UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
HG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, Zip Code)
(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.
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).
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 ☐
Smaller reporting 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
As of November 11, 2021,
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HG HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivables | ||||||||
| Interest and dividend receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax receivable | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Investment in affiliate | ||||||||
| Subordinated notes receivable | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued salaries, wages and benefits | ||||||||
| Commissions payable | ||||||||
| Escrow liabilities | ||||||||
| Other accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Reserve for title claims | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, par value, shares authorized and shares issued and outstanding on each respective date | ||||||||
| Capital in excess of par value | ||||||||
| Retained deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
HG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months |
Nine Months |
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| Ended |
Ended |
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| September 30, |
September 30, |
September 30, |
September 30, |
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| 2021 |
2020 |
2021 |
2020 |
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| Revenues: |
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| Net premiums written |
$ | $ | $ | $ | ||||||||||||
| Escrow and other title fees |
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| Management fees |
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| Total revenues |
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| Cost of revenues: |
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| Underwriting expenses |
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| Provision for title claim losses |
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| Search and other fees |
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| Total operating expenses |
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| Gross underwriting profit |
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| Operating expenses: |
||||||||||||||||
| General and administrative expenses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income/expenses: |
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| Interest income |
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| Dividend income |
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| Other income |
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| Gain on extinguishment of debt |
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| Gain on settlement of subordinated note receivable |
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| Gain on remeasurement of equity interest |
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| Income (loss) from affiliate |
( |
) | ( |
) | ( |
) | ||||||||||
| Loss on impairment |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income (loss) from operations before income taxes |
( |
) | ||||||||||||||
| Income tax benefit |
||||||||||||||||
| Net income (loss) |
$ | $ | ( |
) | $ | $ | ||||||||||
| Basic and diluted (loss) income per share: |
||||||||||||||||
| Net (loss) income – basic |
$ | $ | (. |
) | $ | $ | . |
|||||||||
| Net (loss) income – diluted |
$ | $ | (. |
) | $ | $ | . |
|||||||||
| Weighted average shares outstanding: |
||||||||||||||||
| Basic |
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| Diluted |
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The accompanying notes are an integral part of the consolidated financial statements.
HG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income from operations | $ | $ | ||||||
| Adjustments to reconcile net income from operations to net cash flows from operating activities: | ||||||||
| Depreciation expense | ||||||||
| Accretion income on notes receivable | ( | ) | ||||||
| Stock compensation expense | ||||||||
| Paid in kind interest on subordinated note receivable | ( | ) | ||||||
| Bargain purchase gain on acquisition of subsidiary | ( | ) | ||||||
| Gain on remeasurement of equity interest | ( | ) | ||||||
| Gain on settlement of subordinated note receivable | ( | ) | ||||||
| Gain on extinguishment of debt | ( | ) | ||||||
| Impairment loss on subordinated note receivable | ||||||||
| Dividends on HC Realty common stock | ||||||||
| Loss from affiliate | ||||||||
| Changes in assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts receivable | ||||||||
| Interest and dividends receivables | ( | ) | ||||||
| Income tax receivable | ||||||||
| Deferred tax assets and other assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Commissions payable | ||||||||
| Escrow liabilities | ( | ) | ||||||
| Reserve for title claims | ||||||||
| Other accrued expenses | ( | ) | ( | ) | ||||
| Other long-term liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operations | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant, and equipment | ( | ) | ||||||
| Investment in affiliate | ( | ) | ||||||
| Investment in subsidiaries, net of cash acquired | ||||||||
| Principal payments received on loan to affiliate | ||||||||
| Principal payments received on subordinated secured notes receivable | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Issuance of common stock | ||||||||
| Redemption of fractional shares from stock split | ( | ) | ||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Net increase in cash and restricted cash | ||||||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash and restricted cash | $ | $ | ||||||
| Supplemental Non-Cash Disclosures: | ||||||||
| Dividends on investment in affiliate | $ | $ | ||||||
| Extinguishment of debt | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements
HG HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 1. | Preparation of Interim Unaudited Financial Statements |
The consolidated 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 consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in our latest Annual Report on Form 10-K.
All prior period share numbers, stock option numbers, exercise prices and per share data appearing in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the reverse stock split effective July 15, 2021, unless otherwise indicated or unless context suggests otherwise. As previously stated in our proxy statement, the Reverse Split did not affect the par value of our common stock, which remained $
HG Holdings, Inc, together with its consolidated subsidiaries (the “Company”), operates through its wholly owned subsidiaries National Consumer Title Insurance Company (“NCTIC”), National Consumer Title Group, LLC (“NCTG”), Title Agency Ventures, LLC (“TAV”), and Omega National Title Agency, LLC (“Omega”) and through an affiliated investment in HC Government Realty Trust, Inc., a Maryland corporation (“HC Realty”).
Description of the Business
Title Insurance
The Company engages in issuing title insurance through our subsidiary NCTIC and providing title agency services through our subsidiaries NCTG, TAV, and Omega. Through NCTIC, the Company underwrites land title insurance for owners and mortgagees as the primary insurer. The Company currently only provides title insurance services in the state of Florida.
Title insurance protects against loss or damage resulting from title defects that affect real property. When real property is conveyed from one party to another, occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property. If a covered claim is made against real property, title insurance provides indemnification against insured defects. There are two basic types of title insurance policies – one for the mortgage lender and one for the real property owner. A lender often requires the property owner to purchase a lender’s title insurance policy to protect its position as a holder of a mortgage loan, but the lender’s title insurance policy does not protect the property owner. The property owner has to purchase a separate owner’s title insurance policy to protect its investment.
NCTIC issues title insurance policies in Florida through its home office and through a network of affiliated and independent title agents. Issuing agents, in the state of Florida, are independent agents or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations. The ability to attract and retain issuing agents is a key determinant of the Company’s growth in title insurance premiums written.
Revenues for the title insurance segment primarily result from purchases of new and existing residential and commercial real estate, refinance activity and certain other types of mortgage lending such as home equity lines of credit. Title insurance premiums vary from state to state and are subject to extensive regulation. Statutes generally provide that rates must not be excessive, inadequate or unfairly discriminatory. The process of implementing a rate change in most states involves pre-approval by the applicable state insurance regulator.
Volume is a factor in the Company’s title insurance operation’s profitability due to fixed operating costs that are incurred regardless of title insurance premium volume. The resulting operating leverage tends to amplify the impact of changes in volume on profitability. The Company’s title insurance profitability also depends, in part, upon its ability to manage its investment portfolio to maximize investment returns and to minimize risks such as interest rate changes, defaults and impairments of assets.
The Company’s volume of title insurance premiums is affected by the overall level of residential and commercial real estate activity, which includes property sales, mortgage financing and mortgage refinancing. Real estate activity, home sales and mortgage lending are cyclical in nature. Real estate activity is affected by a number of factors, including the availability of mortgage credit, the cost of real estate, consumer confidence, employment and family income levels, and general United States economic conditions. Interest rate volatility is also an important factor in the level of residential and commercial real estate activity.
The Company’s title insurance premiums in future periods are likely to fluctuate due to these and other factors which are beyond management’s control.
Historically, the title insurance business tends to be seasonal as well as cyclical. Because home sales are typically strongest in periods of favorable weather, the first calendar quarter tends to have the lowest activity levels, while the spring and summer quarters tend to be more active. Mortgage refinance activity tends to be influenced less by seasonality and more by economic cycles, with activity levels increasing during times of falling interest rates.
Real Estate Related
The Company engages in rental real estate through our equity investment in HC Realty. HC Realty is an internally-managed REIT formed to grow the business of acquiring, developing, financing, owning and managing build-to-suit or improved-to-suit, single-tenant properties leased primarily to the United States of America and administered by the GSA or directly by the federal government agencies or departments occupying such properties (referred to as “GSA Properties”). HC Realty invest primarily in GSA Properties in sizes that range from 5,000 to 50,000 rentable square feet that are in their first lease term after original construction or renovation-to-suit date. HC Realty further emphasizes GSA Properties that fulfill mission critical or direct citizen service functions. Leases associated with the GSA Properties in which HC Realty invests are full faith and credit obligations of the United States of America. HC Realty intends to grow its portfolio primarily through acquisitions of single-tenanted, federal government-leased properties in such markets; although, at some point in the future HC Realty may elect to develop, or joint venture with others in the development of, competitively bid, built-to-suit, single-tenant, federal government-leased properties, or buy facilities that are leased to credit-worthy state or municipal tenants.
For information about our reportable segments refer to Note 9 Segment Information.
Recent Developments
On July 20, 2021, the Company completed the acquisition (the “Acquisition”) pursuant to that certain Equity Purchase Agreement (the “First Purchase Agreement”) dated April 20, 2021 with NCTIC, a Florida corporation, NCTG, a Florida limited liability company, 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”). On such date, pursuant to the First Purchase Agreement, the Company purchased
Pursuant to the Acquisition, the Company effectively purchased (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
On September 1, 2021, the Company entered into a Membership Interests Purchase Agreement (the “Second Purchase Agreement”) with TAV and Fidelis US Holdings, Inc., a Delaware corporation (“Second Agreement Seller”). On such date, pursuant to the Second Purchase Agreement and in an immediate sign-and-close transaction, the Company purchased
Combined with the Acquisition by the Company in July 2021 of a 100% membership interest in NCTG, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV, and by virtue thereof, owns all of the membership interests in Omega.
On April 3, April 9, and June 29, 2020, the Company entered into subscription agreements with HC Realty, pursuant to which we purchased
As of September 30, 2021, HC Realty owned and operated a portfolio of 25 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
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 consolidated financial statements.
2. Subordinated Notes Receivable
The Company received a $
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 $
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 $
On March 12 and 13, 2020, the Company received payments from Buyer of $
On March 16, 2020, the Company received payment of $
S&L Note
The S&L Note had a principal amount of $
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 $
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 $
As of September 30, 2021, the Company concluded that the S&L would not have adequate cash required to repay the carrying value of the S&L Note. Given the facts and circumstances, the Company recorded an impairment loss of $
A reconciliation of the activity in the S&L Note for the three and nine months ending September 30, 2021 is as follows (in thousands):
| Principal | Discount | Balance | ||||||||||
| Balance at January 1, 2021 | $ | $ | ( | ) | $ | |||||||
| Accretion of discount | - | |||||||||||
| Principal payments | ( | ) | - | ( | ) | |||||||
| Balance at March 31, 2021 | $ | $ | ( | ) | $ | |||||||
| Accretion of discount | - | |||||||||||
| Principal payments | ( | ) | - | ( | ) | |||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | |||||||
| Accretion of discount | - | |||||||||||
| Impairment loss | - | ( | ) | ( | ) | |||||||
| Principal payments | - | |||||||||||
| Balance at September 30, 2021 | $ | $ | ( | ) | $ | |||||||
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 $
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 and nine months ending September 30, 2020 was $
4. Investment in Affiliate
HC Realty’s
The following table summarizes the Company’s investment in HC Realty as of September 30, 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 September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| HC Realty Series B Stock (a) | % | % | $ | $ | $ | $ | ||||||||||||||||||||||||||
| HC Realty common stock | % | % | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Total | % | % | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| (a) | Represents investments in shares of HC Realty preferred stock with a basis of $ |
| (b) | Loss from these investments is included in “Loss from affiliate” in the consolidated 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. | Paycheck Protection Program (“PPP”) Loan |
On May 7, 2020, prior to the Company’s acquisitions, ONTA entered into a loan agreement with Wells Fargo, N.A. in the aggregate amount of $
The Loan is scheduled to mature five years from the date on which ONTA applies for loan forgiveness under the CARES Act, bears interest at a rate of 1% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration (“SBA”) under the CARES Act. The PPP provides that the use of the Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. ONTA used all of the PPP proceeds toward qualifying expenses.
