Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this Annual Report on Form 10-K, including our financial statements and related notes included elsewhere in this Annual Report on Form 10-K, before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition, results of operations or prospects could be materially and adversely affected. This could cause the trading price of our common stock to decline and a loss of all or part of your investment.
Risks Related to the Company
We have limited operating history in the title insurance and title agency businesses.
Since the Asset Sale on March 2, 2018, we completed the acquisitions of NCTIC, through which we provide title insurance, and NCTG, TAV, ONTA, ONF and ONP, through which we provide title agency services. We have limited operating history in the title insurance and title agency lines of business. Accordingly, our future success may in part be subject to the risks, expenses, uncertainties and delays inherent in establishing a footprint in this line of business and our ultimate success in the title insurance and title agency business cannot be assured.
Additionally, we may seek to acquire other assets in the title insurance and title agency businesses. If we are not successful in identifying, acquiring and operating such assets, our results of operations and cash flows may be adversely affected and our stock price may decline.
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 (as described below) 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. In general, an ownership change would occur if the percentage of our common stock held by one or more 5% shareholders increases by more than 50% over the lowest percentage of our common stock owned by such shareholder during a three-year test period.
Resources may be expended in researching potential acquisitions that might not be consummated.
The investigation of additional businesses or 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. 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, as amended (the “1940 Act”).
Under Section 3(a)(l) of the 1940 Act, an issuer is deemed to be an investment company if it is engaged in or proposes to engage 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 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.
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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 set forth in Rule 3a-1 under the 1940 Act, which provides a safe harbor from investment company registration for an issuer if no more than 45% of the value of its total assets consists of, and no more than 45% of its net income after taxes is derived from, securities, other than, among other limited types of securities, those issued by companies which are controlled primarily by such issuer. We acquired an equity interest in HC Realty on March 19, 2019. On April 3, 2020, April 29, 2020, and June 29, 2020, we purchased an aggregate of 825,000 additional shares of HC Series B Stock for an aggregate purchase price of $8.25 million. As a result of these purchases, we now own approximately 28.0% of the voting interest in HC Realty. We believe that these additional purchases allow us to rely on the safe harbor from investment company registration set forth in Rule 3a-1 of the 1940 Act because we own (i) at least 25% of the voting securities of HC Realty, 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 Series B Stock so that we primarily control HC Realty within the meaning of Rule 3a-1 of the 1940 Act.
We have not sought or obtained an exemptive order, no-action letter or any other assurances from the SEC or its staff regarding our ability to rely on 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.
Cybersecurity risks and cyber incidents may adversely affect our business in the event we or any other party that provides us with essential services experiences cyber incidents.
We and any other party that provides us with services essential to our operations (including, but not limited to, our title insurance and title agency subsidiaries) are vulnerable to service interruptions or damages from any number of sources, including computer viruses, malware, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption.
The risk of a security breach or disruption, particularly through cyberattacks or cyber intrusions, including by computer hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased, and will likely continue to increase in the future. Such threats are prevalent and continue to rise, are increasingly difficult to detect, and come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” organized criminal threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors. Some actors now engage and are expected to continue to engage in cyberattacks, including, without limitation, nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third-party service providers upon which we may rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyberattacks.
The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our stockholder relationships. As we and the parties that provide essential services to us increase our and their reliance on technology, the risks posed to the information systems of such persons have also increased. We have implemented processes, procedures and internal controls to help mitigate cyber incidents, but these measures do not guarantee that a cyber-incident will not occur or that attempted security breaches or disruptions would not be successful or damaging. A cyber incident could materially adversely impact our business, financial condition, results of operations, cash flows, or our ability to satisfy our debt service obligations. There also may be liability for any stolen assets or misappropriated Company funds or confidential information. Any material adverse effect experienced by us or other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.
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We may use artificial intelligence in our business and we are subject to risks related to such use.
We may use artificial intelligence in our business or incorporate artificial intelligence into our products and services. The artificial intelligence we may use may not operate properly or as expected, which could cause our title insurance subsidiaries to write policies they may not have otherwise written, misprice policies, assume greater risks, or overpay customer claims, among other potential negative impacts on our business and operations. Our existing competitors, new entrants, technology companies or other third parties may leverage artificial intelligence to the benefit of their business or operations or may incorporate artificial intelligence into their products and services more quickly or successfully than we do, which could make us less competitive and negatively impact our results of operations. In addition, if the content, analyses, output or recommendations produced by or with the assistance of artificial intelligence are unintentionally, or are alleged to be, deficient, inaccurate or misleading, our business, financial condition and results of operations may be adversely impacted.
We hold our cash and restricted cash in depository accounts that could be adversely affected if the financial institutions holding such deposits fail.
In 2023, certain specialized banking institutions with elevated concentrations of uninsured deposits experienced large deposit outflows coupled with insufficient liquidity to meet withdrawal demands, resulting in the institutions being placed into Federal Deposit Insurance Corporation (“FDIC”) receiverships. We maintain our cash and restricted cash at insured financial institutions. The account balances at each institution periodically substantially exceed the FDIC insurance coverage of $250,000, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. If a bank in which we hold funds fails or is subject to adverse conditions in the financial or credit markets, we may be subject to a risk of loss or delay in accessing all or a portion of our funds exceeding the FDIC insurance coverage, which could adversely impact our short-term liquidity, ability to operate our business, and financial performance. To date, we have not experienced any material loss as a result of the failure of any financial institution in which we hold cash or restricted cash in depository accounts.
Catastrophic events, including, but not limited to, natural events and the outbreak of diseases, along with geopolitical concerns and changes to trade policy, could have a material adverse impact on our financial performance and results of operations.
A significant natural disaster, such as a hurricane, tropical storm, tornado, windstorm, earthquake, hail, and other catastrophic events, including the occurrence of a contagious disease or illness, such as COVID-19 or any other future epidemics or pandemics, could have a material adverse impact on our business, results of operations, and financial condition. In addition, climate change could result in an increase in the frequency or severity of natural disasters. Given the unpredictable nature of these events with respect to size, severity, duration and geographic location, it is not currently possible to quantify the ultimate impact that they may have on our business. Additionally, geopolitical concerns (including the ongoing conflicts between Russia and Ukraine and Israel and Hamas), the imposition of tariffs and other changes to trade policy in the U.S. and other jurisdictions, and terrorist attacks could result in increased volatility in, or damage to, real estate prices and the United States and the worldwide financial markets and economy more generally, including with respect to supply chain disruptions, labor market interruptions and government interventions, all of which could have a material adverse effect on our results of operations and financial condition.
Our common stockis traded on the OTCQBand there may belimitedability 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 national 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 shares of common stock were traded on other markets.
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We have recorded goodwill as a result of prior acquisitions, and an economic or business downturn could cause these balances to become impaired, requiring write-downs that would reduce our operating income.
Goodwill aggregated approximately $6.5 million, or approximately 15% of our total assets as of
December 31, 2024. Current accounting rules require that goodwill be assessed for impairment at least annually or whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. Factors that may be considered a change in circumstance indicating the carrying value of our goodwill may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends. As of
December 31, 2024, management has deemed there is no impairment of our recorded goodwill. However, if there is an economic downturn in the future, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record an impairment charge, which would have a negative impact on our results of operations and financial condition. Management will continue to monitor our operating results, our market capitalization, and the impact of the economy to determine if there is an impairment of goodwill in future periods.
Risks Related to our Title Insurance and Title Agency Businesses
Conditions in the real estate market generally impact the demand for a substantial portion of our title insurance and title agency subsidiaries’ products and services and NCTIC’s title claims experience.
Demand for a substantial portion of our title insurance and title agency subsidiaries’ products and services generally decreases as real estate activity, such as sales, mortgage financing and mortgage refinancing, decreases. We have found that real estate activity and, as a result, the demand for our title insurance and title agency subsidiaries’ products and services, generally decreases in the following situations:
● When mortgage interest rates are high or rising;
● When real estate affordability is declining.
National inventory levels for residential real estate have declined over the past several years and remain below historical average levels. The number of residential purchase transactions has also declined, particularly as a result of decreased demand due to increased mortgage interest rates beginning in 2022. Residential refinance activity is also strongly correlated with changes in mortgage interest rates, and rising mortgage interest rates during previous years have, expectedly, had an adverse impact on our refinance business, which is expected to continue for so long as mortgage interest rates remain high relative to the interest rates of outstanding mortgages. Higher interest rates have also negatively impacted the volume of commercial transactions since 2022.
Additionally, these market conditions and the increase in foreclosures that often results therefrom, may adversely impact NCTIC’s title claims experience. Historically, increasing foreclosure activity has led to an increase in title claims.
Unfavorable economic conditions may adversely affect our title insurance and title agency subsidiaries' businesses.
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 our title insurance and title agency subsidiaries’ core title and settlement businesses.
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The demand for our title insurance and title agency services is dependent primarily on the volume of residential and commercial real estate transactions. The volume of these transactions historically has been influenced by such factors as mortgage interest rates, inventory, affordability, availability of financing and the overall state of the economy. Mortgage rates remained very high after emergency actions taken by the Federal Reserve to substantially increase its benchmark interest rate in an attempt to control inflation during 2022 and 2023. In the last four months of 2024, the Federal Reserve lowered the federal funds rate three times to a current range of 4.25% to 4.50%, and while there are expectations that the Federal Reserve will continue lowering the federal funds rate in 2025, these expectations may not materialize and the Federal Reserve may increase rates in the future in an effort to combat inflation. While the latest and potential future Federal Reserve rate decreases may positively impact the title insurance market, mortgage rates continue to remain relatively high and will likely continue to contribute to decreased real estate activity in the upcoming year. Should the Federal Reserve decide to raise rates in the future, this will result in further increases in market interest rates and continued low volume of real estate activity. In a rising interest rate environment, any leverage that we incur may bear a higher interest rate than may currently be available. There may not, however, be a corresponding increase in our revenues. Further, when interest rates are increasing or when the economy is experiencing a downturn, real estate activity declines. As a result, the title insurance and title agency industry tends to experience decreased revenues and earnings, and potentially increased title claims experience. Additionally, any increase in inflation could have an adverse impact on our general and administrative expenses, as these costs could increase at a rate higher than our revenue.
