ESCALADE INC 10-Q

Item 1. FINANCIAL STATEMENTS ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS All Amounts in Thousands Except Share Information March 31, 2024 December 31, 2023 March 31, 2023 (Unaudited) (Audited) (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 283 $ 16 $ 6,064 Receivables, less allowance of $ 882 ; $ 652 ; and $ 490 ; respectively 52,274 49,985 50,468 Inventories 95,991 92,462 122,453 Prepaid expenses 2,949 4,280 4,879 Prepaid income tax - 88 175 TOTAL CURRENT ASSETS 151,497 146,831 184,039 Property, plant and equipment, net 23,420 23,786 24,679 Assets held for sale 2,480 2,653 2,823 Operating lease right-of-use assets 8,118 8,378 8,844 Intangible assets, net 28,047 28,640 30,500 Goodwill 42,326 42,326 42,326 Other assets 459 391 376 TOTAL ASSETS $ 256,347 $ 253,005 $ 293,587 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 7,143 $ 7,143 $ 7,143 Trade accounts payable 15,981 9,797 17,232 Accrued liabilities 9,484 15,283 10,500 Income tax payable 441 - - Current operating lease liabilities 1,055 1,041 991 TOTAL CURRENT LIABILITIES 34,104 33,264 35,866 Other Liabilities: Long‑term debt 46,383 43,753 88,082 Deferred income tax liability 3,125 3,125 4,516 Operating lease liabilities 7,628 7,897 8,398 Other liabilities 387 387 407 TOTAL LIABILITIES 91,627 88,426 137,269 Stockholders' Equity: Preferred stock: Authorized 1,000,000 shares; no par value, none issued Common stock: Authorized 30,000,000 shares; no par value, issued and outstanding – 13,861,552 ; 13,736,800 ; and 13,729,859 ; shares respectively 4,909 4,480 2,879 Retained earnings 159,811 160,099 153,439 TOTAL STOCKHOLDERS' EQUITY 164,720 164,579 156,318 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 256,347 $ 253,005 $ 293,587 See notes to Consolidated Condensed Financial Statements. 3 ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended All Amounts in Thousands Except Per Share Data March 31, 2024 March 31, 2023 Net sales $ 57,304 $ 56,931 Costs and Expenses Cost of products sold 42,950 45,879 Selling, administrative and general expenses 10,701 10,283 Amortization 593 620 Operating Income 3,060 149 Other Income (Expense) Interest expense ( 735 ) ( 1,375 ) Other income 3 18 Income (Loss) Before Income Taxes 2,328 ( 1,208 ) Provision (Benefit) for Income Taxes 553 ( 256 ) Net Income (Loss) $ 1,775 $ ( 952 ) Earnings (Loss) Per Share Data: Basic earnings (loss) per share $ 0.13 $ ( 0.07 ) Diluted earnings (loss) per share $ 0.13 $ ( 0.07 ) Dividends declared $ 0.15 $ 0.15 See notes to Consolidated Condensed Financial Statements. 4 ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED) Common Stock Retained All Amounts in Thousands Shares Amount Earnings Total Balances at December 31, 2022 13,594 $ 2,025 $ 156,450 $ 158,475 Net loss ( 952 ) ( 952 ) Expense of restricted stock units 459 - 459 Settlement of restricted stock units 105 - - - Dividends declared ( 2,059 ) ( 2,059 ) Issuance of common stock for service 31 395 - 395 Balances at March 31, 2023 13,730 $ 2,879 $ 153,439 $ 156,318 Balances at December 31, 2023 13,737 $ 4,480 $ 160,099 $ 164,579 Net income 1,775 1,775 Expense of restricted stock units 429 429 Settlement of restricted stock units 125 - - Dividends declared ( 2,063 ) ( 2,063 ) Balances at March 31, 2024 13,862 $ 4,909 $ 159,811 $ 164,720 See notes to Consolidated Condensed Financial Statements. 5 ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended All Amounts in Thousands March 31, 2024 March 31, 2023 Operating Activities: Net income (loss) 1,775 $ ( 952 ) Depreciation and amortization 1,373 1,396 Allowance for credit losses 222 - Stock-based compensation 429 459 Loss on disposal of assets 67 - Common stock issued in lieu of bonus to officers - 395 Adjustments necessary to reconcile net income to net cash provided by operating activities ( 3,859 ) 3,218 Net cash provided by operating activities 7 4,516 Investing Activities: Purchase of property and equipment ( 357 ) ( 704 ) Proceeds from sale of property and equipment 50 - Net cash used by investing activities ( 307 ) ( 704 ) Financing Activities: Proceeds from issuance of long-term debt 36,798 35,231 Payments on long-term debt ( 34,168 ) ( 34,887 ) Cash dividends paid ( 2,063 ) ( 2,059 ) Net cash provided (used) by financing activities 567 ( 1,715 ) Net increase in cash and cash equivalents 267 2,097 Cash and cash equivalents, beginning of period 16 3,967 Cash and cash equivalents, end of period $ 283 $ 6,064 See notes to Consolidated Condensed Financial Statements. 