HG Holdings, Inc. (Form: 10-K, Received: 03/29/2019 16:05:15)

1. Significant Accounting Policies

Organization and Basis of Presentation

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The consolidated financial statements include the accounts of all subsidiaries and affiliates in which the Company holds a controlling financial interest as of the financial statement date. All subsidiaries were sold to Stanley Furniture Company, LLC, formerly Churchill Downs, LLC, in the Asset Sale effective March 2, 2018. As of the balance sheet date, we do not have any subsidiaries which are consolidated.

On March 2, 2018, we sold substantially all of our assets (the “Asset Sale”) to Stanley Furniture Company LLC, formerly 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 consideration for the Asset Sale, Buyer paid a purchase price consisting of cash in the amount of approximately $10.8 million (of which approximately $1.3 million was used to pay the outstanding amount under our credit agreement), a subordinated secured promissory note in the principal amount of approximately $7.4 million (the “Original Note”), and a 5% equity interest in Buyer’s post-closing ultimate parent company, Churchill Downs Holdings, Ltd., a British Virgin Islands business company. At the closing of the Asset Sale, Buyer acquired approximately $193,000 of cash that was on the Company’s balance sheet, resulting in the Company recording net cash received of approximately $10.6 million from the Asset Sale. The Buyer also assumed substantially all of our liabilities.

As a result of the sale, on March 2, 2018, the Company’s Board of Directors approved an amendment to the Company’s Restated Certificate of Incorporation to change the name of the Company to HG Holdings, Inc. The amendment became effective upon the filing of a Certificate of Amendment with the Secretary of State of the State of Delaware on March 2, 2018.

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 consolidated financial statements. As previously disclosed, the Company may consider a rights offering of the Company’s common stock to existing stockholders to raise additional cash for acquisitions in addition to the equity interest we acquired in HC Realty which could provide the Company greater resources and flexibility in acquiring non-furniture assets, which may include purchasing additional HC Series B Stock.

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 sheets as of December 31, 2017 to reduce the accrual for other long-term liabilities by approximately $250,000 to correct these errors.

Cash

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Restricted Cash

Restricted cash includes collateral deposits required under the Company’s letter of credit agreement, which expires in June 2019, to guarantee the Company’s workers compensation insurance policy. The restricted cash balance is expected to mature over the next twelve months. As of December 31, 2018, there was no outstanding balance on the letter of credit agreement.

Concentration of Credit Risk

The Company place its cash and restricted cash with financial institutions and, at times, cash held in depository accounts may exceed the Federal Deposit Insurance Corporation insured limit.

F-8

Revenue Recognition

Revenue, prior to the Asset Sale, was recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this principle, the Company performed the following five steps: (i) identification of a contract with a customer; (ii) identification of any separate performance obligation; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligation in the contract, if any; and (v) recognition of revenue when the Company had satisfied the underlying performance obligation if any. The Company recognized substantially all of its revenue at a point in time when control of the Company’s goods was passed to the customer, which typically occurs upon shipment, with the exception of consigned goods. The Company considered its performance obligation satisfied at the time this control was transferred. Customer payment terms for these shipments typically ranged between 30- and 90-days. The Company elected to treat shipping and handling performed after control has transferred to customers as a fulfillment activity, and additionally, elected the practical expedient to report sales taxes on a net basis. The Company recorded shipping and handling expense related to product sales as cost of sales.

Interest Income

Interest income is recorded on an accrual basis based on the effective interest rate method and includes the accretion of fair value adjustments/discounts. Fair value adjustments to par value are accreted/amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of fair value adjustments, if any.

Other revenues are recognized when contractual obligations are fulfilled or as services are provided.

Payment-in-Kind Interest

The Company has subordinated secured notes receivables that may contain payment-in-kind (“PIK”) provisions. The PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income.

Variable Interest Entities

As a result of both the Asset Sale and the S&L Asset Sale, we have a variable interest in three 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 three 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.

Subordinated Notes Receivable

In accordance with ASC 810-40-5, upon the sale of substantially all of the assets the Company recorded a gain on the deconsolidation of a group of assets based on the difference between the fair value of the consideration received and the carrying amount of the group of assets. As the Original Note was part of the consideration received, the Company recorded the Original Note at its fair value on March 2, 2018. The fair value of the Original Note was estimated using discounted cash flow analyses, using market rates at the acquisition date that reflect the credit and inherent rate-risk inherent in the Original Note. The discount resulting from the fair value adjustment was recorded as a direct reduction to the original principal balance and amortized to interest income using the effective interest method. As of the date of the assignment and transfer from the Buyer to S&L, it was determined that the Original Note was extinguished and therefore both the A&R Note and the New Note were measured based on their fair value in accordance with Emerging Issues Task Force (EITF) – Creditors Accounting for Modification or Exchange of Debt Instruments. The discounts resulting from the fair value adjustments for the A&R Note and the S&L Note were recorded as a direct reduction to the original principal balance and amortized to interest income using the effective interest method. When impairment is determined to be probable, the measurement will be based on the fair value of the collateral securing the notes. The determination of impairment involves management’s judgment and the use of market and third-party estimates regarding collateral values.

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 charged to general and administrative expenses. Gains and losses related to dispositions and retirements are included in income. 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. Our long-lived assets were tested for impairment at December 31, 2018 and determined that the long-lived assets were not impaired.

F-9

Cost Method Investments

The Company holds a 1.4% equity interest in Churchill Downs Holdings, Ltd. (“Churchill”), a British Virgin Island business company which it received as a partial consideration for the sale of substantially all of our assets. As a result of additional equity capital contributions to Churchill during the fourth quarter 2018, HG Holdings equity interest was diluted from its original 5% ownership interest. Long-term investments consist of investments in equity securities of nonpublic entities without readily determinable fair values. These investments are classified in “Investment in closely held company” on the consolidated balance sheets. The company determines the appropriate classifications of its investment(s) at the acquisition date. Upon adoption of ASU 2016-01, the Company carries its long-term investment at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transaction for the identical or a similar investment of the same issuer. 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. During the year ended December 31, 2018, the Company determined that the equity investment was impaired and determined the fair value to be zero. Accordingly, the Company recorded an impairment loss of $168,000.