Additionally, the current U.S. presidential administration has imposed or sought to impose new or increased tariffs on goods imported into the U.S. The imposition of new or increased tariffs may contribute to increased volatility and uncertainty in the economy and financial markets and adversely affect the volume of residential and commercial real estate transactions and the demand for our title insurance and title agency services.
Unfavorable economic 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.
Our revenues and results of operations have been and may in the future be adversely affected by a decline in real estate prices, real estate activity and the availability of financing alternatives. Deterioration in the macroeconomic environment generally causes weakness or adverse changes in the level of real estate activity, which could have a material adverse effect on our consolidated financial condition or results of operations. Also, we may not be able to accurately predict the effects of periods or expectations of high or rapidly rising inflation rates, and governmental responses thereto, and may not respond in a timely or adequate manner to mitigate the negative effects of such inflation, such as decreases in the demand for our products and services and higher labor and other expenses. Depending upon the ultimate severity and duration of any economic downturn, the resulting effects on our title insurance and title agency subsidiaries’ businesses could be materially adverse, including a significant reduction in revenues, earnings and cash flows, deterioration in the value of or return on their investments and increased credit risk from customers and others with obligations to our title insurance and title agency subsidiaries.
Changes in our relationships with large mortgage lenders or government–sponsored enterprises could adversely affect our business.
Large mortgage lenders and government-sponsored enterprises, because of their significant role in the mortgage process, have significant influence over our title insurance and title agency subsidiaries and other service providers. Changes in our relationship with any of these lenders or government-sponsored enterprises, the loss of all or a portion of the business we derive from these parties, any refusal of these parties to accept our 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 our products and services, could have a material adverse effect on our business.
A downgrade by ratings agencies, reductions in statutory capital and surplus maintained by NCTIC, our title insurance underwriter, or a deterioration in other measures of financial strength could adversely affect our business.
The financial strength of NCTIC may be measured by ratings provided by ratings agencies. Demotech, Inc. currently rates NCTIC’s operations. NCTIC’s financial strength ratings are “Exceptional” or “A” by Demotech, Inc. This rating provides the ratings agency’s perspective on NCTIC’s financial strength, operating performance and cash generating ability. The ratings agency will continually review these ratings and the ratings are subject to change. If NCTIC’s ratings are downgraded from current levels by Demotech, Inc. or any other ratings agencies, NCTIC’s ability to retain existing customers and develop new customer relationships may be negatively impacted, which could result in a material adverse impact on our consolidated financial condition or results of operations.
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Statutory capital and surplus, or the amount by which statutory assets exceed statutory liabilities, is also a measure of financial strength of an insurance company. Accordingly, if the statutory capital and surplus of NCTIC is reduced from the current level, or if there is a deterioration in other measures of financial strength, NCTIC’s results of operations, competitive position and liquidity could be adversely affected.
The issuance of title insurance policies and related activities by title agents, some of which operate with substantial independence from us, could adversely affect our business.
Our title insurance subsidiaries issue a significant portion of their policies through title agents, some that may operate largely independent of us. There is no guarantee that these title agents will fulfill their contractual obligations to our title insurance subsidiaries, which contracts include limitations that are designed to limit our title insurance subsidiaries’ risk with respect to the title agents’ activities. In addition, regulators are increasingly seeking to hold companies such as our title insurance subsidiaries responsible for the actions of these title agents and, under certain circumstances, our title insurance subsidiaries may be held liable directly to third parties for actions (including defalcations) or omissions of these title agents. As a result, the use of title agents by our title insurance subsidiaries could result in increased claims on the policies issued through title agents and an increase in other costs and expenses.
Competition in the title insurance industry may affect our revenues.
Competition in the title insurance industry is intense, particularly with respect to price, service and expertise. Larger commercial customers and mortgage originators also look to the size and financial strength of a title insurer. The four largest title insurance companies typically maintain greater than 80% of the market for title insurance in the United States. In our principal market, competitors include other major title underwriters such as Fidelity National Financial, Inc., First American Financial Corporation, Old Republic International Corporation, Stewart Information Services Corporation, Westcor Land Title Insurance Company, and WFG National Title Insurance Company, as well as other regional title insurance companies, underwritten title companies and independent agency operations. Although we are not aware of any current initiatives to reduce regulatory barriers to entering our industry, any such reduction could result in new competitors, including financial services firms or institutions, entering the title insurance business. From time-to-time, new entrants enter the marketplace with alternative products to traditional title insurance, although many of these alternative products have been disallowed by title insurance regulators. Further, advances in technologies, including artificial intelligence, could, over time, significantly disrupt the traditional business model of financial services and real estate-related companies, including title insurance companies. These alternative products or disruptive technologies, if permitted by regulators, could have a material adverse effect on our revenues and earnings.
We depend on our ability to attract and retain key personnel and agents, and our inability to do so could adversely affect our business.
Competition for skilled and experienced personnel in our industry is high, and our success is substantially dependent on our ability to attract and retain such personnel. We may have difficulty hiring and retaining the necessary marketing and management personnel to support future growth plans. Also, our results of operations and financial condition could be adversely affected if we are unsuccessful in attracting and retaining new agents.
Errors and fraud involving the transfer of funds may adversely affect our title insurance and title agency subsidiaries.
Our title insurance and title agency subsidiaries rely on their systems, employees and domestic banks to transfer funds on behalf of our title insurance and title agency subsidiaries as well as title agents that are not affiliates of ours. 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. Our title insurance and title agency subsidiaries’ email and computer systems and systems used by their 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 our title insurance and title agency subsidiaries or their agents to improperly transfer funds. Funds transferred to a fraudulent recipient are often not recoverable. In certain instances, our title insurance and title agency subsidiaries may be liable for those unrecovered funds. The controls and procedures used by our title insurance and title agency 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.
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Regulatory oversight and changes in government regulation could prohibit or limit our title insurance and title agency subsidiaries’ operations, make it more costly or burdensome to conduct such operations or result in decreased demand for their products and services.
Our title insurance business is regulated by various federal, state, and local governmental agencies and operates within statutory guidelines. The industry in which our title insurance business operates and the markets into which it sells its products are also regulated and subject to statutory guidelines. In general, our title insurance 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.
For instance, the Consumer Financial Protection Bureau (“CFPB”) is charged with protecting consumers by enforcing federal consumer protection laws and regulations. The CFPB is an independent agency and funded by the United States Federal Reserve System. Its jurisdiction includes banks, credit unions, securities firms, payday lenders, mortgage servicing operations, foreclosure relief services, debt collectors and other financial companies. The nature and extent of these regulations include, but are not limited to: conducting rule-making, supervision, and enforcement of federal consumer protection laws; restricting unfair, deceptive, or abusive acts or practices; marshalling consumer complaints; promoting financial education; researching consumer behavior; monitoring financial markets for new risks to consumers; and enforcing laws that outlaw discrimination and other unfair treatment in consumer finance.
Governmental authorities regulate our insurance subsidiaries in the states in which we do business. These regulations generally are intended for the protection of policyholders rather than stockholders. The nature and extent of these regulations vary from jurisdiction to jurisdiction, but typically involve:
● approving or setting of insurance premium rates;
● limitations on types and amounts of investments;
● regulating underwriting and marketing practices;
● regulating dividend payments and other transactions among affiliates;
● licensing of insurers, agencies and, in certain states, escrow officers;
● regulation of reinsurance;
● restrictions on the size of risks that may be insured by a single company;
● deposits of securities for the benefit of policyholders;
● approval of policy forms;
● methods of accounting; and
These regulations may impede or impose burdensome conditions on rate increases or other actions that we might want to take to enhance our operating results. In addition, state regulators perform periodic examinations of insurance companies, which could result in increased compliance or legal expenses.
Regulatory oversight could require us to raise capital, and/or make it more difficult to deploy capital. For example, our regulatory capital requirements have historically applied only at the subsidiary level, specifically our insurance underwriter subsidiaries. However, the National Association of Insurance Commissioners has adopted an approach to assess group risks and capital adequacy and assist in the regulation of insurer solvency using the Group Capital Calculation (the “GCC”), which uses an aggregation methodology for all entities within an insurance holding company system. The adoption of the GCC could increase our prescribed capital requirements, the level at which regulatory scrutiny intensifies, as well as significantly increase our cost of regulatory compliance. 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 our title insurance and title agency subsidiaries’ products or services could prohibit or limit their 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 their competitive position. The impact of these changes would be more significant if they involve the Florida jurisdiction, as a majority of our title premiums are currently generated in the state of Florida. These changes may restrict our ability to acquire assets or businesses, may limit the manner in which we conduct our business or otherwise may have a negative impact on our ability to generate revenues, earnings and cash flows. Additionally, in jurisdictions where rates are not promulgated by the state insurance regulator, these changes may compel us to reduce our prices and may restrict our ability to implement price increases.
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Regulation of title insurance rates could adversely affect our business.
Title insurance rates are subject to extensive regulation, which varies from state to state. Our title insurance subsidiaries currently operate primarily in the state of Florida. In Florida, rates are promulgated by the state insurance regulator. Our insurance subsidiaries’ ability to promptly adapt to changing market dynamics through price adjustments may be limited due to the rates promulgated by the state’s insurance regulator, particularly in a declining market.
Our title insurance business may be adversely affected by business or regulatory conditions that disproportionately affect Florida.
Our title insurance subsidiaries currently operate primarily in the state of Florida. As a result of the significant income derived from customers in this state, our title insurance business is exposed to adverse business or regulatory conditions that significantly or disproportionally affect Florida. For example, a declining business climate or real estate market that is localized in Florida could have an adverse effect on the title insurance segment’s results of operations. Adverse regulatory developments, including reductions in rates or increased regulatory or capital requirements in Florida could similarly adversely affect the title insurance segment’s business, financial condition and results of operations.
