Notes
to Consolidated Financial Statements
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Description
of Business
Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides
industrial products to the U.S. market through nineteen locations in thirteen states throughout the United States. In December
2020, the Company completed the sale of Southern Wire (“Southern”) to Southern Rigging Companies, LLC (“Southern
Rigging”) for $17.5 million, net of the final working capital adjustment, and was negotiating an agreement for the sale of
substantially all of the assets of Southwest Wire Rope (“Southwest”) to Southern Rigging. Accordingly, Southwest is
classified as held for sale as of December 31, 2020. (See Note 13) The Company has no other business activity.
Basis
of Presentation and Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following accounting
principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission
(“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation
of the Company’s financial position and operating results. All significant inter-company balances and transactions have
been eliminated.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to
the allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization
of deferred tax assets and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from
the estimates and assumptions used for the preparation of the financial statements.
Accounts
Receivable
Accounts receivable consists primarily
of receivables from customers, less an allowance for doubtful accounts of $0.3 million at December 31, 2020 and $0.2 million at
December 31, 2019. Consistent with industry practices, the Company requires payment frommost customers within 30-60 days of the
invoice date. The Company has an estimation procedure, based on historical data and recent changes in the aging of its receivables,
that it uses to record an allowance. The Company reviews delinquent accounts, typically over 90 days, and writes-off balances,
as appropriate, after collection efforts have been exhausted. The Company has no contractual repurchase arrangements with its
customers. Credit losses have been within management’s expectations.
Inventories
Inventories
are carried at the lower of cost, using the average cost method, and net realizable value and consist primarily of goods purchased
for resale, less a reserve for obsolescence and unusable items and unamortized vendor rebates. The reserve for inventory is based
upon a number of factors, including the experience of the purchasing and sales departments, age of the inventory, new product
offerings, and other factors. The reserve for inventory may periodically require adjustment as the factors identified above change.
Vendor
Rebates
Under
many of the Company’s arrangements with its vendors, the Company receives a rebate of a specified amount of consideration,
payable when the Company achieves any of a number of measures, generally related to the volume level of purchases from the vendors.
The Company accounts for such rebates as a reduction of the prices of the vendors’ products and therefore as a reduction
of inventory until it sells the products, at which time such rebates reduce cost of sales in the accompanying consolidated statements
of operations. Throughout the year, the Company estimates the amount of the rebates earned based on purchases to date relative
to the total purchase levels expected to be achieved during the rebate period. At year end, the Company recalculates the rebates
earned based on actual purchases made.
Property
and Equipment
The
Company provides for depreciation on a straight-line method over the following estimated useful lives:
Buildings
|
|
25 to 30 years
|
Machinery and equipment
|
|
3 to 10 years
|
Leasehold
improvements are depreciated over their estimated life or the term of the lease, whichever is shorter.
Total
depreciation expense was approximately $1.7 million for the years ended December 31, 2020 and 2019, and $1.4 million for the year
ended December 31, 2018.
Goodwill
Goodwill
represents the excess of the amount paid to acquire businesses over the estimated fair value of tangible assets and identifiable
intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed
requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions
with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2020, the goodwill balance
was $9.8 million, representing 6.3% of the Company’s total assets.
The
Company conducts impairment testing for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an
interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined
below its carrying value. Events or circumstances which could indicate a probable impairment include, but are not limited to,
financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results
of goodwill impairment testing and the timing of the last performance of a quantitative assessment.
The Company tests goodwill at the reporting unit level, which is defined as an operating segment or one
level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed
by management. The Company determined that, in 2020, it had four reporting units for this purpose. At December 31, 2020, the Company
only had three reporting units due to the sale of Southern. Before testing goodwill, the Company considers whether or not to first
assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not
that the fair value of a reporting unit is less than its carrying amount and whether an impairment test is required. If as a result
of the qualitative assessment, the Company determines that an impairment test is required, or alternatively, if the Company elects
to forego the qualitative assessment, the Company performs a quantitative assessment and records an impairment to goodwill to the
extent the carrying amount of the reporting unit, including goodwill, exceeds the fair value of the reporting unit. See Note 4
for more details.
Intangibles
Intangible
assets, consist of customer relationships and tradenames from the acquisition of Southwest and Southern in 2010 and the acquisition
of Vertex in 2016, as well as internal-use software acquired in 2020. The Southern intangible assets were written off at December
31, 2020 in connection with the sale. The customer relationships and internal-use software are amortized over 9 and 3 year useful
lives, respectively. If events or circumstances were to indicate that any of the Company’s definite-lived intangible assets
might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated
from the applicable intangible asset. If the undiscounted cash flows were less than the carrying value, then the intangible assets
would be written down to their fair value. Tradenames have an indefinite life and are not being amortized and are tested for impairment
on an annual basis. See Note 4 for more details.
Leases
At
the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The assessment is based on (1)
whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially
all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct
the use of the asset. All significant lease arrangements are recognized at lease commencement. Leases with a lease term of 12
months or less at inception are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over
the lease term in the Consolidated Statements of Operations. The Company determines the lease term by assuming the exercise of
renewal options that are reasonably certain. As most of the leases do not provide an implicit interest rate, the Company uses
the incremental borrowing rate which approximates to a collateralized rate at the commencement date to determine the present value
of future payments that are reasonably certain. See Note 7 for more details.
Self
Insurance
The
Company retains certain self-insurance risks for health benefits. The Company limits its exposure to these self-insurance risks
by maintaining excess and aggregate liability coverage. Self-insurance reserves are established based on claims filed and estimates
of claims incurred but not reported. The estimates are based on information provided to the Company by its claims administrators.
