10-Q 1 stly20240331_10q.htm FORM 10-Q stly20240331_10q.htm
0000797465 HG Holdings, Inc. false --12-31 Q1 2024 0.02 0.02 35,000,000 35,000,000 2,861,547 2,861,547 2,861,547 2,861,547 2 0 282,000 0 4 753 - 2,699 0 0 0 0 0 1 5 false false false false As of March 31, 2024, there are no unfunded commitments related to the investment in limited partnership. This limited partnership invests in property catastrophe risk through customized reinsurance solutions. The underlying assets of the limited partnership are one year or less in duration and the Company’s proceeds may be redeemed or reinvested annually. Changes in net asset value of the investment in limited partnership are included in Net investment income on the Company’s Unaudited Consolidated Statements of Operations. Loss from these investments is included in “Net income (loss) from investments in related parties” in the Unaudited Consolidated Statements of Operations. Since HC Realty is a REIT and not a taxable entity, the loss is not reported net of taxes. During the three months ended March 31, 2024 the Company distributed earnings related to non-controlling interest holders of Omega National Title of Florida, LLC and Omega National Title of Pensacola, LLC. The carrying value measurements in the tables above do not equal Investments on our Consolidated Balance Sheets as they exclude investment in limited partnership carried at NAV (as defined below) as a practical expedient. The Company does not allocate its assets by segment, with the exception of Goodwill and Intangible assets. Represents investments in shares of HC Series B Stock with a basis of $10.25 million. Each share of HC Series B Stock has voting rights on an as converted basis and can be converted into shares of HC Common Stock at a conversion ratio equal to $10.00 per share divided by the lesser of $9.10 per share or the fair market value per share of HC Common Stock, subject to adjustment upon the occurrence of certain events. Our held-to-maturity investment portfolio is reported at amortized cost, net of valuation allowance. 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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____.

 

Commission file number: 001-34964

 

HG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

54-1272589

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

2115 E. 7th Street, Suite 101, Charlotte, NC 28204
(Address of principal executive offices, Zip Code)

 

Registrant’s telephone number, including area code: (850) 772-0698

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.02 per share

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company 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. ☐

 

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

 

As of May 14, 2024, 2,861,547 shares of common stock of HG Holdings, Inc., par value $0.02 per share, were outstanding.

 



 

     

 

 

TABLE OF CONTENTS

 

 

Page

Part I – Financial Information

3

Item 1. Consolidated Financial Statements (Unaudited)

3

Consolidated Balance Sheets – March 31, 2024 and December 31, 2023

3

Consolidated Statements of Operations – Three Months Ended March 31, 2024 and March 31, 2023

4

Consolidated Statements of Changes in Stockholders’ Equity  March 31, 2024 and March 31, 2023

5

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2024 and March 31, 2023

6

Notes to Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

Item 4. Controls and Procedures

24

Part II  Other Information

25

Item 1. Legal Proceedings

25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3. Defaults Upon Senior Securities

25

Item 4. Mine Safety Disclosures

25

Item 5. Other Information

25

Item 6. Exhibits

26

Signatures

27

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Consolidated Financial Statements

 

HG HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
  

(unaudited)

     

ASSETS

        

Cash and cash equivalents

 $10,284  $10,247 

Restricted cash

  12,141   7,505 

Investments

        

Fixed income securities, held-to-maturity

  3,123   3,122 

Investments in limited partnerships

  1,238   1,280 

Investments in related parties

  10,807   10,834 

Accounts receivable

  204   136 

Interest and dividend receivables

  283   293 

Prepaid expenses

  253   223 

Property, plant and equipment, net

  98   120 

Lease assets

  490   582 

Goodwill

  6,492   6,492 

Intangible assets, net

  249   267 

Other assets

  815   803 

Total assets

 $46,477  $41,904 
         

LIABILITIES

        

Accounts payable

 $171  $400 

Accrued salaries, wages and benefits

  546   350 

Escrow liabilities

  12,088   7,454 

Other accrued expenses

  430   344 

Reserve for title claims

  350   313 

Lease liabilities

  500   590 

Other liabilities

  31   32 

Total liabilities

 $14,116  $9,483 
         

STOCKHOLDERS’ EQUITY

        

Common stock, $0.02 par value, 35,000,000 shares authorized as of March 31, 2024 and December 31, 2023, respectively; 2,861,547 shares issued and outstanding as of March 31, 2024 and December 31, 2023.

  53   53 

Additional paid-in capital

  30,491   30,491 

Retained earnings

  1,896   1,894 

Total stockholders’ equity

  32,440   32,438 

Noncontrolling interests

  (79)  (17)

Total equity

  32,361   32,421 

Total liabilities and stockholders’ equity

 $46,477  $41,904 

 

The accompanying notes are an integral part of the consolidated financial statements. 

 

 

  

HG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

   

Three Months

 
   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 
                 

Revenues:

               

Net premiums written

  $ 1,239     $ 830  

Commission revenue

    165       499  

Escrow and other title fees

    542       609  

Management fees from related parties

    753       3  

Total revenues

    2,699       1,941  
                 

Cost of revenues:

               

Underwriting expenses

    71       106  

Provision for title claim losses

    37       69  

Search and other fees

    10       31  

Total cost of revenues

    118       206  
                 

Gross underwriting profit

    2,581       1,735  
                 

Operating expenses:

               

General and administrative expenses

    (3,081 )     (2,810 )
                 

Other income/expenses:

               

Net investment income

    423       356  

Other net income

    3       11  

Net income (loss) from investments in related parties

    135       (121 )
                 

Income (loss) from operations before income taxes

    61       (829 )
                 

Income tax expense

    68       9  
                 

Net loss

    (7 )     (838 )

Net loss attributable to noncontrolling interests

    (27 )     (39 )

Net income (loss) attributable to the Company's shareholders

  $ 20     $ (799 )
                 

Basic and diluted net income (loss) attributable to the Company's shareholders per share:

               

Basic

  $ 0.01     $ (0.28 )

Diluted

  $ 0.01     $ (0.28 )
                 

Weighted average shares outstanding:

               

Basic

    2,862       2,870  

Diluted

    2,862       2,870  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

HG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

 

                   

Additional

   

Retained

                 
   

Common Stock

   

Paid in

   

Earnings

   

Noncontrolling

         
   

Shares

   

Common Stock

   

Capital

   

(Deficit)

   

Interest

   

Total

 
                                                 

Balance at January 1, 2023

    2,870     $ 54     $ 30,491     $ 2,777     $ 104     $ 33,426  
                                                 

Net loss

    -       -       -       (799 )     (39 )     (838 )

Repurchase of common stock

    -       -       -       (1 )             (1 )
                                                 

Balance at March 31, 2023

    2,870     $ 54     $ 30,491     $ 1,977     $ 65     $ 32,587  
                                                 

Balance at January 1, 2024

    2,862     $ 53     $ 30,491     $ 1,894     $ (17 )   $ 32,421  
                                                 

Net income (loss)

    -       -       -       20       (27 )     (7 )

Subsidiary distributions to non-controlling interest shareholders (1)

    -       -       -       (18 )     (35 )     (53 )
                                                 

Balance at March 31, 2024

    2,862     $ 53     $ 30,491     $ 1,896     $ (79 )   $ 32,361  
 

(1)