Changes in certain laws and regulations, and in the regulatory environment in which we operate, could adversely affect our business.
Federal and state officials are discussing various potential changes to laws and regulations that could impact our 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 our title insurance and title agency subsidiaries and their customers operate, could adversely impact the volume of mortgage originations in the United States and our title insurance and title agency subsidiaries competitive position and results of operations.
The overturning of the Chevron doctrine could have an unfavorable impact on us.
In June 2024, the U.S. Supreme Court issued a decision in the Loper Bright Enterprises v. Raimondo case that overturned the long-standing federal Chevron doctrine. The Chevron doctrine set forth a test that outlined when courts should defer to an agency’s interpretation of federal law. Under the doctrine, if Congress had not spoken directly to the precise issue in question, the courts were to defer to the agency’s interpretation so long as the interpretation was reasonable. Under the Loper Bright decision, courts are now required to exercise their independent judgment in deciding whether an agency has acted within its statutory authority and may not defer to an agency interpretation of the law simply because a statute is ambiguous.
The overturning of the Chevron doctrine is likely to result in challenges to numerous agency interpretations in various areas of law including energy, environment, taxation, and labor, among others. If these challenges are upheld, they could have both favorable and unfavorable impacts on us, depending on whether the interpretations that are overturned were more favorable toward our business and operations than subsequent revised agency interpretations. The likely increase of challenges to agency actions may also increase legal costs and create less certainty around agency actions, at least in the near term.
Actual claims experience could materially vary from the expected claims experience reflected in NCTIC’
s reserve for incurred but not reported claims.
NCTIC maintains a reserve for 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 experienced as a result of the COVID-19 pandemic, rising inflation and rising interest rates, larger changes may be more likely. Material changes in expected ultimate losses and corresponding loss rates for older policy years are 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.
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Risks Related to our Investment in HC Realty
Our investment in HC Realty may lose value.
We owned approximately 28.0% of the voting interest in HC Realty as of December 31, 2024. There is no guarantee that HC Realty will be successful implementing its business strategy for the acquisition, financing, ownership and management of Government Properties and, as a result, our investment in HC Common Stock and HC Series B Stock may lose value.
HC Realty depends on leases by the U.S. government and its agencies for substantially all of its revenues and any failure by the U.S. government and its agencies to perform their obligations under their leases or renew their leases upon expiration could have a material adverse effect on our investment in HC Realty.
As of December 31, 2024, leases by the U.S. government and its agencies accounted for substantially all of HC Realty’s revenues. We expect that leases to agencies of the U.S. government will continue to be HC Realty’s primary source of revenues for the foreseeable future. Due to such concentration, any failure by the U.S. government to perform its obligations under its leases or a failure to renew its leases upon expiration, could cause interruptions in the receipt of lease revenue or result in vacancies, or both, which would reduce HC Realty’s revenue until the affected properties are leased, and could decrease the ultimate value of the affected property upon sale and have a material adverse effect on our investment in HC Realty. In addition, as part of ongoing efforts to reduce waste, the U.S. government and the GSA are reaching out to all tenant agencies to see if there are opportunities to reduce space usage.
Some of HC Realty’s leases with the U.S. government permit the U.S. government to terminate the lease and discontinue paying rent prior to the lease expiration date.
From time to time, HC Realty enters into leases that provide the U.S. government the right to terminate the lease during a specified period prior to the expiration of the total term stated in the lease, with such period often referred to as the “soft term.” In the event that a portion of HC Realty’s U.S. government tenant agencies exercise their termination rights during a soft term period prior to the expiration of the total term stated in the lease, for fiscal policy reasons, security concerns or other reasons, and HC Realty is not able to lease the vacant space to another tenant in a timely manner or at all, it could have a material adverse effect on HC Realty’s business, financial condition and results of operations, and our investment in HC Realty.
The U.S. government may consolidate its existing GSA leases, which may have an adverse effect on HC Realty’s business and results of operations and our investment in HC Realty.
The U.S. government has been acting to reduce its expenses by consolidating various lease agreements for single office buildings in which several agencies and/or branches are located. HC Realty faces the risk that such consolidation will take place in one or more of its Government Properties, leading lessees to migrate to a property that is not beneficially owned by HC Realty. There can be no assurance that the U.S. government will not consolidate GSA leases. Because many of the Government Properties were built or renovated for specific GSA lessees, it may be difficult to find other tenants interested in facilities with these specifications. HC Realty may consequently have to invest significant amounts of capital to renovate Government Properties with GSA specifications for other tenants. The vacancies or costs attendant to renovations for new tenants resulting from U.S. government lease consolidation could significantly impair HC Realty’s revenues and business strategy and our investment in HC Realty.
The value of our 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. HC Realty’s continued qualification as a REIT depends on its satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. HC Realty’s 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 provisions of the Internal Revenue Code of 1986, as amended, 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 investment in HC Common Stock and HC Series B Stock.
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Risks Related to our Reinsurance Business
Losses associated with our reinsurance business could reduce our liquidity and adversely affect our results from operations.
Our reinsurance business exposes us to risks arising from catastrophes. Catastrophes can be caused by various natural events, including but not limited to hurricanes, tropical storms, tornadoes, windstorms, earthquakes, hail, and other severe weather events. The frequency and severity of weather conditions are inherently unpredictable, but the frequency and severity of property claims generally increase when severe weather conditions occur.
In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, its associated extreme weather events linked to rising temperatures and its effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow. Climate studies by government agencies, academic institutions, catastrophe modeling organizations and other groups indicate that climate change may be altering the frequency and/or severity of catastrophic weather events, such as hurricanes, tornadoes, windstorms, floods and other natural disasters. As a result, catastrophes could be more frequent or severe than contemplated in our pricing and risk management models and may have a material adverse effect on our results from operations during any reporting period due to increases in the losses and loss adjustment expenses ceded to us. Catastrophe losses, in excess of the reinsurance premium received, may reduce liquidity and adversely affect our results from operations in any reporting period. We will continue to pursue opportunities to provide reinsurance to other carriers and limit risks related to catastrophe losses by pricing risks adequately and limiting triggering loss events through policy language.
Risks Related to Conflicts of Interest
Our Chairman and Chief Executive Officer, who is also a director, may have potential or actual conflicts of interest because of his positions with HPCM and HC Realty.
Steven A. Hale II, our Chairman and Chief Executive Officer, is the sole manager of HPCM which serves as the investment adviser for the Hale Partnership Fund, L.P. and related entities (collectively, the “Hale Funds”) and certain holders of HC Series B Stock other than us. The Hale Funds own approximately 36.0% of our outstanding common stock. We also own HC Series B Stock and HC Common Stock. Mr. Hale also serves as Chairman, Chief Executive Officer and President and a director of HC Realty.
Mr. Hale owes fiduciary duties to (i) us, (ii) HC Realty as a result of his position with HC Realty and (iii) the Hale Funds and certain holders of HC Series B Stock other than us as a result of his position with HPCM, the investment adviser to these parties. As a result, Mr. Hale 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 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 other holders of HC 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 78.0% 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 our dissolution. 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 Chief Executive Officer, who will be employed on a part-time basis for the foreseeable future, currently has outside business interests that will require his time and attention and may interfere with his ability to devote all of his time to our business, which may adversely affect our business and operations.
Mr. Hale, our Chief Executive Officer, will be employed for the foreseeable future on a part-time basis and has outside business interests that could require substantial time and attention. Mr. Hale is also associated with HPCM and HC Realty and devotes significant time to their affairs. We cannot accurately predict the amount of time and attention that will be required of Mr. Hale to perform his ongoing duties related to outside business interests. The inability of Mr. Hale to devote sufficient time to managing our business could have a material adverse effect on our business and operations.
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Item 1B.Unresolved Staff Comments
None.
Item 1C.Cybersecurity
As part of our commitment to maintaining the integrity, confidentiality, and availability of our information assets, the Company places a significant emphasis on cybersecurity. The Company’s risk management program is designed to comply with laws and regulations applicable to cybersecurity. The Board is responsible for overseeing the Company’s risk management program and cybersecurity is a critical element of this program. The Company's management, including its Director of Information Technology, is responsible for the day-to-day administration of the Company’s risk management program and its cybersecurity policies, processes, and practices. Our Director of Information Technology has served in similar roles in information technology and information security for over 20 years. He holds an undergraduate degree in Management Information Systems.
Our strategies, policies, and initiatives aimed at protecting our systems and data against potential threats are outlined below.
1. Cybersecurity Governance:
The Company has established a robust governance framework to oversee cybersecurity initiatives. This framework includes:
2. Cybersecurity Policies:
The Company has implemented a comprehensive set of cybersecurity policies and procedures designed to mitigate risks and protect our information assets. These policies cover areas such as:
3. Cybersecurity Compliance:
The Company is committed to complying with all applicable cybersecurity regulations and standards. We regularly review our cybersecurity practices to ensure they align with industry best practices and regulatory requirements.
Cybersecurity is a top priority for us and we are dedicated to continuously improving our cybersecurity posture to protect our systems and data from evolving threats. By implementing robust governance, policies, technologies, and compliance measures, we strive to maintain the trust and confidence of our stakeholders in our ability to safeguard their information.
Pursuant to the Company’s cybersecurity policy, the Board will be promptly notified of any material cybersecurity incident required to be disclosed under Item 1.05 of Form 8-K and shall oversee the Company’s response to such matter.
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In 2024, we did not identify any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of operations, or financial condition. However, despite our efforts, we cannot eliminate all risks from cybersecurity threats, or provide assurances that we have not experienced an undetected cybersecurity incident. For more information about these risks, please see “Item 1A. Risk Factors – Risks Related to the Company - Cybersecurity risks and cyber incidents may adversely affect our business in the event we or any other party that provides us with essential services experiences cyber incidents” in this Annual Report on Form 10-K.
