BASSETT FURNITURE INDUSTRIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED MAY 27, 2023 AND MAY 28, 2022 – UNAUDITED (In thousands)       Six Months Ended       May 27, 2023     May 28, 2022   Operating activities:                 Net income   $ 3,521     $ 52,691   Adjustments to reconcile net income to net cash provided by (used in) operating activities:                 Depreciation and amortization     4,909       6,065   Gain on disposal of discontinued operations     -       ( 53,254 ) Gain on revaluation of contingent consideration     ( 1,013 )     -   Deferred income taxes     392       ( 3,796 ) Other, net     1,388       915   Changes in operating assets and liabilities:                 Accounts receivable     3,005       ( 1,829 ) Inventories     15,145       ( 14,861 ) Other current assets     953       6,421   Right of use assets under operating leases     9,105       11,153   Customer deposits     ( 12,022 )     ( 5,101 ) Accounts payable and other liabilities     ( 8,715 )     4,891   Obligations under operating leases     ( 10,255 )     ( 12,241 ) Net cash provided by (used in) operating activities     6,413       ( 8,946 )                   Investing activities:                 Purchases of property and equipment     ( 7,405 )     ( 12,638 ) Proceeds from sales of property and equipment     -       9   Proceeds from the disposal of discontinued operations, net     1,000       85,521   Other     ( 637 )     ( 538 ) Net cash provided by (used in) investing activities     ( 7,042 )     72,354                     Financing activities:                 Cash dividends     ( 2,832 )     ( 17,170 ) Other issuance of common stock     177       177   Repurchases of common stock     ( 3,450 )     ( 8,642 ) Taxes paid related to net share settlement of equity awards     ( 109 )     -   Repayments of finance lease obligations     ( 137 )     ( 537 ) Net cash used in financing activities     ( 6,351 )     ( 26,172 ) Effect of exchange rate changes on cash and cash equivalents     ( 42 )     -   Change in cash and cash equivalents     ( 7,022 )     37,236   Cash and cash equivalents - beginning of period     61,625       34,374   Cash and cash equivalents - end of period   $ 54,603     $ 71,610     The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.     6 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)     1. Basis of Presentation   The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.   References to “ASC” included hereinafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.   The condensed consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated (“Bassett”, “we”, “our”, or the “Company”) and our wholly-owned subsidiaries of which we have a controlling interest. In accordance with ASC Topic 810, we have evaluated our licensees and certain other entities to determine whether they are variable interest entities (“VIEs”) of which we are the primary beneficiary and thus would require consolidation in our financial statements. To date we have concluded that none of our licensees represent VIEs. During the second and third fiscal quarters of 2022, we were the primary beneficiary of one VIE by virtue of our control over the activities that most significantly impact the entity’s economic performance. This VIE was created to effect a Section 1031 like-kind exchange involving the purchase of real property in Tampa, Florida, for $ 7,668 during the second quarter of 2022 and the sale of real property in Houston, Texas for $ 8,217 during the third quarter of 2022 for the purpose of deferring approximately $ 4,300 of the taxable gain resulting from the sale of the Houston property. Subsequent to the completion of the exchange transactions during the third quarter of fiscal 2022, the sole equity interest in the VIE was transferred to Bassett and the entity is now consolidated as a wholly owned subsidiary.   Revenue from the sale of furniture and accessories is reported in the accompanying condensed consolidated statements of income net of estimates for returns and allowances.   On January 31, 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”). The sale was completed on February 28, 2022. Accordingly, the operations of our logistical services segment for the three and six months ended May 28, 2022 are presented in the accompanying condensed consolidated statements of income as discontinued operations. See Note 12, Discontinued Operations, for additional information. Costs incurred by Bassett for logistical services performed for Bassett by Zenith were included in selling, general and administrative expenses for the six months ended May 28, 2022.   On September 2, 2022, we acquired 100 % of the capital stock of Noa Home Inc. (“Noa Home”), a mid-priced e-commerce furniture retailer headquartered in Montreal, Canada. Noa Home has operations in Canada, Australia, Singapore and the United Kingdom. Since acquisition, Noa Home has been consolidated as a wholly-owned subsidiary. See Note 3 for additional information.   Certain prior year amounts have been reclassified to conform to the current year presentation (see Note 13, Segments).     2. Interim Financial Presentation and Other Information   All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The results of operations for the three and six months ended May 27, 2023 are not necessarily indicative of results for the full fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 26, 2022.   