STLY 8-K/A
HG Holdings, Inc. (STLY)
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(State or other jurisdiction
of incorporation)
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(Commission File Number)
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(IRS Employer
Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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2.1
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23.1
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99.1
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99.2
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99.3
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Cover Page Interactive Data File (embedded within the Inline XBRL document)
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(1)
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Filed herewith
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HG HOLDINGS, INC.
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Date: October 5, 2021
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By:
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/s/ Bradley G. Garner
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Bradley G. Garner
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Principal Financial and Accounting Officer
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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 September 29, 2021, referenced in Item 9.01(a) relating to the financial statements of National Consumer Title Insurance Company (NCTIC).
Thomas Howell Ferguson P.A.
Tampa, Florida
October 4, 2021
Exhibit 99.1
Financial Statements
National Consumer Title Insurance Company
Years ended December 31, 2020 and 2019
with Report of Independent Auditors
National Consumer Title Insurance Company
Financial Statements
Years ended December 31, 2020 and 2019
Contents
| Report of Independent Auditors | 1 |
| Financial Statements | |
| Balance Sheets | 3 |
| Statements of Operations | 4 |
| Statements of Changes in Stockholders' Equity | 5 |
| Statements of Cash Flows | 6 |
| Notes to Financial Statements | 7 |
Report of Independent Auditors
The Board of Directors
National Consumer Title Insurance Company
Report on the Financial Statements
We have audited the accompanying financial statements of National Consumer Title Insurance Company (the Company), which comprise the balance sheets as of December 31, 2020 and 2019, the related statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, 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.
Page Two
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Consumer Title Insurance Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Thomas Howell Ferguson P.A.
Tampa, Florida
September 29, 2021
National Consumer Title Insurance Company
Balance Sheets
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
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Cash and cash equivalents |
$ | 5,033,628 | $ | 4,717,364 | ||||
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Premiums receivable |
50,732 | 32,247 | ||||||
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Income taxes recoverable |
4,190 | 4,216 | ||||||
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Net deferred tax asset |
15,286 | 25,603 | ||||||
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Other assets |
- | 707 | ||||||
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Total assets |
$ | 5,103,836 | $ | 4,780,137 | ||||
| Liabilities and stockholders' equity | ||||||||
| Liabilities: | ||||||||
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Reserves for claims |
$ | 171,757 | $ | 109,969 | ||||
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Reinsurance premiums payable |
37,500 | 37,500 | ||||||
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Commissions payable |
96,728 | 203,691 | ||||||
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Taxes, licenses, and fees payable |
4,340 | - | ||||||
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Amounts withheld or retained in escrow |
333,979 | - | ||||||
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Total liabilities |
644,304 | 351,160 | ||||||
| Stockholders' equity: | ||||||||
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Common stock |
3,000,000 | 3,000,000 | ||||||
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Additional paid-in capital |
1,500,000 | 1,500,000 | ||||||
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Accumulated deficit |
(40,468 | ) | (71,023 | ) | ||||
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Total stockholders' equity |
4,459,532 | 4,428,977 | ||||||
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Total liabilities and stockholders' equity |
$ | 5,103,836 | $ | 4,780,137 | ||||
See accompanying notes.
National Consumer Title Insurance Company
Statements of Operations
| Years ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
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Premiums earned, net of reinsurance ceded |
$ | 1,504,160 | $ | 892,678 | ||||
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Other title fees and service charges |
184,506 | 96,580 | ||||||
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Net investment income |
13,854 | 44,404 | ||||||
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Total revenues |
1,702,520 | 1,033,662 | ||||||
| Expenses: | ||||||||
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Provision for claims |
62,044 | 67,166 | ||||||
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Operating expenses |
1,599,578 | 1,056,621 | ||||||
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Total expenses |
1,661,622 | 1,123,787 | ||||||
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Income (loss) before income taxes |
40,898 | (90,125 | ) | |||||
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Income tax expense (benefit) |
10,343 | (22,822 | ) | |||||
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Net income (loss) |
$ | 30,555 | $ | (67,303 | ) | |||
See accompanying notes.
National Consumer Title Insurance Company
Statements of Changes in Stockholders' Equity
Years ended December 31, 2020 and 2019
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | ||||||||||||||||||
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Shares |
Par Value |
Capital |
Deficit |
Total |
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Balance as of December 31, 2018 |
30,000 | $ | 3,000,000 | $ | 1,500,000 | $ | (3,720 | ) | $ | 4,496,280 | ||||||||||
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Net loss |
- | - | - | (67,303 | ) | (67,303 | ) | |||||||||||||
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Balance as of December 31, 2019 |
30,000 | 3,000,000 | 1,500,000 | (71,023 | ) | 4,428,977 | ||||||||||||||
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Net income |
- | - | - | 30,555 | 30,555 | |||||||||||||||
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Balance as of December 31, 2020 |
30,000 | $ | 3,000,000 | $ | 1,500,000 | $ | (40,468 | ) | $ | 4,459,532 | ||||||||||
See accompanying notes.