Item 2.Properties
Our corporate headquarters is located in Charlotte, North Carolina where we lease office space. The Company’s subsidiaries, principally Omega, lease office space throughout Florida. It is our opinion that these leased properties are in good operating condition, suitable, and adequate for present uses.
Item 3.Legal Proceedings
The information required for this Part I, Item 3 is incorporated by reference to the discussion under the heading “Litigation” in Note 12, Commitments and Contingencies in the accompanying notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Item 4.Mine Safety Disclosures
Not Applicable.
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PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market and Dividend Information
Our common stock is traded in the over-the-counter market on the OTCQB under the symbol “STLY”. Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of March 18, 2025, we had approximately 399 beneficial stockholders. We currently anticipate that we will retain all future earnings for the operation of our business, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future.
Issuer Purchases of Equity Securities
On August 5, 2022, the Board authorized the repurchase of up to $1.5 million of shares of the Company’s common stock (the "2022 Repurchase Program"). The authorization did not obligate the Company to acquire a specific number of shares during any period and did not have an expiration date, but it could be modified, suspended, or discontinued at any time at the discretion of the Board. Repurchases under the 2022 Repurchase Program could be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and subject to the Company’s cash requirements for other purposes, and other factors it deemed relevant. The Company's Rule 10b5-1/Rule 10b-18 Repurchase Plan in connection with the Company’s repurchases of shares of common stock expired on December 31, 2023 and was not renewed.
On May 14, 2024, the Board authorized the repurchase of up to $1.5 million of shares of the Company’s common stock (the “2024 Repurchase Program”) and discontinued the 2022 Repurchase Program. The authorization does not obligate the Company to acquire a specific number of shares during any period and does not have an expiration date. Repurchases under the 2024 Repurchase Program may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in such quantities, at such prices, in such manner and on such terms and conditions as the authorized officers of the Company determine are in the best interests of the Company. Repurchases may also be made under a plan adopted pursuant to Rule 10b5-1 promulgated under the Exchange Act.
The Company did not repurchase any shares of common stock during the three months ended December 31, 2024.
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Item 6. Reserved
The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.
The statements in this discussion regarding business outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to the risks and uncertainties described in Part I, Item 1A “Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Overview
For a description of our business, including descriptions of segments, see the discussion under Business in Item 1 of Part I of this Annual Report on Form 10-K, which is incorporated by reference into this Item 7 of Part II of this Annual Report on Form 10-K.
Title Insurance Segment Trends and Conditions
Our title insurance segment revenue is closely related to the level of real estate activity, such as sales, mortgage financing and mortgage refinancing. Declines in the level of real estate activity or the average price of real estate sales will adversely affect our title insurance revenues. The industry as a whole saw a decline in total real estate transactions in the last two years, largely due to higher mortgage interest rates. Mortgage rates remained very high after emergency actions taken by the Federal Reserve to substantially increase its benchmark interest rate in an attempt to control inflation. In the last four months of 2024, the Federal Reserve lowered the federal funds rate three times to a current range of 4.25% to 4.50%, and while there are expectations that the Federal Reserve will continue lowering the federal funds rate in 2025, these expectations may not materialize and the Federal Reserve may increase rates in the future in an effort to combat inflation. While the latest and potential future Federal Reserve rate decreases may positively impact the title insurance market, mortgage rates continue to remain relatively high and will likely continue to contribute to decreased real estate activity in the upcoming year. Per the Mortgage Bankers Association's (“MBA”) Mortgage Finance Forecast as of February 2025, interest rates on a Freddie Mac 30-year, fixed rate mortgage averaged 6.6% in the fourth quarter of 2024 and are projected to stay relatively stable at the current level through 2027.
Further, per the MBA Mortgage Finance Forecast as of February 2025, total loan originations are forecast to increase by approximately 13% in 2025 as compared to 2024, from approximately 5.0 million units to approximately 5.7 million units. Mortgage origination volume is expected to increase by approximately 16% in 2025 as compared to 2024, to approximately $2.1 trillion in mortgage originations as compared to $1.8 trillion in 2024. Fannie Mae forecasts overall existing-home sales to increase 4% in 2025 compared to 2024.
A shortage in the supply of homes for sale, increasing home prices, high mortgage interest rates and inflation have created volatility in the residential real estate market since 2021. Despite the Federal Reserve lowering the federal funds rate in 2024, current interest rates remain at elevated levels compared to pre-2021 interest rates. Additionally, recent geopolitical uncertainties and federal government efforts have created elevated volatility in domestic and global arenas.
Because commercial real estate transactions tend to be generally driven by supply and demand for commercial space and occupancy rates in a particular area rather than by interest rate fluctuations, we believe that our commercial real estate title insurance business is less dependent on the industry cycles discussed above than our residential real estate title business. Commercial real estate transaction volume is also often linked to the availability of financing. Factors including U.S. tax reform and a shift in U.S. monetary policy have had, or are expected to have, varying effects on availability of financing in the U.S. Lower corporate and individual tax rates, and corporate tax-deductibility of capital expenditures have provided increased capacity and incentive for investments in commercial real estate.
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Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months. The fourth quarter is typically strong due to the desire of commercial entities to complete transactions by year-end. Seasonality in recent years deviated from historical patterns due to COVID-19 and the subsequent rapid increase in interest rates. We have noted short-term fluctuations through recent years in resale and refinance transactions as a result of changes in interest rates.
Real Estate Segment
The Company currently owns approximately
28.0% of the voting interest in HC Realty through its ownership of 250 shares of HC Common Stock and 1,025,000 shares of HC Series B Stock. HC Realty currently owns and operates a portfolio of Government Properties leased to and occupied by U.S. government tenant agencies and sub-agencies such as the Federal Bureau of Investigation, the Department of Veterans Affairs, the Drug Enforcement Administration, the Immigration & Customs Enforcement, the Social Security Administration and the Department of Transportation.
As part of ongoing efforts to reduce waste, the U.S. government and the GSA are reaching out to all tenant agencies to see if there are opportunities to reduce space usage. As of December 31, 2024, leases by the U.S. government and its agencies accounted for substantially all of HC Realty’s revenues. In the event the U.S. government reduces its spending on real estate or changes its preference away from leased properties, HC Realty’s sources of revenues, and our investment in HC Realty, could be adversely affected.
Reinsurance Segment
The Company previously engaged in providing another insurance company excess-of-loss reinsurance coverage related to catastrophic weather risk in Texas. The Company did not have any reinsurance contracts in-force during the year ended
December 31, 2024; however, the Company may actively look to provide reinsurance coverage to other carriers as future opportunities arise.
Management Services Segment
The Company, through its wholly-owned subsidiary, HGMA, engages in providing various management advisory services such as legal entity formation, licensure, regulatory approval, assumption of policies and other general operational services.
Results of Operations
The following table sets forth the key items discussed in the results of operations section below for the years ended December 31, 2024 and 2023 (dollar amounts in thousands):
Reinsurance premium written - 300 (300 )
Loss before income taxes $ (267 ) $ (908 ) $ 641
Effective tax rate 6.7 % (5.0) %
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2024 Compared to 2023
As of December 31, 2024, our sources of income include earnings on our title insurance and title agency subsidiaries, dividends on HC Common Stock and HC Series B Stock, revenue earned from management services, and interest paid on our cash deposits and investment portfolio. The Company believes that the revenue generating from these sources and cash on hand are sufficient to fund operating expenses for at least 12 months from the date of the accompanying consolidated financial statements.
The Company’s underwriting results were primarily influenced by a growth of the net title premium to $6.0 million for the year ended December 31, 2024 from $5.9 million for the year ended December 31, 2023. This growth was offset by no reinsurance coverage written in 2024. The Company's reinsurance segment generated $0.3 million of earned reinsurance premium for the year ended December 31, 2023.
The Company’s escrow and other title fees remained relatively flat at $2.5 million for the year ended December 31, 2024, compared to $2.6 million for the year ended December 31, 2023.
Management fees generated by the Company were $3.0 million for the year ended December 31, 2024, as compared to $2.3 million for the year ended December 31, 2023, primarily as a result of the timing of the management advisory services contract that was entered into on April 1, 2023.
The Company’s cost of revenue consists primarily of a provision for title claim losses and underwriting expenses, which are largely comprised of commissions to unaffiliated title agencies. Cost of revenue was flat at $0.6 million for the years ended December 31, 2024 and 2023.
The Company’s operating expenses primarily consist of general and administrative expenses, such as personnel expenses, office and technology expenses, and professional fees. General and administrative expenses for the year ended December 31, 2024 were $12.6 million, as compared to $13.0 million for the year ended December 31, 2023. The decrease in operating expenses was primarily attributable to savings from the Company's workforce optimization efforts during 2024.
Other income and expenses primarily consist of interest and dividend income, changes in the net asset value of investment in limited partnership, changes in value of our related party investments and legal settlements and recoveries. During the year ended December 31, 2024, the Company generated $1.4 million in other income and expense, largely driven by a recovery of $1.1 million on FedNat Holding Company (“FedNat”) litigation (See Note 12, Commitments and Contingencies in the accompanying notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K). Additionally, the Company generated dividend and interest income of $0.7 million, increase in the net asset value of investment in limited partnership of $0.4 million and net gain from related parties of $0.2 million during the year ended December 31, 2024, which were largely offset by an impairment of the investment in HC Common Stock and HC Series B Stock of $1.2 million. During the year ended December 31, 2023, the Company generated $1.6 million in other income and expense primarily as a result of dividend income from HC Common Stock and HC Series B Stock of $1.0 million. Additionally, the Company generated interest income of $0.5 million, increase in the net asset value of investment in limited partnership of $0.3 million, offset by the net loss from related parties of $0.1 million and a settlement of $0.1 million related to the Hollie Settlement Agreement (as defined and described in further detail in Note 12, Commitments and Contingencies in the accompanying notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K).
