Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)

[X]

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

For the quarterly period ended July 1, 2017

[ ]

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

For the transition period from to .

Commission file number: 0-14938

STANLEY FURNITURE COMPANY, INC.

(Exact name of registrant as specified in its charter)

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

200 North Hamilton Street, No. 200, High Point, North Carolina, 27260
(Address of principal executive offices, Zip Code)

(336-884-770 0 )

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

As of July 21, 2017, 15,083,331 shares of common stock of Stanley Furniture Company, Inc., par value $.02 per share, were outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	July 1 ,			December 31,
	201 7			2016
	(unaudited)
ASSETS
Current assets:
Cash	$	4,532		$	4,212
Restricted cash		631			663
Accounts receivable, less allowances of $227 and $272, on each respective date		4,561			3,492
Finished goods inventory, net		20,930			22,951
Prepaid expenses and other current assets		851			729
Total current assets		31,505			32,047

Property, plant and equipment, net		1,521			1,606
Other assets		2,740			2,868
Total assets	$	35,766		$	36,521

LIABILITIES
Current liabilities:
Accounts payable	$	5,687		$	5,674
Accrued salaries, wages and benefits		1,481			1,371
Deferred revenue		827			759
Other accrued expenses		654			593
Total current liabilities		8,649			8,397

Deferred compensation		3,891			4,219
Supplemental retirement plan		1,678			1,724
Other long-term liabilities		1,850			2,199
Total liabilities		16,068			16,539

STOCKHOLDERS’ EQUITY
Common stock, $0.02 par value, 25,000,000 shares authorized, 14,681,284 and 14,730,805 shares issued and outstanding on each respective date		275			275
Capital in excess of par value		16,774			16,840
Retained earnings		4,861			5,129
Accumulated other comprehensive loss		(2,212	)		(2,262	)
Total stockholders’ equity		19,698			19,982
Total liabilities and stockholders’ equity	$	35,766		$	36,521

The accompanying notes are an integral part of the consolidated financial statements.

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months						Six Months
	Ended						Ended
	July 1 ,			July 2,			July 1 ,			July 2,
	2017			2016			2017			2016

Net sales	$	11,615		$	12,053		$	22,805		$	23,736

Cost of sales		8,883			9,991			17,836			19,133

Gross profit		2,732			2,062			4,969			4,603

Selling, general, and administrative expenses		2,738			3,508			5,396			6,819

Operating loss		(6	)		(1,446	)		(427	)		(2,216	)

Other income, net		18			6			22			11
Interest expense, net		-			-			-			109

Income (loss) from operations before taxes		12			(1,440	)		(405	)		(2,314	)

Income tax (benefit) expense		(2	)		(48	)		(3	)		563

Net income (loss)	$	14		$	(1,392	)	$	(402	)	$	(2,877	)

Net income (loss) per share:
Basic	$	-		$	(.10	)	$	(.03	)	$	(.20	)
Diluted	$	-			(.10	)	$	(.03	)	$	(.20	)

Weighted average shares outstanding:
Basic		14,203			14,083			14,196			14,164
Diluted		14,203			14,083			14,196			14,164

The accompanying notes are an integral part of the consolidated financial statements.

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	Three Months					Six Months
	Ended					Ended
	July 1 ,		July 2,			July 1 ,			July 2,
	201 7		2016			201 7			2016

Net income (loss)	$	14	$	(1,392	)	$	(402	)	$	(2,877	)
Other comprehensive income:
Amortization of actuarial loss		25		24			50			47
Adjustments to net periodic benefit cost		25		24			50			47
Comprehensive income (loss)	$	39	$	(1,368	)	$	(352	)	$	(2,830	)

The accompanying notes are an integral part of the consolidated financial statements.