National Consumer Title Insurance Company
Statements of Cash Flows
| Years ended December 31, | ||||||||
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2020 |
2019 |
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| Operating activities | ||||||||
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Net income (loss) |
$ | 30,555 | $ | (67,303 | ) | |||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
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Deferred income taxes |
10,317 | (22,822 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
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Premiums receivable |
(18,485 | ) | (16,035 | ) | ||||
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Income taxes recoverable |
26 | (5,000 | ) | |||||
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Other assets |
707 | (707 | ) | |||||
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Reserve for claims |
61,788 | 51,077 | ||||||
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Reinsurance premiums payable |
- | 37,500 | ||||||
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Commissions payable |
(106,963 | ) | 152,457 | |||||
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Taxes, licenses, and fees payable |
4,340 | (6,248 | ) | |||||
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Net cash (used in) provided by operating activities |
(17,715 | ) | 122,919 | |||||
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Financing activities |
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Amounts withheld or retained in escrow |
333,979 | - | ||||||
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Net cash provided by financing activities |
333,979 | - | ||||||
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Net increase in cash and cash equivalents |
316,264 | 122,919 | ||||||
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Cash and cash equivalents at beginning of year |
4,717,364 | 4,594,445 | ||||||
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Cash and cash equivalents at end of year |
$ | 5,033,628 | $ | 4,717,364 | ||||
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Cash and cash equivalents consists of the following: |
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Cash and cash equivalents |
$ | 4,699,649 | $ | 4,717,364 | ||||
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Restricted cash in escrow |
333,979 | - | ||||||
| $ | 5,033,628 | $ | 4,717,364 | |||||
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Supplemental disclosures of cash flow information |
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Income taxes paid |
$ | - | $ | 5,000 | ||||
See accompanying notes.
National Consumer Title Insurance Company
Notes to Financial Statements
Years ended December 31, 2020 and 2019
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1. |
Summary of Significant Accounting Policies |
Organization and Description of the Company
National Consumer Title Insurance Company (the Company) is a licensed title insurance company domiciled in the state of Florida. The Company received its certificate of authority from the Florida Office of Insurance Regulation (the Office) and began operations in June 2017. The Company writes title insurance policies exclusively in the state of Florida. The Company attempts to mitigate its exposure to losses by purchasing reinsurance coverage.
Basis of Presentation
The accompanying financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
Revenue Recognition
The premium related to a title insurance policy is due upon the effective date of the insurance policy and is not refundable. The term of a title insurance policy is indefinite in that the policyholder is insured for as long as the owners or the heirs or devisees have an interest in the property. Accordingly, the premium is fully earned on the date of the policy issuance, since substantially all of the services associated with the contract have been rendered by that time.
Title fees, service charges, and other revenues are earned as the related services are provided.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and other highly-liquid investments with original maturities of three months or less on the date of acquisition.
The Company is required to maintain deposits pursuant to Florida statutes to help secure the payment of claims. Cash of $100,000 has been assigned at December 31, 2020 and 2019, to satisfy this requirement.
Premiums Receivable
Premiums receivable includes amounts due from Preferred Managing Agency, LLC (PMA), a company affiliated through common ownership and common management, for collected premiums. Uncollectible premiums receivable are charged to bad debt expense in the period determined uncollectible. Recoveries paid on amounts previously charged off are credited to bad debt expense in the period recovered. There was no bad debt expense recorded in 2020 and 2019.
National Consumer Title Insurance Company
Notes to Financial Statements
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1. |
Summary of Significant Accounting Policies (continued) |
Concentration of Credit Risk
The Company's financial instruments exposed to concentrations of credit risk consist primarily of its cash and cash equivalents, reinsurance recoveries, and premium revenue. The Company maintains its cash and cash equivalents at several financial institutions. Deposits with financial institutions are covered by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. Bank deposit accounts, at times, may exceed federally-insured limits. The Company has not experienced any losses in such accounts.
Reserve for Claims
The total reserve for all reported and unreported 1osses the Company incurred is represented by the reserve for claims. The Company's reserve for unpaid losses and loss adjustment expenses (LAE) is established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders that may be reported in the future (incurred but not reported, or "IBNR"). Despite the variability of such estimates, management believes that the reserve is adequate to cover claims losses resulting from pending and future claims for policies issued through December 31, 2020. The Company continually reviews and adjusts its reserve estimates as necessary to reflect its loss experience and any new information that becomes available. Adjustments resulting from such reviews may be significant.
Reinsurance
The accompanying balance sheets reflect reserves for claims gross of reinsurance ceded. The accompanying statements of operations reflect premiums and provision for claims net of reinsurance ceded. The reinsurance arrangements allow management to control exposure to potential claims arising from large risks and catastrophic events. Amounts recoverable from reinsurers are estimated in a manner consistent with the reserves associated with the reinsured policies. Reinsurance premiums, losses, and LAE are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance agreements.
Income Taxes
The Company files a separate return and uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carry forwards to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
National Consumer Title Insurance Company
Notes to Financial Statements
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1. |
Summary of Significant Accounting Policies (continued) |
Subsequent Events
The Company has evaluated subsequent events through September 29, 2021, the date the financial statements were available to be issued. During the period from December 31, 2020 to September 29, 2021, the Company did not have any material recognizable subsequent events, except for the matter described in Note 8.
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.
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2. |
Reserve for Claims |
The following table provides a reconciliation of the beginning and ending reserve for claims:
| December 31, | ||||||||
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2020 |
2019 |
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Reserves at beginning of year |
$ | 109,969 | $ | 58,893 | ||||
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Provision related to: |
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Current year |
62,044 | 67,166 | ||||||
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Prior years |
- | - | ||||||
| 62,044 | 67,166 | |||||||
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Claims paid related to: |
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Current year |
- | - | ||||||
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Prior years |
256 | 16,090 | ||||||
| 256 | 16,090 | |||||||
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Reserves at end of year |
$ | 171,757 | $ | 109,969 | ||||
At December 31, 2020 and 2019, there were no reinsurance recoverables on paid claims or reserves.
In 2020 and 2019, the net provision for claims attributable to insured events of prior years developed by $62,044 and $67,166, respectively, as a result of claims paid and reestimation of the reserve for claims. Original estimates are decreased or increased as additional information becomes known regarding individual claims.
National Consumer Title Insurance Company
Notes to Financial Statements
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3. |
Reinsurance |
Certain premiums and benefits are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide the Company with increased capacity to write more risk and maintain its exposure to loss within its capital resources. As of December 31, 2020 and 2019, the Company's reinsurance program consisted of excess of loss reinsurance treaties. Following is a summary of the reinsurance coverage.
