NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note A – Summary of
Significant Accounting Policies
Presentation of Consolidated Condensed Financial Statements
– The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting
are consistent with the accounting policies followed for its annual financial reporting. All adjustments that are of a normal recurring
nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included
in the accompanying consolidated condensed financial statements. The consolidated condensed balance sheet of the Company as of
December 28, 2019 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information
and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These consolidated condensed
financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the
Company’s Form 10-K annual report for 2019 filed with the Securities and Exchange Commission.
Reclassifications – Certain reclassifications have
been made to prior year financial statements to conform to the current year financial statement presentation. These reclassifications
had no effect on net earnings.
Note B - Seasonal Aspects
The results of operations for the three months ended March
21, 2020 and March 23, 2019 are not necessarily indicative of the results to be expected for the full year.
Note C - Inventories
In thousands
|
|
March 21,
2020
|
|
|
December 28,
2019
|
|
|
March 23,
2019
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
4,452
|
|
|
$
|
3,186
|
|
|
$
|
4,052
|
|
Work in progress
|
|
|
2,329
|
|
|
|
2,177
|
|
|
|
2,891
|
|
Finished goods
|
|
|
35,454
|
|
|
|
36,906
|
|
|
|
40,801
|
|
|
|
$
|
42,235
|
|
|
$
|
42,269
|
|
|
$
|
47,744
|
|
Note D – Income Taxes
The provision for income taxes was computed based on financial
statement income.
Note E – Fair Values of Financial Instruments
The following methods were used to estimate the fair value of
all financial instruments recognized in the accompanying balance sheets at amounts other than fair values.
Cash
and Cash Equivalents
Fair values of cash and cash equivalents approximate cost due
to the short period of time to maturity.
Long-term
Debt
Fair values of long-term debt is estimated based on borrowing
rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted
cash flow model.
The following table presents estimated fair values of the Company’s
financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with
FASB ASC 825 at March 21, 2020, December 28, 2019 and March 23, 2019.
|
|
|
|
|
Fair Value Measurements Using
|
|
March 21, 2020
In thousands
|
|
Carrying
Amount
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,167
|
|
|
$
|
6,167
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
December 28, 2019
In thousands
|
|
Carrying
Amount
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,882
|
|
|
$
|
5,882
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
March 23, 2019
In thousands
|
|
Carrying
Amount
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,299
|
|
|
$
|
4,299
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
3,662
|
|
|
$
|
--
|
|
|
$
|
3,662
|
|
|
$
|
--
|
|
Note F – Stock Compensation
The fair value of stock-based compensation is recognized in
accordance with the provisions of FASB ASC 718, Stock Compensation.
During the three months ended March 21, 2020, the Company awarded
20,000 restricted stock units to directors and 68,000 restricted stock units to employees. The restricted stock units awarded to
directors time vest over two years (one-half one year from grant date and one-half two years from grant date) provided that the
director is still a director of the Company at the vest date. Director restricted stock units are subject to forfeiture, except
for termination of services as a result of retirement, death or disability, if on the vesting date the director no longer holds
a position with the Company. The 2020 restricted stock units awarded to employees time vest over three years (one-third one year
from grant, one-third two years from grant and one-third three years from grant) provided that the employee is still employed by
the Company on the vesting date.
For the three months ended March 21, 2020 and March 23, 2019,
the Company recognized stock based compensation expense of $136 thousand and $144 thousand, respectively. At March 21, 2020 and
March 23, 2019, respectively, there was $1.2 million and $1.2 million in unrecognized stock-based compensation expense related
to non-vested stock awards.
Note G - Segment Information
|
|
As of and for the Three Months
Ended March 21, 2020
|
|
In thousands
|
|
Sporting Goods
|
|
|
Corp.
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
37,289
|
|
|
$
|
--
|
|
|
$
|
37,289
|
|
Operating income (loss)
|
|
|
2,823
|
|
|
|
(399
|
)
|
|
|
2,424
|
|
Net income (loss)
|
|
|
2,049
|
|
|
|
(98
|
)
|
|
|
1,951
|
|
Total assets
|
|
$
|
137,010
|
|
|
$
|
8,411
|
|
|
$
|
145,421
|
|
|
|
As of and for the Three Months
Ended March 23, 2019
|
|
In thousands
|
|
Sporting Goods
|
|
|
Corp.
