q.e.p. co., inc. and subsidiaries · 2020. 7. 13. · flooring and flooring installation solutions....

Q.E.P. CO., INC. AND SUBSIDIARIES

Consolidated Financial StatementsFor the Years Ended February 29, 2020 and February 28, 2019

C O N T E N T S

Page

Report of Independent Certified Public Accountants 2

Financial Statements

Consolidated Balance Sheets 4

Consolidated Statements of Operations 5

Consolidated Statements of Comprehensive Income (Loss) 6

Consolidated Statements of Cash Flows 7

Consolidated Statements of Shareholders’ Equity 8

Notes to Consolidated Financial Statements 9

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Q.E.P. Co., Inc.

We have audited the accompanying consolidated financial statements of Q.E.P. Co.,Inc. (a Florida corporation) and subsidiaries, which comprise the consolidated balance

sheets as of February 29, 2020 and February 28, 2019, and the related consolidatedstatements of operations, comprehensive income (loss), changes in shareholders’equity, and cash flows for the years then ended, and the related notes to the financialstatements.

Management’s responsibility for the financial statementsManagement is responsible for the preparation and fair presentation of theseconsolidated financial statements in accordance with accounting principles generallyaccepted in the United States of America; this includes the design, implementation,and maintenance of internal control relevant to the preparation and fair presentation ofconsolidated financial statements that are free from material misstatement, whetherdue to fraud or error.

Auditor’s responsibilityOur responsibility is to express an opinion on these consolidated financial statementsbased on our audits. We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amountsand disclosures in the consolidated financial statements. The procedures selected

depend on the auditor’s judgment, including the assessment of the risks of materialmisstatement of the consolidated financial statements, whether due to fraud or error.In making those risk assessments, the auditor considers internal control relevant to

the entity’s preparation and fair presentation of the consolidated financial statementsin order to design audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the entity’s internal

control. Accordingly, we express no such opinion. An audit also includes evaluatingthe appropriateness of accounting policies used and the reasonableness of significantaccounting estimates made by management, as well as evaluating the overall

presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to

provide a basis for our audit opinion.

GT.COM Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firmsare separate legal entities and are not a worldwide partnership.

GRANT THORNTON LLP

1301 International Parkway, Suite 300

Fort Lauderdale, FL 33323

D +1 954 768 9900

F +1 954 768 9908

OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, thefinancial position of Q.E.P. Co., Inc. and subsidiaries as of February 29, 2020 and February 28, 2019, and theresults of their operations and their cash flows for the years then ended in accordance with accounting principlesgenerally accepted in the United States of America.

Emphasis of matterWe draw attention to Notes 2 and 8 to the financial statements, which describes that the Company has changedits method of accounting for leases as of March 1, 2019, due to the adoption of FASB Accounting StandardsCodification (Topic 842), Leases. Our opinion is not modified with respect to this matter.

Fort Lauderdale, FloridaJuly 10, 2020

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Q.E.P. CO., INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except par values)

The accompanying notes are an integral part of these financial statements.

February 29,

2020

February 28,

2019

ASSETS

Cash 4,999$ 6,467$

Accounts receivable, less allowance for doubtful accounts of $475and $751 as of February 29, 2020 and February 28, 2019, respectively 49,264 53,295

Inventories 69,061 91,684

Prepaid expenses and other current assets 4,280 7,360

Prepaid income taxes 740 2,217

Current assets 128,344 161,023

Property and equipment, net 15,168 16,695

Right of use operating lease assets 18,320 -

Deferred income taxes, net 4,135 3,271

Intangibles, net 13,871 16,815

Goodwill 2,288 6,140

Other assets 2,824 1,056

Total Assets 184,950$ 205,000$

LIABILITIES AND SHAREHOLDERS' EQUITY

Trade accounts payable 31,114$ 36,611$

Accrued liabilities 19,366 29,358

Current operating lease liabilities 5,262 -

Lines of credit 40,107 49,398

Current maturities of notes payable 3,399 1,733

Current liabilities 99,248 117,100

Notes payable 7,854 11,101

Non-current operating lease liabilities 14,121 -

Deferred income taxes 114 193

Other long term liabilities 872 1,084

Total Liabilities 122,209 129,478

Preferred stock, 2,500 shares authorized, $1.00 par value; 0 sharesissued and outstanding at February 29, 2020 and February 28, 2019, - -respectively

Common stock, 20,000 shares authorized, $.001 par value;3,827 and 3,821 shares issued, and 3,139 and 3,142 shares outstanding atFebruary 29, 2020 and February 28, 2019, respectively 4 4

Additional paid-in capital 11,087 10,963

Retained earnings 64,887 77,029

Treasury stock, 688 and 679 shares held at cost at February 29, 2020 -and February 28, 2019, respectively (8,869) (8,700)

Accumulated other comprehensive income (4,368) (3,774)

Shareholders' Equity 62,741 75,522

Total Liabilities and Shareholders' Equity 184,950$ 205,000$

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Q.E.P. CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)


February 29, February 28,

2020 2019

Net sales 393,901$ 379,402$

Cost of goods sold 289,983 278,798

Gross profit 103,918 100,604

Operating expenses:

Shipping 43,986 37,923

General and administrative 33,778 41,112

Selling and marketing 35,860 28,209

Impairment loss on goodwill 4,041 -

Other income, net (1,035) (823)

Total operating expenses 116,630 106,421

Operating income (loss) (12,712) (5,817)

Non-operating income 2,370 3,414

Interest expense, net (2,441) (1,567)

Income (loss) before provision for income

taxes (12,783) (3,970)

Benefit for income taxes (641) (950)

Net income (loss) (12,142)$ (3,020)$

Earnings (loss) per share:Basic (3.84)$ (0.95)$

Diluted (3.84)$ (0.95)$

Weighted average number of common

shares outstanding:Basic 3,160 3,179

Diluted 3,160 3,181

For the Year Ended

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Q.E.P. CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)


For the Year Ended


2020 2019

Net income (loss) (12,142)$ (3,020)$

Unrealized currency translation adjustments (594) (993)

Comprehensive income (loss) (12,736)$ (4,013)$

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Q.E.P. CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


February 29,

2020

February 28,

2019

Operating activities:

Net loss (12,142)$ (3,020)$

Adjustments to reconcile net income to net cash

provided by operating activities:

Gain on sale of businesses (2,370) (3,415)

Gain on sale of property (10) (96)

Impairment loss on goodwill 4,041 -

Impairment loss on long term assets - 238

Depreciation and amortization 4,754 4,728

Other non-cash adjustments 273 281

Changes in assets and liabilities, net of acquisitions:

Accounts receivable 2,975 (2,457)

Inventories 19,480 (15,141)

Prepaid expenses and other assets 9,331 (2,253)

Trade accounts payable and accrued liabilities (18,018) 8,161

Net cash provided by (used in) operating activities 8,314 (12,974)

Investing activities:

Acquisitions (1,324) (39,075)

Capital expenditures (1,339) (8,206)

Proceeds from sale of businesses 4,663 9,350

Proceeds from sale of property 401 599

Purchase of equity securities (1,900) -

Net cash provided by (used in) investing activities 501 (37,332)

Financing activities:

Net borrowings (repayment) under lines of credit (8,397) 31,805

Net borrowings (repayments) of notes payable (1,408) 10,036

Purchase of treasury stock (155) (1,121)

Principal payments on finance leases (21) -

Net cash provided by (used in) financing activities (9,981) 40,720

Effect of exchange rate changes on cash (302) (81)

Net decrease in cash (1,468) (9,667)

