnings generated by the acquired loan portfolio as it was collected. For the six months ended June 30, 2009 and 2008, Payments received approximately $18,000 and $63,000 based on the net earnings generated from collections of the acquired loan portfolio. Under the terms of the sale, PFS has agreed that, during the five year period ending January 31, 2013 (subject to automatic renewal for successive two year terms under certain circumstances), it will purchase, assume and service all eligible premium finance contracts originated by us in the states of New York and Pennsylvania.  In connection with such purchases, we will be entitled to receive a fee generally equal to a percentage of the amount financed.

As a result of the sale of the premium finance portfolio on February 1, 2008, the operating results of the premium financing operations for the six months and three months ended June 30, 2009 and 2008 have been presented as discontinued operations.  Net assets and liabilities to be disposed of or liquidated, at their book value, have been separately classified in the accompanying balance sheets at June 30, 2009 and December 31, 2008. Continuing operations of our premium financing operations only consists of placement fee revenue and any related expenses.

Summarized financial information of the premium financing business as discontinued operations for the six months and three months ended June 30, 2009 and 2008 follows (unaudited):
 
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Six Months Ended
   
Three Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Premium finance revenue
  $ -     $ 225,322     $ -     $ -  
                                 
Operating Expenses:
                               
General and administrative expenses
    -       181,943       -       2,915  
Provision for finance receivable losses
    -       89,316       -       -  
Depreciation and amortization
    -       46,556       -       -  
Interest expense
    -       45,181       -       -  
Total operating expenses
    -       362,996       -       2,915  
                                 
Loss from operations
    -       (137,674 )     -       (2,915 )
Loss on sale of premim financing portfolio
    -       245,875       -       162,252  
Loss before provision for income taxes
    -       (383,549 )     -       (165,167 )
Provision for income taxes
    -       -       -       -  
                                 
Loss from discontinued operations,
                               
net of income taxes
  $ -     $ (383,549 )   $ -     $ (165,167 )
 
The components of assets and liabilities of the premium financing discontinued operations as of June 30, 2009 and December 31, 2008 are as follows:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Due from purchaser of premium finance portfolio
  $ -     $ 18,291  
Total assets
  $ -     $ 18,291  
                 
Total liabilities
  $ -     $ -  

Retail Business

In December 2008, due to declining revenues and profits we decided to restructure our network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of our least profitable locations during the month of December 2008 and the entry into negotiations to sell the remaining 19 locations in our Retail Business.

On April 17, 2009, our wholly-owned subsidiaries that owned and operated our 16 remaining Retail Business locations in New York State sold substantially all of their assets, including the book of business (the “New York Assets”).  The purchase price for the New York Assets was approximately $2,337,000, of which approximately $1,786,000 was paid at closing.  Promissory notes in the aggregate approximate principal amount of $551,000 (the “New York Notes”) were also delivered at the closing. The New York Notes are payable in installments of approximately $275,500 on each of March 31, 2010 and September 30, 2010 and provide for interest at the rate of 5.25% per annum. As additional consideration, we shall be entitled to receive through September 30, 2010 an additional amount equal to 60% of the net commissions derived from the book of business of six New York retail locations that we closed in 2008.

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Effective June 30, 2009, we sold all of the outstanding stock of the subsidiary that operated our three remaining Pennsylvania stores (the “Pennsylvania Stock”).  The purchase price for the Pennsylvania Stock was approximately $397,000 which was paid by delivery of two promissory notes, one in the approximate principal amount of $238,000 and payable with interest at the rate of 9.375% per annum in 120 equal monthly installments, and the other in the approximate principal amount of $159,000 and payable with interest at the rate of 6% per annum in 60 monthly installments commencing August 10, 2011 (with interest only being payable prior to such date).

