HG HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

For a description of our business, including descriptions of segments and recent
business developments, see the discussion the notes to the financial statement
contained herein including in Note 1 Basis of Financial Statements in the
accompanying unaudited Consolidated Financial Statements included in Item 1 of
Part I of this Report, which is incorporated by reference into this Part I, Item
2.

As of September 30, 2022, our sources of income include earnings on our title
insurance subsidiaries, dividends on HC Realty Series B Stock, premiums earned
on reinsurance treaties, management service agreements, and interest paid on our
cash deposits and bond portfolio. 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 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
shareholders.

Results from Operations

Three and Nine Months Ended September 30, 2022

The Company generated dividend income of $256,000 and $769,000 for both the
three and nine month periods ending September 30, 2022 and 2021.

As a result of the Company's acquisition of the title insurance operations, the
Company generated title premium and other title fee revenue of $1.7 million and
$5.1 million for the three and nine month periods ended September 30, 2022,
respectively, compared to $984,000 for the three and nine months periods ended
September 30, 2021. The title insurance subsidiaries cost of revenue consists
primarily of a provision for title claim losses and underwriting expenses, which
is primarily 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 three and nine month periods
ended September 30, 2022 was $2.2 million and $6.0 million, respectively,
consisting primarily of $1.3 and $3.4 million in wages, $181,000 and $493,000 of
rent expense, and $73,000 and $417,000 in professional and legal fees. During
the first quarter of 2022, the Company began operations of HGMA to provide
management oversight of title operations. The operating expenses incurred at
HGMA are included in the operating results of our title insurance segment.

As a result of the Company's reinsurance provided to other insurance companies,
the Company generated reinsurance premiums earned of $3.3 million for both the
three and nine month periods ended September 30, 2022. The reinsurance expenses
associated with the reinsurance revenue are primarily management service costs
associated with the formation and operation of White Rock USA Cell 47.
Reinsurance expenses for the three and nine month periods ended September 20,
2022 was $40,000.

Corporate general and administrative expenses are not directly allocable to
either of our reporting segments and consist primarily of wages and personnel
costs, legal and professional fees, insurance expense, and stock based
compensation. Corporate general and administrative expenses incurred were
$339,000 and $904,000 for the three and nine month periods ending September 30,
2022, respectively, compared to $313,000 and $910,000 for the three and nine
month periods ending September 30, 2021. General and administrative expenses for
the three and nine month periods ending September 30, 2022 consisted of $64,000
and $252,000 of professional fees, $44,000 and $169,000 of wages and personnel
costs, $0 and $41,000 of stock based compensation expense, and $230,000 and
$442,000 of other operating expenses, respectively.

Our effective tax rate for the three and nine month periods ended September 30,
2022 and 2021 was effectively 0% due to our net operating loss carryforwards.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand, earnings from our title insurance
subsidiaries, earnings from reinsurance provided to other insurance companies,
management service agreements, and dividends from our HC Realty common stock 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 consolidated
financial statements. At September 30, 2022, we had $11.0 million in cash and
additional $13.3 million in restricted cash, of which $13.3 million is cash held
in escrow for title insurance transactions. 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 stock and
Series B Stock at annual rates of 5.5% and 10%.

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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 nine month
period ended September 30, 2022 of $10.9 million consisted of primarily
reinsurance unearned premiums of $3.3 million, increase in title escrow
liabilities of $5.3 million, dividends on our HC Realty Series B Stock of
$769,000, and management service fees earned; offset by expense from our title
operations.

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 did not repurchase any of its shares of common
stock during the three month period ending September 30, 2022.

Critical Accounting Policies

Our critical accounting policies and estimates are discussed in the information
provided in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations", included in our 2021 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 nine
months ended September 30, 2022.

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 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 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.