BASSETT FURNITURE INDUSTRIES INC 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   Safe-harbor, forward-looking statements:   This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Bassett Furniture Industries, Incorporated and subsidiaries. Such forward-looking statements are identified by use of forward-looking words such as “ anticipates ”, “ believes ”, “ plans ”, “ estimates ”, “ expects ”, “ aims ” and “ intends ” or words or phrases of similar expression. These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any such matters will be realized. Important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements include:   • the impact of the COVID-19 pandemic and resulting supply chain disruptions upon our ability to maintain normal operations at our retail stores, manufacturing facilities and in our logistical services operations, and the resulting effects any future interruption of those operations may have upon our financial condition, results of operations and liquidity, as well as the impact of the pandemic upon general economic conditions, including consumer spending and the strength of the housing market in the United States   • competitive conditions in the home furnishings industry   • overall retail traffic levels in stores and on the web and consumer demand for home furnishings   • ability of our customers and consumers to obtain credit   • the profitability of the Bassett stores (independent licensees and Company-owned retail stores) which may result in future store closings   • ability to implement our Company-owned retail strategies and realize the benefits from such strategies, including our initiatives to expand and improve our digital marketing capabilities, as they are implemented   • fluctuations in the cost and availability of raw materials, fuel, labor, delivery costs and sourced products, including those which may result from supply chain disruptions and the imposition of new or increased duties, tariffs, retaliatory tariffs and trade limitations with respect to foreign-sourced products   • results of marketing and advertising campaigns   • effectiveness and security of our information and technology systems and possible disruptions due to cybersecurity threats, including any impacts from a network security incident; and the sufficiency of our insurance coverage, including cybersecurity insurance   • future tax legislation, or regulatory or judicial positions   • ability to efficiently manage the import supply chain to minimize business interruption   • concentration of domestic manufacturing, particularly of upholstery products, and the resulting exposure to business interruption from accidents, weather and other events and circumstances beyond our control   Additionally, other risks that could cause actual results to differ materially from those contemplated by such forward-looking statements are set forth in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended November 27, 2021.   You should keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as of the date on which such forward-looking statement is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the events described in any forward-looking statement made in this report or elsewhere, might not occur.   21 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Overview   Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We also sell our products through our website at www.bassettfurniture.com . We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 119-year history has instilled the principles of quality, value, and integrity in everything we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and meet the demands of a global economy.   With 96 BHF stores at February 26, 2022, we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.  Our store program is designed to provide a single source home furnishings retail store that provides a unique combination of stylish, quality furniture and accessories with a high level of customer service.  In order for the Bassett brand to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 30 independent sales representatives who have stated geographical territories. These sales representatives are compensated based on a standard commission rate. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.     The BHF stores feature custom order furniture, free in-home or virtual design visits (“home makeovers”) and coordinated decorating accessories.  Our philosophy is based on building strong long-term relationships with each customer.  Sales people are referred to as “Design Consultants” and are trained to evaluate customer needs and provide comprehensive solutions for their home decor.  Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home or virtual design services for our customers.   In 2018, we added outdoor furniture to our offerings with the acquisition of the Lane Venture brand. Our strategy is to distribute these products outside of our BHF store network through a network of over 15 independent sales representatives. Using Lane Venture as a platform, we developed the Bassett Outdoor brand that is only marketed through the BHF store network. This allows Bassett branded product to move from inside the home to outside the home to capitalize on the growing trend of outdoor living.   We have factories in Newton, North Carolina that manufacture both stationary and motion upholstered furniture for inside the home along with our outdoor furniture offerings. We also have factories in Martinsville and Bassett, Virginia that assemble and finish our custom dining offerings. We currently lease a facility in Haleyville, Alabama where we manufacture aluminum frames for our outdoor furniture. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its manufacturing process. In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture (casegoods) and certain leather upholstery offerings from several foreign plants, primarily in Vietnam, Thailand and China. Over 75% of the products we currently sell are manufactured in the United States.   We consider our website to be the front door to our brand experience where customers can research our furniture and accessory offerings and subsequently buy online or engage with an in-store design consultant. Customer acquisition resulting from our digital outreach strategies has significantly increased our traffic to the website since 2019. The migration to digital brand research has caused us to comprehensively evaluate all of our American made custom products. While our Bench Made line of Custom Upholstery and Custom Dining products continue to be our most successful offerings, most of these items must be purchased in a store as they are not conducive to web transactions due to the number of options available. Consequently, we will continue to methodically re-design each one of these important lines to best serve our customers online, in the store or wherever our customer might be. Our intent is to continue to offer the consumer custom options that will help them personalize their home but to do so in an edited fashion that will provide a better web experience in the research phase and will also allow the final purchase to be made either on the web or in the store. While we work to make it easier to purchase either in store or on-line, we will not compromise our in-store experience or the quality of our in-home makeover capabilities.   22 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   We are engaged in a multi-year cross-functional digital transformation initiative which has begun by examining, enhancing and standardizing our product development and data management and governance processes. This will result in more consistent underlying data that our merchandising and sales teams can use in analyzing various product and sales trends for making better informed decisions. It will also provide a uniform view of product data that can be leveraged by our website, retail locations and wholesale partners. We expect to complete this initial phase in mid-2022 at which time we will begin the process of implementing a new eCommerce platform that we plan to introduce in 2023.  The new web platform will leverage world class features including enhanced customer research capabilities and streamlined navigation.  We expect to spend between $3,000 and $4,000 this fiscal year on these efforts.   During the first quarter of fiscal 2022 we closed one retail store in Ontario, California upon the expiration of the lease for that location.   Sale of the Assets of Zenith Freight Lines, LLC   During the first quarter of 2022, we entered into a definitive agreement to sell substantially all of the assets of our wholly-owned subsidiary, Zenith Freight Lines, LLC (“Zenith”) to J.B. Hunt Transport Services, Inc. (“J.B. Hunt”) for approximately $86,900 in cash. On February 28, 2022 the transaction was completed with us receiving approximately $85,500 after the payment of $400 in certain transaction costs and the funding of $1,000 held in escrow. The final purchase price is subject to a customary post-closing working capital adjustment. In the second quarter of 2022, we will recognize a substantial gain on this transaction. As a result, the operations of our logistical services segment, which consists entirely of the operations of Zenith, are presented in the accompanying condensed consolidated statements of income and in the following discussion as discontinued operations.   Impact of the COVID-19 Pandemic Upon Our Financial Condition and Results of Operations   On March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak to be a global pandemic. The significant adverse economic impact of the pandemic upon our results of operations was limited to fiscal 2020, however we continue to experience the logistical challenges faced by the entire home furnishings industry resulting from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs. In addition, inflationary pressures throughout the supply chain have resulted in us implementing multiple wholesale price increases over the last several months. We expect that wholesale gross margins will be slightly impacted during the first half of fiscal 2022 as we cycle through the backlog.   23 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Results of Continuing Operations – Periods ended February 26, 2022 compared with the periods ended February 27, 2021:   Consolidated results of continuing operations for the three months ended February 26, 2022 and February 27, 2021 are as follows:       Quarter Ended     Change       February 26, 2022     February 27, 2021     Dollars     Percent                                                     Net sales of furniture and accessories   $ 117,864       100.0 %   $ 101,655       100.0 %   $ 16,209       15.9 % Cost of furniture and accessories sold     60,471       51.3 %     48,252       47.5 %     12,219       25.3 % Gross profit     57,393       48.7 %     53,403       52.5 %     3,990       7.5 % SG&A expenses     50,915       43.2 %     47,842       47.1 %     3,073       6.4 %                                                   Income from operations   $ 6,478       5.5 %   $ 5,561       5.5 %   $ 917       16.5 %   Total sales revenue for the three months ended February 26, 2022 increased $16,209 from the prior year periods primarily due to a 28% increase in wholesale shipments to the open market, along with a 6.1% increase in retail sales.   