Our effective tax rate for the years ended December 31, 2024 and 2023 was 6.7% and (5.0%), respectively, primarily as a result of net operating loss carryforward, valuation allowances on deferred tax assets, and state income tax differences in the jurisdictions in which the Company currently operates.
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Financial Condition, Liquidity and Capital Resources
Sources of liquidity include cash on hand, earnings from our title insurance and title agency subsidiaries, management service fees earned, and interest and dividends from deposits and invested assets. We expect cash on hand to be adequate for ongoing operational expenditures for at least 12 months from the date of the issuance of the accompanying consolidated financial statements. At December 31, 2024, we had $12.1 million in cash and cash equivalents and an additional $8.3 million in restricted cash, all of which is cash held in escrow for title insurance transactions. The Company records an offsetting escrow liability given that we are liable for the disposition of these escrowed funds. A portion of our unrestricted and restricted cash and cash equivalents is currently held in savings accounts earning interest at approximately 3.6% annually.
Cash Flows
(in thousands)
Net cash provided by operating activities $ 1,961 $ 1,683
Net cash provided by investing activities 1,060 1,116
Net cash used in financing activities (364 ) (52 )
Net increase in cash and cash equivalents and restricted cash 2,657 2,747
Cash and cash equivalents and restricted cash at end of period $ 20,409 $ 17,752
Cash flows from operating activities differ from net income due to adjustments for non-cash items, such as gains and losses on investments, amortization, depreciation, claims and other accrued liabilities, and collections or changes in receivables and other assets. Net cash provided by operations of $2.0 million for the year ended December 31, 2024 differs from operating results for the year ended December 31, 2024 primarily due to an impairment of the investment in HC Common Stock and HC Series B Stock of $1.2 million and an increase of $0.7 million in escrow liabilities on the title insurance subsidiaries. Net cash provided by operations of $1.7 million for the year ended December 31, 2023 differs from operating results for the year ended December 31, 2023 primarily due to an increase of $2.0 million in escrow liabilities on the title insurance subsidiaries.
Cash flows from investing activities include effects of purchases and sales of plant, property, and equipment, purchases of investments and proceeds from sales or maturities of investments. During the year ended December 31, 2024, the Company had $1.1 million of net cash provided by investing activities, which was a result of $2.4 million of proceeds from redemptions of securities and returns on investments, partially offset by $1.3 million of purchases of investments, including investments in related parties of $0.5 million. During the year ended December 31, 2023, the Company had $1.1 million of net cash provided by investing activities, which consisted of $1.2 million of proceeds from redemption of securities, partially offset by purchases of investments in related parties of $33,000 and purchases of equipment of $51,000.
Cash flows from financing activities include effects of capital contributions, repurchase of outstanding shares of common stock and changes in noncontrolling interest. Cash flows used in financing activities for the year ended December 31, 2024 were $0.4 million and consisted of $243,000 in repurchases of shares of common stock and $121,000 of distributions to minority stockholders. Cash flows used in financing activities for the year ended December 31, 2023 were $52,000 and consisted of $62,000 in repurchases of shares of common stock, partially offset by $10,000 provided by minority stockholders in exchange for an interest in a consolidated subsidiary.
Critical Accounting Estimates
See Note 1, Significant Accounting Policies in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of our significant accounting and reporting policies.
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Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), which requires management to make estimates and assumptions. We believe that the accounting policies that require the most significant judgments and estimations by management are: (1) valuation of goodwill, (2) valuation of investments in related parties, and (3) reserve for title claims. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.
Valuation of Goodwill Impairment
Goodwill represents the excess of purchase price over fair value of identifiable net assets acquired and assumed in a business combination. Goodwill is reviewed for impairment at the reporting unit level on an annual basis or more frequently if circumstances indicate potential impairment, through a comparison of fair value to the carrying amount. In evaluating the recoverability of goodwill, we perform a quarterly goodwill impairment analysis based on a review of qualitative factors to determine if events and circumstances exist, which will lead to a determination that the fair value of a reporting unit is greater than its carrying amount, prior to performing a full fair-value assessment. In the absence of any indicators of potential impairment, the evaluation of goodwill is performed annually during the fourth quarter of each year.
For our annual goodwill impairment test, we utilize two approaches to value goodwill: the income approach, which converts future estimates of cash flows by reporting unit to a single (discounted) current value, and the market approach, which uses publicly available peer data to estimate value of the reporting unit. The valuation techniques performed in our quantitative analysis make use of our estimates and assumptions related to revenue and operating margin growth rates, future market conditions, determination of market multiples and comparative companies, and determination of risk-adjusted discount rates. Forecasts of future operations are based, in part, on actual operating results and our expectations as to future growth and market conditions, which are inherently uncertain and difficult to project. In performing our analysis, we make assumptions and apply judgments to estimate industry economic factors and the future profitability of our businesses. Due to the uncertainty and complexity of performing the goodwill impairment analysis, future results related to market conditions and our business operations and other inputs to the analysis may be worse than estimated or assumed. In such cases, we may be exposed to future material impairments of goodwill.
As of December 31, 2024, the Company recognized $4.5 million in goodwill as the result of the acquisition of 50% of the membership interest in TAV on September 1, 2021 and an additional $2.0 million in goodwill as a result of the business combination with Omega Title Florida, LLC on August 1, 2022. These amounts represent the fair value of the consideration paid, less the identified and valued intangible assets and tangible net assets. During 2024 and 2023, the Company determined that the title insurance segment was the appropriate operating segment for the purposes of testing goodwill for impairment. Based on our quantitative annual valuations as of December 31, 2024 and 2023, we have concluded that there was no impairment of goodwill.
Valuation of Investments in Related Parties
The Company’s investments in related parties are accounted for either under the equity method of accounting or, where they do not meet the criteria of accounting under the equity method, under the cost adjusted for market observable events less impairment method. For information about the Company’s investments in related parties and its accounting policy, refer to Note 3, Investments in Related Parties and Note 1, Significant Accounting Policies in the accompanying notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
The Company's review of its investments in related parties is performed on a regular basis to determine if the investments are impaired. For purposes of this assessment, the Company performs a qualitative review where it considers the investee’s cash position, liquidity, earnings and revenue outlook, equity position, and ownership, among other factors. If the qualitative impairment assessment leads to a conclusion that a potential impairment exists, a quantitative assessment is performed. In performing the quantitative assessment for impairment, the Company estimates a fair value of the investment utilizing a combination of the income, market and cost approach, where applicable. If indicated fair value is lower than the carrying amount of the investment, the Company recognizes in current earnings an impairment loss that is equal to the difference between the fair value of the investment and its carrying amount. The valuation techniques performed in our quantitative analysis make use of the investee's growth projections and free cash flows, assumptions related to risk-adjusted discount rate, timing of liquidity events, determination of market multiples and comparative companies, and assumptions related to reproduction or replacement value. Forecasts of future operations are based, in part, on assumptions and data provided by management of the investee and our expectations as to market, peer data and research, which are inherently uncertain and difficult to project. Due to the uncertainty and complexity of performing the valuation analysis, future results related to market conditions and the investee's business operations and other inputs to the analysis may be worse than estimated or assumed. In such cases, we may be exposed to future material impairments of our investments in related parties.
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As of December 31, 2024, the Company recognized $1.2 million in impairments to investments in related parties. No impairments were recognized in 2023.
Reserve for Title Claims
The total reserve for all reported and unreported losses the Company incurred is represented by the reserve for title claims. The Company's reserves for unpaid losses and loss adjustment expenses (“LAE”) 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 reported (“IBNR”). We reserve for each known claim based on our review of the estimated amount of the claim and the costs required to settle the claim. The reserves for IBNR claims are estimates that are established at the time the premium revenue is recognized and are based upon historical policy loss emergence and development patterns, adjusted for other factors, including industry trends, legal environment, policy year and policy type differences.
The table below summarizes our reserves for known claims and IBNR claims related to title insurance (in thousands):
As of As of
Known title claims $ 114 $ 8
Non-title claims - -
Total reserve for title claims $ 637 $ 313
Although claims against title insurance policies can be reported relatively soon after the policy has been issued, claims may be reported many years later. 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. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors. The Company continually reviews and adjusts its reserve estimates as necessary to reflect its loss experience and any new information that becomes available. 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.
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 December 31, 2024.
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The table below presents our title insurance loss development experience for the past two years (in thousands):
For the Year For the Year
Ended Ended
Provision for claims related to:
Total provision for claim losses 328 174
Claims paid related to:
Current year - -
Prior years (4 ) (148 )
Total title claims paid (4 ) (148 )
Ending reserve for title claims $ 637 $ 313
As of December 31, 2024 and 2023, our title claim reserves were $637,000 and $313,000, respectively, which we determined were reasonable and represented our best estimate. These recorded amounts were within a reasonable range of the central estimates provided by our actuaries. During the years ended December 31, 2024 and 2023, the Company recognized $109,000 and ($6,000), respectively, in net provision for claims development attributable to insured events of the prior years. Original estimates are decreased or increased as additional information becomes known regarding individual claims.
At December 31, 2024 and 2023, there were no reinsurance recoverables on paid claims or unpaid reserves.
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Item 7A.Quantitative and Qualitative Disclosures about Market Risk
Not applicable as the Company is a smaller reporting company.
Item 8.Financial Statements and Supplementary Data
See the “Index to Consolidated Financial Statements” at page F-1 of this Annual Report on Form 10-K.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2024 was conducted under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, as of December 31, 2024, were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Under Rule 13a-15(c), management must evaluate, with the participation of the principal executive officer and principal financial officer, the effectiveness, as of the end of each fiscal year, of our internal control over financial reporting. The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedure that:
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In the course of preparing this Annual Report on Form 10-K and the consolidated financial statements included herein, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commissions (COSO) in the Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2024.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm as we are a smaller reporting company as of December 31, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
During the three months ended December 31, 2024, none of our directors or officers, as defined in Section 16 of the Exchange Act, adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K of the Exchange Act.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
Our Board has set the number of our directors at three, one of whom is our Chairman and Chief Executive Officer, Steven A. Hale II, and two of whom are independent. Our directors are divided into three classes with staggered terms. One director, Peter M. Sherman, whose term was expiring at the time of the Company’s 2024 annual meeting of stockholders, was nominated for re-election by our Board and re-elected by our stockholders to serve another three-year term expiring at our 2027 annual meeting of stockholders.