On September 16, 2021, ONTA received notice from the SBA that the full amount of the loan was forgiven. The forgiveness of the loan is included as gain on extinguishment of debt on the Consolidated Statements of Operations.
| 6. | Reserve for Title Claims |
NCTIC’s reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy claims that have been incurred but not yet reported (“IBNR”). Despite the variability of such estimates, management believes that the total reserve for claims is adequate to cover claim losses which might result from pending and future claims under title insurance policies issued through September 30, 2021. We continually update loss reserve estimates as new information becomes known, new loss patterns emerge or as other contributing factors are considered and incorporated into the analysis of reserve for claim losses. Due to the uncertainty inherent in the process and to the judgment used by management, the ultimate liability may be greater or less than our current reserves. If actual claims loss development varies from what is currently expected and is not offset by other factors, it is possible that additional reserve adjustments may be required in future periods in order to maintain our recorded reserve within a reasonable range of our actuary's central estimate.
A reconciliation of the activity in the reserves account for the three month period since the Acquisition ending September 30, 2021 is as follows (in thousands):
| Beginning Reserves | $ | |||
| Provision for claims related to: | ||||
| Current year | ||||
| Prior years | ||||
| Total provision for claim losses | ||||
| Claims paid related to: | ||||
| Current year | ||||
| Prior years | ||||
| Total title claims paid | ||||
| Ending Reserves | $ |
At September 30, 2021, there were
For the three months ended September 30, 2021, there was
| 7. | Reinsurance |
Certain premiums and benefits at NCTIC are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide NCTIC with increased capacity to write more risk and maintain its exposure to loss within its capital resources. For the three month period ended September 30, 2021, NCTIC's reinsurance program consisted of excess of loss reinsurance treaties. The following is a summary of the reinsurance coverage.
Effective January 1, 2021, NCTIC entered into a per risk excess of loss reinsurance agreement that provides coverage of $
Effective January 1, 2021, NCTIC entered into a reinstatement premium protection reinsurance agreement to reinsure the reinstatement premium payment obligations of NCTIC under the shared per risk excess of loss agreement. The coverage is limited to
NCTIC’s reinsured risks are treated, to the extent of reinsurance, as though they are risks for which the Company is not liable. However, NCTIC remains contingently liable in the event the reinsuring companies do not meet their obligations under these reinsurance contracts. NCTIC uses a broker to place its reinsurance through Lloyd’s syndicates. Chaucer Ltd (“Chaucer”) and Beazley Syndicate (“Beazley”) are each
The effects of reinsurance on premiums written and earned at NCTIC are as follows:
| For the Three Months Ended | ||||||||
| September 30, 2021 | ||||||||
| Written | Earned | |||||||
| Direct premiums | $ | $ | ||||||
| Ceded premiums | ( | ) | ( | ) | ||||
| Net premiums | $ | $ | ||||||
8. Statutory Reporting
NCTIC's assets, liabilities, and results of operations have been reported in accordance with accounting principles generally accepted in the United States of America (GAAP), which varies from statutory accounting practices (SAP) prescribed or permitted by insurance regulatory authorities. Prescribed SAP are found in a variety of publications of the National Association of Insurance Commissioners (NAIC), state laws and regulations, as well as through general practices. The principal differences between SAP and GAAP are that under SAP: (1) certain assets that are not admitted assets are eliminated from the balance sheet, (2) a supplemental reserve for claims is charged directly to unassigned surplus rather than provision for claims under GAAP, and (3) differences may arise in the computation of deferred income taxes. The Company must file with applicable state insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and stockholders' equity (called “surplus as regards policyholders” in statutory reporting).
| 9. | Segment Information |
The Company has reportable segments, title insurance services and real estate. The remaining immaterial segments have been combined into a group called “Corporate and Other.” The title insurance segment issues title insurance policies, which insures titles to real estate, and provides title agency services for residential and commercial real estate transactions. The real estate segment, through an affiliate investment in HC Realty, owns and operates a portfolio of single-tenant properties leased entirely to the United States of America for occupancy by federal agencies.
Provided below is selected financial information about the Company’s operations by segment for the three months ending September 30, 2021 (in thousands):
| Title Insurance | Real Estate Related | Corporate and Other | Total | |||||||||||||
| Insurance and other services revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ( | ) | ( | ) | ||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income and expenses | ( | ) | ||||||||||||||
| Income (loss) before income taxes | $ | $ | $ | ( | ) | $ | ||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
Provided below is selected financial information about the Company’s operations by segment for the three months ending September 30, 2020 (in thousands):
| Title Insurance | Real Estate Related | Corporate and Other | Total | |||||||||||||
| Insurance and other services revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ( | ) | ( | ) | ||||||||||||
| Other income and expenses | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
Provided below is selected financial information about the Company’s operations by segment for the nine months ending September 30, 2021 (in thousands):
| Title Insurance | Real Estate Related | Corporate and Other | Total | |||||||||||||
| Insurance and other services revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ( | ) | ( | ) | ||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income and expenses | ( | ) | ||||||||||||||
| Income (loss) before income taxes | $ | $ | $ | ( | ) | $ | ||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
Provided below is selected financial information about the Company’s operations by segment for the nine months ending September 30, 2020 (in thousands):
| Title Insurance | Real Estate Related | Corporate and Other | Total | |||||||||||||
| Insurance and other services revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ( | ) | ( | ) | ||||||||||||
| Other income and expenses | ||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
10. Income taxes
During the nine months ended September 30, 2021, the Company recorded a non-cash credit to its valuation allowance of $
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 September 30, 2021, the Company has
The Company’s effective tax rate for the current and prior year three and nine month periods were effectively
11. 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 | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Weighted average shares outstanding for basic calculation | ||||||||||||||||
| Add: Effect of dilutive stock awards | ||||||||||||||||
| Weighted average shares outstanding, adjusted for diluted calculation | ||||||||||||||||
For the three and nine month periods ended September 30, 2021, approximately
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
On June 19, 2020, the Company issued
On the close of business on July 15, 2021, the Company effectuated a 1-for-
A reconciliation of the activity in Stockholders’ Equity accounts for the three and nine months ended September 30, 2021 is as follows (in thousands):
| Capital in | ||||||||||||
| Common | Excess of | Retained | ||||||||||
| Stock | Par Value | Deficit | ||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | |||||||
| Net loss | ( | ) | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | |||||||
| Net loss | ( | ) | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | |||||||
| Net income | ||||||||||||
| Effect of reverse stock split | ( | ) | ||||||||||
| Redemption of fractional shares | ( | ) | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | |||||||
A reconciliation of the activity in Stockholders’ Equity accounts for the three and nine months ended September 30, 2020 is as follows (in thousands):
| Capital in | ||||||||||||
| Common | Excess of | Retained | ||||||||||
| Stock | Par Value | Deficit | ||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ( | ) | |||||||
| Net income | ||||||||||||
| Stock-based compensation expense | ||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | |||||||
| Issuance of common stock | ||||||||||||
| Net loss | ( | ) | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | |||||||
| Net loss | ( | ) | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | |||||||
12. Revenue from Contracts with Customers
ASC 606, Revenue from Contracts with Customers requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance does not apply to revenue associated with insurance contracts (including title insurance policies), financial instruments and lease contracts; and therefore is primarily applicable to the following Company revenue categories.
Escrow and other title-related fees – The Company’s title insurance segment recognizes commission revenue and fees related to items such as searches, settlements, commitments and other ancillary services. Escrow and other title-related fees are recognized as revenue at the time of the related transactions as the earnings process, or performance obligation, is then considered to be complete.
Non-title services –All non-title service fees, such as management fees, are recognized as revenue as performance obligations are completed.
13. Business Combinations
On July 20, 2021, the Company completed the Acquisition of NCTIC and NCTG by purchasing
The purchase price allocation for NCTIC and NCTG is as follows (in thousands):
| Cash paid for NCTIC | $ | |||
| Cash paid for NCTG | ||||
| Total consideration paid | $ |
| NCTIC | NCTG | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Deferred tax assets | ||||||||
| Investment in TAV | ||||||||
| Other assets | ||||||||
| Total assets acquired | ||||||||
| Accrued expenses | ||||||||
| Reinsurance payable | ||||||||
| Escrow liability | ||||||||
| Reserve for claims | ||||||||
| Total liabilities assumed | ||||||||
| Net assets acquired | $ | $ | ||||||
| Bargain purchase gain | $ | ( | ) | $ | ||||
A bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree is less than the fair value of the identifiable net assets acquired. The bargain purchase gain was primarily driven by differences in NCTIC’s statutory surplus and GAAP surplus at the date of acquisition. The Company believes that the Sellers wanted to exit the business relatively quickly and there were a limited number of potential buyers due to factors inherent to the property and casualty market, which resulted in a bargain purchase gain. The bargain purchase gain is recorded in other income on the Consolidated Statement of Operations.
On September 1, 2021, the Company acquired the remaining
The operating results of TAV are included in the Company’s unaudited consolidated statements of operations beginning September 1, 2021. TAV’s results are included in the title insurance segment.
The final purchase price allocation for TAV at fair value is as follows (in thousands):
| Cash paid for remaining of TAV | $ | |||
| Fair value of existing equity interest | ||||
| Total consideration | $ | |||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Prepaid expenses | ||||
| Fixed assets | ||||
| Total assets acquired | ||||
| Accrued expenses | ||||
| Management fee payable | ||||
| Escrow liability | ||||
| Payable to affiliate | ||||
| Note payable | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Goodwill | $ |
The acquisition date fair value of the Company’s previously held equity interest in TAV was $
The acquisition of the remaining equity interest was accounted for as a step-transaction in accordance with FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). The Second Purchase Price has been allocated to TAV's assets acquired and liabilities assumed based on our best estimates of the fair values as of the acquisition date. Due to the close proximity in timing of the Second Acquisition and our filing of this Quarterly Report on Form 10-Q, the fair value of assets acquired and liabilities assumed represent a preliminary allocation as our evaluation of facts and circumstances available as of September 30, 2021 is ongoing. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. Goodwill consists primarily of intangible assets that do not qualify for separate recognition.