Effective October 1, 2019, the Company entered into a per risk excess of loss reinsurance agreement that provides coverage of $650,000 in excess of $350,000 on each and every risk. The contract allows for one full reinstatement at 100% additional premium as to time and pro rata as to amount. The agreement was extended, in 2020, through January 1, 2021.
Effective October 1, 2019, the Company entered into a per risk excess of loss reinsurance agreement that provides coverage of $4,000,000 in excess of $1,000,000 on each and every risk. The contract allows for one full reinstatement at 100% additional premium as to time and pro rata as to amount. This per risk agreement is shared with other non-affiliated companies. Each company pays its share of the reinsurance cost based on separate company earned premiums. The agreement was extended, in 2020, through January 1, 2021.
Effective October 1, 2019, the Company entered into a reinstatement premium protection reinsurance agreement to reinsure the reinstatement premium payment obligations of the Company under the shared per risk excess of loss agreement. The coverage is limited to 100% ofthe original contracted reinsurance placement. This agreement is shared with the other non- affiliated companies. Each company pays its share of the reinsurance cost based on separate company earned premiums. The agreement was extended, in 2020, through January 1, 2021.
The Company’s reinsured risks are treated, to the extent of reinsurance, as though they are risks for which the Company is not liable. However, the Company remains contingently liable in the event the reinsuring companies do not meet their obligations under these reinsurance contracts. Given the quality of the reinsuring companies, management believes this possibility to be remote. See Note 2 for recoveries due from reinsurers relating to paid and unpaid claims under these treaties.
The effects of reinsurance on premiums written and earned are as follows:
| Years ended December 31, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
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Written |
Earned |
Written |
Earned |
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Direct premiums |
$ | 1,654,160 | $ | 1,654,160 | $ | 1,076,428 | $ | 1,076,428 | ||||||||
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Ceded premiums |
(37,500 | ) | (150,000 | ) | (247,500 | ) | (183,750 | ) | ||||||||
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Net premiums |
$ | 1,616,660 | $ | 1,504,160 | $ | 828,928 | $ | 892,678 | ||||||||
National Consumer Title Insurance Company
Notes to Financial Statements
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4. |
Income Taxes |
The income tax provision is as follows:
| Years ended December 31, | ||||||||
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2020 |
2019 |
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| Current: | ||||||||
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Federal |
$ | 26 | $ | - | ||||
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State |
- | - | ||||||
| 26 | - | |||||||
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Deferred: |
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Federal |
8,549 | (18,910 | ) | |||||
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State |
1,768 | (3,912 | ) | |||||
| 10,317 | (22,822 | ) | ||||||
| $ | 10,343 | $ | (22,822 | ) | ||||
The components of the net deferred tax asset at year end are as follows:
| December 31, | ||||||||
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2020 |
2019 |
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| Deferred tax assets: | ||||||||
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Unpaid losses and LAE |
$ | 4,604 | $ | 6,435 | ||||
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Net operating loss |
10,175 | 19,168 | ||||||
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Other |
507 | - | ||||||
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Net deferred tax asset |
$ | 15,286 | $ | 25,603 | ||||
A reconciliation of the income tax provision to that computed by applying the statutory federal income tax rate to the income (loss) before provision for income taxes is as follows:
| Years ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Expense (benefit) computed at statutory rate | $ | 8,588 | $ | (18,926 | ) | |||
| State taxes and other | 1,755 | (3,896 | ) | |||||
| Income tax expense (benefit) | $ | 10,343 | $ | (22,822 | ) | |||
As of December 31, 2020, the Company had $40,146 of net operating loss carryforwards available to offset against future taxable income that will expire, if unused, starting in 2039.
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5. |
Stockholders' Equity |
The Company authorized 30,000 shares of $100 par value common stock, of which 30,000 shares were issued and outstanding at December 31, 2020 and 2019. No other classes of common or preferred shares were issued during 2020 or 2019.
The maximum amount of dividends that may be paid by title insurance companies without prior approval of the Office is subject to restrictions. The Company did not declare or pay any dividends during 2020 or 2019.
National Consumer Title Insurance Company
Notes to Financial Statements
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6. |
Related Party Transactions |
The Company has entered into a managing general agency agreement with PMA. PMA contracts with a service company to provide all underwriting, premium billing, and collection functions. Expenses incurred under the agreement with PMA that have been charged to underwriting, acquisition, and other expenses totaled $246,728 and $152,457 during 2020 and 2019, respectively. The amounts payable under this agreement were $96,728 and $203,691 at December 31, 2020 and 2019, respectively, and are reported as commissions payable on the balance sheets.
On June 1, 2019, a company affiliated through common ownership and common management, acquired Omega National Title Agency (ONTA). ONTA provides agency services to the Company. Expenses incurred under the agreement with ONTA have been charged to commissions expense totaled $1,124,245 and $753,436 during 2020 and 2019, respectively, and are included in operating expenses on the statements of operations.
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7. |
Statutory Reporting |
The Company's assets, liabilities, and results of operations have been reported in accordance with accounting principles generally accepted in the United States of America (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).
A reconciliation between the GAAP net income (loss) and the statutory net income (loss) is as follows:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
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GAAP net income (loss) |
$ | 30,555 | $ | (67,303 | ) | |||
| Increase (decrease) due to: | ||||||||
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Deferred income taxes |
10,317 | (22,822 | ) | |||||
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Supplemental reserve |
(9,569 | ) | 13,417 | |||||
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Statutory net income (loss) |
$ | 31,303 | $ | (76,708 | ) | |||
National Consumer Title Insurance Company
Notes to Financial Statements
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7. |
Statutory Reporting (continued) |
A reconciliation between the GAAP stockholders' equity and surplus as regards policyholders is as follows:
| December 31, | ||||||||
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2020 |
2019 |
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GAAP members' equity |
$ | 4,459,532 | $ | 4,428,977 | ||||
| Increase (decrease) due to: | ||||||||
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GAAP to SAP cumulative net income |
748 | (9,405 | ) | |||||
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Nonadmitted assets |
(8,142 | ) | (1,114 | ) | ||||
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Deferred income taxes |
9,245 | 23,371 | ||||||
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Supplemental reserve |
(13,877 | ) | (22,979 | ) | ||||
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Statutory surplus as regards policyholders |
$ | 4,447,506 | $ | 4,418,850 | ||||
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8. |
Subsequent Events |
In April 2021, subject to approval by the Florida Office of Insurance Regulation, the Company's stockholders entered into an agreement to sell the Company to HG Holdings, Inc., which closed and became effective in August 2021.