As a result of the restructuring in December 2008, the sale of the New York Assets on April 17, 2009 and the sale of the Pennsylvania Stock effective June 30, 2009, the operating results of the Retail Business operations for the six months and three months ended June 30, 2009 and 2008 have been presented as discontinued operations.  Net assets and liabilities to be disposed of or liquidated, at their book value, have been separately classified in the accompanying balance sheets at June 30, 2009 and December 31, 2008.

Summarized financial information of the Retail Business as discontinued operations for the six months and three months ended June 30, 2009 and 2008 follows (unaudited):
 
   
Six Months Ended
   
Three Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Commissions and fee revenue
  $ 1,028,797     $ 2,145,346     $ 247,666     $ 1,060,475  
                                 
Operating Expenses:
                               
General and administrative expenses
    1,178,888       1,941,587       438,257       939,325  
Depreciation and amortization
    59,481       109,811       14,811       53,443  
Interest expense
    10,483       21,455       1,161       10,503  
Impairment of intangibles
    49,470               49,470       -  
Total operating expenses
    1,298,322       2,072,853       503,699       1,003,271  
                                 
Loss (income) from operations
    (269,525 )     72,493       (256,033 )     57,204  
Loss on sale of business
    21,392       -       21,392       -  
(Loss) income before benefit from income taxes
    (290,917 )     72,493       (277,425 )     57,204  
Benefit from income taxes
    (76,499 )     -       (76,499 )     -  
                                 
(Loss) income from discontinued operations,
                               
net of income taxes
  $ (214,418 )   $ 72,493     $ (200,926 )   $ 57,204  
 
The components of assets and liabilities of the Retail Business discontinued operations as of June 30, 2009 and December 31, 2008 are as follows:
 
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June 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Accounts receivable
  $ -     $ 404,180  
Other current assets
    -       32,325  
Property and equipment, net
    -       144,750  
Goodwill
    -       2,207,658  
Other intangibles, net
    -       75,666  
Other assets
    6,837       30,277  
Total assets
  $ 6,837     $ 2,894,856  
                 
Accounts payable and accrued expenses
  $ 79,163     $ 136,685  
Deferred income taxes
    -       77,000  
Total liabilities
  $ 79,163     $ 213,685  
 
Franchise Business
 
Effective May 1, 2009, we sold all of the outstanding stock of the subsidiaries that operated our DCAP franchise business (collectively, the “Franchise Stock”). The purchase price for the Franchise Stock was $200,000 which was paid by delivery of a promissory note in such principal amount (the “Franchise Note”).  The Franchise Note is payable in installments of $50,000 on May 15, 2009, $50,000 on May 1, 2010 and $100,000 on May 1, 2011 and provides for interest at the rate of 5.25% per annum.  A principal of the buyer is the son-in-law of Morton L. Certilman, one of our principal shareholders.
 
As a result of the sale of the Franchise Stock, the operating results of the franchise business operations for the six months and three months ended June 30, 2009 and 2008 have been presented as discontinued operations.  Net assets and liabilities to be disposed of or liquidated, at their book value, have been separately classified in the accompanying balance sheets at June 30, 2009 and December 31, 2008.
 
Summarized financial information of the franchise business as discontinued operations for the six months and three months ended June 30, 2009 and 2008 follows (unaudited):
 
19

 
   
Six Months Ended
   
Three Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Commissions and fee revenue
  $ 213,831     $ 260,542     $ 58,249     $ 127,906  
                                 
Operating Expenses:
                               
General and administrative expenses
    179,813       556,044       25,309       219,027  
Depreciation and amortization
    2,061       18,934       (1,204 )     8,669  
Total operating expenses
    181,874       574,978       24,105       227,696  
                                 
Income (loss) from operations
    31,957       (314,436 )     34,144       (99,790 )
Loss on sale of business
    1,312       -       1,312       -  
Income (loss) before provision for income taxes
    30,645       (314,436 )     32,832       (99,790 )
Provision for income taxes
    -       -       -       -  
                                 
Income (loss) from discontinued operations,
                               
net of income taxes
  $ 30,645     $ (314,436 )   $ 32,832     $ (99,790 )
 
