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

-K.

March 2, 2018,

HG Holdings, Inc. (the “Company”) sold substantially all of its assets (the “Asset Sale”) to Stanley Furniture Company LLC, formerly Churchill Downs LLC (“Buyer”), pursuant to the terms of the Asset Purchase Agreement, dated as of

November 20, 2017,

as amended by the First Amendment thereto dated

January 22, 2017 (

the “Asset Purchase Agreement. As a result of the sale, the Company

longer has a wholly owned subsidiary.

September 6, 2018,

as previously reported on Form

-K filed by the Company with the Securities and Exchange Commission on

September 12, 2018,

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 subordinated secured promissory note payable to the Company (“Original Note”).

As a result of both the Asset Sale and the S&L Asset Sale, we have a variable interest in

two

entities that have been determined to be variable interest entities ("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

two

VIEs as we do

not

have the power to direct the activities that most significantly impact the VIEs’ economic performance and therefore are

not

required to consolidate these entities.

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.

March 19, 2019,

the Company and certain entities affiliated with HPCM (the “Lenders”) also entered into a loan agreement with HC Realty’s operating partnership (the “Operating Partnership”), pursuant to which the Lenders provided the Operating Partnership with a

$10,500,000

senior secured term loan, of which

$2,000,000

was provided by the Company. While some of these entities have other investments with HPCM, each of these entities made the loan separate and direct to HC Realty and HPCM does

not

receive management fees, performance fees, or any other economic benefits with respect to the loan agreement.

As of

March 31, 2020,

HC Realty owned and operated a portfolio of

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.

Recent Accounting Pronouncements

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

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

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,

however early application is permitted for reporting periods beginning after

December 15, 2018.

The Company does

not

anticipate the adoption of ASU

2016

to have a material impact to the financial statements.