Pursuant to Topic 805, the financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional adjustments as we obtain information not available as of the completion of this preliminary fair value calculation as determined within the measurement period. We will also be required to record, in the same period as the financial statements, the effects to any income statement captions, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
The following table presents unaudited pro forma financial information as if NCTIC, NCTG, and TAV had been included in the Company’s financial results as of January 1, 2021, through the date of acquisition:
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 (a) | 2020 | 2021 (a) | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| a. | Pro forma net income for the three and nine months ended September 30, 2021 excludes $ |
14. Goodwill
As of September 30, 2021, the Company recognized $
15. 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. S&L, 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 S&L’s products. Therefore, uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon the future results of operations of S&L and its corresponding impact to the collectability of the S&L Note.
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 COVID-19 pandemic caused the Company’s title operations at NCTIC and Omega 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 on 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 on the title operations.
The Company continues to evaluate the impact of these measures on our operational and financial performance, specifically the impact on S&L, HC Realty, and NCTIC and Omega’s operations. During the third quarter 2021, the Company did not receive its contractual payments on the S&L Note largely as a result of the impacts that COVID-19 had to its operations and its customers. Management used these facts in our analysis of the impairment of the S&L note during the period ended September 30, 2021.
As of September 30, 2021, the Company has not experienced any adverse impacts to the payment of HC Realty’s common and Series B Stock dividends.
ITEM 2. 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 September 30, 2021, our sources of income include earnings on our title 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 September 30, 2021
The Company generated interest income of $1,000 and $13,000 for the three and nine month periods ending September 30, 2021, respectively, as compared to $176,000 and $607,000 for the three and nine month periods ending September 30, 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, 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 September 30, 2021 consisted of cash interest income on our cash deposits and income tax receivable. The Company generated dividend income of $256,000 and $769,000 for the three and nine month periods ending September 30, 2021, respectively, as compared to $256,000 and $427,000 for the three and nine month periods ending September 30, 2020, respectively. The increase resulted primarily from the April 3, April 29, and June 29, 2020 acquisitions of additional HC 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 $838,000 and management fees of $146,000. 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 period subsequent to the Company’s acquisition of NCTIC on July 1, 2021 and the acquisition of TAV on September 1, 2021 was $614,000.
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 increased to $303,000 for the three month period ending September 30, 2021 from $227,000 for the three month period ending September 30, 2020. The increase is primarily due to legal and professional fees incurred in connection with the Company’s acquisitions in the quarter. For the nine months ended September 30, 2021 and 2020, the corporate general and administrative expenses decreased to $900,000 from $1.1 million 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 and nine month period ending September 30, 2021 consisted of $117,000 and $355,000 of professional fees, $63,000 and $188,000 of wages, $24,000 and $69,000 of insurance expense, $21,000 and $63,000 of stock based compensation expense, and $78,000 and $225,000 of other operating expenses. Included in the expenses incurred in the three and nine month periods ended September 30, 2021 were approximately $68,000 and $200,000 of legal and professional fees and other due diligence costs related to the acquisitions.
Our effective tax rate for the three and nine month periods ended September 30, 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, earnings from our title insurance subsidiaries, 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 consolidated financial statements. At September 30, 2021, we had $11.8 million in cash and $6.5 million in restricted cash, of which $6.3 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 and Series B Stock at annual rates of 5.5% and 10%. See Note 15 of 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 September 30, 2021 of $2.7 million consisted primarily of an increase of $3.3 million in escrow liabilities on the title insurance subsidiaries.
Cash provided by investing activities for the nine months ending September 30, 2021 consisted primarily $7.7 million of cash used of the acquisition of our title insurance subsidiaries offset by cash acquired of $16.9 million and the cash principal payments received on the S&L Note of approximately $170,000.
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.
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 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.
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 second 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 previously disclosed 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, SFC 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.
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 1A. Risk Factors
The following description of risk factors includes material changes to, and supersedes, the description of risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ending December 31, 2020.
We may not receive the amount owed us under the secured promissory note from S&L.
The S&L Note, which had an outstanding principal amount of $3.3 million as of December 31, 2020, will mature and the entire principal amount will be payable in March 2023. During 2021 and 2020, we recorded an impairment losses of $609,000 and $833,000, respectively, on the S&L Note as a result of concluding, based on current information and events, including the impact of the novel coronavirus (“COVID-19”) on S&L’s business and its customers, that we did not believe we would be able to collect the entire amount due under the S&L Note. S&L’s ability to make payments to us under the S&L Note may continue to be adversely impacted by the current pandemic health event resulting from COVID-19 as S&L’s operations may continue to be adversely impacted by disruptions to the supply chain and distribution channels for its products caused by this pandemic. Consequently, we may have to record additional impairment charges with respect to the S&L Note. There is no guarantee that S&L will pay us the amounts owed under the S&L Note or that, in the event of default by S&L, the collateral securing the S&L Note will be sufficient to pay the S&L Note in full.
Our business may be adversely impacted as a result of the pandemic health event resulting from COVID-19.
The pandemic health event resulting from COVID-19 has adversely impacted, and may continue to adversely impact, economic activity nationally and globally. These economic and market conditions and other effects resulting from COVID-19 may adversely affect us. At this point, the extent to which COVID-19 may impact us is uncertain. S&L’s ability to make payments to us under the S&L Note may continue to be adversely impacted by the current pandemic health event resulting from COVID-19 as S&L’s operations may continue to be adversely impacted by disruptions to the supply chain and distribution channels for its products caused by this pandemic. Consequently, we may have to record additional impairment charges with respect to the S&L Note.
We will also monitor the impact of this pandemic on our investment in HC Realty, but we are not currently anticipating a significant impact as HC Realty holds properties that are leased entirely to the United States Government for occupancy by federal agencies. Many of these federal agencies are deemed essential and continued operations amidst the various federal, state, and local restrictions aimed at slowing the spread of COVID-19. It is possible, however, that a resurgence in COVID-19 cases resulting in tighter restrictions may have the effect of heightening adverse impacts to HC Realty’s operations.
We will also monitor the impact of the pandemic on participants in real estate transaction and the demand for NCTIC and Omega’s products and services.
An “ownership change” could limit the use of our net operating loss carryforwards and our potential to derive a benefit from our net operating loss carryforwards.
If an “ownership change” occurs pursuant to applicable statutory regulations, we are potentially subject to limitations on the use of our net operating loss carryforwards which in turn could adversely impact our potential to derive a benefit from our net operating loss carryforwards. While we have entered into a rights agreement designed to preserve and protect our net operating loss carryforwards, there is no guarantee that the rights agreement will prevent us from experiencing an ownership change and, therefore, having a limitation on our ability to use our net operating loss carryforwards. In general, an “ownership change” would occur if there is a cumulative change in the ownership of our common stock of more than 50% by one or more “5% shareholders” during a three-year test period.
Failure to successfully identify, acquire and, to the extent applicable, operate non-furniture related assets could cause our stock price to decline.
We continue evaluating alternatives for using remaining cash proceeds from the Asset Sale and Rights Offering to acquire non-furniture related assets. Since the Asset Sale, we have completed the Acquisition of NCTIC and NCTG and the equity interest we acquired in HC Realty. We may not be able to acquire other profitable assets with the remaining cash proceeds of the Asset Sale and Rights Offering. In addition, any assets that we do acquire, including the Acquisition and our equity interest in HC Realty, may not be profitable. If we are not successful in identifying, acquiring and, to the extent applicable, operating non-furniture related assets, our stock price may decline.
We have no operating history in the NCTIC’s title insurance and Omega’s title agency businesses, and therefore, with respect to certain assets, we will be subject to the risks inherent in establishing a new line of business.
We have had no operating history in the title insurance and title agency lines of business for which NCTIC and Omega operate. Accordingly, our future success may in part be subject to the risks, expenses, problems and delays inherent in establishing a new line of business and the ultimate success of such new business cannot be assured. In addition, prior to March 2019, our management did not have prior experience relating to an investment in a real estate investment trust (“REIT”) such as HC Realty and the ultimate success of our investment in HC Realty cannot be assured.
Resources may be expended in researching potential acquisitions that might not be consummated.
The investigation of additional non-furniture company assets to acquire and the negotiation, drafting and execution of relevant agreements and other documents will require substantial management time and attention in addition to potentially incurring legal and other professional expenses. If a decision is made not to complete a specific acquisition, the costs incurred up to that point for the proposed transaction likely would not be recoverable. As of September 30, 2021 and December 31, 2020, we had incurred no such related expenses. Furthermore, even if an agreement is reached relating to a specific acquisition, we may fail to consummate the acquisition for any number of reasons including those beyond our control.
We may be required to register under the Investment Company Act of 1940.
Under Section 3(a)(l) of the 1940 Act, an issuer is deemed to be an investment company if it is engaged in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. The 1940 Act defines “investment securities” broadly to include virtually all securities except U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves regulated or exempt investment companies. Consequently, the A&R Note (while it was outstanding) and S&L Note, as well as the securities of HC Realty we hold, may be considered investment securities and we may fall within the scope of Section 3(a)(1)(C) of the 1940 Act.
A company that falls within the scope of Section 3(a)(1)(C) of the 1940 Act can avoid being regulated as an investment company if it can rely on certain of the exclusions or exemptions under the 1940 Act. One such exclusion is Rule 3a-2 under the 1940 Act, which temporarily relieves certain issuers that are in transition to a non-investment company business from regulation under the1940 Act (a “transient investment company”). The rule provides a one-year safe harbor for a company to comply with another exemption or exclusion under the 1940 Act provided that the company has a bona fide intent to be primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. The one-year grace period started on the date of the Asset Sale, which was March 2, 2018, and ended on March 2, 2019. We did not acquire sufficient assets within one year from closing the Asset Sale as contemplated by Rule 3a-2. There is no assurance that we will not be deemed subject to the 1940 Act and be required to register as an investment company.
While in transient investment company status, we actively pursued alternatives for using cash proceeds from the Asset Sale for the acquisition of non-furniture related assets and acquired an equity interest in HC Realty on March 19, 2019. On April 3, 2020, we used $1.0 million of our cash to purchase an additional 100,000 shares of HC Realty Series B Stock. On April 29, 2020, we used an additional $2.5 million of our cash to purchase an additional 250,000 shares of HC Realty Series B Stock. On June 29, 2020, we used $4.75 million of the cash proceeds from the Rights Offering to purchase an additional 475,000 shares of HG Realty Series B Stock. As a result of these purchases, we now own approximately 37.0% of the as-converted equity interest in HC Realty. We believe that these additional purchases allow us to rely on the exemption from investment company registration set forth in Rule 3a-1 of the 1940 Act because we own (i) at least 25% of the HC Realty Common Stock on an as-converted basis, resulting in us being presumed to control HC Realty within the meaning of Section 2(a)(9) of the 1940 Act and (ii) a sufficient number of shares of HC Realty Series B Stock so that we primarily control HC Realty within the meaning of Rule 3(a)-1 of the 1940 Act.
