Overview

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

As of September 30, 2021, our sources of income include earnings on our title insurance subsidiaries, dividends on HC Realty Series B Stock, and interest paid on our cash deposits and the S&L Note. The Company believes that the revenue generating from these sources, dividends paid on HC Realty Common Stock, and cash on hand is sufficient to fund operating expenses for at least 12 months from the date of these consolidated financial statements.

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





Results from Operations

Three and Nine Months Ended September 30, 2021

The Company generated interest income of $1,000 and $13,000 for the three and nine month periods ending September 30, 2021, respectively, as compared to $176,000 and $607,000 for the three and nine month periods ending September 30, 2020, respectively. The decrease was primarily a result of decreased interest income from the Second A&R Note pursuant to the Forbearance Agreement and payoff of that note in March 2020, decreased interest income from the HC Realty Loan Agreement as a result of the payoff of that note in August 2020, ceasing to accrete interest income on the S&L Note in third quarter 2020, recognizing interest payments on the S&L Note as principal payments, and lower interest rates on our cash deposits. Interest income for the three and nine month periods ending September 30, 2021 consisted of cash interest income on our cash deposits and income tax receivable. The Company generated dividend income of $256,000 and $769,000 for the three and nine month periods ending September 30, 2021, respectively, as compared to $256,000 and $427,000 for the three and nine month periods ending September 30, 2020, respectively. The increase resulted primarily from the April 3, April 29, and June 29, 2020 acquisitions of additional HC Realty Series B Stock.

As a result of the Company's acquisition of the title insurance operations, the Company generated title premium and other title fee revenue of $838,000 and management fees of $146,000. The title insurance subsidiaries cost of revenue consists primarily of a provision for title claim losses and underwriting expenses, which is primarily commissions to title agencies. The title insurance operating expenses consist primarily of personnel expenses, office and technology expenses and professional fees. Operating expenses for the period subsequent to the Company's acquisition of NCTIC on July 1, 2021 and the acquisition of TAV on September 1, 2021 was $614,000.

Corporate general and administrative expenses are not directly allocable to either of our reporting segments and consist primarily of wages and personnel costs, legal and professional fees, insurance expense, and stock based compensation. Corporate general and administrative expenses increased to $303,000 for the three month period ending September 30, 2021 from $227,000 for the three month period ending September 30, 2020. The increase is primarily due to legal and professional fees incurred in connection with the Company's acquisitions in the quarter. For the nine months ended September 30, 2021 and 2020, the corporate general and administrative expenses decreased to $900,000 from $1.1 million primarily due to reduced legal and professional fees incurred in connection with the Company's registration statement and amendments with respect to the Rights Offering in June 2020. General and administrative expenses for the three and nine month period ending September 30, 2021 consisted of $117,000 and $355,000 of professional fees, $63,000 and $188,000 of wages, $24,000 and $69,000 of insurance expense, $21,000 and $63,000 of stock based compensation expense, and $78,000 and $225,000 of other operating expenses. Included in the expenses incurred in the three and nine month periods ended September 30, 2021 were approximately $68,000 and $200,000 of legal and professional fees and other due diligence costs related to the acquisitions.


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Our effective tax rate for the three and nine month periods ended September 30, 2021 and 2020 was effectively 0% due to our net operating loss carryforwards.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand, cash interest earned on our cash on hand and the S&L Note, earnings from our title insurance subsidiaries, and dividends from our HC Realty common and Series B Stock. We expect cash on hand to be adequate for ongoing operational expenditures for at least 12 months from the date of these consolidated financial statements. At September 30, 2021, we had $11.8 million in cash and $6.5 million in restricted cash, of which $6.3 million is cash held in escrow for title insurance transactions. A portion of our unrestricted and restricted cash is currently held in savings accounts earning approximately 0.05%. We also received quarterly dividends on our HC Realty common and Series B Stock at annual rates of 5.5% and 10%. See Note 15 of the Notes to the Consolidated Financial Statements for a discussion of uncertainties related to COVID-19.

Cash used in operations for the nine months ending September 30, 2021 of $2.7 million consisted primarily of an increase of $3.3 million in escrow liabilities on the title insurance subsidiaries.

Cash provided by investing activities for the nine months ending September 30, 2021 consisted primarily $7.7 million of cash used of the acquisition of our title insurance subsidiaries offset by cash acquired of $16.9 million and the cash principal payments received on the S&L Note of approximately $170,000.





Critical Accounting Policies

Our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our 2020 Annual Report on Form 10-K. We believe some of our critical accounting policies have changed as a result of the acquisitions of the title insurance subsidiaries.

Premiums Written and Commissions to Agents - Generally, title insurance premiums are recognized at the time of settlement of the related real estate transaction, as the earnings process is then considered complete, irrespective of the timing of the issuance of a title insurance policy or commitment. Expenses typically associated with premiums, including agent commissions, premium taxes, and a provision for future claims are recognized concurrent with recognition of related premium revenue.

Premium revenues from certain agency operations include accruals for transactions which have settled but have not been reported as of the balance sheet date. These accruals are based on estimates of the typical lag time between settlement of real estate transactions and the agent's reporting of these transactions to the Company. Reporting lag times vary by market. In certain markets, the lag time may be very short, but in others, can be as high as 100 days. The Company reviews and adjusts lag time estimates periodically, using historical experience and other factors, and reflects any adjustments in the result of operations in the period in which new information becomes available.

Quarterly, the Company evaluates the collectability of receivables. Write-offs of receivables have not been material to the Company.

Reserve for Claim Losses - The total reserve for all reported and unreported losses the Company incurred is represented by the reserve for claims. The Company's reserve for unpaid losses and loss adjustment expenses (LAE) is established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders that may be reported in the future (incurred but not reported, or "IBNR"). The Company continually reviews and adjusts its reserve estimates as necessary to reflect its loss experience and any new information that becomes available. Adjustments resulting from such reviews may be significant.

Reinsurance - The accompanying balance sheets reflect reserves for claims gross of reinsurance ceded. The accompanying statements of operations reflect premiums and provision for claims net of reinsurance ceded. The reinsurance arrangements allow management to control exposure to potential claims arising from large risks and catastrophic events. Amounts recoverable from reinsurers are estimated in a manner consistent with the reserves associated with the reinsured policies. Reinsurance premiums, losses, and LAE are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance agreements.





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Forward-Looking Statements

Certain statements made in this report are not based on historical facts but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "estimates," "expects," "may," "will," "should," "could," or "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the occurrence of events, including from the COVID-19 pandemic, that negatively impact the business or assets of HC Realty reducing the value of our investment in HC Realty, or that negatively impact our liquidity in such a way as to limit or eliminate our ability to use proceeds from the S&L Asset Sale or the Rights Offering to fund acquisitions, or an inability on our part to identify further additional suitable businesses to acquire or develop with the proceeds of the S&L Asset Sale or the Rights Offering, or an inability on the part of S&L to make payments to us under the S&L Note, or inability to successfully run and manage the new operations purchased under the Acquisition and the Second Acquisition. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

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