Director Whose Term Expires this Year
Steven A. Hale II, 41, has been a director since February 2017 and has served as Chairman of our Board since November 2017. He has also served as our Chief Executive Officer since March 2018. Since March 2019, Mr. Hale has served as Chairman and Chief Executive Officer of HC Realty, an internally-managed real estate investment trust focused on acquiring, financing, owning and managing build-to-suit or renovate-to-suit, single-tenant properties leased primarily to the U.S. government and administered by the GSA or directly by the federal government agencies or sub-agencies occupying such properties. He has also served as President of HC Realty from August 2020 until January 2022 and again beginning in August 2024. We currently own approximately 28.0% of the voting interest of HC Realty and HC Realty is considered to be a related party of the Company. Mr. Hale is also the founder and sole manager of HPCM, an asset management firm that serves as the investment manager to certain privately held investment partnerships. Mr. Hale has held his position with HPCM since 2010. From 2007 to 2010, prior to founding HPCM, Mr. Hale was an associate director with Babson Capital Management, LLC, an asset management firm, where he had responsibility for coverage of distressed debt investments across a variety of industries. From 2005 to 2007, Mr. Hale was a leveraged finance analyst with Banc of America Securities. Our corporate governance and nominating committee and our Board concluded that Mr. Hale is qualified to serve as a director by reason of his experience as our Chief Executive Officer, his experience with asset management and his indirect ownership of approximately 36% of our outstanding shares of common stock. Mr. Hale’s term as a director expires at the 2025 annual meeting of stockholders.
Mr. Hale was initially elected to our Board pursuant to the terms of an agreement dated January 30, 2017 with Hale Partnership Fund, LP, and related parties (collectively, the “Hale Group”), a stockholder group that, as of the date of the agreement, owned approximately 10% of our outstanding shares of common stock and which had nominated two candidates for election to our Board at the 2017 annual meeting of stockholders. Under this agreement, we appointed Mr. Hale to our Board and the Hale Group withdrew its nominations and agreed, among other things, to vote in favor of the election of Messrs. Hale and Gilliam as directors at the 2017 annual meeting of stockholders for a term that expired at the 2020 annual meeting of stockholders. Mr. Hale was re-elected by our stockholders at the 2020 and 2022 annual meetings of stockholders.
Directors Whose Terms Do Not Expire this Year
Jeffrey S. Gilliam, 67, has been a director since February 2015. Since April 2022, Mr. Gilliam has served as the CFO/Treasurer of Hickory Springs Manufacturing Company. Mr. Gilliam also has served as the managing member of Willow Oak Advisory Group, LLC (“Willow Oak Advisory Group”), a provider of business advisory services, since January 2016. Related to his duties with Willow Oak Advisory Group, Mr. Gilliam served as President of Columbus Industries, Inc. (a division of Filtration Group) from August 2019 until February 2022. Mr. Gilliam was a director of the Finley Group, a corporate advisory firm, from August 2012 until January 2016. Mr. Gilliam served as President of Toter, Incorporated (a division of Wastequip, LLC), a manufacturer of automated cart systems, from October 2008 until August 2012, and as Vice President Finance (Chief Financial Officer) from June 2002 until October 2008. Our corporate governance and nominating committee and our Board concluded that Mr. Gilliam is qualified to serve as a director by reason of his strong financial experience as a chief financial officer. Mr. Gilliam was appointed to our Board in February 2015 pursuant to an agreement dated February 12, 2015 with Hale Partnership Fund, LP and Talanta Fund, L.P. (collectively with their affiliates, the “Hale-Talanta Group”), which had nominated two candidates for election to our Board at the 2015 annual meeting of stockholders. Under this agreement, we appointed Mr. Gilliam to our Board for a term expiring at the 2017 annual meeting of stockholders and the Hale-Talanta Group withdrew its nominations. Mr. Gilliam was re-elected by our stockholders at the 2020 and 2023 annual meetings of stockholders. Mr. Gilliam's term as director expires at our 2026 annual meeting of stockholders.
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Peter M. Sherman, 63, has been a director since December 2020. Mr. Sherman has served as founder of Sherman Capital Management, a special situation investing and restructuring consulting firm for institutional investors, since July 2016. Mr. Sherman also served as Chief Risk Officer of Capitala Group, a lower to middle market lender and equity investor, from February 2018 to March 2024. Mr. Sherman was a partner in Brevet Capital Management, a middle market direct lending hedge fund, from June 2014 to June 2016. Mr. Sherman was elected to our Board in December 2020 upon the recommendation of our Chairman and Chief Executive Officer and was re-elected by the Company’s stockholders at the 2021 and 2024 annual meetings of stockholders. Our corporate governance and nominating committee and our Board concluded that Mr. Sherman is qualified to serve as a director by reason of his experience in principal finance and debt capital markets, special situation restructuring, and as a capital provider to lower to middle market companies through his role as a chief risk officer. Mr. Sherman’s term as director expires at the 2027 annual meeting of stockholders.
Delinquent Section 16(a) Reports
The Exchange Act requires our executive officers and directors, and any persons owning more than 10% of our common stock, to file certain reports of ownership and changes in ownership with the SEC. Based solely on our review of the copies of the Forms 3, 4 and 5 we have received, and written representations from certain reporting persons that no Forms 5 were required to be filed by those persons, we believe that all executive officers, directors and 10% stockholders complied with these filing requirements.
Code of Ethics
We have adopted a code of ethics that applies to our associates, including the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our code of ethics is posted on our website at www.hgholdingsinc.net. Amendments to and waivers from our code of ethics will be posted to our website when permitted by applicable SEC rules and regulations.
Audit Committee
The audit committee of our Board presently consists of Messrs. Gilliam (Chair) and Sherman. Our Board has determined that Messrs. Gilliam and Sherman each meet the current independence requirements contained in the rules of the NASDAQ Stock Market (which we have adopted for purposes of determining such independence even though our common stock is not listed on a national securities exchange), including the additional independence requirements applicable to audit committee members. Our Board has also determined that Mr. Gilliam qualifies as an “audit committee financial expert” as that term is defined in regulations promulgated by the SEC.
Insider Trading Policy
We have adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of our securities by directors, officers, and employees that are reasonably designed to promote compliance with insider trading laws, rules and regulations (the “Insider Trading Policy”). The Insider Trading Policy is filed as Exhibit 19.1 to this Annual Report on Form 10-K.
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Item 11. Executive Compensation.
Our named executive officers for 2024 were Steven A. Hale II, our Chairman and Chief Executive Officer, Anna A. Lieb, our Principal Financial and Accounting Officer; Secretary, effective as of May 31, 2024, and Justin H. Edenfield, our former Principal Financial and Accounting Officer; Secretary, who resigned from such role on May 31, 2024 (collectively the “Named Executive Officers”).
During 2024, our executive compensation program had two major components: salary and a cash bonus. The program was designed to promote our strategy of profitably growing our core title insurance and management services business.
Our executive compensation program is administered by the compensation and benefits committee of our Board.
Salary and Bonus. Our Named Executive Officers received the following cash compensation in 2024:
● Steven A. Hale II received an annual salary of $125,000,
Long-Term Incentives. Our Named Executive Officers did not receive any restricted stock awards in 2024.
Summary Compensation Table
The following table sets forth compensation received by the Named Executive Officers for the years ended December 31, 2024 and 2023.
SUMMARY COMPENSATION TABLE
Stock Option Non-Equity All Other
Salary Awards Awards Incentive Plan Compensation Total
Name and Principal Position Year ($) Bonus ($) ($) ($) Compensation ($) ($)
Principal Financial and Accounting Officer; Secretary 2023 — — — — — — —
Outstanding Equity Awards at Fiscal Year-End Table
As of December 31, 2024, there were no outstanding equity awards.
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Director Compensation
Our Board has approved a policy for compensation of non-employee directors providing that each non-employee director receives annual cash compensation in the amount of $35,000. The corporate governance and nominating committee reviews director compensation annually and, as part of that process, typically has for review publicly available director compensation information for other comparable companies. Our Board approves director compensation. Pursuant to the agreement under which he was elected to our Board, Mr. Hale has agreed to serve as a director without compensation.
The following table sets forth information concerning the compensation of directors for the year ended December 31, 2024.
DIRECTOR COMPENSATION
FOR THE FISCAL YEAR ENDED December 31, 2024
Fees
Earned Stock
Name in Cash ($) Awards ($) (1) Total ($)
STEVEN A. HALE II — — —
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 18, 2025 by each stockholder we know to be the beneficial owner of more than 5% of our outstanding common stock, by each director, by each of our Named Executive Officers and by all directors and executive officers as a group. Unless otherwise set forth below, the address of each stockholder listed in the following table is 2115 E. 7th Street, Suite 101, Charlotte, North Carolina 28204. Percentages are based on 2,813,214 shares of common stock outstanding as of March 18, 2025.
Amount and
Nature
of Beneficial Percent
Name Ownership of Class
Hale Partnership Fund, L.P. and related parties 974,960 (b) 34.7 %
Jeffrey S. Gilliam 4,165 (c)
Anna A. Lieb — —
Justin H. Edenfield — —
Peter M. Sherman 8,702 (c)
All directors and executive officers as a group (4 persons) 1,015,604 (d) 36.1 %
(c) 1% or less.
Equity Compensation Plan Information
The Company’s 2012 Incentive Compensation Plan, as amended, expired during 2022. Therefore, the Company does not have any outstanding options, warrants or rights subject to equity compensation plans, and there are no shares remaining available for future issuance under equity compensation plans.