Segment
Reporting
The
Company operates in a single operating and reportable segment, sales of industrial products, including electrical and mechanical
wire and cable, industrial fasteners, hardware and related services to the U.S. market. The Company’s chief operating decision
maker (“CODM”) is its Chief Executive Officer. The CODM makes operational and resource decisions based on company-wide
sales and margin performance compared to the established strategic goals of the Company.
Revenue
Recognition, Returns & Allowances
The
Company’s primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers.
Revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product.
Control is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer
pickup or through common carrier). It is not normal Company practice to grant extended payment terms. Revenue is recognized net
of any sales taxes collected, which are subsequently remitted to the appropriate taxing authorities. The Company treats its transportation
costs (shipping and handling) as fulfillment costs and not as a separate performance obligation. These transportation costs are
recorded in cost of sales.
The
amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for products
sold. Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product returns,
trade discounts and allowances. The Company accrues for variable consideration using the expected value method. Estimates of variable
consideration are included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur.
Customers are permitted to return product
only on a case-by-case basis. Product exchanges are handled as a credit, with any replacement item being re-invoiced to the customer.
Customer returns are recorded as a refund liability, included in accrued and other liabilities, with a corresponding reduction
to sales. The Company estimates the gross profit impact of returns and allowances for previously recorded sales. This liability
is calculated on historical and statistical returns and allowances data and adjusted as trends in the variables change. The Company
has no installation obligations.
The
Company may offer sales incentives, which are accrued monthly as an adjustment to sales.
Shipping
and Handling
The
Company incurs shipping and handling costs in the normal course of business. Freight amounts invoiced to customers are included
as sales, and freight charges are included as a component of cost of sales.
Credit
Risk
No
single customer accounted for 10% or more of the Company’s sales in 2020, 2019 or 2018. The Company performs periodic credit
evaluations of its customers and generally does not require collateral.
Financial
Instruments
The
carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value,
due to the short maturity of these instruments.
Stock-Based
Compensation
Restricted
stock awards, units and cash awards are valued at the closing price of the Company’s stock on the grant date and are granted
under the Company’s 2017 Stock Plan. Stock options issued under the Company’s now-expired 2006 Stock Plan have an
exercise price equal to the fair value of the Company’s stock on the grant date. The Company recognizes compensation expense
ratably over the vesting period. The Company’s stock-based compensation expense is included in salaries and commissions
expense for employees and in other operating expenses for non-employee directors in the accompanying Consolidated Statements of
Operations.
The
Company receives a tax deduction for certain stock option exercises in the period in which the options are exercised, generally
for the excess of the market price on the date of exercise over the exercise price of the options. The Company reports excess
tax benefits from the award of equity instruments as operating cash flows. Excess tax benefits result when a deduction reported
for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized
for financial reporting purposes.
Income
Taxes
Deferred
tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A valuation allowance for deferred tax assets is recognized when it
is more-likely-than-not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood,
the Company uses its current financial position, results of operations, both actual and forecasted, the reversal of deferred tax
liabilities, and tax planning strategies to determine whether a valuation allowance is required.
Recently
Adopted Accounting Standards
The
Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole
source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an
Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability
and impact of all ASUs. The following are those recent ASUs that were recently adopted by the Company.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement.” The amendments in this update eliminate, add and modify certain disclosure requirements
for fair value measurements as part of the FASB’s disclosure framework project. The Company adopted this ASU in the first
quarter of 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40); Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments
in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements)
to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable
term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer
or for which the exercise is controlled by the service provider. The Company adopted this ASU in the first quarter of 2020, and
the adoption did not have a material impact on the Company’s consolidated financial statements.
Recent
Accounting Pronouncements
In
November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses.”
This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries. This ASU permits
organizations to record expected recoveries on assets purchased with credit deterioration. In addition to other narrow technical
improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale
debt securities. The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB deferred the effective dates
of this ASU for smaller reporting companies (“SRC”) to fiscal years beginning after December 15, 2022. As of December
31, 2020, the Company qualifies as a SRC and expects to adopt this ASU in the first quarter of 2023.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes.” This ASU removes specific exceptions to the general principles in Topic 740 in GAAP.
It eliminates the need for an organization to analyze whether certain exceptions apply in a given period. This ASU also
improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: a) Franchise
taxes that are partially based on income; b) Transactions with a government that result in a step up in the tax basis of goodwill;
c) Separate financial statements of legal entities that are not subject to tax; and d) Enacted changes in tax laws in interim
periods. For public business entities, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and
interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated
financial statements.
In
March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.” The amendments in the ASU provide optional guidance for a limited time to ease the potential
burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S.
GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.
The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate ("LIBOR")
or another reference rate expected to be discontinued due to reference rate reform. The provisions of the new guidance were effective
upon issuance and generally can be applied through December 31, 2022 with the option to apply the guidance at any point during
that time period. The Company currently has a debt agreement that references LIBOR and will apply the new guidance as this agreement
is modified to reference other rates.
2. Earnings
(loss) per Share
Basic
earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding.
Diluted earnings (loss) per share include the dilutive effects of options and unvested restricted stock awards and units.