In connection with the sale of the Company, the managing general agency agreement with PMA was terminated.
The Company entered into reinsurance agreements in 2021 that have similar terms and coverages as those reinsurance agreements described in Note 3.
Exhibit 99.2
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NATIONAL CONSUMER TITLE INSURANCE COMPANY |
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Balance Sheets |
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(in thousands) |
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June 30, 2021 |
December 31, 2020 |
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ASSETS |
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Cash and cash equivalents |
$ | 4,834 | $ | 5,034 | ||||
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Premiums receivable |
40 | 51 | ||||||
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Total current assets |
4,874 | 5,085 | ||||||
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Net deferred tax asset |
14 | 15 | ||||||
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Income taxes Recoverable |
4 | 4 | ||||||
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Total assets |
$ | 4,892 | $ | 5,104 | ||||
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
$ | 169 | $ | 97 | ||||
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Reserves for claims |
209 | 172 | ||||||
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Reinsurance premium payables |
41 | 38 | ||||||
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Escrow liabilities |
3 | 334 | ||||||
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Taxes, licenses, and fees payable |
- | 4 | ||||||
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Total liabilities |
422 | 645 | ||||||
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Stockholders' Equity |
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Common stock, $0.02 par value, 35,000,000 shares authorized and 34,404,556 shares issued and outstanding on each respective date |
3,000 | 3,000 | ||||||
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Capital in excess of par value |
1,500 | 1,500 | ||||||
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Retained deficit |
(30 | ) | (41 | ) | ||||
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Total stockholders' equity |
4,470 | 4,459 | ||||||
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Total liabilities and stockholders' equity |
$ | 4,892 | $ | 5,104 | ||||
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See Notes to Unaudited Financial Statements |
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NATIONAL CONSUMER TITLE INSURANCE COMPANY |
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Statement of Operations |
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(in thousands) |
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(unaudited) |
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Six Months Ended |
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2021 |
2020 |
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REVENUES |
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Premiums earned, net of reinsurance ceded |
$ | 941 | $ | 703 | ||||
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Other title fees and service charges |
77 | 79 | ||||||
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Net investment income |
1 | 10 | ||||||
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Total Revenue |
1,019 | 792 | ||||||
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EXPENSES |
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Provision for claims |
37 | 66 | ||||||
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General and administrative expenses |
970 | 763 | ||||||
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Total Expenses |
1,007 | 829 | ||||||
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Total income (loss) before income taxes |
12 | (37 | ) | |||||
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Income tax (expense) benefit |
(1 | ) | 10 | |||||
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Net income (loss) |
$ | 11 | $ | (27 | ) | |||
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See Notes to Unaudited Financial Statements |
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NATIONAL CONSUMER TITLE INSURANCE COMPANY |
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Statements of Cash Flows |
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(in thousands) |
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(unaudited) |
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|
Six Months Ended |
||||||||
|
2021 |
2020 |
|||||||
|
Operating activities |
||||||||
|
Net income (loss) |
$ | 11 | $ | (28 | ) | |||
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
||||||||
|
Deferred income taxes |
1 | (10 | ) | |||||
|
Changes in operating assets and liabilities: |
||||||||
|
Premiums receivable |
11 | (5 | ) | |||||
|
Reserve for claims |
37 | 66 | ||||||
|
Reinsurance premiums payable |
3 | - | ||||||
|
Commissions payable |
72 | (101 | ) | |||||
|
Taxes, licenses, and fees payable |
(4 | ) | - | |||||
|
Net cash provided by (used in) operating activities |
$ | 131 | $ | (78 | ) | |||
|
Financing activities |
||||||||
|
Escrow funds received |
(331 | ) | 8 | |||||
|
Net cash (used in) provided by financing activities |
(331 | ) | 8 | |||||
|
Net decrease in cash and cash equivalents |
(200 | ) | (70 | ) | ||||
|
Cash and cash equivalents at beginning of year |
5,034 | 4,717 | ||||||
|
Cash and cash equivalents at end of year |
$ | 4,834 | $ | 4,647 | ||||
|
Cash |
$ | 4,831 | $ | 4,639 | ||||
|
Cash held in escrow |
3 | 8 | ||||||
|
Cash and cash equivalents at end of year |
$ | 4,834 | $ | 4,647 | ||||
|
See notes to unaudited financial statements |
||||||||
NATIONAL CONSUMER TITLE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Organization and Description of the Company
National Consumer Title Insurance Company (“NCTIC”) is a licensed title insurance company domiciled in the state of Florida. NCTIC received its certificate of authority from the Florida Office of Insurance Regulation (the “Office”) and began operation in June 2017. NCTIC writes title insurance policies exclusively in the state of Florida. NCTIC attempts to mitigate its exposure to losses by purchasing reinsurance coverage.
Basis of Presentation
The accompanying financial statement include the accounts of NCTIC and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Revenue Recognition
The premium related to a title insurance policy is due upon the effective date of the insurance policy and is not refundable. The term of a title insurance policy is indefinite in that the policyholder is insured for as long as the owners or the heirs or devisees have an interest in the property. Accordingly, the premium is fully earned on the date of the policy issuance, since substantially all of the services associated with the contract have been rendered by that time.