The Company has not sought or obtained an exemptive order, no-action letter or any other assurances from the SEC or its staff regarding the Company’s ability to rely on Rule 3a-2 or Rule 3a-1 of the 1940 Act, nor has the SEC or its staff provided any such order, no-action letter or other assurances. If we are required to register under the 1940 Act, compliance with these additional regulatory burdens would significantly increase our operating expenses. Registered investment companies are subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates.
Other risks specific to our investment in HC Realty
Our investment in HC Realty may lose value.
In connection with using cash proceeds from the Asset Sale to acquire non-furniture related assets, we acquired an equity interest in HC Realty on March 19, 2019 by purchasing HC Common Stock and HC Series B Stock. We acquired additional HC Series B Stock on April 3, April 29, and June 29, 2020. As a result of these stock purchases, we currently own 36.1% of the as-converted equity interest of HC Realty. There is no guarantee that HC Realty will be successful implementing its business strategy for the acquisition, management and disposition of GSA properties and as a result our HC Common Stock and HC Series B Stock may lose value.
The value of our equity investment in HC Realty would be adversely affected if HC Realty failed to qualify as a REIT.
HC Realty has elected to be treated as a REIT for U.S. federal income tax purposes. Its continued qualification as a REIT depends on its satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. Its ability to satisfy some of the asset tests depends upon the fair market values of its assets, some of which are not able to be precisely determined and for which HC Realty has indicated it will not obtain independent appraisals. If HC Realty fails to qualify as a REIT in any taxable year, and certain statutory relief provisions are not available, HC Realty would be subject to U.S. federal income tax on its taxable income at regular corporate rates and distributions to stockholders would not be deductible by it in computing its taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution. Unless entitled to relief under certain Internal Revenue Code provisions, HC Realty also would be disqualified from taxation as a REIT for the four taxable years following the year during which HC Realty ceased to qualify as a REIT. In addition, if HC Realty fails to qualify as a REIT, HC Realty will no longer be required to make distributions. As a result of all these factors, HC Realty’s failure to qualify as a REIT could impair its ability to expand business and raise capital and could adversely affect the value of our HC Common Stock and HC Series B Stock.
Other risks specific to the Acquisition of the Title Insurance Businesses
Conditions in the real estate market generally impact the demand for a substantial portion of the Company’s title insurance subsidiaries’ products and services and NCTIC’s claims experience.
Demand for a substantial portion of the Company’s insurance subsidiaries’ products and services generally decreases as the number of real estate transactions in which its products and services are purchased decreases. The number of real estate transactions in which the insurance subsidiaries’ products and services are purchased decreases in the following situations, among others:
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When mortgage interest rates are high or rising; |
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When the availability of credit, including commercial and residential mortgage funding, is limited; and |
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When real estate affordability is declining. |
These circumstances, particularly when combined with declining real estate values and the increase in foreclosures that often results therefrom, also tend to adversely impact NCTIC’s title claims experience.
Unfavorable economic conditions may adversely affect NCTIC and Omega.
Historically, uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and a general decline in the value of real property, have created a difficult operating environment for the NCTIC and Omega’s core title and settlement businesses. Uncertainty and a deterioration in economic conditions in connection with the coronavirus pandemic adversely affected the NCTIC and Omega early in the pandemic. These conditions also tend to negatively impact the amount of funds NCTIC receives from third parties to be held in trust pending the closing of commercial and residential real estate transactions. During periods of unfavorable economic conditions, the return on these funds deposited with third party financial institutions, tends to decline. In addition, title agencies, such as Omega, may have been negatively impacted by these conditions, as well as other securities in NCTIC has in its investment portfolio, which also may be negatively impacted by these conditions. Depending upon the ultimate severity and duration of any economic downturn, the resulting effects on NCTIC and Omega could be materially adverse, including a significant reduction in revenues, earnings and cash flows, deterioration in the value of or return on its investments and increased credit risk from customers and others with obligations to NCITC and Omega.
Changes in NCTIC’s relationships with large mortgage lenders or government–sponsored enterprises could adversely affect the Company.
Large mortgage lenders and government-sponsored enterprises, because of their significant role in the mortgage process, have significant influence over NCTIC and other service providers. Changes in NCTIC’s relationship with any of these lenders or government-sponsored enterprises, the loss of all or a portion of the business NCTIC derives from these parties, any refusal of these parties to accept NCTIC’s products and services, the modification of the government-sponsored enterprises’ requirement for title insurance in connection with mortgages they purchase or the use of alternatives to NCTIC’s products and services, could have a material adverse effect on NCTIC.
A downgrade by ratings agencies, reductions in statutory capital and surplus maintained by NCTIC, the Company’s title insurance underwriter, or a deterioration in other measures of financial strength could adversely affect the Company.
The financial strength of NCTIC may be measured by ratings provided by ratings agencies and levels of statutory capital and surplus maintained by NCTIC, in determining the amount of a policy they will accept and the amount of reinsurance required. Demotech currently rates the NCTIC’s operations. NCTIC’s financial strength ratings are “S” by Demotech, Inc. This rating provides the agency’s perspective on the financial strength, operating performance and cash generating ability of the operation. The agency will continually review these ratings and the ratings are subject to change. Statutory capital and surplus, or the amount by which statutory assets exceed statutory liabilities, is also a measure of financial strength. Accordingly, if the rating or statutory capital and surplus of NCTIC are reduced from the current level, or if there is a deterioration in other measures of financial strength, the NCTIC’s results of operations, competitive position and liquidity could be adversely affected.
The issuance of a title insurance policies and related activities by title agents, some of which operate with substantial independence from the Company, could adversely affect NCTIC.
The Company’s title insurance subsidiaries issue a significant portion of their policies through title agents, some that may operate largely independent of the Company. There is no guarantee that these title agents will fulfill their contractual obligations to the Company’s insurance subsidiaries, which contracts include limitations that are designed to limit NCTIC’s risk with respect to their activities. In addition, regulators are increasingly seeking to hold NCTIC responsible for the actions of these title agents and, under certain circumstances, NCTIC may be held liable directly to third parties for actions (including defalcations) or omissions of these agents. Case law in certain states also suggests that NCTIC is liable for the actions or omissions of its agents in those states, regardless of contractual limitations. As a result, NCTIC’s use of title agents could result in increased claims on the NCTIC’s policies issued through agents and an increase in other costs and expenses.
Errors and fraud involving the transfer of funds may adversely affect the Company’s insurance subsidiaries.
The Company’s insurance subsidiaries rely on their systems, employees and domestic banks to transfer funds on behalf the Company’s insurance subsidiaries as well as title agents that are not affiliates of the Company. These transfers are susceptible to user input error, fraud, system interruptions, incorrect processing and similar errors that from time to time result in lost funds or delayed transactions. The Company’s insurance subsidiaries’ email and computer systems and systems used by its agents, customers and other parties involved in a transaction may be subject to, and may continue to be the target of, fraudulent attacks, including attempts to cause the Company’s insurance subsidiaries or its agents to improperly transfer funds. Funds transferred to a fraudulent recipient are often not recoverable. In certain instances, the Company’s insurance subsidiaries may be liable for those unrecovered funds. The controls and procedures used by the Company’s insurance subsidiaries to prevent transfer errors and fraud may prove inadequate, resulting in financial losses, reputational harm, loss of customers or other adverse consequences which could be material.
Regulatory oversight and changes in government regulation could prohibit or limit the Company or its insurance subsidiaries’ operations, make it more costly or burdensome to conduct such operations or result in decreased demand for their products and services.
The title insurance business is regulated by various federal, state, local governmental agencies and operates within statutory guidelines. The industry in which the title insurance business operates and the markets into which it sells its products are also regulated and subject to statutory guidelines. In general, the title business may be subject to increasing regulatory oversight and increasingly complex statutory guidelines. This may be due, among other factors, to the passing of, and significant changes in, laws and regulations pertaining to privacy and data protection.
Regulatory oversight could require the Company to raise capital, and/or make it more difficult to deploy capital. For example, regulatory capital requirements for the Company have historically applied only at the subsidiary level, specifically the insurance underwriter subsidiaries. However, the National Association of Insurance Commissioners have issued a proposal for group capital calculations. The proposal, if finalized and adopted in their current forms, may apply to the Company at the group level and would be in addition to existing subsidiary-level capital requirements. It is possible that the requirements, particularly in an economic downturn, could have the effect of requiring the Company to raise capital and/or making it more difficult to otherwise deploy capital.
In addition, changes in the applicable regulatory environment, statutory guidelines or interpretations of existing regulations or statutes, enhanced governmental oversight or efforts by governmental agencies to cause customers to refrain from using the Company’s insurance subsidiaries’ products or services could prohibit or limit its future operations or make it more costly or burdensome to conduct such operations or result in decreased demand for their products and services or a change in its competitive position. The impact of these changes would be more significant if they involve the Florida jurisdiction, as all of the Company’s title premiums are currently generated in the state of Florida. These changes may compel the Company to reduce its prices, may restrict its ability to implement price increases or acquire assets or businesses, may limit the manner in which the Company conducts its business or otherwise may have a negative impact on its ability to generate revenues, earnings and cash flows.
Regulation of title insurance rates could adversely affect the Company
Title insurance rates are subject to extensive regulation, which varies from state to state. In many states the approval of the applicable state insurance regulator is required prior to implementing a rate change. These regulations could hinder the Company’s insurance subsidiaries’ ability to promptly adapt to changing market dynamics through price adjustments, which could adversely affect its results of operations, particularly in a rapidly declining market.
Changes in certain laws and regulations, and in the regulatory environment in which the Company operates, could adversely affect the Company
Federal and state officials are discussing various potential changes to laws and regulations that could impact the Company’s businesses, including the reform of government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and additional data privacy regulations, among others. Changes in these areas, and more generally in the regulatory environment in which the Company’s insurance subsidiaries and its customers operate, could adversely impact the volume of mortgage originations in the United States and the Company’s insurance subsidiaries competitive position and results of operations. In addition, in connection with the coronavirus pandemic, the Company’s insurance subsidiaries and generally its agents have been deemed in most areas an essential business and have been permitted to operate. A change in this determination, particularly in jurisdictions where the Company generates a large portion of its revenues, could adversely impact the Company’s insurance subsidiaries’ business.
Actual claims experience could materially vary from the expected claims experience reflected in the NCTIC’s reserve for incurred but not reported claims
NCTIC maintains a reserve for incurred but not reported (“IBNR”) claims pertaining to its title, insurance products. The majority of this reserve pertains to title insurance policies, which are long-duration contracts with the majority of the claims reported within the first few years following the issuance of the policy. Generally, 70% to 80% of claim amounts become known in the first six years of the policy life, and the majority of IBNR reserves relate to the six most recent policy years. Changes in expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could result in a material adjustment to the IBNR reserves. Loss rates for recent policy years, positive or negative, may vary significantly given the long duration nature of a title insurance policy. In uncertain economic times, such as those currently being experienced as a result of the coronavirus pandemic, larger changes may be more likely. Material changes in expected ultimate losses and corresponding loss rates for older policy years is also possible, particularly for policy years with loss ratios exceeding historical norms. The estimates made in determining the appropriate level of IBNR reserves could ultimately prove to be materially different from actual claims experience.