Income Taxes

Deferred income taxes are determined based on the difference between the consolidated financial statement 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.

Fair Value of Financial Instruments

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). The fair value of receivables and payables approximate the carrying amount because of the short maturity of these instruments.

Earnings per Common Share

Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share includes any dilutive effect of outstanding stock options and restricted stock calculated using the treasury stock method.

Stock-Based Compensation

We record share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest, over the vesting period. The fair value of stock options was determined using the Black-Scholes option-pricing model. The fair value of the restricted stock awards was based on the closing price of the Company’s common stock on the date of the grant. For awards with performance conditions, we recognize compensation cost over the expected period to achieve the performance conditions, provided achievement of the performance conditions are deemed probable.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Changes in such estimates may affect amounts reported in future periods.

New 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.

F-10

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). The new standard will be effective for the first quarter of our fiscal year ending December 31, 2019. Early adoption is permitted. As of December 31, 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. Our only lease as of December 31, 2018 relates to a real estate lease for the corporate office space. The company does not anticipate the adoption of ASU 2016-02 to have a material impact to the consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilitie s. 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 equity interest in Churchill Downs Holdings, Ltd, as described in Note 4, 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, 2018 (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 twelve months ended December 31, 2018 and 2017 (in thousands):

	Twelve Months
	Ended
	Dec. 31,			Dec. 31,
	2018			2017
Net sales	$	6,787		$	45,178
Cost of sales		(6,485	)		(40,342	)
Selling, general and administrative expenses		(2,448	)		(11,972	)
Other income, net		-			32
Loss on sale of assets		(865	)		-
Loss from discontinued operations before income taxes		(3,011	)		(7,104	)
Income tax benefit		-			35
Loss from discontinued operations, net of taxes	$	(3,011	)	$	(7,069	)

Included in selling, general and administrative expenses incurred for the twelve months ended December 31, 2018 were certain transaction costs including investment banking fees, legal fees, and other transaction costs directly attributable to the Asset Sale.

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

	December 31,		December 31,
	2018		2017
Cash	$	-	$	975
Accounts receivable, net		-		3,146
Inventory		-		23,231
Prepaid expenses and other current assets		-		541
Property, plant and equipment		-		1,449
Other assets		-		2,128
Total assets		-		31,470
Accounts payable and other liabilities		-		9,252
Accrued salaries, wages, and benefits		-		1,716
Deferred revenue		-		500
Other accrued expenses		-		1,179
Deferred compensation		-		4,101
Supplemental retirement plan		-		1,701
Other long-term liabilities		-		976
Total liabilities		-		19,425
Net assets	$	-	$	12,045

F-11

As a result of the Asset Sale, the Company had no revenue-generating operations. As of March 19, 2019, our sources of income include dividends on HC Common Stock and HC Series B Stock, interest paid on the loan we made to HC Realty’s operating partnership, and interest paid on cash and subordinated secured promissory notes. The Company believes that the revenue generating from these sources in addition to the cash on hand is sufficient to fund operating expenses for at least 12 months from the date of these consolidated financial statements. As previously disclosed, the Company may consider a rights offering of the Company’s common stock to existing stockholders to raise additional cash for acquisitions in addition to the equity interest we acquired in HC Realty which could provide the Company greater resources and flexibility in acquiring additional non-furniture assets, which may include purchasing additional HC Series B Stock.

4. Subordinated Notes Receivable

The Company received a $7.4 million subordinated secured promissory note (the “Original Note”) from the Buyer as partial consideration for the sale of substantially all of our assets during the first quarter of 2018. On September 6, 2018, the Buyer sold certain of its assets, including certain inventory and the Stone & Leigh tradename (the “S&L Asset Sale”) to Stone & Leigh, LLC (“S&L”), which is owned by a group which includes Matthew W. Smith, the Company’s former interim Chief Executive Officer. As a part of the S&L Asset Sale, the Buyer assigned to S&L certain of its rights and obligations under the original $7.4 million subordinated secured promissory note. In connection with the assignment, the Company entered into an Amended and Restated Subordinated Secured promissory note with the Buyer (the “A&R Note”) and a new Subordinated Secured Promissory Note with S&L (the “New Note”).

We determined that the assignment of a portion of the Original Note to S&L resulted in an extinguishment of the note receivable under ASC 310, Receivables , requiring that the Original Note be derecognized and both the A&R Note and the New Note separately be recorded at fair value on the extinguishment date. As a result of this analysis, we recognized a $448,000 gain on the extinguishment of the Original Note.

The A&R Note has a principal amount as of the assignment date of $3.3 million. The note maturity remains March 2, 2023, at which time the total principal amount is due. Interest on the principal balance of the note continues to accrue daily at an annual fixed rate of 6%. Cash interest payments begin upon certain availability thresholds defined in the Buyer’s senior secured loan facility. For the portions of the year which the availability thresholds were not met, accrued interest of $337,000 was considered paid in kind and capitalized to the principal balance of the note. During portions of the year ended December 31, 2018, there was an event of default on the Buyer’s senior secured loan. An event of default on the Buyer’s senior secured loan triggers an event of default under the A&R Note. The default interest accrues at a fixed rate of 12% per annum. The event of default was cured on November 5, 2018 when the Buyer paid off the senior secured loan facility. The payoff resulted in the elimination of the availability thresholds and the Company began receiving cash interest payments. The Company received $35,000 of cash interest for the year ended December 31, 2018 on the A&R Note.

During the first quarter 2018, we evaluated the fair value of the Original Note, which resulted in a fair value adjustment of $2.6 million. Prior to the assignment date, we recorded accreted interest income on the fair value adjustment of the Original Note of $199,000. We re-evaluated the fair value adjustment of the A&R Note at the assignment date, which resulted in a fair value adjustment of $1.1 million on the $3.3 million principal amount. Subsequent to the assignment date, we recorded accreted interest income on the fair value adjustment of the A&R Note of $66,000 during the year.

