Overview

For a description of our business, including descriptions of segments and recent business developments, see the discussion the notes to the financial statement contained herein including in Note 1 Basis of Financial Statements in the accompanying unaudited Consolidated Financial Statements included in Item 1 of Part I of this Report, which is incorporated by reference into this Part I, Item 2.

As of September 30, 2022, our sources of income include earnings on our title insurance subsidiaries, dividends on HC Realty Series B Stock, premiums earned on reinsurance treaties, management service agreements, and interest paid on our cash deposits and bond portfolio. The Company believes that the revenue generating from these sources, dividends paid on HC Realty Common Stock, and cash on hand is sufficient to fund operating expenses for at least 12 months from the date of these consolidated financial statements.

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





Results from Operations

Three and Nine Months Ended September 30, 2022

The Company generated dividend income of $256,000 and $769,000 for both the three and nine month periods ending September 30, 2022 and 2021.

As a result of the Company's acquisition of the title insurance operations, the Company generated title premium and other title fee revenue of $1.7 million and $5.1 million for the three and nine month periods ended September 30, 2022, respectively, compared to $984,000 for the three and nine months periods ended September 30, 2021. The title insurance subsidiaries cost of revenue consists primarily of a provision for title claim losses and underwriting expenses, which is primarily commissions to title agencies. The title insurance operating expenses consist primarily of personnel expenses, office and technology expenses and professional fees. Operating expenses for the three and nine month periods ended September 30, 2022 was $2.2 million and $6.0 million, respectively, consisting primarily of $1.3 and $3.4 million in wages, $181,000 and $493,000 of rent expense, and $73,000 and $417,000 in professional and legal fees. During the first quarter of 2022, the Company began operations of HGMA to provide management oversight of title operations. The operating expenses incurred at HGMA are included in the operating results of our title insurance segment.

As a result of the Company's reinsurance provided to other insurance companies, the Company generated reinsurance premiums earned of $3.3 million for both the three and nine month periods ended September 30, 2022. The reinsurance expenses associated with the reinsurance revenue are primarily management service costs associated with the formation and operation of White Rock USA Cell 47. Reinsurance expenses for the three and nine month periods ended September 20, 2022 was $40,000.

Corporate general and administrative expenses are not directly allocable to either of our reporting segments and consist primarily of wages and personnel costs, legal and professional fees, insurance expense, and stock based compensation. Corporate general and administrative expenses incurred were $339,000 and $904,000 for the three and nine month periods ending September 30, 2022, respectively, compared to $313,000 and $910,000 for the three and nine month periods ending September 30, 2021. General and administrative expenses for the three and nine month periods ending September 30, 2022 consisted of $64,000 and $252,000 of professional fees, $44,000 and $169,000 of wages and personnel costs, $0 and $41,000 of stock based compensation expense, and $230,000 and $442,000 of other operating expenses, respectively.

Our effective tax rate for the three and nine month periods ended September 30, 2022 and 2021 was effectively 0% due to our net operating loss carryforwards.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand, earnings from our title insurance subsidiaries, earnings from reinsurance provided to other insurance companies, management service agreements, and dividends from our HC Realty common stock and Series B Stock. We expect cash on hand to be adequate for ongoing operational expenditures for at least 12 months from the date of these consolidated financial statements. At September 30, 2022, we had $11.0 million in cash and additional $13.3 million in restricted cash, of which $13.3 million is cash held in escrow for title insurance transactions. A portion of our unrestricted and restricted cash is currently held in savings accounts earning approximately 0.05%. We also received quarterly dividends on our HC Realty common stock and Series B Stock at annual rates of 5.5% and 10%.


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Cash flows provided by operating activities differ from net income due to adjustments for non-cash items, such as gains and losses on investments and affiliates, impairment losses on note receivables, the timing of disbursements for taxes, claims and other accrued liabilities, and collections or changes in receivables and other assets. Net cash provided by operations for the nine month period ended September 30, 2022 of $10.9 million consisted of primarily reinsurance unearned premiums of $3.3 million, increase in title escrow liabilities of $5.3 million, dividends on our HC Realty Series B Stock of $769,000, and management service fees earned; offset by expense from our title operations.

On August 5, 2022, the Board authorized the repurchase of up to $1.5 million of shares of the Company's common stock. The authorization does not obligate the Company to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of the Board. Repurchases may 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 deems relevant. The Company did not repurchase any of its shares of common stock during the three month period ending September 30, 2022.

Critical Accounting Policies

Our critical accounting policies and estimates are discussed in the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2021 Annual Report on Form 10-K. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the nine months ended September 30, 2022.





Forward-Looking Statements

Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "estimates," "expects," "may," "will," "should," "could," or "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the occurrence of events 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 and/or the business or assets of HC Realty and the value of our investment in HC Realty. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

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