Company Quick10K Filing
HG Holdings
Price0.60 EPS0
Shares15 P/E22
MCap9 P/FCF6
Net Debt-2 EBIT0
TEV7 TEV/EBIT17
TTM 2019-09-30, in MM, except price, ratios
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STLY 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits
EX-31.1 ex_246225.htm
EX-31.2 ex_246226.htm
EX-32.1 ex_246227.htm
EX-32.2 ex_246228.htm

HG Holdings Earnings 2021-03-31

Balance SheetIncome StatementCash Flow
1159269462302012201420172020
Assets, Equity
3020100-10-202013201520172019
Rev, G Profit, Net Income
3020100-10-202012201420172020
Ops, Inv, Fin

10-Q 1 stly20210331_10q.htm FORM 10-Q stly20210331_10q.htm
 

 



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, 2021

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: 0-14938

 

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)

 

252-355-4610

(Registrant’s telephone number, including area code)

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

NA

NA

 

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 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 5, 2021, 34,404,556 shares of common stock of HG Holdings, Inc., par value $.02 per share, were outstanding.

 



 

 

 
 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

HG HOLDINGS, INC.

BALANCE SHEETS

(in thousands, except share data)

 

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 
    (unaudited)          

ASSETS

 

 

         

Current assets:

               

Cash

  $ 12,078     $ 11,396  

Restricted cash

    234       234  

Interest and dividend receivables

    298       298  

Prepaid expenses and other current assets

    130       139  

Income tax receivable

    -       488  

Total current assets

    12,740       12,555  
                 

Property, plant and equipment, net

    7       7  

Investment in affiliate

    11,915       12,072  

Subordinated notes receivable

    1,776       1,883  

Other assets

    542       509  

Total assets

  $ 26,980     $ 27,026  
                 

LIABILITIES

               

Current liabilities:

               

Accounts payable

  $ 17     $ 3  

Accrued salaries, wages and benefits

    3       2  

Other accrued expenses

    167       58  

Total current liabilities

    187       63  
                 

Other long-term liabilities

    240       243  

Total liabilities

    427       306  
                 

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       684  

Capital in excess of par value

    29,759       29,738  

Retained deficit

    (3,890 )     (3,702 )

Total stockholders’ equity

    26,553       26,720  

Total liabilities and stockholders’ equity

  $ 26,980     $ 27,026  

 

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

 

2

 
 

 

HG HOLDINGS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

   

Three Months

 
   

Ended

 
   

March 31,

   

March 31,

 
   

2021

   

2020

 
                 

Operating Expenses

               
                 

General and administrative expenses

  $ (340 )   $ (439 )
                 

Other income/expenses

               
                 

Interest income

    12       224  

Dividend income

    256       50  

Gain on settlement of subordinated note receivable

    -       1,326  

Loss from affiliate

    (116 )     (108 )
                 

(Loss) income from operations before income taxes

    (188 )     1,053  
                 

Income tax benefit

    -       -  
                 

Net (loss) income

  $ (188 )   $ 1,053  
                 

Basic and diluted (loss) income per share:

               

Net (loss) income

  $ (.01 )   $ .07  
                 

Weighted average shares outstanding:

               

Basic

    33,988       14,517  

Diluted

    33,988       14,947  

 

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

 

3

 
 

 

HG HOLDINGS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

   

For the Three Months Ended

March 31,

 
   

2021

   

2020

 
                 

Net (loss) income from operations

  $ (188 )   $ 1,053  

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

               

Accretion income on notes receivable

    -       (37 )

Stock compensation expense

    21       21  

Paid in kind interest on subordinated note receivable

    -       (25 )

Gain on settlement of subordinated note receivable

    -       (1,326 )

Dividends on HC Realty common stock

    41       41  

Loss from affiliate

    116       108  

Changes in assets and liabilities:

               

Prepaid expenses and other current assets

    9       (34 )

Income tax receivable

    488       (247 )

Deferred tax assets and other assets

    (33 )     246  

Accounts payable

    14       (6 )

Other accrued expenses

    110       82  

Other long-term liabilities

    (3 )     -  

Net cash provided by (used in) operations

    575       (124 )
                 

Cash flows from investing activities:

               

Principal payments received on subordinated secured notes receivable

    107       2,062  

Net cash provided by investing activities

    107       2,062  
                 

Net increase in cash and restricted cash

    682       1,938  

Cash and restricted cash at beginning of period

    11,630       2,800  

Cash and restricted cash at end of period

  $ 12,312     $ 4,738  
                 

Cash

  $ 12,078     $ 4,505  

Restricted cash

    234       233  

Cash and restricted cash

  $ 12,312     $ 4,738  
                 

Supplemental Non-Cash Disclosures:

               

Dividends on investment in affiliate

  $ 256     $ 100  

 

The accompanying notes are an integral part of the financial statements

 

4

 

 

HG HOLDINGS, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

 

1.

