HG HOLDINGS, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in
reflect the consolidated operations of the Company. The consolidated financial
statements include the accounts of
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Equity investments in which the Company exercises significant
influence but does not control and is not the primary beneficiary, are accounted
for using the equity method of accounting. Equity investments in which the
Company does not exercise significant influence over the investee and without
readily determinable fair values, or non-marketable equity securities, are
accounted for at cost, less impairment, and are adjusted up or down for any
observable price changes.
Overview
For a description of our business, including descriptions of segments, see the
discussion under Business in Item 1 of Part I of this Annual Report on Form
10-K, which is incorporated by reference into this Item 7 of Part II of this
Annual Report on Form 10-K.
COVID-19 Pandemic
Despite the widespread availability of vaccines, COVID-19 (including its variant
strains) continues to impact
The COVID-19 pandemic has negatively impacted worldwide economic activity and
created significant volatility and disruptions of financial markets. In
response, the
significant measures to provide fiscal and monetary stimulus. Such actions have
included an unscheduled cut to the federal funds rate, the introduction of new
programs to preserve market liquidity, extended unemployment and sick leave
benefits, mortgage loan forbearance actions, low-interest loans for working
capital access and payroll assistance, and other relief measures for both
workers and businesses. Many such actions have lapsed or otherwise been reduced
as time has passed since the onset of the pandemic. The Company and its
subsidiaries have remained fully operational throughout the pandemic and did not
have any reductions in workforce during 2022.
19 --------------------------------------------------------------------------------
The COVID-19 pandemic has caused the Company to modify its business practices
(including employee travel, employee work locations and cancellation of physical
participation in meetings, events and conferences). The COVID-19 pandemic and
any of its variants could continue to affect the Company in a number of ways
including, but not limited to, the impact of employees becoming ill,
quarantined, or otherwise unable to work or travel due to illness or
governmental restriction, potential decreases in net premiums written in the
future, and future fluctuations in the Company's investment portfolio due to the
pandemic and the economic disruption it is causing. Because of the inherent
uncertainty regarding the duration and severity of the COVID-19 pandemic
(including any of its variants) and its effects on the economy, as well as
uncertainty regarding the effects of government measures already taken, and
which may be taken or continued in the future, to combat the spread of the virus
and any of its variants, and/or provide additional economic stimulus, the
Company is currently unable to predict the ultimate impact of the pandemic.
See Item 1A of Part I of this Annual Report on Form 10-K for further discussion
of risk factors related to COVID-19.
Title Insurance Segment Trends and Conditions
Our title insurance segment revenue is closely related to the level of real
estate activity that includes sales, mortgage financing and mortgage
refinancing. Declines in the level of real estate activity or the average price
of real estate sales will adversely affect our title insurance revenues.
We believe that real estate activity is generally dependent on mortgage interest
rates, access and availability to mortgage debt, residential housing inventory,
home prices, commercial property supply and demand, and the general economic
conditions in the
As of the
Association
in 2023 due to higher mortgage interest rates before showing increased
transaction volumes in 2024 and 2025, as it projects a decrease in mortgage
interest rate during this period. Additionally, the MBA expects residential
refinance transactions to continue to decrease in 2023 before starting to show
increases in 2024 and 2025 as interest rates are expected to start decreasing in
the second half of 2024.
The industry as a whole saw a decline in total real estate transactions in 2022,
largely due to higher mortgage interest rates. Mortgage rates remained
abnormally high after emergency actions taken by the
substantially increase its benchmark interest rate in the final three quarters
of 2022, in an attempt to slow the quarter over quarter inflation. The
Reserve
resulting in a range from 4.25% to 4.50% as of
that the
2023 to, among other things, control inflation. Should the
continue to raise rates in the future, this will likely result in further
increases in market interest rates. Per the MBA's Mortgage Finance Forecast,
interest rates on a Freddie Mac 30-year, fixed rate mortgage averaged 6.6% in
the fourth quarter of 2022 as compared to 3.9% in the first quarter of 2022.
A shortage in the supply of homes for sale, increasing home prices, rising
mortgage interest rates, inflation and disrupted labor markets created some
volatility in the residential real estate market in 2021 and 2022, which has
continued into 2023. Additionally, geopolitical uncertainties associated with
the war in
beginning in 2022.
Because commercial real estate transactions tend to be generally driven by
supply and demand for commercial space and occupancy rates in a particular area
rather than by interest rate fluctuations, we believe that our commercial real
estate title insurance business is less dependent on the industry cycles
discussed above than our residential real estate title business. Commercial real
estate transaction volume is also often linked to the availability of financing.