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	July 1 ,			July 2,
	201 7			2016
Cash flows from operating activities:
Cash received from customers	$	21,801		$	25,087
Cash paid to suppliers and employees		(21,453	)		(26,028	)
Interest paid, net		-			(199	)
Income taxes paid		(26	)		(262	)
Net cash provided (used) by operating activities		322			(1,402	)

Cash flows from investing activities:
Proceeds from surrender of corporate-owned life insurance policies		-			28,139
Purchase of other assets		-			(14	)
Decrease in restricted cash		32			-
Proceeds from sale of property, plant and equipment		25			-
Purchase of property, plant and equipment		(10	)		-
Net cash provided by investing activities		47			28,125

Cash flows from financing activities:
Payment of dividends		(49	)		-
Payments on insurance policy loans		-			(5,495	)
Repurchase and retirement of common stock		-			(1,012	)
Stock purchase and retirement for tax withholdings on vesting of restricted awards		-			(14	)
Net cash used by financing activities		(49	)		(6,521	)

Cash flows from discontinued operations:
Cash used by operating activities		-			(7	)
Net cash used by discontinued operations		-			(7	)

Net increase in cash		320			20,195
Cash at beginning of period		4,212			6,497
Cash at end of period	$	4,532		$	26,692

Reconciliation of net loss to net cash provided ( used ) by operating activities:
Net loss	$	(402	)	$	(2,877	)
Depreciation and amortization		229			234
Stock-based compensation		(66	)		117
Gain on sale of property, plant and equipment		(16	)		-

Changes in assets and liabilities:
Accounts receivable		(1,069	)		1,318
Inventories		2,021			(268	)
Prepaid expenses and other assets		(137	)		(93	)
Accounts payable		13			(31	)
Accrued salaries, wages and benefits		161			77
Other accrued expenses		319			649
Other long-term liabilities		(731	)		(528	)
Net cash provided (used) by operating activities	$	322		$	(1,402	)

The accompanying notes are an integral part of the consolidated financial statements.

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	Preparation of Interim Unaudited Consolidated Financial Statements

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

Recent Accounting Pronouncements

In March 2017, 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 (“ASU 2017-07). 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 net benefit cost from within operating income to a separate expense outside of operations.

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 ASU 2016-13 to have a material impact to the consolidated financial statements.

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The new standard will be effective for the first quarter of our fiscal year ending December 31, 2019. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on the consolidated financial statements and related disclosures by reviewing all long-term leases and determining the potential impact. 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 March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions. The new guidance requires that excess tax benefits (which represent 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 230). 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 light 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. We are in the initial phases and have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a full or modified retrospective basis in the first quarter of our fiscal year ending December 31, 2018.

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

2.	Property, Plant and Equipment

	(in thousands)
	July 1 ,		December 31,
	201 7		2016
Machinery and equipment	$	2,620	$	2,675
Leasehold improvements		1,842		1,833
Property, plant and equipment, at cost		4,462		4,508
Less accumulated depreciation		2,941		2,902
Property, plant and equipment, net	$	1,521	$	1,606

3 .

Debt

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%.

The credit facility contains covenants that, among other things limit our ability to incur certain types 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 for the trailing twelve months with an initial compliance date at December 31, 2017.

At July 1, 2017, and December 31, 2016, no borrowings were outstanding under this revolving credit facility.

4 .	Income taxes

During the first six months of 2017, we recorded a non-cash charge to our valuation allowance of $121,000, increasing our valuation allowance against deferred tax assets to $12.7 million at July 1, 2017. The primary assets covered by this valuation allowance are net operating losses, which are approximately $20.9 million at July 1, 2017. In the prior year six months, we utilized $21.7 million of our net operating loss carry-forward against taxable 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 in the current three and six month periods was effectively $0 due to our net loss. In the prior year, the income 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. Therefore, the income tax benefit recognized during the prior year three month period was the result of normal operating losses incurred during the period. Those losses ultimately offset the income recognized in the first three months, which lowered the impact of the federal alternative minimum tax and state income taxes. The income tax expense recognized during the prior year six month period was the result of federal alternative minimum tax 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)

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

Our effective tax rate for the current three and six month periods was effectively 0% due to our net loss for the first six months of the year. The effective tax rate in the prior year three and six month periods were 3.3% and negative 24.3%, 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.