Resulting from the interest being paid in kind, the accretion of the fair value adjustment, and the assignment of the $4.4 million of the Original Note to S&L, the carrying value of the A&R Note decreased to $2.4 million as of December 31, 2018.

The New Note had a principal amount of $4.4 million as of the assignment date. The New Note also matures on March 2, 2023, at which time the total principal amount is due. Interest on the New Note accrues at a fixed rate of 10% per annum. In connection with the issuance of the New Note, the Company entered into an Intercreditor and Debt Subordination Agreement (the “New Subordination Agreement”) with Hale Partnership Fund, L.P. (a related party) as agent for a number of affiliated funds (collectively, the “Senior Lenders”). The New Subordination Agreement allowed the Company to receive payments, including monthly cash interest payments, from S&L unless such payment would result in an event of default under the Senior Note. Cash interest payments of $141,000 were paid current during the year. On December 17, 2018, S&L paid off the Senior Lenders and began making principal payments on the New Note. As of December 31, 2018, the Company received $60,000 of principal payments on the New Note.

At the assignment date, we evaluated the fair value of the New Note, which resulted in a fair value adjustment of $945,000. We recorded accreted interest income on the fair value adjustment of the New Note of $62,000. Resulting from the accretion of the fair value discount, the carrying amount of the New Note was $3.5 million as of December 31, 2018.

F-12

As of December 31, 2018 and 2017, subordinated notes receivable consisted of the following (in thousands):

	2018							2017
	Principal Balance		Discount			Balance		Principal Balance		Discount		Balance
A&R Note	$	3,376	$	(1,012	)	$	2,364		-		-		-
S&L Note		4,340		(822	)		3,518		-		-		-
	$	7,716	$	(1,834	)	$	5,882		-		-		-

5. Income Taxes

The provision for income tax (benefit) expense consists of (in thousands):

	2018			2017
Current:
Federal	$	-		$	-
State		(213	)		-
Total current		(213	)		-
Deferred:
Federal		(989	)		-
State		-			-
Total deferred		(989	)		-
Income tax (benefit) expense from continuing operations	$	(1,202	)	$	-

Income tax (benefit) expense from discontinued operations	$	-		$	(35	)

A reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate follows:

	201 8			2017
Federal statutory rate		21.0	%		35.0	%
State tax, net of federal benefit		2.3			(12.3	)
State tax credits and adjustments		(11.8	)		(1.7	)
Change in federal tax rate		-			(54.6	)
Alternative minimum tax		67.7			-
Valuation allowance increase		(11.5	)		38.8
Other, net		14.5			(4.7	)
Effective income tax rate		82.2	%		0.5	%

The reconciliation of the difference between the federal statutory rate and the effective income tax rate for the 2017 period relates to the discontinued operation.

We have completed our analysis of the income tax effects of the Tax Act and recorded all final adjustments during 2018. As noted in 2017, the Tax Act repeals the corporate alternative minimum tax, or AMT, regime, including claiming a refund and full realization of remaining AMT credits. During 2018, we further analyzed the nature, validity, and recoverability of the AMT-related deferred tax credit carryforwards and recorded a tax benefit of $988,000 for the credits that will be refundable in future years.

F-13

The income tax effects of temporary differences that comprise deferred tax assets and liabilities at December 31 follow (in thousands):

	20 1 8			2017
Noncurrent deferred tax assets (liabilities):
Accounts receivable	$	-		$	46
Other accrued expenses		50			339
Property, plant and equipment		(1	)		(659	)
Notes receivable fair value adjustment		413			-
Employee benefits		95			1,970
Contribution carryforward		-			-
AMT credit		698			1,192
Net operating loss		7,743			6,733
Gross non-current deferred tax assets		8,998			9,621
Less valuation allowance		(8,504	)		(9,621	)
Net noncurrent deferred tax assets	$	494		$	-

We have U.S. federal net operating loss carryforwards of approximately $33.7 million which are available to reduce future taxable income. The federal net operating loss will begin expiring in 2033. We have combined state net operating loss carryforwards of $23.9 million that will expire at various times beginning in 2027.

During 2018, we recorded a non-cash credit to our valuation allowance of $1.1 million against our December 31, 2018 deferred tax assets. The primary assets which are covered by this valuation allowance are employee benefits and net operating losses in excess of the amounts which can be carried back to prior periods. 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 four-year period were heavily affected by our business restructuring activities. Our cumulative loss represented sufficient negative evidence to require a valuation allowance. 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.

The unrecognized tax benefits activity for the year ended December 31 follows (in thousands):

	201 8			2017
Unrecognized tax benefits balance at January 1	$	454		$	471
Gross (decrease) increases in tax positions of prior years		(213	)		(17	)
Unrecognized tax benefits balance at December 31	$	241		$	454

As of December 31, 2018 and 2017, we had approximately $34,000 and $80,000 of accrued interest related to uncertain tax positions, respectively.

Total amount of unrecognized tax benefits that would affect our effective tax rate if recognized is $190,000 at December 31, 2018 and $358,000 at December 31, 2017. The 2010 through 2016 tax years remain open to examination by major taxing jurisdictions.

F-14

6. Stockholders’ Equity

In addition to common stock, authorized capital includes 1,000,000 shares of “blank check” preferred stock. None was outstanding during the two years ended December 31, 2018. The Board of Directors (“Board”) is authorized to issue such stock in series and to fix the designation, powers, preferences, rights, limitations and restrictions with respect to any series of such shares. Such “blank check” preferred stock may rank prior to common stock as to dividend rights, liquidation preferences or both, may have full or limited voting rights and may be convertible into shares of common stock.

Basic and diluted earnings per share are calculated using the following share data (in thousands):

	2018		2017
Weighted average shares outstanding for basic calculation		14,531		14,236
Dilutive effect of restricted stock		43		-
Weighted average shares outstanding for diluted calculation		14,574		14,236

For the year ended December 31, 2018, approximately 225,000 stock awards were excluded from the diluted per share calculation as they would be anti-dilutive. In 2017, the dilutive effect of stock options and restricted shares was not recognized since we had a net loss.