Cash at beginning of period 6,467 16,134

Cash at end of period 4,999$ 6,467$

For the Year Ended

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Q.E.P. CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)


Accumulated

Other Total

Paid-in Retained Treasury Comprehensive Shareholders'

Shares Amount Shares Amount Capital Earnings Stock Income Equity

Balance at February 28, 2018 - -$ 3,820,785 4$ 10,854$ 80,049$ (7,557)$ (2,781)$ 80,569$

Net loss (3,020) (3,020)

Other comprehensive income (loss) (993) (993)

Purchase of treasury stock (1,143) (1,143)

Stock-based compensation expense 109 109


Net loss (12,142) (12,142)

Other comprehensive income (loss) (594) (594)

Issuance of common stock in connection

with exercise of stock options 5,857 - 124 124

Purchase of treasury stock (169) (169)


Preferred Stock Common Stock

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Q.E.P. CO., INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Founded in 1979, Q.E.P. Co., Inc. is a leading global provider of high quality, innovative and value-drivenflooring and flooring installation solutions. QEP manufactures, markets and sells a comprehensive line offlooring installation tools, adhesives, and underlayment for both consumers as well as professionalinstallers. Under the Harris Flooring Group ™, QEP manufactures and offers a complete line of hardwood,luxury vinyl, and modular carpet tile. QEP sells its products throughout the world to home improvementretail centers, professional specialty distribution outlets, and flooring dealers under brand namesincluding QEP®, LASH®, Roberts®, Harris Flooring Group™, Capitol®, Harris®Wood, Kraus®, Naturally AgedFlooring™, Vitrex®, Homelux®, Brutus®, PRCI®, Plasplugs®, Tomecanic®, Premix-Marbletite® (PMM),Apple Creek® and Elastiment®.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Q.E.P. Co., Inc. and its wholly ownedsubsidiaries, after eliminating all significant inter-company accounts and transactions.

Accounts and Notes Receivable

The Company’s accounts receivable principally are due from home improvement retailers, professionalspecialty distributors and flooring dealers. Credit is extended based on an evaluation of a customer’sfinancial condition and collateral is not required. Accounts receivable are due at various times based oneach customer’s selling arrangements and credit worthiness. The outstanding balances are stated net ofan allowance for doubtful accounts. The Company determines its allowance for accounts receivable byconsidering a number of factors, including the extent to which trade accounts receivable are past due,loss history, customers’ ability to pay, and the general condition of the economy and the industry as awhole. Uncollectible accounts are written off against the allowance. Payments subsequently received onsuch receivables are credited to the allowance for doubtful accounts.

The Company’s notes receivable are initially recognized at fair value. The Company does not subsequentlyadjust the fair value of these notes receivable unless it is determined that the note receivable is impaired.As with its accounts receivable allowance, the Company considers the issuer’s financial condition,payment history, and other relevant factors when assessing the collectability of the note and reserves aportion of such note for which collection does not appear likely. Interest income is recognized as earned.

Inventories

Inventories are stated at the lower of standard cost and net realizable value, which approximates thelower of cost on a first-in, first-out basis and net realizable value. Standard costs include themanufacturing or purchase costs of a product, as well as related freight, duties and fees.

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Property and Equipment

Property and equipment are stated at cost. Depreciation is recorded using the straight-line method inamounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives.Leasehold improvements are amortized over their expected useful life or the remaining life of therespective lease, whichever is shorter.

The following are the estimated lives of the Company’s property and equipment:

Machinery and warehouse equipment 3 to 10 yearsFurniture and computer equipment 3 to 10 yearsBuildings 30 yearsLeasehold improvements 5 to 10 years

Maintenance and repairs are charged to expense. Significant renewals and betterments are capitalized.When property is sold or otherwise disposed of the cost and related accumulated depreciation areremoved from the accounts and any resulting gain or loss is reflected in operations for the period.

Impairment of Long-Lived Assets

The Company evaluates its property and equipment for impairment whenever events or circumstancesindicate that the carrying amount of such assets may not be recoverable. Recoverability is measured bya comparison of the carrying amount to its fair value. If an asset is considered to be impaired, theimpairment to be recognized is the amount by which the carrying amount of the asset exceeds its fairvalue. Assets to be disposed of are reported at the lower of the carrying amount or fair value less coststo sell.

Income Taxes

Deferred income taxes are based on the estimated future tax effects of differences between the financialstatement and tax basis of assets, and liabilities and on available net operating loss carry forwards.Deferred income tax provisions and benefits are based on changes to the basis of assets or liabilities fromyear to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictionsin which it operates, estimates of future taxable income and available tax planning strategies. If taxregulations, operating results or the ability to implement tax-planning strategies vary, adjustments to thecarrying value of deferred tax assets and liabilities may be required.

The Company recognizes the financial statement benefit of a tax position only after determining that therelevant tax authority would more likely than not sustain the position upon examination. For tax positionsmeeting the “more-likely-than-not” threshold, the amount recognized in the financial statementsgenerally is the largest benefit that has a greater than 50 percent likelihood of being realized uponultimate settlement with the relevant tax authority as adjusted for future economic uncertainties.Penalties and interest on the Company’s reserve for uncertain tax positions are included in provision forincome taxes.

Intangible Assets

The Company evaluates goodwill and indefinite lived intangibles for impairment annually or wheneverevents or circumstances indicate that the fair value of a reporting unit may not exceed its carrying amount,including goodwill. The Company amortizes the cost of other intangibles over their estimated useful livesand tests such items for impairment whenever events or circumstances indicate that the carrying amount

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may not be recoverable. If the Company determines that an intangible asset is impaired, it is written downto its fair value.

Leases

On March 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” using the modifiedretrospective transition method, which requires recognition of leases differently pre- and post-adoption.See “New Accounting Standards- ASU No. 2016-02” and Leases Footnote 8 below for more information.

Prior to the adoption of Topic ASC 842, under ASC 840, “Leases”, effective for QEP through February 28,2019, leases that meet relevant criteria are classified as capital leases. For such leases, assets andobligations are recorded initially at the present value of the contractual lease payments. The capitalizedleases are amortized using the straight-line method over the shorter of the assets’ estimated economiclives or the term of the lease. Interest expense relating to the lease liabilities is recorded to effect aconstant rate of interest over the terms of the obligations. Leases not meeting capitalization criteria areclassified as operating leases and related rentals are charged to expense on a straight-line basis.

Earnings (Loss) Per Share

Basic earnings (loss) per share are computed based on weighted average shares outstanding during theperiod. Diluted earnings (loss) per share are computed using the weighted average number of commonand dilutive common stock equivalent shares outstanding during the period. Dilutive common stockequivalent shares consist of the dilutive effect of stock option and restricted stock awards.

Fair Value of Financial Instruments

The carrying amount of financial instruments, including cash, accounts receivable, notes receivable,accounts payable, accrued liabilities, lines of credit and notes payable, approximate fair value due to theshort maturity, variable interest rates and other terms of these instruments.

Foreign Currencies

The consolidated financial statements are presented in US Dollars. The financial statements ofsubsidiaries outside the United States are measured using the local currency as the functional currency.Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balancesheet date. Translation adjustments resulting from this process are charged or credited to equity.Revenues and expenses are translated at average rates of exchange prevailing during each month of theyear. Gains and losses on foreign currency transactions are included in general and administrativeexpenses. Foreign currency transactions resulted in losses of $0.7 million and $0.6 million in fiscal years2020 and 2019, respectively.