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 rate was 18.4 % and 27.1 % for the three and six months ended May 27, 2023, respectively, and 26.0 % for both the three and six months ended May 28, 2022. The effective rates for the three and six months ended May 27, 2023 differ from the federal statutory rate of 21 % primarily due to the non-taxable gain on revaluation of contingent consideration associated with the acquisition of Noa Home (see Note 3), increases in the valuation allowance placed on deferred tax assets associated with Noa Home and the effects of state income taxes and various permanent differences. For the three and six months ended May 28, 2022, the effective rates differ from the federal statutory rate of 21 % primarily due to the effects of state income taxes and various permanent differences, including tax of $ 522 associated with the non-deductible goodwill written off in connection with the sale of Zenith and included in income tax on discontinued operations.   7 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   Non-cash Investing and Financing Activity   During the six months ended May 27, 2023 and May 28, 2022, $ 3,881 and $ 6,049 , respectively, of lease right-of-use assets were added through the recognition of the corresponding lease obligations.     3. Business Combinations   On September 2, 2022, we acquired 100 % of the capital stock of Noa Home, a mid-priced e-commerce furniture retailer headquartered in Montreal, Canada. Noa Home has operations in Canada, Australia, Singapore and the United Kingdom. The initial purchase price (denominated in Canadian dollars) of approximately C$ 7,700 included cash payments of C$ 2,000 paid to the co-founders of Noa Home and approximately C$ 5,700 for the repayment of existing debt owed by Noa Home. Per the terms of the agreement at the acquisition date, the Noa Home co-founders also had the opportunity to receive additional cash payments totaling approximately C$ 1,330 per year for the three fiscal years following the year of acquisition based on established increases in net revenues and achieving certain internal EBITDA goals.   Under the acquisition method of accounting, the fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date with the remaining unallocated amount recorded as goodwill.   The allocation of the fair value of the acquired business has been based on a preliminary valuation. Our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). The primary areas of the preliminary allocation of the fair value of consideration transferred that are not yet finalized relate to the fair values of certain tangible and intangible assets acquired and the residual goodwill. As of May 27, 2023, there have been no changes to the preliminary allocation of the purchase price (translated into U.S. dollars as of the acquisition date) which is as follows:   Fair value of consideration given in exchange for 100% of Noa Home:         Cash   $ 5,878   Fair value of contingent consideration as of acquisition date     1,375   Total fair value of consideration given   $ 7,253             Allocation of the fair value of consideration transferred:         Identifiable assets acquired:         Cash   $ 296   Inventory     1,585   Other current assets     317   Property & equipment     155   Intangible asset - trade name     1,929   Total identifiable assets acquired     4,282   Liabilities assumed:         Accounts payable     ( 1,227 ) Customer deposits     ( 1,059 ) Other current liabilities and accrued expenses     ( 458 ) Total liabilities assumed     ( 2,744 ) Net identifiable assets acquired     1,538   Goodwill     5,715   Total net assets acquired   $ 7,253     8 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   Goodwill was determined based on the residual difference between the fair value of the consideration transferred and the value assigned to the tangible and intangible assets and liabilities recognized in connection with the acquisition and is deductible for tax purposes. Among the factors that contributed to a purchase price resulting in the recognition of goodwill are the expected synergies arising from combining the Company’s manufacturing and distribution capabilities with Noa Home’s position in the international e-commerce market for home furnishings and accessories.   A portion of the fair value of the consideration transferred in the amount of $ 1,929 has been assigned to the identifiable intangible asset associated with the Noa Home trade name. This intangible asset is considered to have an indefinite life. The indefinite-lived intangible asset and goodwill are not amortized but will be tested for impairment annually or between annual tests if an indicator of impairment exists and the Company determines it is more likely than not that the fair value of the goodwill is below its book value.   The fair values of consideration transferred and net assets acquired were determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, Fair Value Measurements and Disclosures .   Subsequent to the acquisition date, the parties concluded that the targets originally set forth by which the Noa Home co-founders were to earn the contingent consideration would likely not be met within the initially anticipated time frame. Therefore, we have agreed to replace the contingent consideration with two fixed payments of C$ 200 each, payable in June of 2023 and December of 2024. As a result of the write-down of the contingent consideration payable that was recognized at the acquisition date, we recorded a gain of $ 1,013 for the three and six months ended May 27, 2023.   The revenues and results of operations of Noa Home for the three and six months ended May 27, 2023 were not material. The pro forma impact of the acquisition has not been presented because it was not material to our consolidated results of operations for the three and six months ended May 28, 2022.     