5 .	Employee Benefit Plans

Components of other postretirement benefit cost (in thousands):

	Three Months				Six Months
	Ended				Ended
	July 1 ,		July 2,		July 1 ,		July 2,
	201 7		2016		201 7		2016
Interest cost	$	59	$	63	$	117	$	127
Amortization of actuarial loss		25		24		50		47
Net periodic postretirement benefit cost	$	84	$	87	$	167	$	174

6 .	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):

Three Months

Six Months

Ended

July 1 ,

July 2,

July 1 ,

July 2,

201 7

2016

201 7

2016

Weighted average shares outstanding for basic calculation

14,203

14,083

14,196

14,164

Add: Effect of dilutive stock awards

Weighted average shares outstanding, adjusted for diluted calculation

14,203

14,083

14,196

14,164

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

6 .	Stockholders’ Equity (continued)

In the three month period ending July 1, 2017, we had no dilutive effect from equity awards. In the six month period ending July 1, 2017 and the three and six month periods ended July 2, 2016, the dilutive effect of equity awards was not recognized since we had a net loss. Approximately 993,000 shares in the three and six month periods of 2017 were issuable upon the exercise of stock options. These were not included in the diluted per share calculation because they were anti-dilutive. Also, 462,000 shares in 2017 of restricted stock were not included because they were anti-dilutive. In the three and six month periods ended July 2, 2016, approximately 1.2 million of stock options were excluded from the diluted per share calculation as they would be anti-dilutive. In addition, 638,000 shares in 2016 of restricted stock were not included because they were anti-dilutive.

A reconciliation of the activity in stockholders’ equity accounts for the quarter ended July 1, 2017 is as follows (in thousands):

									Accumulated
			Capital in						Other
	Common		Excess of			Retained			Comprehensive
	Stock		Par Value			Earnings			Loss
Balance at December 31, 2016	$	275	$	16,840		$	5,129		$	(2,262	)
Net loss		-		-			(402	)		-
Dividend payable adjustment due to restricted share forfeitures		-		-			134			-
Stock-based compensation		-		(66	)		-			-
Adjustment to net periodic benefit cost		-		-			-			50
Balance at July 1, 2017	$	275	$	16,774		$	4,861		$	(2,212	)

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Three Months Ended July 1, 2017 compared to Three Months Ended April 1, 2017 and December 31, 2016

The following table sets forth the percentage relationship to net sales of certain items included in the consolidated statements of operations and results for the sequential three month periods. We have disclosed a quarterly comparison of our operating results on a sequential basis and plan to continue throughout the current year because we believe that this information is meaningful as we begin to recover from sourcing issues inhibiting sales growth:

	Three Months Ended
	July 1 ,			April 1,			Dec 31,
	201 7			2017			2016
Net sales		100.0	%		100.0	%		100.0	%
Cost of sales		76.5			80.0			79.9
Gross profit		23.5			20.0			20.1
Selling, general and administrative expenses		23.6			23.7			34.2
Operating loss		(.1	)		(3.7	)		(14.1	)
CDSOA income		-			-			11.3
Other income, net		.2			-			.1
Income (loss) from operations before income taxes		.1			(3.7	)		(2.7	)
Income tax expense		-			-			.4
Net income (loss)		.1	%		(3.7	)%		(3.1	)%

Net sales of $11.6 million for the three month period ended July 1, 2017, increased 3.8% from $11.2 million and 18.5% from $9.8 million compared to the three month periods ending April 1, 2017 and December 31, 2016, respectively. Net sales increased compared to the sequential first quarter of 2017 due primarily to higher average selling prices resulting from lower discounting. Unit volumes for these comparable periods were essentially flat. Compared to the sequential quarter ending December 31, 2016, net sales increased primarily due to higher unit volume resulting from servicing backlog on product introductions which have been delayed by sourcing issues in the prior year.

