HG Holdings, Inc. - Quarter Report: 2018 June (Form 10-Q)

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

or

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____.

 

Commission file number: 0-14938

 

HG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware	54-1272589
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

2115 E. 7^th Street, Suite 101, Charlotte, NC 28204
(Address of principal executive offices, Zip Code)

 

252-355-4610

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (X) No ( )

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (X) No ( )

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act,:

Large accelerated filer ( ) Accelerated filer ( ) Non-accelerated filer ( ) (Do not check if a smaller reporting company) Smaller reporting company (X)

Emerging growth company ( )

 

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes (X) No ( )

 

As of July 19, 2018, 14,712,377 shares of common stock of HG Holdings, Inc., par value $.02 per share, were outstanding.

 

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		June 30,				December 31,
		2018				2017
ASSETS
Current assets:
Cash		$	6,101			$	-
Restricted cash			400				631
Prepaid expenses and other current assets			259				4
Current assets from discontinued operations			-				27,893
Total current assets			6,760				28,528
Property, plant and equipment, net			4				-
Subordinated note receivable			5,073				-
Investment in closely held company			168				-
Other assets			480				465
Noncurrent assets from discontinued operations			-				3,577
Total assets		$	12,485			$	32,570
LIABILITIES
Current liabilities:
Accounts payable		$	7			$	-
Accrued salaries, wages and benefits			33				65
Other accrued expenses			140				28
Current liabilities from discontinued operations			53				12,647
Total current liabilities			233				12,740
Other long-term liabilities			266				567
Long-term liabilities from discontinued operations			-				6,778
Total liabilities			499				20,085
STOCKHOLDERS’ EQUITY
Common stock, $0.02 par value, 25,000,000 shares authorized, 14,712,377 and 14,920,117 shares issued and outstanding on each respective date			294				298
Capital in excess of par value			17,241				17,104
Retained deficit			(5,549	)			(2,495	)
Accumulated other comprehensive loss			-				(2,422	)
Total stockholders’ equity			11,986				12,485
Total liabilities and stockholders’ equity		$	12,485			$	32,570

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		Three Months								Six Months
		Ended								Ended
		June 30,				July 1,				June 30,				July 1,
		2018				2017				2018				2017
Operating Expenses
General and administrative expenses		$	(160	)		$	(235	)		$	(572	)		$	(507	)
Total operating expenses			(160	)			(235	)			(572	)			(507	)
Interest income			242				-				317				-
Income (loss) from continuing operations before income taxes			82				(235	)			(255	)			(507	)
Income tax benefit			(231	)			-				(212	)			-
Income (loss) from continuing operations			313				(235	)			(43	)			(507	)
Discontinued operations
Gain (loss) from discontinued operations (including loss on sale of assets of $865)		$	-			$	247			$	(3,011	)		$	102
Income tax benefit			-				(2	)			-				(3	)
Loss from discontinued operations			-				249				(3,011	)			105
Net income (loss)		$	313			$	14			$	(3,054	)		$	(402	)
Basic and diluted income (loss) per share:
Income (loss) from continuing operations		$	.02			$	(.02	)		$	-			$	(.04	)
Income (loss) from discontinued operations			-				.02				(.21	)			.01
Net income (loss)		$	.02			$	-			$	(.21	)		$	(.03	)
Weighted average shares outstanding:
Basic			14,519				14,203				14,551				14,196
Diluted			14,519				14,203				14,551				14,196

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		Three Months								Six Months
		Ended								Ended
		June 30,				July 1,				June 30,				July 1,
		2018				2017				2018				2017
Net income (loss)		$	313			$	14			$	(3,054	)		$	(402	)
Other comprehensive income:
Amortization of actuarial loss			-				25				-				50
Adjustments to net periodic benefit cost			-				25				-				50
Settlement of employee benefit obligations directly related to the disposal transaction			-				-				2,422				-
Comprehensive income (loss)		$	313			$	39			$	(632	)		$	(352	)

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		Six Months Ended
		June 30,				July 1,
		2018				2017
Net loss from continuing operations		$	(43	)		$	(507	)
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Accretion income on note receivable			(111	)			-
Stock compensation expense			14				-
Paid in kind interest on subordinated note receivable			(112	)
Changes in assets and liabilities:
Prepaid expenses and other current assets			(255	)			-
Other assets			(15	)			-
Accounts payable			7				-
Other accrued expenses			80				-
Other long-term liabilities			(301	)			-
Net cash used by continuing operations			(736	)			(507	)
Cash flows from investing activities:
Purchase of property, plant and equipment			(4	)			-
Net cash used by investing activities			(4	)			-
Cash flows from financing activities:
Repurchase and retirement of common stock			(133	)			-
Stock purchase and retirement for tax withholdings on vesting of restricted award			(30	)			-
Net cash used by financing activities			(163	)			-
Cash flows from discontinued operations:
Cash used by discontinued operations			(3,664	)			829
Cash provided by investing activities			9,228				47
Cash provided by financing activities			1,209				(49	)
Net cash provided by discontinued operations			6,773				827
Net increase in cash and restricted cash			5,870				320
Cash and restricted cash at beginning of period			631				4,212
Cash and restricted cash at end of period		$	6,501			$	4,532
Supplemental Non-Cash Disclosures:
Payments made on line of credit from proceeds of the sale		$	(1,348	)		$	-

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1.	Preparation of Interim Unaudited Consolidated Financial Statements

 

The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles in the United States have been either condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of results of operations and financial position. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our latest Annual Report on Form 10-K.

