8-K/A
HG Holdings, Inc. (STLY)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 1, 2021
HG Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | No. 0-14938 | 54-1272589 |
|---|---|---|
| (State or other jurisdiction<br><br> <br>of incorporation) | (Commission File Number) | (IRS Employer<br><br> <br>Identification No.) |
| 2115 E. 7 ^th^ Street, Suite 101<br><br> <br>Charlotte , North Carolina | 28204 | |
| --- | --- | |
| (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number, including area code: (252) 355-4610 |
Not Applicable
(Former name or address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| --- | --- |
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2).
Emerging growth 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. ☐
EXPLANATORY NOTE
On September 1, 2021, HG Holdings, Inc. (the “Company”) entered into a Membership Interests Purchase Agreement (the “Purchase Agreement”) with Title Agency Ventures LLC, a Delaware limited liability company (“TAV”), and Fidelis US Holdings, Inc., a Delaware corporation (“Seller”). On such date, pursuant to the Purchase Agreement and in an immediate sign-and-close transaction, the Company purchased 50% of the membership interests of TAV from Seller (the “Acquisition”) for $2.2 million (the “Purchase Price”).
The Acquisition, combined with the previously-announced acquisition by the Company in July 2021 of a 100% membership interest in National Consumer Title Group LLC (“NCTG”), a Florida limited liability company, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV, and by virtue thereof, owns all of the membership interests in Omega National Title Agency (“Omega”), a Florida based title agency. Omega operates 10 title agency locations in Florida providing title agency services for residential and commercial real estate transactions.
The Purchase Agreement contains customary representations and warranties of each party and certain covenants made by each party. The representations and warranties by the Seller survive closing for 12 months, except certain fundamental representations survive for the latter of (i) five years, or (ii) 60 days after the expiration of the applicable statute of limitations. The Seller’s indemnification obligations for breaches of non-fundamental representations are capped at $220,000.
The representations, warranties and covenants included in the Purchase Agreement were made solely for purposes of the agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of the Purchase Agreement, including exceptions set forth on confidential disclosure schedules. Accordingly, the Company’s shareholders should not rely on such representations, warranties and covenants as characterizations of the actual state of related facts or circumstances, and should bear in mind that such representations, warranties and covenants were made solely for the benefit of the parties to the Purchase Agreement, were negotiated for purposes of allocating contractual risk among such parties and may be subject to contractual standards of materiality that differ from those generally applicable to shareholders. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date hereof and any such subsequent information may not be fully reflected in the Company’s public disclosures.
The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement, a copy of which is filed as Exhibit 2.1 to this report and incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited financial statements of NCTG for the year ended December 31, 2020 and for the period June 1, 2019 (inception) through December 31, 2019, and the report of Thomas Howell Ferguson, P.A., independent auditor, thereon, are filed herewith as Exhibit 99.1 and incorporated herein by reference.
The unaudited financial statements of NCTG as of June 30, 2021 and for the six months ended June 30, 2021 and 2020 are filed herewith as Exhibit 99.2, and incorporated herein by reference.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined balance sheet of the Company, reflecting the acquisition of NCTG and TAV as if such acquisition had occurred on June 30, 2021, the pro forma combined statement of operations of the Company for the year ended December 31, 2020 as if the acquisition had occurred on January 1, 2020, and the pro forma combined statement of operations of the Company for the subsequent interim six months ended June 30, 2021 as if the acquisition had occurred on January 1, 2021, are filed herewith as Exhibit 99.3 and incorporated herein by reference. Such unaudited pro forma condensed combined financial statements are not indicative of the operating results or financial position that actually would have been achieved if such acquisition had been in effect on the dates indicated of that may be achieved in future periods, and should be read in conjunction with the financial statements of the Company and NCTG.
(c) Shell Company Transaction.
Not applicable.
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
| HG HOLDINGS, INC. | ||
|---|---|---|
| Date: November 18, 2021 | By: | /s/ Bradley G. Garner |
| Bradley G. Garner | ||
| Principal Financial and Accounting Officer |
ex_309132.htm
Exhibit 23.1
Consent of Independent Auditor
We consent to the inclusion, in this Current Report on Form 8-K/A to the Registration Statement (No. 0-14938) of HG Holdings, Inc., of our report dated November 12, 2021, referenced in Item 9.01(a) relating to the financial statements of National Consumer Title Group, LLC (NCTG).
/s/ Thomas Howell Ferguson P.A.
Tampa, Florida
November 17, 2021
ex_308961.htm
Exhibit 99.1
Financial Statements
National Consumer Title Group, LLC
Year ended December 31, 2020 and for the period
June 1, 2019 (inception) through December 31, 2019
with Report of Independent Auditors
National Consumer Title Group, LLC
Financial Statements
Year ended December 31, 2020 and for the period
June 1, 2019 (inception) through December 31, 2019
Contents
| Report of Independent Auditors | 1 |
|---|---|
| Financial Statements | |
| Balance Sheets | 3 |
| Statements of Operations | 4 |
| Statements of Changes in Members' Equity | 5 |
| Statements of Cash Flows | 6 |
| Notes to Financial Statements | 7 |
Report of Independent Auditors
The Board of Directors
National Consumer Title Group, LLC
Report on the Financial Statements
We have audited the accompanying financial statements of National Consumer Title Group, LLC (the Company) which comprise the balance sheets as of December 31, 2020 and 2019, the related statements of operations, changes in members' equity, and cash flows for the year ended December 31, 2020 and for the period June 1, 2019 (inception) through December 31, 2019, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
1
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Consumer Title Group, LLC as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year ended December 31, 2020 and for the period June 1, 2019 (inception) through December 31, 2019, in accordance with accounting principles generally accepted in the United States of America.
/s/ Thomas Howell Ferguson P.A.