4. Financial Instruments and Investments   Financial Instruments   Our financial instruments include cash and cash equivalents, short-term investments in certificates of deposit (CDs), accounts receivable, and accounts payable. Because of their short maturities, the carrying amounts of cash and cash equivalents, short-term investments in CDs, accounts receivable, and accounts payable approximate fair value.   Investments   Our short-term investments of $ 17,725 and $ 17,715 at May 27, 2023 and November 26, 2022 consisted of CDs. At May 27, 2023, the CDs had original terms averaging seven months, bearing interest at rates ranging from 0.7 % to 5.05 %. At May 27, 2023, the weighted average remaining time to maturity of the CDs was approximately three months and the weighted average yield of the CDs was approximately 4.41 %. Each CD is placed with a federally insured financial institution and all deposits are within federal deposit insurance limits. Due to the nature of these investments and their relatively short maturities, the carrying amount of the short-term investments at May 27, 2023 and November 26, 2022 approximates their fair value.     5. Accounts Receivable   Accounts receivable consists of the following:       May 27, 2023     November 26, 2022   Gross accounts receivable   $ 15,344     $ 19,099   Allowance for doubtful accounts     ( 511 )     ( 1,261 ) Accounts receivable, net   $ 14,833     $ 17,838     9 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)     We maintain an allowance for credit losses for estimated losses resulting from the inability of our customers to make required payments. The allowance for credit losses is based on a review of specifically identified accounts in addition to an overall aging analysis which is applied to accounts pooled on the basis of similar risk characteristics. Judgments are made with respect to the collectability of accounts receivable within each pool based on historical experience, current payment practices and current economic trends based on our expectations over the expected life of the receivables, which is generally ninety days or less. Actual credit losses could differ from those estimates.   Activity in the allowance for credit losses for the six months ended May 27, 2023 was as follows:   Balance at November 26, 2022   $ 1,261   Additions charged to expense     137   Write-offs against allowance     ( 887 ) Balance at May 27, 2023   $ 511     We believe that the carrying value of our net accounts receivable approximates fair value. The inputs into these fair value estimates reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures . See Note 4.     6. Inventories   Domestic furniture inventories are valued at the lower of cost, which is determined using the last-in, first-out (LIFO) method, or market. Imported inventories and those applicable to our Lane Venture and Bassett Outdoor lines are valued at the lower of cost, which is determined using the first-in, first-out (FIFO) method, or net realizable value.   Inventories were comprised of the following:       May 27, 2023     November 26, 2022   Wholesale finished goods   $ 33,916     $ 46,607   Work in process     616       620   Raw materials and supplies     20,236       22,859   Retail merchandise     33,175       32,974   Total inventories on first-in, first-out method     87,943       103,060   LIFO adjustment     ( 11,862 )     ( 12,416 ) Reserve for excess and obsolete inventory     ( 5,749 )     ( 5,167 )     $ 70,332     $ 85,477     10 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand, market conditions and the respective valuations at LIFO. The need for these reserves is primarily driven by the normal product life cycle. As products mature and sales volumes decline, we rationalize our product offerings to respond to consumer tastes and keep our product lines fresh. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. In determining reserves, we calculate separate reserves on our wholesale and retail inventories. Our wholesale inventories tend to carry the majority of the reserves for excess quantities and obsolete inventory due to the nature of our distribution model. These wholesale reserves primarily represent design and/or style obsolescence. Typically, product is not shipped to our retail warehouses until a consumer has ordered and paid a deposit for the product. We do not typically hold retail inventory for stock purposes. Consequently, floor sample inventory and inventory for delivery to customers account for the majority of our inventory at retail. Retail reserves are based on accessory and clearance floor sample inventory in our stores and any inventory that is not associated with a specific customer order in our retail warehouses.   Activity in the reserves for excess quantities and obsolete inventory by segment are as follows:       Wholesale Segment     Retail Segment     Total                             Balance at November 26, 2022   $ 4,103     $ 1,064     $ 5,167   Additions charged to expense     1,987       488       2,475   Write-offs     ( 1,628 )     ( 265 )     ( 1,893 ) Balance at May 27, 2023   $ 4,462     $ 1,287     $ 5,749     Our estimates and assumptions have been reasonably accurate in the past. We have not made any significant changes to our methodology for determining inventory reserves in 2023 and do not anticipate that our methodology is likely to change in the future.     