Revenue Recognition

Revenue recognition is evaluated through the following five steps: 1) identification of the contracts withcustomers; 2) identification of the performance obligations in the contracts; 3) determination of thetransaction price; 4) allocation of the transaction price to the performance obligations in the contract;and 5) recognition of revenue as or when performance obligations are satisfied.

Revenue is recognized at a point in time when title and control to merchandise has passed to thecustomer, typically when shipped. The significant majority of the Company’s contracts with its customers

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are for standard product sales under standard ship and bill arrangements and are generally accounted foras having a single performance obligation and the transaction price is agreed upon in the contract.Contracts do not have significant financing components and payment terms do not exceed one year fromthe date of the sale. Adjustments for price adjustments, rebates, allowances, and certain advertising andpromotional costs are variable consideration and are recorded as a reduction of product sales revenue inthe same period the related product sales are recorded. The Company does not incur significant creditlosses from contracts with customers. The Company establishes reserves for returns and allowancesbased on current and historical information and trends. Net sales have been reduced by such amounts.Taxes collected from customers and remitted to governmental authorities are excluded from revenues.

On March 1, 2018, the Company adopted the new accounting standard, ASC 606, Revenue from Contractswith Customers and the related amendments (“ASC 606”) and applied the provisions of the standard toall contracts using the modified retrospective approach method. The necessary processes under the newguidance were either already in place, or changes were implemented for the end of fiscal year 2018.Therefore, there was no adjustment recorded to the opening balance of retained earnings. Substantiallyall the Company’s revenue is recognized at a point in time when the product is either shipped or receivedfrom the Company’s facilities and control of the product is transferred to the customer. The adoption ofASC 606 did not have a material impact on the amounts reported in the Company’s consolidated financialposition, results of operations or cash flows.

Shipping Costs

The Company treats shipping and handling activities that occur after control of the product transfers asfulfillment activities, and therefore, does not account for shipping and handling costs as a separateperformance obligation. Shipping costs to customers are expensed as incurred and included in shippingexpenses. Shipping costs billed to customers are included in net sales.

Advertising Allowances and Costs

Advertising allowances are expensed as incurred and totaled $7.6 million and $7.5 million for the yearsended February 29, 2020 and February 28, 2019, respectively. In return, the Company’s products areadvertised in various forms of media on a local, regional or national level. The Company’s products arealso displayed on in-store signage and the Company receives the benefit of advertising its productsdirectly to professional contractors. The Company is not able to reasonably estimate the fair value of thebenefit received under these arrangements. Accordingly, the Company accounts for these promotionalfunds as a reduction to the selling price and the costs are included in net sales.

Advertising costs are expensed as incurred and totaled $1.3 million and $1.2 million for fiscal years 2020and 2019, respectively. These costs are recorded in selling and marketing expenses and primarily consistof advertising through direct media and in trade publications.

Warranty Costs

The Company provides for estimated product warranty expenses when it sells the related product. Sincewarranty estimates are forecasts that are based on the best available information, mostly historical claimsexperience, the claims costs may differ from amounts provided. A warranty accrual of approximately $1.2million was recorded as of February 29, 2020 and $1.3 million as of February 28, 2019. This accrualrepresent management’s best estimate of its probable future liability for warranty claims related to itsproducts, including wood, laminate, adhesives, and tools, based on a lag analysis of historical warrantyclaims made and paid.

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Use of Estimates

In preparing financial statements, management is required to make certain estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements, and of the revenues and expenses during the reportingperiod. Significant estimates include the valuation of deferred income taxes, impairment evaluation ofgoodwill, other intangible assets and long-lived assets, inventory valuation and product warranty reserves,the allowance for doubtful accounts, and the fair value of assets acquired and liabilities assumed inbusiness combinations. Actual results could differ from those estimates.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) as currently reported and also considers theeffect of additional economic events that are not required to be recorded in determining net income butthat are reported as a separate component of shareholders’ equity. The Company’s balance incomprehensive income (loss) is derived from currency translation adjustments.

New Accounting Standards

In February 2016, the FASB released ASU 2016-02, “Leases (Topic 842).” The guidance, and subsequentamendments issued, requires a lessee to recognize lease assets and lease liabilities that arise from a leaseagreement. The new standard is effective for interim and annual periods beginning after December 15,2018. The Company adopted this standard effective March 1, 2019 under a modified retrospectiveapproach using the effective date as the date of initial application. Financial information will not beupdated and the disclosures required under the new standard will not be provided for dates and periodsbefore March 1, 2019. The new standard provides a number of optional practical expedients in transition.The company elected the ‘package of practical expedients’, which permits not to reassess under the newstandard prior conclusions about lease identification, lease classification and initial direct costs. TheCompany did not elect the use-of-hindsight or the practical expedient pertaining to land easements; thelatter not being applicable. Additionally, the Company elected ongoing practical expedients, including theoption to not recognize right of use asset or lease liabilities for leases with terms shorter than twelvemonths. The Company also elected the practical expedient to not separate lease and non-leasecomponents for equipment leases only.

The adoption of ASC 842 in fiscal year 2020 had a material impact on the Company’s Consolidated BalanceSheets, but did not have a material impact on the Company’s Consolidated Statements of Operations orConsolidated Statements of Cash Flows. The Company recognized net operating lease right-of-use assetsof $21.0 million and operating lease liabilities of $21.0 million on the effective date.

In February 2018, the FASB released 2018-02 “Income Statement—Reporting Comprehensive Income(Topic 220)”, which allow a reclassification from accumulated other comprehensive income to retainedearnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Companies may adopt the newguidance using either a retrospective approach to each period in which the income tax effects of the 2017Act related to items remaining in accumulated other comprehensive income are recognized, or at thebeginning of the period of adoption. The new guidance is effective for public business entities in fiscalyears, and interim periods within those fiscal years, beginning after December 15, 2018. The Companyadopted this standard on March 1, 2019 and chose to leave the tax effect of the rate change in othercomprehensive income.

In August 2018, the FASB released ASU 2017-12, “Derivatives and Hedging (Top 815): Targeted

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Improvements to Accounting for Hedging Activities,” which expands the eligibility of hedging strategiesfor hedge accounting, amends presentation and disclosure requirements, and changes the effectivenessassessment. The new guidance is effective for public business entities in fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2018. The adoption of this guidance by theCompany in fiscal year 2020 did not have a material impact on its financial statements.

In August 2018, the FASB released 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software(Subtopic 350-40): Customer’s accounting for implementation costs incurred in a cloud computingarrangement that is a service contract”, which aligns the requirements for capitalizing implementationcosts incurred in a hosting arrangement that is a service contract with the requirements for capitalizingimplementation costs incurred to develop or obtain internal-use software (and hosting arrangements thatinclude an internal-use software license). This guidance can be applied either retrospectively orprospectively to all implementation costs incurred after the date of adoption. The new guidance iseffective for public business entities in fiscal years, and interim periods within those fiscal years, beginningafter December 15, 2019. The Company is assessing what impacts this new standard will have on itsfinancial statements.

In February 2019, the FASB released ASU 2019-12 “Income Taxes-Simplifying the Accounting for IncomeTaxes (Topic 740)", which simplified the accounting for income taxes in several areas by removing certainexceptions and by clarifying and amending existing guidance applicable to accounting for income taxes.The new guidance is effective for public business entities in fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2020. The Company is assessing what impacts this newstandard will have on its financial statements.

In June 2016, the FASB released ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326),” whichintroduces new guidance for the accounting for credit losses. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model. The new guidance is effective for public business entities, excludingentities eligible to be smaller reporting companies as defined by the SEC, in fiscal years, and interimperiods within those fiscal years, beginning after December 15, 2019. Effective for all other entities, forfiscal years, and interim periods within those fiscal years beginning after December 15, 2022. Earlyadoption is permitted for all entities. The Company is assessing what impacts this new standard will haveon its financial statements.

