UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended SeptemberJune 30, 20172018

or

ForFor the transition period from _____ to ._____.

Commission file number: 0-14938

STANLEY FURNITURE COMPANY,HG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

200 North Hamilton2115 E. 7^th Street, Suite 101, Charlotte, NC 28204No. 200, High Point, North Carolina, 27260
(Address of principal executive offices, Zip Code)

(336-884-7700)252-355-4610

(Registrant’sRegistrant’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: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:

Act,:

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

Smaller reporting company (X) (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 ( ) No (x)

As of November 4, 2017, 15,083,331July 19, 2018, 14,712,377 shares of common stock of Stanley Furniture Company,HG Holdings, Inc., par value $.02 per share, were outstanding.

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. We suggest that theseThese 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.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 March 2017, June 2016, the FASB issued ASU 2017-07,Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Currently, net benefit cost is reported as an employee cost within operating income (or capitalized into assets where appropriate). The amendment requires the bifurcation of net benefit cost. The service cost component will be presented with the other employee compensation costs in operating income (or capitalized in assets). The other components will be reported separately outside of operations, and will not be eligible for capitalization. The amendment is effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption will be permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. The guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost (including gains and losses on curtailments and settlements, and termination benefits paid through plans), and on a prospective basis for the capitalization of only the service cost component of net benefit cost. Amounts capitalized into assets prior to the date of adoption should not be adjusted through a cumulative effect adjustment, but should continue to be recognized in the normal course, as for example, inventory is sold or fixed assets are depreciated. The Company has no service cost component in its net benefit cost. The impact of adopting this amendment will be the movement of approximately $330,000 of annual net benefit cost from within operating income to a separate expense outside of operations.

In June 2016, the FASB issued ASU 2016-13,2016-13, Financial Instruments – Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”2016-13”). The amendments in ASU 2016-132016-13 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 2016-132016-13 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 2016-132016-13 to have a material impact to the consolidated financial statements.

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification ("ASC"), Leases (Topic 842)842) (“ASU 2016-02”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-useright-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)840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840)840). Our leases as of September 30, 2017, 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 are evaluatingwill evaluate the effect that ASU 2016-022016-02 will have on theour consolidated financial statements and related disclosures by reviewing allat such time a long-term leases and determining the potential impact.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. 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In On March 2016, 2, 2018, we sold substantially all of our assets (the “Asset Sale”) to Churchill Downs LLC (“Buyer”), pursuant to the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in ASU 2016-09 simplify several aspectsterms of the accounting for share-based payment transactions. The new guidance requires that excess tax benefits (which representAsset Purchase Agreement, dated as of November 20, 2017, as amended by the excess of actual tax benefits receive at the date of vesting or settlement over the benefits recognized over the vesting period or upon issuance of share-based payments) be recorded in the income statement as a reduction of income or income taxes when the awards vest or are settled. The new guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows rather than as a financing activity. The adoption of these amendments in the first quarter of this year had no material impact on the Company’s financial statements. The Company has elected to maintain its practice of estimating forfeitures when recognizing expense for share-based payment awards.

In August 2016, FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230First Amendment thereto dated January 22, 2017 (the “Asset Purchase Agreement”). The guidance is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard will be effective for the first quarter of our fiscal year ending December 31, 2018. Early adoption is permitted, provided all amendments are adopted in the same period. In November 2016, FASB issued ASU 2016-18,Statement of Cash Flows(Topic 230): Restricted Cash. We have reviewed the standard and determined that our statement of cash flows will include changes in restricted cash with related disclosures. The guidance requires application using a retrospective transition method. We do not anticipate ASU 2016-15 or ASU 2016-18 to have a material impact to our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost.  The adoption of these amendments in the first quarter of this year had no material impact on the Company’s financial statements.

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606). This standard is intended to improve, and converge with international standards, the financial reporting requirements for revenue from contracts with customers. The new standard will be effective for the first quarter of our fiscal year ending December 31, 2018. Early adoption is permitted but we do not expect to early adopt this new accounting pronouncement. In preparation for this new standard, we are identifying all forms of agreements with our customers and will begin to evaluate the provisions in such agreements in lightOperations of the five-step model specified by the new guidance. The five-step model includes: 1) determination of whether a contract – an agreement between two or more parties that creates legally enforceable rights and obligations exists; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue when (or as) the performance obligation is satisfied. We are also evaluating the impact of the new standard on certain common practices currently employed by us and others in our industry, such as co-operative advertising, pricing allowances and consumer coupons. The Company anticipates adopting the standard using the modified retrospective transition approach.  Under this approach, the new standard would apply to all new contracts initiated on or after January 1, 2018.  For existing contracts that have remaining obligations as of furniture business from January 1, 2018 any difference between the recognition criteria in the new standard and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustmentthrough March 2, 2018 are reflected as discontinued operation pursuant to the opening balanceprovisions of retained earnings.  Any potential effectAccounting Standards Codification 2015-20, Presentation of adoptionFinancial Statements – Discontinued Operations for all periods presented.

Loss from discontinued operations, net of taxes, comprised the new standard has not yet been quantified; however, based onfollowing for the Company’s initial review of contracts to date, the adoption of the new standard is not expected to have a material effect on the timing or amount of revenue recognized as compared to current practices.  The Company continues to evaluate the expanded disclosure requirements associated with Topic 606three and anticipates completing its assessment in the fourth quarter of 2017.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.