Gross margins for the three months ended February 26, 2022 decreased 380 basis points from 2021 primarily due to rising raw material and inbound freight costs, including the impact of rising fuel prices. While these rising costs have been somewhat mitigated by price increases implemented since the first quarter of 2021, the increase in order backlogs and order fulfillment times limited our ability to match revised pricing to manufacturing costs. Another wholesale price increase will be implemented during the second quarter of fiscal 2022, and we will continue to monitor our costs to determine if additional price increases are warranted.     Segment Information   We have strategically aligned our business into two reportable segments as described below:   Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations, which include Lane Venture, as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.   Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores and the Company-owned distribution network utilized to deliver products to our retail customers.   Our former logistical services segment which represented the operations of Zenith is now presented as discontinued operations.   24 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Reconciliation of Segment Results to Consolidated Results of Operations   To supplement the financial measures prepared in accordance with GAAP, we present gross profit by segment inclusive of the effects of intercompany sales by our wholesale segment to our retail segment. Because these intercompany transactions are not eliminated from our segment presentations and because we do not present gross profit as a measure of segment profitability in the accompanying condensed consolidated financial statements, the presentation of gross profit by segment is considered to be a non-GAAP financial measure. The reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP is presented below along with the effects of various other intercompany eliminations on our consolidated results of operations.       Quarter Ended February 26, 2022       Non-GAAP Presentation               GAAP Presentation       Wholesale     Retail     Eliminations       Consolidated                                       Net sales of furniture and accessories   $ 83,485     $ 64,107     $ (29,728 ) (1)   $ 117,864   Cost of furniture and accessories sold     59,662       29,951       (29,142 ) (2)     60,471   Gross profit     23,823       34,156       (586 )       57,393   SG&A expense     20,438       30,806       (329 ) (3)     50,915   Income from operations   $ 3,385     $ 3,350     $ (257 )     $ 6,478         Quarter Ended February 27, 2021       Non-GAAP Presentation               GAAP Presentation       Wholesale     Retail     Eliminations       Consolidated                                       Net sales of furniture and accessories   $ 70,264     $ 60,395     $ (29,004 ) (1)   $ 101,655   Cost of furniture and accessories sold     47,288       29,309       (28,345 ) (2)     48,252   Gross profit     22,976       31,086       (659 )       53,403   SG&A expense     18,179       29,992       (329 ) (3)     47,842   Income from operations   $ 4,797     $ 1,094     $ (330 )     $ 5,561     Notes to segment consolidation table:   (1) Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores. (2) Represents the elimination of purchases by our Company-owned BHF stores from our wholesale segment, as well as the change for the period in the elimination of intercompany profit in ending retail inventory. (3) Represents the elimination of rent paid by our retail stores occupying Company-owned real estate.   25 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Wholesale Segment   Results for the wholesale segment for the periods ended February 26, 2022 and February 27, 2021 are as follows:       Quarter Ended     Change       February 26, 2022     February 27, 2021     Dollars     Percent                                                     Net sales   $ 83,485       100.0 %   $ 70,264       100.0 %   $ 13,221       18.8 % Gross profit (1)     23,823       28.5 %     22,976       32.7 %     847       3.7 % SG&A expenses     20,438       24.5 %     18,179       25.9 %     2,259       12.4 %                                                   Income from operations   $ 3,385       4.1 %   $ 4,797       6.8 %   $ (1,412 )     -29.4 %     (1) Gross profit at the segment level is considered a Non-GAAP financial measure due to the included effects of intercompany transactions. Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under the Reconciliation of Segment Results to Consolidated Results of Operations above.   Wholesale sales by major product category are as follows:       Quarter Ended       February 26, 2022     February 27, 2021     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 31,929     $ 20,096     $ 52,025       62.3 %   $ 24,884     $ 18,464     $ 43,348       61.7 %   $ 8,677       20.0 % Bassett Leather     12,939       12       12,951       15.5 %     7,558       29       7,587       10.8 %     5,364       70.7 % Bassett Custom Wood     5,980       6,261       12,241       14.7 %     5,341       6,202       11,543       16.4 %     698       6.0 % Bassett Casegoods     2,909       3,359       6,268       7.5 %     3,477       4,309       7,786       11.1 %     (1,518 )     -19.5 % Total   $ 53,757     $ 29,728     $ 83,485       100.0 %   $ 41,260     $ 29,004     $ 70,264       100.0 %   $ 13,221       18.8 %   Analysis of Results - Wholesale   Net sales for the three months ended February 26, 2022 increased $13,221 from the prior year period due primarily to a 28% increase in shipments to the open market along with a 6.9% increase in shipments to the BHF store network. As previously discussed, Bassett and most of the home furnishings industry have been faced with continuing logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs. During the first quarter of fiscal 2022, we made progress in decreasing these backlogs and expect them to continue decreasing as our ability to manufacture and ship product has improved. At February 26, 2022, wholesale backlog totaled $78,135 as compared to $90,057 at November 27, 2021, $67,469 at February 27, 2021 and $14,617 at February 29, 2020. Gross margins for the three months ended February 26, 2022 declined 420 basis points compared to the prior year period as we have experienced significant increases in material costs primarily in the upholstery operation, partially offset by greater leverage on fixed costs due to higher sales volumes.   