HG Holdings, Inc 10-Q for FY2023 Q1
HG Holdings, Inc. (STLY)
About this 10-Q
HG Holdings, Inc filed this 10-Q on May 15, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.94M
- up 31.1% from $1.48M a year earlier
- Net loss
- $799K
- compared with a net loss of $577K a year earlier
- Diluted EPS
- -$28.00
- compared with -$20.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | 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:
HG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
As of May 12, 2023,
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HG HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
|
| (unaudited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Investments | ||||||||
| Accounts receivables | ||||||||
| Interest and dividend receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Lease assets | ||||||||
| Investment in affiliate | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued salaries, wages and benefits | ||||||||
| Lease liabilities, current portion | ||||||||
| Escrow liabilities | ||||||||
| Other accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Reserve for title claims | ||||||||
| Unearned premiums | ||||||||
| Lease liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized and and shares issued and outstanding, respectively | ||||||||
| Capital in excess of par value | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Noncontrolling interests | ||||||||
| Total equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
HG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months |
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| Ended |
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| March 31, |
March 31, |
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| 2023 |
2022 |
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| Revenues: |
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| Net premiums written |
$ | $ | ||||||
| Escrow and other title fees |
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| Management fees |
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| Total revenues |
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| Cost of revenues: |
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| Underwriting expenses |
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| Provision for title claim losses |
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| Search and other fees |
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| Total operating expenses |
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| Gross underwriting profit |
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| Operating expenses: |
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| General and administrative expenses |
( |
) | ( |
) | ||||
| Other income/expenses: |
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| Interest income |
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| Dividend income |
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| Loss from affiliate |
( |
) | ( |
) | ||||
| Other income |
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| Loss from operations before income taxes |
( |
) | ( |
) | ||||
| Income tax expense |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Net loss attributable to noncontrolling interests |
( |
) | ||||||
| Net loss after noncontrolling interests |
$ | ( |
) | $ | ( |
) | ||
| Basic and diluted loss per share: |
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| Net loss – basic |
$ | (. |
) | $ | (. |
) | ||
| Net loss – diluted |
$ | (. |
) | $ | (. |
) | ||
| Weighted average shares outstanding: |
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| Basic |
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| Diluted |
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The accompanying notes are an integral part of the consolidated financial statements.
HG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| For the Three Months Ended March 31, |
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| 2023 |
2022 |
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| Net loss after noncontrolling interests |
$ | ( |
) | $ | ( |
) | ||
| Net loss attributable to noncontrolling interests |
( |
) | ||||||
| Net loss from operations |
( |
) | ( |
) | ||||
| Adjustments to reconcile net loss from operations to net cash flows from operating activities: |
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| Depreciation expense |
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| Amortization expense |
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| Stock compensation expense |
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| Dividends on HC Realty common stock |
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| Loss from affiliate |
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| Changes in assets and liabilities: |
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| Prepaid expenses and other current assets |
( |
) | ||||||
| Accounts receivable |
( |
) | ||||||
| Deferred tax assets and other assets |
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| Accounts payable |
( |
) | ||||||
| Accrued salaries, wages, and benefits |
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| Escrow liabilities |
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| Reserve for title claims |
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| Other accrued expenses |
( |
) | ||||||
| Other long-term liabilities |
( |
) | ( |
) | ||||
| Net cash provided by operations |
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| Cash flows from investing activities: |
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| Purchase of property, plant, and equipment |
( |
) | ( |
) | ||||
| Proceeds from sale of investments |
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| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Cash flows from investing activities: |
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| Repurchase of shares of common stock |
( |
) | ||||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Net increase in cash and restricted cash |
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| Cash and restricted cash at beginning of period |
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| Cash and restricted cash at end of period |
$ | $ | ||||||
| Cash |
$ | $ | ||||||
| Restricted cash |
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| Cash and restricted cash |
$ | $ | ||||||
| Supplemental Non-Cash Disclosures: |
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| Dividends on investment in affiliate |
$ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements
HG HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 1. | Preparation of Interim Unaudited Financial Statements |
The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of the Company (as defined below), these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been either condensed or omitted pursuant to SEC rules and regulations. However, the Company believes that the disclosures made are adequate for a fair presentation of results of operations and financial position. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. These consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s latest Annual Report on Form 10-K filed with the SEC on March 30, 2023.
HG Holdings, Inc, together with its consolidated subsidiaries (the “Company,” “we,” ‘us” or “our”), operates through its wholly owned subsidiaries National Consumer Title Insurance Company (“NCTIC”), National Consumer Title Group, LLC (“NCTG”), Title Agency Ventures, LLC (“TAV”), HG Managing Agency, LLC (“HGMA”), and Omega National Title Agency, LLC (“Omega”) and through an affiliated investment in HC Government Realty Trust, Inc., a Maryland corporation (“HC Realty”).
Description of the Business
Title Insurance
The Company engages in issuing title insurance through its subsidiary NCTIC and providing title agency services through its subsidiaries NCTG, TAV, and Omega. Through NCTIC, the Company underwrites land title insurance for owners and mortgagees as the primary insurer. The Company currently only provides title insurance services in the state of Florida.