Tampa, Florida
November 12, 2021
2
National Consumer Title Group, LLC
Balance Sheets
| December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| Assets | **** | **** | **** | **** |
| Current assets: | ||||
| Cash and cash equivalents | $ | 9,201 | $ | 9,738 |
| Due from affiliate | **** | 221,372 | 58,463 | |
| Total current assets | **** | 230,573 | 68,201 | |
| Equity method investment | **** | 2,641,964 | 2,096,731 | |
| Total assets | $ | 2,872,537 | $ | 2,164,932 |
| Liabilities and members' equity | **** | **** | **** | **** |
| Liabilities: | ||||
| Due to affiliate | $ | 10,000 | $ | 10,000 |
| Total liabilities | **** | 10,000 | 10,000 | |
| Members' equity: | ||||
| Contributed capital | **** | 2,200,000 | 1,980,000 | |
| Retained earnings | **** | 662,537 | 174,932 | |
| Total members' equity | **** | 2,862,537 | 2,154,932 | |
| Total liabilities and members' equity | $ | 2,872,537 | $ | 2,164,932 |
See accompanying notes.
3
National Consumer Title Group, LLC
Statements of Operations
| Year ended<br><br> <br>December 31,<br><br> <br>2020 | For the period<br><br> <br>June 1, 2019<br><br> <br>(inception)<br><br> <br>through<br><br> <br>December 31,<br><br> <br>2019 | |||
|---|---|---|---|---|
| Operating revenues: | ||||
| Management fees earned | $ | 162,226 | $ | 58,463 |
| Earnings from equity method investment | **** | 326,013 | 116,731 | |
| Total operating revenues | **** | 488,239 | 175,194 | |
| Operating expenses: | ||||
| Taxes, licenses, and fees | **** | 634 | 262 | |
| Total operating expenses | **** | 634 | 262 | |
| Net income | $ | 487,605 | $ | 174,932 |
See accompanying notes.
4
| National Consumer Title Group, LLC | ||||||
|---|---|---|---|---|---|---|
| Statements of Changes in Members' Equity | ||||||
| Year ended December 31, 2020 and for the period June 1, 2019 (inception) through December 31, 2019 | ||||||
| Members' | Retained | **** | **** | |||
| --- | --- | --- | --- | --- | --- | --- |
| Capital | Earnings | Total | ||||
| Balance as of June 1, 2019 (inception) | ||||||
| Contributions from members | 1,980,000 | 1,980,000 | ||||
| Net income | 174,932 | 174,932 | ||||
| Balance as of December 31, 2019 | 1,980,000 | 174,932 | 2,154,932 | |||
| Contributions from members | **** | 220,000 | **** | - | **** | 220,000 |
| Net income | **** | **** | **** | 487,605 | **** | 487,605 |
| Balance as of December 31, 2020 | $ | 2,200,000 | $ | 662,537 | $ | 2,862,537 |
See accompanying notes.
5
National Consumer Title Group, LLC
Statements of Cash Flows
| Year ended<br><br> <br>December 31,<br><br> <br>2020 | For the period<br><br> <br>June 1, 2019<br><br> <br>(inception)<br><br> <br>through<br><br> <br>December 31,<br><br> <br>2019 | |||||
|---|---|---|---|---|---|---|
| Operating activities | **** | **** | **** | **** | **** | **** |
| Net income | $ | 487,605 | $ | 174,932 | ||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||
| Earnings from equity method investment | **** | (326,013 | ) | (116,731 | ) | |
| Changes in operating assets and liabilities: | ||||||
| Due from affiliate | **** | (162,909 | ) | (58,463 | ) | |
| Due to affiliate | **** | - | 10,000 | |||
| Net cash (used in) provided by operating activities | **** | (1,317 | ) | 9,738 | ||
| Investing activities | **** | **** | **** | **** | **** | **** |
| Equity method investment | **** | (219,220 | ) | (1,980,000 | ) | |
| Net cash used in investing activities | **** | (219,220 | ) | (1,980,000 | ) | |
| Financing activities | **** | **** | **** | **** | **** | **** |
| Capital contributions from members | **** | 220,000 | 1,980,000 | |||
| Net cash provided by financing activities | **** | 220,000 | 1,980,000 | |||
| Net (decrease) increase in cash and cash equivalents | **** | (537 | ) | 9,738 | ||
| Cash and cash equivalents at beginning of year | **** | 9,738 | - | |||
| Cash and cash equivalents at end of year | $ | 9,201 | $ | 9,738 |
See accompanying notes.
6
National Consumer Title Group, LLC
Notes to Financial Statements
Year ended December 31, 2020 and for the period
June 1, 2019 (inception) through December 31, 2019
1. Summary of Significant Accounting Policies
Nature of Operations
National Consumer Title Group, LLC (the Company) began operations on June 1, 2019 (inception) as an investment holding company and is organized under the laws of the state of Florida.
| Basis of Presentation |
|---|
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting practices and polices are summarized as follows:
| Revenue Recognition and Concentration |
|---|
The Company’s only source of operating revenue is management fees for providing administrative and management services to Title Agency Ventures, LLC (TAV), an affiliate through common management and ownership. TAV is the Company's only customer. The Company recognizes its management fee revenue as services are provided.
| Cash and Cash Equivalents |
|---|
The Company considers all highly‑liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include demand deposits with financial institutions and investments in highly‑liquid money market securities.
Investments
The Company evaluates its investments in accordance with the variable interest model to determine if it has a controlling financial interest in an investment. This evaluation is made as of the date on which the Company makes its initial investment, and subsequent evaluations are made if the structure of the investment changes. The Company generally consolidates investments in which it holds a controlling ownership interest of greater than 50%. When the Company consolidates less than wholly‑owned subsidiaries, it discloses its noncontrolling interest in its financial statements.
The Company uses the equity method of accounting for its investments in entities in which it has significant influence; generally, this represents an ownership interest of between 20% and 50%. A decline in value that is determined to be other‑than‑temporary is recorded as an impairment charge as a component of earnings in the period in which that determination is made.
7
National Consumer Title Group, LLC
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
| Concentration of Credit Risk |
|---|
The Company's concentrations of credit risk consist primarily of its cash and cash equivalents, equity method investment, and operating revenues. The Company maintains its cash and cash equivalents at several financial institutions. Deposits with financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. Bank deposits at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
| Income Taxes |
|---|
The Company has elected to be taxed as a partnership under the provisions of the Internal Revenue Code. Therefore, taxes are paid at the member level, not at the Company level. Accordingly, no provision or liability for income taxes has been included in the financial statements.