Changes in laws or regulations impacting real estate, particularly when applied retroactively, may cause a material change in expected ultimate losses and corresponding loss rates for recent and/or older policy years.
Risks related to our common stock
Our common stock is listed on the OTCQB and there may be limited ability to trade our common stock.
Trading of our common stock is currently conducted in the over-the-counter market on the OTCQB, which is generally a less active, and therefore a less liquid, trading market than other types of markets such as stock exchanges. As a result, an investor may find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock than if our stock was traded on other markets.
Risks related to our management
Our executive officers and some of our current and former directors may have potential or actual conflicts of interest because of their positions with HCPM and HC Realty
Steven A. Hale II, our Chairman and Chief Executive Officer, is sole manager of HPCM which serves as the investment adviser for the Hale Funds and two current holders of HC Realty Series B Stock. The Hale Funds own approximately 33.8% of our outstanding common stock. We also own HC Realty Series B Stock and HC Realty Common Stock. Mr. Hale also serves as Chairman and Chief Executive Officer and a director of HC Realty. Bradley G Garner, our Principal Financial and Accounting Officer, also serves as a director of HC Realty and is chief compliance officer for HPCM. Matthew A. Hultquist, one of our former directors, also serves as a director of HC Realty and is a part time employee of HC Realty serving as Senior Vice President - Acquisitions.
Mr. Hale and Mr. Garner owe fiduciary duties to us, as well as to HC Realty as a result of their positions with HC Realty and to the Hale Funds and two current holders of HC Realty Series B Stock as a result of their positions with HPCM, the investment adviser to these parties. Mr. Hultquist used to owe fiduciary duties to us and currently owes such duties to HC Realty. As a result, these executive officers and current and former directors may have potential or actual conflicts of interest when faced with decisions that could have different implications for us and HC Realty. In addition, Mr. Hale and Mr. Garner may have potential or actual conflicts of interest when faced with decisions that could have different implications for us and the Hale Funds or the two holders of HC Realty Series B Stock advised by HPCM. For example, these potential conflicts could arise over matters such as funding and capital matters.
Our executive officers, directors and 10% stockholders have significant voting power and may vote their shares in a manner that is not in the best interest of other stockholders.
Our current executive officers, directors and 10% stockholders control approximately 75.8% of the voting power represented by our outstanding common stock. If these stockholders act together, they may be able to exert significant control over our management and affairs requiring stockholder approval, such as the election of directors or the dissolution of the company. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.
Our management, who will be employed on a part-time basis for the foreseeable future, currently has outside business interests that will require their time and attention and may interfere with their ability to devote all of their time to our business, which may adversely affect our business and operations.
Our two executive officers will be employed for the foreseeable future on a part-time basis and have outside business interests that could require substantial time and attention. Our executive officers are associated with Hale Partnership Capital Management LLC and devote significant time to its affairs. Our executive officers are also associated with HC Realty. On March 19, 2019, we acquired an equity interest in HC Realty and made a loan to HC Realty’s operating partnership. We cannot accurately predict the amount of time and attention that will be required of our officers to perform their ongoing duties related to outside business interests. The inability of our officers to devote sufficient time to managing our business could have a material adverse effect on our business and operations.
ITEM 6. Exhibits
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Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (Commission File No. 0-14938) filed August 6, 2021). |
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| 101 |
The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline Xtensible Business Reporting Language (“XBRL”): (i) balance sheets, (ii) statements of operations, (iii) statements of cash flows, (iv) the notes to the financial statements, and (v) document and entity information. (1) |
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Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
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Filed herewith |
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Furnished herewith |
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: November 12, 2021 |
HG HOLDINGS, INC. |
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| By: /s/ Brad G. Garner |
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| Brad G. Garner |
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| Principal Financial and Accounting Officer |
Exhibit 31.1
I, Steven A. Hale II, certify that:
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I have reviewed this quarterly report on Form 10-Q of HG Holdings, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods in this report. |
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: November 12, 2021 |
By: /s/ Steven A. Hale II |
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Steven A. Hale II |
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Chairman and Chief Executive Officer |
Exhibit 31.2
I, Brad G. Garner, certify that:
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I have reviewed this quarterly report on Form 10-Q of HG Holdings, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods in this report. |
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: November 12, 2021 |
By: /s/ Brad G. Garner |
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Brad G. Garner |
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Principal Financial and Accounting Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the HG Holdings, Inc. (the “Company”) Quarterly Report on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven A. Hale II, Chief Executive Officer of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: November 12, 2021 |
By: /s/ Steven A. Hale II |
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Steven A. Hale II |
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Chairman and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the HG Holdings, Inc. (the “Company”) Quarterly Report on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brad G. Garner, Principal Financial and Accounting Officer of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: November 12, 2021 |
By: /s/ Brad G. Garner |
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Brad G. Garner |
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Principal Financial and Accounting Officer |
Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares |
Sep. 30, 2021 |
Dec. 31, 2020 |
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| Common stock, par value (in dollars per share) | $ 0.02 | $ 0.02 |
| Common stock, shares authorized (in shares) | 35,000,000 | 35,000,000 |
| Common stock, shares issued (in shares) | 2,873,031 | 2,873,031 |
| Common stock, shares outstanding (in shares) | 2,873,031 | 2,873,031 |
Note 1 - Preparation of Interim Unaudited Financial Statements |
9 Months Ended | ||
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Sep. 30, 2021 | |||
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| Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block] |
The consolidated 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 consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in our latest Annual Report on Form 10-K.
All prior period share numbers, stock option numbers, exercise prices and per share data appearing in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the reverse stock split effective July 15, 2021, unless otherwise indicated or unless context suggests otherwise. As previously stated in our proxy statement, the Reverse Split did not affect the par value of our common stock, which remained $0.02 per share of common stock. As a result, upon effectiveness of the Reverse Split, the stated capital on our balance sheet attributable to the common stock was reduced in proportion to the fraction by which the number of shares of common stock was reduced, and the additional paid-in capital account was credited with the amount by which the stated capital was reduced. The per share net income or loss and net book value of our common stock will be increased because there will be fewer shares of our common stock outstanding.
HG Holdings, Inc, together with its consolidated subsidiaries (the “Company”), operates through its wholly owned subsidiaries National Consumer Title Insurance Company (“NCTIC”), National Consumer Title Group, LLC (“NCTG”), Title Agency Ventures, LLC (“TAV”), and Omega National Title Agency, LLC (“Omega”) and through an affiliated investment in HC Government Realty Trust, Inc., a Maryland corporation (“HC Realty”).
Description of the Business
Title Insurance
The Company engages in issuing title insurance through our subsidiary NCTIC and providing title agency services through our subsidiaries NCTG, TAV, and Omega. Through NCTIC, the Company underwrites land title insurance for owners and mortgagees as the primary insurer. The Company currently only provides title insurance services in the state of Florida.
Title insurance protects against loss or damage resulting from title defects that affect real property. When real property is conveyed from one party to another, occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property. If a covered claim is made against real property, title insurance provides indemnification against insured defects. There are two basic types of title insurance policies – one for the mortgage lender and one for the real property owner. A lender often requires the property owner to purchase a lender’s title insurance policy to protect its position as a holder of a mortgage loan, but the lender’s title insurance policy does not protect the property owner. The property owner has to purchase a separate owner’s title insurance policy to protect its investment.
NCTIC issues title insurance policies in Florida through its home office and through a network of affiliated and independent title agents. Issuing agents, in the state of Florida, are independent agents or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations. The ability to attract and retain issuing agents is a key determinant of the Company’s growth in title insurance premiums written.
Revenues for the title insurance segment primarily result from purchases of new and existing residential and commercial real estate, refinance activity and certain other types of mortgage lending such as home equity lines of credit. Title insurance premiums vary from state to state and are subject to extensive regulation. Statutes generally provide that rates must not be excessive, inadequate or unfairly discriminatory. The process of implementing a rate change in most states involves pre-approval by the applicable state insurance regulator.
Volume is a factor in the Company’s title insurance operation’s profitability due to fixed operating costs that are incurred regardless of title insurance premium volume. The resulting operating leverage tends to amplify the impact of changes in volume on profitability. The Company’s title insurance profitability also depends, in part, upon its ability to manage its investment portfolio to maximize investment returns and to minimize risks such as interest rate changes, defaults and impairments of assets.
The Company’s volume of title insurance premiums is affected by the overall level of residential and commercial real estate activity, which includes property sales, mortgage financing and mortgage refinancing. Real estate activity, home sales and mortgage lending are cyclical in nature. Real estate activity is affected by a number of factors, including the availability of mortgage credit, the cost of real estate, consumer confidence, employment and family income levels, and general United States economic conditions. Interest rate volatility is also an important factor in the level of residential and commercial real estate activity.
The Company’s title insurance premiums in future periods are likely to fluctuate due to these and other factors which are beyond management’s control.
Historically, the title insurance business tends to be seasonal as well as cyclical. Because home sales are typically strongest in periods of favorable weather, the first calendar quarter tends to have the lowest activity levels, while the spring and summer quarters tend to be more active. Mortgage refinance activity tends to be influenced less by seasonality and more by economic cycles, with activity levels increasing during times of falling interest rates.
Real Estate Related
The Company engages in rental real estate through our equity investment in HC Realty. HC Realty is an internally-managed REIT formed to grow the business of acquiring, developing, financing, owning and managing build-to-suit or improved-to-suit, single-tenant properties leased primarily to the United States of America and administered by the GSA or directly by the federal government agencies or departments occupying such properties (referred to as “GSA Properties”). HC Realty invest primarily in GSA Properties in sizes that range from 5,000 to 50,000 rentable square feet that are in their first lease term after original construction or renovation-to-suit date. HC Realty further emphasizes GSA Properties that fulfill mission critical or direct citizen service functions. Leases associated with the GSA Properties in which HC Realty invests are full faith and credit obligations of the United States of America. HC Realty intends to grow its portfolio primarily through acquisitions of single-tenanted, federal government-leased properties in such markets; although, at some point in the future HC Realty may elect to develop, or joint venture with others in the development of, competitively bid, built-to-suit, single-tenant, federal government-leased properties, or buy facilities that are leased to credit-worthy state or municipal tenants.
For information about our reportable segments refer to Note 9 Segment Information.
Recent Developments
On July 20, 2021, the Company completed the acquisition (the “Acquisition”) pursuant to that certain Equity Purchase Agreement (the “First Purchase Agreement”) dated April 20, 2021 with NCTIC, a Florida corporation, NCTG, a Florida limited liability company, 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”). On such date, pursuant to the First Purchase Agreement, the Company purchased 100% of the stock of NCTIC and 100% of the membership interest in NCTG for $5.463 million, adjusted for a customary post-closing working capital adjustment (the “Purchase Price”). Pursuant to the mechanics in the First Purchase Agreement, the Purchase Price was determined at closing by taking the $5.5 million purchase price originally agreed to under the First Purchase Agreement, subtracting the debt of NCTIC and NCTG, adding payment for $75,000 of the transaction expenses of the Sellers and, adding a closing related working capital adjustment. The Company funded the Purchase Price from cash on hand. Also at closing, the Company and Sellers agreed that the economic benefits and burdens of the ownership of the equity, including for accounting and tax purposes, be transferred as of 12:01 am on July 1, 2021. For all other purposes, the effective time of the transfer remained July 20, 2021.