Factors including
or are expected to have, varying effects on availability of financing in the
of capital expenditures have provided increased capacity and incentive for
investments in commercial real estate.
Historically, real estate transactions have produced seasonal revenue
fluctuations in the real estate industry. The first calendar quarter is
typically the weakest quarter in terms of revenue due to the generally low
volume of home sales during January and February. The second and third calendar
quarters are typically the strongest quarters in terms of revenue, primarily due
to a higher volume of residential transactions in the spring and summer months.
The fourth quarter is typically strong due to the desire of commercial entities
to complete transactions by year-end. Seasonality in 2020, 2021 and 2022
deviated from historical patterns due to COVID-19 and the subsequent rapid
increase in interest rates. We have noted short-term fluctuations through recent
years in resale and refinance transactions as a result of changes in interest
rates.
20
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Real Estate Related Segment
The Company currently owns 300,000 shares of HC Common Stock and 1,025,000
shares of HC Series B Stock of
a portfolio of(i) 30
government tenant agencies and sub-agencies such as the
Investigation
Administration
Administration
Properties
2019
price of
purchase price of
Company entered into subscription agreements with
we purchased 100,000, 250,000, and 475,000 shares of HC Series B Stock,
respectively, for an aggregate purchase price of
these purchases, we currently own approximately 33.9% of the voting interest of
As of
28
subject to a ground lease, three
the rights to the profits, losses, and any distributed cash flow , each of which
is leased to
it has been awarded a lease for a newly constructed build-to-suit facility and
for which it is under contract to acquire the land.
properties contain approximately 628,000 leased rentable square feet located in
21 states. As of
agencies. Based on leased rentable square feet, the portfolio has a weighted
average remaining lease term of 9.5 years if none of the tenants' early
termination rights are exercised and 5.9 years if all of the tenants' early
termination right are exercised.
Results of Operations 2022 Compared to 2021
As of
insurance subsidiaries, dividends on HC Common Stock and HC Series B Stock,
premiums related to reinsurance provided to others, management services, and
interest paid on our cash deposits. The Company believes that the revenue
generating from these sources, and cash on hand is sufficient to fund operating
expenses for at least 12 months from the date of the accompanying consolidated
financial statements.
The Company generated interest income of
31, 2022
increase was primarily a result of the increased interest rate environment of
cash accounts and the title insurance underwriter being able to invest excess
cash in the stocks and bonds. The Company generated dividend income of
million
reported in our real estate related segment. Dividend income relates primarily
to the HC Series B Stock held by the Company.
As a result of the Company's title insurance operations, the Company generated
title premium and other title fee revenue of
The title insurance subsidiaries' cost of revenue consists primarily of a
provision for title claim losses and underwriting expenses, which primarily
consist of commissions to title agencies. The title insurance operating
expenses consist primarily of personnel expenses, office and technology expenses
and professional fees. Operating expenses for the year ended
were
As a result of the Company's reinsurance related segment, the Company generated
which was offset by operating expenses of
premium tax expenses and management fees related to the formation and management
of White
during the year ended
As a result of the management services related segment, the Company generated
offset by operating expenses of
compensation allocated to the time related to providing these services to the
outside party, as compared to
during the year ended
insurance holding company's non-statutory entities.
21 --------------------------------------------------------------------------------
Corporate general and administrative expenses are not directly allocable to any
of our reporting segments and consist primarily of wages and personnel costs,
legal and professional fees, insurance expense, and stock based compensation.
General and administrative expenses of
31, 2022
expenses of
Our effective tax rate for the year ended
net operating loss carryforwards. Our effective tax rate for the year ended
unrecognized tax benefits position under
("FASB") Interpretation No. 48 ("FIN 48").
Financial Condition, Liquidity and Capital Resources
Sources of liquidity include cash on hand, earnings from our title insurance
subsidiaries, reinsurance premiums earned, management service fees earned, and
dividends from our HC Common Stock and HC Series B Stock. We expect cash on hand
to be adequate for ongoing operational expenditures for at least 12 months from
the date of the accompanying consolidated financial statements. At
2022
cash, all of which is cash held in escrow for title insurance transactions. The
Company records an offsetting escrow liability given that we are liable for the
disposition of these escrowed funds. A portion of our unrestricted and
restricted cash is currently held in savings accounts earning interest at
approximately 3.46% annually. We also received quarterly dividends on our HC
Common Stock and HC Series B Stock at annual rates of 5.5% and 10%,
respectively, during the year ended
Cash flows provided by operating activities differ from net income due to
adjustments for non-cash items, such as gains and losses on investments and
affiliates, impairment losses on note receivables, the timing of disbursements
for taxes, claims and other accrued liabilities, and collections or changes in
receivables and other assets. Net cash provided by operations for the year ended
by
cash used in operations for the year ended
consisted of net income from operations of
Common Stock of
million
interest.