Subsequent Events
The Company has evaluated subsequent events through November 12, 2021, the date the financial statements were available to be issued. During the period from December 31, 2020 to November 12, 2021, the Company did not have any material recognizable subsequent events, except for the matters described in Note 5.
| Fair Value of Financial Instruments |
|---|
The fair value of financial instruments represents estimates of fair values at a specific point in time determined by the Company using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts the Company could realize or settle currently.
The level in the fair value hierarchy within which fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the hierarchy are as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date.
Level 2: Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
8
National Consumer Title Group, LLC
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability at the measurement date.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The carrying values of cash and cash equivalents, due from affiliate, and due to affiliate approximate their fair value.
| Use of Estimates |
|---|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
2. Equity Method Investment
The Company owns a 50% noncontrolling membership interest in TAV, which owns 100% of the membership interest in Omega National Title Agency, LLC (Omega), a Florida‑based title agency. Omega operates 10 title agency locations in Florida providing title agency services for residential and commercial real estate transactions.
9
National Consumer Title Group, LLC
Notes to Financial Statements
2. Equity Method Investment (continued)
Significant information on the assets and liabilities of TAV, an equity method investment of the Company, as of December 31 is as follows:
| 2020 | 2019 | |||
|---|---|---|---|---|
| Assets | **** | **** | **** | **** |
| Cash, accounts receivable, and other current assets | $ | 6,286,456 | $ | 2,939,980 |
| Fixed assets | **** | 264,346 | 333,346 | |
| Goodwill | **** | 4,040,000 | 4,040,000 | |
| Total assets | $ | 10,590,802 | $ | 7,313,326 |
| Liabilities and equity | **** | **** | **** | **** |
| Liabilities: | ||||
| Accounts payable and accrued expenses | $ | 482,996 | $ | 939,466 |
| Amounts held in escrow | **** | 4,278,691 | 2,182,570 | |
| Note payable | **** | 544,842 | - | |
| Total liabilities | **** | 5,306,529 | 3,122,036 | |
| Total equity | **** | 5,284,273 | 4,191,290 | |
| Total liabilities and equity | $ | 10,590,802 | $ | 7,313,326 |
The Company recorded $2,641,964 and $2,096,731 for its equity method investment in TAV at December 31, 2020 and 2019, respectively.
Significant information on the results of operations of TAV for 2020 and 2019 is as follows:
| 2020 | 2019 | |||
|---|---|---|---|---|
| Operating results: | **** | **** | **** | **** |
| Total revenues | $ | 5,824,722 | $ | 2,838,280 |
| Total expenses | **** | 5,173,299 | 2,606,990 | |
| Net income | $ | 651,423 | $ | 231,290 |
The Company recorded earnings from its equity method investment in TAV of $326,013 and $116,731 for 2020 and 2019, respectively.
Omega is named defendant in various legal actions arising in the normal course of business. Omega's management believes that the resolution of these actions will not have a material adverse effect on Omega's financial position or results of operations.
10
National Consumer Title Group, LLC
Notes to Financial Statements
| 3. Related Party Transactions |
|---|
The Company has a service agreement with TAV, an affiliate through common management and ownership. Under terms of the agreement, the Company provides administrative and management services to TAV for a fee equal to 20% of TAV’s earnings (prior to calculation of the fee due to the Company). The Company recorded management fee income of $162,226 and $58,463 for 2020 and 2019, respectively, related to the agreement. As of December 31, 2020 and 2019, the Company was owed $221,372 and $58,463, respectively, from TAV in fees, which are presented as due from affiliate on the balance sheets.
The Company owed $10,000 at December 31, 2020 and 2019, to Preferred Managing Agency, LLC (PMA), an affiliate through common management, for an advance received by the Company from PMA to help with the startup of operations.
| 4. Members' Equity |
|---|
The Company had one class of ownership units at December 31, 2020 and 2019. The Company received capital contributions from its members of $220,000 and $1,980,000 in 2020 and 2019, respectively.
| 5. Subsequent Events |
|---|
In July 2021, HG Holdings, Inc. purchased all of the Company’s outstanding ownership interest.
In September 2021, HG Holdings, Inc. purchased the remaining outstanding ownership interest in TAV.
11
ex_307885.htm
Exhibit 99.2
| NATIONAL CONSUMER TITLE GROUP, LLC | ||||
|---|---|---|---|---|
| Balance Sheets | ||||
| (in thousands) | ||||
| June 30, 2021 (unaudited) | December 31, 2020 (audited) | |||
| --- | --- | --- | --- | --- |
| ASSETS | **** | **** | **** | **** |
| Current assets: | ||||
| Cash and cash equivalents | $ | 9 | $ | 9 |
| Total current assets | 9 | 9 | ||
| Other assets: | ||||
| Due from affiliate | 418 | 221 | ||
| Equity method investment | 3,032 | 2,642 | ||
| Total assets | $ | 3,459 | $ | 2,872 |
| LIABILITIES AND MEMBERS' EQUITY | **** | **** | **** | **** |
| Liabilities: | ||||
| Due to affiliate | $ | 10 | $ | 10 |
| Total liabilities | 10 | 10 | ||
| Members' equity: | ||||
| Contributed capital | 2,200 | 2,200 | ||
| Retained earnings | 1,249 | 662 | ||
| Total members' equity | 3,449 | 2,862 | ||
| Total liabilities and members' equity | $ | 3,459 | $ | 2,872 |
| See Notes to Unaudited Financial Statements | ||||
| --- |
| NATIONAL CONSUMER TITLE GROUP, LLC | ||||
|---|---|---|---|---|
| Statement of Operations | ||||
| (in thousands) | ||||
| (unaudited) | ||||
| Six Months Ended June 30, | ||||
| --- | --- | --- | --- | --- |
| 2021 | 2020 | |||
| Operating revenues: | **** | **** | **** | **** |
| Management fees earned | $ | 197 | $ | 21 |
| Earnings from equity method investment | 390 | 43 | ||
| Total operating revenues | 587 | 64 | ||
| Operating expenses: | **** | **** | **** | **** |
| Taxes, licenses, and fees | - | - | ||
| Total operating expenses | - | - | ||
| Net income | $ | 587 | $ | 64 |
| See Notes to Unaudited Financial Statements | ||||
| --- |
| NATIONAL CONSUMER TITLE GROUP, LLC | ||||||
|---|---|---|---|---|---|---|
| Statements of Cash Flows | ||||||
| (in thousands) | ||||||
| (unaudited) | ||||||
| Six Months Ended June 30, | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| 2021 | 2020 | |||||
| Operating activities | **** | **** | **** | **** | **** | **** |
| Net income | $ | 587 | $ | 64 | ||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||
| Earnings from equity method investment | (390 | ) | (43 | ) | ||
| Changes in operating assets and liabilities: | ||||||
| Due from affiliate | (197 | ) | (21 | ) | ||
| Due to affiliate | - | - | ||||
| Net cash (used in) provided by operating activities | $ | - | $ | - | ||
| Investing activities | **** | **** | **** | **** | **** | **** |
| Equity method investments | - | - | ||||
| Net cash used in investing activities | - | - | ||||
| Financing activities | **** | **** | **** | **** | **** | **** |
| Capital contributions from members | - | - | ||||
| Net cash provided by financing activities | - | - | ||||
| Net (decrease) increase in cash and cash equivalents | - | - | ||||
| Cash and cash equivalents at beginning of year | 9 | 10 | ||||
| Cash and cash equivalents at end of year | $ | 9 | $ | 10 | ||
| See notes to unaudited financial statements | ||||||
| --- |
NATIONAL CONSUMER TITLE GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
| 1. | Summary of Significant Accounting Policies |
|---|
Nature of Operations
National Consumer Title Group, LLC (the Company) began operations on June 1, 2019 (inception) as an investment holding company and is organized under the laws of the state of Florida.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting practices and policies are summarized as follows:
Revenue Recognition
The Company recognizes revenues as services are provided. The Company’s primary source of operating revenue is management fees for providing administrative and management services to Title Agency Ventures, LLC (TAV), an affiliate through common management and ownership.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include demand deposits with financial institutions and investments in highly-liquid money market securities.