7. Goodwill and Other Intangible Assets   Goodwill and other intangible assets consisted of the following:       May 27, 2023       Gross Carrying Amount     Accumulated Amortization     Intangible Assets, Net   Intangibles subject to amortization                         Customer relationships   $ 512     $ ( 308 )   $ 204                             Intangibles not subject to amortization:                         Trade names                     8,680   Goodwill                     12,648   Total goodwill and other intangible assets                   $ 21,532         November 26, 2022       Gross Carrying Amount     Accumulated Amortization     Intangible Assets, Net   Intangibles subject to amortization                         Customer relationships   $ 512     $ ( 280 )   $ 232                             Intangibles not subject to amortization:                         Trade names                     8,723   Goodwill                     12,772   Total goodwill and other intangible assets                   $ 21,727     11 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   Changes in the carrying amounts of goodwill by reportable segment were as follows:       Wholesale     Retail     Corporate & Other     Total                                     Balance as of November 26, 2022   $ 7,217     $ -     $ 5,554     $ 12,771   Foreign currency translation adjustments     -       -       ( 123 )     ( 123 ) Balance as of May 27, 2023   $ 7,217     $ -     $ 5,431     $ 12,648     Accumulated impairment losses at both May 27, 2023 and November 26, 2022 were $ 3,897 .   Due to the decline in the share price of our common stock through the end of the second quarter of 2023, we performed a qualitative analysis of our goodwill as of May 27, 2023 and concluded that it was not more likely than not that the carrying value of our reporting units with goodwill exceeded their fair values.   Amortization expense associated with intangible assets during the three and six months ended May 27, 2023 and May 28, 2022 was as follows:       Quarter Ended     Six Months Ended       May 27, 2023     May 28, 2022     May 27, 2023     May 28, 2022                                     Intangible asset amortization expense   $ 14     $ 14     $ 28     $ 28     Estimated future amortization expense for intangible assets that exist at May 27, 2023 is as follows:   Remainder of fiscal 2023   $ 28   Fiscal 2024     57   Fiscal 2025     57   Fiscal 2026     57   Fiscal 2027     5   Fiscal 2028     -   Total   $ 204       8. Bank Credit Facility     Our bank credit facility provides for a line of credit of up to $ 25,000 . At May 27, 2023, we had $ 3,731 outstanding under standby letters of credit against our line, leaving availability under our credit line of $ 21,269 . 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 charges a fee of 0.25 % on the daily unused balance of the line, payable quarterly. Under the terms of the bank credit 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 May 27, 2023 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.   12 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)     9. Post Employment Benefit Obligations   Defined Benefit Plans   We have an unfunded Supplemental Retirement Income Plan (the “Supplemental Plan”) that covers one current and certain former executives. The liability for the Supplemental Plan was $ 6,028 and $ 5,987 as of May 27, 2023 and November 26, 2022, respectively.   We also have the Bassett Furniture Industries, Incorporated Management Savings Plan (the “Management Savings Plan”) which was established in the second quarter of fiscal 2017. The Management Savings Plan is an unfunded, nonqualified deferred compensation plan maintained for the benefit of certain highly compensated or management level employees. As part of the Management Savings Plan, we have made Long Term Cash Awards (“LTC Awards”) totaling $ 2,000 to certain management employees in the amount of $ 400 each. The liability for the LTC Awards was $ 1,325 and $ 1,275 as of May 27, 2023 and November 26, 2022, respectively.   The combined pension liability for the Supplemental Plan and LTC Awards is recorded as follows in the condensed consolidated balance sheets:       May 27, 2023     November 26, 2022   Accrued compensation and benefits   $ 698     $ 698   Post employment benefit obligations     6,655       6,564   Total pension liability   $ 7,353     $ 7,262     Components of net periodic pension costs for our defined benefit plans for the three and six months ended May 27, 2023 and May 28, 2022 are as follows:       Quarter Ended     Six Months Ended       May 27, 2023     May 28, 2022     May 27, 2023     May 28, 2022   Service cost   $ 7     $ 9     $ 14     $ 18   Interest cost     93       58       185       115   Amortization of prior service costs     31       31       63       63   Amortization of loss     -       33       -       67   Net periodic pension cost   $ 131     $ 131     $ 262     $ 263     The components of net periodic pension cost other than the service cost component, which is included in selling, general and administrative expenses, are included in other loss, net in our condensed consolidated statements of operations.   Deferred Compensation Plans   We have an unfunded deferred compensation plan that covers one current executive and certain former executives and provides for voluntary deferral of compensation. This plan has been frozen with no additional participants or deferrals permitted. Our liability under this plan was $ 1,636 and $ 1,616 as of May 27, 2023 and November 26, 2022, respectively.   We also have an unfunded, nonqualified deferred compensation plan maintained for the benefit of certain highly compensated or management level employees which was established under the Management Savings Plan. Our liability under this plan, including both accrued Company contributions and participant salary deferrals, was $ 2,457 and $ 2,070 as of May 27, 2023 and November 26, 2022, respectively.   