Pursuant to the Acquisition, the Company effectively purchased (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 TAV, and by virtue thereof, owns 50% of the membership interest in 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 and commercial real estate transactions.
On September 1, 2021, the Company entered into a Membership Interests Purchase Agreement (the “Second Purchase Agreement”) with TAV and Fidelis US Holdings, Inc., a Delaware corporation (“Second Agreement Seller”). On such date, pursuant to the Second Purchase Agreement and in an immediate sign-and-close transaction, the Company purchased 50% of the membership interests of TAV from Second Agreement Seller (the “Second Acquisition”) for $2.2 million (the “Second Acquisition Purchase Price”).
Combined with the Acquisition by the Company in July 2021 of a 100% membership interest in NCTG, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV, and by virtue thereof, owns all of the membership interests in Omega.
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 $8.3 million. As a result of these purchases, the Company owns approximately 36.4% of the as converted equity interest of HC Realty as of September 30, 2021.
As of September 30, 2021, HC Realty owned and operated a portfolio of 25 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
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 consolidated financial statements. |
Note 2 - Subordinated Notes Receivable |
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| Loans, Notes, Trade and Other Receivables Disclosure [Text Block] |
2. Subordinated Notes Receivable
The Company received a $7.4 million subordinated secured promissory note (the “Original Note”) from Stanley Furniture Company, LLC, formerly known as Churchill Downs, LLC (the “Buyer”) as partial consideration for the sale of substantially all of our assets during the first quarter of 2018 (the “Asset Sale”). On September 6, 2018, the Buyer sold certain of its assets (the “S&L Asset Sale”), including certain inventory and the Stone & Leigh tradename to Stone & Leigh, LLC (“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.
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. No cash interest payments were accrued or received during the three and nine months ending September 30, 2021. Cash interest payments of $84,000 and $250,000 were accrued or received during the three and nine months ending September 30,2020. During the three and nine months ending September 30, 2021, the Company received $0 and $170,000 of principal payments on the S&L Note as compared to $0 and $2,000 for the three and nine months ending September 30, 2020.
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 $28,000 and $104,000 for the three and nine months ending September 30, 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 $0 and $170,000 received in the three and nine months ending September 30, 2021 as reductions of the principal balance of the S&L Note.
As of September 30, 2021, the Company concluded that the S&L would not have adequate cash required to repay the carrying value of the S&L Note. Given the facts and circumstances, the Company recorded an impairment loss of $609,000 in the three months ending September 30, 2021. 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 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 and nine months ending September 30, 2021 is as follows (in thousands):
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Note 3 - Loan to Affiliate |
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| Investments in and Advances to Affiliates, Schedule of Investments [Text Block] |
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 and nine months ending September 30, 2020 was $62,000 and $204,000, respectively. |
Note 4 - Investment in Affiliate |
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| Equity Method Investments and Joint Ventures Disclosure [Text Block] |
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.
The following table summarizes the Company’s investment in HC Realty as of September 30, 2021 and December 31, 2020 (in thousands):
The Company’s investment in HC Realty common stock is accounted for under the equity method of accounting.
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Note 5 - Paycheck Protection Program ("PPP") Loan |
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| Debt Disclosure [Text Block] |
On May 7, 2020, prior to the Company’s acquisitions, ONTA entered into a loan agreement with Wells Fargo, N.A. in the aggregate amount of $544,842 (the “Loan”), pursuant to the PPP under the CARES Act. The Loan was necessary to support ongoing operations due to the economic uncertainty resulting from the COVID-19 pandemic and lack of access to alternative sources of liquidity.
The Loan is scheduled to mature five years from the date on which ONTA applies for loan forgiveness under the CARES Act, bears interest at a rate of 1% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration (“SBA”) under the CARES Act. The PPP provides that the use of the Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. ONTA used all of the PPP proceeds toward qualifying expenses.
On September 16, 2021, ONTA received notice from the SBA that the full amount of the loan was forgiven. The forgiveness of the loan is included as gain on extinguishment of debt on the Consolidated Statements of Operations. |
Note 6 - Reserve for Title Claims |
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| Insurance Disclosure [Text Block] |
NCTIC’s reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy claims that have been incurred but not yet reported (“IBNR”). Despite the variability of such estimates, management believes that the total reserve for claims is adequate to cover claim losses which might result from pending and future claims under title insurance policies issued through September 30, 2021. We continually update loss reserve estimates as new information becomes known, new loss patterns emerge or as other contributing factors are considered and incorporated into the analysis of reserve for claim losses. Due to the uncertainty inherent in the process and to the judgment used by management, the ultimate liability may be greater or less than our current reserves. If actual claims loss development varies from what is currently expected and is not offset by other factors, it is possible that additional reserve adjustments may be required in future periods in order to maintain our recorded reserve within a reasonable range of our actuary's central estimate.
A reconciliation of the activity in the reserves account for the three month period since the Acquisition ending September 30, 2021 is as follows (in thousands):
At September 30, 2021, there were no reinsurance recoverables on paid claims or unpaid reserves.
For the three months ended September 30, 2021, there was no development of the net provision for claims attributable to insured events of the prior year as a result of estimation of the reserve for claims. Original estimates are decreased or increased as additional information becomes known regarding individual claims. |
Note 7 - Reinsurance |
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| Reinsurance [Text Block] |
Certain premiums and benefits at NCTIC are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide NCTIC with increased capacity to write more risk and maintain its exposure to loss within its capital resources. For the three month period ended September 30, 2021, NCTIC's reinsurance program consisted of excess of loss reinsurance treaties. The following is a summary of the reinsurance coverage.
Effective January 1, 2021, NCTIC entered into a per risk excess of loss reinsurance agreement that provides coverage of $650,000 in excess of $350,000 on each and every risk. The contract allows for one full reinstatement at 100% additional premium as to time and pro rata as to amount. The agreement expires December 31, 2021. Effective January 1, 2021, NCTIC entered into a per risk excess of loss reinsurance agreement that provides coverage of $4,000,000 in excess of $1,000,000 on each and every risk. The contract allows for one full reinstatement at 100% additional premium as to time and pro rata as to amount. This per risk agreement is shared with other non-affiliated companies. Each company pays its share of the reinsurance cost based on separate company earned premiums. The agreement expires December 31, 2021.
Effective January 1, 2021, NCTIC entered into a reinstatement premium protection reinsurance agreement to reinsure the reinstatement premium payment obligations of NCTIC under the shared per risk excess of loss agreement. The coverage is limited to 100% of the original contracted reinsurance placement. This agreement is shared with the other nonaffiliated companies. Each company pays its share of the reinsurance cost based on separate company earned premiums. The agreement expires December 31, 2021.
NCTIC’s reinsured risks are treated, to the extent of reinsurance, as though they are risks for which the Company is not liable. However, NCTIC remains contingently liable in the event the reinsuring companies do not meet their obligations under these reinsurance contracts. NCTIC uses a broker to place its reinsurance through Lloyd’s syndicates. Chaucer Ltd (“Chaucer”) and Beazley Syndicate (“Beazley”) are each 50% participants in the Lloyd’s syndicate. As such, NCTIC has a concentration of reinsurance risk with these third party reinsurers that could have a material impact on NCTIC’s financial position in the event that either of these reinsurers fail to perform their obligations under the reinsurance treaty. As of September 30, 2021, both reinsurers had an A-issuer credit rating from AM Best, an AA- from Fitch, and an A+ from S&P. The Company monitors both the financial condition of individual reinsurers and risk concentration arising from similar activities and economic characteristics of reinsurers to attempt to reduce the risk of default by such reinsurers. Given the quality of the reinsurers, management believes this possibility to be remote. See Note 6 for recoveries due from reinsurers relating to paid and unpaid claims under these treaties
The effects of reinsurance on premiums written and earned at NCTIC are as follows:
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Note 8 - Statutory Reporting |
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| Statutory Accounting Practices [Text Block] |
8. Statutory Reporting
NCTIC's assets, liabilities, and results of operations have been reported in accordance with accounting principles generally accepted in the United States of America (GAAP), which varies from statutory accounting practices (SAP) prescribed or permitted by insurance regulatory authorities. Prescribed SAP are found in a variety of publications of the National Association of Insurance Commissioners (NAIC), state laws and regulations, as well as through general practices. The principal differences between SAP and GAAP are that under SAP: (1) certain assets that are not admitted assets are eliminated from the balance sheet, (2) a supplemental reserve for claims is charged directly to unassigned surplus rather than provision for claims under GAAP, and (3) differences may arise in the computation of deferred income taxes. The Company must file with applicable state insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and stockholders' equity (called “surplus as regards policyholders” in statutory reporting).
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Note 9 - Segment Information |
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| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting Disclosure [Text Block] |
The Company has reportable segments, title insurance services and real estate. The remaining immaterial segments have been combined into a group called “Corporate and Other.” The title insurance segment issues title insurance policies, which insures titles to real estate, and provides title agency services for residential and commercial real estate transactions. The real estate segment, through an affiliate investment in HC Realty, owns and operates a portfolio of single-tenant properties leased entirely to the United States of America for occupancy by federal agencies.
Provided below is selected financial information about the Company’s operations by segment for the three months ending September 30, 2021 (in thousands):
Provided below is selected financial information about the Company’s operations by segment for the three months ending September 30, 2020 (in thousands):
Provided below is selected financial information about the Company’s operations by segment for the nine months ending September 30, 2021 (in thousands):
Provided below is selected financial information about the Company’s operations by segment for the nine months ending September 30, 2020 (in thousands):
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Note 10 - Income Taxes |
9 Months Ended |
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Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Income Tax Disclosure [Text Block] |
10. Income taxes
During the nine months ended September 30, 2021, the Company recorded a non-cash credit to its valuation allowance of $224,000 increasing its valuation allowance against deferred tax assets to $8.5 million as of September 30, 2021. The primary assets covered by this valuation allowance are net operating losses, which are approximately $36.0 million at September 30, 2021. The Company did make any cash payments for income tax in the three and nine month periods ended September 30, 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 September 30, 2021, the Company has no deferred tax assets not covered by a valuation allowance. During the nine months ended September 30, 2021, the Company received the income tax refund resulting from the Alternative Minimum Tax (“AMT”) credit.
The Company’s effective tax rate for the current and prior year three and nine month periods were effectively 0% due to the change in the valuation allowance. |
Note 11 - Stockholders' Equity |
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| Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Equity Note Disclosure [Text Block] |
11. 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):
For the three and nine month periods ended September 30, 2021, approximately 35,000 stock awards were included in the diluted per share calculation as they are dilutive. For the three month period ended September 30, 2020, the dilutive effect of stock options and restricted awards was not recognized since we had a net loss. For the nine month period ended September 30, 2020, approximately 35,000 stock awards were included in the diluted per share calculation as they are 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 year three and nine 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.