During the three months ended March 31, 2024, the Company distributed earnings related to non-controlling interest holders of Omega National Title of Florida, LLC and Omega National Title of Pensacola, LLC. 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

  

HG HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

For the Three Months Ended

 
   

March 31,

 
   

2024

   

2023

 
                 

Net income (loss) attributable to the Company's shareholders

  $ 20     $ (799 )

Net loss attributable to noncontrolling interests

    (27 )     (39 )

Net loss

    (7 )     (838 )

Adjustments to reconcile net loss from operations to net cash flows from operating activities:

               

Depreciation expense

    22       19  

Amortization expense

    18       20  

Dividends on HC Realty common stock

    3       41  

Income from investment in limited partnership

    42       -  

Loss from investments in related parties

    23       121  

Changes in assets and liabilities:

               

Prepaid expenses and interest and dividends receivable

    (20 )     1  

Accounts receivable

    (68 )     (123 )

Lease assets

    92       62  

Other assets

    (12 )     353  

Accounts payable

    (229 )     (167 )

Accrued salaries, wages, and benefits

    196       151  

Escrow liabilities

    4,634       11,317  

Reserve for title claims

    37       69  

Other accrued expenses

    86       (118 )

Lease liabilities

    (90 )     (62 )

Other liabilities

    (1 )     (2 )

Net cash provided by operating activities

    4,726       10,844  
                 

Cash flows from investing activities:

               

Purchases of property, plant, and equipment

    -       (40 )

Purchases of investments

    -       203  

Net cash provided by investing activities

    -       163  
                 

Cash flows from financing activities:

               

Repurchase of shares of common stock

    -       (1 )

Subsidiary distributions paid to non-controlling interest shareholders

    (53 )     -  

Net cash used in financing activities

    (53 )     (1 )
                 

Net increase in cash and cash equivalents and restricted cash

    4,673       11,006  

Cash and cash equivalents and restricted cash at beginning of period

    17,752       15,003  

Cash and cash equivalents and restricted cash at end of period

  $ 22,425     $ 26,009  
                 

Cash and cash equivalents

  $ 10,284     $ 9,347  

Restricted cash

    12,141       16,662  

Cash and cash equivalents and restricted cash

  $ 22,425     $ 26,009  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

  

HG HOLDINGS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

1.

Basis of Presentation and Nature of Operations

 

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete annual financial statements. However, the Company (as defined below) believes that the disclosures made are adequate for a fair presentation of results of operations and financial position. In addition, the year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of the Company, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. These consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s latest Annual Report on Form 10-K filed with the SEC on March 28, 2024 (the “2023 Form 10-K”).

 

HG Holdings, Inc. (together with its consolidated subsidiaries, the “Company,” “we,” ‘us” or “our”), operates through its subsidiaries, National Consumer Title Insurance Company (“NCTIC”), National Consumer Title Group, LLC (“NCTG”), Title Agency Ventures, LLC (“TAV”), HG Managing Agency, LLC (“HGMA”), Omega National Title Agency, LLC (“ONTA” or “Omega”), Omega National Title of Florida, LLC (“ONF”) and Omega National Title of Pensacola, LLC (“ONP”), and through an affiliated investment in HC Government Realty Trust, Inc., a Maryland corporation (“HC Realty”).

 

Description of the Business

 

Title Insurance

 

The Company engages in issuing title insurance through its subsidiary, NCTIC, and providing title agency services through its subsidiaries, NCTG, TAV, ONTA, ONF and ONP. Through NCTIC, the Company underwrites title insurance for owners and mortgagees as the primary insurer. The Company mainly provides title insurance services in the state of Florida.

 

Title insurance protects against loss or damage resulting from title defects that affect real property. When real property is conveyed from one party to another, occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property. If a covered claim is made against real property, title insurance provides indemnification against insured defects. There are two basic types of title insurance policies – one for the mortgage lender and one for the real property owner. A lender often requires the property owner to purchase a lender’s title insurance policy to protect its position as a holder of a mortgage loan, but the lender’s title insurance policy does not protect the property owner. The property owner has to purchase a separate owner’s title insurance policy to protect its investment.

 

NCTIC issues title insurance policies through its home office and through a network of affiliated and independent title agents. In the state of Florida, issuing agents are independent agents or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations. The ability to attract and retain issuing agents is a key determinant of the Company’s growth in title insurance premiums written.

 

Revenues for the title insurance segment primarily result from purchases of new and existing residential and commercial real estate, refinance activity and certain other types of mortgage lending such as home equity lines of credit. Title insurance premiums vary from state to state and are subject to extensive regulation. Statutes generally provide that rates must not be excessive, inadequate or unfairly discriminatory. The process of implementing a rate change in most states involves pre-approval by the applicable state insurance regulator.

 

7

 

The substantial majority of the Company's title insurance business is dependent upon the overall level of residential and commercial real estate activity and mortgage markets, which are cyclical and seasonal. Residential purchase activity is typically slower in the winter months with increased volumes in the spring and summer months and is sensitive to interest rates. Refinance activity is not seasonal, but is generally correlated with changes in interest rates and general economic cycles. Commercial real estate volumes are less sensitive to changes in interest rates than residential real estate volumes, but fluctuate based on local supply and demand conditions and financing availability. Commercial real estate historically has elevated activity towards the end of the year. However, changes in general economic conditions in the United States and abroad can cause fluctuations in these traditional patterns of real estate activity, and changes in the general economic conditions in a geography can cause fluctuations in these traditional patterns of real estate activity in that geography. The Company’s revenues from title insurance premiums in future periods are likely to fluctuate due to these and other factors which are beyond management’s control.

 

In conducting its title insurance operations, the Company often holds customers’ assets in escrow, pending completion of real estate transactions. This cash is presented as restricted cash on the Company’s Consolidated Balance Sheets. The Company records an offsetting escrow liability given that we are liable for the disposition of these escrowed funds.

 

Real Estate

 

The Company engages in rental real estate through its equity investment in HC Realty. HC Realty is an internally-managed real estate investment trust (“REIT”) focused on acquiring, developing, financing, owning and managing build-to-suit or renovate-to-suit, single-tenant properties leased primarily to the U.S. government and administered by the U.S. General Services Administration or directly by the federal government agencies or sub-agencies occupying such properties (referred to as “Government Properties”). HC Realty invests primarily in Government Properties ranging from 10,000 to 100,000 rentable square feet that are in their initial lease term after original construction or renovation-to-suit. HC Realty further emphasizes Government Properties that perform law enforcement, public service or other functions that support the mission of the agencies or sub-agencies occupying such properties. Leases associated with the Government Properties in which HC Realty invests are full faith and credit obligations of the United States of America. HC Realty intends to grow its portfolio primarily through direct acquisitions and development of Government Properties; although, HC Realty may elect to invest in Government Properties through indirect investments, such as joint ventures.

 

The Company currently owns 300,000 shares of HC Realty’s Common Stock (the “HC Common Stock”) and 1,025,000 shares of HC Realty’s 10.00% Series B Cumulative Convertible Preferred Stock (the “HC Series B Stock”). As of March 31, 2024, the Company owns approximately 27.4% of the voting interest of HC Realty.