Investments
The Company evaluates its investments in accordance with the variable interest model to determine if it has a controlling financial interest in an investment. This evaluation is made as of the date on which the Company makes its initial investment, and subsequent evaluations are made if the structure of the investment changes. The Company generally consolidates investments in which it holds a controlling ownership interest of greater than 50%. When the Company consolidates less than wholly-owned subsidiaries, it discloses its noncontrolling interest in its financial statements.
The Company uses the equity method of accounting for its investments in entities in which it has a significant influence; generally, this represents an ownership interest of between 20% and 50%. A decline in value that is determined to be other-than-temporary is recorded as an impairment charge as a component of earnings in the period in which that determination is made.
Concentration of Credit Risk
The Company’s concentrations of credit risk consist primarily of its cash and cash equivalents, equity method investment, and operating revenues. The Company maintains its cash and cash equivalents at several financial institutions. Deposits with financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. Bank deposits at times may exceed federally insured limits. The Company has not experienced any losses in such times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Income Taxes
The Company has elected to be taxed as a partnership under the provisions of the Internal Revenue Code. Therefore, taxes are paid at the member level, not at the Company level. Accordingly, no provision or liability for income taxes has been included in the financial statements.
Fair Value of Financial Instruments
The fair value of financial instruments represents estimates of fair values at a specific point in time determined by the Company using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts the Company could realize or settle currently.
The level in the fair value hierarchy within which fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the hierarchy are as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date.
Level 2: Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets of liabilities. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability at the measurement date.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize their fair value.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
| 2. | Equity Method Investment |
|---|
The Company owns a 50% noncontrolling membership interest in TAV, which owns 100% of the membership interest in Omega National Title Agency, LLC (Omega), a Florida-based title agency. Omega operates 10 title agency locations in Florida providing title agency services for residential and commercial real estate transactions.
Significant information on the assets and liabilities of TAV, an equity method investment of the Company, as of June 30, 2021 is as follows (in thousands):
| Assets: | **** | **** |
|---|---|---|
| Current assets: | ||
| Cash and cash equivalents | $ | 2,703 |
| Restricted Cash | 10,650 | |
| Accounts receivables | 172 | |
| Prepaid expenses and other current assets | 54 | |
| Total current assets | 13,579 | |
| Property, plant and equipment, net | 228 | |
| Goodwill | 4,040 | |
| Total assets | $ | 17,847 |
| Liabilities: | **** | **** |
| Current liabilities: | ||
| Accounts payable | $ | 170 |
| Escrow liabilities | 10,650 | |
| Accrued management fee | 418 | |
| Total current liabilities | 11,238 | |
| Long-term liabilities: | ||
| Note payable | 545 | |
| Total long-term liabilities | 545 | |
| Total liabilities | 11,783 | |
| Members’ capital: | **** | **** |
| Members’ capital contributions | 4,400 | |
| Retained earnings | 1,664 | |
| Total members’ capital | 6,064 | |
| Total liabilities and members’ capital | $ | 17,847 |
The Company recorded $3.0 million for its equity method investment in TAV at June 30, 2021.
Significant information on the results of operations of TAV for the six months ended June 30, 2021 is as follows (in thousands):
| Revenues: | ||
|---|---|---|
| Premiums written | $ | 2,332 |
| Escrow and other title fees | 1,446 | |
| Other income | 14 | |
| Total revenues | 3,792 | |
| Cost of revenues: | ||
| Escrow losses | 57 | |
| Search and other fees | 50 | |
| Total cost of revenues | 107 | |
| Gross underwriting profit | 3,685 | |
| Operating expenses: | ||
| General and administrative expenses | 2,905 | |
| Net income | $ | 780 |
The Company recorded earnings from its equity method investment in TAV of $390,000 for the six months ended June 30, 2021.
| 3. | Related Party Transactions |
|---|
The Company has a service agreement with TAV, an affiliate through common management and ownership. Under terms of the agreement, the Company provides administrative and management services to TAV for a fee equal to 20% of TAV’s earnings (prior to calculation of the fee due to the Company). The Company recorded management fee income of $197,000 for the six months ended June 30, 2021 related to the agreement. As of June 30, 2021, the Company was owed $418,000 from TAV in fees, which are presented as due from affiliate on the balance sheets.