Title insurance protects against loss or damage resulting from title defects that affect real property. When real property is conveyed from one party to another, occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property. If a covered claim is made against real property, title insurance provides indemnification against insured defects. There are two basic types of title insurance policies – one for the mortgage lender and one for the real property owner. A lender often requires the property owner to purchase a lender’s title insurance policy to protect its position as a holder of a mortgage loan, but the lender’s title insurance policy does not protect the property owner. The property owner has to purchase a separate owner’s title insurance policy to protect its investment.
NCTIC issues title insurance policies in Florida through its home office and through a network of affiliated and independent title agents. In the State of Florida, issuing agents are independent agents or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations. The ability to attract and retain issuing agents is a key determinant of the Company’s growth in title insurance premiums written.
Revenues for the title insurance segment primarily result from purchases of new and existing residential and commercial real estate, refinance activity and certain other types of mortgage lending such as home equity lines of credit. Title insurance premiums vary from state to state and are subject to extensive regulation. Statutes generally provide that rates must not be excessive, inadequate or unfairly discriminatory. The process of implementing a rate change in most states involves pre-approval by the applicable state insurance regulator.
Volume is a factor in the Company’s title insurance operation’s profitability due to fixed operating costs that are incurred regardless of title insurance premium volume. The resulting operating leverage tends to amplify the impact of changes in volume on profitability. The Company’s title insurance profitability also depends, in part, upon its ability to manage its investment portfolio to maximize investment returns and to minimize risks such as interest rate changes, defaults and impairments of assets.
The Company’s volume of title insurance premiums is affected by the overall level of residential and commercial real estate activity, which includes property sales, mortgage financing and mortgage refinancing. Real estate activity, home sales and mortgage lending are cyclical in nature. Real estate activity is affected by a number of factors, including the availability of mortgage credit, the cost of real estate, consumer confidence, employment and family income levels, and general United States economic conditions. Interest rate volatility is also an important factor in the level of residential and commercial real estate activity.
The Company’s title insurance premiums in future periods are likely to fluctuate due to these and other factors which are beyond management’s control.
Historically, the title insurance business tends to be seasonal as well as cyclical. Because home sales are typically strongest in periods of favorable weather, the first calendar quarter tends to have the lowest activity levels, while the spring and summer months tend to be more active. Mortgage refinance activity tends to be influenced less by seasonality and more by economic cycles, with activity levels increasing during times of falling interest rates.
Real Estate Related
The Company engages in rental real estate through its equity investment in HC Realty. HC Realty is an internally-managed real estate investment trust (“REIT”) focused on acquiring, developing, financing, owning and managing build-to-suit or renovate-to-suit, single-tenant properties leased primarily to the U.S. government and administered by the U.S. General Services Administration or directly by the federal government agencies or sub-agencies occupying such properties (referred to as “Government Properties”). HC Realty invests primarily in Government Properties ranging from
The Company currently owns
As of March 31, 2023, HC Realty owned
Reinsurance Related
The Company, through the formation of White Rock USA Cell 47, previously engaged in providing another insurance company excess-of-loss reinsurance coverage related to catastrophic weather risk in Texas. The Company does currently have any reinsurance contracts in-force during the three month period ended March 31, 2023; however, the Company may actively look to provide reinsurance coverage to other carriers as future opportunities arise.
Management Advisory Services Related
The Company, through its wholly-owned subsidiary HGMA, previously engaged in providing management advisory services including formation, operational, and restructuring services. The Company may continue to actively look to provide management advisory services as future opportunities arise.
For information about our reportable segments refer to Note 9 Segment Information.
Developments Impacting Comparison of the Three-Month Periods ended March 31, 2023 and 2022
Effective August 1, 2022, Omega acquired substantially all the assets of Omega Title Florida, LLC (“OTF”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’) Topic 805, the Company has determined that the transaction should be accounted for as a business combination. The acquisition allows Omega to expand into additional geographic areas of Florida and expand its footprint.
For information about our business combinations refer to Note 12 Business Combinations.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment is effective for public entities for annual reporting periods beginning after December 15, 2022. Early application is permitted for reporting periods beginning after December 15, 2018, although the Company has not opted to do so. The Company has adopted ASU 2016-13 with no related impact to the consolidated financial statements.
| 2. | Subordinated Notes Receivable |
The Company received a $
S&L Note
The S&L Note had a principal amount of $
As a result of the Company’s recording of impairment losses in prior quarters, based on current information and events, including the impact of COVID-19 on S&L’s business and its customers, the Company fully impaired the S&L Note as of December 31, 2022. Upon maturity on March 2, 2023, S&L informed the Company that it will not be able to pay the Company any amounts outstanding including principal or interest due. Any future recoveries from S&L, if any, will be recognized as Other Income on the Company’s Unaudited Consolidated Statements of Operations when the recoveries are recognized.
| 3. | Investment in Affiliate |
The HC Series B Stock is not deemed to be in-substance common stock and is accounted for using the measurement alternative for equity investments with no readily determinable fair value. The HC Series B Stock will be reported at cost, adjusted for impairments or any observable price changes in ordinary transactions with identical or similar investments issued by HC Realty.