The components of assets and liabilities of the franchise business discontinued operations as of June 30, 2009 and December 31, 2008 are as follows:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Accounts receivable
  $ -     $ 134,522  
Other current assets
    -       101,678  
Deferred income taxes
    -       16,000  
Property and equipment, net
    -       7,876  
Other assets
    -       4,996  
Total assets
  $ -     $ 265,072  
                 
Accounts payable and accrued expenses
  $ -     $ 9,809  
Total liabilities
  $ -     $ 9,809  
 
Summarized Financial Information of Discontinued Operations
 
Summarized financial information of consolidated discontinued operations for the six months and three months ended June 30, 2009 and 2008 follows (unaudited):
 
20

   
Six Months Ended
   
Three Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Commissions and fee revenue
  $ 1,242,628     $ 2,405,888     $ 305,915     $ 1,188,381  
Premium finance revenue
    -       225,322       -       -  
Total revenue
    1,242,628       2,631,210       305,915       1,188,381  
                                 
Operating Expenses:
                               
General and administrative expenses
    1,358,701       2,679,574       463,566       1,161,267  
Provision for finance receivable losses
    -       89,316       -       -  
Depreciation and amortization
    61,542       175,301       13,607       62,112  
Interest expense
    10,483       66,636       1,161       10,503  
Impairment of intangibles
    49,470       -       49,470       -  
Total operating expenses
    1,480,196       3,010,827       527,804       1,233,882  
                                 
Loss from operations
    (237,568 )     (379,617 )     (221,889 )     (45,501 )
Loss on sale of businesses
    22,704       245,875       22,704       162,252  
Loss before benefit from income taxes
    (260,272 )     (625,492 )     (244,593 )     (207,753 )
Benefit from income taxes
    (76,499 )     -       (76,499 )     -  
                                 
Loss from discontinued operations,
                               
net of income taxes
  $ (183,773 )   $ (625,492 )   $ (168,094 )   $ (207,753 )
 
The components of assets and liabilities of our consolidated discontinued operations as of June 30, 2009 and December 31, 2008 are as follows:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Accounts receivable
  $ -     $ 538,702  
Due from purchaser of premium finance portfolio
    -       18,291  
Other current assets
    -       134,003  
Deferred income taxes
    -       16,000  
Property and equipment, net
    -       152,626  
Goodwill
    -       2,207,658  
Other intangibles, net
    -       75,666  
Other assets
    6,837       35,273  
Total assets
  $ 6,837     $ 3,178,219  
                 
Accounts payable and accrued expenses
  $ 79,163     $ 146,494  
Deferred income taxes
    -       77,000  
Total liabilities
  $ 79,163     $ 223,494  
 
Summary of Significant Accounting Policies of Discontinued Operations
 
Finance income, fees and receivables - For our premium finance operations, we used the interest method to recognize interest income over the life of each loan in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Upon the establishment of a premium finance contract, we recorded the gross loan payments as a receivable with a corresponding reduction for deferred interest. The deferred interest was amortized to interest income using the interest method over the life of each loan. The weighted average interest rate charged with respect to financed insurance policies was approximately 26.1% per annum for the six months ended June 30, 2008. Upon completion of collection efforts, after cancellation of the underlying insurance policies, any uncollected earned interest or fees were charged off.
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Commission and fee income – In our discontinued operations, we recognized commission revenue from insurance policies at the beginning of the contract period. Refunds of commissions on the cancellation of insurance policies were reflected at the time of cancellation. Fees for income tax preparation were recognized when the services are completed. Automobile club dues were recognized equally over the contract period.
 
Franchise fee revenue on initial franchisee fees was recognized when substantially all of our contractual requirements under the franchise agreement were completed. Franchisees also paid a monthly franchise fee plus an applicable percentage of advertising expense. We were obligated to provide marketing and training support to each franchisee.
 