Net cash used in financing activities of
acquisition of investments in our title insurance underwriter, and
in goodwill acquired in a business combination for one of our title agencies,
offset by cash received of
of related purchases. Net cash provided by investing activities of
for the year ended
investments in subsidiaries, net of cash acquired, and
payments received on subordinated secured notes receivable.
Net cash used in investing activities stayed relatively flat for the year ended
repurchases of common stock in the amount of
31, 2022
Recent Accounting Pronouncements
In
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
Early application is permitted for reporting periods beginning after
15, 2018
anticipate the adoption of ASU 2016-13 to have a material impact to the
consolidated financial statements.
22 --------------------------------------------------------------------------------
Critical Accounting Policies
We have chosen accounting policies that are necessary to accurately and fairly
report our operational and financial position. Below are the critical accounting
policies that involve the most significant judgments and estimates used in the
preparation of our consolidated financial statements.
Equity Investments - Long-term investments consist of investments in equity
securities where our ownership is less than 50% and the Company has the ability
to exercise significant influence, but not control, over the investee. These
investments are classified in "Investment in affiliate" on the consolidated
balance sheets. Investments accounted for under the equity method of accounting
are initially recorded at cost and the Company subsequently increases or
decreases the investment by its proportionate share of the net income or loss
and other comprehensive income or loss of the investee. For investments that do
not have readily determinable fair values, the Company made an accounting policy
election for a measurement alternative. Upon adoption of ASU 2016-01:
Recognition and Measurement of Financial Assets and Financial Liabilities, the
Company carries these investments at cost minus impairment, if any, plus or
minus any changes resulting from observable price changes in orderly
transactions for the identical or a similar investment of the same issuer.
If the Company believes a decline in market value below cost is other than
temporary, a loss is charged to earnings, which establishes a new cost basis for
the security. The Company determination of whether an equity investment is other
than temporarily impaired incorporates both quantitative and qualitative
information. The Company considers a number of factors including, but not
limited to, the length of time and the extent to which the fair value has been
less than cost, the length of time expected for recovery, the financial
condition of the investee, the reason for decline in fair value, the ability and
intent to hold the investment to maturity, and other factors specific to the
individual investment.
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations -
FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations,
requires an acquirer to recognize, separately from goodwill, the identifiable
assets acquired, liabilities assumed, and any noncontrolling interest in the
acquiree, and to measure these items generally at their acquisition date fair
values.
exceeds the fair value of the net assets acquired. If the initial accounting for
a business combination is incomplete by the end of the reporting period in which
the combination occurs, we are required to report provisional amounts in the
financial statements for the items for which the accounting is incomplete.
Adjustments to provisional amounts initially recorded that are identified during
the measurement period are recognized in the reporting period in which the
adjustment amounts are determined. This includes any effect on earnings of
changes in depreciation, amortization, or other income effects as a result of
the change to the provisional amounts, calculated as if the accounting had been
completed at the acquisition date. During the measurement period, we are also
required to recognize additional assets or liabilities if new information is
obtained about facts and circumstances that existed as of the acquisition date
that, if known, would have resulted in the recognition of those assets and
liabilities as of that date. The measurement period ends the sooner of one year
from the acquisition date or when we receive the information we were seeking
about facts and circumstances that existed as of the acquisition date or learn
that more information is not obtainable. Contingent consideration liabilities or
receivables recorded in connection with business acquisitions must also be
adjusted for changes in fair value until settled.
Note Receivable - In accordance with FASB ASC Topic 810-40-5, upon the sale of
substantially all of the assets of the Company, the Company recorded a gain on
the deconsolidation of a group of assets based on the difference between the
fair value of the consideration received and the carrying amount of the group of
assets. As the Original Note was part of the consideration received for the sale
of substantially all of the Company's furniture related assets and liabilities,
the Company recorded the Original Note at its fair value on
fair value of the Original Note was estimated using discounted cash flow
analyses, using market rates at the acquisition date that reflect the credit and
inherent rate-risk inherent in the Original Note. The discount resulting from
the fair value adjustment was recorded as a direct reduction to the original
principal balance and amortized to interest income using the effective interest
method. As of the date of the assignment and transfer from the Buyer to S&L, it
was determined that the Original Note was extinguished and therefore both the
A&R Note and the S&L Note were measured based on their fair value in accordance
with
or Exchange of Debt Instruments. The discounts resulting from the fair value
adjustments for the A&R Note and the S&L Note were recorded as a direct
reduction to the original principal balance and amortized to interest income
using the effective interest method. When impairment is determined to be
probable, the measurement will be based on the fair value of the collateral
securing the notes. The determination of impairment involves management's
judgment and the use of market and third-party estimates regarding collateral
values.