The
following reconciles the denominator used in the calculation of diluted earnings (loss) per share:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
16,504,141
|
|
|
|
16,433,644
|
|
|
|
16,389,876
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
119,222
|
|
|
|
133,723
|
|
Denominator for diluted earnings per share
|
|
|
16,504,141
|
|
|
|
16,552,866
|
|
|
|
16,523,599
|
|
Stock
awards to purchase 843,336, 369,325 and 298,406 shares of common stock were not included in the diluted net income (loss) per
share calculation for 2020, 2019 and 2018, respectively, as their inclusion would have been anti-dilutive. For the first quarter
of 2018, the Company calculated earnings per share using the “two-class” method, whereby unvested share-based payment
awards that contained non-forfeitable rights to dividends or dividend equivalents were considered “participating securities”,
and therefore, these participating securities were treated as a separate class in computing earnings per share.
|
3.
|
Detail
of Selected Balance Sheet Accounts
|
Accounts Receivable
The following table summarizes the changes in the allowance for doubtful accounts for the past three years:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
211
|
|
|
$
|
182
|
|
|
$
|
172
|
|
Bad debt expense
|
|
|
201
|
|
|
|
119
|
|
|
|
73
|
|
Write-offs, net of recoveries
|
|
|
(113
|
)
|
|
|
(90
|
)
|
|
|
(63
|
)
|
Current year divestiture
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance at end of year
|
|
$
|
296
|
|
|
$
|
211
|
|
|
$
|
182
|
|
Inventories
The following table
summarizes the changes in the inventory reserves for the past three years:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
3,584
|
|
|
$
|
3,709
|
|
|
$
|
3,925
|
|
Provision for inventory write-downs
|
|
|
1,033
|
|
|
|
515
|
|
|
|
615
|
|
Deduction for inventory write-offs
|
|
|
(1,146
|
)
|
|
|
(640
|
)
|
|
|
(831
|
)
|
Current year divestiture/HFS classification
|
|
|
(328
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance at end of year
|
|
$
|
3,143
|
|
|
$
|
3,584
|
|
|
$
|
3,709
|
|
Property
and Equipment, net
Property
and equipment are stated at cost and consist of:
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
617
|
|
|
$
|
2,476
|
|
Buildings
|
|
|
3,168
|
|
|
|
8,712
|
|
Machinery and equipment (1)
|
|
|
17,203
|
|
|
|
19,199
|
|
|
|
|
20,988
|
|
|
|
30,387
|
|
Less accumulated depreciation
|
|
|
(13,530
|
)
|
|
|
(15,798
|
)
|
Total
|
|
$
|
7,458
|
|
|
$
|
14,589
|
|
|
(1)
|
This
includes finance leases. See Note 7 for more details.
|
Intangible
assets
Intangible assets consist of:
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Tradenames
|
|
$
|
2,081
|
|
|
$
|
5,816
|
|
Customer relationships
|
|
|
6,990
|
|
|
|
18,620
|
|
Internal-use software
|
|
|
1,774
|
|
|
|
—
|
|
|
|
|
10,845
|
|
|
|
24,436
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
—
|
|
|
|
—
|
|
Customer relationships
|
|
|
(3,301
|
)
|
|
|
(14,154
|
)
|
Internal-use software
|
|
|
(154
|
)
|
|
|
—
|
|
|
|
|
(3,455
|
)
|
|
|
(14,154
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,390
|
|
|
$
|
10,282
|
|
As
of December 31, 2020, accumulated amortization on the remaining acquired/purchased intangible assets was $3.4 million, and amortization
expense was $0.9 million in the year ended December 31, 2020 and $0.8 million in the years ended December 31, 2019 and 2018. Future
amortization expense to be recognized on the remaining acquired/purchased intangible assets is expected to be as follows:
|
|
Annual
Amortization
Expense
|
|
|
|
(In thousands)
|
|
2021
|
|
$
|
1,368
|
|
2022
|
|
|
1,368
|
|
2023
|
|
|
1,213
|
|
2024
|
|
|
777
|
|
2025
|
|
|
583
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
22,353
|
|
|
$
|
22,353
|
|
Less current year divestiture
|
|
|
(12,504
|
)
|
|
|
—
|
|
Balance at end of year (1)
|
|
$
|
9,849
|
|
|
$
|
22,353
|
|
(1)
|
|
The balance
is net of $12.6 million of accumulated impairment losses, of which
none were recorded in 2020 or 2019.
|
Accrued
and Other Current Liabilities
|
|
|
|
|
|
|
|
Accrued and other current liabilities consist of:
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Customer rebates
|
|
$
|
3,833
|
|
|
$
|
4,979
|
|
Payroll, commissions, and bonuses
|
|
|
2,272
|
|
|
|
1,930
|
|
Accrued inventory purchases
|
|
|
997
|
|
|
|
11,122
|
|
Property taxes
|
|
|
1,078
|
|
|
|
977
|
|
Freight
|
|
|
346
|
|
|
|
464
|
|
Refund liability
|
|
|
1,765
|
|
|
|
1,182
|
|
Prepayments on customer orders (1)
|
|
|
743
|
|
|
|
2
|
|
Professional fees
|
|
|
446
|
|
|
|
399
|
|
Accrued interest
|
|
|
84
|
|
|
|
248
|
|
Lease obligations
|
|
|
854
|
|
|
|
593
|
|
Other
|
|
|
1,129
|
|
|
|
1,365
|
|
Total
|
|
$
|
13,547
|
|
|
$
|
23,261
|
|
|
(1)
|
This amount represents prepayments by customers for inventory. As the customer requests their inventory, the Company ships the material,
reduce the prepayment and recognize the revenue.
|
|
4.
|
Impairment
of Goodwill and Intangible Assets
|
The
Company tests goodwill and indefinite lived intangibles for impairment at least annually or more frequently whenever events or
circumstances occur indicating that it might be impaired. During the first and second quarter of 2020, the Company’s market
capitalization declined significantly, driven by macroeconomic and geopolitical conditions due in large part to the COVID-19 outbreak,
which has contributed to a decline in demand for the Company’s products, a decline in overall financial performance, partially
due to the decline in oil prices, and a deterioration of industry and market conditions. Based on these events, the Company concluded
that it was more-likely-than-not that the fair values of certain of its reporting units were less than their carrying values.