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. During 2018 and 2017, we repurchased 46,643 shares for approximately $30,000 and 163,214 shares for approximately $135,000, respectively. The 2017 share repurchase was included in discontinued operations.

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. During 2018, we repurchased 221,121 shares of common stock for approximately $133,000. As of December 31, 2018, we have approximately $2.8 million remaining on this authorization to repurchase our common stock. No repurchases of our common stock were made in 2017.

In the fourth quarter of 2016, the Board adopted a Rights Agreement designed to protect the Company’s substantial net operating loss carryforwards. Under the Rights Agreement, company stockholders of record as of December 15, 2016 received one preferred share purchase right for each share of common stock they owned on such date. If a person or group acquires beneficial ownership of 4.9% or more of the Company’s outstanding common stock (subject to certain specified exceptions), the rights will become exercisable. The rights will also become exercisable if a person or group that already owns 4.9% or more of the Company’s outstanding common stock acquires an additional 1% or more of the Company’s outstanding common stock. The Company entered into Amendment No. 1, dated January 30, 2017, to the Rights Agreement. This amendment amends the definition of Acquiring Person in the Rights Agreement to exclude any member of the Hale Group (Hale Partnership Fund, LP and certain affiliates that are parties to the agreement (Hale Agreement) dated January 30, 2017 with the Company), provided that any purchases made by members of the Hale Group after December 5, 2016 are made in compliance with Section 1(h) of the Hale Agreement.

If the rights become exercisable, all holders of rights, other than the person or group triggering the rights, will be entitled to purchase Company common stock at a 50% discount. Rights held by the person or group triggering the rights will become void and will not be exercisable. The rights have a de minimis fair value.

The rights trade with the Company’s common stock. The Rights Agreement and the rights will expire on December 5, 2019 (unless the Company’s NOLs are utilized prior to that date). The Board may amend the Rights Agreement in any way or redeem the rights at any time unless and until the rights are triggered.

The Rights Agreement includes a procedure for the Board to consider requests to exempt a particular transaction from triggering the exercisability of the rights under the Rights Agreement if the transaction (i) does not (x) create a significant risk of the Company’s NOLs being impaired or (y) constitute a default under the change-in-control covenant included in the Company’s credit facility or (ii) is otherwise in the best interests of the Company.

F-15

7. Stock Based Compensation

The Stanley Furniture Company, Inc. 2012 Incentive Compensation Plan (Incentive Compensation Plan) provides for the granting of performance grants, performance shares, stock options, restricted stock, restricted stock units, and stock appreciation rights to employees and certain service providers. Under this plan, the aggregate number of common shares that may be issued through awards of any form is 1.6 million. In addition, shares authorized under the 2008 Incentive Compensation Plan are also available for issuance under the Incentive Compensation Plan if they are unissued or subsequently expire, are forfeited or terminate unexercised. As of December 2018, there are 1.4 million shares remaining available for future issuance under equity compensation plans.

Stock Options

The options are issued at market value on the date of grant and have a term of 10 years from the grant date. In general, employee grants vest ratably over a four to five-year period and Director grants vest after one year. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. We have estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes pricing valuation model.

The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. No options were granted in 2018 or 2017.

Stock option activity for the two years ended December 31, 2018, follows:

	Number of shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016		1,129,582		$	5.35		3.8
Cancelled/Forfeited		(258,706	)		4.10
Expired		(44,294	)		12.51

Outstanding at December 31, 2017		826,582		$	5.35		2.8

Expired		(763,385	)		5.28

Outstanding at December 31, 2018		63,197		$	7.01		1.8	$	-

Exercisable at December 31, 2018		63,197		$	7.01		1.8	$	-

There were no stock options exercised in 2018 and 2017.

F-16

Restricted Stock

The restricted stock awards are accounted for as “non-vested equity shares” until the awards vest or are forfeited. In general, restricted stock awards for employees are time vested or performance vested and for non-employee directors vest at the end of their current term on the Board. The fair value of each share of restricted stock is the market price of our stock on the grant date. The fair value of each time vested award is amortized into compensation expense on a straight-line basis between the award date and the vesting date. Performance based awards are amortized into compensation expense based on the probability of meeting the performance criteria. In 2018 and 2017, 182,732 and 569,263 of restricted stock awards vested and were released, respectively. Included in the 2017 vesting was 491,607 shares related to the separation agreement with the former chief executive officer.

The following table summarizes information about restricted stock awards for the two years ended December 31, 2018:

	Number of shares			Weighted- Average Grant Date Fair Value
Outstanding at December 31, 2016		544,024		$	2.89
Vested		(569,263	)		2.20
Granted		458,081			1.26
Cancelled/Forfeited/Expired		(105,559	)		2.83

Outstanding at December 31, 2017		327,283		$	1.82
Vested		(182,732	)		2.02
Granted		161,290			0.62
Cancelled/Forfeited /Expired		(101,266	)		1.55

Outstanding at December 31, 201 8		204,575		$	0.83

As of December 31, 2018, there was $30,000 of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average remaining vesting period of 0.4 years.

10. Subsequent Events

On February 7, 2019, the Company, Buyer and related parties entered into a Consent, Reaffirmation, and Joinder (the “Consent”) in connection with a new senior credit facility that Buyer expected to enter into with Alterna Capital Solutions, LLC (“Alterna”). Pursuant to the Consent, Buyer paid $180,000 of principal and accrued interest under the A&R Note as provided in the Consent and Buyer delivered a Seconded Amended and Restated Subordinated Secured Promissory Note (the “Second A&R Note”) in favor of the Company. The Second A&R Note has a principal amount of $3,201,536 and remains payable no later than March 2, 2023. The terms of the Second A&R Note are substantially the same as those of the A&R Note. The Second A&R Note also remains guaranteed by Stanley Intermediate Holdings LLC, formerly Churchill Downs Intermediate Holdings LLC. Pursuant to the Consent, Buyer’s British Virginia island parent company has also guaranteed the Second A&R Note.