 

As of March 31, 2024, HC Realty owned 35 Government Properties, comprised of 33 Government Properties that it owns and two Government Properties that it owns subject to a ground lease, each of which is leased to the United States government and occupied by tenant agencies and sub-agencies such as the Federal Bureau of Investigation, the Department of Veterans Affairs, the Drug Enforcement Administration, the Immigration & Customs Enforcement, the Social Security Administration and the Department of Transportation. HC Realty’s portfolio properties contain approximately 663,000 leased rentable square feet located in 22 states. As of March 31, 2024, its portfolio properties are 98% leased to the United States government and occupied by 12 different federal government agencies. Based on leased rentable square feet, the portfolio has a weighted average remaining lease term of 9.2 years if none of the tenants’ early termination rights are exercised and 5.2 years if all of the tenants’ early termination rights are exercised.

 

Reinsurance

 

The Company, through the formation of White Rock USA Cell 47, previously engaged in providing another insurance company excess-of-loss reinsurance coverage related to catastrophic weather risk in Texas. The Company did not have any reinsurance contracts in-force during the three month period ended March 31, 2024; however, the Company may actively look to provide reinsurance coverage to other carriers as future opportunities arise.

 

Management Advisory Services

 

The Company, through its wholly-owned subsidiary, HGMA, engages in providing various management advisory services such as legal entity formation, licensure, regulatory approval, assumption of policies, and other general operational services.

 

Effective January 1, 2024, the Company, through HGMA, is engaged to provide management advisory services to a related captive managing general agency, HP Managing Agency, LLC ("HPMA"), and its affiliates, including but not limited to general management, legal compliance, strategy services and review of potential acquisitions and transactions. The engagement is for twelve months from January 1, 2024 through December 31, 2024, for a monthly fee of $200,000. HPMA is a related party of the Company as it is controlled by Steven A. Hale II, who serves as our Chairman, Chief Executive Officer and Director. 

 

8

 

Effective April 1, 2023, the Company, through HGMA, was engaged to provide management advisory services to a related captive managing general agency, HPMA, regarding its affiliated entity's anticipated assumption of policies from Citizens Property Insurance Company. The services included underwriting, modeling, and advising on the subset of potential policies selected for the proposed assumption. The engagement was for six months from April 1, 2023 at a monthly fee of $200,000, and was renewed effective October 1, 2023 for an additional three months. The engagement expired in accordance with its terms on December 31, 2023. 

 

Effective April 1, 2023, the Company, through HGMA, was also engaged to provide management advisory services to a related reinsurance intermediary affiliated with HPMA. The services include legal entity formation, licensure, regulatory approval, and other general operational services to allow the intermediary to adequately perform its business functions. The engagement was initially for twelve months from April 1, 2023 at a monthly fee of $50,000, and has been renewed effective April 1, 2024 for an additional nine months.

 

For information about our reportable segments, refer to Note 9, Segment Information.   

 

 

2.

Significant Accounting Policies

 

During the three months ended March 31, 2024, there have been no material changes to the Company’s significant accounting policies as described in its 2023 Form 10-K.

 

Recent Accounting Pronouncements

 

In December 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, that requires public entities to provide enhanced segment disclosures, including significant segment expenses and other segment items. The amendment is effective for public entities for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impacts of this standard on our segment disclosures and is not planning to early adopt.

 

In December 2023, the FASB also issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, that requires public entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and provide more details about the reconciling items in some categories if items meet a quantitative threshold. The guidance will require all entities to disclose income taxes paid, net of refunds, disaggregated by federal (national), state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold. The guidance makes several other changes to the disclosure requirements. All entities are required to apply the guidance prospectively, with the option to apply it retrospectively. The amendment is effective for public entities for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impacts of this standard on our tax disclosures and is not planning to early adopt.

 

Reclassifications

 

Certain comparative figures have been reclassified to conform to the current quarter presentation.

 

9

 
 

3.

Investments in Related Parties

 

The following table summarizes the Company’s investment in HC Realty as of March 31, 2024, and  December 31, 2023 (dollar amounts in thousands):

 

                  

Loss recorded in the Consolidated

 
  

Ownership %

  

Carrying Value

  

Statements of Operations(b)

 
                  

For the Three

 
                  

Months Ended

 
                  

March 31,

 
  

March 31,

  

December 31,

  

March 31,

  

December 31,

         
  

2024

  

2023

  

2024

  

2023

  

2024

  

2023

 
                         

HC Series B Stock (a)

  26.3%  26.3% $10,250  $10,250  $-  $- 

HC Common Stock

  1.1%  1.1%  275   301   (26)  (121)

Total

  27.4%  27.4% $10,525  $10,551  $(26) $(121)

 

 

(a)

Represents investments in shares of HC Series B Stock with a basis of $10.25 million. Each share of HC Series B Stock has voting rights on an as converted basis and can be converted into shares of HC Common Stock at a conversion ratio equal to $10.00 per share divided by the lesser of $9.10 per share or the fair market value per share of HC Common Stock, subject to adjustment upon the occurrence of certain events.

 

(b)

Loss from these investments is included in “Net income (loss) from investments in related parties” in the Unaudited Consolidated Statements of Operations. Since HC Realty is a REIT and not a taxable entity, the loss is not reported net of taxes.

 

The Company’s investment in HC Common Stock is accounted for under the equity method of accounting as the Company has concluded it has a significant influence over the investee. The HC Series B Stock is not deemed to be in-substance common stock and is accounted for under the cost adjusted for market observable events less impairment method.

 

As a result of the Company’s holding in HC Realty, the Company includes the following summarized income statement information of HC Realty for the three months ended March 31, 2024 and 2023 (in thousands):

 

  

Three Months

 
  

Ended

 
  

March 31,

  

March 31,

 
  

2024

  

2023

 

Total revenue

 $5,243  $4,949 

Total expense

  8,713   7,512 

Net loss

 $(3,470) $(2,563)

 

The Company’s other investments in related parties were $282,000 as of both  March 31, 2024 and December 31, 2023, and include investments in limited liability companies and corporations. These investments do not meet the criteria for accounting under the equity method and are accounted for under the cost adjusted for market observable events less impairment method. As of March 31, 2024, the Company had total receivables from these related parties of $40,000 and payables of $42,000. As of December 31, 2023, the Company had total receivables and payables from these related parties of $27,000 and $73,000, respectively. During the three month period ended March 31, 2024, the Company received $161,000 of distributions from other investments in related parties, which are included in “Net income (loss) from investments in related parties” in the Unaudited Consolidated Statements of Operations. No distributions were received from other investments in related parties during the three month period ended March 31, 2023.   

 

10

 
 

4.

Investments

 

The following table details investments by major investment category, other than investments in related parties, at March 31, 2024 and December 31, 2023 (in thousands):

 

   

March 31, 2024

   

December 31, 2023

 
           

Cost/Amortized

           

Cost/Amortized

 
   

Fair Value

   

Cost, Net

   

Fair Value

   

Cost, Net

 

U.S. government and agency securities, held-to-maturity (1)

  $ 3,092     $ 3,123     $ 3,086     $ 3,122  

Investment in limited partnership, at net asset value (2)

    1,238       1,238       1,280       1,280  

Total investments

  $ 4,330     $ 4,361     $ 4,366     $ 4,402  

 

 

(1)

Our held-to-maturity investment portfolio is reported at amortized cost, net of valuation allowance. All securities within the portfolio are rated AA+ by Standard & Poor’s Rating Services (“S&P”).