Preparation of Interim Unaudited Financial Statements

 

The financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles in the United States have been either condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of results of operations and financial position. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. These financial statements should be read in conjunction with the financial statements and accompanying notes included in our latest Annual Report on Form 10-K.

 

On September 6, 2018, as previously reported on Form 8-K filed by the Company with the Securities and Exchange Commission on September 12, 2018, Stanley Furniture Company LLC, formerly Churchill Downs, LLC (“Buyer”) sold certain of its assets, including certain inventory of the Stone & Leigh tradename (the “S&L Asset Sale”), to Stone & Leigh, LLC (“S&L”), a newly formed limited liability company owned by a group which includes Matthew W. Smith, the Company’s former interim Chief Executive Officer. As a part of the S&L Asset Sale, Buyer assigned to S&L certain of its rights and obligations under the $7.4 million subordinated secured promissory note payable to the Company (“Original Note”).

 

As a result of the S&L Asset Sale, we had a variable interest in one entity that has been determined to be a variable interest entity ("VIE"). If we conclude that we are the primary beneficiary of a VIE, we are required to consolidate it. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of our VIE requires significant assumptions and judgments. We have concluded that we are not the primary beneficiary of the VIE as we do not have the power to direct the activities that most significantly impact the VIE’s economic performance and therefore are not required to consolidate the entity.

 

On March 19, 2019, we entered into subscription agreements with HC Government Realty Trust, Inc., a Maryland corporation (“HC Realty”), pursuant to which we purchased (i) 200,000 shares of HC Realty’s 10.00% Series B Cumulative Convertible Preferred Stock (the “Series B Stock”) for an aggregate purchase price of $2,000,000 and (ii) 300,000 shares of HC Realty’s common stock for an aggregate purchase price of $3,000,000. Certain investors affiliated with Hale Partnership Capital Management, LLC (the “HPCM”) purchased an additional 850,000 shares of Series B Stock for an aggregate purchase price of $8,500,000. While some of these investors have other investments with HPCM, each of these investors made a separate and direct investment in HC Realty and HPCM does not receive management fees, performance fees, or any other economic benefits with respect to these investors’ investment in HC Realty’s Series B Stock.

 

On April 3, April 9, and June 29, 2020, the Company entered into subscription agreements with HC Realty, pursuant to which we purchased 100,000, 250,000, and 475,000 shares of Series B Stock, respectively, for an aggregate purchase price of $8,250,000. As a result of these purchases, the Company owns approximately 36.4% of the as converted equity interest of HC Realty as of March 31, 2021.

 

As of March 31, 2021, HC Realty owned and operated a portfolio of 24 single-tenant properties leased entirely to the United States of America for occupancy by federal agencies including the Federal Bureau of Investigation, the Drug Enforcement Administration, the Social Security Administration and the Department of Transportation.

 

5

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment is effective for public entities for annual reporting periods beginning after December 15, 2022. Early application is permitted for reporting periods beginning after December 15, 2018, although the Company has not opted to do so. The Company does not anticipate the adoption of ASU 2016-13 to have a material impact to the financial statements.

 

 

2.

Subordinated Notes Receivable

 

The Company received a $7.4 million subordinated secured promissory note from the Buyer as partial consideration for the sale of substantially all of our assets during the first quarter of 2018. On September 6, 2018, the Buyer sold certain of its assets, including certain inventory and the Stone & Leigh tradename to S&L, which is owned by a group which includes Matthew W. Smith, the Company’s former interim Chief Executive Officer. As a part of the S&L Asset Sale, the Buyer assigned to S&L certain of its rights and obligations under the Original Note. In connection with the assignment, the Company entered into an Amended and Restated Subordinated Secured promissory note with the Buyer (the “A&R Note”) and a new Subordinated Secured Promissory Note with S&L (the “S&L Note”). The A&R Note had a principal amount as of the assignment date of $3.3 million.