Title fees, service charges, and other revenues are earned as the related services are provided.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and other highly-liquid investments with original maturities of three months or less on the date of acquisition.
The Company is required to maintain deposits pursuant to Florida statutes to help secure the payment of claims. Cash of $100,000 has been assigned at June 30, 2021 and December 31, 2020, to satisfy this requirement.
Premiums Receivable
Premiums receivable includes amounts due from a company affiliated through common ownership and common management, for collected premiums. Uncollectible premiums receivable is charged to bad debt expense in the period determined uncollectible. Recoveries paid on amounts previously charged off are credited to bad debt expense in the period recovered. There was $21,000 and $0 of bad debt expense recorded in the six month periods ended June 30, 2021 and 2020, respectively.
Concentration of Credit Risk
NCTIC's financial instruments exposed to concentrations of credit risk consist primarily of its cash and cash equivalents, reinsurance recoveries, and premium revenue. NCTIC maintains its cash and cash equivalents at several financial institutions. Deposits with financial institutions are covered by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. Bank deposit accounts, at times, may exceed federally-insured limits.
NCTIC has not experienced any losses in such accounts.
Reserve for Claims
The total reserve for all reported and unreported 1osses the Company incurred is represented by the reserve for claims. NCTIC’s reserve for unpaid losses and loss adjustment expenses (LAE) is established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders that may be reported in the future (incurred but not reported, or "IBNR"). Despite the variability of such estimates, management believes that the reserve is adequate to cover claims losses resulting from pending and future claims for policies issued through June 30, 2021. The Company continually reviews and adjusts its reserve estimates as necessary to reflect its loss experience and any new information that becomes available. Adjustments resulting from such reviews may be significant.
Reinsurance
The accompanying balance sheets reflect reserves for claims gross of reinsurance ceded. The accompanying statements of operations reflect premiums and provision for claims net of reinsurance ceded. The reinsurance arrangements allow management to control exposure to potential claims arising from large risks and catastrophic events. Amounts recoverable from reinsurers are estimated in a manner consistent with the reserves associated with the reinsured policies. Reinsurance premiums, losses, and LAE are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance agreements.
Income Taxes
NCTIC files a separate return and uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carry forwards to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
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. Reserve for Claims
A reconciliation of the activity in the reserves accounts for the six months ended June 30, 2021 is as follows (in thousands):
|
Beginning Reserves |
$ | 172 | ||
|
Provision related to: |
||||
|
Current year |
37 | |||
|
Prior years |
- | |||
| $ | 209 | |||
|
Claims paid related to: |
||||
|
Current year |
- | |||
|
Prior years |
- | |||
| - | ||||
|
Ending Reserves |
$ | 209 |
At June 30, 2021, there were no reinsurance recoverables on paid claims or unpaid reserves.
For the six months ended June 30, 2021, 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.
3. Reinsurance
Certain premiums and benefits are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide the Company with increased capacity to write more risk and maintain its exposure to loss within its capital resources. For the six month period ended June 30, 2021, the Company's reinsurance program consisted of excess of loss reinsurance treaties. Following is a summary of the reinsurance coverage.
Effective January 1, 2021, the Company entered into a per risk excess of loss reinsurance agreement that provides coverage of $650,000 in excess of $350,000 on each and every risk. The contract allows for one full reinstatement at 100% additional premium as to time and pro rata as to amount. The agreement expires December 31, 2021. Effective January 1, 2021, the Company entered into a per risk excess of loss reinsurance agreement that provides coverage of $4,000,000 in excess of $1,000,000 on each and every risk. The contract allows for one full reinstatement at 100% additional premium as to time and pro rata as to amount. This per risk agreement is shared with other non-affiliated companies. Each company pays its share of the reinsurance cost based on separate company earned premiums. The agreement expires December 31, 2021.
Effective January 1, 2021, the Company entered into a reinstatement premium protection reinsurance agreement to reinsure the reinstatement premium payment obligations of the Company under the shared per risk excess of loss agreement. The coverage is limited to 100% of the original contracted reinsurance placement. This agreement is shared with the other nonaffiliated companies. Each company pays its share of the reinsurance cost based on separate company earned premiums. The agreement expires December 31, 2021.
The Company’s reinsured risks are treated, to the extent of reinsurance, as though they are risks for which the Company is not liable. However, the Company remains contingently liable in the event the reinsuring companies do not meet their obligations under these reinsurance contracts. Given the quality of the reinsuring companies, management believes this possibility to be remote. See Note 2 for recoveries due from reinsurers relating to paid and unpaid claims under these treaties.
The effects of reinsurance on premiums written and earned are as follows:
|
For the Six Months Ended |
||||||||
|
June 30, 2021 |
||||||||
|
Written |
Earned |
|||||||
|
Direct premiums |
$ | 1,023 | $ | 1,023 | ||||
|
Ceded premiums |
(41 | ) | (82 | ) | ||||
|
Net premiums |
$ | 982 | $ | 941 | ||||
4. Income Taxes
The provision for income tax (benefit) expense as of June 30, 2021 consists of (in thousands):
|
Current: |
||||
|
Federal |
$ | - | ||
|
State |
- | |||
|
Total current |
1 | |||
|
Deferred: |
||||
|
Federal |
1 | |||
|
State |
- | |||
|
Total deferred |
1 | |||
|
Income tax (benefit) expense from continuing operations |
$ | 1 |
The components of the net deferred tax asset as of June 30, 2021 is as follows (in thousands):
|
Deferred tax assets: |
||||
|
Unpaid losses and LAE |
$ | 6 | ||
|
Allowance for doubtful accounts |
7 | |||
|
Other |
1 | |||
|
Gross deferred tax assets |
$ | 14 | ||
|
Net deferred tax assets |
$ | 14 |
A reconciliation of the income tax provision to that computed by applying the statutory federal income tax rate to the income (loss) before provision for income taxes is as follows:
|
Expense (benefit) computed at statutory rate |
$ | 2 | ||
|
State tax, net of federal benefit |
- | |||
|
Other, net |
(1 | ) | ||
|
Income tax expense (benefit) |
$ | 1 |
As of June 30, 2021, NCTIC had $1,000 of net operating loss carryforwards available to offset against future taxable income that will expire, if unused, starting in 2039.