26 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Retail – Company-owned Stores Segment   Results for the retail segment for the periods ended February 26, 2022 and February 27, 2021 are as follows:       Quarter Ended     Change       February 26, 2022     February 27, 2021     Dollars     Percent                                                     Net sales   $ 64,107       100.0 %   $ 60,395       100.0 %   $ 3,712       6.1 % Gross profit (1)     34,156       53.3 %     31,086       51.5 %     3,070       9.9 % SG&A expenses     30,806       48.1 %     29,992       49.7 %     814       2.7 % Income (loss) from operations   $ 3,350       5.2 %   $ 1,094       1.8 %   $ 2,256       N/M       (1) Gross profit at the segment level is considered a Non-GAAP financial measure due to the included effects of intercompany transactions. Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under the Reconciliation of Segment Results to Consolidated Results of Operations above.   Retail sales by major product category are as follows:       Quarter Ended     Change       February 26, 2022     February 27, 2021     Dollars     Percent                                                     Bassett Custom Upholstery   $ 37,818       59.0 %   $ 34,461       57.1 %   $ 3,357       9.7 % Bassett Leather     240       0.4 %     252       0.4 %     (12 )     -4.8 % Bassett Custom Wood     9,407       14.7 %     5,458       9.0 %     3,949       72.4 % Bassett Casegoods     8,292       12.9 %     11,077       18.3 %     (2,785 )     -25.1 % Accessories, mattresses and other (1)     8,350       13.0 %     9,147       15.1 %     (797 )     -8.7 % Total   $ 64,107       100.0 %   $ 60,395       100.0 %   $ 3,712       6.1 %     (1) Includes the sale of goods other than Bassett-branded products, such as accessories and bedding, and also includes the sale of furniture protection plans.   Analysis of Results - Retail   Net sales for the three months ended February 26, 2022 increased $3,712 from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 2.4% from the first quarter of 2021. Retail backlog at February 26, 2022 was $84,685 as compared to $82,894 at November 27, 2021, 64,806 at February 27, 2021 and $29,775 at February 29, 2020. As previously discussed, Bassett and most of the home furnishings industry has been faced with continuing logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs. Gross margins for the three months ended February 26, 2022 increased by 180 basis points, primarily driven by improved pricing strategies, lower levels of promotional activity and increased margins on clearance activity. Selling, general and administrative expenses for the three months ended February 26, 2022 as a percentage of sales decreased as compared to the first quarter of 2021 primarily due to greater leverage on fixed costs from higher sales volumes.   27 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Discontinued Operations – Logistical Services   Results for the operations of Zenith, which was sold to J.B. Hunt subsequent to the end of the first quarter, for the periods ended February 26, 2022 and February 27, 2021 are as follows:       Quarter Ended     Change       February 26, 2022     February 27, 2021     Dollars     Percent                                                     Logistical services revenue   $ 16,776       100.0 %   $ 12,018       100.0 %   $ 4,758       39.6 % Cost of logistical services     15,001       89.4 %     11,558       96.2 %     3,443       29.8 % Other loss, net     (63 )     -0.4 %     (38 )     -0.3 %     (25 )     65.8 %                                                   Income from discontinued operations before tax   $ 1,712       10.2 %   $ 422       3.5 %   $ 1,290       305.7 %   The amounts shown above represent the results of Zenith’s business transactions with third parties. The increase in income from discontinued operations for the three months ended February 26, 2022 as compared to the prior year period is primarily due to freight and warehousing rate increases which Zenith primarily implemented during the fourth quarter of fiscal 2021.   During the three months ended February 26, 2022 and February 27, 2021, Zenith also charged Bassett $9,121 and $8,063, respectively, for logistical services provided to our wholesale segment. These shipping and handling costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income. We have entered into a service agreement with J.B. Hunt for the continuation of these services for a period of seven years following the sale of Zenith.     Other Items Affecting Net Income   Other Loss, Net   Other loss, net, for the three months ended February 26, 2022 was $629 compared to $299 for the three months ended February 27, 2021, a net increase of $330. The net change was primarily due to higher net costs of Company-owned life insurance.   Income Taxes   We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision.  Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter.   Our effective tax rates for the three months ended February 26, 2022 and February 27, 2021 of 26.3% and 29.4%, respectively, differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including charges of $135 during the three months ended February 27, 2021 related to the vesting of stock awards.   