6 ESCALADE, INCORPORATED AND SUBSIDIARIES 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 31, 2023 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 2023 filed with the Securities and Exchange Commission. Correction of Immaterial Errors During the year ended December 31, 2023, management became aware of an error in reporting of common stock value within the consolidated balance sheet and statement of stockholders’ equity. Common stock previously was reported with a $ 1.00 stated value even though, per the Company’s Articles of Incorporation, the common stock has no par value. Additionally, components of equity that should have been reflected within common stock were improperly reported within retained earnings. We have reviewed historical activity reflected in common stock and retained earnings and have identified adjustments to be made to correct the immaterial reporting error. The consolidated balance sheet and consolidated statement of stockholders’ equity have been corrected and have been updated for prior years within this Form 10-Q. We assessed the materiality of this error on prior periods' financial statements in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality , codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements . We concluded that the error was not material to any prior annual or interim period and therefore, amendments of previously filed reports are not required. In accordance with ASC 250, we have corrected the reporting for all prior periods presented by revising the consolidated financial statements appearing herein. Periods not presented herein will be revised, as applicable, in future filings. The revisions had no impact on total assets, total liabilities, total shareholders' equity, net income or the cash flow statement. The impact of this revision on our consolidated balance sheet and consolidated statement of stockholders’ equity as of March 31, 2023 was as follows: As Previously Reported Correction As Corrected In Thousands Common Stock $ 13,730 $ ( 10,851 ) $ 2,879 Retained Earnings 142,588 10,851 153,439 Total Stockholders’ Equity $ 156,318 - $ 156,318 Note B ‑ Seasonal Aspects The results of operations for the three months ended March 31, 2024 and March 31, 2023 are not necessarily indicative of the results to be expected for the full year. 7 Note C ‑ Inventories In thousands March 31, 2024 December 31, 2023 March 31, 2023 Raw materials $ 3,665 $ 4,050 $ 7,311 Work in progress 2,595 2,308 3,386 Finished goods 89,731 86,104 111,756 $ 95,991 $ 92,462 $ 122,453 Note D – Fair Values of Financial Instruments Accounting Standard Codification (“ASC”) 820, “ Fair Value Measurement and Disclosures, ” outlines a valuation framework and creates a fair value hierarchy for assets and liabilities as follows: - Level 1: Observable inputs such as quoted prices in active markets; - Level 2: Inputs other than quoted prices in active markets that are either directly or indirectly observable; and - Level 3: Unobservable inputs for which little or no market data exists, therefore requiring the Company to develop its own assumptions. Due to their short-term nature, the fair value of cash and cash equivalents, accounts receivable, accounts payable and certain other liabilities approximated their carrying values at March 31, 2024, December 31, 2023 and March 31, 2023. The Company believes the carrying value of borrowings under our senior secured revolving credit facility, due to variable rate interest, adequately reflects the fair value of these instruments. The Company discloses the fair value of its term loan using Level 2 inputs, which are estimated using treasury rates for a similar instrument, as follows: March 31, 2024 December 31, 2023 March 31, 2023 In thousands Carrying Value Fair Value Carrying Value Fair Value Carrying Value Fair Value Term Loan Facility $ 30,952 $ 27,844 $ 32,738 $ 29,439 $ 38,095 $ 33,734 Note E – Stock Compensation The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation . For the three months ended March 31, 2024 and March 31, 2023, the Company recognized stock based compensation expense of $ 429 thousand and $ 459 thousand, respectively. At March 31, 2024 and March 31, 2023, respectively, there was $ 991 thousand and $ 2,816 thousand in unrecognized stock-based compensation expense related to non-vested stock awards. The unrecognized compensation expense of unvested restricted stock awards net yet recognized as of March 31, 2024 are