13 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   Our combined liability for all deferred compensation arrangements, including Company contributions and participant deferrals under the Management Savings Plan, is recorded as follows in the condensed consolidated balance sheets:       May 27, 2023     November 26, 2022   Accrued compensation and benefits   $ 296     $ 296   Post employment benefit obligations     3,797       3,390   Total deferred compensation liability   $ 4,093     $ 3,686     We recognized expense under our deferred compensation arrangements during the three and six months ended May 27, 2023 and May 28, 2022 as follows:       Quarter Ended     Six Months Ended       May 27, 2023     May 28, 2022     May 27, 2023     May 28, 2022   Deferred compensation expense (benefit)   $ 119     $ 7     $ 197     $ 61       10. Commitments and 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, we believe that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.   Lease Guarantees   We were contingently liable under a licensee lease obligation guarantee in the amounts of $ 1,897 and $ 1,880 at May 27, 2023 and November 26, 2022, respectively. The remaining term under this lease guarantee extends for five years.   In the event of default by an independent dealer under the guaranteed lease, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer or liquidating the collateral (primarily inventory). The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligation, net of recorded reserves. The fair value of this lease guarantee (an estimate of the cost to the Company to perform on the guarantee) at May 27, 2023 and November 26, 2022 was not material.   14 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)     11. Earnings Per Share   The following reconciles basic and diluted earnings per share:       Net Income     Weighted Average Shares     Net Income Per Share   For the quarter ended May 27, 2023:                                                   Basic earnings per share - continuing operations   $ 2,076       8,810,178     $ 0.24   Add effect of dilutive securities:                         Restricted shares     -       11,853       -   Diluted earnings per share - continuing operations   $ 2,076       8,822,031     $ 0.24                                                       For the quarter ended May 28, 2022:                                                   Basic earnings per share - continuing operations   $ 7,743       9,521,085     $ 0.81   Add effect of dilutive securities:                         Options and restricted shares     -       12,938       -   Diluted earnings per share - continuing operations   $ 7,743       9,534,023     $ 0.81                             Basic earnings per share - discontinued operations   $ 39,375       9,521,085     $ 4.14   Add effect of dilutive securities:                         Options and restricted shares     -       12,938       ( 0.01 ) Diluted earnings per share - discontinued operations   $ 39,375       9,534,023     $ 4.13                                                       For the six months ended May 27, 2023:                                                   Basic earnings per share - continuing operations   $ 3,521       8,839,029     $ 0.40   Add effect of dilutive securities:                         Restricted shares     -       18,881       -   Diluted earnings per share - continuing operations   $ 3,521       8,857,910     $ 0.40                                                       For the six months ended May 28, 2022:                                                   Basic earnings per share - continuing operations   $ 12,034       9,636,813     $ 1.25   Add effect of dilutive securities:                         Options and restricted shares     -       2,917       -   Diluted earnings per share - continuing operations   $ 12,034       9,639,730     $ 1.25                             Basic earnings per share - discontinued operations   $ 40,657       9,636,813     $ 4.22   Add effect of dilutive securities:                         Options and restricted shares     -       2,917       -   Diluted earnings per share - discontinued operations   $ 40,657       9,639,730     $ 4.22     For the three and six months ended May 27, 2023 and May 28, 2022, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:       Quarter Ended     Six Months Ended       May 27, 2023     May 28, 2022     May 27, 2023     May 28, 2022                                     Unvested shares     15,113       15,799       66,113       67,099     15 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)     12. Discontinued Operations   On January 31, 2022, we entered into a definitive agreement to sell substantially all of the assets of Zenith to J.B. Hunt. The sale was completed on February 28, 2022. During the second quarter of fiscal 2022, we received the following net proceeds:   Sales price prior to post-closing working capital adjustment   $ 86,939   Less:         Amount held in escrow for contingencies related to representations and warranties (1)     1,000   Seller expenses paid at closing     418   Net proceeds from the sale   $ 85,521       (1) This was held in escrow until the first anniversary of the sale, at which time the full amount was released to the Company on March 2, 2023. As of November 26, 2022, this amount is included in other current assets in the accompanying condensed consolidated balance sheets.   