In addition, Buyer’s British Virgin Island parent company repurchased 2,500 shares of its stock held by the Company for $120,000 pursuant to a stock purchase agreement dated February 7, 2019. The Company no longer maintains an equity interest in Buyer’s British Virgin Island parent company.

On February 25, 2019, Buyer closed and funded its new senior credit facility with Alterna. Pursuant to the Consent, the Company entered into an Intercreditor and Debt Subordination Agreement, dated February 25, 2019 (the “Subordination Agreement”), with Alterna. The Subordination Agreement with Alterna is generally on the same terms as the subordination agreement the Company previously entered into with North Mill Capital, LLC in connection with the original subordinated secured promissory note dated March 2, 2018 from Buyer in favor of the Company, except that principal payments on the Second A&R Note, before satisfaction of the of indebtedness to Alterna and termination of the Subordination Agreement, are conditioned upon (l) no event of default under the new senior credit facility existing or resulting from the payment, (2) availability under the new senior credit facility to make the payment, (3) all tax and debt obligations of SFC being current and within their terms, and (4) there being no delinquency in payables or other obligations of SFC to specified critical vendors.

Subsequent to December 31, 2018 through the report date, the Company has received principal payments from S&L of approximately $704,000 resulting in a current balance of approximately $3,696,000 under the S&L Note.

As the CDSOA distributed monies collected by Customs to eligible domestic producers that supported a successful antidumping petition (“Supporting Producers”), a portion of the proceeds were retained and held in an escrow account in order to fund future expenses (such as professional fees) related to the petition. As of December 31, 2018, there was approximately $7.5 million held in escrow in addition to cash deposits held of $224,000. During the first quarter of 2019, the Supporting Producers group decided, based on the current facts and circumstances of the petition, to disburse the portion of those funds related to the 2013, 2014, and first half of 2015 distributions, which was approximately $3.5 million. The Company’s share of the escrow release is approximately $1.2 million, which we received on March 15, 2019. The group of Supporting Producers expect that the remaining funds held in escrow will be used for future expenses related to the petition. The Company does not expect any future disbursements related to these escrow funds.

On March 19, 2019, HG Holdings, Inc. (the “Company”) entered into subscription agreements with HC Government Realty Trust, Inc., a Maryland corporation (“HC Realty”), pursuant to which it purchased (i) 200,000 shares of HC Realty’s 10.00% Series B Cumulative Convertible Preferred Stock (the “Series B Stock”) for an aggregate purchase price of $2,000,000 and (ii) 300,000 shares of HC Realty’s common stock for an aggregate purchase price of $3,000,000. Certain investors affiliated with Hale Partnership Capital Management, LLC (the “Hale Partnership”) purchased an additional 850,000 shares of Series B Stock for an aggregate purchase price of $8,500,000.

On March 19, 2019, the Company and certain entities affiliated with the Hale Partnership (the “Lenders”) also entered into a loan agreement with HC Government Realty Holdings, L.P., HC Realty’s operating partnership (the “Operating Partnership”), pursuant to which the Lenders provided the Operating Partnership with a $10,500,000 senior secured term loan, of which $2,000,000 was provided by the Company.

In connection with the transactions discussed above, Steven A. Hale II (“Hale”), the Company’s Chairman and Chief Executive Officer, was appointed to serve as HC Realty’s Chairman and Chief Executive Officer, effective immediately, and Hale, Brad G. Garner, the Company’s Principal Financial and Accounting Officer, and Matthew A. Hultquist, one of the Company’s directors, were each appointed to serve as directors of HC Realty, effective immediately.

HC Realty currently owns and operates a portfolio of 16 single-tenant properties leased entirely to the United States of America for occupancy by federal agencies including the Federal Bureau of Investigation, the Drug Enforcement Administration, the Social Security Administration and the Department of Transportation.

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

Common Stock, par value $.02 per share	14,712,377
(Class of Common Stock)	Number of Shares

Part I		Page

Item 1	Business	3
Item 1A	Risk Factors	5
Item 1B	Unresolved Staff Comments	9
Item 2	Properties	9
Item 3	Legal Proceedings	9
Item 4	Mine Safety Disclosures	9

Part II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6	Selected Financial Data	11
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	16
Item 8	Financial Statements and Supplementary Data	17
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	17
Item 9A	Controls and Procedures	17
Item 9B	Other Information	18

Part III

Item 10	Directors, Executive Officers and Corporate Governance	18
Item 11	Executive Compensation	18
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	18
Item 13	Certain Relationships and Related Transactions, and Director Independence	18
Item 14	Principal Accounting Fees and Services	18

Part IV

Item 15	Exhibits, Financial Statement Schedules	19
Item 16	10-K Summary	21
	Signatures	22
Index to Consolidated Financial Statements and Schedule		F-1

	●	cash in the amount of approximately $800,000, including restricted cash in an amount equal to approximately $632,000;
	●	the rights to and interest in any distributions after the closing date of monies collected by U.S. Customs and Border Protection under the Continued Dumping and Subsidy Offset Act (“CDSOA”) and to distributions of any prepaid legal expenses held by the Committee for Legal Trade relating thereto;
	●	a split dollar life insurance policy for a former executive officer and related collateral assignment providing for repayment at death of premiums we paid of approximately $465,000;
	●	the corporate seals, organizational documents, minute books, stock books, tax returns, books of account or other records having to do with our corporate organization;
	●	all insurance policies and all rights to applicable claims and proceeds under our insurance policies with respect to the excluded assets or excluded liabilities;
	●	certain of our agreements and contracts, including indemnification agreements between us and our directors, the services agreement with our registered accounting firm and the separation agreement between us and our former chief executive officer and the change in control protection agreement between us and our current principal financial officer;
	●	certain of our employee benefit plans, including our incentive compensation plans and annual bonus plan;
	●	all of our tax assets, including our net operating loss carryforwards and any tax refunds and prepayments;
	●	all rights to any action, suit or claim of any nature with respect to any excluded asset or excluded liability;
	●	all guarantees, warranties, indemnities and similar rights in favor of us with respect to any excluded asset or excluded liability;
	●	all of our rights under the Asset Purchase Agreement and any related document; and
	●	all records, correspondence and other materials prepared by or on behalf of us in connection with the Asset Sale Transaction.