Therefore, the Company performed interim goodwill impairment tests in both the first and second quarter.
Goodwill impairment
is evaluated at each reporting unit that has goodwill; the Southern and Vertex reporting units as of December 31, 2019 and the
Vertex reporting unit as of December 31, 2020. At December 31, 2019, the Company determined that the fair values of these two
reporting units, as well as certain of the Company’s indefinite lived intangibles, exceeded their respective carrying values.
The goodwill balance of Vertex at December 31, 2020 was $9.8 million, and due to its negative carrying value, no goodwill impairment
was recorded.
During June 2020,
the Company determined the fair value of its Vertex reporting unit’s tradenames was below its carrying value, and as a result
recorded an impairment charge of $0.1 million. The Company also determined the fair value of its Southwest reporting unit’s
tradenames was below its carrying value, and as a result, recorded an impairment charge of $0.1 million in June 2020 and $0.2 million
in March 2020.
As
part of the divestiture of the Southern reporting unit, the Company wrote-off its $12.5 million
goodwill balance and as part of the HFS classification of the Southwest reporting unit, wrote-off its $1.0
million tradenames balance at December 31, 2020.
A
qualitative assessment was performed as of October 1, 2019 for the Southern, Southwest and Vertex reporting units. The results
of the test indicated that it was more-likely-than-not that the fair value of the reporting units exceeded their respective carrying
values except for certain of the tradenames of the Southwest reporting unit for which a quantitative test was necessary and an
impairment charge of $0.1 million was recorded for 2019.
The
Company is still anticipating growth in the business acquired in Vertex reporting unit. If this projected growth is not achieved
and or there are future reductions in our market capitalization or market multiples, further goodwill and intangible assets impairments
may result.
On
March 12, 2019 and December 10, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex, as borrowers, and
Bank of America, N.A., as agent and lender, entered into the Second and Third Amendments, respectively, to the Fourth Amended
and Restated Loan and Security Agreement (such agreement, as so amended, the “Loan Agreement”). The Second
Amendment extended the expiration date until March 12, 2024 and the Third Amendment increased the revolving credit facility
to $115 million
. Under certain circumstances, the Company may request an increase in the commitment by an additional $50
million.
Portions
of the loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans
bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, and loans not
converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal
funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. The unused commitment fee is 25 basis points.
Availability
under the Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser
of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory,
in each case less certain reserves. The Loan Agreement is secured by substantially all of the property of the Company, other than
real estate.
The
Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge coverage
ratio, unless certain availability levels exist. Additionally, the Loan Agreement allows for the unlimited payment of dividends
and repurchases of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and minimum
level of availability. The Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability,
in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the Loan
Agreement remains March 12, 2024. At December 31, 2020, the Company was in compliance with the availability-based covenant governing
its indebtedness.
The
Company’s borrowings at December 31, 2020 and 2019 were $28.8
million and $83.5 million,
respectively. The weighted average interest rates on outstanding borrowings were 1.9%
and 3.4% at December 31,
2020 and 2019, respectively.
At
December 31, 2020, the Company had available borrowing capacity of $47.5
million under the terms of the Loan Agreement. The Company paid $0.1 million
for each of the years ended December 31, 2020, 2019, and 2018 for the unused facility.
The
carrying amount of long term debt approximates fair value as it bears interest at variable rates. The fair value is a Level 2
measurement as defined in ASC Topic 820, “Fair Value Measurement.”
On
May 4, 2020, the Company received a $6.2 million
Paycheck Protection Program (“PPP”) loan from Bank of America (“Lender”), funded under the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), pursuant to a Promissory Note issued by the
Company to Lender. The Company used the funds to pay its payroll related expenses as well as rent expenses, as allowed by the
terms of the loan. The Company has applied for loan forgiveness and expects to achieve 90-95% forgiveness. The forgiveness
amount will be equal to the amount that the Company used for the approved expenses: a minimum of 60% on payroll related
expenses and up to 40% on non-payroll expenses. Any amount of the loan that is not forgiven will be due two years from the
funding date of May 4, 2020 to repay the balance of the PPP loan. No principal or interest payments will be due prior to the
end of the six-month deferment period and the interest rate on the balance of the loan will not exceed 1.0% per
annum.
Principal
repayment obligations for succeeding fiscal years are as follows:
|
|
|
(In thousands)
|
|
2021
|
|
|
$
|
—
|
|
2022 (1)
|
|
|
|
6,185
|
|
2023
|
|
|
|
—
|
|
2024
|
|
|
|
22,580
|
|
Total
|
|
|
$
|
28,765
|
|
|
(1)
|
The Company has applied for loan forgiveness and believes that it will achieve 90-95% forgiveness, or approximately $5.6-$5.9
million.