The Company owed $10,000 at June 30, 2021 to Preferred Managing Agency, LLC (PMA), an affiliate through common management, for an advance received by the Company from PMA to help with the startup of operations.
| 4. | Members’Equity |
|---|
The Company had one class of ownership units at June 30, 2021.
| 5. | Subsequent Event |
|---|
In July 2021, HG Holdings, Inc., purchased all of the Company’s outstanding ownership interest.
In September 2021, HG Holdings, Inc., purchased the remaining outstanding ownership interest in TAV.
ex_307886.htm
Exhibit 99.3
HG HOLDINGS, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On September 1, 2021, HG Holdings, Inc. (the “Company”) entered into a Membership Interests Purchase Agreement (the “Purchase Agreement”) with Title Agency Ventures LLC, a Delaware limited liability company (“TAV”), and Fidelis US Holdings, Inc., a Delaware corporation (“Seller”). On such date, pursuant to the Purchase Agreement and in an immediate sign-and-close transaction, the Company purchased 50% of the membership interests of TAV from Seller (the “Second Acquisition”) for $2.2 million (the “Purchase Price”).
The Acquisition, combined with the previously-announced acquisition (the “First Acquisition”, and collectively with the Second Acquisitions, the “Acquisition”) by the Company in July 2021 of a 100% membership interest in National Consumer Title Group LLC, a Florida limited liability company, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV, and by virtue thereof, owns all of the membership interests in Omega National Title Agency (“Omega”), a Florida based title agency. Omega operates 10 title agency locations in Florida providing title agency services for residential and commercial real estate transactions. As previously disclosed, in the First Acquisition, the Company also effectively purchased 100% of the stock of National Consumer Title Insurance Company (“NCTIC”), NCTIC provides title insurance, closing and/or escrow services and similar or related services in the state of Florida in connection with residential real estate transactions. The Company has previously provided certain pro forma financial statements of NCTIC in its amendment No. 1 of its Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2021 (“October 2021 Form 8-K/A”) and the pro forma financial statements provided herein include NCTIC’s pro forma financial statements as set forth below.
The unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2021 combines the Company’s unaudited statement of operations for the six months ended June 30, 2021, NCTIC’s unaudited statement of operations for the six months ended June 30, 2021, NCTG’s unaudited statement of operations for the six months ended June 30, 2021, and TAV’s unaudited statement of operations for the six months ended June 30, 2021.
Both the full year and six month unaudited pro forma condensed combined statements of operations give effect to the Acquisition as if it had been consummated on January 1, 2020 and January 1, 2021, respectively, and include adjustments which are directly attributable to the Acquisition, are expected to have continuing impact on the combined results of operations, and are factually supportable.
The unaudited pro forma condensed combined balance sheet combines the Company’s unaudited consolidated balance sheet as of June 30, 2021, NCTIC’s unaudited combined balance sheet as of June 30, 2021, NCTG’s unaudited combined balance sheet as of June 30, 2021, and TAV’s unaudited combined balance sheet as of June 30, 2021, giving effect to the Acquisition as if it had been consummated on June 30, 2021.
The unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of operations are also referred to herein as the unaudited pro forma financial statements.
The unaudited pro forma financial statements are presented for information purposes only and should be read in conjunction with the accompanying notes to the unaudited pro forma financial statements. In addition, the unaudited pro forma financial statements are based on and should be read in conjunction with the following historical financial statements and accompanying notes for the Company, the historical combined financial statements and accompanying notes of NCTG, and the historical combined financial statements and accompanying notes of NCTIC:
| ● | Separate unaudited historical financial statements and the related notes of the Company as of and for the six months ended June 30, 2021 included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021, as well as the audited historical financial statements and the related notes of the Company as of and for the year ended December 31, 2020 included in its Annual Report on Form 10-K for the year ended December 31, 2020; |
|---|---|
| ● | Separate audited historical financial statements of NCTG for the year ended December 31, 2020 and for the period June 1, 2019 (inception) through December 31, 2019, which are included as Exhibit 99.1 to this Current Report on Form 8-K/A; |
| --- | --- |
| ● | Separate unaudited historical financial statements of NCTG as of June 30, 2021 and for the six months ended June 30, 2021 and 2020, which are included as Exhibit 99.2 to this Current Report on Form 8-K/A; |
| --- | --- |
| ● | Separate audited historical financial statements of NCTIC as of December 31, 2020 and 2019 and for the years then ended, which are included as Exhibit 99.1 to the October 2021 Form 8-K/A; and |
| --- | --- |
| ● | Separate unaudited historical financial statements of NCTIC as of June 30, 2021 and for the six months ended June 30, 2021 and 2020, which are included as Exhibit 99.2 to the October 2021 Form 8-K/A. |
| --- | --- |
The unaudited pro forma financial statements have been prepared by management in accordance with SEC Regulation S-X Article 11, Pro Forma Financial Information. The unaudited pro forma financial statements are not necessarily indicative of what the Company’s financial position or results of operations actually would have been had the Company completed the Acquisition on the dates indicated, nor do they purport to project the future financial position or operating results of the combined businesses.
The unaudited pro forma financial statements have been prepared using the acquisition method of accounting under accounting principles generally accepted in the United States of America (“U.S. GAAP”). The pro forma adjustments are preliminary, based upon available information and made solely for the purpose of providing these unaudited pro forma financial statements. Differences between these preliminary adjustments and the final acquisition accounting may occur and these differences could have a material impact on the future results of operations and financial position of the combined company.