Gross profit as a percentage of net sales for the second quarter of 2017 improved to 23.5% from 20.0% and 20.1% in the first quarter of 2017 and the fourth quarter of 2016, respectively. Gross profit percentage improved over the prior two sequential periods primarily due to lower discounting and improved fixed overhead absorption from increased sales.

Selling, general and administrative expense for the second quarter was $2.7 million, essentially flat with the first quarter of 2017 and down 18% compared to $3.4 million in the fourth quarter of 2016. Compared to the first quarter of 2017, second quarter salaries increased due to the restoration of salaries retroactive to the beginning of the year through make whole payments for associates who had taken salary reductions during the first half of 2017 to assist the company’s profitability. Offsetting this increase was a decrease in equity compensation expense for performance awards and separated associates. Compared to the sequential fourth quarter of 2016, selling, general and administrative expenses in the second quarter of 2017 declined mostly due to cost reductions implemented early in 2017 and lower equity compensation expense.

As a result, operating results were essentially breakeven compared to an operating loss as a percentage of net sales of 3.7% for the sequential period ending April 1, 2017 and 14.1% for the sequential period ending December 31, 2016, respectively.

During the fourth quarter of 2016, we received $1.1 million in funds under the CDSOA. No CDSOA proceeds have been received in the 2017 periods.

Three and Six Months Ended July 1, 2017 compared to Three Months and Six Months Ended July 2, 2016

The following table sets forth the percentage relationship to net sales of certain items included in the Consolidated Statements of Operations:

	Three Months Ended						Six Months Ended
	July 1 ,			July 2,			July 1 ,			July 2,
	201 7			2016			201 7			2016
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		76.5			82.9			78.2			80.6
Gross profit		23.5			17.1			21.8			19.4
Selling, general and administrative expenses		23.6			29.1			23.7			28.7
Operating loss		(.1	)		(12.0	)		(1.9	)		(9.3	)
Other income, net		.2			-			.1			.1
Interest expense, net		-			-			-			.5
Income (loss) from operations before income taxes		.1			(12.0	)		(1.8	)		(9.7	)
Income tax (benefit) expense		-			(.4	)		-			2.4
Net income (loss)		.1	%		(11.6	)%		(1.8	)%		(12.1	)%

Net sales of $11.6 million for the three month period ended July 1, 2017, decreased 3.6%, compared to the 2016 three month period. For the six month period ended July 1, 2017, net sales decreased 3.9%, from the comparable 2016 period. The decrease in both periods was due to lower unit volume, partially offset by higher average selling prices. Higher average selling prices are the result of aggressive discounting in the prior year periods to move older discontinued product and also to generate inline product orders until newer more marketable product was received.

Gross profit for the current three month period improved to $2.7 million, or 23.5% of net sales, from $2.1 million, or 17.1% of net sales, for the comparable three months of 2016. Gross profit for the current six month period improved to $5.0 million, or 21.8% of net sales, from $4.6 million, or 19.4% of net sales, for the comparable six months of 2016. The increase in gross profit margins in both the three and six month periods was driven by lower sales discounting and an improved product mix as we began shipping our more marketable product.

Selling, general and administrative expenses for the three and six month periods of 2017 were $2.7 million and $5.4 million, or 23.6% and 23.7% of net sales, respectively, compared to $3.5 million and $6.8 million, or 29.1% and 28.7% of net sales, in the comparable 2016 periods. Expenditures for the current three and six month periods declined due primarily to cost reduction actions taken at the beginning of the year to reduce our break-even level and, to a lesser extent, lower equity compensation expenses for performance awards and separated associates. Partially offsetting these lower expenses were higher commission costs and no benefit in the six month period of 2017 from the cash surrender value growth of corporate-owned life insurance policies that were liquidated in the first quarter of 2016.