The sales price was subject to customary post-closing working capital adjustments. For the three and six months ended May 28, 2022 we recognized a pre-tax gain on the sale of $ 53,254 which included a preliminary estimate of the post-closing adjustments. Upon settlement of the post-closing adjustments, which were paid in the second half of fiscal 2022, the final pre-tax gain was $ 52,534 .   The operations of our logistical services segment, which consisted entirely of the operations of Zenith, are presented in the accompanying condensed consolidated statements of income as discontinued operations.   The following table summarizes the major classes of line items constituting income of the discontinued operations, as reported in the condensed consolidated statements of income for the three and six months ended May 28, 2022:       Quarter Ended     Six Months Ended       May 28, 2022     May 28, 2022   Major line items constituting pretax income of discontinued operations:                 Logistical services revenue   $ -     $ 16,776   Cost of logistical services     -       15,001   Other loss, net     -       ( 63 ) Income from operations of logistical services     -       1,712   Gain on disposal     53,254       53,254   Pretax income of discontinued operations     53,254       54,966   Income tax expense     13,879       14,309   Income from discontinued operations, net of tax   $ 39,375     $ 40,657     The amounts for revenue and costs of logistical services shown above represent the results of Zenith’s business transactions with third parties. Zenith also charged Bassett for logistical services provided to our wholesale segment in the amount of $ 9,121 during the six months ended May 28, 2022. Upon the sale of Zenith we entered into a service agreement with J.B. Hunt for the continuation of these services for a period of seven years. We incurred expense for logistical services performed by J.B. Hunt of $ 6,717 and $ 14,094 during the three and six months ended May 27, 2023, respectively, and $ 9,546 for the three and six months ended May 28, 2022, respectively.   Included in other loss, net, is interest arising from finance leases assumed by J.B. Hunt as part of the transaction. Such interest amounted to $ 78 for the six months ended May 28, 2022.   16 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   The following table summarizes the cash flows generated by discontinued operations during the six months ended May 28, 2022:       Six Months Ended       May 28, 2022   Cash provided by operating activities   $ 1,681   Cash used in investing activities     ( 81 ) Cash used in financing activities     ( 371 ) Net cash provided by discontinued operations   $ 1,229       13. Segment Information   As of the beginning of fiscal 2023 we have strategically aligned our business into three reportable segments as defined in ASC 280, Segment Reporting , and 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 includes Lane Venture.     ● Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities and capital expenditures directly related to these stores and the Company-owned distribution network utilized to deliver products to our retail customers.     ● Corporate and other – Corporate and other includes the shared costs of corporate functions such as treasury and finance, information technology, accounting, human resources, legal and others, including certain product development and marketing functions benefitting both wholesale and retail operations. In addition to property and equipment and various other assets associated with the shared corporate functions, the identifiable assets of Corporate and other include substantially all of our cash and our investments in CDs. We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segment, the recently acquired Noa Home (see Note 3).   Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores. Inter-company income elimination includes the embedded wholesale profit in the Company-owned store inventory that has not been realized. These profits will be recorded when merchandise is delivered to the retail consumer. The inter-company income elimination also includes rent paid by our retail stores occupying Company-owned real estate.   Prior to the beginning of fiscal 2023, the functions included in Corporate and other were included in our wholesale segment reportable segment, and Noa Home was included in our retail reportable segment for the fourth quarter of fiscal 2022 following its acquisition on September 2, 2022. We believe that the new alignment of our reporting segments provides our chief operating decision maker with clearer information with which to assess the operating results of our wholesale segment. Noa Home does not meet the requirements to be a separate reportable segment as it is below the thresholds of the revenue, income and asset tests. The segment information presented below for the three and six months ended May 28, 2022 and as of November 26, 2022 has been restated to reflect the new alignment of our reportable segments.   Our former logistical services segment which represented the operations of Zenith is now presented as a discontinued operation in the accompanying condensed consolidated balances sheets and statements of income (see Note 12).   