Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the accompanying Unaudited Consolidated Financial Statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the "SEC") on March 27, 2025. The terms the "Company", "we", "our" or "us" refer to HG Holdings, Inc., together with its consolidated subsidiaries, and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our accompanying Unaudited Consolidated Financial Statements and the notes thereto.

Forward-Looking Statements

Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "estimates," "expects," "may," "will," "should," "could," "would," "intends" or "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the occurrence of events that negatively impact the Company's liquidity in such a way as to limit or eliminate the Company's ability to use its cash on hand to fund further asset acquisitions, an inability on the part of the Company to identify additional suitable businesses to acquire or develop, and the occurrence of events that negatively impact the title insurance operations of the Company's subsidiaries and/or the business or assets of HC Realty and the value of our investment in HC Realty, such as HC Realty's dependence on leases by the U.S. government and its agencies for substantially all of its revenues, and the risk that the U.S. government reduces its spending on real estate or that it changes its preference away from leased properties. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

Overview

For a description of our business, including descriptions of segments and recent business developments, see the discussion in Note 1, Basis of Presentation and Nature of Operations - Description of the Business in the accompanying Unaudited Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Part I, Item 2.

As of June 30, 2025, our sources of income include earnings from our title insurance subsidiaries, management service fees and interest earned on invested assets. The Company believes that the revenue generated from these sources and cash on hand is sufficient to fund operating expenses for at least 12 months from the date of the accompanying Unaudited Consolidated Financial Statements.

The Company will continue to pursue acquisition opportunities which will allow us to potentially derive benefit from the Company's net operating loss carryforwards and also create appropriate risk adjusted returns for stockholders.

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 declined levels in total real estate transactions in the last several years, largely due to higher mortgage interest rates. In the last four months of 2024, the Federal Reserve lowered the federal funds rate to a current range of 4.25% to 4.50%; however, the ongoing political and market uncertainties have prevented the Federal Reserve from reducing the federal funds rate further, stalling any small improvements in real estate activity. While the 2024 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 July 2025,interest rates on a Freddie Mac 30-year, fixed rate mortgage averaged 6.8% in the first quarter of 2025 and are projected to stay relatively stable at the current level through the end of 2025. However, despite continued elevated interest rates, per the MBA Mortgage Finance Forecast as of July 2025, mortgage origination volume is expected to increase by approximately 14% in 2025 as compared to 2024, to approximately $2.02 trillion in mortgage originations as compared to $1.78 trillion in 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 in the last several years. 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.

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.

Results from Operations

(in thousands)

		Three Months Ended												Six Months Ended
		June 30,				June 30,								June 30,				June 30,
		2025				2024				Change				2025				2024				Change
Net title premium written		$	1,998			$	1,670			$	328			$	3,386			$	3,074			$	312
Escrow and other title fees			812				704				108				1,396				1,246				150
Management fees			1,250				750				500				2,000				1,503				497
Total revenue			4,060				3,124				936				6,782				5,823				959
Cost of revenues			(157	)			(94	)			(63	)			(257	)			(212	)			(45	)
Gross profit		$	3,903			$	3,030			$	873			$	6,525			$	5,611			$	914
Operating expenses			(3,321	)			(3,150	)			(171	)			(6,492	)			(6,231	)			(261	)
Other income, net			366				(49	)			415				635				511				124
Income (loss) before income taxes		$	948			$	(169	)		$	1,117			$	668			$	(109	)		$	777

Comparison of three and six months ended June 30, 2025 and 2024

The Company's net title premiums written for the three- and six-month periods ended June 30, 2025 were $2.0 million and $3.4 million, respectively, compared to net title premiums written for the three- and six-month periods ended June 30, 2024 of $1.7 million and $3.1 million, respectively. The increase in net title premiums written for the three- and six-month periods ended June 30, 2025 as compared to the same periods of last year was due to higher volume of affiliated title business written during the second quarter of 2025. Escrow and other title fees revenue also increased by $0.1 million for the three months ended June 30, 2025, as compared to the three months ended June 30, 2024, and increased $0.2 million for the six months ended June 30, 2025, as compared to the six months ended June 30, 2024, due to higher volume of affiliated title business written during the second quarter of 2025.