|
The
provision (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,814
|
|
|
$
|
719
|
|
|
$
|
3,041
|
|
State
|
|
|
346
|
|
|
|
125
|
|
|
|
658
|
|
Total current
|
|
|
2,160
|
|
|
|
844
|
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,592
|
)
|
|
|
400
|
|
|
|
(1,246
|
)
|
State
|
|
|
(204
|
)
|
|
|
31
|
|
|
|
(98
|
)
|
Total deferred
|
|
|
(2,796
|
)
|
|
|
431
|
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(636
|
)
|
|
$
|
1,275
|
|
|
$
|
2,355
|
|
A
reconciliation of the U.S. Federal statutory tax rate to the effective tax rate on income before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State taxes, net of federal benefit
|
|
|
(1.1
|
)
|
|
|
3.4
|
|
|
|
4.3
|
|
Impairment, non-deductible portion
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
Share-based compensation
|
|
|
(1.5
|
)
|
|
|
3.7
|
|
|
|
1.2
|
|
Non-deductible items
|
|
|
(0.3
|
)
|
|
|
5.4
|
|
|
|
2.1
|
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
(9.5
|
)
|
Current year divestiture
|
|
|
(13.9
|
)
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
0.6
|
|
|
|
(0.2
|
)
|
|
|
2.2
|
|
Total effective tax rate
|
|
|
4.8
|
%
|
|
|
33.3
|
%
|
|
|
21.4
|
%
|
Significant
components of the Company’s deferred taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
3,203
|
|
|
$
|
3,425
|
|
Inventory reserve
|
|
|
856
|
|
|
|
1,072
|
|
Uniform capitalization adjustment
|
|
|
1,523
|
|
|
|
1,633
|
|
Stock compensation expense
|
|
|
501
|
|
|
|
666
|
|
Accrued commission
|
|
|
144
|
|
|
|
124
|
|
Held for sale
|
|
|
1,577
|
|
|
|
—
|
|
Property and equipment, net
|
|
|
233
|
|
|
|
—
|
|
Refund liability
|
|
|
406
|
|
|
|
—
|
|
Other
|
|
|
224
|
|
|
|
199
|
|
Total deferred tax assets
|
|
|
8,667
|
|
|
|
7,119
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
|
(3,075
|
)
|
|
|
(3,316
|
)
|
Goodwill
|
|
|
(232
|
)
|
|
|
(838
|
)
|
Intangible assets
|
|
|
(1,555
|
)
|
|
|
(2,230
|
)
|
Other
|
|
|
(409
|
)
|
|
|
(135
|
)
|
Total deferred tax liabilities
|
|
|
(5,271
|
)
|
|
|
(6,519
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
3,396
|
|
|
$
|
600
|
|
The
Company does not have any unrecognized tax benefits recorded at December 2020, 2019 and 2018. The Company recognizes interest
on any tax issue as a component of interest expense and any related penalties in other operating expenses. As of December 31,
2020 and 2019, the Company recorded no provision for interest or penalties related to uncertain tax positions. The tax years 2016
through 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Effective
January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and the series of related ASUs that followed
(collectively referred to as “Topic 842”). The most significant changes under the new guidance include clarification
of the definition of a lease, and the requirements for lessees to recognize a right-of-use (ROU) asset and a lease liability for
all qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional
disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty
of cash flows arising from leases.
The
Company elected the practical expedient available under ASU 2018-11 “Leases: Targeted Improvements,” which allows
the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative
period presented in the Company’s financial statements. Therefore, the Company recognized and measured leases existing at
January 1, 2019 but without retrospective application. The Company also elected all other available practical expedients except
the hindsight practical expedient.
In
electing the practical expedients, the Company utilized the transition practical expedient package whereby the Company did not
reassess (i) whether any of the Company’s expired or existing contracts contain a lease, (ii) the classification for any
expired or existing leases and (iii) initial direct costs for any existing leases.
The
impact of Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 was the recognition of ROU assets
and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially
unchanged. The Company’s finance leases were immaterial prior to the adoption of Topic 842, and no change was made to
the classification of these leases. As a result of the adoption of Topic 842, beginning retained earnings was impacted by
$0.1 million
and there was no impact to the consolidated statement of operations.
The
Company leases property including warehouse space, offices, vehicles and equipment. The Company determines if an arrangement is
a lease at inception. As part of the transition to the new standard, the Company reviewed agreements with suppliers, vendors,
customers, and other outside parties to determine if any agreements met the definition of an embedded lease. This is based on
the nature of the contracts reviewed, and various factors, including identified assets included in the agreement to which the
Company has exclusive rights of control as described by Topic 842. The Company concluded that these are not material agreements
with parties that would constitute an embedded lease. For purposes of calculating operating lease liabilities, lease terms may
be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that
option.
Beginning
January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease
payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the
present value of the remaining lease payments over the remaining lease term as of January 1, 2019. The Company is required to
determine a discount rate in order to calculate the present value of lease payments. If the rate is not included in the lease
or cannot be readily determined, the Company uses its incremental secured borrowing rate based on lease term information
available at the commencement date of the lease in determining the present value of lease payments. The Company recognizes
lease components and non-lease components together and not as separate parts of a lease for all leases. The
Company will exercise this practical expedient in the future by asset class.
Lease Type
|
|
Statement of Operations Classification
|
|
2020
|
|
|
2019
|
|
|
|
|
|
(In thousands)
|
|
Consolidated operating lease expense
|
|
Operating expenses
|
|
$
|
3,570
|
|
|
$
|
5,887
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated financing lease amortization
|
|
Depreciation and amortization
|
|
|
835
|
|
|
|
305
|
|
Consolidated financing lease interest
|
|
Interest expense
|
|
|
141
|
|
|
|
61
|
|
Consolidating financing lease expense
|
|
|
|
|
976
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease cost
|
|
|
|
$
|
4,546
|
|
|
$
|
6,253
|
|
Rent expense was approximately $3.7 million
in 2018.