The following table summarizes the Company’s investment in HC Realty as of March 31, 2023, and December 31, 2022 (in thousands):
| Ownership % | Investment in Affiliate Balance | Loss recorded in the Statements of Operations (b) | ||||||||||||||||||||||
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | 2023 | 2022 | |||||||||||||||||||
| HC Series B Stock (a) | % | % | $ | $ | $ | |||||||||||||||||||
| HC Common Stock | % | % | ( | ) | ( | ) | ||||||||||||||||||
| Total | % | % | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||
| (a) | Represents investments in shares of HC Series B Stock with a basis of $ | |
| (b) | Loss from these investments is included in “Loss from affiliate” in the Unaudited Consolidated Statements of Operations. Since HC Realty is a REIT and not a taxable entity, the loss is not reported net of taxes. |
The Company’s investment in HC Common Stock is accounted for under the equity method of accounting.
| 4. | Investments |
The following table details investments by major investment category, at March 31, 2023 (in thousands):
| Cost or Adjusted/ Amortized Costs | Gross Unrealized Gains | Gross Unrealized Losses | Total | |||||||||||||
| U.S. government and agency securities, held-to-maturity | $ | $ | $ | $ | ||||||||||||
| Investments in limited partnership | ||||||||||||||||
| Common stock | ||||||||||||||||
| Total investments | $ | $ | $ | $ | ||||||||||||
The table below summarizes our fixed maturities at March 31, 2023 (dollars in thousands) by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.
| Cost or Amortized Cost | Percent of Total | Fair Value | Percent of Total | |||||||||||||
| Due in one year or less | $ | % | $ | % | ||||||||||||
| Due after one year through five years | ||||||||||||||||
| Due after five years through ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
Fair value measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on our Unaudited Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.
Level 2: Assets and liabilities whose values are based on the following:
| a. | Quoted prices for similar assets or liabilities in active markets; | |
| b. | Quoted prices for identical or similar assets or liabilities in markets that are not active; or | |
| c. | Valuation models whose inputs are observable, directly, or indirectly, for substantially the full term of the asset or liability. |
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the assets and liabilities.
We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the New York Stock Exchange, Nasdaq and NYSE American. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on March 31, 2023. Changes in interest rates subsequent to March 31, 2023 may affect the fair value of our investments.
The fair value of our fixed maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed-income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience.
All fixed-income securities are classified as held-to-maturity and are reported at amortized cost as of March 31, 2023. The Company performs ongoing impairment evaluations, and we did record any other then temporary impairments during the three months ended March 31, 2023.
The Company’s other investments include investments in limited partnerships whose purpose is to invest capital in various growth-oriented enterprises. The Company does not have significant influence over any investee and the Company’s investment typically represents less than 5% of the investee’s ownership. These investments do not meet the criteria of accounting under the equity method.
The following table presents the fair value of our financial instruments measured on a recurring basis by level at March 31, 2023 (in thousands):
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Common stock | $ | $ | $ | $ | ||||||||||||
| Investments, at fair value | ||||||||||||||||
| Investment in limited partnership | ||||||||||||||||
| U.S. government and agency securities, held-to-maturity | ||||||||||||||||
| Total investments | $ | $ | $ | $ | ||||||||||||
| 5. | Reserve for Title Claims |
NCTIC’s reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy claims that have been incurred but not yet reported (“IBNR”). Despite the variability of such estimates, management believes that the total reserve for claims is adequate to cover claim losses which might result from pending and future claims under title insurance policies issued through March 31, 2023. We continually update loss reserve estimates as new information becomes known, new loss patterns emerge or as other contributing factors are considered and incorporated into the analysis of reserve for claim losses. Due to the uncertainty inherent in the process and to the judgment used by management, the ultimate liability may be greater or less than our current reserves. If actual claims loss development varies from what is currently expected and is not offset by other factors, it is possible that additional reserve adjustments may be required in future periods in order to maintain our recorded reserve within a reasonable range of our actuary's central estimate.
A reconciliation of the activity in the reserves account for the three month period ending March 31, 2023 and 2022 is as follows (in thousands):
| For the Three Months Ended | For the Three Months Ended | |||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Beginning Reserves | $ | $ | ||||||
| Provision for claims related to: | ||||||||
| Current year | ||||||||
| Prior years | ||||||||
| Total provision for claim losses | ||||||||
| Claims paid related to: | ||||||||
| Current year | ||||||||
| Prior years | ||||||||
| Total title claims paid | ||||||||
| Ending Reserves | $ | $ | ||||||
At March 31, 2023, there were
For the three months ended March 31, 2023, there was no development of the net provision for claims attributable to insured events of the prior year as a result of estimation of the reserve for claims. Original estimates are decreased or increased as additional information becomes known regarding individual claims.
A summary of the Company’s loss reserves at March 31, 2023 and December 31, 2022 are as follows (in thousands):
| As of March 31, 2023 | As of December 31, 2022 | |||||||
| Known title claims | $ | $ | ||||||
| IBNR title claims | ||||||||
| Total title claims | ||||||||
| Non-title claims | ||||||||
| Total title claims reserves | $ | $ | ||||||
| 6. | Reinsurance |
Certain premiums and benefits at NCTIC are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide NCTIC with increased capacity to write more risk and maintain its exposure to loss within its capital resources. For the three month period ended March 31, 2023, NCTIC's reinsurance program consisted of excess of loss reinsurance treaties. The following is a summary of the reinsurance coverage.