 

(2)

As of March 31, 2024, there are no unfunded commitments related to the investment in limited partnership. This limited partnership invests in property catastrophe risk through customized reinsurance solutions. The underlying assets of the limited partnership are one year or less in duration and the Company’s proceeds may be redeemed or reinvested annually. Changes in net asset value of the investment in limited partnership are included in Net investment income on the Company’s Unaudited Consolidated Statements of Operations.

 

Held-to-Maturity

 

The following tables provide the amortized cost, gross unrealized investment gains (losses), and fair value of the Company’s held-to-maturity securities as of March 31, 2024 and December 31, 2023 (in thousands):

 

   

March 31, 2024

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Costs

   

Gains

   

Losses

   

Fair Value

 

U.S. government and agency securities, held-to-maturity

  $ 3,123     $ -     $ (31 )   $ 3,092  

 

   

December 31, 2023

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Costs

   

Gains

   

Losses

   

Fair Value

 

U.S. government and agency securities, held-to-maturity

  $ 3,122     $ -     $ (36 )   $ 3,086  

 

The table below summarizes our fixed-income securities at  March 31, 2024 (dollars in thousands) by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.

 

 

   

Amortized

   

Percent of

           

Percent

 
   

Cost

   

Total

   

Fair Value

   

of Total

 

Due in one year or less

  $ 3,123       100.0 %   $ 3,092       100.0 %

Total

  $ 3,123       100.0 %   $ 3,092       100.0 %

 

11

 

Fair value measurement

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on our Unaudited Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

 

Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.

 

Level 2: Assets and liabilities whose values are based on the following:

a.    Quoted prices for similar assets or liabilities in active markets;

b.    Quoted prices for identical or similar assets or liabilities in markets that are not active; or

c.    Valuation models whose inputs are observable, directly, or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the assets and liabilities.

 

Where available, we estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the New York Stock Exchange, Nasdaq and NYSE American. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable.

 

Our fixed-income securities are classified as held-to-maturity and are reported at amortized cost as of March 31, 2024 and December 31, 2023. The Company performs ongoing impairment evaluations, and we did not record any current expected credit losses (CECL) during the three months ended March 31, 2024 and 2023, as U.S. government and agency securities are assumed to have no risk of non-payment.

 

The disclosed fair value of our fixed-income securities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed-income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience.

 

12

 

The following tables present fair value, by valuation hierarchy, and carrying value of the financial instruments not measured at fair value for which fair value is disclosed as of March 31, 2024 and December 31, 2023 (in thousands):

 

   

March 31, 2024

 
                           

Total Fair

   

Carrying

 
   

Level 1

   

Level 2

   

Level 3

   

Value

   

Value (1)

 

U.S. government and agency securities, held-to-maturity

  $ -     $ 3,092     $ -     $ 3,092     $ 3,123  

 

   

December 31, 2023

 
                           

Total Fair

   

Carrying

 
   

Level 1

   

Level 2

   

Level 3

   

Value

   

Value (1)

 

U.S. government and agency securities, held-to-maturity

  $ -     $ 3,086     $ -     $ 3,086     $ 3,122  

 

 

(1)

The carrying value measurements in the tables above do not equal Investments on our Unaudited Consolidated Balance Sheets as they exclude the Company's investment in limited partnership carried at NAV (as defined below) as a practical expedient.

 

The Company has elected the practical expedient for fair value for its investment in limited partnership which is estimated based on our share of the net asset value (“NAV”) of the limited partnership, as provided by the independent fund administrator. The Company’s share of the NAV represents the Company’s proportionate interest in the members’ equity of the limited partnership.

 

The Company’s investments in related parties are accounted for either under the equity method of accounting or, where they do not meet the criteria of accounting under the equity method, under the cost adjusted for market observable events less impairment method. For information about the Company’s investments in related parties, refer to Note 3, Investments in Related Parties.

 

Net investment income

 

Net investment income for the three months ended March 31, 2024 and 2023 is detailed below (in thousands):

 

   

For the Three Months Ended

 
   

March 31, 2024

   

March 31, 2023

 
                 

Interest on:

               

Cash equivalents

  $ 103     $ 63  

Fixed income securities

    29       38  

Dividends on investment in HC Series B Stock

    256       256  

Change in NAV of investment in limited partnership

    36       -  

Less: Investment expense

    (1 )     (1 )

Net investment income

  $ 423     $ 356  

   

 

5.

Subordinated Note Receivable

 

On September 6, 2018, the Company entered into a Subordinated Secured Promissory Note in the principal amount of $4.4 million (the “S&L Note”) with Stone & Leigh, LLC (“S&L”). The S&L Note matured on March 2, 2023, at which time the total principal amount became due. Interest on the S&L Note accrues at a fixed rate of 10% per annum. No cash interest payments were accrued or received during the three months ended March 31, 2024 and 2023.

 

As a result of the Company’s recording of impairment losses in prior quarters, based on current information and events, including the impact of COVID-19 on S&L’s business and its customers, the Company fully impaired the S&L Note as of December 31, 2022. Upon maturity on March 2, 2023, S&L informed the Company that it will not be able to pay the Company any amounts outstanding including principal or interest due. Any future recoveries from S&L, if any, will be recognized as Other Income on the Company’s Unaudited Consolidated Statements of Operations when the recoveries are recognized.

 

13

   
 

6.

Reserve for Title Claims

 

NCTIC’s reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy claims that have been incurred but not yet reported (“IBNR”). Despite the variability of such estimates, management believes that the total reserve for claims is adequate to cover claim losses which might result from pending and future claims under title insurance policies issued through March 31, 2024. We continually update loss reserve estimates as new information becomes known, new loss patterns emerge or as other contributing factors are considered and incorporated into the analysis of reserve for claim losses. Due to the uncertainty inherent in the process and to the judgment used by management, the ultimate liability may be greater or less than our current reserves. If actual claims loss development varies from what is currently expected and is not offset by other factors, it is possible that additional reserve adjustments may be required in future periods in order to maintain our recorded reserve within a reasonable range of our actuary's central estimate.

 

A reconciliation of the activity in the reserves account for the three month period ended March 31, 2024 and 2023 is as follows (in thousands): 

 

   

For the Three

   

For the Three

 
   

Months Ended

   

Months Ended

 
   

March 31, 2024

   

March 31, 2023

 

Beginning Reserves

  $ 313     $ 287  
                 

Provision for claims related to:

               

Current year

    37       69  

Prior years

    -       -  

Total provision for claim losses

    37       69  
                 

Claims paid related to:

               

Current year

    -       -  

Prior years

    -       -  

Total title claims paid

    -       -  
                 

Ending Reserves

  $ 350     $ 356  

 

At March 31, 2024, there were no reinsurance recoverables on paid claims or unpaid reserves.

 

For the three months ended March 31, 2024, 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 of ultimate loss exposures are decreased or increased as additional information becomes known during the adjustment process regarding individual claims.

 

A summary of the Company’s loss reserves at March 31, 2024 and December 31, 2023 is as follows (in thousands):

 

   

As of March 31, 2024

   

As of December 31, 2023

 

Known title claims

  $ 8     $ 8  

IBNR title claims

    342       305  

Total title claims

    350       313  

Non-title claims

    -       -  

Total title claims reserves

  $ 350     $ 313  

 

14

 
 

7.