23
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The Company concluded, based on current information and events, including the
impact of the COVID-19 pandemic on S&L's business and its customers, that the
Company did not believe it would be able to collect the amount due under the S&L
Note and determined that the note was other than temporarily impaired. The
evaluation was generally based on an assessment of the borrower's financial
condition and the adequacy of the collateral securing the S&L Note. Given the
facts and circumstances, the Company recorded an impairment loss of
during the year ended
interest and 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.
Interest Income - Interest income is recorded on an accrual basis based on the
effective interest rate method to the extent that we expect to collect such
amounts.
Deferred taxes - We recognize deferred tax assets and liabilities based on the
estimated future tax effects of differences between the consolidated financial
statements and the tax basis of assets and liabilities given the enacted tax
laws. We evaluate the need for a deferred tax asset valuation allowance by
assessing whether it is more likely than not that the Company will realize its
deferred tax assets in the future. The assessment of whether or not a valuation
allowance is required often requires significant judgment, including the
forecast of future taxable income. Adjustments to the deferred tax valuation
allowance are made to earnings in the period when such assessment is made.
In preparation of our consolidated financial statements, we exercise judgment in
estimating the potential exposure to unresolved tax matters and apply a more
likely than not criteria approach for recording tax benefits related to
uncertain tax positions. While actual results could vary, we believe we have
adequate tax accruals with respect to the ultimate outcome of such unresolved
tax matters.
Long-lived assets - Property, plant and equipment is reviewed for possible
impairment when events indicate that the carrying amount of an asset may not be
recoverable. Assumptions and estimates used in the evaluation of impairment may
affect the carrying value of long-lived assets, which could result in impairment
charges in future periods that would lower our earnings. Our depreciation policy
reflects judgments on the estimated remaining useful lives of assets.
Stock-Based Compensation - We record share-based payment awards at fair value on
the grant date of the awards, based on the estimated number of shares that are
expected to vest, over the vesting period. The fair value of stock options is
determined using the Black-Scholes option-pricing model. The fair value of
restricted stock awards is based on the closing price of the Company's common
stock on the date of the grant. For awards with performance conditions, we
recognize compensation cost over the expected period to achieve the performance
conditions, provided achievement of the performance conditions is deemed
probable.
Premiums Written and Commissions to Agents - Generally, title insurance premiums
are recognized at the time of settlement of the related real estate transaction,
as the earnings process is then considered complete, irrespective of the timing
of the issuance of a title insurance policy or commitment. Expenses typically
associated with premiums, including agent commissions, premium taxes, and a
provision for future claims are recognized concurrent with recognition of
related premium revenue. Fee income related to escrow and other closing services
is recognized when the related services have been performed and completed.
Rather than making estimates that could be subject to significant variance from
actual premium and fee production, the Company recognizes revenues from those
sources upon receipt. Such receipts can reflect up to a three to four month lag
relative to the effective date of the underlying title policy and are offset
concurrently by production expenses and claim reserve provisions.
Quarterly, the Company evaluates the collectability of receivables. Write-offs
of receivables have not been material to the Company.
Reserve for Title Claims - The total reserve for all reported and unreported
losses the Company incurred is represented by the reserve for title claims. The
Company's reserve for unpaid losses and loss adjustment expenses ("LAE") is
established using estimated amounts required to settle claims for which notice
has been received (reported) and the amount estimated to be required to satisfy
incurred claims of policyholders that may be reported in the future. The Company
continually reviews and adjusts its reserve estimates as necessary to reflect
its loss experience and any new information that becomes available. Adjustments
resulting from such reviews may be significant.
24 --------------------------------------------------------------------------------
Reinsurance - The accompanying consolidated balance sheets reflect reserves for
claims gross of reinsurance ceded. The accompanying consolidated statements of
operations reflect premiums and provision for claims net of reinsurance ceded.
The reinsurance arrangements allow management to control exposure to potential
claims arising from large risks and catastrophic events. Amounts recoverable
from reinsurers are estimated in a manner consistent with the reserves
associated with the reinsured policies. Reinsurance premiums, losses, and LAE
are accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance agreements.
Off-Balance Sheet Arrangements
We do not have transactions or relationships with "special purpose" entities,
and we do not have any off-balance sheet financing other than normal operating
leases for office space.
BIORA THERAPEUTICS, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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