Effective January 1, 2023, NCTIC entered into a per risk excess of loss reinsurance agreement that provides coverage of $
Effective January 1, 2022, NCTIC entered into a reinstatement premium protection reinsurance agreement to reinsure the reinstatement premium payment obligations of NCTIC under the shared per risk excess of loss agreement. The coverage was limited to
NCTIC’s reinsured risks are treated, to the extent of reinsurance, as though they are risks for which the Company is not liable. However, NCTIC remains contingently liable in the event the reinsuring companies do not meet their obligations under these reinsurance contracts. NCTIC uses a broker to place its reinsurance through Lloyd’s syndicates. Chaucer Ltd (“Chaucer”) and Beazley Syndicate (“Beazley”) are each
The effects of reinsurance on premiums earned at NCTIC are as follows for the three month periods ended March 31, 2023 and 2022:
| For the Three Months Ended | For the Three Months Ended | |||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Direct title premiums | $ | $ | ||||||
| Ceded title premiums | ( | ) | ( | ) | ||||
| Net title premiums | $ | $ | ||||||
| 7. | Statutory Reporting |
NCTIC's assets, liabilities, and results of operations have been reported in accordance with GAAP, which varies from statutory accounting practices (SAP) prescribed or permitted by insurance regulatory authorities. Prescribed SAP are found in a variety of publications of the National Association of Insurance Commissioners (“NAIC”), state laws and regulations, as well as through general practices. The principal differences between SAP and GAAP are that under SAP: (1) certain assets that are not admitted assets are eliminated from the balance sheet, (2) a supplemental reserve for claims is charged directly to unassigned surplus rather than provision for claims under GAAP, and (3) differences may arise in the computation of deferred income taxes. The Company must file with applicable state insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and stockholders' equity (called “surplus as regards policyholders” in statutory reporting).
| 8. | Segment Information |
The Company has
Provided below is selected financial information about the Company’s operations by segment for the three months ended March 31, 2023 (in thousands):
| Title Insurance | Real Estate Related | Reinsurance Related | Management Services Related | Corporate and Other | Total | |||||||||||||||||||
| Insurance and other services revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | ( | ) | ( | ) | ||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Other income and expenses | ||||||||||||||||||||||||
| (Loss) income before income taxes | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Provided below is selected financial information about the Company’s operations by segment for the three months ended March 31, 2022 (in thousands):
| Title Insurance | Real Estate Related | Reinsurance Related | Management Services Related | Corporate and Other | Total | |||||||||||||||||||
| Insurance and other services revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | ( | ) | ( | ) | ||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Other income and expenses | ||||||||||||||||||||||||
| (Loss) income before income taxes | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 9. | Income taxes |
During the three months ended March 31, 2023, the Company recorded a non-cash credit to its valuation allowance of $
The Company maintains a valuation allowance against deferred tax assets that currently exceed its deferred tax liabilities. The primary assets covered by this valuation allowance are net operating loss carry-forwards. The valuation allowance was calculated in accordance with the provisions of ASC Topic 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. The Company’s results over the most recent four-year period were heavily affected by business restructuring activities. The Company’s cumulative loss represented sufficient negative evidence to require a valuation allowance. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal, resulting in no deferred tax asset balance being recognized. Should the Company determine that it will not be able to realize all or part of its deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made.
As of March 31, 2023, the Company has
The Company’s effective tax rate for the current and prior year three month periods were effectively
| 10. | Stockholders’ Equity |
Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options and restricted stock are treated as potential common stock for purposes of computing diluted earnings per share. Basic and diluted earnings per share are calculated using the following share data (in thousands):
| As of the Three Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2023 | 2022 | |||||||
| Weighted average shares outstanding for basic calculation | ||||||||
| Add: Effect of dilutive stock awards | ||||||||
| Weighted average shares outstanding, adjusted for diluted calculation | ||||||||
For the three month periods ended March 31, 2023 and 2022, the dilutive effect of stock options and restricted awards was not recognized since we had a net loss. For the three month period ended March 31, 2023, there were
On August 5, 2022, the Company’s board of directors (“Board”) authorized the repurchase of up to $
During the three months ended March 31, 2023, the Company repurchased
A reconciliation of the activity in Stockholders’ Equity accounts for the three months ended March 31, 2023 is as follows (in thousands):
| Common | Capital in Excess of | Retained | Noncontrolling | |||||||||||||
| Stock | Par Value | Earnings | Interest | |||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | ||||||||||||
| Shares repurchased | ( | ) | ||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ||||||||||||
A reconciliation of the activity in Stockholders’ Equity accounts for the three months ended March 31, 2022 is as follows (in thousands):
| Common | Capital in Excess of | Retained | Noncontrolling | |||||||||||||
| Stock | Par Value | Deficit | Interest | |||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||
| Net loss | ( | ) | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||
| 11. | Leases |
Right-of-use assets and lease liabilities related to operating leases under FASB ASU No. 2016-02, Leases Topic 842 (“Topic 842”) are recorded when the Company and its subsidiaries are party to a contract, which conveys the right for it to control an asset for a specified period of time. Substantially all of our operating lease arrangements relate to rented office space and real estate for our title operations. We generally are not a party to any material contracts considered finance leases. Right-of-use assets and lease liabilities under Topic 842 are recorded as Lease assets and Lease liabilities, respectively, on the Unaudited Consolidated Balance Sheets.