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Liquidity

As a result of September 30, 2017, the Asset Sale, the Company has no revenue-generating operations. While the cash and subordinated secured promissory note received as partial consideration for the nine months ended September 30, 2017, we had approximately $1.2 million in availableAsset Sale generate interest income, the Company believes that the cash a net loss of $707,000 and negative cash flow from operations of $3.0 million. The negative cash flow was the result of abnormally high shipments over the last fewon hand is sufficient to fund operating expenses for at least 12 months from overseas suppliers,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 improved stock availability for customers, but which followed prolonged periods of production delays that led to depressed order rates.  As a result, subsequent tocould provide the quarter ended September 30, 2017, we have utilized our revolving credit facility from time to time,Company greater resources and through the period ending November 4, 2017 there were additional net cash outflows of approximately $700,000. In November 2017, we obtained a waiver from our lender to eliminate the fixed charge coverage ratio requirement which removes any financial covenant requirements and allows us to borrow on the revolver through October 2018. As of September 30, 2017, our availability was approximately $3.4 million on the line of credit with a maximum availability of $4.0 million, subject to certain reserve adjustments by the bank.  Management has plans to reduce and/or delay operating expenses and utilize our line of credit availability as necessaryflexibility in order to meet obligations as they become due.acquiring non-furniture assets.

3.            Debt

4. We have a secured $6.0 million revolving credit facility with Wells Fargo Bank, National Association with an excess availability requirement of $2.0 million resulting in maximum borrowings of $4.0 million under the facility, subject to borrowing base eligibility requirements.  The credit facility matures in October 2018 and is secured by our accounts receivable, inventory and certain other assets. Borrowings under the credit facility bear interest at a variable per annum rate equal to the daily three-month London Bank Interbank Offered Rate plus 3.5%.

Subordinated Secured Promissory Note Receivable

The credit facility contains covenantsCompany 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 among other things, limit our abilitythe availability thresholds were not met, the accrued interest was considered paid in kind and capitalized to incur certain typesthe principal balance of debt or liens, pay dividends, enter into mergers and consolidations or use proceeds of borrowing for other than permitted uses.  The credit facility also includes a covenant requiring us to maintain a minimum fixed charge ratio of not less than 1.1 to 1.0 measured annually on a trailing twelve months with an initial compliance date at December 31, 2017.  We obtained a waiver on November 9, 2017 for compliance with this covenant as of December 31, 2017, as long as the aggregate principal outstanding under the credit facility is not greater than $250,000 on December 31, 2017..note.

At SeptemberDuring 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, 2017, 2018.

Resulting from the interest being paid in kind and December 31, 2016, no borrowings were outstanding under this revolving credit facility. 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.

4.            Income taxes

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.

During the firstnine six months of 2017,2018, we recorded a non-cash charge to our valuation allowance of $141,000$368,000 increasing our valuation allowance against deferred tax assets to $12.7$10.0 million at SeptemberJune 30, 2017. 2018. The primary assets covered by this valuation allowance are net operating losses, which are approximately $21.8$35.5 million at SeptemberJune 30, 2017. In the prior year nine months, we utilized $19.7 million of our net operating loss carry-forward against taxable2018. The Company did not make any cash payments for income resulting primarily from our surrender of corporate-owned life insurance policies. The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these policies when held until death of the covered lives, but this growth, net of premiums paid, became taxable when we surrendered the policies. The aggregate impact of the surrender of these policies in the first quarter of last year was the creation of $24.0 million in taxable income. The income tax benefit in the current three and ninesix month periods wasperiod ended June 30, 2018 and prior year three and six month period ended July 1, 2017 due to state incomeour net loss. During the current three month period, we recorded a $231,000 decrease in tax adjustments. In thepositions of prior year, the incomeyears’ related to our unrecognized tax expense associated with the surrender of the corporate-owned life insurance policies was recognized in full during the prior year first quarter and was largely the result of federal alternative minimum tax which limits our ability to offset income generated during the period with net operating carry-forwards, and, to a lesser extent, the impact of surrendering these policies have on state income taxes.

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

4.            Income taxes (continued)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-yearthree-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-yearthree-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 resulting in no deferred tax asset balance being recognized, until sufficient positive evidence exists to support its reversal.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 rates for the current threeand nineprior year three and six month periods were 9.5% and 4.7%effectively 0% due to state income tax adjustments. The effective tax rate in the prior year three and nine month periods were negative 6.1% and negative 16.0%, respectively, driven by the impact of the alternative minimum tax and state related taxes on the surrender of corporate owned life insurance policies. The major reconciling items between our effective income tax rate and the federal statutory rate are the change in our valuation allowance and, in the prior year period, the cash surrender value on life insurance policies.net loss.

5.           Employee Benefit Plans

Components of other postretirement benefit cost (in thousands):

6

7.Stockholders’ Equity

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):

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

6.Stockholders’ Equity (continued)

7.	Stockholders’ Equity (continued)

In both the current three and ninesix month periods ending Septemberended June 30, 2017 2018 and the prior three and ninesix month periods ending Octoberended July 1, 2016, 2017, the dilutive effect of equity awardsstock options was not recognized since we had a net loss.losses. Approximately 944,00063,000 shares and 993,000 shares in the three2018 and nine month periods of 2017, respectively, were issuable upon the exercise of stock options. Theseoptions, which were not included in the diluted per share calculation because they were anti-dilutive. Also, 864,000205,000 shares and 462,000 shares in 2018 and 2017, respectively, of restricted stock were not included in 2017 because they were anti-dilutive. In the three and nine month periods ended October 1, 2016, approximately 1.2 million of stock options and 638,000

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 excludedno 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 diluted per share calculation as they would be anti-dilutive.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’ equityStockholders’ Equity accounts for the firstninesix months ended SeptemberJune 30, 2017 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.