3. ACQUISITIONS AND SALE OF BUSINESS

Acquisitions

During the fiscal year ended February 29, 2020 the Company did not make any acquisitions.

On April 3, 2018, the Company acquired certain assets of PR Floors Pty Ltd (“PR Floors”), an Australianregistered company for $3.8 million, through an asset purchase agreement. PR Floors is a wholesaleflooring distribution company that provides a wide range of branded flooring products, underlays, marinesealants and accessories as well as one of the most extensive ranges of flooring tools and accessories inthe country. This acquisition expands the Company's distribution base of flooring in Australia and NewZealand.

On May 1, 2018, the Company acquired certain assets and assumed certain liabilities of Ace Floor Co., Inc.,d/b/a Naturally Aged Flooring (“NAF”) for $12.3 million, through an asset purchase agreement. NaturallyAged Flooring is a hardwood flooring importer and distributor with over 30 years of history in the industry.

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This acquisition expanded the Company’s sales distribution channels and its presence in wood flooringmarket.

On October 5, 2018, the Company acquired certain assets and assumed certain liabilities of the hardsurface and carpet tile distribution business of The Kraus Group of Companies (“Kraus”) for $24.8 million,through an asset purchase agreement. Kraus is a distributor of high-quality flooring products includingmodular tile, hardwood, laminate and luxury vinyl, with presence in the US and Canada. This acquisitionexpanded the Company’s sales distribution channels and its presence in the wood flooring market.

The acquisitions of certain net assets of PR Floors, NAF and Kraus were accounted for as businesscombinations; accordingly, the results have been included in the Company’s consolidated results ofoperations as part of its Australia/ New Zealand and North America segments since the acquisition date.The purchase price of the acquired businesses was allocated based on the fair value of the assets acquiredand liabilities assumed.

A summary of the aggregate fair values of assets acquired and liabilities assumed in connection with thebusinesses acquired during the fiscal year ended February 28, 2019 follows (in thousands):

The acquired intangibles relate to tradenames and customer relationships, non-compete agreements andfavorable lease interest and are being amortized over a period of 10 years and 5 years, 4 years and 1.5years respectively. The excess of the purchase price over the fair value of net assets acquired wasrecorded as goodwill in the accompanying balance sheets. The goodwill recognized is attributableprimarily to expected synergies and the assembled workforce of the acquired entities. The goodwill isdeductible for income tax purposes over a fifteen year period.

During fiscal year 2019, the Company recognized $1.7 million of acquisition related expenses in generaladministrative expenses.

Sale of Business

On March 15, 2019, the Company sold net assets utilized in manufacturing and distribution of tack stripand underlayment flooring products which were previously part of the North America segment. Thepurchase price was $4.7 million. The transaction included all inventory, equipment and intangible assetsneeded to produce these products. The purchaser assumed one facility lease. In addition, the majority

PR Floors NAF Kraus

Consideration paid 3,776$ 12,273$ 24,812$

Less: Fair value of assets acquired:

Accounts receivable - 2,509 9,658

Inventories 2,116 3,822 25,329

Property and equipment 729 230 899

Identifiable intangible assets 1,062 6,049 1,955

Other assets 11 403 353

(142) (740) (13,382)

Plus: Fair value of trade accounts payable

and accrued liabilites assumed 142 3,681 13,382

Goodwill -$ 2,941$ -$

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of employees working in the facility were transferred to the purchaser. The total assets transferred tothe purchaser was $2.3 million. A gain of $2.4 million is recorded in non-operating income.

On February 8, 2019, the Company sold net assets of its striking tool product lines (“Nupla and Hisco”)which were previously part of the North America segment. The purchase price was $9.3 million. Thetransaction included all accounts receivable, inventory, equipment and intangible assets needed toproduce Nupla and Hisco products. The purchaser assumed two facility leases, certain equipment leases,and identified accounts payable and accrued expenses. In addition, the majority of employees workingin the Nupla and Hisco business were transferred to the purchaser. The total assets transferred to andliabilities assumed by the purchaser were $6.3 million and $0.4 million, respectively. A gain of $3.4million is recorded in non-operating income.

4. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income by the weighted average number ofshares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net incomeby the weighted average number of shares of common and dilutive common stock equivalent sharesoutstanding.

The following is a reconciliation of the number of shares used in the basic and diluted computation ofearnings per share (in thousands):

5. SEGMENT INFORMATION

The Company operates in three business segments: North America, Europe and Australia/New Zealand.Management has chosen to organize the segments into geographic areas, with each segment being theresponsibility of a segment manager. Each segment markets and sells to home improvement retailers,professional specialty distributors and flooring dealers. The Europe segment is made up of operations inthe UK, France and Germany while the North America segment is made up of operations in the UnitedStates and Canada.

The performance of the business is evaluated at the segment level. Cash, debt and income taxesgenerally are managed centrally. Accordingly, the Company evaluates performance of its segmentsbased on operating earnings exclusive of financing activities and income taxes.

Year Ended

February

29, 2020

February

28, 2019

Weighted average number of common shares outstanding - basic 3,160 3,179

Dilution from stock options and restricted stock - 2

Weighted average number of common shares outstanding - diluted 3,160 3,181

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Segment results were as follows (in thousands):

The fiscal year 2020 operating income includes the non-cash charge for impairment of goodwill in thecompany’s North America segment of $4.0 million. At February 29, 2020 and February 28, 2019, totalassets included $31.3 million and $39.7 million, respectively, of net property and equipment and netintangibles, including $19.9 million and $26.7 million, respectively, located in the North America segmentand $9.9 million and $11.3 million, respectively, located in the Europe segment, and $1.5 million and $1.7million located in the Australia/ New Zealand segment.

Amounts are attributed to the country of the legal entity that recognized the sale or holds the assets.

February 29,

2020

February 28,

2019

Net sales:

North America 302,441$ 285,227$

Europe 39,865 38,885

Australia/New Zealand 51,595 55,290

Total 393,901$ 379,402$

Operating income:

North America (13,123)$ (5,509)$

Europe 1,163 566

Australia/New Zealand (752) (874)

Total (12,712)$ (5,817)$

Depreciation and amortization:

North America 2,999$ 2,903$

Europe 1,342 1,406

Australia/New Zealand 413 419

Total 4,754$ 4,728$

Capital expenditures:

North America 856$ 7,962$

Europe 396 149

Australia/New Zealand 87 95

Total 1,339$ 8,206$

Total assets:February 29,

2020

February 28,

2019

North America 130,811$ 150,912$

Europe 34,566 31,995

Australia/New Zealand 18,320 19,876

Total 183,697$ 202,783$

Year Ended

18

6. INVENTORIES

Inventories consisted of the following (in thousands):

7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

Depreciation expense of property and equipment was $2.6 million each in each fiscal years 2020 and 2019.Amortization of assets recorded under capital leases is included in depreciation expense.

8. LEASES

Lease agreements represent contracts that convey the right to control the use of an asset, which includewarehouse, office space, equipment and vehicles. The Company classifies leases at their inception asoperating, unless the occurrence of conditions listed in ASC 842 requires a classification as finance leases.

Right of use assets and lease liabilities are measured at commencement date at the present value of thefuture minimum lease payments over the lease term. Minimum lease payments include fixed, and variablelease payments depending on an index or rate, as determined at the lease inception date. Variable leasepayments not based on an index or rate are not included in the capitalized base, as they cannot bereasonably estimated. These variable lease payments are recognized as incurred and they consistprimarily of common area maintenance, property taxes and charges based on usage.