As a result, operating results as a percentage of net sales were essentially breakeven for the current three month period compared to an operating loss of 12.0% of net sales in the prior three month period. An operating loss of 1.9% of net sales for the current six month period compared to a loss 9.3% of net sales in the prior year six month period.

Interest expense for the six month period of 2016 included $109,000 interest on loans against cash surrender value of insurance policies used to fund our legacy deferred compensation plan. The elimination of this expense was due to surrendering these policies and paying off loans against the cash surrender value in the first quarter of 2016.

Our effective tax rate for the current three and six month periods was minimal due to essentially no income before taxes. The effective tax rate in the prior year three and six month periods were a benefit of 3.3% and an expense of 24.3%, respectively. As indicated above, we surrendered our corporate-owned life insurance policies during the first quarter of 2016, which resulted in taxable income for the period. The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these polices 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 which was recognized in the prior year first quarter. The income tax expense recognized during the six month period of 2016 was largely the result of federal alternative minimum tax which limits our ability to offset income generated during that period with net operating carry-forwards, and, to a lesser extent, the impact of no state income taxes on the income from the policy surrendered. 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 periods, the cash surrender value on life insurance policies.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand, cash generated from operations and the revolving credit facility. While we believe that our business strategy will be successful, we cannot predict with certainty the ultimate impact on our revenues, operating costs and cash flow from operations. We expect cash on hand and borrowings under the revolving credit facility to be adequate for ongoing operational and capital expenditures for the next twelve months. At July 1, 2017, we had $4.5 million in cash and $631,000 in restricted cash.

Working capital, excluding cash and restricted cash, decreased to $17.7 million at July 1, 2017 from $18.8 million on December 31, 2016. The decrease was primarily the result of a $2.0 million decrease in inventories as we continued to decrease our discontinued inventory and began shipping newer introductions that had been previously delayed by our sourcing vendors. Partially offsetting this decline was an increase of $1.1 million in accounts receivable due to higher shipments in the latter part of the quarter. The remaining decline in net working capital was due to a $252,000 increase in current liabilities.

Cash generated from operations was $322,000 in the current six months of 2017 compared to cash used by operations of $1.4 million in the comparable prior year period. The improved cash flow during the current period was primarily due to cost cutting initiatives, a reduction in working capital, a decrease in tax payments and the elimination of interest payments since first quarter of 2016 with the liquidation of corporate-owned life insurance policies and paying off all related loans. The current period and the prior year period include approximately $450,000 in annual payments to participants in our legacy deferred compensation plan.

Cash generated from investing activities in the first six months of 2017 included proceeds from sale of property, plant and equipment and the reduction in restricted cash, partially offset by a miscellaneous purchase of property, plant and equipment. In the prior year period, cash generated from investing activities consisted of $28.1 million in proceeds from the surrender of corporate-owned life insurance policies.

In the first six months of 2017, $49,000 of cash was used by financing activities to pay dividends on restricted stock that vested during the period. Net cash used by financing activities in the prior year six months was $6.5 million and consisted of $5.5 million to pay off the remaining outstanding life insurance policy loans in conjunction with our decision to surrender these corporate-owned life insurance policies and $1.0 million for the repurchase and retirement of 400,000 shares of our common stock.

Continued Dumping and Subsidy Offset Act (“CDSOA”)

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (“Customs”) for imports covered by antidumping duty orders entering the United States through September 30, 2007 to eligible domestic producers that supported a successful antidumping petition (“Supporting Producers”) for wooden bedroom furniture imported from China. Antidumping duties for merchandise entering the U.S. after September 30, 2007 have remained with the U.S. Treasury.