17 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   The following table presents our segment information:       Quarter Ended     Six Months Ended       May 27, 2023     May 28, 2022     May 27, 2023     May 28, 2022   Sales Revenue                                 Wholesale sales of furniture and accessories   $ 61,774     $ 87,501     $ 131,658     $ 170,986   Less: Sales to retail segment     ( 24,330 )     ( 34,415 )     ( 54,429 )     ( 64,143 ) Wholesale sales to external customers     37,444       53,086       77,229       106,843   Retail sales of furniture and accessories     60,778       75,620       125,740       139,727   Corporate and other     2,297       -       5,248       -   Consolidated net sales of furniture and accessories   $ 100,519     $ 128,706     $ 208,217     $ 246,570                                     Income from Operations                                 Wholesale   $ 7,005     $ 11,465     $ 15,999     $ 21,667   Retail - Company-owned stores     755       7,293       2,285       9,915   Net expenses - Corporate and other     ( 6,949 )     ( 7,549 )     ( 14,720 )     ( 13,794 ) Inter-company elimination     656       ( 197 )     605       ( 298 ) Gain on revaluation of contingent consideration     1,013       -       1,013       -   Consolidated   $ 2,480     $ 11,012     $ 5,182     $ 17,490                                     Depreciation and Amortization                                 Wholesale   $ 614     $ 603     $ 1,220     $ 1,173   Retail - Company-owned stores     1,533       1,480       2,832       2,975   Corporate and other     422       327       857       651   Consolidated   $ 2,569     $ 2,410     $ 4,909     $ 4,799                                     Capital Expenditures                                 Wholesale   $ 712     $ 1,328     $ 1,349     $ 2,431   Retail - Company-owned stores     1,740       8,285       3,022       8,401   Corporate and other     1,612       682       3,034       1,806   Consolidated   $ 4,064     $ 10,295     $ 7,405     $ 12,638         As of     As of   Identifiable Assets   May 27, 2023     November 26, 2022   Wholesale   $ 105,471     $ 125,433   Retail - Company-owned stores     155,978       162,222   Corporate and other     112,876       118,618   Consolidated   $ 374,325     $ 406,273     See Note 14, Revenue Recognition, for disaggregated revenue information regarding sales of furniture and accessories by product type for the wholesale and retail segments.     14. Revenue Recognition   We recognize revenue when we transfer promised goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. For our wholesale and retail segments, revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the buyer. At wholesale, transfer occurs and revenue is recognized upon the shipment of goods to independent dealers and licensee-owned BHF stores. At retail, transfer occurs and revenue is recognized upon delivery of goods to the customer. All wholesale and retail revenues are recorded net of estimated returns and allowances based on historical patterns. We typically collect a significant portion of the purchase price from our retail customers as a deposit upon order, with the balance typically collected upon delivery. These customer deposits are carried on our balance sheet as a current liability until delivery is fulfilled and amounted to $ 23,941 and $ 35,963 as of May 27, 2023 and November 26, 2022, respectively. Substantially all of the customer deposits held at November 26, 2022 related to performance obligations that were satisfied during the current year-to-date period and have therefore been recognized in revenue for the six months ended May 27, 2023.   18 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)   Sales commissions are expensed as part of selling, general and administrative expenses at the time revenue is recognized because the amortization period would have been one year or less. Sales commissions at wholesale are accrued upon the shipment of goods. Sales commissions at retail are accrued at the time a sale is written (i.e. – when the customer’s order is placed) and are carried as prepaid commissions in other current assets until the goods are delivered and revenue is recognized. At May 27, 2023 and November 26, 2022, our balance of prepaid commissions included in other current assets was $ 2,399 and $ 3,768 , respectively.   We exclude from revenue all amounts collected from customers for sales tax. We do not disclose amounts allocated to remaining unsatisfied performance obligations as they are expected to be satisfied within one year or less.   Disaggregated revenue information for sales of furniture and accessories by product category for the three and six months ended May 27, 2023 and May 28, 2022, excluding intercompany transactions between our segments, is a follows:       Quarter Ended       May 27, 2023     May 28, 2022       Wholesale     Retail     Corporate & Other (2)     Total     Wholesale     Retail     Corporate & Other     Total   Bassett Custom Upholstery   $ 24,156     $ 34,711     $ -     $ 58,867     $ 33,838     $ 45,376     $ -     $ 79,214   Bassett Leather     6,078       577       -       6,655       9,859       292       -       10,151   Bassett Custom Wood     4,201       9,798       -       13,999       5,660       11,237       -       16,897   Bassett Casegoods     3,009       7,771       -       10,780       3,729       9,188       -       12,917   Accessories, mattresses and other (1)     -       7,921       2,297       10,218       -       9,527       -       9,527   Consolidated net sales of furniture and accessories   $ 37,444     $ 60,778     $ 2,297     $ 100,519     $ 53,086     $ 75,620     $ -     $ 128,706         Six Months Ended       May 27, 2023     May 28, 2022       Wholesale     Retail     Corporate & Other (2)     Total     Wholesale     Retail     Corporate & Other     Total   Bassett Custom Upholstery   $ 48,659     $ 70,870     $ -     $ 119,529     $ 65,750     $ 83,194     $ -     $ 148,944   Bassett Leather     12,883       1,071       -       13,954       22,821       532       -       23,353   Bassett Custom Wood     9,079       19,467       -       28,546       11,643       20,644       -       32,287   Bassett Casegoods     6,608       17,821       -       24,429       6,629       17,480       -       24,109   Accessories, mattresses and other (1)     -       16,511       5,248       21,759       -       17,877       -       17,877   Consolidated net sales of furniture and accessories   $ 77,229     $ 125,740     $ 5,248     $ 208,217     $ 106,843     $ 139,727     $ -     $ 246,570     (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. (2) Our Corporate and other segment for the three and six months ended May 27, 2023 includes the sales of Noa Home, which was acquired on September 2, 2023 (see Note 3).   