The Company uses an incremental borrowing rate to determine the present value of lease payments,since the implicit rate is not readily determinable for the majority of the contracts. The rate is determinedon an annual basis.

Lease terms include any renewal option that the Company is reasonably certain to exercise. Thisdetermination is made based on market factors or other strategic considerations. A substantial majority


2020 2019

Finished goods 61,257$ 82,575$

Raw materials and work-in-process 7,804 9,109

Total inventory, net 69,061$ 91,684$


2020 2019

Machinery and warehouse equipment 20,600$ 20,485$

Building and leasehold improvements 10,718 10,480

Office furniture, equipment and computer equipment 9,721 9,295

41,039 40,260

Less: Accumulated depreciation and amortization (25,871) (23,565)

Property and equipment, net 15,168$ 16,695$

19

of the Company’s leases have remaining lease terms of one to 15 years, with options that can extend thelease term for a period between 2 and 11 years.

Some of the Company’s leases include periodical adjustments to rental payments due to inflation or otherstep increases. The Company’s leases do not contain any material residual value guarantees or materialrestrictive covenants.

The Company subleases warehouse space to a third party. The sublease agreement is classified as anoperating lease.

Right of use assets and lease liabilities presented in the Balance sheet as follows (in thousands):

The components of lease cost consisted of the following (in thousands):

Consolidated balance sheets caption February 29, 2020

Assets

Operating Right of use operating lease assets 18,320$

Finance Other assets 410

Total lease assets 18,730$

Liabilities

Current

Operating Current operating lease liabilities $5,262

Finance Accrued liabilities 78

Non-current

Operating Non-current operating lease liabilities 14,121

Finance Other long term liabilities 325

Total lease liabilities 19,786$

Cost of goods

sold

Shipping General and

administrative

Sales and

Marketing

Total

Operating

Lease Cost 1,316$ 3,610$ 1,240$ 302$ 6,468$

Short Term Lease Cost 338 199 73 105 715

Variable Lease Cost 385 606 254 4 1,249

Sublease Income (74) - - - (74)

Total operating expenses 1,965$ 4,415$ 1,567$ 411$ 8,358$

Finance

General and

administrative

Interest

expense, net

Total

Amortization of ROU Asset 14$ -$ 14$

Interest on Lease Liabilities - 3 3

Total finance expenses 14$ 3$ 17$

Twelve Months Ended February 29, 2020

Twelve Months Ended February 29, 2020

20

Maturities of lease liabilities consist of the following (in thousands):

The amounts presented above are not inclusive of approximately $0.5 million of leases that commencedafter February 29, 2020 that created rights and obligations for the Company.

Future minimum payments under non-cancelable operating leases for fiscal years ending after February28, 2019 and accounted under the previous lease guidance were as follows (in millions): $5.7 in 2020,$4.5 in 2021, $2.9 in 2022, $2.0 in 2023, $0.7 in 2024 and $2.4 thereafter.

The Company had no outstanding balances under capital leases at February 28, 2019

Lease Term and discount rates are as follows:

Supplemental cash flow information related to leases consists of the following (in thousands):

Year Ending February 28,

Operating

Leases

Finance

Leases

Total

2021 6,014$ 94$ 6,108$

2022 4,702 94 4,796

2023 3,499 94 3,593

2024 1,354 94 1,448

2025 1,167 71 1,238

Thereafter 5,695 - 5,695

Total lease payments 22,431$ 447$ 22,878$

Less: amount representing interest 3,048 44

Present value of lease liabilities 19,383$ 403$

At February 29, 2020

Weighted average remaining lease term

Operating 6.29

Finance 4.83

Weighted average discount rate

Operating 4.58%

Finance 4.55%

Twelve Monts Ended

Cash paid for amounts included in the measurement of lease liabilities February 29, 2020

Operating cash flow from operating leases 6,497$

Operating cash flow from finance leases 3

Financing cash flow from finance leases 20

Right of use assets obtained in exchange for lease obligations

Operating leases 3,076$

Finance leases 424

21

9. INTANGIBLE ASSETS

Impairment of goodwill

During the fourth quarter of fiscal 2020, the Company determined that certain events, including a declinein sales had occurred that triggered the need to evaluate the carrying value of its goodwill for impairment.The Company engaged the assistance of an independent third-party specialist to determine the fair valueof its reporting units which included an evaluation based on the market approach as well as a discountedcash flow. The resulting fair values led the Company to conclude that its North America goodwill wasimpaired. The Company recorded a non-cash impairment charge of $4.0 million.

A reconciliation of the beginning and ending balances of goodwill and other intangible assets is as follows(in thousands) for the years ended:

Total North America Europe

Australia/

New Zealand

Balance, February 28, 2018 3,308$ 1,128$ 2,180$ -$

Acquisitions:

NAF 2,941 2,941 - -

Unrealized currency translation adjustments (109) (22) (87) -

Balance, February 28, 2019 6,140$ 4,047$ 2,093$ -$

Acquisitions:

PR Floors 257 - - 257

Impariment losses (4,036) (4,036) - -

Unrealized currency translation adjustments (73) (11) (62) -

Balance, February 29, 2020 2,288$ -$ 2,031$ 257$

Gross Carrying Amount of Goodwill

Supply Trade- Customer Other

Total Agreements marks Lists Intangibles

Balance, February 28, 2018 19,917$ 9,413$ 7,478$ 3,026$ -$

Acquisitions:

PR Floors 1,062 - 327 668 67

NAF 6,049 - 2,402 3,404 243

Kraus 1,955 - 1,652 - 303

Sale:

Nupla (1,870) - (1,383) (487) -

Unrealized currency translation adjustments (651) (379) (141) (125) (6)

Balance, February 28, 2019 26,462$ 9,034$ 10,335$ 6,486$ 607$

Sale:

Halex (594) (347) (247)

Unrealized currency translation adjustments (478) (263) (389) (115) 289

Balance, February 29, 2020 25,390$ 8,771$ 9,599$ 6,124$ 896$

Gross Carrying Amounts

22

Other intangible assets, which are subject to amortization, are as follows (in thousands):

Amortization expense related to intangible assets was $2.2 million each in fiscal years 2020 and 2019.Estimated amortization expense for each of the fiscal years in the five year period ending in February 2025is $2.0 million for 2021, $1.9 million for 2022, $1.7 million for 2023, $1.5 million for 2024, $1.6 million for2025, and $5.2 million thereafter.

10. INVESTMENT IN EQUITY

During fiscal year 2020, the Company entered into an agreement with Hijos de Gaya Fores, a Spanish tilecompany for the purpose of purchasing 10% of its share capital. The Company contributed approximately$0.2 million in cash and financed $1.7 million with a sellers note for a total consideration of $1.9 millionduring the year ended February 29, 2020. The Company applied ASC 321, Investments – Equity Securities,and elected to measure the fair value of the investment at cost less impairment.

During fiscal year 2020, the Company determined that the investment was not impaired and did notrecord any unrealized gains and losses. This investment is included within other assets in theaccompanying consolidated balance sheet.

11. DEBT

Debt consists of the following (in thousands):

The aggregate maturities of notes payable for each of the fiscal years in the five year period ending inFebruary 2025 are as follows: $3.4 million in 2021, $4.0 million in 2022, $1.2 million in 2023, $2.6 millionin 2024 and none in 2025.

Interest paid for all debt was $2.4 million in fiscal year 2020 and $1.6 million in fiscal year 2019.