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Review of Transactions with Related Persons
Under the audit committee charter, the audit committee is responsible for reviewing any transaction involving related persons which requires disclosure pursuant to SEC Regulation S-K, Item 404 and has the power to approve or disapprove these transactions.
Since January 1, 2024, the Company has entered into the following transactions involving amounts in excess of $120,000 with related persons or affiliated entities.
In October 2024, the Company invested $500,000 into HP LPT Holding Company LLC ("HP LPT"), a limited liability company domiciled in the state of Florida. HP LTP is a related party of the Company as it is controlled by Mr. Hale through his ownership of the Hale Funds.
During 2024, the Company, through HGMA, was engaged to provide management advisory services to a related captive managing general agency, HPMA, and its affiliates, including but not limited to general management, legal entity formation, legal compliance, strategy services, review of potential acquisitions and transactions, licensure, regulatory approval, and other general operational services. The engagement was for twelve months from January 1, 2024 through December 31, 2024, for a monthly fee of $250,000. HPMA is a related party of the Company as it is controlled by Mr. Hale.
During 2024, the Company received $465,000 of distributions as a result of the Company's equity investment in HP Holding Company, LLC. HP Holding Company, LLC is a related party of the Company as it is controlled by Mr. Hale through his ownership of the Hale Funds.
Director Independence
Our Board has determined that all current directors, with the exception of Mr. Hale, who serves as our Chief Executive Officer, are “independent directors” as that term is defined in the rules of the NASDAQ Stock Market (which we have adopted for purposes of determining such independence even though we do not have any securities listed on a national securities exchange).
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Item 14. Principal Accountant Fees and Services.
Fees and Services
The following table sets forth the fees, including reimbursement of expenses, billed by, or expected to be billed by, Horne LLP ("Horne"), our independent public auditors for the fiscal years ended December 31, 2024 and 2023, engaged as of October 12, 2023, and Cherry Bekaert LLP, our independent public auditors through the first two quarters of 2023, all of which were pre-approved by the audit committee.
Audit-Related Fees — —
Tax Fees — —
All Other Fees — —
Audit Fees. These fees relate to professional services rendered for the audit of our annual financial statements and reviews of our Quarterly Reports on Form 10-Q.
Pre-Approval Policies and Procedures
The audit committee has established a policy to pre-approve all audit, audit-related, tax and other services proposed to be provided by our independent accountants before engaging the accountants for that purpose. Consideration and approval of these services generally occur at the audit committee’s regularly scheduled meetings. In order to address situations where it is impractical to wait until the next scheduled meeting, the audit committee has delegated the authority to approve non-audit services not in excess of $25,000 individually or in the aggregate to the chairman of the audit committee. Any services approved pursuant to this delegation of authority are required to be reported to the full audit committee at the next regularly scheduled meeting.
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PART IV
(1) Item 15. Exhibit and Financial Statement Schedules
(a)(1) Financial Statements:
(b) Exhibits:
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19.1 Insider Trading Policy. (2)
21.1 List of Subsidiaries. (2)
101.INS Inline XBRL INSTANCE DOCUMENT (2)
101.SCH Inline XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT (2)
101.CAL Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE (2)
101.DEF Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE (2)
101.LAB Inline XBRL TAXONOMY EXTENSION LABELS LINKBASE (2)
101.PRE Inline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE (2)
(1) Management contract or compensatory plan
(2) Filed Herewith
(3) Furnished Herewith
Item 16.Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HG HOLDINGS, INC.
By: /s/Steven A. Hale II
Steven A. Hale II
Chairman, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Peter M. Sherman (Peter M. Sherman) Director March 27, 2025
/s/Jeffrey S. Gilliam (Jeffrey S. Gilliam) Director March 27, 2025
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HG HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED December 31, 2024
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 171) F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2024 and 2023 F-4
Notes to Consolidated Financial Statements F-8
F-1
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of HG Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of HG Holdings, Inc. and its subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of the Reserve for Title Claims
As disclosed in Notes 1 and 6 to the financial statements, 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") within a reasonable range of their actuary's central estimate. As of December 31, 2024, the Company had a liability of $637,000 in reserve for title claims. The Company establishes reserves for claims which are incurred but not reported at the time the related premium revenue is recognized based on estimated loss provision rates. There is significant uncertainty inherent in determining the loss provision rates.
Auditing the valuation of the Company's reserve for title claims requires significant auditor judgment, subjectivity and effort in performing appropriate procedures to evaluate the reasonableness of the assumptions and methodologies utilized.
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Our audit procedures related to the valuation of the reserve for title claims included the following, among others:
Evaluation of Investment in HC Government Realty Trust, Inc. Series B Stock for Impairment
As disclosed in Note 3 to the financial statements, the Company accounts for their investments in the 10.00% Series B Cumulative Convertible Preferred Stock (the "HC Series B Stock") of HC Government Realty Trust, Inc. ("HC Realty"), a related party entity, under the cost adjusted for market observable events less impairment method as it is not deemed to be in-substance common stock. The Company reviews its investment in HC Series B Stock on a regular basis to determine if the investment is impaired. The Company considers HC Realty’s cash position, liquidity, earnings and revenue outlook, equity position and ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Company recognizes in current earnings an impairment loss that is equal to the difference between the fair value of the investment and its carrying value. As disclosed in Note 3 to the financial statements, the carrying value of the Company’s investment in HC Series B Stock totaled $9.3 million as of December 31, 2024 and the Company recognized an impairment loss in the HC Series B Stock in the amount of $1.0 million during the year ended December 31, 2024.
Auditing management’s evaluation of their investment in HC Series B Stock for impairment was complex due to the significant assumptions used in management’s evaluation such as growth projections, forecasted cash flows and relevant market multiples, all of which can be affected by expectations about future market conditions and the investee’s business operations.
Our audit procedures related to the evaluation of the investment in HC Series B Stock for impairment included the following, among others:
/s/ HORNE LLP
We have served as the Company's auditor since 2023.
Ridgeland, Mississippi
March 27, 2025
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HG HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2024 and 2023
(in thousands, except per share and share amounts)
December 31, December 31,
ASSETS
Investments
Fixed income securities, held-to-maturity 1,000 3,122
Investments in limited partnerships 2,183 1,280
Interest and dividend receivables 19 293
Property, plant and equipment, net 62 120
LIABILITIES
Accrued salaries, wages and benefits 496 350
Reserve for title claims 637 313
Other liabilities 35 32
STOCKHOLDERS’ EQUITY
Noncontrolling interests (148 ) (17 )
Total liabilities and stockholders’ equity $ 42,168 $ 41,904
The accompanying notes are an integral part of the consolidated financial statements.
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HG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2024 and 2023
(in thousands, except per share and share amounts)
Revenues:
Cost of revenues:
Provision for title claim losses 328 174
Search and other fees 62 122
Operating expenses:
General and administrative expenses (12,579 ) (12,992 )
Other income/expenses:
Other income (expense), net 1,151 (82 )
Loss from investments in related parties, net (815 ) (132 )
Loss from operations before income taxes (267 ) (908 )
Income tax (benefit) expense (18 ) 45
Net loss attributable to noncontrolling interests (10 ) (131 )
Net loss attributable to the Company's shareholders $ (239 ) $ (822 )
Basic and diluted per share net loss attributable to the Company's shareholders:
Weighted average shares outstanding:
The accompanying notes are an integral part
of the consolidated financial statements.
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HG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the years ended December 31, 2024 and 2023
(in thousands)
Additional Retained
Common Stock Paid-in Earnings Noncontrolling
Shares Common Stock Capital (Deficit) Interest Total
Issuance of noncontrolling interest(1) - - - - 10 10
Repurchase of common stock (8 ) (1 ) - (61 ) - (62 )
Distribution of noncontrolling interest - - - - (121 ) (121 )
Repurchase of common stock (49 ) (1 ) - (242 ) - (243 )
The accompanying notes are an integral part
of the consolidated financial statements.
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HG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2024 and 2023
(in thousands)
Cash flows from operating activities:
Net loss attributable to the Company's shareholders $ (239 ) $ (822 )
Net loss attributable to noncontrolling interests (10 ) (131 )
Depreciation expense 59 87
Amortization expense 74 75
Dividends on HC Realty common stock - 86
Change in net asset value of investment in limited partnership (363 ) (280 )
Amortization of premium and accretion of discount, net (3 ) (9 )
Loss from investment in related parties 1,286 213
Changes in assets and liabilities:
Prepaid expenses (65 ) 78
Accounts receivable (127 ) (30 )
Interest and dividends receivables 274 42
Accrued salaries, wages, and benefits 146 181
Unearned premium reserve - (300 )
Reserve for title claims 324 26
Other accrued expenses 16 (181 )
Lease liabilities 26 (113 )
Other liabilities 2 3
Net cash provided by operating activities 1,961 1,683
Cash flows from investing activities:
Purchases of property, plant, and equipment - (51 )
Purchases of investments (775 ) -
Purchases of investments in related parties (525 ) (33 )
Proceeds from sale of investments 235 -
Proceeds from redemptions of fixed-income securities 2,125 1,200
Net cash provided by investing activities 1,060 1,116
Cash flows from financing activities:
Repurchase of common stock (243 ) (62 )
(Distribution) issuance of non-controlling interest (121 ) 10
Net cash used in financing activities (364 ) (52 )
Net increase in cash and cash equivalents and restricted cash 2,657 2,747
Cash and cash equivalents and restricted cash at beginning of year 17,752 15,005
Cash and cash equivalents and restricted cash at end of year $ 20,409 $ 17,752
Cash and cash equivalents and restricted cash $ 20,409 $ 17,752
The accompanying notes are an integral part
of the consolidated financial statements
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HG HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and reflect the consolidated operations of HG Holdings, Inc. The consolidated financial statements include the accounts of HG Holdings, Inc. and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated.