Management fees increased to $1.3 million and $2.0 million for the three and six months ended June 30, 2025, respectively, as compared to $0.8 million and $1.5 million for the three and six months ended June 30, 2024, respectively. The increase was due to the new Services Agreement with HP Risk becoming effective June 1, 2025. HP Risk is a wholly-owned subsidiary of HP Holding Company, LLC, which, in turn, is wholly owned by certain affiliates of Steven A. Hale II, our Chairman and Chief Executive Officer, pursuant to which the Company is providing certain managerial and operational services to HP Risk for consideration from HP Risk of $6.0 million per year over the course of three years. Such services include, but are not limited to: reinsurance brokerage services; the review and improvement of financial goals; compliance with legal and regulatory mandates; maintenance of an ethical business environment; investment and asset manager compliance; cash and equity management; corporate tax management; personnel management; related party transaction oversight; tax preparation administration; strategic capital modeling; the review of potential acquisitions and transactions involving affiliates and third parties, including but not limited to, renewal rights deals, loss portfolio transfers or entity acquisitions; execution of (or provision for the execution of) all general corporate legal matters; and provision of internal control management services.

Total revenue was $4.1 million and $3.1 million for the three-month periods ended June 30, 2025 and June 30, 2024, respectively, and $6.8 million and $5.8 million for the six-month periods ended June 30, 2025 and June 30, 2024, respectively. The increase in revenue was primarily a result of the management fees derived from the Services Agreement with HP Risk and higher title affiliated business volume written in the second quarter of 2025.

The Company's cost of revenues consists primarily of a provision for title claim losses and underwriting expenses, which are largely comprised of commissions to unaffiliated title agencies. Cost of revenues for the three-month periods ended June 30, 2025 and June 30, 2024 was $0.2 million and $0.1 million, respectively. Cost of revenues for the six-month period ended June 30, 2025 was $0.3 million compared to $0.2 million for the six-month period ended June 30, 2024. The increase in cost of revenue for both the three and six months ended June 30, 2025, as compared to prior periods, was attributable to a $47,000 increase in the provision for title claims loss and loss adjustment expense attributable to one claim related to the prior insured year, as a result of estimation of the reserve for claims loss and loss adjustment expenses. Original estimates of ultimate loss exposures are decreased or increased as additional information becomes known during the adjustment process regarding individual claims.

The Company's operating expenses primarily consist of general and administrative expenses such as personnel expenses, office and technology expenses, and professional fees. Operating expenses increased $0.2 million for the three months ended June 30, 2025 as compared to three months ended June 30, 2024, and $0.3 million for the six months ended June 30, 2025, as compared to the six months ended June 30, 2024. The increase is primarily due to higher legal and professional fees related to transactions described in Note 3, Significant Transactions, in the accompanying Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as an increase in employee health and benefit costs in 2025 as compared to 2024.

Other income, net primarily consists of net interest income, dividend income, change in the net asset value of investment in limited partnership as well as changes in value and distributions from our related party investments. Other income, net was$0.4 million for the three-month period ended June 30, 2025, compared to Other expense, net of ($0.05 million) for the three-month period ended June 30, 2024. The increase was primarily a result of higher distributions from related parties for the three-month period ended June 30, 2025 of $240,000, as compared to $39,000 distributed during the three-month period ended June 30, 2024. Additionally, Other expense, net during the three-month period ended June 30, 2024 was driven by the impairment of HC Common Stock of $241,000. Other income, net was $0.6 million for the six-month period ended June 30, 2025, compared to $0.5 million for the six-month period ended June 30, 2024. The increase was primarily driven by higher distributions from related parties for the six-month period ended June 30, 2025 of $485,000, as compared to $200,000 distributed during the six-month period ended June 30, 2024 as well as lower impairment taken on the Company's investments in HC Common Stock and HC Series B Stock of $41,000 during the six-month period ended June 30, 2025 as compared to impairment of $241,000 during the six month period ended June 2024. Additionally, HC Realty did not declare or pay dividends on HC Common Stock or HC Series B Stock during the six-month period ended June 30, 2025, compared to $0.3 million of dividends declared on the HC Series B Stock for the six-month period ended June 30, 2024.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand, earnings from our title insurance subsidiaries, management service fees and interest earned on invested assets. At June 30, 2025, we had$9.5 million in cash and cash equivalents and an additional $11.1 million in restricted cash, substantially all of which is cash held in escrow for title insurance transactions. A portion of our unrestricted and restricted cash is currently held in savings accounts earning interest at approximately 3.8%annually. Historically, we also received discretionary dividends on our HC Common Stock and HC Series B Stock at annual dividend rates of approximately 0.4% and 10%, respectively. No dividends have been declared on HC Common Stock and HC Series B Stock since the first quarter of 2024. During the second quarter of 2025, the Company entered into the Services Agreement with HP Risk under which the Company earns a management advisory fee of $6.0 million per year over the course of three years. We believe that the sources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months, even if no dividends are declared on HC Common Stock and HC Series B Stock within the next 12 months.