	●	liabilities or obligations with respect to an excluded asset including the separation agreement with our former President and Chief Executive Officer and Principal Financial and Accounting Officer of approximately $870,000 and certain worker’s compensation claims associated with our restricted cash of approximately $224,000;
	●	dividends payable of approximately $158,000 with respect to restricted shares of our common stock awarded under our incentive compensation plans and annual bonus plan; and
	●	costs and expenses of approximately $2.15 million incurred by us in connection with the negotiation, preparation and performance of the Asset Purchase Agreement and any related agreements or documents.

Name	Age	Position
Steven A. Hale II	35	Chairman, Chief Executive Officer and Director

Brad G. Garner	36	Principal Financial and Accounting Officer

Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾		Approximate Dollar Value of Shares that May Yet b e Purchased under the Plans or Programs ⁽ ¹⁾
January 1 to March 31, 2018		221,208		$	0.60		174,565	$	2,865,933
April 1 to June 30, 2018		46,556			0.64		46,556		2,835,905
July 1 to September 30, 2018		-					-		2,835,905
Nine months ended September 30, 2018		267,764					221,121
October 1 to October 31, 2018		-					-		2,835,905
November 1 to November 30, 2018		-					-		2,835,905
December 1 to December 31, 2018		-					-		2,835,905
Three months ended December 31, 2018		-					-
Twelve months ended December 31, 2018		267,764	⁽²⁾				221,121

⁽¹⁾		In July 2012, the Board of Directors authorized the purchase of up to $5.0 million of our common stock. These repurchases were authorized to be made from time to time in the open market, in privately negotiated transactions, or otherwise, at prices the company deemed appropriate. Our Board does not intend to repurchase additional shares of our common stock under this authorization.
⁽²⁾		Represents shares tendered by recipient of restricted stock awards on December 7, 2017 to satisfy tax withholding obligations on vested restricted stock.

	December 31 ,		December 31,
	2018		2017
Cash	$	-	$	975
Accounts receivable, net		-		3,146
Inventory		-		23,231
Prepaid expenses and other current assets		-		541
Property, plant and equipment		-		1,449
Other assets		-		2,128
Total assets		-		31,470
Accounts payable and other liabilities		-		9,252
Accrued salaries, wages, and benefits		-		1,716
Deferred revenue		-		500
Other accrued expenses		-		1,179
Deferred compensation		-		4,101
Supplemental retirement plan		-		1,701
Other long-term liabilities		-		976
Total liabilities		-		19,425
Net assets	$	-	$	12,045

(1)	The following consolidated financial statements are included in this report on Form 10-K:
	Report of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets as of December 31, 2018 and 2017
	Consolidated Statements of Operations for each of the two years in the period ended December 31, 2018
	Consolidated Statements of Comprehensive Loss for each of the two years ended in the period ended December 31, 2018
	Consolidated Statements of Changes in Stockholders’ Equity for each of the two years in the period ended December 31, 2018
	Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2018
	Notes to Consolidated Financial Statements

(2)	Financial Statement Schedule :
	Schedule II – Valuation and Qualifying Accounts for each of the two years in the period ended December 31, 2018

(b)	Exhibits:

2.1	Asset Purchase Agreement, dated as of November 20, 2017, by and between Churchill Downs, LLC and Stanley Furniture Company, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on November 20, 2017). (1)

2.2	First Amendment to Asset Purchase Agreement, dated as of January 22, 2018, by and between Churchill Downs, LLC and Stanley Furniture Company, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 23, 2018). (1)

3.1	Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2017).

3.2	By-laws of the Registrant as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed November 20, 2017).

3.3	Certificate of Designation of Series A Participating Preferred Stock of Stanley Furniture Company, Inc. (incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K (Commission File No. 0-14938) filed December 6, 2016).

4.1	The Certificate of Incorporation, By-laws and Certificate of Designation of Series A Participating Preferred Stock of the Registrant as currently in effect (incorporated by reference to Exhibit 3.1, Exhibit 3.2 and Exhibit 3.3 hereto).

4.2	Rights Agreement, dated as of December 5, 2016, between Stanley Furniture Company, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K (Commission File No. 0-14938) filed December 6, 2016).

4.3	Amendment No. 1, dated as of January 30, 2017, to the Rights Agreement, dated as of December 5, 2016, between Stanley Furniture Company, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed January 30, 2017).

10.1	Form of Indemnification Agreement between the Registrant and each of its Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed on September 25, 2008).

10.2	2008 Incentive Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement (Commission File No. 0-14938) for the annual meeting of stockholders held on April 15, 2008). (2)

10.3	Form of Stock Option Award under 2008 Incentive Plan (Directors) (incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2008). (2)

10.4	2012 Incentive Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement (Commission File No. 0-14938) for the annual meeting of stockholders held on April 18, 2012). (2)

10.5	Form of Stock Option Award under 2012 Incentive Plan (Officers) (incorporated by reference to Exhibit 10.19 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2012). (1)

10.6	Form of Restricted Stock Award under 2012 Incentive Plan (Officers) (time vesting) (incorporated by reference to Exhibit 10.20 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2012). (2)

10.7	Form of Restricted Stock Award under 2012 Incentive Plan (Directors) (incorporated by reference to Exhibit 10.21 to Registrant’s Form 10-K (Commission File No. 0-14938) for year ended December 31, 2014). (2)

10.8	Form of Restricted Stock Award under 2012 Incentive Plan (Officers) (time and performance vesting) (incorporated by reference to Exhibit 10.22 to Registrant’s Form 10-K (Commission File No. 0-14938) for year ended December 31, 2014). (2)

10.9	Form of Restricted Stock Award under 2012 Incentive Plan (Officers) (performance vesting) (incorporated by reference to Exhibit 10.23 to Registrant’s Form 10-K (Commission File No. 0-14938) for year ended December 31, 2014). (2)

10.10	Agreement dated January 7, 2016 by and among Stanley Furniture Company, Inc. and the entities and natural persons listed on Exhibit A thereto (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K (Commission File No. 0-14938) filed January 8, 2016).