12. Subsequent Events
 
Exchange of Notes Receivable
 
Effective July 1, 2009, Commercial Mutual Insurance Company (“CMIC”) converted from an advance premium cooperative to a stock property and casualty insurance company. Upon the effectiveness of the conversion, CMIC’s name was changed to Kingstone Insurance Company (“KICO”) and our name was changed to Kingstone Companies, Inc. Pursuant to the plan of conversion, we acquired a 100% equity interest in KICO in consideration of the exchange of our $3,750,000 principal amount of Surplus Notes of KICO.  In addition, we forgave all accrued and unpaid interest of $2,246,000 on the Surplus Notes as of the date of exchange (see Note 3).
 
Our Chairman is also Chairman of the Board and Chief Investment Officer of KICO. Our other directors and our Chief Financial Officer are also directors of KICO.
 
The financial statements and pro forma financial information, which are required to be filed in connection with this acquisition, will be filed on Form 8-K/A not later than September 14, 2009.
 

 
 
 
22

 

Item 2.  Management's Discussion and Analysis or Plan of Operation.
 
Overview
 
Until December 2008, our continuing operations primarily consisted of the ownership and operation of 19 storefronts, including 12 Barry Scott locations in New York State, three Atlantic Insurance locations in Pennsylvania, and four Accurate Agency locations in New York State. In December 2008, due to declining revenues and profits, we made a decision to restructure our network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of our least profitable locations during December 2008 and the sale of the remaining 19 Retail Business locations.  On April 17, 2009, we sold substantially all of the assets, including the book of business, of the 16 remaining Retail Business locations that we owned in New York State (the “New York Sale”). Effective June 30, 2009, we sold all of the outstanding stock of the subsidiary that operated our three remaining Retail Business locations in Pennsylvania (the “Pennsylvania Sale”).  As a result of the restructuring in December 2008, the New York Sale on April 17, 2009 and the Pennsylvania Sale effective June 30, 2009, our Retail Business has been presented as discontinued operations and prior periods have been restated.
 
Through April 30, 2009, we received fees from 33 franchised locations in connection with their use of the DCAP name. Effective May 1, 2009, we sold all of the outstanding stock of the subsidiaries that operated our DCAP franchise business.  As a result of the sale, our franchise business has been presented as discontinued operations and prior periods have been restated.
 
Payments Inc., our wholly-owned subsidiary, is an insurance premium finance agency that is licensed within the states of New York and Pennsylvania. Until February 1, 2008, Payments Inc. offered premium financing to clients of DCAP, Barry Scott, Atlantic Insurance and Accurate Agency offices, as well as non-affiliated insurance agencies.  On February 1, 2008, Payments Inc. sold its outstanding premium finance loan portfolio. As a result of the sale, our business of internally financing insurance contracts has been presented as discontinued operations.  Effective February 1, 2008, revenues from our premium financing business have consisted of placement fees based upon premium finance contracts purchased, assumed and serviced by the purchaser of the loan portfolio.
 
In our Retail Business discontinued operations, the insurance storefronts served as insurance agents or brokers and placed various types of insurance on behalf of customers.  Our Retail Business focused on automobile, motorcycle and homeowner’s insurance and our customer base was primarily individuals rather than businesses.
 
The stores also offered automobile club services for roadside assistance and some of our franchise locations offered income tax preparation services.
 
The stores from our Retail Business discontinued operations received commissions from insurance companies for their services.  Prior to July 1, 2009, neither we nor the stores served as an insurance company and therefore we did not assume underwriting risks; however, as discussed below, effective July 1, 2009, we acquired a 100% equity interest in Commercial Mutual Insurance Company (now renamed Kingstone Insurance Company or “KICO”). KICO is a property and casualty insurance company licensed to operate in New York State.
 
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Critical Accounting Policies
 
Our consolidated financial statements include accounts of Kingstone Companies, Inc., formerly known as DCAP Group, Inc., and all wholly-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, our management has utilized information available including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses.
 