Our operating leases range in term from to years. As of March 31, 2023, the weighted-average remaining lease term of our operating leases was
Our lease agreements do not contain material variable lease payments, buyout options, residual value guarantees or restrictive covenants.
Most of our leases include one or more options to renew, with renewal terms that can extend the lease term by varying amounts. The exercise of lease renewal options is at our sole discretion. We do not include options to renew in our measurement of lease assets and lease liabilities as they are not considered reasonably assured of exercise.
The lease liability is determined by discounting future lease payments using a discount rate based on our incremental borrowing rate for similar collateralized borrowing. The discount rate is calculated using estimates of capitalization rates and borrowing rates. As of March 31, 2023, the weighted-average discount rate used to determine our operating lease liability was
Lease expense included in general and administrative expense on the Unaudited Consolidated Statements of Operations was $
Future payments under operating lease arrangements accounted for under ASC Topic 842 for each twelve month period following March 31, 2023 are as follows (in thousands):
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total lease payments, undiscounted | $ | |||
| Less: present value discount | ( | ) | ||
| Lease liabilities, at present value | $ |
| 12. | Revenue from Contracts with Customers |
ASC Topic 606, Revenue from Contracts with Customers requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance does not apply to revenue associated with insurance contracts (including title insurance policies), financial instruments and lease contracts; and therefore is primarily applicable to the following Company revenue categories.
Escrow and other title-related fees – The Company’s title insurance segment recognizes commission revenue and fees related to items such as searches, settlements, commitments and other ancillary services. Escrow and other title-related fees are recognized as revenue at the time of the related transactions as the earnings process, or performance obligation, is then considered to be complete.
Non-title services –All non-title service fees, such as management fees, are recognized as revenue as performance obligations are completed.
| 13. | Business Combinations |
Effective August 1, 2022, Omega acquired substantially all the assets of OTF. In accordance with ASC Topic 805, the Company has determined that the transaction should be accounted for as a business combination. The assets of OTF at the date of acquisition were as follows (in thousands):
| Title files in progress | $ | |||
| Property, plant, and equipment | ||||
| Noncompetition agreement | ||||
| Total assets acquired | $ |
The purchase price paid by Omega for the assets of OTF were as follows (in thousands):
| Cash paid | $ | |||
| Noncontrolling interest in Omega | ||||
| Total consideration paid | $ | |||
| Title files in progress | $ | |||
| Fixed assets | ||||
| Noncompetition agreement | ||||
| Total assets acquired | ||||
| Goodwill | $ |
The fair value of assets acquired and liabilities assumed represent a preliminary allocation as our evaluation of facts and circumstances available as of March 31, 2023.
The following table presents the unaudited pro forma financial information as if OTF had been included in the Company’s financial results as of January 1, 2022 through the date of acquisition (in thousands):
| Three Months | ||||
| Ended | ||||
| March 31, | ||||
| 2022 | ||||
| Revenues | $ | |||
| Net loss | $ | ( | ) | |
| 13. | Goodwill and Intangible Assets |
Goodwill
As of March 31, 2023, the Company recognized $
Intangible Assets
The following is a summary of intangible assets excluding goodwill recorded as intangible assets on our Unaudited Consolidated Balance Sheets (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Intangible assets subject to amortization | $ | $ | ||||||
| Total | $ | $ | ||||||
Intangible assets subject to amortization consisted of the following as of March 31, 2023 (dollars in thousands):
| Weighted-average remaining amortization period (in years) | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||
| Noncompetition agreement | $ | $ | ( | ) | $ | |||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||||
No impairment in the value of amortizing intangible assets was recognized during the three months ended March 31, 2023.
Amortization expense of our intangible assets was $
Estimated amortization expense of the intangible assets to be recognized by the Company during the remainder of 2023 and over the next five years is as follows (in thousands):
| Year ending December 31, | Estimated Amortization Expense | |||
| Remaining in 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ | |||
| 14. | Uncertainties |
The demand for the Company’s title insurance services is dependent primarily on the volume of residential and commercial real estate transactions. The volume of these transactions historically has been influenced by such factors as mortgage interest rates, inventory, affordability, availability of financing and the overall state of the economy. The Federal Reserve raised the federal funds rate a total of seven times throughout 2022, and three times in 2023 as of the filing date of this Quarterly Report on Form 10-Q, resulting in a current range from 5.00% to 5.25%. It is expected that the Federal Reserve may continue to increase the federal funds rate during 2023 to, among other things, control inflation. Should the Federal Reserve continue to raise rates in the future, this will likely result in further increases in market interest rates. Typically, when interest rates are increasing or when the economy is experiencing a downturn, real estate activity declines. As a result, the title insurance industry tends to experience decreased revenues and earnings, and potentially increased title claims experience.