Remaining February 29, 2020 February 28, 2019

Weighted Gross Net Gross Net

Average Carrying Accumulated Carrying Carrying Accumulated Carrying

Useful Life Amount Amortization Amount Amount Amortization Amount

Trademarks 7 9,599$ (4,211)$ 5,388$ 10,335$ (3,911)$ 6,424$

Supply agreement 8 8,771 (4,093) 4,678 9,034 (3,614) 5,420

Customer lists 4 6,124 (2,520) 3,604 6,486 (1,983) 4,503

Other intangibles 1 896 (695) 201 607 (139) 468

25,390$ (11,519)$ 13,871$ 26,462$ (9,647)$ 16,815$


2020 2019

Lines of Credit:

North America revolving credit facility $ 35,570 $ 47,501

International credit facilities 4,537 1,897

$ 40,107 $ 49,398

Notes Payable:

Term loan facilities $ 11,253 $ 12,834

Less current installments 3,399 1,733

$ 7,854 $ 11,101

23

General

The Company determined that as a result of the fourth quarter operating loss, it would be in breach ofcertain financial covenants under its North America revolving credit facility as of February 29, 2020. Thisbreach would constitute an event of default under the revolving credit facility, as well as a certaininternational facility. Unless waived by the lenders, the lenders have the right to prohibit additionalborrowings under the facilities, accelerate the Company’s indebtedness and take other actions providedfor in each of the credit facilities.

On June 26, 2020, the Company and the lenders entered into a Forbearance Agreement that amendedcertain conditions within the loan agreement to establish future covenant targets and allowed theCompany’s Canadian subsidiary to file a plan of compromise or arrangement with the Ontario SuperiorCourt of Justice under the Companies’ Creditors Arrangement Act. The Forbearance Agreement limits theCompany’s investment in capital expenditures, modifies the Company’s reporting frequency andrequirements to the lender and provides for additional liquidity for the Company through resetting certainFILO loans. Other terms and conditions of the loan agreement remain substantially unchanged.

North America Revolving Credit Facility

The Company has a loan agreement with a domestic financial institution to provide an asset basedrevolving credit facility, term loans and mortgage financing. The Company is allowed to borrow amaximum of $85.0 million under the revolving credit facility based on a percentage of eligible accountsreceivable and inventories. The interest rate applicable to the revolving credit facility is equal to a rangeof the Libor rate associated with the borrowed currency plus 1.50% to 2.00% for advances with fixedmaturities or to a range of the Base Rate associated with the borrowed currency plus 0.50% to 1.00% forall other advances. The Base Rate varies with fluctuations in money market conditions and the interestrate on Base Rate advances is equal to or higher than the interest rate on advances with fixed maturities.

The loan agreement permits the Company to allocate the maximum revolving credit facility between itsNorth America and U.K. revolving credit facilities, is collateralized by substantially all of the Company’sassets, requires the Company to maintain certain financial covenants, prohibits the Company fromincurring certain additional indebtedness without the lender’s prior agreement, limits certaininvestments, advances, loans and treasury stock purchases, restricts substantial asset sales and certaincapital expenditures, and prohibits the payment of dividends.

In connection with the Kraus acquisition, on October 5, 2018 the Company amended its loan agreementwith the domestic financial institution to increase the amount available under the revolving credit facility,reduce the range of each of the interest rates, provide FILO Loans up to a maximum of $7.5 million thatamortize on a quarterly basis over three years commencing June 2019, modified advance rates on eligibleinventories and extended the maturity of the loan agreement from June 2020 to October 2023, with allother material terms in the agreement remaining the same.

At February 29, 2020, the interest rate under the revolving credit facility ranged from 2.96% to 7.25%,the Company had borrowed $38.8 million, including FILO loans, and $5.7 million was available for futureborrowings, net of $8.0 million availability block and $2.3 million in an outstanding letter of credit andother reserves. At February 28, 2019, the interest rate under the revolving credit facility ranged from2.48% to 7.5%, the Company had borrowed $52.8, including FILO loans million, in foreign currencies and$15.5 million was available for future borrowings, net of $1.2 million in outstanding letters of credit.

24

International Credit Facilities

The Company’s U.K. subsidiary has an asset based revolving credit facility with a domestic financialinstitution that allows the subsidiary to borrow up to $10.0 million against a percentage of eligibleaccounts receivable and inventories. The facility has an interest rate and term that varies with the interestrate and term of the Company’s domestic revolving credit facility. This agreement is collateralized bysubstantially all of the subsidiary’s assets and is guaranteed by the Company. The agreement prohibitsthe subsidiary from incurring certain additional indebtedness, limits certain investments, advances orloans, restricts substantial asset sales and certain capital expenditures, and prohibits the payment ofdividends. At February 29, 2020, the interest rate under the agreement was the financial institution’sSterling Reference Rate (1.25% at February 29, 2020) plus 0.75%, the subsidiary borrowed $2.3 millionunder the facility and $5.0 million was available for future borrowing. At February 28, 2019, the interestrate under the agreement was the financial institution’s Sterling Reference Rate (0.75% at February 28,2019) plus 0.75%, the subsidiary had no borrowings under the facility and $3.3 million was available forfuture borrowing.

The Company’s Australian subsidiary has a revolving credit facility with an Australian financial institutionthat, as amended in September 2018, provides the subsidiary with advances of up to AUD 4.5 million ($3.0million). The interest rate applicable to the facility is equal to the financial institution’s Business LendingRate (2.75% at February 29, 2020) plus 2.2% and (3.8% at February 28, 2019) plus 2.2%. The subsidiary’sobligations under the facility are collateralized by substantially all of the subsidiary’s assets and theAustralian financial institution is indemnified against loss by the Company. The facility expires inNovember 2020. The subsidiary had borrowed $2.3 million under the facility at February 29, 2020 and$1.9 million at February 28, 2019.

The Company’s French subsidiary has lines of credit with two French financial institutions that, asamended through March 2016, allow it to borrow an aggregate of €1.0 million ($1.1 million), including€0.5 million against drafts presented for future settlement in payment of the subsidiary’s accountsreceivable and €0.5 million in working capital advances. As of February 29, 2020, the facilities bearinterest at the Euro Interbank Offered Rate (minus 0.37% at February 29, 2020 and minus 0.37% atFebruary 28, 2019) plus a range of 0.65% to 0.85%. The subsidiary had no borrowings under the facility atFebruary 29, 2020 and at February 28, 2019.

Term Loan Facilities

The Company has a term loan under its domestic credit facility (the “2010 Term Loan”) that bears interestequal to, at the option of the Company, the US Dollar Libor rate or the US dollar Base Rate interest ratesapplicable to the revolving credit facility. The facility has a term that varies with the term of the loanagreement and requires quarterly payment of principal of $0.2 million with a balloon payment uponmaturity. During fiscal year 2019, the Company borrowed an additional $3.9 million under this facility.The outstanding balance of the 2010 Term Loan was $4.9 million at February 29, 2020 and $5.8 million atFebruary 28, 2019.

During fiscal 2019, the Company’s Australian subsidiary borrowed AUD 2.6 million ($1.9 million) in a termloan through the expansion of its existing credit facility. The term loan bears interest equal to the rateapplicable to its revolving credit facility and will expire September 2023. The Australia Term Loan requiresquarterly payments of principal of AUD 0.1 million. The outstanding balance of the Australia Term loanwas $1.3 million at February 29, 2020 and $1.8 million at February 28, 2019. As of February 29, 2020, theCompany’s Australian subsidiary was not in compliance with certain requirements related to its debtobligation. However, the financial institution has waived its right to any further action until the covenantis re-tested as of November 30, 2020.