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
32,102
|
|
|
$
|
--
|
|
|
$
|
32,102
|
|
Operating income (loss)
|
|
|
761
|
|
|
|
(367
|
)
|
|
|
394
|
|
Net income (loss)
|
|
|
507
|
|
|
|
(240
|
)
|
|
|
267
|
|
Total assets
|
|
$
|
144,006
|
|
|
$
|
6,326
|
|
|
$
|
150,332
|
|
Note H – Dividend Payment
On March 16, 2020, the Company paid a quarterly dividend of
$0.125 per common share to all shareholders of record on March 9, 2020. The total amount of the dividend was approximately $1.8
million and was charged against retained earnings.
Note I - Earnings Per Share
The shares used in computation of the Company’s basic
and diluted earnings per common share are as follows:
|
|
Three Months Ended
|
|
In thousands
|
|
March 21,
2020
|
|
|
March 23,
2019
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
14,118
|
|
|
|
14,447
|
|
Dilutive effect of stock options and restricted stock units
|
|
|
56
|
|
|
|
28
|
|
Weighted average common shares outstanding, assuming dilution
|
|
|
14,174
|
|
|
|
14,475
|
|
Stock options that are anti-dilutive as to earnings per share
and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation
of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 2020 and 2019 were
79,700 and 89,431, respectively.
Note J – New Accounting Standards and Changes in Accounting
Principles
With the exception of that discussed below, there have been
no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 21, 2020, as compared
to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 28, 2019, that are of significance, or potential significance to the Company.
In January 2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment. The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim,
goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge
should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from
any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment
loss, if applicable.
The Company adopted this standard on December 29, 2019. The
adoption of this standard did not have an impact to the financial statements of the Company.
Note K – Revenue from Contracts with Customers
Revenue Recognition – Effective
December 31, 2017, we adopted ASC 606. The adoption of this standard did not impact the timing of revenue recognition for customer
sales. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs
with the transfer of control of our goods at a point in time based on shipping terms and transfer of title. Revenue is measured
as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect
concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported
within revenue.
Gross-to-net sales adjustments –
We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statement of operations. These
adjustments are referred to as gross-to-net sales adjustments and primarily fall into one of three categories; returns, warranties
and customer allowances.
Returns – The Company records
an accrued liability and reduction in sales for estimated product returns based upon historical experience. An accrued liability
and reduction in sales is also recorded for approved return authorizations that have been communicated by the customer.
Warranties – Limited warranties
are provided on certain products for varying periods. We record an accrued liability and reduction in sales for estimated future
warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the
estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and sales in the current year.
Customer Allowances – Customer
allowances are common practice in the industries in which the Company operates. These agreements are typically in the form of advertising
subsidies, volume rebates and catalog allowances and are accounted for as a reduction to gross sales. The Company reviews such
allowances on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available.
Disaggregation of Revenue –
We generate revenue from the sale of widely recognized sporting goods brands in basketball goals, archery, indoor and outdoor game
recreation and fitness products. These products are sold through multiple sales channels that include; mass merchants, specialty
dealers, key on-line retailers (“E-commerce”) and international. The following table depicts the disaggregation of
revenue according to sales channel:
|
|
Three Months Ended
|
|
All Amounts in Thousands
|
|
March 21,
2020
|
|
|
March 23,
2019
|
|
|
|
|
|
|
|
|
Gross Sales by Channel:
|
|
|
|
|
|
|
|
|
Mass Merchants
|
|
$
|
13,468
|
|
|
$
|
11,430
|
|
Specialty Dealers
|
|
|
13,067
|
|
|
|
13,601
|
|
E-commerce
|
|
|
13,581
|
|
|
|
9,934
|
|
International
|
|
|
1,556
|
|
|
|
1,174
|
|
Other
|
|
|
476
|
|
|
|
702
|
|
Total Gross Sales
|
|
|
42,148
|
|
|
|
36,841
|
|
|
|
|
|
|
|
|
|
|
Less: Gross-to-Net Sales Adjustments
|
|
|
|
|
|
|
|
|
Returns
|
|
|
1,079
|
|
|
|
1,175
|
|
Warranties
|
|
|
405
|
|
|
|
373
|
|
Customer Allowances
|
|
|
3,375
|
|
|
|
3,191
|
|
Total Gross-to-Net Sales Adjustments
|
|
|
4,859
|
|
|
|
4,739
|
|
Total Net Sales
|
|
$
|
37,289
|
|
|
$
|
32,102
|
|
Note L – Leases
We have operating leases for office, manufacturing and distribution
facilities as well as for certain equipment. Our leases have remaining lease terms of 1 year to 5 years. As of March 21, 2020,
the Company has not entered into any lease arrangements classified as a finance lease.