5. Stockholders’ Equity
The Company authorized 30,000 shares of $100 par value common stock, of which 30,000 shares were issued and outstanding at June 30, 2021. No other classes of common or preferred shares were issued during the six month period ending 2021.
The maximum amount of dividends that may be paid by title insurance companies without prior approval of the Office is subject to restrictions. The Company did not declare or pay any dividends during the six-month period ending June 30, 2021.
6. Related Party Transactions
NCTIC has entered into a managing general agency agreement with Preferred Managing Agency, LLC (“PMA”). PMA contracts with a service company to provide all underwriting, premium billing, and collection functions. Expenses incurred under the agreement with PMA that have been charged to underwriting, acquisition, and other expenses totaled $168,000 for the six month period ended June 30, 2021. The amounts payable under this agreement were $168,000 at June 30, 2021, and are reported as commissions payable on the balance sheets. See additional information regarding the agreement with PMA in Note 8.
On June 1, 2019, a company affiliated through common ownership and common management, acquired Omega National Title Agency (ONTA). ONTA provides agency services to the Company. Expenses incurred under the agreement with ONTA have been charged to commissions expense totaled $692,000 for the six month period ended June 30, 2021 and are included in operating expenses on the statements of operations.
7. Statutory Reporting
NCTIC's assets, liabilities, and results of operations have been reported in accordance with accounting principles generally accepted in the United States of America (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).
A reconciliation of the difference between GAAP net income (loss) and the statutory net income (loss) for the six month period ending June 30, 2021 is as follows:
|
GAAP net income (loss) |
$ | 11 | ||
|
Increase (decrease) due to: |
||||
|
Deferred taxes |
1 | |||
|
Allowance for doubtful accounts |
21 | |||
|
Supplemental reserves |
2 | |||
|
Statutory net income (loss) |
$ | 35 |
A reconciliation of the difference between GAAP stockholders’ equity and surplus as regards to policy holders for the six month period ending June 30, 2021 is as follows:
|
GAAP stockholders’ equity |
$ | 4,470 | ||
|
Increase (decrease) due to: |
||||
|
GAAP to SAP cumulative net income |
(22 | ) | ||
|
Nonadmitted assets |
29 | |||
|
Deferred taxes |
(8 | ) | ||
|
Supplemental reserves |
(16 | ) | ||
|
Statutory surplus |
$ | 4,453 |
8. Subsequent Events
On July 20, 2021, HG Holdings, Inc. (“HG”) completed the previously announced acquisition pursuant to that certain Equity Purchase Agreement with National Consumer Title Insurance Company, a Florida corporation (“NCTIC”), National Consumer Title Group LLC, a Florida limited liability company (“NCTG”), Southern Fidelity Insurance Company, a Florida corporation (“SFIC”), Southern Fidelity Managing Agency, LLC, a Florida limited liability company (“SFMA”), and Preferred Managing Agency, LLC, a Florida limited liability company (“PMA” and together with SFIC and SFMA, each, a “Seller” and collectively, the “Sellers”). On such date, pursuant to the Purchase Agreement, HG purchased 100% of the stock of NCTIC and 100% of the membership interest in NCTG for $5.5 million, subject to a customary post-closing working capital adjustment. At closing, HG and Sellers agreed that the economic benefits and burdens of the ownership of the equity, including for accounting and tax purposes, be transferred as of 12:01 am on July 1, 2021. For all other purposes, the effective time of the transfer remained July 20, 2021.
In conjunction with the above transaction, the Company terminated its agreement with PMA.
Exhibit 99.3
HG HOLDINGS, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On July 20, 2021, HG Holdings, Inc. (the “Company”) completed the previously announced acquisition (the “Acquisition”) pursuant to that certain Equity Purchase Agreement (the “Purchase Agreement”) with National Consumer Title Insurance Company, a Florida corporation (“NCTIC”), National Consumer Title Group LLC, a Florida limited liability company (“NCTG”), Southern Fidelity Insurance Company, a Florida corporation (“SFIC”), Southern Fidelity Managing Agency, LLC, a Florida limited liability company (“SFMA”), and Preferred Managing Agency, LLC, a Florida limited liability company (“PMA” and together with SFIC and SFMA, each, a “Seller” and collectively, the “Sellers”). On such date, pursuant to the Purchase Agreement, the Company purchased 100% of the stock of NCTIC and 100% of the membership interest in NCTG for $5.5 million, subject to a customary post-closing working capital adjustment (the “Purchase Price”). Pursuant to the mechanics in the Purchase Agreement, the Purchase Price was determined at closing by taking the $5.5 million purchase price originally agreed to under the Purchase Agreement, subtracting the debt of NCTIC and NCTG, adding payment for $75,000 of the transaction expenses of the Sellers, and adding a closing related working capital adjustment. The Company funded the Purchase Price from cash on hand. Also at closing, the Company and Sellers agreed that the economic benefits and burdens of the ownership of the equity, including for accounting and tax purposes, be transferred as of 12:01 am on July 1, 2021. For all other purposes, the effective time of the transfer remained July 20, 2021.
Pursuant to the Acquisition, the Company effectively purchased (i) 100% of the stock of NCTIC, a Florida title insurer formed in 2017, and (ii) a 100% membership interest in NCTG, which owns a 50% non-controlling membership interest in Title Agency Ventures, LLC, and by virtue thereof, owns 50% of the membership interest in Omega National Title Agency (“Omega”), also a Florida based title agency. 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. Omega operates 10 title agency locations in Florida providing title agency services for residential and commercial real estate transactions.