Reinsurance

 

Certain premiums and benefits at NCTIC are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide NCTIC with increased capacity to write more risk and maintain its exposure to loss within its capital resources. For the three month periods ended March 31, 2024 and 2023, NCTIC's reinsurance program consisted of excess of loss reinsurance treaties. The following is a summary of the reinsurance coverage:

 

Effective January 1, 2024, NCTIC 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 without additional premium. 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, 2024.

 

Effective January 1, 2023, NCTIC entered into a per risk excess of loss reinsurance agreement that provided coverage of $4,000,000 in excess of $1,000,000 on each and every risk. The contract allowed for one full reinstatement without additional premium. This per risk agreement was shared with other non-affiliated companies. Each company paid its share of the reinsurance cost based on separate company earned premiums. The agreement expired  December 31, 2023.

 

NCTIC’s reinsured risks are treated, to the extent of reinsurance, as though they are risks for which the Company is not liable. However, NCTIC remains contingently liable in the event its reinsurers do not meet their obligations under these reinsurance contracts. NCTIC uses a broker to place its reinsurance through Lloyd’s syndicates, a group of underwriters who work together to provide insurance coverage for a variety of risks. Chaucer Syndicates Ltd. (“Chaucer Syndicates”) and Beazley Syndicate (“Beazley”) are each 50% participants in the Lloyd’s syndicate. As such, NCTIC has a concentration of reinsurance risk with these third-party reinsurers that could have a material impact on NCTIC’s financial position in the event that either of these reinsurers fail to perform their obligations under the reinsurance treaty. As of March 31, 2024, Chaucer Syndicates was rated A (excellent) by A.M. Best, A+ (strong) by S&P and AA- (very strong) by Fitch. Beazley was rated A (excellent) by A.M. Best, AA- (very strong) by S&P and AA- (very strong) by Fitch. The Company monitors the financial condition of individual reinsurers, risk concentration arising from similar activities as well as economic characteristics of reinsurers to attempt to reduce the risk of default by such reinsurers. Given the quality of the reinsurers, management believes this possibility to be remote. At March 31, 2024, there were no reinsurance recoverables on paid claims or unpaid reserves.

 

The effects of reinsurance on premiums written and earned by NCTIC for the three month periods ended March 31, 2024 and 2023 are as follows (in thousands):

 

   

Three Months

 
   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 

Direct title premiums

  $ 1,249     $ 844  

Ceded title premiums

    (10 )     (14 )
                 

Net title premiums written

  $ 1,239     $ 830  

 

The Company did not have any written reinsurance contracts in-force during the three month period ended March 31, 2024. The Company may actively look to provide reinsurance coverage to other carriers as future opportunities arise.

 

8.

Statutory Reporting and Requirements

 

NCTIC's assets, liabilities, and results of operations have been reported in accordance with U.S. 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 U.S. 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 U.S. 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). 

 

15

 

NCTIC is subject to regulations and standards of the Florida Office of Insurance Regulation (“FLOIR”). These standards and regulations include a requirement that the insurance entities domiciled in the State of Florida maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid by the insurance entities to the parent company. As of March 31, 2024, NCTIC’s statutory surplus is $6.6 million and exceeded the minimum of $3.0 million required by the State of Florida for title insurance companies. The maximum amount of dividends which can be paid by State of Florida insurance companies to shareholders without prior approval of the Insurance Commissioner is subject to restrictions relating to statutory surplus. Cash dividends may only be paid out of accumulated surplus funds derived from net operating profits and realized capital gains not exceeding 10% of such surplus in any one year, although there are no restrictions on cash dividend payments out of profits and gains derived during the immediately preceding year. For the three months ended March 31, 2024 and 2023no dividends were paid from NCTIC to the Company.

   

 

9.

Segment Information

 

The Company has four reportable segments: title insurance, real estate, reinsurance, and management advisory services. The remaining immaterial segments have been combined into a group called “Corporate and Other.” See Note 1, Basis of Presentation and Nature of Operations for a description of the Company’s segments.

 

Provided below is selected financial information about the Company’s operations by segment for the three months ended March 31, 2024 (in thousands):

 

                           

Management

                 
   

Title

   

Real

           

Advisory

   

Corporate

         
   

Insurance

   

Estate

   

Reinsurance

   

Services

   

and Other

   

Total

 

Insurance and other services revenue

  $ 1,946     $ -     $ -     $ 753     $ -     $ 2,699  

Cost of revenues

    (118 )     -       -       -       -       (118 )

Gross profit

  $ 1,828     $ -     $ -     $ 753     $ -     $ 2,581  

Operating expenses

    (2,391 )     -       -       (120 )     (570 )     (3,081 )

Other net income

    68       230       -       -       263       561  

(Loss) income before income taxes

  $ (495 )   $ 230     $ -     $ 633     $ (307 )   $ 61  
                                                 

Goodwill and intangible assets, net (1)

  $ 6,741     $ -     $ -     $ -     $ -     $ 6,741  
 

(1)

The Company does not allocate its assets by segment, with the exception of Goodwill and Intangible assets.

 

Provided below is selected financial information about the Company’s operations by segment for the three months ended  March 31, 2023 (in thousands):

 

                           

Management

                 
   

Title

   

Real

           

Advisory

   

Corporate

         
   

Insurance

   

Estate

   

Reinsurance

   

Services

   

and Other

   

Total

 

Insurance and other services revenue

  $ 1,938     $ -     $ -     $ 3     $ -     $ 1,941  

Cost of revenues

    (206 )     -       -       -       -       (206 )

Gross profit

  $ 1,732     $ -     $ -     $ 3     $ -     $ 1,735  

Operating expenses

    (2,428 )     -       -       -       (382 )     (2,810 )

Other net income

    45       135       -       -       66       246  

(Loss) income before income taxes

  $ (651 )   $ 135     $ -     $ 3     $ (316 )   $ (829 )
                                                 

Goodwill and intangible assets, net (1)

  $ 6,815     $ -     $ -     $ -     $ -     $ 6,815  
 

(1)

The Company does not allocate its assets by segment, with the exception of Goodwill and Intangible assets.

 

16

   
 

10.

Income taxes

 

During the three months ended March 31, 2024, the Company recorded a non-cash credit to its valuation allowance of $135,000, decreasing its valuation allowance against deferred tax assets to $8.0 million as of March 31, 2024. The primary assets covered by this valuation allowance are net operating losses, which approximate $33.5 million at March 31, 2024. The Company did not make any cash payments for income tax in the three month periods ended March 31, 2024 and 2023 due to its net operating loss carryforwards.

 

The Company maintains a valuation allowance against deferred tax assets that currently exceeds our deferred tax liabilities. The primary assets covered by this valuation allowance are net operating loss carry-forwards. The valuation allowance was calculated in accordance with the provisions of FASB Accounting Standards Codification ("ASC") 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. The Company’s results over the most recent four-year period were heavily affected by business restructuring activities. The Company’s cumulative loss represented sufficient negative evidence to require a valuation allowance. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal, resulting in no deferred tax asset balance being recognized. Should the Company determine that it will not be able to realize all or part of its deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made.