The
value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of December 31, 2020 and
December 31, 2019 were as follows:
Lease Type
|
|
Balance Sheet Classification
|
|
2020
|
|
|
2019
|
|
|
|
|
|
(In thousands)
|
|
Total ROU operating lease assets (1)
|
|
Operating lease right-of-use assets, net
|
|
$
|
10,879
|
|
|
$
|
13,481
|
|
Total ROU financing lease assets (2)
|
|
Property and equipment, net
|
|
|
2,793
|
|
|
|
2,430
|
|
Total lease assets
|
|
|
|
$
|
13,672
|
|
|
$
|
15,911
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current operating lease obligation
|
|
Operating lease liabilities
|
|
$
|
2,699
|
|
|
$
|
2,742
|
|
Total current financing lease obligation
|
|
Accrued and other current liabilities
|
|
|
856
|
|
|
|
593
|
|
Total current lease obligation
|
|
|
|
$
|
3,555
|
|
|
$
|
3,335
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term operating lease obligation
|
|
Operating lease long term liabilities
|
|
$
|
8,736
|
|
|
$
|
11,182
|
|
Total long term financing lease obligation
|
|
Other long term liabilities
|
|
|
1,958
|
|
|
|
1,860
|
|
Total long term lease obligation
|
|
|
|
$
|
10,694
|
|
|
$
|
13,042
|
|
(1)
|
|
Operating lease assets are recorded net of accumulated amortization of $4.3
million and $2.3
million as of December 31, 2020 and 2019, respectively.
|
(2)
|
|
Financing lease assets are recorded net of accumulated amortization of $1.2
million and $0.4
million as of December 31, 2020 and 2019, respectively.
|
The
future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of December 31, 2020 were
as follows:
|
|
|
|
|
|
|
|
|
|
Maturity Date of Lease Liabilities
|
|
Operating Leases
|
|
|
Financing Leases
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Year one
|
|
$
|
3,222
|
|
|
$
|
968
|
|
|
$
|
4,190
|
|
Year two
|
|
|
3,186
|
|
|
|
887
|
|
|
|
4,073
|
|
Year three
|
|
|
2,654
|
|
|
|
753
|
|
|
|
3,407
|
|
Year four
|
|
|
2,330
|
|
|
|
406
|
|
|
|
2,736
|
|
Year five
|
|
|
1,076
|
|
|
|
31
|
|
|
|
1,107
|
|
Subsequent years
|
|
|
266
|
|
|
|
—
|
|
|
|
266
|
|
Total lease payments
|
|
|
12,734
|
|
|
|
3,045
|
|
|
|
15,779
|
|
Less: Interest
|
|
|
(1,299
|
)
|
|
|
(231
|
)
|
|
|
(1,530
|
)
|
Present value of lease liabilities
|
|
$
|
11,435
|
|
|
$
|
2,814
|
|
|
$
|
14,249
|
|
The
weighted average remaining lease terms and discount rates of the leases held by the Company as of December 31, 2020 and 2019
were as follows:
Lease Type
|
|
Weighted Average
Term in Years
|
|
|
Weighted Average Interest Rate
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating leases
|
|
|
4.2
|
|
|
|
4.9
|
|
|
|
5.3
|
|
|
|
5.3
|
|
Financing leases
|
|
|
3.4
|
|
|
|
4.2
|
|
|
|
4.7
|
|
|
|
5.3
|
|
The
cash outflows of the leasing activity of the Company as lessee for the twelve months ended December 31, 2020 and 2019 were as
follows:
Cash
Flow Source
|
|
Classification
|
|
2020
|
|
|
2019
|
|
|
|
|
|
(In thousands)
|
|
Operating cash outflows from operating leases
|
|
Operating activities
|
|
$
|
3,442
|
|
|
$
|
6,140
|
|
Operating cash outflows from financing leases
|
|
Operating activities
|
|
|
140
|
|
|
|
54
|
|
Financing cash outflows from financing leases
|
|
Financing activities
|
|
|
837
|
|
|
|
293
|
|
During
the years ended December 31, 2020 and 2019, the Company recorded non-cash ROU financing lease assets and corresponding
financing lease obligations totaling $1.2
million and $2.5 million, respectively, primarily related to warehouse machinery and IT infrastructure lease agreements.
Also
during the year ended December 31, 2019, the Company modified certain terms of the lease agreement with the landlord of
Vertex’s Massachusetts facility, including early termination of the lease on November 30, 2019 and Vertex subleasing a
portion of the space until the end of November. In connection with the modification, the Company recognized expense related
to the early termination of approximately $2.2 million
in 2019.
On
March 7, 2014, the Board of Directors adopted a stock repurchase program under which the Company is authorized to purchase up
to $25
million of its outstanding shares of common stock from time to time, depending on market conditions, trading activity,
business conditions and other factors. Shares of stock purchased under the program are held as treasury shares and may be
used to satisfy the exercise of options, issuance of restricted stock, to fund acquisitions or for other uses as authorized
by the Board of Directors. In November 2016, the Board of Directors suspended purchases under the stock repurchase program.
In August 2019, the plan was reactivated and during 2019, the Company purchased an aggregate of 235,500
shares for a total cost of $1.1 million. There were no purchases under the program in 2020.
Under
the terms of the 2017 Stock Plan, the Company acquired 25,201 shares and 26,731 shares that were surrendered by the holders to
pay withholding taxes in 2020 and 2019, respectively. (See Note 10)
The
Company paid a quarterly cash dividend from August 2007 until August 2016. The Company has not paid a cash dividend since 2016.
The
Company is authorized to issue 5,000,000 shares of preferred stock, par value $.001 per share. The Board of Directors is authorized
to fix the particular preferences, rights, qualifications and restrictions of each series of preferred stock. In connection with
the adoption of a now terminated stockholder rights plan, the Board of Directors designated 100,000 shares as Series A Junior
Participating Preferred Stock. No shares of preferred stock have been issued.
|
9.
|
Retirement-related
Benefits
|
Defined
Contribution Plan
The
Company maintains a combination profit-sharing plan and salary deferral plan for the benefit of its employees who are not covered
by a collective bargaining agreement. Employees who are eligible to participate in the plan can contribute a percentage of their
base compensation, up to the maximum percentage allowable not to exceed the limits of Internal Revenue Code Sections 401(k), 404,
and 415, subject to the IRS-imposed dollar limit. Employee contributions are invested in certain equity and fixed-income securities,
based on employee elections. From January 1, 2018 through April 30, 2020, the Company matched 100% of the first 1% of the employee’s
contribution. The Company’s match for the year ended December 31, 2020 was $0.1 million and for the years ended December
31, 2019 and 2018 was $0.2 million for each year.