 

A&R Note

 

On October 31, 2019, the Company entered into a Forbearance Agreement with the Buyer and certain affiliates (the “Loan Parties”) pursuant to which the Company agreed, subject to certain conditions, to forbear until February 24, 2020 from exercising its rights and remedies under the Second Amended and Restated Subordinated Secured Promissory Note (the “Second A&R Note”) issued by Buyer to the Company. On February 24, 2020, the Company and the Loan Parties entered into a letter agreement (the “Forbearance Extension Letter Agreement”) extending the outside termination date for the forbearance period under the Forbearance Agreement from February 24, 2020 to February 26, 2020. The other terms and conditions of the Forbearance Agreement remained the same. The forbearance period terminated on February 26, 2020 under the terms of the Forbearance Extension Letter Agreement and Forbearance Agreement.

 

The Company received payments on January 31, 2020, February 28, 2020, and March 4, 2020 of $130,000, $200,000 and $350,000, respectively, of the principal amount on the Second A&R Note from the Buyer.

 

On March 6, 2020, the Company and the Loan Parties entered into a letter agreement (the “Second Forbearance Extension Letter Agreement”) extending, subject to certain conditions, the outside termination date from February 26, 2020 to March 17, 2020. The extension of the outside termination and the effectiveness of the Second Forbearance Extension Letter Agreement was conditioned on Buyer making payments to be applied to the outstanding principal balance of the Second A&R Note of $250,000 on or before March 12, 2020 and $750,000 on or before March 13, 2020. The Second Forbearance Extension Letter Agreement also required the Buyer to make an additional $391,970 payment on or before March 17, 2020 to be applied to the outstanding principal balance of the Second A&R Note. The other terms and conditions of the Forbearance Agreement remained the same.

 

On March 12 and 13, 2020, the Company received payments from Buyer of $250,000 and $750,000, respectively, pursuant to the Second Forbearance Extension Letter Agreement which payments were applied to the outstanding principal amount of the Second A&R Note.

 

On March 16, 2020, the Company received payment of $392,000 from the Buyer resulting in satisfaction in full of the Second A&R Note pursuant to the terms of the Forbearance Agreement as amended. As a result of the payments received from Buyer in January, February, and March of 2020 on the Second A&R Note, the Company recognized a gain of $1.3 million on the payoff of the Second A&R Note during the first quarter of 2020.

 

6

 

S&L Note

 

The S&L Note had a principal amount of $4.4 million as of the assignment date. The S&L Note matures on March 2, 2023, at which time the total principal amount is due. Interest on the S&L Note accrues at a fixed rate of 10% per annum. Cash interest payments of $0 and $83,000 were accrued or received during the three months ending March 31, 2021 and 2020, respectively. During the three months ending March 31, 2021 and 2020, the Company received $107,000 and $2,000 of principal payments on the S&L Note, respectively.

 

At the assignment date, the Company evaluated the fair value of the S&L Note. The Company recorded accreted interest income on the fair value adjustment of the S&L Note of $37,000 for the three months ending March 31, 2020.

 

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 ceased accreting interest income on the fair value discount of the S&L Note on the date in the third quarter of 2020 it determined the note was other than temporarily impaired. The Company recognized interest payments of $107,000 received in the first quarter 2021 as reductions of the principal balance of the S&L Note.

 

As of March 31, 2021, the Company concluded that the estimated fair market value of the S&L Note will provide adequate cash required to repay the $1.8 million carrying value of the S&L Note. The Company’s estimated fair value of the S&L Note is based upon the estimated fair value of the collateral securing the note, namely cash, accounts receivables, and inventory. The determination of fair value involves management’s judgment, including analysis of the impact of COVID-19 on S&L’s business and its customers, and the use of market and third-party estimates regarding collateral values. These collateral value estimates are based on the three-level valuation hierarchy for fair value for fair value measurement and represent Level 1 and 2 inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

A reconciliation of the activity in the S&L Note for the three months ending March 31, 2021 is as follows (in thousands):

 

   

Principal

   

Discount

   

Balance

 

Balance at January 1, 2021

  $ 3,271     $ (1,388 )   $ 1,883  

Accretion of discount

    -       -       -  

Principal payments

    (107 )     -       (107 )

Balance at March 31, 2021

  $ 3,164     $ (1,388 )   $ 1,776  

 

 

3.