 

As of March 31, 2024, the Company has no deferred tax assets not covered by a valuation allowance.

 

The Company’s effective tax rate for the three month period ended March 31, 2024 was 142%, primarily related to state income tax paid in jurisdictions without prior net operating loss carryforwards available to offset taxable income. The Company’s effective tax rate for the three month period ended March 31, 2023 was 0% due to our net operating loss carryforwards.

   

 

11.

Stockholders Equity

 

Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options and restricted stock are treated as potential common stock for purposes of computing diluted earnings per share. Basic and diluted earnings per share are calculated using the following share data (in thousands):

 

  

Three Months

 
  

Ended

 
  

March 31,

  

March 31,

 
  

2024

  

2023

 

Weighted average shares outstanding for basic calculation

  2,862   2,870 

Add: Effect of dilutive stock awards

  -   - 
         

Weighted average shares outstanding, adjusted for diluted calculation

  2,862   2,870 

 

For the three month periods ended March 31, 2024 and 2023, there were no stock options or restricted stock awards outstanding. 

 

On August 5, 2022, the Company’s board of directors (the “Board”) authorized the repurchase of up to $1.5 million of shares of the Company’s common stock. The authorization does not obligate the Company to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of the Board. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and subject to the Company’s cash requirements for other purposes, and other factors it deems relevant. The Company's Rule 10b5-1/Rule 10b-18 Repurchase Plan in connection with the Company’s repurchases of shares of common stock expired on December 31, 2023 and was not renewed. 

 

During the three months ended March 31, 2024, the Company did not repurchase any shares. During the three months ended March 31, 2023, the Company purchased 170 shares of common stock, at a weighted average price per share of $7.74. The total cost of shares repurchased, inclusive of fees and commissions, during the three month period ended  March 31, 2023 was $1,311 or $7.71 per share.

 

During the three months ended March 31, 2024 and  March 31, 2023, the Company did not declare or pay any dividends to its holders of common stock.

 

17

   
 

12.

Goodwill and Intangible Assets

 

Goodwill

 

The Company historically recognized $4.5 million in goodwill as the result of the acquisition of 50% of TAV on September 1, 2021, and an additional $2.0 million in goodwill as a result of the business combination with Omega Title Florida, LLC ("OTF") on August 1, 2022. The fair value of goodwill as of the date of these acquisitions was principally based on Level 3 inputs, such as values obtained from public and private market comparisons. In accordance with ASC Topic 350, Intangibles Goodwill and Other, the Company did not record any goodwill impairment losses during the three months ended March 31, 2024 and 2023. The Company’s goodwill is allocated to the Title Insurance Segment. See Note 9, Segment Information for allocation of goodwill and intangible assets to the Company’s segments.

 

Intangible Assets

 

The following is a summary of intangible assets excluding goodwill recorded as intangible assets on our Unaudited Consolidated Balance Sheets at  March 31, 2024 and  December 31, 2023 (in thousands):

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Intangible assets subject to amortization

 $249  $267 

Total

 $249  $267 

 

Intangible assets subject to amortization consisted of the following as of March 31, 2024 (dollars in thousands):

 

  

Weighted-average

             
  

remaining

             
  

amortization period

  

Gross carrying

  

Accumulated

  

Net carrying

 
  

(in years)

  

amount

  

amortization

  

amount

 

Noncompetition agreement

  3.3  $372  $(123) $249 

Total

     $372  $(123) $249 

 

No impairment in the value of intangible assets was recognized during the three months ended March 31, 2024.

 

Amortization expense of the intangible assets for the three month periods ended March 31, 2024 and 2023 was $18,000 and $20,000, respectively. 

 

Estimated amortization expense of the intangible assets to be recognized by the Company during the remainder of 2024 and over the following years is as follows (in thousands):

 

  

Estimated Amortization

 

Year ending December 31,

 

Expense

 

Remaining in 2024

 $56 

2025

  74 

2026

  74 

2027

  45 

Total

 $249 

 

18

 
 

13.

Commitments and Contingencies

 

The Company and its subsidiaries are parties to claims and lawsuits related to the normal course of business operations. When the Company determines that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure is recorded. Actual losses may materially differ from the Company’s estimates. With respect to our title insurance operations, this customary litigation includes but is not limited to a wide variety of cases arising out of or related to title and escrow claims, for which we make provisions through our loss reserves. See Note 6, Reserve for Title Claims, for further information. None of these claims and lawsuits, in management’s opinion, will have a material adverse effect on our Consolidated Financial Statements.

 

Litigation

 

The Company’s subsidiaries are parties to legal actions incidental to their business. As of March 31, 2024, management believed that the resolution of these matters would not materially affect our financial condition or results of operations.

 

Omega Employee Litigation

 

During the first quarter of 2024, one of the Company’s subsidiaries, Omega, became involved in litigation in the United States District Court for the Middle District of Florida. The case, instituted by a former Omega employee, alleges that the former employee was separated from Omega in a manner inconsistent with the Americans with Disabilities Act and the Florida Civil Rights Act. Omega has retained outside counsel and the Company believes that there is no merit to any claims being made against Omega. Therefore, the Company believes it is unlikely that the case will result in a material adverse effect on the Company’s consolidated financial statements.

 

Fednat Underwriters, Inc. Bankruptcy & Related Proof of Claim

 

As disclosed in a Current Report on Form 8-K filed by FedNat Holding Company (“FedNat”) with the SEC on December 12, 2022, on December 11, 2022, FedNat and certain of its wholly-owned subsidiaries, including FedNat Underwriters, Inc. (“FNU”), filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida in order to maximize value for all stakeholders. As part of the Chapter 11 process, FedNat will evaluate all strategic alternatives to maximize value for stakeholders, whether that be a reorganization of its business or a sale of its assets.

 

On January 26, 2023, the United States Bankruptcy Court for the Southern District of Florida, Ft. Lauderdale Division, entered an order (the “Order”) granting a motion from the debtors (including FNU) pursuant to Section 365(a) of the Bankruptcy Code authorizing such debtors to reject that certain Management Advisory Services Agreement dated and effective as of July 1, 2022 (the “Advisory Services Agreement”) between HGMA and FNU. Based on the Order, the Advisory Services Agreement was deemed rejected as of December 12, 2022.

 

Effective with the rejection of the Advisory Services Agreement, the Company will no longer earn compensation for the remaining duration of the agreement. On February 21, 2023, the Company filed a proof of claim for $609,771 of unsecured claims for compensation earned pre-petition pursuant to the Advisory Services Agreement. The Company also filed a claim for post-petition damages arising from the rejection of the agreement prior to its contractual end date.

 

On July 27, 2023, FNU and HGMA, amongst other parties, entered into a settlement agreement (the “Settlement Agreement”) addressing both claims identified herein. In the Settlement Agreement, FNU and HGMA agreed that the cumulative amount allowed for both proofs of claim was $1,109,771. This recoverable has not yet been recorded on the Company's financial statements as of March 31, 2024 in accordance with ASC Topic 450, Contingencies. On August 11, 2023, the United States Bankruptcy Court for the Southern District of Florida, Ft. Lauderdale Division, entered an order approving the Settlement Agreement. The total amount recovered for the proofs of claim is subject to successful execution of the Chapter 11 plan by FedNat and its affiliates, including FNU.

