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 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
insurance subsidiaries, 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 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
The Company generated interest income of
nine month periods ending
2020
income from the Second A&R Note pursuant to the Forbearance Agreement and payoff
of that note in
Agreement as a result of the payoff of that note in
accrete interest income on the S&L Note in third quarter 2020, recognizing
interest payments on the S&L Note as principal payments, and lower interest
rates on our cash deposits. Interest income for the three and nine month periods
ending
and income tax receivable. The Company generated dividend income of
respectively, as compared to
periods ending
from the
Realty Series B Stock.
As a result of the Company's acquisition of the title insurance operations, the
Company generated title premium and other title fee revenue of
management fees of
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 period
subsequent to the Company's acquisition of NCTIC on
acquisition of TAV on
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 increased to
the three month period ending
to legal and professional fees incurred in connection with the Company's
acquisitions in the quarter. For the nine months ended
2020, the corporate general and administrative expenses decreased to
from
in connection with the Company's registration statement and amendments with
respect to the Rights Offering in
for the three and nine month period ending
compensation expense, and
Included in the expenses incurred in the three and nine month periods ended
professional fees and other due diligence costs related to the acquisitions.
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Our effective tax rate for the three and nine month periods ended
2021
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, earnings from our title insurance subsidiaries, and
dividends from our
to be adequate for ongoing operational expenditures for at least 12 months from
the date of these consolidated financial statements. At
had
million
our unrestricted and restricted cash is currently held in savings accounts
earning approximately 0.05%. We also received quarterly dividends on our
Realty
the Notes to the Consolidated Financial Statements for a discussion of
uncertainties related to COVID-19.
Cash used in operations for the nine months ending
million
on the title insurance subsidiaries.
Cash provided by investing activities for the nine months ending
2021
title insurance subsidiaries offset by cash acquired of
cash principal payments received on the S&L Note of approximately
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 some
of our critical accounting policies have changed as a result of the acquisitions
of the title insurance subsidiaries.
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.
Premium revenues from certain agency operations include accruals for
transactions which have settled but have not been reported as of the balance
sheet date. These accruals are based on estimates of the typical lag time
between settlement of real estate transactions and the agent's reporting of
these transactions to the Company. Reporting lag times vary by market. In
certain markets, the lag time may be very short, but in others, can be as high
as 100 days. The Company reviews and adjusts lag time estimates periodically,
using historical experience and other factors, and reflects any adjustments in
the result of operations in the period in which new information becomes
available.
Quarterly, the Company evaluates the collectability of receivables. Write-offs
of receivables have not been material to the Company.
Reserve for Claim Losses - The total reserve for all reported and unreported
losses the Company incurred is represented by the reserve for claims. The
Company's reserve for unpaid losses and loss adjustment expenses (LAE) is
established using estimated amounts required to settle claims for which notice
has been received (reported) and the amount estimated to be required to satisfy
incurred claims of policyholders that may be reported in the future (incurred
but not reported, or "IBNR"). The Company continually reviews and adjusts its
reserve estimates as necessary to reflect its loss experience and any new
information that becomes available. Adjustments resulting from such reviews may
be significant.
Reinsurance - The accompanying balance sheets reflect reserves for claims gross
of reinsurance ceded. The accompanying statements of operations reflect premiums
and provision for claims net of reinsurance ceded. The reinsurance arrangements
allow management to control exposure to potential claims arising from large
risks and catastrophic events. Amounts recoverable from reinsurers are estimated
in a manner consistent with the reserves associated with the reinsured policies.
Reinsurance premiums, losses, and LAE are accounted for on bases consistent with
those used in accounting for the original policies issued and the terms of the
reinsurance agreements.
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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
the value of our investment in
liquidity in such a way as to limit or eliminate our ability to use proceeds
from the S&L Asset Sale or the Rights Offering to fund acquisitions, or an
inability on our part to identify further additional suitable businesses to
acquire or develop with the proceeds of the S&L 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 successfully run and manage the new operations
purchased under the Acquisition and the Second Acquisition. 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.
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