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 and NCTIC’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 December 31, 2020, 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 and NCTIC’s unaudited combined balance sheet as of June 30, 2021, giving effect to the Acquisition as if it had been consummated on January 1, 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, and 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 NCTIC as of December 31, 2020 and 2019 and for the years then ended, which are included as Exhibit 99.1 to this Current Report on Form 8-K/A; and |
|
● |
Separate unaudited historical financial statements of NCTIC as of June 30, 2021 and for the three and six months then ended, which are included as Exhibit 99.2 to this Current Report on 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 of NCTIC 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) |
|||||||||||||||||
|
HG Holdings, Inc. |
NCTIC |
Pro Forma Adjustments |
Notes |
Combined |
|||||||||||||
|
ASSETS |
|||||||||||||||||
|
Cash and cash equivalents |
$ | 12,199 | $ | 4,834 | $ | (5,464 | ) |
(A) |
$ | 11,569 | |||||||
|
Restricted cash |
234 | - | - | 234 | |||||||||||||
|
Premiums receivable |
- | 40 | - | 40 | |||||||||||||
|
Interest and dividend receivables |
298 | - | - | 298 | |||||||||||||
|
Prepaid expenses and other current assets |
161 | - | - | 161 | |||||||||||||
|
Total current assets |
12,892 | 4,874 | (5,464 | ) | 12,302 | ||||||||||||
|
Property, plant and equipment, net |
6 | - | - | 6 | |||||||||||||
|
Investment in affiliate |
11,764 | - | 1,011 |
(B) |
12,775 | ||||||||||||
|
Investment in subsidiary |
- | - | - |
(C) |
- | ||||||||||||
|
Subordinated notes receivable |
1,713 | - | - | 1,713 | |||||||||||||
|
Net deferred tax asset |
- | 14 | (14 | ) |
(D) |
- | |||||||||||
|
Income taxes Recoverable |
- | 4 | (4 | ) |
(D) |
- | |||||||||||
|
Other assets |
543 | - | - | 543 | |||||||||||||
|
Total assets |
$ | 26,918 | $ | 4,892 | $ | (4,471 | ) | $ | 27,339 | ||||||||
|
LIABILITIES |
|||||||||||||||||
|
Current liabilities: |
|||||||||||||||||
|
Accounts payable |
$ | 5 | $ | 169 | $ | - | $ | 174 | |||||||||
|
Accrued salaries, wages and benefits |
4 | - | - | 4 | |||||||||||||
|
Other accrued expenses |
205 | - | - | 205 | |||||||||||||
|
Reserves for claims |
- | 209 | - | 209 | |||||||||||||
|
Reinsurance premium payables |
- | 41 | - | 41 | |||||||||||||
|
Escrow liabilities |
- | 3 | - | 3 | |||||||||||||
|
Total current liabilities |
214 | 422 | - | 636 | |||||||||||||
|
Other long-term liabilities |
239 | - | - | 239 | |||||||||||||
|
Total liabilities |
453 | 422 | - | 875 | |||||||||||||
|
Stockholders' Equity |
|||||||||||||||||
|
Common stock, $0.02 par value, 35,000,000 shares authorized and 34,404,556 shares issued and outstanding on each respective date |
684 | 3,000 | (3,000 | ) |
(E) |
684 | |||||||||||
|
Capital in excess of par value |
29,780 | 1,500 | (1,500 | ) |
(E) |
29,780 | |||||||||||
|
Retained deficit |
(3,999 | ) | (30 | ) | 29 |
(F) |
(4,000 | ) | |||||||||
|
Total stockholders' equity |
26,465 | 4,470 | (4,471 | ) | 26,464 | ||||||||||||
|
Total liabilities and stockholders' equity |
$ | 26,918 | $ | 4,892 | $ | (4,471 | ) | $ | 27,339 | ||||||||
|
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 |
Pro Forma Adjustments |
Notes |
Combined |
|||||||||||||
|
Revenue |
|||||||||||||||||
|
Premiums earned, net of reinsurance ceded |
$ | - | $ | 1,504 | $ | - | $ | 1,504 | |||||||||
|
Other title fees and service charges |
- | 185 | - | 185 | |||||||||||||
|
Net investment income |
- | 14 | - | 14 | |||||||||||||
|
Total Revenue |
- | 1,703 | - | 1,703 | |||||||||||||
|
Expenses |
|||||||||||||||||
|
Provision for claims |
- | (62 | ) | - | (62 | ) | |||||||||||
|
General and administrative expenses |
(1,304 | ) | (1,600 | ) | - | (2,904 | ) | ||||||||||
|
Total Expenses |
(1,304 | ) | (1,662 | ) | - | (2,966 | ) | ||||||||||
|
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 | ) | |||||||||||
|
Loss from affiliate |
(418 | ) | - | - | (418 | ) | |||||||||||
|
Income from operations before income taxes |
63 | 41 | - | 104 | |||||||||||||
|
Income tax (expense) benefit |
- | (10 | ) | 10 |
(A) |
- | |||||||||||
|
Net income |
$ | 63 | $ | 31 | $ | 10 | $ | 104 | |||||||||
|
Basic and diluted income per share: |
|||||||||||||||||
|
Net income |
$ | 0.00 | $ | - | $ | - | $ | 0.00 | |||||||||
|
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. |
|||||||||||||||||
|
Unaudited Pro Forma Condensed Combined Statement of Operations |
|||||||||||||||||
|
For the Six Months Ended June 30, 2021 |
|||||||||||||||||
|
(in thousands) |
|||||||||||||||||
|
HG Holdings, Inc. |
NCTIC |
Pro Forma Adjustment |
Notes |
Combined |
|||||||||||||
|
Revenue |
|||||||||||||||||
|
Premiums earned, net of reinsurance ceded |
$ | - | $ | 941 | $ | - | $ | 941 | |||||||||
|
Other title fees and service charges |
- | 77 | - | 77 | |||||||||||||
|
Net investment income |
- | 1 | - | 1 | |||||||||||||
|
Total Revenue |
- | 1,019 | - | 1,019 | |||||||||||||
|
Expenses |
|||||||||||||||||
|
Provision for claims |
- | (37 | ) | - | (37 | ) | |||||||||||
|
General and administrative expenses |
(596 | ) | (970 | ) | - | (1,566 | ) | ||||||||||
|
Total Expenses |
(596 | ) | (1,007 | ) | - | (1,603 | ) | ||||||||||
|
Other income/expenses |
|||||||||||||||||
|
Interest income |
13 | - | - | 13 | |||||||||||||
|
Dividend income |
513 | - | - | 513 | |||||||||||||
|
Loss from affiliate |
(226 | ) | - | - | (226 | ) | |||||||||||
|
(Loss) income from operations before income taxes |