Placement fee revenue
 
For our continuing premium finance operations, we earn placement fees upon the establishment of a premium finance contract.
 
Franchise fee revenue (discontinued operations)
 
Franchise fee revenue on initial franchisee fees was recognized when substantially all of our contractual requirements under the franchise agreement were completed.  Franchisees also paid a monthly franchise fee plus a monthly advertising fee.  We were obligated to provide marketing and training support to each franchisee.
 
Commission revenue (discontinued operations)
 
We recognized commission revenue from insurance policies at the beginning of the contract period.  Refunds of commissions on the cancellation of insurance policies were reflected at the time of cancellation.
 
Automobile club dues were recognized equally over the contract period.
 
Finance income, fees and receivables (discontinued operations)
 
For our premium finance operations, we used the interest method to recognize interest income over the life of each loan in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.
 
Upon the establishment of a premium finance contract, we recorded the gross loan payments as a receivable with a corresponding reduction for deferred interest. The deferred interest was amortized to interest income using the interest method over the life of each loan.  The weighted average interest rate charged with respect to financed insurance policies was approximately 26.1% for the six months ended June 30, 2008.
 
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Upon completion of collection efforts, after cancellation of the underlying insurance policies, any uncollected earned interest or fees were charged off.
 
Allowance for finance receivable losses (discontinued operations)
 
Customers who purchase insurance policies are often unable to pay the premium in a lump sum and, therefore, require extended payment terms.  Premium finance involves making a loan to the customer that is backed by the unearned portion of the insurance premiums being financed.  No credit checks were made prior to the decision to extend credit to a customer.  Losses on finance receivables included an estimate of future credit losses on premium finance accounts. Credit losses on premium finance accounts occurred when the unearned premiums received from the insurer upon cancellation of a financed policy were inadequate to pay the balance of the premium finance account. After collection attempts were exhausted, the remaining account balance, including unrealized interest, was written off.  We reviewed historical trends of such losses relative to finance receivable balances to develop estimates of future losses.
 
Goodwill (discontinued operations)
 
The carrying value of goodwill was initially reviewed for impairment as of January 1, 2002, and was reviewed annually or whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. If the fair value of the reporting unit to which goodwill relates is less than the carrying amount of those operations, including unamortized goodwill, the carrying amount of goodwill is reduced accordingly with a charge to impairment expense. Based on our most recent analysis, our results of operations for the six months ended June 30, 2009 include a charge to impairment expense of approximately $49,000.
 
Stock-based compensation
 
Our stock option and other equity-based compensation plans are accounted for in accordance with the recognition and measurement provisions of  SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements. In addition, we adhere to the guidance set forth within Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 107, which provides the Staff's views regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies.
 
Recent Accounting Pronouncements
 
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”), which amends SFAS 157 to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. Guidance on identifying circumstances that indicate a transaction is not orderly is also provided. If it is concluded that there has been a significant decrease in the volume and level of market activity for an asset or liability in relation to normal market activity for an asset or liability, transactions or quoted prices may not be determinative of fair value, and further analysis of the transactions or quoted prices may be needed. A significant adjustment to the transactions or quoted prices may be necessary to estimate fair value which may be determined based on the point within a range of fair value estimates that is most representative of fair value under the current market conditions. Determination of whether the transaction is orderly is based on the weight of the evidence. The disclosure requirements of SFAS 157 are increased since disclosures of the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs during the reporting period are required.
 
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FSP 157-4 defines the disclosures required for major categories by SFAS 157 to be the major security types as defined in FASB Statement No. 115. FSP 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. FSP 157-4 is effective for interim periods ending after June 15, 2009 with early adoption permitted but only in conjunction with the early adoption of FSP FAS 115-2 and FAS 124-2. Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate and disclosed, along with a quantification of the total effect of the change in valuation technique and related inputs, if practicable, by major category. We have adopted the provisions of FSP 157-4 as of April 1, 2009. Currently there was no material impact to our results of operations or financial position upon adoption of FSP 157-4.
 