Loan to Affiliate

 

On March 19, 2019, the Company, together with certain other Lenders, entered into a loan agreement (the “Loan Agreement”) with HC Realty’s operating partnership, and HCM Agency, LLC, as collateral agent (the “Agent”), pursuant to which the Lenders provided HC Realty’s operating partnership with a $10,500,000 senior secured term loan (the “Initial Term Loan”), of which $2,000,000 was provided by the Company.

 

On August 14, 2020, pursuant to the terms of the Loan Agreement, HC Realty’s operating partnership repaid the loan in full, including all accrued interest and make whole interest. Interest earned for the three months ending March 31, 2020 was $71,000.

 

 

4.

Investment in Affiliate

 

HC Realty’s 10.00% Series B Cumulative Convertible Preferred Stock (the “Series B Stock”)is not deemed to be in-substance common stock and is accounted for using the measurement alternative for equity investments with no readily determinable fair value. The Series B Stock will be reported at cost, adjusted for impairments or any observable price changes in ordinary transactions with identical or similar investments issued by HC Realty.

 

7

 

The following table summarizes the Company’s investment in HC Realty as of March 31, 2021 and December 31, 2020 (in thousands):

 

   

Ownership %

   

Investment in Affiliate

Balance

   

Loss recorded in

the Statements of

Operations (b)

 
                                   

For the Three

Months Ended

March 31,

 
   

March 31,

2021

   

December 31,

2020

   

March 31,

2021

   

December 31,

2020

   

2021

   

2020

 
                                                 

HC Realty Series B Stock (a)

    28.7 %     28.7 %   $ 10,250     $ 10,250     $ -     $ -  

HC Realty common stock

    7.7 %     7.7 %     1,665       1,822       (116 )     (108 )

Total

    36.4 %     36.4 %   $ 11,915     $ 12,072     $ (116 )   $ (108 )

 

 

(a)

Represents investments in shares of HC Realty preferred stock with a basis of $10.25 million. Each share of preferred stock can be converted into one share of HC Realty common stock at a conversion price equal to the lesser of $9.10 per share or the fair market value per share of HC Realty common stock, subject to adjustment upon the occurrence of certain events.

 

(b)

Loss from these investments is included in “Loss from affiliate” in the statement of operations. Since HC Realty is a Real Estate Investment Trust and not a taxable entity, the loss is not reported net of taxes.

 

The Company’s investment in HC Realty common stock is accounted for under the equity method of accounting.

 

 

5.

Income taxes

 

During the three months ended March 31, 2021, the Company recorded a non-cash credit to its valuation allowance of $16,000 increasing its valuation allowance against deferred tax assets to $8.3 million as of March 31, 2021. The primary assets covered by this valuation allowance are net operating losses, which are approximately $35.3 million at March 31, 2021. The Company did not make any cash payments for income tax in the three month periods ended March 31, 2021 and 2020 due to its net operating loss carryforwards.

 

The Company maintains a valuation allowance against deferred tax assets that currently exceed 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 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, 2021, the Company has no deferred tax assets not covered by a valuation allowance. During the three months ended March 31, 2021, the Company received the income tax refund resulting from the AMT credit.

 

The Company’s effective tax rate for the current and prior year three month period were effectively 0% due to the change in the valuation allowance.

 

8

 

 

6.

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,

 
   

2021

   

2020

 

Weighted average shares outstanding for basic calculation

    33,988       14,517  

Add: Effect of dilutive stock awards

    -       430  

Weighted average shares outstanding, adjusted for diluted calculation

    33,988       14,947  

 

For the three month period ended March 31, 2021, the dilutive effect of stock options and restricted awards was not recognized since we had a net loss. For the three month period ended March 31, 2021, approximately 417,000 stock awards were excluded from the diluted per share calculation as they would be anti-dilutive.

 

The Company will repurchase common shares from time to time that are tendered by recipients of restricted stock awards to satisfy tax withholding obligations on vested restricted stock. There were no such repurchased shares during the current or prior three month periods.

 

On June 19, 2020, the Company issued 19,500,000 shares of its common stock at a purchase price of $0.65 per share to stockholders of record as of May 18, 2020 in connection with its rights offering.