10.11	Agreement, dated as of January 30, 2017, by and among Stanley Furniture Company, Inc. and the entities and natural persons listed on Exhibit A thereto (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K (Commission File No. 0-14938) filed January 30, 2017).

10.12	Amendment No. 1, dated as of January 30, 2017, to the Agreement, dated as of January 7, 2016, by and among Stanley Furniture Company, Inc. and the entities and natural persons listed on Exhibit A thereto (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K (Commission File No. 0-14938) filed January 30, 2017).

10.13	Subordinated Promissory Note, dated March 2, 2018, of Churchill Downs LLC in favor of Stanley Furniture Company, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 8, 2018).

10.14	Intercreditor and Debt Subordination Agreement, dated March 2, 2018, between Stanley Furniture Company, Inc. and North Mill Capital LLC (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on March 8, 2018).

10.15	Amended and Restated Subordinated Secured Promissory Note, dated September 6, 2018, issued by Stanley Furniture Company LLC in favor of HG Holdings, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed September 12, 2018).

10.16	Subordinated Secured Promissory Note, dated September 6, 2018, issued by Stone & Leigh, LLC in favor of HG Holdings, Inc. (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed September 12, 2018).

10.17	Intercreditor and Debt Subordination Agreement, dated September 6, 2018, between HG Holdings, Inc. and Hale Partnership Fund, L.P., as agent (incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed September 12, 2018).

10.18	Second Amended and Restated Subordinated Secured Promissory Note, dated February 7, 2019, issued by Stanley Furniture Company LLC in favor of HG Holdings, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed February 13, 2019).

10.19	Consent, Reaffirmation and Joinder, dated February 7, 2019, among Stanley Furniture Company LLC, Stanley Intermediate Holdings LLC, Churchill Downs Holdings Ltd., Stanley Furniture Company 2.0, LLC and HG Holdings, Inc. (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed February 13, 2019).

10.20	Agreement, dated February 7, 2019, between HG Holdings, Inc. and Churchill Downs Holdings Ltd. (incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed February 13, 2019).

10.21	Intercreditor and Subordination Agreement, dated February 25, 2019, among HG Holdings, Inc. and Alterna Capital Solutions, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed March 1, 2019).

10.22	Subscription Agreement, dated as of March 19, 2019, by and between HC Government Realty Trust, Inc. and HG Holdings, Inc., with respect to the purchase of shares of Common Stock (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed March 25, 2019).

10.23	Subscription Agreement, dated as of March 19, 2019, by and between HC Government Realty Trust, Inc., and HG Holdings, Inc., with respect to the purchase of shares of Series B Stock (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed March 25, 2019).

10.24	Loan Agreement, dated as of March 19, 2019, by and between HC Government Realty Holdings, L.P., as borrower, the Lenders party thereto and HCM Agency, LLC, as collateral agent (incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (Commission File No. 0-14938) filed March 25, 2019).

21	List of Subsidiaries. (3)

23.1	Consent of BDO USA, LLP. (3)

31.1	Certification by Steven A. Hale II, our Chairman and Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. (3)

31.2	Certification by Brad G. Garner, our Principal Financial and Accounting Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. (3)

32.1	Certification by Steven A. Hale II, our Chairman and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4)

32.2	Certification by Brad G. Garner, our Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4)

101	The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2018, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) condensed consolidated statements of comprehensive (loss) income, (iv) condensed consolidated statements of cash flows, (v) the notes to the consolidated financial statements, and (vi) document and entity information. (3)

__________________________________________
(1)	Certain schedules to these agreements have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedules and/or exhibits will be furnished to the SEC upon request.
(2)	Management contract or compensatory plan
(3)	Filed Herewith
(4)	Furnished Herewith

	HG HOLDINGS, INC.

March 29, 2019	By:	/s/ Steven A. Hale II
		Steven A. Hale II
		Chairman, Chief Executive Officer and Director

Signature	Title	Date

/s/ Steven A. Hale II (Steven A. Hale II)	Chairman, Chief Executive Officer and Director	March 29, 2019

/s/ Brad G. Garner (Brad G. Garner)	Principal Financial and Accounting Officer	March 29, 2019

/s/ Matthew A. Hultquist (Matthew A. Hultquist)	Director	March 29, 2019

/s/ Jeffrey S. Gilliam (Jeffrey S. Gilliam)	Director	March 29, 2019

	Page

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2018 and 2017	F-3

Consolidated Statements of Operations for each of the two years in the period ended December 31, 2018	F-4

Consolidated Statements of Comprehensive Loss for each of the two years in the period ended December 31, 2018	F-5

Consolidated Statements of Changes in Stockholders’ Equity for each of the two years in the period ended December 31, 2018	F-6

Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2018	F-7

Notes to Consolidated Financial Statements	F-8


Financial Statement Schedule

Schedule II – Valuation and Qualifying Accounts for each of the two years in The period ended December 31, 2018	S-1

													Accumulated
							Capital in			Retained			Other
	Common Stock						Excess of			Earnings			Comprehensive
	Shares			Amount			Par Value			(Deficit)			(Loss) Income			Total

Balance at December 31, 2016		14,731		$	275		$	16,840		$	5,129		$	(2,262	)	$	19,982

Net loss		-			-			-			(7,459	)		-			(7,459	)
Other comprehensive loss		-			-			-			-			(160	)		(160	)
Dividends		-			-			-			(165	)		-			(165	)
Restricted stock grants		458			-			-			-			-			-
Restricted stock forfeited		(106	)		-			-			-			-			-
Stock purchase and retirement for tax withholdings on vesting of restricted awards		(163	)		-			(136	)		-			-			(136	)
Other		-			23			(23	)		-			-			-
Stock-based compensation		-			-			423			-			-			423