expected to be recognized over the weighted average period of 1.3 years. On April 3, 2024, the Company awarded 130,800 restricted stock units to employees. The 2024 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 continues to serve as an employee, director or consultant of the Company on the vesting date. 8 Note F ‑ Segment Information As of and for the Three Months Ended March 31, 2024 In thousands Sporting Goods Corp. Total Revenues from external customers $ 57,304 $ - $ 57,304 Operating income (loss) 4,100 ( 1,040 ) 3,060 Net income (loss) 2,442 ( 667 ) 1,775 Total assets $ 254,816 $ 1,531 $ 256,347 As of and for the Three Months Ended March 31, 2023 In thousands Sporting Goods Corp. Total Revenues from external customers $ 56,931 $ - $ 56,931 Operating income (loss) 690 ( 541 ) 149 Net loss ( 484 ) ( 468 ) ( 952 ) Total assets $ 284,252 $ 9,335 $ 293,587 Note G – Dividend Payment On January 12, 2024, the Company paid a quarterly dividend of $ 0.15 per common share to all shareholders of record on January 5, 2024. The total amount of the dividend was approximately $ 2.1 million and was charged against retained earnings. Note H ‑ 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 31, 2024 March 31, 2023 Weighted average common shares outstanding 13,786 13,648 Dilutive effect of stock options and restricted stock units 104 - Weighted average common shares outstanding, assuming dilution 13,890 13,648 Note I – 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 31, 2024, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, that are of significance, or potential significance to the Company. In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which enhances reporting requirements under Topic 280. ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within the segment measure of profit or loss, an amount and description of its composition for other segment items to reconcile to segment profit or loss, and the title and position of the entity’s CODM. ASU 2023-07 will be applied retrospectively and is effective for annual reporting periods in fiscal years beginning after December 15, 2023, and interim reporting periods in fiscal years beginning after December 31, 2024. 9 Note J – Revenue from Contracts with Customers Revenue Recognition – Revenue is recognized when a contract exists with a customer that specifies the goods to be provided at an agreed upon sales price and when the performance obligations under the terms of the contract 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. Sales are made on normal and customary short-term credit terms or upon delivery of point-of-sale transactions. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales commissions are expensed as incurred. These costs are recorded in selling, general and administrative expenses in the accompanying consolidated statements of operations. 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. The Company enters into contractual arrangements with customers in the form of customer orders that specify goods, quantity, pricing, and associated order terms. The Company does not have long-term contracts that are satisfied over time. Due to the nature of the contracts, no significant judgment exists in relation to the identification of the customer contract, satisfaction of the performance obligations, or transaction price. The Company expenses incremental costs of obtaining a contract due to the short-term nature of the contracts. 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 31, 2024 March 31, 2023 Gross Sales by Channel: Mass Merchants $ 21,025 $ 16,690 Specialty Dealers 20,995 21,615 E-commerce 18,363 20,592 International 2,856 3,041 Other 808 1,035 Total Gross Sales 64,047 62,973 Less: Gross-to-Net Sales Adjustments Returns 1,836 1,512 Warranties 445 440 Customer Allowances 4,462 4,090 Total Gross-to-Net Sales Adjustments 6,743 6,042 Total Net Sales $ 57,304 $ 56,931 10 Note K – 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 8 years. As of March 31, 2024, 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 is as follows: Three Months Ended All Amounts in Thousands March 31, 2024 March 31, 2023 Lease Expense Operating Lease Cost $ 375 $ 374 Short-term Lease Cost 357 612 Variable Lease Cost 165 129 Total Operating Lease Cost $ 897 $ 1,115 Operating Lease – Operating Cash Flows $ 255 $ 245 New ROU Assets – Operating Leases (non-cash) $ - $ - Weighted Average Remaining Lease Term – Operating Leases (years) 7.89 8.79 Weighted