HG Holdings, Inc. (together with its consolidated subsidiaries, the “Company,” “we,” ‘us” or “our”) operates through its subsidiaries, National Consumer Title Insurance Company (“NCTIC”), National Consumer Title Group, LLC (“NCTG”), Title Agency Ventures, LLC (“TAV”), HG Managing Agency, LLC (“HGMA”), Omega National Title Agency, LLC (“ONTA” or “Omega”), Omega National Title of Florida, LLC (“ONF”) and Omega National Title of Pensacola, LLC (“ONP”), and through an affiliated investment in HC Government Realty Trust, Inc., a Maryland corporation (“HC Realty”).
The significant accounting policies of the Company are summarized below:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held in banks and other short-term, highly liquid investments with the original maturity of three months or less.
Restricted Cash
Restricted cash includes cash held in escrow under escrow agreements. Cash held by the Company in escrow was approximately $8.3 million and $7.5 million as of December 31, 2024 and 2023, respectively. The Company records an offsetting escrow liability reflecting that we are liable for the disposition of these escrowed funds.
Investments
Fair Value Measurement - Where available, we estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the New York Stock Exchange, Nasdaq and NYSE American. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Refer to Note 4, Investments for additional information. Accounting for fair value measurements requires disclosure of the level within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3).
Fixed income debt securities - The Company's fixed income debt portfolio consists of U.S. government and agency securities. Our fixed income securities are classified as held-to-maturity and are reported at amortized cost. The Company performs ongoing impairment evaluations of its fixed income securities, and we did not record any current expected credit losses ("CECL") during the years ended December 31, 2024 and 2023, as the U.S. government and agency securities are assumed to have no risk of non-payment.
Investments in Limited Partnerships - The Company has elected the practical expedient for fair value for its investment in limited partnership which is estimated based on the Company's share of the net asset value (“NAV”) of the limited partnership, as provided by the independent fund administrator. The Company’s share of the NAV represents the Company’s proportionate interest in the members’ equity of the limited partnership.
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Investments in Related Parties
The Company’s investments in related parties are accounted for either under the equity method of accounting or, where they do not meet the criteria of accounting under the equity method, under the cost adjusted for market observable events less impairment method. For information about the Company’s investments in related parties, refer to Note 3, Investments in Related Parties.
Equity Method Investments - Investments in entities over which the Company exercises significant influence, but does not control, are accounted for using the equity method of accounting. Investments accounted for under the equity method of accounting are initially recorded at cost and the Company subsequently increases or decreases the investment by its proportionate share of the net income or loss and other comprehensive income or loss of the investee. For purposes of this assessment, the Company considers the investee’s cash position, liquidity, earnings and revenue outlook, equity position, and ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Company estimates the fair value of the equity method investment and recognizes in current earnings an impairment loss that is equal to the difference between the fair value of the equity method investment and its carrying amount.
Other Investments in Related Parties - Investments in which the Company does not exercise significant influence over the investee and that do not have readily determinable fair values, are accounted for under the measurement alternative - cost, less impairment, adjusted for any observable price changes, when available. The Company reviews its equity securities without readily determinable fair values on a regular basis to determine if the investment is impaired. For purposes of this assessment, the Company considers the investee’s cash position, liquidity, earnings and revenue outlook, equity position, and ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Company estimates the fair value of the equity investment and recognizes in current earnings an impairment loss that is equal to the difference between the fair value of the equity investment and its carrying amount.
Variable and Voting Interest Entities
We evaluate our investments to determine whether those investments are variable interest entities ("VIEs") or voting interest entities (“VOEs”) and whether consolidation is required. The Company consolidates the results of operations and financial position of all VOEs in which it has a controlling financial interest and VIEs in which it is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VOE or VIE, depends on the facts and circumstances surrounding each entity.
Noncontrolling interests
The Company consolidates the results of entities in which it has a controlling financial interest. Noncontrolling interests are presented as a separate line within stockholders’ equity in the Consolidated Balance Sheets. The Company presents the portion of net loss attributable to noncontrolling interests as a separate line within the Consolidated Statements of Operations.
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") Topic 805, Business Combinations ("Topic 805"), requires an acquirer to recognize, separately from goodwill, the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree, and to measure these items generally at their acquisition date fair values. Goodwill is recorded as the residual amount by which the purchase price exceeds the fair value of the net assets acquired. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we are required to report provisional amounts in the financial statements for the items for which the accounting is incomplete. Adjustments to provisional amounts initially recorded that are identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. During the measurement period, we are also required to recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends the sooner of one year from the acquisition date or when we receive the information we were seeking about facts and circumstances that existed as of the acquisition date or learn that more information is not obtainable. Contingent consideration liabilities or receivables recorded in connection with business acquisitions must also be adjusted for changes in fair value until settled.
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Goodwill
Goodwill represents the excess of purchase price over fair value of identifiable net assets acquired and liabilities assumed in a business combination. Goodwill and other intangible assets with indefinite useful lives are reviewed for impairment at the reporting unit level on an annual basis or more frequently if circumstances indicate potential impairment, through a comparison of fair value to the carrying amount. In evaluating the recoverability of goodwill, we perform a quarterly goodwill impairment analysis based on a review of qualitative factors to determine if events and circumstances exist, which will lead to a determination that the fair value of a reporting unit is greater than its carrying amount, prior to performing a full fair-value assessment. In the absence of any indicators of potential impairment, the evaluation of goodwill is performed annually during the
fourth quarter of each year.
For our annual goodwill impairment test, we utilize two approaches to value goodwill: the income approach, which converts future estimates of cash flows by reporting unit to a single (discounted) current value, and the market approach, which uses publicly available peer data to estimate value of the reporting unit. The valuation techniques performed in our quantitative analysis make use of our estimates and assumptions related to revenue and operating margin growth rates, future market conditions, determination of market multiples and comparative companies, and determination of risk-adjusted discount rates. In performing our analysis, we make assumptions and apply judgments to estimate industry economic factors and the future profitability of our businesses. Based on our quantitative annual valuations as of December 31, 2024 and 2023, we have concluded that there was no impairment of goodwill.
Leases
The Company enters into lease agreements that are primarily used for office space, and all current leases are accounted for as operating leases. Amounts related to operating leases are included in lease assets and lease liabilities on the Consolidated Balance Sheets. Lease assets represent the Company’s right to use an underlying asset for the stated lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from an operating lease. Lease assets and liabilities are recognized at the date of the lease commencement and are based on the present value of lease payments over the lease term. The Company's current leases do not provide an implicit interest rate, thus the Company calculated a discount rate using estimates of its incremental borrowing rate for similar collateralized borrowings and capitalization rates in determining the present value of lease payments. A portion of the Company's current leases includes an option to extend or cancel the lease term. The exercise of such an option is solely at the Company's discretion. The operating lease liability recorded in the Consolidated Balance Sheets includes lease payments related to options to extend or cancel the lease term if the Company determined at the date of adoption that the lease was expected to be renewed or extended. A lease expense, which is calculated on a straight-line basis over the lease term and presented as part of operating expenses in the Consolidated Statements of Operations, is composed of the amortization of the lease asset and the accretion of the lease liability.
Variable lease payments are not capitalized and are recorded as lease expense when incurred. Operating leases with initial terms of 12 months or less (short-term leases), which are not reasonably certain to be extended at the commencement date, are not capitalized on the balance sheet. For further information on the Company’s leasing arrangements see Note 12, Commitments and Contingencies.
Property, Plant and Equipment
Depreciation of property, plant and equipment is computed using the straight-line method based upon the estimated useful lives. Depreciation expense is included in operating expenses in the Consolidated Statements of Operations. Maintenance and repairs are charged to expense as incurred; renewals and betterments are capitalized. Assets are reviewed for possible impairment when events indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of property, plant and equipment, which could result in impairment charges in future periods. Our depreciation policy reflects judgments on the estimated useful lives of assets. No impairment losses on our long-lived assets were recognized during the years ended December 31, 2024 and 2023.
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Title Premiums Written and Commissions to Agents
When the policy is issued directly, the premiums collected are retained by the Company. When the policy is issued through a title insurance agency, the agency retains a majority of the premium as a commission and remits the net amount to the Company. The Company’s title insurance premiums are recognized as revenue at the time title insurance policies written by agencies are reported to the Company. Our direct title insurance premiums and agency commission revenues are recognized as revenue at the time of closing of the underlying transaction as the earnings process is then considered complete. Expenses typically associated with premiums, including agent commissions, premium taxes, and a provision for future claims are recognized concurrent with recognition of related premium revenue. Fee income related to escrow and other closing services is recognized when the related services have been performed and completed. Other revenues are recognized when contractual obligations are fulfilled or as services are provided. Quarterly, the Company evaluates the collectability of receivables. Write-offs of receivables have not been material to the Company.
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.
Reserve for Title Claims
The total reserve for all reported and unreported losses the Company incurred is represented by the reserve for title claims. The Company's reserve for unpaid losses and loss adjustment expenses ("LAE") is established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders that may be reported in the future (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.
Reinsurance
The accompanying Consolidated Balance Sheets reflect reserves for claims gross of reinsurance ceded. The accompanying Consolidated Statements of Operations reflect premiums and provision for claims net of reinsurance ceded. The reinsurance arrangements allow management to control exposure to potential claims arising from large risks and catastrophic events. Amounts recoverable from reinsurers are estimated in a manner consistent with the reserves associated with the reinsured policies. Reinsurance premiums, losses, and LAE are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance agreements.
Interest Income
Interest income, as well as the related amortization of premium and accretion of discount, on debt securities are recognized on an accrual basis under the effective interest rate method and are included in Net investment income in the Consolidated Statements of Operations.
Income Taxes
Deferred income taxes are determined based on the difference between the consolidated financial statements and income tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense represents the change in the deferred tax asset/liability balance. Income tax credits are reported as a reduction of income tax expense in the year in which the credits are generated. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. Interest and penalties on uncertain tax positions are recorded as income tax expense.
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Earnings per Share of Common Stock