In April 2009, the FASB issued FAS FSP No. 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and 124-2”). FSP 115-2 and 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 and 124-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP 115-2 and 124-2 requires the entity to assess whether the impairment is other-than-temporary if the fair value of a debt security is less than its amortized cost basis at the balance sheet date. This statement also provides guidance to assessing whether or not the impairment is other-than-temporary and guidance on determining the amount of the other-than-temporary impairment that should be recognized in earnings and other comprehensive income. FSP 115-2 and 124-2 also requires an entity to disclose information that enables users to understand the types of securities held, including those investments in an unrealized loss position for which the other-than-temporary impairment has or has not been recognized. FSP 115-2 and 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. Currently there was no material impact of FSP 115-2 and 124-2 on our results of operations, financial position and liquidity.
 
In April 2009, the FASB issued FAS FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1”). FSP 107-1 requires disclosures about fair value of financial instruments at interim reporting periods. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 provided FSP 115-2 and 124-2 (described above) are also early adopted. The adoption of FSP 107-1 did not currently have a material impact on our consolidated financial statements.
 
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In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. We have evaluated subsequent events through August 14, 2009, the date our financial statements were issued. We do not believe SFAS 165 will result in significant changes to reporting of subsequent events either through recognition or disclosure.
 
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 eliminates the concept of a “qualifying special-purpose entity” from SFAS 140 and changes the requirements for derecognizing financial assets. SFAS 166 is effective for interim or annual financial periods beginning after November 15, 2009. Earlier application is prohibited. SFAS 166 must be applied to transfers occurring on or after the effective date. We are currently evaluating the impact of the pending adoption of SFAS 166 on our consolidated financial statements.
 
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46R” (“SFAS 167”). SFAS 167 amends the evaluation criteria to identify the primary beneficiary of a variable interest entity provided by SFAS Interpretation No. 46R, “Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51”. Additionally, SFAS 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. SFAS 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited. We are currently evaluating the impact of the pending adoption of SFAS 167 on our consolidated financial statements.
 
In June 2009, the FASB issued SFAS No.168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS 168”). U.S. GAAP will no longer be issued in the form of an “accounting standard,” but rather as an update to the applicable “topic” or “subtopic” within the codification. As such, accounting guidance will be classified as either “authoritative” or “nonauthoritative” based on its inclusion or exclusion from the codification. The codification will be the single source of authoritative U.S. accounting and reporting standards, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants. The codification of U.S. GAAP will be effective for interim or annual periods ending after September 15, 2009.  We do not expect SFAS 168 to have a material impact on our consolidated financial statements.
 
Results of Operations
 
In December 2008, due to declining revenues and profits, we made a decision to restructure our network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of our least profitable locations during December 2008 and the sale of the remaining 19 Retail Business locations. On April 17, 2009, we sold substantially all of the assets, including the book of business, of the 16 remaining Retail Business locations that we owned in New York State (the “New York Sale”). Effective June 30, 2009, we sold all of the outstanding stock of the subsidiary that operated our three remaining Retail Business locations in Pennsylvania (the “Pennsylvania Sale”).  As a result of the restructuring in December 2008, the New York Sale on April 17, 2009 and the Pennsylvania Sale effective June 30, 2009, our Retail Business has been presented as discontinued operations and prior periods have been restated.
 
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Effective May 1, 2009, we sold all of the outstanding stock of the subsidiaries that operated our DCAP franchise business.  As a result of the sale, our franchise business has been presented as discontinued operations and prior periods have been restated.
 
On February 1, 2008, we sold our outstanding premium finance loan portfolio. As a result of the sale, our premium financing operations have been presented as discontinued operations.
 
Separate discussions follow for results of continuing operations and discontinued operations.
 
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
 
Continuing Operations
 
The following table summarizes the changes in the significant components of the results of continuing operations (in thousands) for the periods indicated:
 
   
Six months ended
 
   
June 30,
 
               
Change