Cash Flows

(in thousands)

		Six Months Ended				Six Months Ended
		June 30, 2025				June 30, 2024
Net cash provided by operating activities		$	2,907			$	7,754
Net cash provided by (used in) investing activities			1,059				(500	)
Net cash used in financing activities			(3,851	)			(346	)
Net increase in cash and cash equivalents and restricted cash			115				6,908
Cash and cash equivalents and restricted cash at beginning of period		$	20,409			$	17,752
Cash and cash equivalents and restricted cash at end of period		$	20,524			$	24,660

Cash flows provided by operating activities differ from net income (loss) due to adjustments for non-cash items, such as gains and losses on investments, the timing of disbursements for taxes, claims and other accrued liabilities, and collections or changes in receivables and other assets. Net cash provided by operating activities of $2.9 million differs from operating results for the six-month period ended June 30, 2025, primarily due to an increase of $2.8 million in escrow liabilities on the title insurance subsidiaries. Net cash provided by operating activities of $7.8 million differs from operating results for the six-month period ended June 30, 2024, primarily due to an increase of $7.8 million in escrow liabilities on the title insurance subsidiaries.

Cash flows provided by (used in) investing activities include effects of purchases of investments and proceeds from sales or maturities of investments. During the six-month period ended June 30, 2025, the Company's fixed-income portfolio has matured, resulting in $1.0 million in proceeds. Additionally, during the six-month period ended June 30, 2025, the Company received proceeds from its investments in limited partnership of $0.3 million and provided additional contributions to related parties of $0.3 million. During the six-month period ended June 30, 2024, the Company purchased $0.7 million and received proceeds of $0.2 million from its investments in limited partnerships.

Cash flows used in financing activities include share repurchases and effects of changes in noncontrolling interest. Cash flows used in financing activities for the six-month period ended June 30, 2025 of $3.9 million consisted of $3.8 million of repurchases of common stock and $17,000 of distributions to non-controlling interest shareholders. Cash flows used in financing activities for the six-month period ended June 30, 2024 of $0.3 million consisted of $0.2 million of repurchases of common stock and $0.1 million of distributions to non-controlling interest shareholders.

Non-cash Transactions

Additionally, during the second quarter of 2025, the Company entered into an Assignment and Contribution Agreement (the "Contribution Agreement") with the certain assignors listed therein (the "Assignors"), pursuant to which the Assignors agreed to assign and contribute to the Company an aggregate of 10,203 shares of common stock, no par value ("ACMAT Common Stock"), and 291,656 shares of Class A stock, no par value ("ACMAT Class A Stock"), of ACMAT Corporation ("ACMAT"), a Connecticut corporation, and, in consideration of and exchange therefor, the Company agreed to issue to the Assignors an aggregate of 2,899,876 shares of Company common stock, contingent upon the closing of the transactions contemplated by the Services Agreement. After giving effect to the transactions pursuant to the Contribution Agreement, the Company owns approximately 39.1% of the outstanding equity of ACMAT and approximately 10.4% of the voting power of ACMAT, based on ACMAT's outstanding equity as of May 6, 2025. Holders of ACMAT Class A Stock are entitled to one-tenth vote per share in relation to ACMAT Common Stock, holders of which are entitled to one vote per share, with respect to matters subject to approval by ACMAT stockholders. ACMAT, through its subsidiaries, offers surety bonds for prime, sub-prime, specialty trade, environmental, asbestos and lead abatement contractors and miscellaneous obligations nationwide. ACMAT also provides other miscellaneous surety such as workers' compensation bonds, supply bonds, subdivision bonds, and license and permit bonds. Hale Partnership Capital Management, LLC, an entity wholly owned by Mr. Hale, is the registered investment advisor or investment manager for each of the Assignors, and Mr. Hale is the sole principal owner of Hale Partnership Capital Advisors, LLC, the general partner of all but one of the Assignors. The transaction closed on June 30, 2025.

As a result of the transaction, the Company recorded a $12.5 million investment in ACMAT Corporation based on the value of the Company's 2,899,876 shares of common stock issued as a consideration given. The transaction is classified as a nonmonetary, non-reciprocal transfer between related parties and did not constitute a business combination under ASC 805. No cash consideration was exchanged. Refer to Note 5, Investments, in the accompanying Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for initial and subsequent measurements of the Company's investments in ACMAT Common Stock and ACMAT Class A Stock.

Critical Accounting Policies

Our critical accounting policies and estimates are provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K for the year ended December 31, 2024. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the three and six months ended June 30, 2025.