We determine if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and operating
lease liabilities on our consolidated balance sheet. The Company has elected an accounting policy to not recognize short-term leases
(one year or less) on the balance sheet. The Company also elected the package of practical expedients which applies to leases that
commenced before the adoption date. By electing the package of practical expedients, the Company did not need to reassess the following;
whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs
for any existing leases.
ROU assets and operating lease liabilities are recognized based
on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease
is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement
date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it
is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line
basis over the lease term. Components of lease expense and other information as follows:
|
|
Three Months Ended
|
|
All Amounts in Thousands
|
|
March 21,
2020
|
|
|
March 23,
2019
|
|
|
|
|
|
|
|
|
Lease Expense
|
|
|
|
|
|
|
|
|
Operating Lease Cost
|
|
$
|
207
|
|
|
$
|
191
|
|
Short-term Lease Cost
|
|
|
23
|
|
|
|
90
|
|
Variable Lease Cost
|
|
|
36
|
|
|
|
55
|
|
Total Operating Lease Cost
|
|
$
|
266
|
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
Operating Lease – Operating Cash Flows
|
|
$
|
187
|
|
|
$
|
175
|
|
New ROU Assets – Operating Leases
|
|
$
|
688
|
|
|
$
|
73
|
|
Weighted Average Remaining Lease Term – Operating Leases
|
|
|
2.61 years
|
|
|
|
1.65 years
|
|
Weighted Average Discount Rate – Operating Leases
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Future minimum lease payments under non-cancellable leases as
of March 21, 2020 were as follows:
All Amounts in Thousands
|
|
|
|
|
|
|
|
Year 1
|
|
$
|
790
|
|
Year 2
|
|
|
502
|
|
Year 3
|
|
|
291
|
|
Year 4
|
|
|
86
|
|
Year 5
|
|
|
30
|
|
Thereafter
|
|
|
2
|
|
Total future minimum lease payments
|
|
|
1,701
|
|
Less imputed interest
|
|
|
(104
|
)
|
Total
|
|
$
|
1,597
|
|
|
|
|
|
|
Reported as of March 21, 2020
|
|
|
|
|
Current operating lease liabilities
|
|
|
730
|
|
Long-term operating lease liabilities
|
|
|
867
|
|
Total
|
|
$
|
1,597
|
|
Note M – Commitments
and Contingencies
The Company is involved in litigation arising in the normal
course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will
have a material adverse effect on the business or financial condition of the Company.
Note N – Subsequent
Events
There are many uncertainties regarding the current coronavirus
("COVID-19") pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business,
including how it will impact its customers, employees, suppliers, vendors, business partners and distribution channels. While the
pandemic did not materially adversely affect the Company’s financial results and business operations in the Company’s
first fiscal quarter ended March 21, 2020, we are unable to predict the impact that COVID-19 will have on its financial position
and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of the COVID-19
pandemic and intends to make adjustments to its responses accordingly.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") was enacted on March 27, 2020 in the United States. On April 14, 2020, Indian Industries, Inc., a wholly-owned subsidiary
of Escalade, Incorporated (“Indian”), was informed by its lender, JPMorgan Chase Bank, N.A. (the “Bank”),
that the Bank received approval from the U.S. Small Business Administration (“SBA”) to fund Indian’s request
for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted CARES
Act administered by the SBA. In connection with the PPP Loan, Indian has entered into the promissory note attached as Exhibit 10.4
to this Form 10-Q. Per the terms of the PPP Loan, Indian will receive total proceeds of $5,627,500 from the Bank. In accordance
with the requirements of the CARES Act, Indian intends to use the proceeds from the PPP Loan primarily for payroll costs. The PPP
Loan is scheduled to mature on April 9, 2022, has a 1.00% interest rate, and is subject to the terms and conditions applicable
to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act.
As disclosed in the Company’s Form 8-K filed with the
SEC on April 1, 2020, on March 30, 2020, the Board of Directors of Escalade, Incorporated announced that Scott Sincerbeaux has
agreed to become the Company’s new President and Chief Executive Officer. Mr. Sincerbeaux is expected to commence his employment
with the Company on or about April 27, 2020.