On the close of business on July 15, 2021, the Company effectuated a 1-for-12 reverse stock split of its outstanding shares of Common Stock, par value $0.02 per share (the “Common Stock”) such that every holder of Common Stock receives one share of Common Stock for every twelve shares of Common Stock held (the “Reverse Stock Split”). The amendment to the Company’s Restated Certificate of Incorporation approved by the Company’s stockholders was effective as of such record date.
No fractional shares of common stock were issued as a result of the Reverse Stock Split. Instead, in lieu of any fractional shares to which a stockholder of record would otherwise be entitled as a result of the Reverse Stock Split, the Company paid cash (without interest) equal to such fractional share multiplied by $0.70 which was the 90-day Volume Weighted Average Price (“VWAP”) of our common stock on the OTCQB for the period immediately preceding the Effective Time (with such average closing sales prices being adjusted to give effect to the Reverse Stock Split). After the Reverse Stock Split, a stockholder otherwise entitled to a fractional interest will not have any voting, dividend or other rights with respect to such fractional interest except to receive payment as described above. Stockholders owning fractional shares were paid out in cash for such fractional shares.
A reconciliation of the activity in Stockholders’ Equity accounts for the three and nine months ended September 30, 2021 is as follows (in thousands):
A reconciliation of the activity in Stockholders’ Equity accounts for the three and nine months ended September 30, 2020 is as follows (in thousands):
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Note 12 - Revenue From Contracts With Customers |
9 Months Ended |
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Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Revenue from Contract with Customer [Text Block] |
12. Revenue from Contracts with Customers
ASC 606, Revenue from Contracts with Customers requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance does not apply to revenue associated with insurance contracts (including title insurance policies), financial instruments and lease contracts; and therefore is primarily applicable to the following Company revenue categories.
Escrow and other title-related fees – The Company’s title insurance segment recognizes commission revenue and fees related to items such as searches, settlements, commitments and other ancillary services. Escrow and other title-related fees are recognized as revenue at the time of the related transactions as the earnings process, or performance obligation, is then considered to be complete.
Non-title services –All non-title service fees, such as management fees, are recognized as revenue as performance obligations are completed. |
Note 13 - Business Combinations |
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| Business Combination Disclosure [Text Block] |
13. Business Combinations
On July 20, 2021, the Company completed the Acquisition of NCTIC and NCTG by purchasing 100% of the stock of NCTIC and 100% of the membership interest in NCTG for the Purchase Price. NCTG owns a 50% non-controlling membership interest in TAV, and by virtue thereof, owns 50% of the membership interest in Omega. The 50% non-controlling membership interest in TAV was accounted for under the equity method of accounting.
The purchase price allocation for NCTIC and NCTG is as follows (in thousands):
A bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree is less than the fair value of the identifiable net assets acquired. The bargain purchase gain was primarily driven by differences in NCTIC’s statutory surplus and GAAP surplus at the date of acquisition. The Company believes that the Sellers wanted to exit the business relatively quickly and there were a limited number of potential buyers due to factors inherent to the property and casualty market, which resulted in a bargain purchase gain. The bargain purchase gain is recorded in other income on the Consolidated Statement of Operations.
On September 1, 2021, the Company acquired the remaining 50% membership interests of TAV for $2.2 million. This acquisition, combined with the July 2021 Acquisition of a 100% membership interest in NCTG, which owns a 50% membership interest in TAV, the Company now is the sole owner of TAV.
The operating results of TAV are included in the Company’s unaudited consolidated statements of operations beginning September 1, 2021. TAV’s results are included in the title insurance segment.
The final purchase price allocation for TAV at fair value is as follows (in thousands):
The acquisition date fair value of the Company’s previously held equity interest in TAV was $3.6 million with a fair value primarily estimated through an income approach valuation. The Company recorded a gain of $3.3 million on the fair value remeasurement of our previously held equity interest in TAV on the unaudited consolidated statements of operations for the three and nine months ended September 30, 2021.
The acquisition of the remaining equity interest was accounted for as a step-transaction in accordance with FASB Accounting Standards Codification Topic 805, Business Combinations ("Topic 805"). The Second Purchase Price has been allocated to TAV's assets acquired and liabilities assumed based on our best estimates of the fair values as of the acquisition date. Due to the close proximity in timing of the Second Acquisition and our filing of this Quarterly Report on Form 10-Q, the fair value of assets acquired and liabilities assumed represent a preliminary allocation as our evaluation of facts and circumstances available as of September 30, 2021 is ongoing. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. Goodwill consists primarily of intangible assets that do not qualify for separate recognition.
Pursuant to Topic 805, the financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional adjustments as we obtain information not available as of the completion of this preliminary fair value calculation as determined within the measurement period. We will also be required to record, in the same period as the financial statements, the effects to any income statement captions, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
The following table presents unaudited pro forma financial information as if NCTIC, NCTG, and TAV had been included in the Company’s financial results as of January 1, 2021, through the date of acquisition:
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Note 14 - Goodwill |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Goodwill Disclosure [Text Block] |
14. Goodwill
As of September 30, 2021, the Company recognized $4.5 million in goodwill as the result of the acquisition of 50% of TAV on September 1, 2021. The fair value of goodwill as of the date of acquisition, a Level 3 input, was principally based on values obtained from public and private market comps. In accordance with ASC 350, management determined that no events or changes in circumstances occurred during the three months ending September 30, 2021 that would indicate the carrying amounts may not be recoverable, and therefore determined that there were no goodwill impairments. |
Note 15 - Uncertainties |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Uncertainties [Text Block] |
15. 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. S&L, 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 S&L’s products. Therefore, uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon the future results of operations of S&L and its corresponding impact to the collectability of the S&L Note.
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 COVID-19 pandemic caused the Company’s title operations at NCTIC and Omega 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 on 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 on the title operations.
The Company continues to evaluate the impact of these measures on our operational and financial performance, specifically the impact on S&L, HC Realty, and NCTIC and Omega’s operations. During the third quarter 2021, the Company did not receive its contractual payments on the S&L Note largely as a result of the impacts that COVID-19 had to its operations and its customers. Management used these facts in our analysis of the impairment of the S&L note during the period ended September 30, 2021.
As of September 30, 2021, the Company has not experienced any adverse impacts to the payment of HC Realty’s common and Series B Stock dividends. |
Significant Accounting Policies (Policies) |
9 Months Ended |
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Sep. 30, 2021 | |
| Accounting Policies [Abstract] | |
| New Accounting Pronouncements, Policy [Policy Text Block] | 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 consolidated financial statements. |
Note 2 - Subordinated Notes Receivable (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block] |
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Note 4 - Investment in Affiliate (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Method Investments [Table Text Block] |
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Note 6 - Reserve for Title Claims (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Liability for Unpaid Claims and Claims Adjustment Expense [Table Text Block] |
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Note 7 - Reinsurance (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of Reinsurance [Table Text Block] |
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Note 9 - Segment Information (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Segment Reporting Information, by Segment [Table Text Block] |
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Note 11 - Stockholders' Equity (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] |
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| Schedule of Stockholders Equity [Table Text Block] |
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Note 13 - Business Combinations (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Business Acquisitions, by Acquisition [Table Text Block] |
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| Schedule of Recognized Identified Assets Acquired and Liabilities Assumed [Table Text Block] |
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| Business Acquisition, Pro Forma Information [Table Text Block] |
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Note 2 - Subordinated Notes Receivable - Reconciliation of the Activity (Details) - Second A&R Note [Member] - USD ($) $ in Thousands |
3 Months Ended | ||
|---|---|---|---|
Sep. 30, 2021 |
Jun. 30, 2021 |
Mar. 31, 2021 |
|
| Principal | $ 3,101 | $ 3,164 | $ 3,271 |
| Discount, balance | (1,388) | (1,388) | (1,388) |
| Balance | 1,713 | 1,776 | 1,883 |
| Accretion of discount, discount | 0 | 0 | 0 |
| Accretion of discount | 0 | 0 | 0 |
| Principal payments, principal | 0 | (63) | (107) |
| Principal payments | 0 | 63 | (107) |