 

A reconciliation of the activity in Stockholders’ Equity accounts for the three months ended March 31, 2021 is as follows (in thousands):

 

           

Capital in

         
   

Common

   

Excess of

   

Retained

 
   

Stock

   

Par Value

   

Deficit

 

Balance at January 1, 2021

  $ 684     $ 29,738     $ (3,702 )

Net loss

    -       -       (188 )

Stock-based compensation expense

    -       21       -  

Balance at March 31, 2021

  $ 684     $ 29,759     $ (3,890 )

 

A reconciliation of the activity in Stockholders’ Equity accounts for the three months ended March 31, 2020 is as follows (in thousands):

 

           

Capital in

         
   

Common

   

Excess of

   

Retained

 
   

Stock

   

Par Value

   

Deficit

 

Balance at January 1, 2020

  $ 294     $ 17,370     $ (3,765 )

Net income

    -       -       1,054  

Stock-based compensation expense

    -       21       -  

Balance at March 31, 2020

  $ 294     $ 17,391     $ (2,711 )

 

 

7.

Uncertainties

 

On March 11, 2020, the World Health Organization declared the current coronavirus (“COVID-19”) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have had a significant adverse impact upon many sectors of the economy.

 

As a result of these measures, many non-essential retail commerce across the country experienced significant disruption causing severely reduced sales volume. Stone & Leigh, who distributes its products through these potentially impacted retail channels, has experienced and may continue to experience a reduction in sales volume as a result of these measures. Whereas most state and local governments have begun to ease restrictions on commercial retail activity, it is possible that a resurgence in COVID-19 cases could prompt a return to tighter restrictions in certain areas of the country. Furthermore, the economic recession brought on by the pandemic may have a continuing adverse impact on consumer demand for Stone & Leigh’s products. Therefore, uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon the future results of operations of Stone & Leigh and its corresponding impact to the collectability of the S&L Note.

 

9

 

Despite the restrictions and measures by federal, state, and local governments in response to COVID-19, many of the U.S. Government tenant agencies of HC Realty’s properties were deemed essential. All of HC Realty’s revenue is generated through the receipt of rental payments from U.S. Government tenant agencies. The extent, however, of future COVID-19 disruption is highly uncertain and cannot be predicted. It is possible that with a resurgence in COVID-19 cases resulting in tighter restriction that risks to HC Realty’s operations become heightened.

 

The Company continues to evaluate the impact of these measures on our operational and financial performance, specifically the impact on Stone & Leigh and HC Realty’s operations.  While, the Company has not experienced any adverse impacts with respect to the contractual payments on the S&L Note as of March 31, 2021, COVID-19 has significantly impacted S&L’s operations and its customers. 

 

As of March 31, 2021, the Company has not experienced any adverse impacts to the payment of HC Realty’s common and Series B Stock dividends.

 

 

8.

Subsequent Events

 

On April 20, 2021, the Company entered into an 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”). Under the Purchase Agreement, the Company is purchasing 100% of the stock of NCTIC and 100% of the membership interest in NCTG for $5.5 million, less the debt of NCTIC and NCTG, subject to a customary working capital adjustment (the “Purchase Price”). The Company will also pay up to $75,000 of the transaction expenses of the Sellers, with any such expenses above that amount being deducted from the Purchase Price. The Company expects to fund these amounts from cash on hand.

 

Assuming the transaction closes, under the Purchase Agreement, the Company will effectively be purchasing (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 real estate transactions.

 

As a closing condition, all necessary regulatory approvals and governmental consents must be obtained, including those from the Florida Office of Insurance Regulation.  Further, the consummation of the transactions contemplated by the Purchase Agreement is subject to certain specified closing conditions, including the receipt of certain third-party consents or approvals, the absence of a “material adverse effect” with respect to the NCTIC, NCTG, Omega and TAV (taken as a whole), and other customary closing conditions, including the accuracy of each party’s representations and warranties and each party’s compliance with its obligations and covenants under the Purchase Agreement. The Purchase Agreement also provides the Sellers and the Company with customary termination rights, including the right to terminate the Purchase Agreement if (to no fault of the terminating party) the closing conditions are not fulfilled by 120 days after the signing date. The transactions contemplated by the Purchase Agreement are not subject to any additional approvals by the Sellers’ owners or the Company’s stockholders.