Liquidity and Capital Resources   Cash Flows   Cash provided by operations for the first three months of fiscal 2022 was $2,866 compared to $4,984 for the first three months of fiscal 2021, representing a decrease of $2,118. Cash provided by the operating activities of our discontinued operations was $1,681 for the first three months of fiscal 2022 compared to $2,841 for the prior year period, a decline of $1,160.  Excluding the decline in operating cash flow from discontinued operations, cash provided by continuing operations declined $958 from the prior year period. This decrease in operating cash flow is primarily due to changes in working capital as we settled accounts payable in the first quarter of 2022 arising from increases in inventory during fiscal 2021 as well as increases in accounts receivable arising from strong sales in our wholesale segment.   Our overall cash position decreased by $2,494 during the first three months of fiscal 2022, compared to a decline of $766 during the first three months of fiscal 2021, a decline of $1,728 from the prior year period. Excluding the decline in cash flow from discontinued operations, overall cash flow from continuing operations declined $409 from the prior year period. In addition to the decline in cash flows from operations, net cash used in investing activities during the first three months of 2022 increased $1,691 to a net use of $2,880 compared to net cash used in investing activities of $1,189 for the prior year period. This increase was primarily due to increased capital expenditures in the current year. Net cash used in financing activities during the first three months of 2022 decreased $2,081 to a net use of $2,480 as compared to a net use of $4,561 for the prior year period, primarily due to a special dividend of $2,479 declared and paid during the first quarter of 2021 partially offset by increased share repurchases of $765 during the first three months of fiscal 2022 as compared to $534 repurchased during the quarter of fiscal 2021. On March 9, 2022 our Board of Directors increased the amount authorized under our existing share repurchase plan to $40,000. With cash and cash equivalents and short-term investments totaling $49,595 on hand at February 26, 2022, expected future operating cash flows, pre-tax cash proceeds of approximately $85,500 subsequently received from the sale of Zenith before a special dividend of $1.50 per share, and the availability under our credit line noted below, we believe we have sufficient liquidity to fund operations for the foreseeable future.   28 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Debt and Other Obligations   Our bank credit facility provides for a line of credit of up to $25,000. At February 26, 2022, we had $3,931 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,069. In addition, we had outstanding standby letters of credit with another bank totaling $325. The line bears interest at the One-Month Term Secured Overnight Financing Rate (“One-Month Term SOFR”) plus 1.5% and is unsecured. Our bank will charge a fee of 0.25% on the daily unused balance of the line, payable quarterly. Under the terms of the facility, we must maintain the following financial covenants, measured quarterly on a rolling twelve-month basis:     ● Consolidated fixed charge coverage ratio of not less than 1.4 times,     ● Consolidated lease-adjusted leverage ratio not to exceed 3.0 times, and     ● Minimum tangible net worth of $140,000.   We were in compliance with these covenants at February 26, 2022 and expect to remain in compliance for the foreseeable future. The credit facility will mature on January 27, 2025, at which time any amounts outstanding under the facility will be due.   We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings used in our wholesale manufacturing operations. We also lease local delivery trucks used in our retail segment. The present value of our obligations for leases with terms in excess of one year at February 26, 2022 is $115,861 and is included in our accompanying condensed consolidated balance sheet at February 26, 2022. Lease obligations associated with discontinued obligations totaled $22,834 at February 26, 2022. These leases were subsequently transferred to J.B. Hunt in connection with the sale of Zenith. We were contingently liable under licensee lease obligation guarantees in the amount of $1,854 at February 26, 2022. Remaining terms under these lease guarantees range from approximately one to three years. See Note 10 to our condensed consolidated financial statements for additional details regarding our lease guarantees.     Investment in Retail Real Estate   We have a substantial investment in real estate acquired for use as retail locations and occupied by Company-owned retail stores. Such real estate is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and consists of eight properties with an aggregate square footage of 201,096 and a net book value of $16,812 at February 26, 2022.   Critical Accounting Policies and Estimates   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 Annual Report on Form 10-K for the fiscal year ended November 27, 2021.   Off-Balance Sheet Arrangements   We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. In addition, we have guaranteed certain lease obligations of licensee operators for some of their store locations. See Note 10 to our condensed consolidated financial statements for further discussion of lease guarantees, including descriptions of the terms of such commitments and methods used to mitigate risks associated with these arrangements.   29 of 33     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES FEBRUARY 26, 2022 (Dollars in thousands except share and per share data)   Contingencies   We are involved in various legal and environmental matters which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations. See Note 9 to our condensed consolidated financial statements for further information regarding certain contingencies as of February 26, 2022.