 

On March 2, 2018, we sold substantially all of our assets (the “Asset Sale”) to Churchill Downs LLC (“Buyer”), pursuant to the terms of the Asset Purchase Agreement, dated as of November 20, 2017, as amended by the First Amendment thereto dated January 22, 2017 (the “Asset Purchase Agreement”). Operations of the furniture business from January 1, 2018 through March 2, 2018 are reflected as discontinued operations pursuant to the provisions of Accounting Standards Codification 2015-20, Presentation of Financial Statements – Discontinued Operations for all periods presented. As a result of the sale, the Company no longer has a wholly owned subsidiary.

 

As a result of the Asset Sale, we have a variable interest in two entities that have been determined to be variable interest entities ("VIE"). If we conclude that we are the primary beneficiary of a VIE, we are required to consolidate it. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of our VIE requires significant assumptions and judgments. We have concluded that we are not the primary beneficiary of the two VIEs as we do not have the power to direct the activities that most significantly impact the VIEs’ economic performance and therefore are not required to consolidate these entities.

 

Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statement for all periods presented, unless otherwise noted.

 

Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to 2018 presentation.  These reclassifications do not have an impact on the consolidated statements of operations or the consolidated statement of comprehensive income (loss).  During the second quarter of 2018, the Company identified errors within the accrued franchise taxes and workers compensation liabilities that originated in prior periods under the former management team.  As the errors were not material to the prior period, the Company has revised the consolidated balance sheet as of December 31, 2017 to reduce the accrual for other long-term liabilities by approximately $250,000 to correct these errors.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment is effective for public entities for annual reporting periods beginning after December 15, 2019, however early application is permitted for reporting periods beginning after December 15, 2018. The Company does not anticipate the adoption of ASU 2016-13 to have a material impact to the consolidated financial statements.

 

 

1.	Preparation of Interim Unaudited Consolidated Financial Statements (continued)

 

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification ("ASC"), Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of -use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). Our leases as of December 31, 2016, principally relate to real estate leases for corporate office, showrooms and warehousing. The new standard will be effective for the first quarter of our fiscal year ending December 31, 2019. Early adoption is permitted. As of June 30, 2018, we do not have any long-term leases. We will evaluate the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures at such time a long-term lease is executed. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Subsequently, the FASB issued ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments-Overall." ASU 2016-01 requires equity investments except those under the equity method of accounting to be measured at fair value with the changes in fair value recognized in net income. The amendment simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. For equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient in ASC 820 to estimate fair value using the net asset value per share of the investment, the guidance provides a new measurement alternative. Entities may choose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company adopted ASU 2016-01 on January 1, 2018 and elected an accounting policy to measure its 5% equity interest in Churchill Downs Holdings, Ltd, as described in Note 5, under the cost method, less any impairment, plus or minus changes resulting from observable price changes. The adoption of ASU 2016-01 did not have a material impact to the Company’s consolidated financial statements. 

 

 

 

2.	Discontinued Operations

 

On March 2, 2018, we sold substantially all of our assets (the “Asset Sale”) to Churchill Downs LLC (“Buyer”), pursuant to the terms of the Asset Purchase Agreement, dated as of November 20, 2017, as amended by the First Amendment thereto dated January 22, 2017 (the “Asset Purchase Agreement”). Operations of the furniture business from January 1, 2018 through March 2, 2018 are reflected as discontinued operation pursuant to the provisions of Accounting Standards Codification 2015-20, Presentation of Financial Statements – Discontinued Operations for all periods presented.

 

Loss from discontinued operations, net of taxes, comprised the following for the three and six months ended June 30, 2018 and July 1, 2017 (in thousands):

 

 

Included in selling, general and administrative expenses incurred for the six months ended June 30, 2018 were certain transaction costs including investment banking fees, legal fees, and other transaction costs directly attributable to the Asset Sale.

 

 

2.	Discontinued Operations (continued)

 

Net (liabilities) assets for discontinued operations are as follows (in thousands):

 

 

As a result of the Asset Sale, the Company has no revenue-generating operations. While the cash and subordinated secured promissory note received as partial consideration for the Asset Sale generate interest income, the Company believes that the cash on hand is sufficient to fund operating expenses for at least 12 months from the date of these financial statements. As previously announced, the Company may consider a rights offering of the Company’s common stock to existing shareholders to raise additional cash for acquisition purposes which could provide the Company greater resources and flexibility in acquiring non-furniture assets.