A shortage in the supply of homes for sale, increasing home prices, rising mortgage interest rates, inflation and disrupted labor markets created some volatility in the residential real estate market in 2021 and 2022, which has continued into 2023. Additionally, geopolitical uncertainties associated with the war in Ukraine have created additional volatility in the global economy beginning in 2022. At this time, the Company is unable to predict the ultimate impact of such disruptions and geopolitical uncertainties.
The Company continues to evaluate the impact of these uncertainties on its operational and financial performance, specifically the impact on HC Realty, and NCTIC and Omega’s operations.
As of March 31, 2023, the Company has not experienced any adverse impacts to the payment of HC Common Stock and HC Series B Stock dividends.
The Company entered into a catastrophe reinsurance treaty as previously disclosed in the Company’s Annual Report on Form 10-K. During the contract period, the counterparty to the treaty was ordered into liquidation by the State of Domicile. While there is uncertainty related to the ultimate amount of premium earned from this treaty, the Company is in discussion with the liquidation trustee regarding a commutation agreement which will provide clarity to the ultimate amount of reinsurance premiums earned. The Company anticipates receiving the trustee approval and execution of the commutation agreement after the filing of the accompanying financial statements; therefore, the Company has maintained a reserve related to this contingency as of March 31, 2023. If the Company does not ultimately receive the commutation agreement from the liquidation trustee, there could be a material impact on the earned premium, net income and liquidity position of the Company as of March 31, 2023.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the accompanying Unaudited Consolidated Financial Statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023. The terms the “Company”, “we”, “our” or “us” refer to HG Holdings, Inc., together with its consolidated subsidiaries, and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our accompanying Unaudited Consolidated Financial Statements and the notes thereto.
Overview
For a description of our business, including descriptions of segments and recent business developments, see the discussion in Note 1 Preparation of Interim Unaudited Financial Statements – Description of the Business in the accompanying Unaudited Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Part I, Item 2.
As of March 31, 2023, our sources of income include earnings from our title insurance subsidiaries, reinsurance premiums earned, management service fees earned and dividends on our HC Common Stock and HC Series B Stock. The Company believes that the revenue generating from these sources and cash on hand is sufficient to fund operating expenses for at least 12 months from the date of the accompanying Unaudited Consolidated Financial Statements.
The Company will continue to pursue acquisition opportunities which will allow us to potentially derive benefit from the Company’s net operating loss carryforwards and also create appropriate risk adjusted returns for stockholders.
Title Insurance Segment Trends and Conditions
Our title insurance segment revenue is closely related to the level of real estate activity that includes sales, mortgage financing and mortgage refinancing. Declines in the level of real estate activity or the average price of real estate sales will adversely affect our title insurance revenues.
We believe that real estate activity is generally dependent on mortgage interest rates, access and availability to mortgage debt, residential housing inventory, home prices, commercial property supply and demand, and the general economic conditions in the U.S. economy.
As of the February 21, 2023 Mortgage Finance Forecast, the Mortgage Bankers Association (“MBA”) expects residential transactions to see continued declines in 2023 due to higher mortgage interest rates before showing increased transaction volumes in 2024 and 2025, as it projects a decrease in mortgage interest rates during this period. Additionally, the MBA expects residential refinance transactions to continue to decrease in 2023 before starting to show increases in 2024 and 2025 as interest rates are expected to start decreasing in the second half of 2024.
The industry as a whole saw a decline in total real estate transactions in 2022, largely due to higher mortgage interest rates. Mortgage rates remained abnormally high after emergency actions taken by the Federal Reserve to substantially increase its benchmark interest rate in the final three quarters of 2022, in an attempt to slow the quarter over quarter inflation. The Federal Reserve raised the federal funds rate a total of seven times throughout 2022 and three times in 2023 as of the filing date of this Quarterly Report on Form 10-Q, resulting in a current range from 5.00% to 5.25%. It is expected that the Federal Reserve may continue to increase the federal funds rate during 2023 to, among other things, control inflation. Should the Federal Reserve continue to raise rates in the future, this will likely result in further increases in market interest rates. Per the MBA’s Mortgage Finance Forecast, interest rates on a Freddie Mac 30-year, fixed rate mortgage averaged 6.6% in the fourth quarter of 2022 as compared to 3.9% in the first quarter of 2022.
A shortage in the supply of homes for sale, increasing home prices, rising mortgage interest rates, inflation and disrupted labor markets created some volatility in the residential real estate market in 2021 and 2022, which has continued into 2023. Additionally, geopolitical uncertainties associated with the war in Ukraine have created additional volatility in the global economy beginning in 2022.
Because commercial real estate transactions tend to be generally driven by supply and demand for commercial space and occupancy rates in a particular area rather than by interest rate fluctuations, we believe that our commercial real estate title insurance business is less dependent on the industry cycles discussed above than our residential real estate title business. Commercial real estate transaction volume is also often linked to the availability of financing. Factors including U.S. tax reform and a shift in U.S. monetary policy have had, or are expected to have, varying effects on availability of financing in the U.S. Lower corporate and individual tax rates, and corporate tax-deductibility of capital expenditures have provided increased capacity and incentive for investments in commercial real estate.
Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months. The fourth quarter is typically strong due to the desire of commercial entities to complete transactions by year-end. Seasonality in 2020, 2021 and 2022 deviated from historical patterns due to COVID-19 and the subsequent rapid increase in interest rates. We have noted short-term fluctuations through recent years in resale and refinance transactions as a result of changes in interest rates.
Recent Bank Failures
In March 2023, three banks in the United States were placed into receivership by a federal banking regulator. In addition, in late March 2023, a large international financial institution suffering distress was forced by its principal regulator to be acquired by its rival. These events have caused great uncertainty and turmoil in the credit markets globally and may cause financial institutions to reduce their lending, which in turn could adversely affect our ability to access capital markets for our liquidity needs and/or cause our cost of capital to increase.
We will endeavor to limit uninsured deposits that we have with banks. Nevertheless, if a bank in which we hold funds fails or is subject to significant adverse conditions in the financial or credit markets, we could be subject to a risk of loss of all or a portion of such uninsured funds or be subject to a delay in accessing all or a portion of such uninsured funds.
Results from Operations
Three Months Ended March 31, 2023
The Company generated dividend income of $256,000 for both of the three month periods ending March 31, 2023 and 2022. Dividend income relates primarily to the HC Series B Stock held by the Company.
As a result of the Company’s title insurance operations, the Company generated title premium and other title fee revenue of $1.9 million and $1.5 million for the three month periods ended March 31, 2023 and 2022, respectively. The title insurance subsidiaries cost of revenue consists primarily of a provision for title claim losses and underwriting expenses, which primarily consist of commissions to title agencies. The title insurance operating expenses consist primarily of personnel expenses, office and technology expenses and professional fees. Operating expenses for the title insurance segment for the three month period ended March 31, 2023 were $2.4 million consisting primarily of $1.6 million in wages, $226,000 of rent expense, and $76,000 in professional and legal fees. Operating expenses for the three month period ended March 31, 2022 was $1.9 million consisting primarily of $1 million in wages, $146,000 of rent expense, and $186,000 in professional and legal fees.
Corporate general and administrative expenses are not directly allocable to either of our reporting segments and consist primarily of wages and personnel costs, legal and professional fees, and insurance expense. Corporate general and administrative expenses increased to $381,000 for the three month period ended March 31, 2023 from $285,000 for the three month period ending March 31, 2022. General and administrative expenses for the three month period ended March 31, 2023 consisted of $57,000 of professional fees, $175,000 of wages and personnel costs, and $149,000 of other operating expenses.
Our effective tax rate for the three month periods ended March 31, 2023 and 2022 was effectively 0% due to our net operating loss carryforwards.
Financial Condition, Liquidity and Capital Resources
Sources of liquidity include cash on hand, earnings from our title insurance subsidiaries, and dividends from our HC Common Stock and HC Series B Stock. At March 31, 2023, we had $9.3 million in cash and an additional $16.6 million in restricted cash, all of which is cash held in escrow for title insurance transactions. A portion of our unrestricted and restricted cash is currently held in savings accounts earning interest at approximately 4.15% annually. We also received quarterly dividends on our HC Realty Common Stock and HC Series B Stock at annual rates of 5.5% and 10%.
Cash flows provided by operating activities differ from net income due to adjustments for non-cash items, such as gains and losses on investments and affiliates, the timing of disbursements for taxes, claims and other accrued liabilities, and collections or changes in receivables and other assets. Net cash provided by operations for the three month period ended March 31, 2023 of $10.8 million consisted of dividends on our HC Realty Common Stock of $41,000, dividends on our HC Series B Stock of $256,000, an increase of $11.3 million in escrow liabilities on the title insurance subsidiaries offset primarily by personnel costs of $1.6 million, title policy software, processing and printing costs of $152,000, office rent of $226,000 and legal and professional fees of $134,000. Net cash provided by operations for the three month period ended March 31, 2022 of $5.3 million consisted of dividends on our HC Common Stock of $41,000, dividends on our HC Series B Stock of $256,000, an increase of $5.7 million in escrow liabilities on the title insurance subsidiaries offset by personnel costs of $1.2 million, title policy software, processing and printing costs of $223,000, office rent of $154,000 and legal and professional fees of $312,000.
Critical Accounting Policies
Our critical accounting policies and estimates are provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the year ended December 31, 2022. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the three months ended March 31, 2023.
Forward-Looking Statements
Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” “could,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the occurrence of events that negatively impact the Company’s liquidity in such a way as to limit or eliminate the Company’s ability to use its cash on hand to fund further asset acquisitions, an inability on the part of the Company to identify additional suitable businesses to acquire or develop, and the occurrence of events that negatively impact the title insurance operations and/or the business or assets of HC Realty and the value of our investment in HC Realty. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not required to be provided by a smaller reporting company.