 

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

 

As of March 31, 2021, our sources of income include dividends on HC Realty Series B Stock, and interest paid on our cash deposits and the S&L Note. The Company believes that the revenue generating from these sources, dividends paid on HC Realty Common Stock, and cash on hand is sufficient to fund operating expenses for at least 12 months from the date of these financial statements.

 

The Company continues 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 shareholders.

 

Results from Operations

 

Three Months Ended March 31, 2021

 

The Company generated interest income of $12,000 and $224,000 for the three month periods ending March 31, 2021 and 2020, respectively. The decrease was primarily a result of decreased interest income from the Second A&R Note pursuant to the Forbearance Agreement and payoff of that note in March 2020, decreased interest income from the HC Realty Loan Agreement as a result of the payoff of that note in August 2020, ceasing to accrete interest income on the S&L Note in third quarter 2020, and lower interest rates on our cash deposits. Interest income for the three month period ending March 31, 2021 consisted of cash interest income on our cash deposits and income tax receivable. The Company generated dividend income of $256,000 and $50,000 for the three month periods ending March 31, 2021 and 2020, respectively. The increase resulted primarily from the April 3, April 29, and June 29, 2020 acquisitions of additional HC Realty Series B Stock.

 

General and administrative expenses decreased to $340,000 for the three month period ending March 31, 2021 from $439,000 for the three month period ended March 31, 2020 primarily due to reduced legal and professional fees incurred in connection with the Company’s registration statement and amendments with respect to the Rights Offering in June 2020. General and administrative expenses for the three month period ending March 31, 2021 consisted of $161,000 of professional fees, $63,000 of wages, $21,000 of insurance expense, $21,000 of stock based compensation expense, $12,000 of franchise tax expense, and $62,000 of other operating expenses. Included in the expenses incurred in the three month period ended March 31, 2021 were approximately $94,000 of legal and professional fees and other due diligence costs related to the pursuit of potential acquisitions, including the transactions contemplated by the Purchase Agreement.

 

Our effective tax rate for the three month periods ended March 31, 2021 and 2020 was effectively 0% due to our net operating loss carryforwards.

 

Financial Condition, Liquidity and Capital Resources

 

Sources of liquidity include cash on hand, cash interest earned on our cash on hand and the S&L Note and dividends from our HC Realty common and Series B Stock. We expect cash on hand to be adequate for ongoing operational expenditures for at least 12 months from the date of these financial statements. At March 31, 2021, we had $12.1 million in cash and $234,000 in restricted cash. A portion of our unrestricted and restricted cash is currently held in savings accounts earning approximately 0.05%. We also received quarterly dividends on our HC Realty common and Series B Stock at annual rates of 5.5% and 10%. See Note 7 of the Notes to the Financial Statements for a discussion of uncertainties related to COVID-19.

 

Cash provided by operations for the three month period ended March 31, 2021 of $575,000 consisted of $12,000 of cash interest income received, $41,000 of dividends on our HC Realty common stock, $256,000 of dividends on our HC Realty Series B Stock, and $488,000 of income tax refund offset by $222,000 of payments to employees and suppliers. The payments to employees and suppliers primarily consisted of $70,000 of wages and payroll expenses to current management and $81,000 of legal and professional fees.

 

Cash provided by investing activities for the three months ended March 31, 2021 consisted of the cash principal payments received on the S&L Note of approximately $107,000.

 

11

 

Critical Accounting Policies

 

Our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 2020 Annual Report on Form 10-K. 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, 2021.

 

Forward-Looking Statements

 

Certain statements made in this report are not based on historical facts but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” “could,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the occurrence of events, including from the COVID-19 pandemic, that negatively impact the business or assets of HC Realty reducing the value of our investment in HC Realty, or that negatively impact our liquidity in such a way as to limit or eliminate our ability to use proceeds from the Asset Sale or the Rights Offering to fund acquisitions, or an inability on our part to identify additional suitable businesses to acquire or develop with the proceeds of the Asset Sale or the Rights Offering, or an inability on the part of S&L to make payments to us under the S&L Note, or inability to close the transactions contemplated by the Purchase Agreement or successfully run those new operations. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Not required to be provided by a smaller reporting company.