Defined
Benefit Plan
The
Company has a non-contributory defined benefit pension plan for those current and former employees of Vertex who are subject to
a collective bargaining agreement. Effective November 30, 2019, there are no active employees in the plan as the plan was frozen
with the closure of Vertex’s Massachusetts facility. The benefit provisions to participants of the defined benefit plan
were calculated based on the number of years of service and an annual negotiated plan benefit per year of service. Annual compensation
(or future compensation increases) is not used in calculating the benefit or future plan contributions. It is the Company’s
policy to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable employee benefit
laws, which currently approximate the benefit payments made each year. A total contribution of less than $0.1 million was made
during each of the years ended December 31, 2020, 2019 and 2018. As of November 30, 2019, the defined benefit plan is inactive,
with no additional incremental benefits being accrued.
The current projected benefit obligation was $0.8 million and
$1.3 million as of December 31, 2020 and 2019, respectively. The discount rate used to determine the projected benefit obligation
was 2.0% and 3.2% in 2020 and 2019, respectively.
The fair value of the assets of the defined benefit plan was $0.8 million and $1.3 million in 2020 and
2019, respectively. The plan assets are all classified
as Level 1 and as such have readily observable prices and therefore a reliable fair market value.
The
Houston Wire & Cable Company 2017 Stock Plan (the “2017 Plan”) as amended in 2019, provides for discretionary
grants of stock options, stock awards, stock units and stock appreciation rights (SARs) to employees and directors up to a total
of 2,500,000 shares. Shares issuable under the 2017 Plan may be authorized but unissued shares or treasury shares. If any award
granted under the 2017 Plan expires, terminates or is forfeited or cancelled for any reason, the shares subject to the award will
again be available for issuance. Any shares subject to an award that are delivered to the Company or withheld by the Company on
behalf of a participant as payment for the award (including the exercise price of a stock option or SAR) or as payment for any
withholding taxes due in connection with the award, or that are purchased by the Company with proceeds received from a stock option
exercise, will not again be available for issuance. The 2017 Plan’s purpose is to attract and retain outstanding individuals
as employees and directors of the Company and its subsidiaries and to provide them with additional incentive to expand and improve
the Company's profits by giving them the opportunity to acquire or increase their proprietary interest in the Company.
The
2017 Plan succeeded the Company’s 2006 Stock Plan (the “2006 Plan”), which expired on May 1, 2017. The types
of equity awards previously authorized under the 2006 Plan did not significantly differ from those permitted under the 2017 Plan.
Stock
Option Awards
The
Company may grant options to purchase its common stock to employees and directors of the Company under the 2006 Plan and 2017
Plan at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term
not exceeding ten years and may be forfeited in the event the employee or director terminates his or her employment or relationship
with the Company. Options granted to employees generally vest over three to five years, and options granted to directors generally
vest one year after the date of grant.
Shares issued to satisfy the exercise of options may be newly issued shares or treasury shares. Each plan contains anti-dilutive
provisions that permit an adjustment of the number of shares of the Company’s common stock represented by each option for
any change in capitalization. Compensation cost for options granted is charged to expense on a straight line basis over the term
of the option.
The
fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model. Expected volatilities
are based on historical volatility of the Company’s stock and other factors. The expected life of options granted represents
the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted in 2020,
2019 or 2018.
All
granted stock options have vested, with the last grant having an expiration date of December 20, 2021. The following summarizes
stock option activity and related information: Schedule of stock option activity
|
|
|
Options
(in 000’s)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Outstanding-Beginning of year
|
|
|
|
122
|
|
|
|
154
|
|
|
|
13.72
|
|
|
|
13.40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1.75
|
|
|
|
2.52
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(13
|
)
|
|
|
(22
|
)
|
|
|
13.23
|
|
|
|
13.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
(19
|
)
|
|
|
(10
|
)
|
|
|
12.14
|
|
|
|
10.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding-End of year
|
|
|
|
90
|
|
|
|
122
|
|
|
|
14.11
|
|
|
|
13.72
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
0.97
|
|
|
|
1.75
|
|
Exercisable-End of year
|
|
|
|
90
|
|
|
|
122
|
|
|
|
14.11
|
|
|
|
13.72
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
0.97
|
|
|
|
1.75
|
|
There
was no excess tax benefit for the years ended December 31, 2020, 2019 and 2018.
There
were no options exercised in the years ended December 31, 2020, 2019 and 2018. There is no intrinsic value of options outstanding
and exercisable as of December 31, 2020 as the closing stock price at the end of 2020 creates a negative intrinsic value.
The
total grant-date fair value of options vested during 2020 and 2019 was $0, as all the options vested as of December 31, 2018.
Restricted
Stock Awards, Restricted Stock Units and Cash Awards
As
a result of the approval of the 2017 Plan by the stockholders at the 2018 Annual Meeting, all cash/liability awards granted prior
to stockholder approval of the 2017 Plan were reclassified to restricted stock units (equity) effective May 8, 2018. The total
liability reclassified to additional paid-in-capital was $0.4 million. This modification resulted in an increase in total fair
value of $0.1 million, recognized over the terms of the grants, which range from 1 to 5 years.
On
November 3, 2020, the Board of Directors granted to the Company’s newly appointed Chief Financial Officer 55,000 voting
shares of restricted stock under the 2017 Plan. The shares vest in one-third increments on the first, second and third anniversaries
of the date of grant, as long as he is then employed by the Company. Any dividends declared will be accrued and paid if and when
the related shares vest.