19 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)     15. Changes to Stockholders ’ Equity   The following changes in our stockholders’ equity occurred during the three and six months ended May 27, 2023 and May 28, 2022:       Quarter Ended     Six Months Ended                                         May 27, 2023     May 28, 2022     May 27, 2023     May 28, 2022   Common Stock:                                                                   Beginning of period   $ 44,311     $ 48,640     $ 44,759     $ 48,811   Issuance of common stock     95       70       187       124   Purchase and retirement of common stock     ( 506 )     ( 2,314 )     ( 1,046 )     ( 2,539 ) End of period   $ 43,900     $ 46,396     $ 43,900     $ 46,396                                     Common Shares Issued and Outstanding:                                                                   Beginning of period     8,862,137       9,727,932       8,951,839       9,762,125   Issuance of common stock     19,029       14,180       37,410       24,976   Purchase and retirement of common stock     ( 101,254 )     ( 462,844 )     ( 209,337 )     ( 507,833 ) End of period     8,779,912       9,279,268       8,779,912       9,279,268                                     Additional Paid-in Capital:                                                                   Beginning of period   $ -     $ -     $ -     $ 113   Issuance of common stock     2       13       ( 10 )     52   Purchase and retirement of common stock     ( 214 )     ( 155 )     ( 414 )     ( 422 ) Stock based compensation     212       142       424       257   End of period   $ -     $ -     $ -     $ -                                     Retained Earnings:                                                                   Beginning of period   $ 149,611     $ 119,557     $ 150,800     $ 115,631   Net income for the period     2,076       47,118       3,521       52,691   Purchase and retirement of common stock     ( 884 )     ( 5,408 )     ( 2,097 )     ( 5,681 ) Cash dividends declared     ( 1,410 )     ( 15,796 )     ( 2,831 )     ( 17,170 ) End of period   $ 149,393     $ 145,471     $ 149,393     $ 145,471                                     Accumulated Other Comprehensive Loss:                                                                   Beginning of period   $ ( 62 )   $ ( 1,774 )   $ 50     $ ( 1,823 ) Cumulative translation adjustments, net of tax     ( 69 )     -       ( 205 )     -   Amortization of pension costs, net of tax     23       48       47       97   End of period   $ ( 108 )   $ ( 1,726 )   $ ( 108 )   $ ( 1,726 )   The balance of cumulative translation adjustments, net of tax, was a net loss of $ 409 and $ 204 at May 27, 2023 and November 26, 2022, respectively.   20 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED MAY 27, 2023 (Dollars in thousands except share and per share data)     16. Recent Accounting Pronouncements   In October 2021, the FASB issued Accounting Standards Update No. 2021-08 – Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and to payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in ASU 2021-08 require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in ASU 2021-08 will become effective for us as of the beginning of our 2024 fiscal year. Early adoption is permitted, including adoption in any interim period. We do not expect that this guidance will have a material impact upon our financial position and results of operations.   In March 2022, the FASB issued Accounting Standards Update No. 2022-02 – Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, to address certain concerns identified in the Post-Implementation Review process for ASU Topic 326. The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings by creditors in ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments in ASU 2022-02 require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The amendments in ASU 2022-02 will become effective for us as of the beginning of our 2024 fiscal year. Early adoption is permitted. We expect that the adoption of this standard will primarily impact our disclosures but do not expect that this guidance will have a material impact upon our financial position and results of operations.   In June 2022, the FASB issued Accounting Standards Update No. 2022-03 – Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, to clarify the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, the amendments in ASU 2022-03 require certain additional disclosures related to investments in equity securities subject to contractual sale restrictions. The amendments in ASU 2022-03 will become effective for us as of the beginning of our 2025 fiscal year. Early adoption is permitted. As of May 27, 2023 we do not hold any investments in equity securities, therefore we do not currently expect that this guidance will have a material impact upon our financial position and results of operations.       21 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)