25

During fiscal 2020, the Company’s North American subsidiary borrowed EUR $1.6 million ($1.8 million) ina note payable in connection with the purchase of an equity investment in Hijos de Francisco Gayafores,S.L. The Gayafores Note Payable bears no interest and matures January 2021. The note is discounted atthe imputed interest rate equal to Filo Loan LIBOR at the month the note was issued, equal to 5.75%. Theoutstanding balance of the Gayafores Note Payable, net of discount, was $1.7 million at February 29,2020.

12. CONTINGENCIES

The Company is subject to federal, state and local laws, regulations and ordinances regarding waterdischarges, hazardous and solid waste management, air quality, and other environmental matters(together, “Environmental Laws”). The Company also must obtain and comply with a wide variety ofenvironmental registrations, licenses, permits, inspections and other approvals in conducting itsoperations (together, “Approval Requirements”). Failure to comply with Environmental Laws or ApprovalRequirements may expose the Company to significant fines and penalties.

The Company’s management is not aware of any situation requiring remedial action by the Company that,because of liability under Environmental Laws or Approval Requirements, would have a material adverseeffect on the Company as a whole. The Company continually evaluates its operations to identify potentialenvironmental exposures and for its compliance with regulatory requirements, but can give no assurancethat it will not incur any material costs or liability in the future.

Premix-Marbletite Manufacturing Co. (“Premix”), a subsidiary of the Company, is a co-defendant in forty-nine (49) cases where the plaintiffs are seeking unspecified damages due to injuries allegedly sustainedas a result of exposure to products containing asbestos, which, in the case of Premix, were manufacturedin excess of thirty years ago. Imperial Industries Inc. (“Imperial”), Premix’s parent company, also is namedas a co-defendant in twenty-six (26) of these cases. Insurance carriers that provide umbrella/excesscoverage for these pending cases have, under a reservation of rights, appointed outside counsel torepresent and defend Premix and Imperial. These policies are not subject to a deductible or self-insuredretention. Premix and Imperial believe that, based on past settlements and outcomes of asbestos cases,there should be adequate insurance coverage for these pending cases.

The Company is otherwise involved in litigation from time to time in the ordinary course of its business.Based on information currently available to management, the Company does not believe that theoutcome of any legal proceeding in which the Company is involved will have a material adverse impact onthe Company.

The Company maintains deposits of cash from time to time in excess of federally insured limits withcertain financial institutions and, accordingly, the Company is subject to credit risk. The Companyevaluates the credit standing of financial institutions with which it maintains such balances.

13. EMPLOYEE BENEFIT PLANS

The Company and certain of its subsidiaries offer defined contribution benefit plans to employees. Theseplans provide for voluntary contributions by employees and matching contributions by the Company,subject to certain limitations. The Company made matching contributions totaling $0.2 million in each offiscal years 2020 and 2019.

The Company also offered a deferred compensation plan that provides certain management personnelwith an opportunity to defer receipt of a portion of their salary, bonus and other specified cashcompensation. The Company entered into a trust under the plan that is used to set aside the amounts of

26

deferred compensation and the earnings from the investment of such amounts. In December 2018, theCompany terminated the deferred compensation plan; balances owed to participants were paid in January2020. The trust assets and the Company’s liability under the plan as of February 29, 2020 had no balance,and as of February 28, 2019 were $1.8 million each.

14. INCOME TAXES

Income before provision for income taxes consisted of the following (in thousands) for the years ended:

The components of the provision for income taxes are as follows (in thousands) for the years ended:

Cash paid for income taxes in fiscal year 2020 and 2019 was $0.5 million and $0.9 million, respectively.

The following is a reconciliation of the statutory federal income tax rate to the effective rate reported inthe financial statements (in thousands):


2020 2019

United States (5,749)$ (715)$

Foreign (7,034) (3,255)

Income (loss) before provision for income taxes (12,783)$ (3,970)$


2020 2019

Current:

Federal -$ (152)$

State 50 54

Foreign 568 358

618 260

Deferred:

Federal (1,129) (157)

State (449) (16)

Foreign 319 (1,037)

(1,259) (1,210)

Provision for income taxes (641)$ (950)$

27

The tax effects of temporary differences which give rise to deferred tax assets / (liabilities) are as follows(in thousands):

The Company has gross net operating loss carry forwards principally from acquisitions of $58.6 millionthat will begin to expire in 2027. Realization of these loss carry forwards is subject to limitation as a resultof ownership changes. Accordingly, the Company has recorded a valuation allowance of $12.6 million asit is unlikely that these losses will be utilized due to the limitation. The Company has $1.1 million of losscarry forwards that will never expire. The Company also has US foreign tax credit carry forwards of $0.1million that begin to expire in 2026. The Company has established a full valuation allowance for theforeign tax credit carry forwards because it may not be able to claim a benefit for the credits in the future.

As of the end of fiscal year 2020, the Company established a valuation allowance of $2.7 million for thedeferred tax assets related to its operations in Canada. Management believes that it is more likely thannot the benefit of these deferred tax assets will not be realized due to the incurred and expected losses

Amount % Amount %

Provision for income taxes at the

federal statutory rate (2,684)$ 21.0% (834)$ 21.0%

State and local income taxes, net of

federal tax benefit (269) 2.1% 68 -1.7%

Foreign tax rate differential (511) 4.0% (234) 5.9%

Tax valuation allowance 2,666 -20.9% (14) 0.3%

Intangible assets amortization 178 -1.4% 179 -4.5%

Other (21) 0.2% (115) 2.9%

Actual provision for income taxes (641)$ 5.0% (950)$ 23.9%

February 29, 2020 February 28, 2019


2020 2019

Deferred Tax Assets:

Net operating losses and foreign tax

credit carry forwards 17,378$ 14,846$

Inventories 1,050 1,048

Intangible assets 1,196 379

Accrued expenses 1,572 1,265

Other 122 398

21,318 17,936

Less: valuation allowance on net operating

losses (15,577) (12,931)

Total deferred tax assets 5,741 5,005

Deferred Tax Liabilities:

Property and equipment (1,393) (1,397)

Prepaid expenses (145) (518)

Other (182) (12)

Total deferred tax liabilities (1,720) (1,927)

Net Deferred Tax Asset 4,021$ 3,078$

28

for its operations in Canada. The Company has $8.5 million of Canadian of gross net operating loss carryforwards that will begin to expire in 2026.

The Company has gross net operating loss carry forwards related to its operations in Australia of $1.6million that never expire.

A reconciliation of the beginning and ending balances of unrecognized tax benefits included in other long-term liabilities in the accompanying consolidated balance sheets are as follows (in thousands) for the yearsended:

The Company is subject to income taxes in US federal and state jurisdictions, and in various foreignjurisdictions. Tax regulations within each jurisdiction are subject to interpretation of the related tax lawsand regulations and require significant judgment to apply. The Company is not subject to US federalincome tax examinations by tax authorities for the years before 2017.

15. SIGNIFICANT CUSTOMER AND VENDOR INFORMATION

The Company’s customer base includes a concentration of home improvement retailers in each of itsprimary markets. One such customer accounted for approximately 33% and 34% of net sales in fiscal years2020 and 2019, respectively, and approximately 33% and 29% of accounts receivable at February 29, 2020and February 28, 2019, respectively.

The Company has multiple sources of supply for nearly all raw materials and finished products purchasedfrom suppliers, and is not dependent on a single supplier for more than 10% of such purchases. Certainraw materials representing less than 10% of purchases are available only from a single supplier or a limitednumber of suppliers. The inability to obtain components and products as required, or to developalternative sources, if and as required in the future, could result in delays or reductions in productshipments, which in turn could have an adverse effect on the Company’s business, financial condition,and results of operations.