 

 

3.	Property, Plant and Equipment

 

 

 

4.	Subordinated Secured Promissory Note Receivable

 

The Company received a $7.4 million subordinated secured promissory note from the Buyer as partial consideration for the sale of substantially all of our assets during the first quarter of 2018.  The note matures on March 2, 2023, at which time the total principal amount is due.  Interest on the principal balance of the note accrues daily at an annual fixed rate of 6.00%.  Cash interest payments begin upon certain availability thresholds defined in the Buyer’s senior secured loan facility.  These thresholds were not met for the period ended June 30, 2018 resulting in the Company accruing approximately $112,000 of interest income on the note.  Given that the availability thresholds were not met, the accrued interest was considered paid in kind and capitalized to the principal balance of the note.

 

During the first quarter 2018, we evaluated the fair value of the subordinated secured promissory note, which resulted in a fair value adjustment of $2.6 million.  We recorded accreted interest income on the fair value adjustment of the note of $111,000 during the three months ended June 30, 2018.

 

 

4.	Subordinated Secured Promissory Note Receivable (continued)

 

Resulting from the interest being paid in kind and the accretion of the fair value adjustment, the carrying value of the note increased $223,000 during the period ended June 30, 2018 to $5.1 million.

 

 

5.	Investment in Closely Held Company

 

The Company holds a 5% equity interest in Churchill Downs Holdings Ltd (“Churchill”), a British Virgin Island business company which it received as partial consideration for the sale of substantially all of our assets during first quarter 2018. The equity interest is considered a variable interest in Churchill, which the Company determined to be a variable interest entity (VIE). We concluded that we do not have the power to direct the activities that most significantly impact the economic performance of Churchill, and, therefore, we concluded we are not the primary beneficiary and accordingly have not consolidated Churchill. The investment in the closely held company is accounted for under the cost method, in accordance with generally accepted accounting principles. As of June 30, 2018, the investment had a carrying value of $168,000, which is reflected as an “Investment in closely held company” on the consolidated balance sheet and represents our maximum exposure to loss.

 

 

6.	Income taxes

 

During the first six months of 2018, we recorded a non-cash charge to our valuation allowance of $368,000 increasing our valuation allowance against deferred tax assets to $10.0 million at June 30, 2018. The primary assets covered by this valuation allowance are net operating losses, which are approximately $35.5 million at June 30, 2018. The Company did not make any cash payments for income tax in the current three and six month period ended June 30, 2018 and prior year three and six month period ended July 1, 2017 due to our net loss. During the current three month period, we recorded a $231,000 decrease in tax positions of prior years’ related to our unrecognized tax benefits position under FIN 48.

 

We maintain a valuation allowance against deferred tax assets that currently exceed our deferred tax liabilities. The primary assets covered by this valuation allowance are net operating loss carry-forwards. The valuation allowance was calculated in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Our results over the most recent three-year period were heavily affected by our business restructuring activities. Our cumulative loss, excluding income from the Continued Dumping and Subsidy Offset Act, in the most recent three-year period, in our view, represented sufficient negative evidence to require a valuation allowance under the provisions of ASC 740, Income Taxes. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal, resulting in no deferred tax asset balance being recognized. Should we determine that we will not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made.

 

Our effective tax rate for the current and prior year three and six month periods were effectively 0% due to our net loss.

 

 

7.	Stockholders’ Equity

 

Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options and restricted stock are treated as potential common stock for purposes of computing diluted earnings per share. Basic and diluted earnings per share are calculated using the following share data (in thousands):

 

 

 

7.	Stockholders’ Equity (continued)

 

In both the current three and six month periods ended June 30, 2018 and prior three and six month periods ended July 1, 2017, the dilutive effect of stock options was not recognized since we had net losses. Approximately 63,000 shares and 993,000 shares in 2018 and 2017, respectively, were issuable upon the exercise of stock options, which were not included in the diluted per share calculation because they were anti-dilutive. Also, 205,000 shares and 462,000 shares in 2018 and 2017, respectively, of restricted stock were not included because they were anti-dilutive.

 

From time to time, we will repurchase common shares that are tendered by recipients of restricted stock awards to satisfy tax withholding obligations on vested restricted stock. There were no such repurchases during the current three-month period.

 

In July 2012, the Board authorized the purchase of up to $5.0 million of our common stock.  These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, at prices the Company deems appropriate.  In the three month period ended June 30, 2018, we repurchased 46,556 shares for $30,000 resulting in total repurchases for the six month period ended June 30, 2018 to 221,121 shares for $133,000. No shares were repurchased in the prior year three or six month period ended July 1, 2017. As of June 30, 2018, we have approximately $2.8 million remaining on this authorization to repurchase our common stock.

 

A reconciliation of the activity in Stockholders’ Equity accounts for the six months ended June 30, 2018 is as follows (in thousands):

 

 

Stock compensation expense of $391,000 for the six months ended June 30, 2018 was related to discontinued operations while $14,000 was related to continuing operations. Dividends of $139,000 for the six months ended June 30, 2018 were related to discontinued operations.

 

 

 

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