Balance at December 31, 2017		14,920		$	298		$	17,104		$	(2,495	)	$	(2,422	)	$	12,485

Net loss		-			-			-			(1,440	)		-			(1,440	)
Other comprehensive loss		-			-			-			-			2,422			2,422
Dividends		-			-			(139	)		-			-			(139	)
Restricted stock forfeited or expired		(101	)		-			-			-			-			-
Stock purchase and retirement for tax withholdings on vesting of restricted awards		(268	)		(4	)		(129	)		-			-			(133	)
Stock-based compensation		161			-			449			-			-			449

Balance at December 31, 2018		14,712		$	294		$	17,285		$	(3,935	)	$	-		$	13,644

Column A	Column B		Column C			Column D			Column E
			Charged
	Balance at		(Credited)						Balance at
	Beginning		to Costs &						End
Descriptions	of Period		Expenses			Deductions			of Period
2018
Doubtful receivables	$	96	$	-		$	96	(c)	$	-
Discounts, returns, and allowances		107		-			107	(c)		-
	$	203	$	-		$	203		$	-

2017
Doubtful receivables	$	117	$	71		$	92	(a)	$	96
Discounts, returns, and allowances		155	(48		)(b)		-			107
	$	272	$	23		$	92		$	203

	2018			2017
ASSETS
Current assets:
Cash	$	6,057		$	-
Restricted cash		404			631
Prepaid expenses and other current assets		273			4
Income tax receivable		488			-
Current assets from discontinued operations		-			27,893
Total current assets		7,222			28,528

Property, plant and equipment, net		9			-
Subordinated notes receivable		5,882			-
Other assets		480			465
Deferred tax assets		494			-
Noncurrent assets from discontinued operations		-			3,577
Total assets	$	14,087		$	32,570

LIABILITIES
Current liabilities:
Accounts payable	$	29		$	-
Accrued salaries, wages and benefits		17			65
Other accrued expenses		110			28
Current liabilities from discontinued operations		-			12,647
Total current liabilities		156			12,740

Other long-term liabilities		287			567
Long-term liabilities from discontinued operations		-			6,778
Total liabilities		443			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		17,285			17,104
Retained deficit		(3,935	)		(2,495	)
Accumulated other comprehensive loss		-			(2,422	)
Total stockholders’ equity		13,644			12,485
Total liabilities and stockholders’ equity	$	14,087		$	32,570

	For the Years Ended
	December 31,
	2018			2017

Operating Expenses

General and administrative expenses	$	(1,005	)	$	(823	)

Total operating expenses		(1,005	)		(823	)

Interest income		943			-
Product financing interest income		125			-
Gain on extinguishment of subordinated note receivable		448			-
Income from Continued Dumping and Subsidy Offset Act, net		26			433
Impairment loss		(168	)		-

Income (loss) from continuing operations before income taxes		369			(390	)

Income tax benefit		1,202			-

Income (loss) from continuing operations		1,571			(390	)

Discontinued operations

Loss from discontinued operations (including loss on sale of assets of $865)	$	(3,011	)	$	(7,104	)
Income tax benefit		-			35

Loss from discontinued operations		(3,011	)		(7,069	)

Net loss	$	(1,440	)	$	(7,459	)

Basic and diluted income (loss) per share:
Income (loss) from continuing operations	$	.11		$	(.06	)
Loss from discontinued operations		(.21	)		(.47	)
Net loss	$	(.10	)	$	(.53	)

Weighted average shares outstanding:
Basic		14,531			14,236
Diluted		14,574			14,236

	For the Years Ended December 31,
	2018			2017

Net loss	$	(1,440	)	$	(7,459	)
Other comprehensive (loss) income:
Actuarial loss		-			268
Amortization of actuarial loss		-			(108	)
Adjustments to net periodic postretirement loss (benefit)		-			160
Settlement of employee benefit obligations directly related to the disposal transaction		2,422			-
Comprehensive loss	$	982		$	(7,299	)

	For the Years Ended December 31,
	2018			2017

Net income (loss) from continuing operations	$	1,571		$	(390	)
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Depreciation expense		1			-
Accretion income on notes receivable		(327	)		-
Stock compensation expense		58			-
Paid in kind interest on subordinated note receivable		(337	)		-
Gain on extinguishment of subordinated note receivable		(448	)		-
Changes in assets and liabilities:
Prepaid expenses, income tax receivables, and other current assets		(696	)		-
Deferred tax assets and other assets		(509	)		-
Accounts payable		29			-
Accrued salaries and other accrued expenses		34			-
Other long-term liabilities		(280	)		-
Net cash used by continuing operations		(904	)		(390	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(10	)		-
New borrowings on subordinated secured notes receivable		(29	)		-
Net cash used by investing activities		(39	)		-

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		(3,501	)		(2,606	)
Cash provided by investing activities		9,228			34
Cash provided (used) by financing activities		1,209			(619	)
Net cash provided (used) by discontinued operations		6,936			(3,191	)

Net increase in cash and restricted cash		5,830			(3,581	)
Cash and restricted cash at beginning of period		631			4,212
Cash and restricted cash at end of period	$	6,461		$	631


Supplemental Non-Cash Disclosures:
Payments made on line of credit from proceeds of the sale	$	(1,348	)	$	-
Principal reduction on subordinated secured promissory note	$	60		$	-

	Depreciable
	lives			(in thousands)
	(in years)			201 8		2017
Computers and equipment	3	to	7	$	7	$	-
Furniture and fixtures	5	to	7		3		-
Property, plant and equipment, at cost					10		-
Less accumulated depreciation					1		-
Property, plant and equipment, net				$	9	$	-

Property, plant and equipment, net, of discontinued operations				$	-	$	1,449

1.	I have reviewed this annual report on Form 10-K of HG Holdings, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

Date: March 29, 2019		/s/ Steven A. Hale II
		Steven A. Hale II
		Chairman and Chief Executive Officer

Date: March 29, 2019		/s/ Brad G. Garner
		Brad G. Garner
		Principal Financial and Accounting Officer

	(1).	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2).	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.