 

19

 

Leases

 

Right-of-use assets and lease liabilities related to operating leases under ASC Topic 842, Leases (“ASC Topic 842”), are recorded when the Company and its subsidiaries are party to a contract, which conveys the right for it to control an asset for a specified period of time. Substantially all of our operating lease arrangements relate to rented office space and real estate for our title operations. The Company is not a party to any material contracts considered finance leases. Right-of-use assets and lease liabilities under ASC Topic 842 are recorded as Lease assets and Lease liabilities, respectively, on the Unaudited Consolidated Balance Sheets.

 

The Company’s operating leases range in term from one to five years. As of March 31, 2024, the weighted-average remaining lease term of our operating leases was 2.1 years.

 

The Company’s lease agreements do not contain material variable lease payments, buyout options, residual value guarantees or restrictive covenants.

 

Most of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term by varying amounts. The exercise of lease renewal options is at our sole discretion. We do not include options to renew in our measurement of lease assets and lease liabilities as they are not considered reasonably assured of exercise as of March 31, 2024.

 

The lease liability is determined by discounting future lease payments using a discount rate based on the Company’s incremental borrowing rate for similar collateralized borrowing. The discount rate is calculated using estimates of capitalization rates and borrowing rates. As of March 31, 2024, the weighted-average discount rate used to determine our operating lease liability was 6.0%.

 

Lease expense included in general and administrative expenses on the Unaudited Consolidated Statements of Operations was $254,000 and $226,000 for the three months ended March 31, 2024, and 2023, respectively.

 

Future minimum rental commitments as of March 31, 2024 under these leases are expected to be as follows (in thousands):

 

Remainder of 2024

  $ 263  

2025

    155  

2026

    65  

2027

    48  

2028

    -  

Total lease payments, undiscounted

  $ 531  

Less: present value discount

    (31 )

Lease liabilities, at present value

  $ 500  

 

 

14.

Subsequent Events

 

Zaske Omega Litigation

 

On April 18, 2024, one of the Company’s subsidiaries, Omega, was served with litigation in the Circuit Court in and for Broward County, Florida. The case, instituted by Thomas Zaske and Patty Sczygiel (collectively "Plaintiffs") alleges that Omega was negligent and breached its fiduciary duty in the process of conducting a closing on certain real estate. Further, Plaintiffs maintain that Omega, and a non-affiliated co-defendant in the matter, fraudulently concealed certain past transactions of a similar nature not involving the Plaintiffs. Omega has retained outside counsel and the Company believes that there is no merit to any claims being made against Omega. Therefore, the Company believes it is unlikely that the case will result in a material adverse effect on the Company’s consolidated financial statements.

 

20

  
 

ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the accompanying Unaudited Consolidated Financial Statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024. The terms the “Company”, “we”, “our” or “us” refer to HG Holdings, Inc., together with its consolidated subsidiaries, and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our accompanying Unaudited Consolidated Financial Statements and the notes thereto.

 

Forward-Looking Statements

 

Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” “could,” "would," "intends" or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the occurrence of events that negatively impact the Company’s liquidity in such a way as to limit or eliminate the Company’s ability to use its cash on hand to fund further asset acquisitions, an inability on the part of the Company to identify additional suitable businesses to acquire or develop, and the occurrence of events that negatively impact the title insurance operations of the Company’s subsidiaries and/or the business or assets of HC Realty and the value of our investment in HC Realty. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

 

Overview

 

For a description of our business, including descriptions of segments and recent business developments, see the discussion in Note 1, Basis of Presentation and Nature of Operations Description of the Business in the accompanying Unaudited Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Part I, Item 2.

 

As of March 31, 2024, our sources of income include earnings from our title insurance subsidiaries, management service fees earned and dividends on HC Realty’s Common Stock (the “HC Common Stock”) and HC Realty’s 10.00% Series B Cumulative Convertible Preferred Stock (the “HC Series B Stock”). The Company believes that the revenue generated from these sources and cash on hand is sufficient to fund operating expenses for at least 12 months from the date of the accompanying Unaudited Consolidated Financial Statements.

 

The Company will continue to pursue acquisition opportunities which will allow us to potentially derive benefit from the Company’s net operating loss carryforwards and also create appropriate risk adjusted returns for stockholders.

 

Title Insurance Segment Trends and Conditions

 

Our title insurance segment revenue is closely related to the level of real estate activity, such as sales, mortgage financing and mortgage refinancing. Declines in the level of real estate activity or the average price of real estate sales will adversely affect our title insurance revenues. The industry as a whole saw a decline in total real estate transactions in the last two years, largely due to higher mortgage interest rates. Mortgage rates remained very high after emergency actions taken by the Federal Reserve to substantially increase its benchmark interest rate in an attempt to control inflation. The Federal Reserve raised the federal funds rate a total of seven times in 2022 and four times in 2023, resulting in a range from 5.25% to 5.50% as of March 31, 2024. Per the Mortgage Bankers Association's (“MBA”) Mortgage Finance Forecast as of April 2024, interest rates on a Freddie Mac 30-year, fixed rate mortgage averaged 7.3% in the fourth quarter of 2023 but are projected to decline to 6.4% by the end of 2024 and 5.9% by the end of 2025. Although there are expectations that the Federal Reserve will begin reducing the federal funds rate in 2024, these expectations may not materialize. 

 

 

Further, per the MBA Mortgage Finance Forecast update as of April 2024, the total number of loan originations is now forecast to increase by approximately 5.6% in 2024 as compared to 2023, from approximately 4.3 million units (the lowest level since 1997) to approximately 4.6 million units. Mortgage origination volume is expected to increase by approximately 11% in 2024 as compared to 2023, to approximately $1.8 trillion in mortgage originations, with an approximately 5% year over year increase in purchase volume and an approximately 34% year over year increase in refinance volume. The MBA further projects a 5% increase in existing home sales and a 9.6% increase in new home sales in 2024 as compared to 2023, slight downward adjustments from previous forecasts.  

 

A shortage in the supply of homes for sale, increasing home prices, rising mortgage interest rates, inflation and disrupted labor markets has created volatility in the residential real estate market since 2021. Additionally, recent geopolitical uncertainties have created elevated volatility in the global economy.  

 

Because commercial real estate transactions tend to be generally driven by supply and demand for commercial space and occupancy rates in a particular area rather than by interest rate fluctuations, we believe that our commercial real estate title insurance business is less dependent on the industry cycles discussed above than our residential real estate title business. Commercial real estate transaction volume is also often linked to the availability of financing. Factors including U.S. tax reform and a shift in U.S. monetary policy have had, and are expected to continue to have, varying effects on availability of financing in the U.S. Lower corporate and individual tax rates, and corporate tax-deductibility of capital expenditures have provided increased capacity and incentive for investments in commercial real estate.

 

Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months. The fourth quarter is typically strong due to the desire of commercial entities to complete transactions by year-end. Seasonality in recent years deviated from historical patterns due to COVID-19 and the subsequent rapid increase in interest rates. We have noted short-term fluctuations through recent years in resale and refinance transactions as a result of changes in interest rates.