| HG HOLDINGS, INC. | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unaudited Pro Forma Condensed Combined Balance Sheet | ||||||||||||||||
| As of June 30, 2021 | ||||||||||||||||
| (in thousands, except share data) | ||||||||||||||||
| NCTIC | NCTG | TAV | Pro Forma<br><br> <br>Adjustments | Notes | Combined | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| ASSETS | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Cash and cash equivalents | 12,199 | $ | 4,834 | $ | 9 | $ | 2,703 | $ | (7,663 | ) | (A) | $ | 12,082 | |||
| Restricted cash | 234 | - | - | 10,650 | - | 10,884 | ||||||||||
| Accounts receivable | - | 40 | - | 172 | - | 212 | ||||||||||
| Interest and dividend receivables | 298 | - | - | - | - | 298 | ||||||||||
| Prepaid expenses and other current assets | 161 | - | 418 | 54 | (418 | ) | (G) | 215 | ||||||||
| Total current assets | 12,892 | 4,874 | 427 | 13,579 | (8,081 | ) | 23,691 | |||||||||
| Property, plant and equipment, net | 6 | - | - | 228 | - | 234 | ||||||||||
| Investment in affiliate | 11,764 | - | 3,032 | - | (3,032 | ) | (B) | 11,764 | ||||||||
| Investment in subsidiary | - | - | - | - | - | (C) | - | |||||||||
| Subordinated notes receivable | 1,713 | - | - | - | - | 1,713 | ||||||||||
| Goodwill | - | - | - | 4,040 | 411 | (F) | 4,451 | |||||||||
| Net deferred tax asset | - | 14 | - | - | (14 | ) | (E) | - | ||||||||
| Income taxes Recoverable | - | 4 | - | - | (4 | ) | (E) | - | ||||||||
| Other assets | 543 | - | - | - | - | 543 | ||||||||||
| Total assets | 26,918 | $ | 4,892 | $ | 3,459 | $ | 17,847 | $ | (10,720 | ) | $ | 42,396 | ||||
| LIABILITIES | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Current liabilities: | ||||||||||||||||
| Accounts payable | 5 | $ | 169 | $ | - | $ | 170 | $ | - | $ | 344 | |||||
| Accrued salaries, wages and benefits | 4 | - | - | - | - | 4 | ||||||||||
| Other accrued expenses | 205 | - | 10 | 418 | (418 | ) | (G) | 215 | ||||||||
| Reserves for claims | - | 209 | - | - | - | 209 | ||||||||||
| Reinsurance premium payables | - | 41 | - | - | - | 41 | ||||||||||
| Escrow liabilities | - | 3 | - | 10,650 | - | 10,653 | ||||||||||
| Total current liabilities | 214 | 422 | 10 | 11,238 | (418 | ) | 11,466 | |||||||||
| Long-term liabilities: | ||||||||||||||||
| Note Payable | - | - | - | 545 | - | 545 | ||||||||||
| Other long-term liabilities | 239 | - | - | - | - | 239 | ||||||||||
| Total long-term liabilities | 239 | - | - | 545 | - | 784 | ||||||||||
| Total liabilities | 453 | 422 | 10 | 11,783 | (418 | ) | 12,250 | |||||||||
| Stockholders' Equity | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Common stock, 0.02 par value, 35,000,000 shares authorized and 34,404,556 shares issued and outstanding | 684 | 3,000 | 2,200 | 4,400 | (9,600 | ) | (H) | 684 | ||||||||
| Capital in excess of par value | 29,780 | 1,500 | - | - | (1,500 | ) | (H) | 29,780 | ||||||||
| Retained deficit | (3,999 | ) | (30 | ) | 1,249 | 1,664 | 797 | (I) | (319 | ) | ||||||
| Total stockholders' equity | 26,465 | 4,470 | 3,449 | 6,064 | (10,303 | ) | 30,145 | |||||||||
| Total liabilities and stockholders' equity | 26,918 | $ | 4,892 | $ | 3,459 | $ | 17,847 | $ | (10,721 | ) | $ | 42,395 |
All values are in US Dollars.
| See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements |
|---|
| HG HOLDINGS, INC. | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unaudited Pro Forma Condensed Combined Statement of Operations | ||||||||||||||||||
| For the Six Months Ended June 30, 2021 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||
| HG Holdings, Inc. | NCTIC | NCTG | TAV | Pro Forma<br><br> <br>Adjustment | Notes | Combined | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenue | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Premiums earned, net of reinsurance ceded | $ | - | $ | 941 | $ | - | $ | 2,332 | $ | - | $ | 3,273 | ||||||
| Other title fees and service charges | - | 77 | - | 1,446 | - | 1,523 | ||||||||||||
| Management fees | - | - | 197 | - | (197 | ) | (B) | - | ||||||||||
| Other income | - | - | - | 14 | - | 14 | ||||||||||||
| Net investment income | - | 1 | - | - | - | 1 | ||||||||||||
| Total Revenue | - | 1,019 | 197 | 3,792 | (197 | ) | 4,811 | |||||||||||
| Expenses | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Provision for title claim losses | - | (37 | ) | - | (57 | ) | - | (94 | ) | |||||||||
| Search and other title fees | - | - | - | (50 | ) | - | (50 | ) | ||||||||||
| General and administrative expenses | (596 | ) | (970 | ) | - | (2,905 | ) | 329 | (D) | (4,142 | ) | |||||||
| Total Expenses | (596 | ) | (1,007 | ) | - | (3,012 | ) | 329 | (4,286 | ) | ||||||||
| Other income/expenses | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Interest income | 13 | - | - | - | - | 13 | ||||||||||||
| Dividend income | 513 | - | - | - | - | 513 | ||||||||||||
| Income (loss) from affiliate | (226 | ) | - | 390 | - | (390 | ) | (C) | (226 | ) | ||||||||
| (Loss) income from operations before income taxes | (296 | ) | 12 | 587 | 780 | (258 | ) | 825 | ||||||||||
| Income tax (expense) benefit | - | (1 | ) | - | - | 1 | (A) | - | ||||||||||
| Net (loss) income | $ | (296 | ) | $ | 11 | $ | 587 | $ | 780 | $ | (257 | ) | $ | 825 | ||||
| Basic and diluted (loss) income per share: | ||||||||||||||||||
| Net (loss) income | $ | (0.01 | ) | $ | - | $ | - | $ | - | $ | - | $ | 0.02 | |||||
| Weighted average shares outstanding: | ||||||||||||||||||
| Basic | 33,988 | - | - | - | - | 33,988 | ||||||||||||
| Diluted | 33,988 | - | - | - | - | 33,988 | ||||||||||||
| See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements | ||||||||||||||||||
| --- |
| HG HOLDINGS, INC. | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unaudited Pro Forma Condensed Combined Statement of Operations | |||||||||||||||||||
| For the Year Ended December 31, 2020 | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||
| HG Holdings, Inc. | NCTIC | NCTG | TAV | Pro Forma<br><br> <br>Adjustments | Notes | Combined | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Revenue | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Premiums earned, net of reinsurance ceded | $ | - | $ | 1,504 | $ | - | $ | 3,507 | $ | - | $ | 5,011 | |||||||
| Other title fees and service charges | - | 185 | - | 2,300 | - | 2,485 | |||||||||||||
| Management fees | - | - | 162 | - | (162 | ) | (B) | - | |||||||||||
| Other income | - | - | - | 17 | - | 17 | |||||||||||||
| Net investment income | - | 14 | - | - | - | 14 | |||||||||||||
| Total Revenue | - | 1,703 | 162 | 5,824 | (162 | ) | 7,527 | ||||||||||||