Average Discount Rate – Operating Leases 5.20 % 5.05 % Future minimum lease payments under non-cancellable leases as of March 31, 2024 were as follows: All Amounts in Thousands Year 1 $ 1,111 Year 2 1,445 Year 3 1,401 Year 4 1,314 Year 5 1,074 Thereafter 4,257 Total future minimum lease payments 10,602 Less imputed interest ( 1,919 ) Total $ 8,683 Reported as of March 31, 2024 Current operating lease liabilities 1,055 Long-term operating lease liabilities 7,628 Total $ 8,683 11 Note L – 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 M – Debt On January 21, 2022, the Company entered into an Amended and Restated Credit Agreement (“Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lender”). Under the terms of the Restated Credit Agreement, Old National Bank has been added as a Lender. The Lenders have now made available to the Company a senior revolving credit facility with increased maximum availability of $ 65.0 million (the “Revolving Facility”), up from $ 50.0 million, plus an accordion feature that would allow borrowings up to $ 90.0 million under the Revolving Facility subject to certain terms and conditions. The maturity date of the revolving credit facility was extended to January 21, 2027. The Company may prepay the Revolving Facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Restated Credit Agreement further extended the maturity date for the term loan facility to January 21, 2027. On July 18, 2022, the Company entered into the First Amendment to the Restated Credit Agreement. Under the terms of the First Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $ 65.0 million to $ 75.0 million pursuant to the accordion feature in the Restated Credit Agreement. The First Amendment also adjusted the funded debt to EBITDA ratio financial covenant to 3:00 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022. On October 26, 2022, the Company entered into the Second Amendment ("Second Amendment”) to the Restated Credit Agreement. Under the terms of the Second Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $ 75.0 million to $ 90.0 million pursuant to the accordion feature in the Restated Credit Agreement. The Second Amendment adjusted the funded debt to EBITDA ratio financial covenant to 3:25 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022 and 3:00 to 1:00 as of the end of the Company’s first fiscal quarter of 2023. The Second Amendment also modified the EBITDA definition to permit add-backs of a) up to $ 2.0 million for disposition related expenses; and b) up to $ 2.0 million for unusual or non-recurring expenses which are incurred prior to the end of fiscal year 2023 and which are subject to the approval of the Administrative Agent. On May 8, 2023, the Company entered into the Third Amendment (the “Third Amendment”) to the Restated Credit Agreement. The Third Amendment adjusted the funded debt to EBITDA ratio financial covenant to 4:25 to 1:00 as of the end of the Company’s second fiscal quarter of 2023, 3:00 to 1:00 as of the end of the Company’s third fiscal quarter of 2023, and 2:75 to 1:00 as of the end of the Company’s fourth fiscal quarter of 2023 and thereafter. The Third Amendment adjusted the fixed charge coverage ratio covenant to 1:10 to 1:00 commencing as of the Company’s fourth fiscal quarter of 2023 and 1:25 to 1:00 as of the end of the Company’s first fiscal quarter of 2024 and thereafter. For the Company’s second and third fiscal quarters in 2023, the Third Amendment suspended the fixed charge coverage ratio covenant and added a minimum EBITDA covenant of $ 22.5 million as of the end of each such fiscal quarter. Under the terms of the Third Amendment, the Company and the Lender also agreed to decrease the maximum availability under the senior revolving credit facility from $ 90.0 million to $ 75.0 million, upon the consummation of the sale of the Company’s Mexican subsidiary and the dissolution of Escalade Insurance, Inc. The proceeds from such sale and dissolution, respectively, will be used to partially prepay the amounts outstanding under the revolving credit facility. As reflected in the Fourth Amendment to the Restated Credit Agreement effective September 1, 2023, the maximum availability of the senior revolving credit facility was reduced to $ 85.0 million following the dissolution of Escalade Insurance, Inc. As of March 31, 2024, the outstanding principal amount of the term loan was $ 31.0 million and total amount drawn under the Revolving Facility was $ 22.5 million. 12