| Principal payments | 0 | (63) | 107 |
| Impairment loss | (609) | ||
| Principal | 3,101 | 3,101 | 3,164 |
| Discount, balance | (1,997) | (1,388) | (1,388) |
| Balance | $ 1,104 | $ 1,713 | $ 1,776 |
Note 3 - Loan to Affiliate (Details Textual) - Senior Secured Term Loan [Member] - USD ($) |
3 Months Ended | 9 Months Ended | |
|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2020 |
Mar. 19, 2019 |
|
| Notes Receivable, Related Parties | $ 2,000,000 | ||
| Interest Income, Related Party | $ 62,000 | $ 204,000 | |
| The Lenders [Member] | |||
| Notes Receivable, Related Parties | $ 10,500,000 |
Note 4 - Investment in Affiliate (Details Textual) - HC Government Realty Trust, Inc [Member] - Series B Cumulative Convertible Preferred Stock [Member] - USD ($) $ / shares in Units, $ in Thousands |
Mar. 19, 2019 |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|---|
| Preferred Stock, Dividend Rate, Percentage | 10.00% | ||
| Equity Method Investment, Aggregate Cost | $ 10,250 | $ 10,250 | |
| Convertible Preferred Stock of Investee, Shares Issued Upon Conversion (in shares) | 1 | 1 | |
| Convertible Preferred Stock, Maximum Conversion Price (in dollars per share) | $ 9.10 | $ 9.10 |
Note 4 - Investment in Affiliate - Equity Method Investments (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Dec. 31, 2020 |
|||||
| Investment in affiliate, balance | $ 11,673 | $ 11,673 | $ 12,072 | ||||||
| Loss recorded in the Consolidated Statements of Operations | $ 26 | $ (124) | $ (199) | $ (301) | |||||
| HC Government Realty Trust, Inc [Member] | |||||||||
| Ownership percentage | 34.10% | 34.10% | 36.40% | ||||||
| Investment in affiliate, balance | $ 11,673 | $ 11,673 | $ 12,072 | ||||||
| Loss recorded in the Consolidated Statements of Operations | [1] | $ (50) | (124) | $ (275) | (301) | ||||
| HC Government Realty Trust, Inc [Member] | Series B Cumulative Convertible Preferred Stock [Member] | |||||||||
| Ownership percentage | [2] | 26.90% | 26.90% | 28.70% | |||||
| Investment in affiliate, balance | [2] | $ 10,250 | $ 10,250 | $ 10,250 | |||||
| Loss recorded in the Consolidated Statements of Operations | [1],[2] | $ 0 | 0 | $ 0 | 0 | ||||
| HC Government Realty Trust, Inc [Member] | Common Stock of Investee [Member] | |||||||||
| Ownership percentage | 7.20% | 7.20% | 7.70% | ||||||
| Investment in affiliate, balance | $ 1,423 | $ 1,423 | $ 1,822 | ||||||
| Loss recorded in the Consolidated Statements of Operations | [1] | $ (50) | $ (124) | $ (275) | $ (301) | ||||
| |||||||||
Note 5 - Paycheck Protection Program ("PPP") Loan (Details Textual) - Paycheck Protection Program Loan [Member] - USD ($) |
Sep. 16, 2021 |
May 07, 2020 |
|---|---|---|
| Proceeds from Issuance of Debt | $ 544,842 | |
| Debt Instrument, Decrease, Forgiveness | $ 544,842 |
Note 6 - Reserve for Title Claims (Details Textual) $ in Thousands |
3 Months Ended |
|---|---|
|
Sep. 30, 2021
USD ($)
| |
| Reinsurance Recoverables, Including Reinsurance Premium Paid, Ending Balance | $ 0 |
| Reinsurance Net Provision Development | $ 0 |
Note 6 - Reserve for Title Claims - Reconciliation of Reserves Account Activity (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Beginning Reserves | $ 209 | |||
| Current year | 22 | |||
| Prior years | 0 | |||
| Total provision for claim losses | 22 | $ 0 | $ 22 | $ 0 |
| Current year | 0 | |||
| Prior years | 0 | |||
| Total title claims paid | 0 | |||
| Ending Reserves | $ 231 | $ 231 | ||
Note 7 - Reinsurance - Reinsurance Premiums Written and Earned (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Net premiums, written | $ 631 | $ 0 | $ 631 | $ 0 |
| National Consumer Title Insurance Company (NCTIC) [Member] | ||||
| Direct premiums, written | 340 | |||
| Direct premiums, earned | 340 | |||
| Ceded premiums, written | (41) | |||
| Ceded premiums, earned | (41) | |||
| Net premiums, written | $ 299 | |||
| Net premiums, earned | $ 299 | |||
Note 9 - Segment Information (Details Textual) |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Number of Reportable Segments | 2 |
Note 9 - Segment Information - Operations By Segement (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Dec. 31, 2020 |
|
| Insurance and other services revenue | $ 984 | $ 0 | $ 984 | $ 0 | |
| Cost of revenues | (288) | 0 | (288) | 0 | |
| Gross profit | 696 | 0 | 696 | 0 | |
| Operating expenses | (983) | (227) | (1,580) | (1,100) | |
| Other income and expenses | 3,568 | (219) | 3,868 | 1,532 | |
| Income (loss) before income taxes | 3,281 | (446) | 2,984 | 432 | |
| Total assets | 36,974 | 27,432 | 36,974 | 27,432 | $ 27,026 |
| The Title Insurance Segment [Member] | |||||
| Insurance and other services revenue | 984 | 0 | 984 | 0 | |
| Cost of revenues | (288) | 0 | (288) | 0 | |
| Gross profit | 696 | 0 | 696 | 0 | |
| Operating expenses | (670) | 0 | (670) | 0 | |
| Other income and expenses | 3,970 | 0 | 3,970 | 0 | |
| Income (loss) before income taxes | 3,996 | 0 | 3,996 | 0 | |
| Total assets | 18,494 | 0 | 18,494 | 0 | |
| Real Estate Segment [Member] | |||||
| Insurance and other services revenue | 0 | 0 | 0 | 0 | |
| Cost of revenues | 0 | 0 | 0 | 0 | |
| Gross profit | 0 | 0 | 0 | 0 | |
| Operating expenses | 0 | 0 | 0 | 0 | |
| Other income and expenses | 206 | 194 | 494 | 330 | |
| Income (loss) before income taxes | 206 | 194 | 494 | 330 | |
| Total assets | 11,673 | 12,231 | 11,673 | 12,231 | |
| Corporate and Other [Member] | |||||
| Insurance and other services revenue | 0 | 0 | 0 | 0 | |
| Cost of revenues | 0 | 0 | 0 | 0 | |
| Gross profit | 0 | 0 | 0 | 0 | |
| Operating expenses | (313) | (227) | (910) | (1,100) | |
| Other income and expenses | (608) | (413) | (596) | 1,202 | |
| Income (loss) before income taxes | (921) | (640) | (1,506) | 102 | |
| Total assets | $ 6,807 | $ 15,201 | $ 6,807 | $ 15,201 | |
Note 10 - Income Taxes (Details Textual) - USD ($) Pure in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount | $ 224,000 | |||
| Deferred Tax Assets, Valuation Allowance, Total | $ 8,500,000 | 8,500,000 | ||
| Operating Loss Carryforwards, Total | 36,000,000.0 | 36,000,000.0 | ||
| Income Taxes Paid, Net, Total | 0 | $ 0 | 0 | $ 0 |
| Deferred Tax Assets, Net of Valuation Allowance, Total | $ 0 | $ 0 | ||
| Effective Income Tax Rate Reconciliation, Percent, Total | 0.00% | 0.00% | 0.00% | 0.00% |
Note 11 - Stockholders' Equity (Details Textual) |
3 Months Ended | 9 Months Ended | |||||
|---|---|---|---|---|---|---|---|
|
Jul. 15, 2021
$ / shares
shares
|
Jun. 19, 2020
$ / shares
shares
|
Sep. 30, 2021
$ / shares
shares
|
Sep. 30, 2020
shares
|
Sep. 30, 2021
$ / shares
shares
|
Sep. 30, 2020
shares
|
Dec. 31, 2020
$ / shares
|
|
| Incremental Common Shares Attributable to Share-based Payment Arrangements, Total (in shares) | 35,000 | 0 | 35,000 | 35,000 | |||
| Common Stock, Par or Stated Value Per Share (in dollars per share) | $ / shares | $ 0.02 | $ 0.02 | $ 0.02 | $ 0.02 | |||
| Stock Issued During Period, Fractional Shares, Stock Splits (in shares) | 0 | ||||||
| Reverse Stock Split, Fractional Shares, Cash, Multiplier | 0.70 | ||||||
| Reverse Stock Split [Member] | |||||||
| Stockholders' Equity Note, Stock Split, Conversion Ratio | 12 | ||||||
| Rights Offering [Member] | |||||||
| Stock Issued During Period, Shares, New Issues (in shares) | 19,500,000 | ||||||
| Shares Issued, Price Per Share (in dollars per share) | $ / shares | $ 0.65 | ||||||
| Restricted Stock [Member] | |||||||
| Stock Repurchased During Period, Shares (in shares) | 0 | 0 | 0 | 0 | |||
Note 11 - Stockholders' Equity - Basic and Diluted Earnings Per Share Calculation (Details) - shares |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Weighted average shares outstanding for basic calculation (in shares) | 2,838,000 | 2,836,000 | 2,838,000 | 1,860,000 |
| Add: Effect of dilutive stock awards (in shares) | 35,000 | 0 | 35,000 | 35,000 |
| Weighted average shares outstanding, adjusted for diluted calculation (in shares) | 2,873,000 | 2,836,000 | 2,873,000 | 1,895,000 |
Note 11 - Stockholders' Equity - Reconciliation of Activity in Stockholders' Equity Accounts (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 |
Jun. 30, 2021 |
Mar. 31, 2021 |
Sep. 30, 2020 |
Jun. 30, 2020 |
Mar. 31, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Balance | $ 26,720 | $ 26,720 | ||||||
| Net income (loss) | $ 3,281 | $ (446) | 2,984 | $ 432 | ||||
| Balance | 29,766 | 29,766 | ||||||
| Common Stock [Member] | ||||||||
| Balance | 684 | $ 684 | 684 | 684 | $ 294 | $ 294 | 684 | 294 |
| Net income (loss) | 0 | 0 | 0 | 0 | 0 | 0 | ||
| Stock-based compensation expense | 0 | 0 | 0 | 0 | 0 | 0 | ||
| Effect of reverse stock split | (630) | |||||||
| Redemption of fractional shares | 0 | |||||||
| Issuance of common stock | 390 | |||||||
| Balance | 54 | 684 | 684 | 684 | 684 | 294 | 54 | 684 |
| Additional Paid-in Capital [Member] | ||||||||
| Balance | 29,780 | 29,759 | 29,738 | 29,696 | 17,391 | 17,370 | 29,738 | 17,370 |
| Net income (loss) | 0 | 0 | 0 | 0 | 0 | 0 | ||
| Stock-based compensation expense | 22 | 21 | 21 | 21 | 20 | 21 | ||
| Effect of reverse stock split | 630 | |||||||
| Redemption of fractional shares | (2) | |||||||
| Issuance of common stock | 12,285 | |||||||
| Balance | 30,430 | 29,780 | 29,759 | 29,717 | 29,696 | 17,391 | 30,430 | 29,717 |
| Retained Earnings [Member] | ||||||||
| Balance | (3,999) | (3,890) | (3,702) | (2,886) | (2,711) | (3,765) | (3,702) | (3,765) |
| Net income (loss) | 3,281 | (109) | (188) | (446) | (175) | 1,054 | ||
| Stock-based compensation expense | 0 | 0 | 0 | 0 | 0 | 0 | ||
| Effect of reverse stock split | 0 | |||||||
| Redemption of fractional shares | 0 | |||||||
| Issuance of common stock | 0 | |||||||
| Balance | $ (718) | $ (3,999) | $ (3,890) | $ (3,332) | $ (2,886) | $ (2,711) | $ (718) | $ (3,332) |
Note 13 - Business Combination - Purchase Price Allocation (Details) $ in Thousands |
Jul. 20, 2021
USD ($)
|
|---|---|
| Consideration paid | $ 5,463 |
| National Consumer Title Insurance Company (NCTIC) [Member] | |
| Consideration paid | 4,453 |
| National Consumer Title Group LLC (NCTG) [Member] | |
| Consideration paid | $ 1,010 |
Note 13 - Business Combination - Assets Acquired and Liabilities Assumed (Details) (Parentheticals) |
Sep. 01, 2021 |
|---|---|
| Title Agency Ventures, LLC (TAV) [Member] | |
| Voting interests acquired | 50.00% |
Note 13 - Business Combination - Pro Forma Financial Information (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 |
[1] | Sep. 30, 2020 |
Sep. 30, 2021 |
[1] | Sep. 30, 2020 |
|||
| Revenues | $ 1,874 | $ 2,127 | $ 6,670 | $ 5,258 | ||||
| Net income | $ 183 | $ 445 | $ 1,170 | $ 523 | ||||
| ||||||||
Note 14 - Goodwill (Details Textual) - USD ($) $ in Thousands |
1 Months Ended | ||
|---|---|---|---|
Sep. 30, 2021 |
Sep. 01, 2021 |
Dec. 31, 2020 |
|
| Goodwill, Ending Balance | $ 4,451 | $ 0 | |
| Goodwill, Impairment Loss | 0 | ||
| Title Agency Ventures, LLC (TAV) [Member] | |||
| Goodwill, Ending Balance | $ 4,500 | $ 4,451 | |
| Business Acquisition, Percentage of Voting Interests Acquired | 50.00% |
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