| Expenses | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Provision for title claim losses | - | (62 | ) | - | (19 | ) | - | (81 | ) | ||||||||||
| Search and other title fees | - | - | - | (123 | ) | - | (123 | ) | |||||||||||
| General and administrative expenses | (1,304 | ) | (1,600 | ) | (1 | ) | (5,030 | ) | 162 | (D) | (7,773 | ) | |||||||
| Total Expenses | (1,304 | ) | (1,662 | ) | (1 | ) | (5,172 | ) | 162 | (7,977 | ) | ||||||||
| Other income/expenses | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | |
| Interest income | 608 | - | - | - | - | 608 | |||||||||||||
| Dividend income | 684 | - | - | - | - | 684 | |||||||||||||
| Gain on settlement of subordinated note receivable | 1,326 | - | - | - | - | 1,326 | |||||||||||||
| Impairment loss | (833 | ) | - | - | - | - | (833 | ) | |||||||||||
| Income (loss) from affiliate | (418 | ) | - | 326 | - | (326 | ) | (C) | (418 | ) | |||||||||
| Income from operations before income taxes | 63 | 41 | 487 | 652 | (326 | ) | 917 | ||||||||||||
| Income tax (expense) benefit | - | (10 | ) | - | - | 10 | (A) | - | |||||||||||
| Net income | $ | 63 | $ | 31 | $ | 487 | $ | 652 | $ | (316 | ) | $ | 917 | ||||||
| Basic and diluted income per share: | |||||||||||||||||||
| Net income | $ | 0.00 | $ | - | $ | - | $ | - | $ | - | $ | 0.04 | |||||||
| Weighted average shares outstanding: | |||||||||||||||||||
| Basic | 25,004 | - | - | - | - | 25,004 | |||||||||||||
| Diluted | 25,421 | - | - | - | - | 25,421 | |||||||||||||
| See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements | |||||||||||||||||||
| --- |
HG HOLDINGS, INC. and SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Please refer to the Notes to the Unaudited Pro Forma Condensed Combined Financial Statements in Exhibit 99.3 of the October 5, 2021 Form 8-K/A for more information regarding the NCTIC pro forma information.
1. Description of the Acquisition
On September 1, 2021, HG Holdings, Inc. (the “Company”) entered into a Membership Interests Purchase Agreement (the “Purchase Agreement”) with Title Agency Ventures LLC, a Delaware limited liability company (“TAV”), and Fidelis US Holdings, Inc., a Delaware corporation (“Seller”). On such date, pursuant to the Purchase Agreement and in an immediate sign-and-close transaction, the Company purchased 50% of the membership interests of TAV from Seller (the “Acquisition”) for $2.2 million (the “Purchase Price”).
The Acquisition, combined with the previously-announced acquisition by the Company in July 2021 of a 100% membership interest in National Consumer Title Group LLC, a Florida limited liability company, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV, and by virtue thereof, owns all of the membership interests in Omega National Title Agency (“Omega”), a Florida based title agency. Omega operates 10 title agency locations in Florida providing title agency services for residential and commercial real estate transactions.
2. Basis of Pro Forma Presentation
The accompanying unaudited pro forma condensed combined balance sheet presents the Company’s historical financial position combined with NCTIC, NCTG and TAV as if the Acquisition had occurred on June 30, 2021. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 present the combined results of the Company as if the Acquisition with NCTIC, NCTG and TAV had occurred on January 1, 2021. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 present the combined results of the Company as if the Acquisition with NCTIC, NCTG and TAV had occurred on January 1, 2021. The accompanying unaudited pro forma condensed combined financial statements include management’s assumptions and certain adjustments as described in greater detail herein.
The unaudited pro forma condensed combined balance sheet information is based on the following:
| ● | With respect to the Company, the unaudited balance sheet as of June 30, 2021; and |
|---|---|
| ● | With respect to NCTIC, NCTG and TAV, the unaudited combined balance sheets as of June 30, 2021. |
| --- | --- |
The unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2021 is based on the following:
| ● | With respect to the Company, the unaudited statement of operations for the six months ended June 30, 2021 included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021; and |
|---|---|
| ● | With respect to NCTIC, NCTG and TAV, the unaudited combined statements of operations for the six months ended June 30, 2021. |
| --- | --- |
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 is based on the following:
| ● | With respect to the Company, the audited statement of operations for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020; and |
|---|---|
| ● | With respect to NCTIC and NCTG, the audited combined statements of operations for the year ended December 31, 2020 and with respect to TAV, the unaudited combined statement of operations for the year ended December 31, 2020. |
| --- | --- |
The accompanying unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting in accordance with Accounting Standards Codification 805, “Business Combinations” (“ASC 805”) and are based on the audited annual and unaudited interim historical financial statements of the Company and NCTIC and NCTG. The unaudited pro forma financial statements are presented for illustrative purposes only. The historical financial statements have been adjusted in the accompanying unaudited pro forma financial statements to give effect to the pro forma events that are (a) directly attributable to the Acquisition, (2) factually supportable, and (3) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the consolidated results.
As the acquirer for accounting purposes, the Company has estimated the fair value of the NCTIC, NCTG and TAV assets acquired and liabilities assumed, and conformed the accounting policies of NCTG to its own accounting policies. The acquisition method of accounting uses the fair value concepts defined in ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). Fair value is defined in ASC 820 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.” Fair value measurements can be highly subjective, and it is possible the application of reasonable judgment could result in different assumptions resulting in a range of alternative estimates using the same facts and circumstances. The allocation of the purchase price is preliminary, pending the finalization of various estimates and analyses as outlined in the Purchase Agreement. Since these unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates of fair values attributable to the Acquisition, the actual amounts eventually recorded for the Acquisition, may differ materially from the pro forma information presented.