 

Results from Operations

(in thousands)

 

   

Three Months Ended

         
   

March 31,

   

March 31,

         
   

2024

   

2023

   

Change

 

Net title premium written

  $ 1,239     $ 830     $ 409  

Commissions and fees revenue

    1,460       1,111       349  

Total revenue

    2,699       1,941       758  

Cost of revenues

    (118 )     (206 )     88  

Gross profit

  $ 2,581     $ 1,735     $ 846  

Operating expenses

    (3,081 )     (2,810 )     (271 )

Other income (expenses)

    561       246       315  

Income (loss) before income taxes

  $ 61     $ (829 )   $ 890  

 

Comparison of three months ended March 31, 2024 and 2023

 

The Company’s underwriting results were primarily influenced by a growth of the net title premiums written to $1.2 million for the three month period ended March 31, 2024 from $0.8 million for the three month period ended March 31, 2023, and growth in commissions and fees revenue to $1.5 million for the three month period ended March 31, 2024 from $1.1 million for the three month period ended March 31, 2023. The growth in commissions and fees revenue is primarily driven by revenue from management advisory services.

 

 

The Company’s cost of revenues consists primarily of a provision for title claim losses and underwriting expenses, which primarily consist of commissions to title agencies. Cost of revenues during the three month period ended March 31, 2024 was $118,000, compared to $206,000 for the three month period ended March 31, 2023. This decrease is a result of lower volume of unaffiliated title business and lower provision for title claims for the three month period ended March 31, 2024 as compared to the same period last year.

 

The Company’s operating expenses primarily consist of general and administrative expenses such as personnel expenses, office and technology expenses, and professional fees. Operating expenses for the three month period ended March 31, 2024 were $3.1 million, compared to $2.8 million for the three month period ended March 31, 2023. The higher expense is primarily attributable to higher personnel costs.

 

Other income primarily consists of interest income, dividend income and change in the net asset value of investment in limited partnership. The Company generated dividend income of $256,000 during the three month periods ended March 31, 2024 and 2023, respectively. Dividend income relates to the HC Series B Stock held by the Company. Increase in other income of $0.3 million for the three month period ended March 31, 2024 as compared to the three month period ended March 31, 2023 is primarily the result of higher income from related parties. 

 

Financial Condition, Liquidity and Capital Resources

 

Sources of liquidity include cash on hand, earnings from our title insurance subsidiaries, and dividends from our HC Common Stock and HC Series B Stock. At March 31, 2024, we had $10.3 million in cash and cash equivalents and an additional $12.1 million in restricted cash, substantially all of which is cash held in escrow for title insurance transactions. A portion of our unrestricted and restricted cash is currently held in savings accounts earning interest at approximately 4.8% annually. We also received quarterly dividends on our HC Common Stock and HC Series B Stock at annual rates of approximately 0.4% and 10%, during the three months ended March 31, 2024, respectively. We believe that the sources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months.

 

Cash Flows

(in thousands)

 

   

Three Months Ended

   

Three Months Ended

 
   

March 31, 2024

   

March 31, 2023

 

Net cash provided by operating activities

  $ 4,726     $ 10,844  

Net cash provided by investing activities

    -       163  

Net cash used in financing activities

    (53 )     (1 )

Net increase in cash and cash equivalents and restricted cash

    4,673       11,006  

Cash and cash equivalents and restricted cash at beginning of period

  $ 17,752     $ 15,003  

Cash and cash equivalents and restricted cash at end of period

  $ 22,425     $ 26,009  

 

Cash flows from operating activities differ from net income due to adjustments for non-cash items, such as gains and losses on investments, the timing of disbursements for taxes, claims and other accrued liabilities, and collections or changes in receivables and other assets. Net cash provided by operations of $4.7 million differs from operating results for the three month period ended March 31, 2024 primarily due to an increase of $4.6 million in escrow liabilities on the title insurance subsidiaries. Net cash provided by operations of $10.8 million differs from operating results for the three month period ended March 31, 2023 primarily due to an increase of $11.3 million in escrow liabilities on the title insurance subsidiaries. 

 

Cash flows from investing activities differ from net income due to adjustments such as purchases and sales of plant, property, and equipment, purchases and proceeds from sales of investments. There was no cash provided by or used in investing activities for the three month period ended March 31, 2024. Net cash provided by investing activities for the three month period ended March 31, 2023 of $0.2 million primarily related to the purchase of investments.

 

 

Cash flows from financing activities differ from net income due to adjustments such as loan proceeds, payments of principal on outstanding loans, capital contributions, dividends to stockholders, repurchases of outstanding shares of common stock, and changes in noncontrolling interest. Cash flows used in financing activities for the three month period ended March 31, 2024 of $53,000 was due to distribution of funds to non-controlling shareholders. There was minimal cash flow used in financing activities for the three month period ended March 31, 2023.

 

Critical Accounting Policies

 

Our critical accounting policies and estimates are provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the year ended December 31, 2023. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the three months ended March 31, 2024.

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Not required to be provided by a smaller reporting company.

 

ITEM 4.  Controls and Procedures

 

Evaluation of disclosure controls and procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

 

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of March 31, 2024 was conducted under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, as of March 31, 2024, were effective at the reasonable assurance level.

 

Changes in internal controls over financial reporting.

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

Part II. OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

 

The information required for this Part II, Item 1 is incorporated by reference to the discussion under the heading “Litigation” in Note 13, Commitments and Contingencies in the accompanying Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

Issuer Purchases of Equity Securities

 

On August 5, 2022, the Board authorized the repurchase of up to $1.5 million of shares of the Company’s common stock. The authorization does not obligate the Company to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of the Board. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and subject to the Company’s cash requirements for other purposes, and other factors it deems relevant. The Company's Rule 10b5-1/Rule 10b-18 Repurchase Plan in connection with the Company’s repurchases of shares of common stock expired on December 31, 2023 and was not renewed. 

 

During the three months ended March 31, 2024, the Company did not repurchase any shares.

 

ITEM 3. Defaults Upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

 

ITEM 5. Other Information

 

During the three months ended March 31, 2024, none of our directors or officers, as defined in Section 16 of the Exchange Act, adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K of the Exchange Act.

 

25

 
 

ITEM 6.  Exhibits

 

3.1

Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (Commission File No. 001-34964) filed August 6, 2021).
   

3.2

By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (Commission File No. 001-34964) filed November 20, 2017).
   

3.3

Certificate of Designation of Series A Participating Preferred Stock of Stanley Furniture Company, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (Commission File No. 001-34964) filed December 6, 2016).
   

31.1

Certification by Steven A. Hale II, our Chief Executive Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
   

31.2

Certification by Justin H. Edenfield, our Principal Financial and Accounting Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
   

32.1

Certification of Steven A. Hale II, our Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
   

32.2

Certification of Justin H. Edenfield, our Principal Financial and Accounting Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
   

101.INS

Inline XBRL INSTANCE DOCUMENT (1)
   

101.SCH

Inline XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT (1)
   

101.CAL

Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE (1)
   

101.DEF

Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE (1)
   

101.LAB

Inline XBRL TAXONOMY EXTENSION LABELS LINKBASE (1)
   

101.PRE

Inline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE (1)
   

104

Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) (1)

 


 

(1)

Filed herewith

 

(2)

In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date: May 14, 2024

 

HG HOLDINGS, INC.

   

By: /s/ Justin H. Edenfield

   

Name: Justin H. Edenfield

   

Title: Principal Financial and Accounting Officer

 

27