 

ITEM 4.  Controls and Procedures

 

(a)          Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

 

(b)          Changes in internal controls over financial reporting. There were no changes in our internal control over financial reporting that occurred during the first quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Hollie Drive Litigation   

 

In November 2019, we received notice that the Company and the Buyer were defendants in a pending case in the Circuit Court for Henry County, Virginia.  The case, which had been instituted on September 18, 2019 by Hollie Drive Associates, LLC (“Hollie”), raises issues arising from the purported breach of a lease for warehouse space in Henry County, Virginia, which is owned by Hollie and was previously rented by the Company.  The relevant lease was assigned to the Buyer in connection with the Asset Sale.  The complaint asserts that the Buyer breached various provisions of the lease including failure to make certain rental payments and failure to pay for certain clean-up and reconstruction after the Buyer vacated the property. The complaint seeks damages in the amount of approximately $555,000 and attorney’s fees.  Hollie named the Company as a party because the Company was the original tenant under the lease.   Under the Asset Purchase Agreement, the Buyer agreed to assume and indemnify the Company against post-closing liabilities arising under the lease including those asserted in the complaint.  The Buyer’s filings in the case do not dispute the obligation to indemnify the Company for any damages awarded in the case.  Based upon discussions with the Buyer and documents produced to date by Hollie, it appears Hollie has asserted damages greatly exceeding the likely recovery in the case.  Given the relatively low damages amount and the Buyer’s indemnity obligation, the Company believes it is not probable the case will result in a material adverse effect on its financial statements.                      

 

12

 

Graham County Property Litigation

 

As previously disclosed, on November 26, 2019, Graham County (the “County”), North Carolina filed a complaint against the Company and the Buyer in the Superior Court for Graham County, North Carolina asserting claims arising out of a conveyance to the County of approximately 36 acres (the “Property”) in November 2014.   The Complaint sought, among other things, (i) rescission of the conveyance of the Property to the County, (ii) reimbursement of expenses incurred by the County in connection with the Property, (iii) to invalidate the indemnity agreements entered into in connection with the conveyance, (iv) and other damages, or (iv), in the alternative to rescinding the conveyance, expenses necessary to make the Property suitable and useable for a public park and outdoor recreation area. Pursuant to the asset purchase agreement with Buyer, the Buyer agreed to assume and indemnify the Company against certain pre-closing liabilities including those relating to the conveyance of the Property. After the filing of the complaint, the Company entered into an agreement with the Buyer providing that, if the Company reaches a settlement with the County resulting in transfer of the Property back to the Company, then the Company can retain the Property notwithstanding provisions of the Asset Purchase Agreement and will waive any right to indemnification from the Buyer with respect to the claims by the County with respect to the Property. In January 2021, representatives of the Company and the County reached an agreement to resolve all claims asserted by the County in the litigation.  Under the terms of the agreement, the County has agreed to transfer the Property back to the Company, lease a portion of the Property from the Company, and dismiss the litigation in exchange for Company making cash payments to the County in a total amount that is immaterial to the Company’s financial performance.

 

 

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. 0-14939) for the quarter ended June 30, 2019).

     

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. 0-14938) filed November 20, 2017).

     

10.1

 

Equity Purchase Agreement, dated as of April 20, 2021, by and among the Company by and among National Consumer Title Insurance Company, a Florida corporation, National Consumer Title Group LLC, a Florida limited liability company, Southern Fidelity Insurance Company, a Florida corporation, Southern Fidelity Managing Agency, LLC, a Florida limited liability company, and Preferred Managing Agency, LLC, a Florida limited liability company (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed April 26, 2021).

     

31.1

 

Certification by Steven A. Hale II, our Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

     

31.2

 

Certification by Brad G. Garner, our Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, 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 Brad G. Garner, our Principal Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (2)

     

 101

 

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Extensible Business Reporting Language (“XBRL”): (i) balance sheets, (ii) statements of operations, (iii) condensed statements of cash flows, (iv) the notes to the financial statements, and (v) document and entity information. (1)

     
     
     
     

 

(1)

Filed herewith

 

(2)

Furnished herewith

 

13

 

SIGNATURE

 

 

 

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

 

 

Date: May 6, 2021

 

HG HOLDINGS, INC.

   

By: /s/ Brad G. Garner

   

Brad G. Garner

   

Principal Financial and Accounting Officer

 

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