ITEM 4. Controls and Procedures
| (a) |
Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. |
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of March 31, 2023 was conducted under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, as of March 31, 2023, were effective at the reasonable assurance level.
| (b) |
Changes in internal controls over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Hollie Drive Litigation
In November 2019, we received notice that the Company and the Buyer were defendants in a pending case in the Circuit Court for Henry County, Virginia. The case, which had been instituted on September 18, 2019 by Hollie Drive Associates, LLC (“Hollie”), raises issues arising from the purported breach of a lease for warehouse space in Henry County, Virginia, which is owned by Hollie and was previously rented by the Company. The relevant lease was assigned to the Buyer in connection with the Asset Sale. The complaint asserts that the Buyer breached various provisions of the lease including failure to make certain rental payments and failure to pay for certain clean-up and reconstruction after the Buyer vacated the property. The complaint seeks damages in the amount of approximately $555,000 and attorney’s fees. Hollie named the Company as a party because the Company was the original tenant under the lease. Under the asset purchase agreement entered into in connection with the Asset Sale, the Buyer agreed to assume and indemnify the Company against post-closing liabilities arising under the lease including those asserted in the complaint. The Buyer’s filings in the case do not dispute the obligation to indemnify the Company for any damages awarded in the case. Based upon discussions with the Buyer and documents produced to date by Hollie, it appears Hollie has asserted damages greatly exceeding the likely recovery in the case. Given the relatively low damages amount and the Buyer’s indemnity obligation, the Company believes it is not probable the case will result in a material adverse effect on its financial statements.
Fednat Underwriters, Inc. Bankruptcy & Related Proof of Claim
On January 26, 2023, the United States Bankruptcy Court for the Southern District of Florida, Ft. Lauderdale Division, entered an order (the “Order”) granting a motion from the debtors (including FNU, as defined below) pursuant to Section 365(a) of the Bankruptcy Code authorizing such debtors to reject that certain Management Advisory Services Agreement dated and effective as of July 1, 2022 (the “Advisory Services Agreement”) between HGMA and FedNat Underwriters, Inc. (“FNU”). Based on the Order, the Advisory Services Agreement is deemed rejected as of December 12, 2022.
As disclosed in a Current Report on Form 8-K filed by FedNat Holding Company (“FedNat”)with the SEC on December 12, 2022, on December 11, 2022, FedNat and certain of its wholly owned subsidiaries, including FNU, filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida in order to maximize value for all stakeholders. As part of the Chapter 11 process, FedNat will evaluate all strategic alternatives to maximize value for stakeholders, whether that be a reorganization of its business or a sale of its assets.
Effective with the rejection of the Advisory Services Agreement, the Company will no longer earn compensation for the remaining duration of the agreement. On February 21, 2023, the Company filed a proof of claim for $609,771 of unsecured claims for compensation earned pre-petition pursuant to the Advisory Services Agreement. The Company also filed a claim for post-petition damages arising from the rejection of the agreement prior to its contractual end date.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On August 5, 2022, the Board authorized the repurchase of up to $1.5 million of shares of the Company’s common stock. The authorization does not obligate the Company to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of the Board. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and subject to the Company’s cash requirements for other purposes, and other factors it deems relevant.
The following table summarizes the Company’s repurchase activity under the share repurchase program for the three months ended March 31, 2023.
| Period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum dollar value of shares that may yet be purchased under the plans or programs |
||||||||
| January 2023 |
139 | $7.82 | 2,838 | $1,478,019 | ||||||||
| February 2023 |
- | $ - | 2,838 | $1,478,019 | ||||||||
| March 2023 |
31 | $7.45 | 2,869 | $1,477,796 | ||||||||
| Total |
170 | $7.74 | 2,869 | $1,477,796 |
ITEM 6. Exhibits
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| 101.INS |
Inline XBRL INSTANCE DOCUMENT (1) |
| 101.SCH |
Inline XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT (1) |
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| 101.CAL |
Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE (1) |
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| 101.DEF |
Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE (1) |
| 101.LAB |
Inline XBRL TAXONOMY EXTENSION LABELS LINKBASE (1) |
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| 101.PRE |
Inline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE (1) |
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| 104 |
Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) (1) |
| (1) |
Filed herewith |
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| (2) |
Furnished herewith |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 15, 2023 |
HG HOLDINGS, INC. |
| By: /s/ Justin H. Edenfield |
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| Justin H. Edenfield |
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| Principal Financial and Accounting Officer |
Exhibit 31.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven A. Hale II, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of HG Holdings, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods in this report. |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 15, 2023 |
By: /s/ Steven A. Hale II |
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Steven A. Hale II |
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Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Justin H. Edenfield, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of HG Holdings, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods in this report. |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 15, 2023 |
By: /s/ Justin H. Edenfield |
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Justin H. Edenfield |
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Principal Financial and Accounting Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the HG Holdings, Inc. (the “Company”) Quarterly Report on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven A. Hale II, Chief Executive Officer of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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(1). |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2). |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 15, 2023 |
By: /s/ Steven A. Hale II |
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Steven A. Hale II |
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Chairman and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the HG Holdings, Inc. (the “Company”) Quarterly Report on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Justin H. Edenfield, Principal Financial and Accounting Officer of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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(1). |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2). |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 15, 2023 |
By: /s/ Justin H. Edenfield |
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Justin H. Edenfield |
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Principal Financial and Accounting Officer |