The unaudited forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the Acquisition occurred on the dates indicated. They may also not be useful in predicting the future financial condition or results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The unaudited pro forma condensed combined financial statements do not reflect any cost savings from operating efficiencies, synergies that could result from the Acquisition, or additional expenses which could also result from the Acquisition. Additionally, the unaudited pro forma condensed combined financial statements do not reflect additional revenue opportunities following the Acquisition.
3. Accounting Policies and Reclassifications
As a result of the continuing review of NCTG and TAV’s accounting policies, the Company may identify differences between the accounting policies of the businesses that, when conformed, could have a material impact on the combined financial statements. The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies other than the assumptions regarding useful lives for certain elements of property and equipment impacting depreciation expense.
4. Preliminary Purchase Price and Allocation
The following tables set forth the purchase considerations paid for the equity of NCTG as of July 20, 2021 and the remaining 50% equity interest in TAV as of September 1, 2021, the respective dates of each acquisition. The preliminary purchase price allocation set forth below assumes the acquisition had closed on June 30, 2021 (in thousands):
| Cash paid for NCTIC | $ | 4,453 |
|---|---|---|
| Cash paid for NCTG | 1,010 | |
| Total consideration paid. | $ | 5,463 |
| NCTIC | NCTG | ||||
|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 4,834 | $ | 9 | |
| Accounts receivable | 40 | - | |||
| Deferred tax assets | 14 | - | |||
| Investment in TAV | - | 593 | |||
| Other assets | 4 | 418 | |||
| Total assets acquired | 4,892 | 1,020 | |||
| Accrued expenses | 169 | 10 | |||
| Reinsurance payable | 41 | - | |||
| Escrow liability | 3 | - | |||
| Reserve for claims | 209 | - | |||
| Total liabilities assumed | 422 | 10 | |||
| Net assets acquired | $ | 4,470 | $ | 1,010 | |
| Bargain purchase gain | $ | (17 | ) | $ | - |
A bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree is less than the fair value of the identifiable net assets acquired. The bargain purchase gain was primarily driven by differences in NCTIC’s statutory surplus and GAAP surplus at the date of acquisition. The Company believes that the Sellers wanted to exit the business relatively quickly and there were a limited number of potential buyers due to factors inherent to the property and casualty market, which resulted in a bargain purchase gain.
On September 1, 2021, the Company acquired the remaining 50% membership interests of TAV for $2.2 million. This acquisition, combined with the July 2021 Acquisition of a 100% membership interest in NCTG, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV.
The final purchase price allocation for TAV at fair value is as follows (in thousands):
| Cash paid for remaining 50% of TAV | $ | 2,200 |
|---|---|---|
| Fair value of initial 50% equity interest | 3,564 | |
| Total consideration | $ | 5,764 |
| Cash and cash equivalents | $ | 12,044 |
| Accounts receivable | 166 | |
| Prepaid expenses | 76 | |
| Fixed assets | 216 | |
| Total assets acquired | 12,502 | |
| Accrued expenses | 32 | |
| Management fee payable | 455 | |
| Escrow liability | 9,293 | |
| Payable to affiliate | 864 | |
| Note payable | 545 | |
| Total liabilities assumed | 11,189 | |
| Net assets acquired | 1,313 | |
| Goodwill | $ | 4,451 |
For the purposes of this pro forma analysis, the purchase price has been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed as of the Acquisition date. The determination of estimated fair value requires management to make significant estimates and assumptions. The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible but no later than one year from the Acquisition date. The Company will adjust its estimates as needed upon the final valuation.
5. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
Explanations of the adjustments to the unaudited pro forma balance sheet are as follows:
| (A) | Represents adjustments to cash due to the following outflows as a result of the Acquisition (in thousands). | |||
|---|---|---|---|---|
| Record cash paid to equity holders of NCTIC at closing | $ | (4,453 | ) | |
| Record cash paid to members of NCTG | (1,010 | ) | ||
| Record cash paid to Fidelis for remaining 50% interest in TAV | (2,200 | ) | ||
| Total | **** | (7,663 | ) | |
| (B) | Record elimination for NCTG’s investment in TAV in consolidation. | $ | (3,032 | ) |
| (C) | Record investment in subsidiary pursuant to cash paid in Adjustment A. | |||
| Record cash paid to equity holders of NCTIC at closing | $ | 4,453 | ||
| Elimination of investment in NCTIC in consolidation | (4,453 | ) | ||
| Total | - | |||
| (E) | Record elimination of NCTIC’s deferred tax assets and tax receivables as a result of the Company’s full valuation allowance in consolidation. | |||
| Eliminate NCTIC’s deferred tax asset due to the Company’s full valuation allowance | $ | (14 | ) | |
| Eliminate NCTIC’s income tax recoverable | (4 | ) | ||
| Total | **** | (18 | ) | |
| (F) | Record adjustment of goodwill in ONTA pursuant to acquisition of TAV | $ | 411 | |
| (G) | Record elimination of management fee receivable from ONTA and management fee payable to NCTG in consolidation | $ | (418 | ) |
| (H) | Record elimination of NCTIC, NCTG, and TAV’s equity in consolidation. | |||
| (I) | Adjustment to NCTIC, NCTG and TAV’s historical equity. |
6. Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations
Explanations of the adjustments to the unaudited pro forma statement of operations are as follows:
| Six months<br><br> <br>ended<br><br> <br>June 30, 2021 | Year ended<br><br> <br>December 31, 2020 | ||||||
|---|---|---|---|---|---|---|---|
| (A) | Represents adjustment to pro forma tax provision based on net impact of the Company’s net operating losses. | $ | 1 | $ | 10 | ||
| (B) | Represents adjustment to eliminate management fee income from ONTA in consolidation. | $ | (197 | ) | $ | (162 | ) |
| (C) | Represents adjustment to eliminate income from NCTG’s equity method investment in TAV in consolidation. | $ | (390 | ) | $ | (326 | ) |
| (D) | To record adjustments to general and administrative expenses in consolidation. | ||||||
| Record adjustment for transaction costs incurred by the Company directly related to the Acquisition. | $ | 132 | $ | - | |||
| Eliminate management fees from ONTA to NCTG in consolidation | 197 | 162 | |||||
| Total | 329 | 162 |