In November 2016, Customs distributed $3.3 million in collected duties that were available for distribution in 2016. Our portion of this distribution was $1.1 million, representing 33.5% of the balance available for distribution in 2016. As of April 30, 2017, Customs preliminary reported that approximately $1.1 million is potentially available for distribution under the CDSOA during the fourth quarter of calendar year 2017 to eligible domestic manufacturers in connection with the case involving bedroom furniture imported from China. The final amounts available for distribution may be higher or lower than the preliminary amounts reported due to liquidations, reliquidations, protests, and other events affecting entries that may take place before the end of the government’s fiscal year. Assuming that our percentage allocation in 2017 is the same as it was for the 2016 distribution (approximately 33.5% of the funds distributed) and that the $1.1 million collected by the government as of April 30, 2017 does not change, we could receive approximately $369,000 in CDSOA funds in the fourth quarter of 2017.

Due to the uncertainty of the administrative processes, we cannot provide assurances as to future amounts of additional CDSOA funds that ultimately will be received, if any, and we cannot predict when we may receive any additional CDSOA funds.

New Accounting Pronouncements

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification ("ASC"), Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of -use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). Our leases as of July 1, 2017, 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. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and disclosures by reviewing all long-term leases and determining the potential impact. 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.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 2016 Annual Report on Form 10-K.

Forward-Looking Statements

Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” “could,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include disruptions in foreign sourcing including those arising from supply or distribution disruptions or those arising from changes in political, economic and social conditions, as well as laws and regulations, in countries from which we source products, international trade policies of the United States and countries from which we source products, the inability to raise prices in response to inflation and increasing costs, lower sales due to worsening of current economic conditions, the cyclical nature of the furniture industry, business failures or loss of large customers, failure to anticipate or respond to changes in consumer tastes, fashions and perceived values in a timely manner, competition in the furniture industry, environmental, health, and safety compliance costs, and failure or interruption of our information technology infrastructure. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

None of our foreign sales or purchases are denominated in foreign currency and we do not have any foreign currency hedging transactions. While our foreign purchases are denominated in U.S. dollars, a relative decline in the value of the U.S. dollar could result in an increase in the cost of our products obtained from offshore sourcing and reduce our earnings or increase our losses, unless we are able to increase our prices for these items to reflect any such increased cost.

ITEM 4. Controls and Procedures

(a)

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b)	Changes in internal controls over financial reporting. There were no changes in our internal control over financial reporting that occurred during the second quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 5. Other Information

As disclosed in our proxy statement for our 2017 annual meeting of stockholders, Solas Capital Management, LLC (“Solas”) submitted an exemption request to our board requesting an exemption from the provisions of our Rights Agreement to purchase an additional 16.9% of our common stock. In response to this exemption request, our board granted Solas an exemption to purchase up to an additional 8% of our common stock (which if acquired by Solas would not have caused Solas to exceed the 25% ownership level triggering an event of default under our credit facility). Our board authorized management to pursue a waiver of the ownership event of default under our credit facility and granted the full exemption requested by Solas, after receiving that waiver and an updated analysis of changes in our stock ownership indicating that the additional requested acquisition by Solas would not create a significant risk of material adverse tax consequences to us.

In June 2016, we announced that our Board of Directors had engaged Stephens, Inc. as financial advisor in connection with the consideration of potential strategic and capital allocation opportunities. The engagement of Stephens, Inc. expired in June 2017. While the Board and management are focused on implementing the company’s business plan, the Board remains committed to maximizing long-term value for the company’s stockholders and will continue to evaluate strategic alternatives.

ITEM 6. Exhibits

3.1	Restated Certificate of Incorporation of the Registrant as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (Commission File No. 0-14938) for the quarter ended July 2, 2005).

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 December 17, 2015).

31.1	Certification by Glenn Prillaman, our Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)

31.2	Certification by Anita W. Wimmer, our Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

32.1	Certification of Glenn Prillaman, our Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)

32.2	Certification of Anita W. Wimmer, our Principal Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (1)

101	The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended April 1, 2017, 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. (1)

(1) Filed herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.