16. SHAREHOLDERS’ EQUITY

Preferred Stock

Series A

500,000 of the Company’s 2,500,000 authorized shares of preferred stock, $1 par value per share, aredesignated as Series A Preferred Stock. The holder of each share of Series A Preferred Stock is entitled toreceive, before any dividends on the Company’s common stock, cumulative dividends equal to the primeinterest rate less 1-1/4%, payable in semiannual installments.

The Company may redeem any or all of the shares of Series A Preferred Stock at a price per share of $1.00plus an amount equal to any accrued but unpaid dividends. The Series A Preferred Stock has no voting


2020 2019

Unrecognized tax benefits, beginning of year 470$ 525$

Additions based on tax position related to current year 11 -

Reductions for tax positions of prior years (82) (55)

Unrecognized tax benefits, end of year 399$ 470$

29

rights, but does have a liquidation preference equal to $1.00 plus accrued and unpaid dividends. AtFebruary 29, 2020 and February 28, 2019 there were no outstanding shares of Series A Preferred Stock.

Series B

1,000,000 of the Company’s 2,500,000 authorized shares of preferred stock, $1 par value per share, aredesignated as Series B Preferred Stock. The holder of each share of Series B Preferred Stock is entitled toreceive a non-cumulative dividend at the rate of $0.05 per share per annum, payable annually, before anydividend on the common stock. The Company may redeem any or all of the shares of Series B PreferredStock at a price per share of $1.00. The Series B Preferred Stock has no voting rights. At February 29,2020 and February 28, 2019 there were no outstanding shares of Series B preferred stock.

Series C

1,000,000 of the Company’s 2,500,000 authorized shares of preferred stock, $1 par value per share, aredesignated as Series C Preferred Stock. The holder of each share of Series C Preferred Stock is entitled toreceive, before any dividends on the Company’s common stock, cumulative dividends at the rate of$0.035 per share per annum, payable in annual installments. The Series C Preferred Stock has no votingrights, but does have a liquidation preference equal to $1.00 plus accrued and unpaid dividends. AtFebruary 28, 2017 there were 17,500 shares of Series C Preferred Stock issued and outstanding. In July2017, the Company redeemed all of the outstanding shares of Series C Preferred Stock at a price per shareof $1.00. February 29, 2020 and February 28, 2019 there were no outstanding shares of Series C preferredstock.

Treasury Stock

The Company has purchased from time to time shares of its common stock to be held in treasury. As ofFebruary 29, 2020 the number of shares held in treasury was 688,490 at an aggregate cost of $8.9 million.In fiscal year 2020, the Company purchased 9,839 shares of common stock at an aggregate cost of $0.2million. In fiscal year 2019, the Company purchased 40,300 shares of common stock at an aggregate costof $1.1 million. The Company has entered into a formal purchase plan pursuant to which the Companymay currently purchase up to $0.5 million per year of additional shares of common stock on the openmarket or in privately negotiated transactions.

17. STOCK PLANS

The Company has removed from registration all of the previously registered shares of common stockunder a previously adopted stock plan and, therefore, is no longer issuing stock options under the stockplan.

At February 29, 2020 and February 28, 2019 there were no options outstanding.

In fiscal year 2020, the Board of Directors approved the granting of 5,857 shares of common stock to theCompany’s Chief Executive Officer in lieu of a cash payment for the fiscal year 2019 executive bonus owedto the Chief Executive Officer. The value of the stock award was $0.1M representing such shares at $21.13per share, the closing market price of the Company’s common stock on the date of grant.

In January 2019, the Company granted 2,500 fully vested shares of restricted common stock to its non-employee directors, fully vested on the same month. The fair value of the shares was $25.00 per shareat the date of grant. In December 2013, the Company granted 15,000 shares of restricted common stockto its non-employee directors. The fair value of the shares was $19.50 per share at the date of grant. Theterms of the grant include provisions for equal vesting over a five year period that commenced in

30

December 2014. Until vested, the restricted shares cannot be transferred and have no rights to vote orreceive dividends. There was no unamortized compensation expense at February 29, 2020 and at February28, 2019.

18. RELATED PARTY TRANSACTIONS

During fiscal years 2020 and 2019, the Company employed certain individuals who are related to theCompany’s Chief Executive Officer or President. These individuals were paid a total $0.3 million in each offiscal years 2020 and 2019. Pursuant to a Board resolution the Company may repurchase up to $120,000per annum of shares of its outstanding common stock from one of these individuals at a price per shareequal to the closing price of the common stock on the date of repurchase. Pursuant to this resolution,the Company repurchased 8,000 shares in fiscal 2020 and 40,300 shares in fiscal 2019, at a cost of $0.1million and $1.1 million, respectively.

19. SUBSEQUENT EVENTS

In preparing the accompanying consolidated financial statements, the Company evaluated the period

through July 10, 2020, the date the financial statements were available to be issued, for material

subsequent events requiring recognition or disclosure.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19)

as a pandemic, which continues to spread throughout North America and other regions of the world in

which the Company operates. As a result, the Company experienced a decline in sales volume. While the

disruption caused by COVID-19 is currently expected to be temporary, its duration remains uncertain.

Therefore, while the Company expects the COVID-19 pandemic to negatively impact its business, results

of operations, financial position, and could lead to further asset impairment, the related financial impact

cannot be reasonably estimated at this time.

On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed. The

CARES Act provides certain tax relief to individuals as well as employers including certain changes to tax

policy. The financial statements do not currently contemplate changes that might occur as a result of the

CARES Act.

On June 26, 2020, the Company and the lenders entered into a Forbearance Agreement that amendedcertain conditions within the loan agreement to establish future covenant targets and allowed theCompany’s Canadian subsidiary to file a plan of compromise or arrangement with the Ontario SuperiorCourt of Justice under the Companies’ Creditors Arrangement Act. The Forbearance Agreement limits theCompany’s investment in capital expenditures, modifies the Company’s reporting frequency andrequirements to the lender and provides for additional liquidity for the Company through resetting certainFILO loans. Other terms and conditions of the loan agreement remain substantially unchanged.

On June 26, 2020, the Company entered into a convertible subordinated promissory note with theCompany’s Chief Executive Officer. The note provided the Company with $1.5 million of additionalliquidity, has a maturity date of January 24, 2024, and is subordinate to the Company’s domestic financialinstitution. Interest on the note is due and payable-in-kind quarterly in arrears at an annual interest rateof 12.5%.

On June 29, 2020, the Ontario Superior Court of Justice (Commercial List) issued an initial order (the “Initial

Order”) granting the Company’s Canadian operating subsidiary protection under the Companies’

Creditors Arrangement Act (CCAA). The Initial Order stayed all proceedings against the Canada subsidiary

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until July 8, 2020, which was subsequently extended by the Court in its final order on July 9, 2020 (the

“Final Order”) to August 31, 2020. The primary purpose of the CCAA proceeding is to implement an

operational restructuring of the Canada subsidiary’s business. The CCAA filing was necessitated by the

Canada subsidiary’s lack of liquidity, which was further exacerbated by the negative impact of the COVID-

19 pandemic. The Canada subsidiary is continuing to operate in the ordinary course of business pursuant

to the provisions of the Final Order and expects to exit CCAA protection in the third quarter of calendar

2020.

q.e.p. co., inc. and subsidiaries · 2020. 7. 13. · flooring and flooring installation solutions....

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