(296 | ) | 12 | - | (284 | ) | |||||||||||
|
Income tax (expense) benefit |
- | (1 | ) | 1 |
(A) |
- | |||||||||||
|
Net (loss) income |
$ | (296 | ) | $ | 11 | $ | 1 | $ | (284 | ) | |||||||
|
Basic and diluted (loss) income per share: |
|||||||||||||||||
|
Net (loss) income |
$ | (0.01 | ) | $ | - | $ | - | $ | (0.01 | ) | |||||||
|
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. and SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Description of the Acquisition
On July 20, 2021, HG Holdings, Inc. (the “Company”) completed the previously announced acquisition (the “Acquisition”) pursuant to that certain Equity Purchase Agreement (the “Purchase Agreement”) with National Consumer Title Insurance Company, a Florida corporation (“NCTIC”), National Consumer Title Group LLC, a Florida limited liability company (“NCTG”), Southern Fidelity Insurance Company, a Florida corporation (“SFIC”), Southern Fidelity Managing Agency, LLC, a Florida limited liability company (“SFMA”), and Preferred Managing Agency, LLC, a Florida limited liability company (“PMA” and together with SFIC and SFMA, each, a “Seller” and collectively, the “Sellers”). On such date, pursuant to the Purchase Agreement, the Company purchased 100% of the stock of NCTIC and 100% of the membership interest in NCTG for $5.5 million, subject to a customary post-closing working capital adjustment (the “Purchase Price”). Pursuant to the mechanics in the Purchase Agreement, the Purchase Price was determined at closing by taking the $5.5 million purchase price originally agreed to under the Purchase Agreement, subtracting the debt of NCTIC and NCTG, adding payment for $75,000 of the transaction expenses of the Sellers, and adding a closing related working capital adjustment. The Company funded the Purchase Price from cash on hand. Also at closing, the Company and Sellers agreed that the economic benefits and burdens of the ownership of the equity, including for accounting and tax purposes, be transferred as of 12:01 am on July 1, 2021. For all other purposes, the effective time of the transfer remained July 20, 2021.
Pursuant to the Acquisition, the Company effectively purchased (i) 100% of the stock of NCTIC, a Florida title insurer formed in 2017, and (ii) a 100% membership interest in NCTG, which owns a 50% non-controlling membership interest in Title Agency Ventures, LLC (“TAV”), and by virtue thereof, owns 50% of the membership interest in Omega National Title Agency (“Omega”), also a Florida based title agency. 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. 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 as if the Acquisition had occurred on January 1, 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 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 had occurred on December 31, 2020. 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 consolidated balance sheet as of June 30, 2021; and |
|
● |
With respect to NCTIC, the unaudited combined balance sheet 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 consolidated 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, the unaudited combined statement 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 consolidated 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, the audited 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. 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 NCTI assets acquired and liabilities assumed, and conformed the accounting policies of NCTIC 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 NCTIC’s accounting policies, the Company may identify differences between the accounting policies of the two 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.
As described in further detail in Note 6, certain reclassifications have been made relative to NCTIC’s historical financial statements to conform to the financial statement presentation of the Company.
4. Preliminary Purchase Price and Allocation
The following table sets forth the purchase consideration paid for the equity of NCTIC as of July 20, 2021, the date of the Acquisition. The preliminary purchase price allocation set forth below assumes the acquisition had closed on January 1, 2020 (in thousands):
|
Sources of consideration paid to equity holders of NCTIC: |
||||
|
Cash consideration |
$ | 4,453 | ||
|
Total cash consideration |
$ | 4,453 | ||
|
Preliminary purchase price allocation: |
||||
|
Cash and cash equivalents |
$ | 4,834 | ||
|
Accounts receivables, net of allowance for doubtful accounts |
37 | |||
|
Payables |
(206 | ) | ||
|
Escrow liabilities |
(3 | ) | ||
|
Underwriting reserves |
(209 | ) | ||
|
Total pro forma net assets acquired |
$ | 4,453 |
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 |
(1,011 | ) | |||
|
Total |
(5,464 | ) | |||
|
(B) |
Record equity method investment in NCTG pursuant to cash paid in Adjustment A. |
$ | 1,011 | ||
|
(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 HG Holdings’ full valuation allowance in consolidation. |
||||
|
Eliminate NCTIC’s deferred tax asset due to HG Holdings full valuation allowance |
$ | (14 | ) | ||
|
Eliminate NCTIC’s income tax recoverable |
(4 | ) | |||
|
Total |
(18 | ) | |||
|
(E) |
Record elimination of NCTIC’s equity in consolidation |
||||
|
(F) |
Adjustment to NCTIC’s historical equity. |
8. 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 ended June 30, 2020 |
Year ended December 31, 2020 |
||||||||
|
(A) |
Represents adjustment to pro forma tax provision based on net impact of HG Holdings Inc.’s net operating losses. |
1 | 10 | ||||||