On
June 26, 2020, the Board of Directors granted 10,000 restricted stock units to the newly named executive chairman of the board.
The award vests in two equal installments on June 26, 2021 and June 26, 2022. The award entitles the executive chairman of the
board to receive a number of shares of the Company’s common stock equal to the number of vested restricted stock units,
together with dividend equivalents from the date of grant, at such time as his service on the board terminates for any reason.
On
December 3, 2019, the Board of Directors granted to the Company’s President and Chief Executive Officer 78,125 voting shares
of restricted stock and to the former Chief Financial Officer, 19,531 voting shares of restricted stock under the 2017 Plan. The
former Chief Financial Officer’s shares were forfeited when he left the Company in July 2020. The President and Chief Executive
Officer’s shares vest in one-third increments on the first, second and third anniversaries of the date of grant, in each
case as long he is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares
vest.
Also,
on December 3, 2019, the Board of Directors granted 250,000 shares of restricted stock to the Company’s President and Chief
Executive Officer and 125,000 shares of restricted stock to the former Chief Financial Officer. The former Chief Financial Officer’s
shares were forfeited when he left the Company in July 2020. The President and Chief Executive Officer’s grant vests if
there is a Change in Control of the Company (as defined in the 2017 Plan) on or before December 2, 2024, as long as he remains
in continuous employment with the Company until the Change in Control or if he is terminated by the Company without cause within
one year before the Change in Control. Any dividends declared will be accrued and paid if and when the related shares vest.
The
Board of Directors also granted 39,719 voting shares of restricted stock under the 2017 Plan to members of management in December
2019. The shares vest in one-third increments on the third, fourth and fifth anniversaries of the date of grant, in each case
as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related
shares or units vest.
Following
the Annual Meeting of Stockholders on May 7, 2019, the Company granted restricted stock units with a grant date value of $60,000
to each nonemployee director who was elected, for an aggregate of 58,920 restricted stock units. Each award of restricted stock
units vested at the date of the 2020 Annual Meeting of Stockholders. Each non-employee director is entitled to receive a number
of shares of the Company’s common stock equal to the number of vested restricted stock units, together with dividend equivalents
from the date of grant, at such time as the director’s service on the board terminates for any reason.
On
March 12, 2019, the Board of Directors granted 52,910 performance stock units to the Company’s President and Chief Executive
Officer and 13,228 performance stock units to the former Chief Financial Officer. The former Chief Financial Officer’s units
were forfeited when he left the Company in July 2020. The President and Chief Executive Officer’s performance stock units
vests on December 31, 2021, based on and subject to the Company’s achievement of cumulative EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) and stock price performance goals over a three-year period, as long as he is then employed
by the Company, and upon vesting will be settled in shares of our common stock. Any dividends declared will be accrued and paid
if and when the related shares vest.
Restricted
common shares and restricted stock units are measured at fair value on the date of grant based on the quoted price of the common
stock. Such value is recognized as compensation expense over the corresponding vesting period which ranges from one to five years,
based on the number of awards that vest.
The
following summarizes restricted stock activity for the years ended December 31, 2020 and 2019: Schedule of restricted stock activity
|
|
Shares
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Shares
(in 000’s)
|
|
|
Weighted
Average
Market
Value at
Grant Date
|
|
|
Shares
(in 000’s)
|
|
|
Weighted
Average
Market
Value at
Grant Date
|
|
Non-vested -Beginning of year
|
|
|
654
|
|
|
$
|
5.18
|
|
|
|
259
|
|
|
$
|
6.78
|
|
Granted
|
|
|
55
|
|
|
|
2.86
|
|
|
|
511
|
|
|
|
3.84
|
|
Vested
|
|
|
(95
|
)
|
|
|
5.59
|
|
|
|
(107
|
)
|
|
|
7.24
|
|
Cancelled/Forfeited
|
|
|
(173
|
)
|
|
|
5.33
|
|
|
|
(9
|
)
|
|
|
6.34
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested -End of year
|
|
|
441
|
|
|
$
|
4.26
|
|
|
|
654
|
|
|
|
5.18
|
|
|
|
Units
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Shares
(in 000’s)
|
|
|
Weighted
Average
Market
Value at
Grant Date
|
|
|
Shares
(in 000’s)
|
|
|
Weighted
Average
Market
Value at
Grant Date
|
|
Non-vested -Beginning of year
|
|
|
277
|
|
|
$
|
6.83
|
|
|
|
215
|
|
|
$
|
7.59
|
|
Granted
|
|
|
10
|
|
|
|
2.19
|
|
|
|
125
|
|
|
|
5.88
|
|
Vested
|
|
|
(137
|
)
|
|
|
6.94
|
|
|
|
(60
|
)
|
|
|
7.59
|
|
Cancelled/Forfeited
|
|
|
(18
|
)
|
|
|
6.18
|
|
|
|
(3
|
)
|
|
|
7.65
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested -End of year
|
|
|
132
|
|
|
|
6.44
|
|
|
|
277
|
|
|
|
6.83
|
|
Total
stock-based compensation cost was $0.9 million for the year ended December 31, 2020, $1.5 million for the year ended December
31, 2019, and $1.3 million for the year ended December 31, 2018. Total income tax benefit recognized for equity awards stock-based
compensation arrangements was $0.2 million for each of the years ended December 31, 2020, 2019 and 2018.
As
of December 31, 2020, there was $0.8 million of total unrecognized compensation cost related to non-vested, stock-based compensation
arrangements. The cost is expected to be recognized over a weighted average period of approximately 17 months. There are 1,631,123
shares available for future grants under the 2017 Plan at December 31, 2020.
|
11.
|
Commitments
and Contingencies
|
The
Company had aggregate purchase commitments for fixed inventory quantities of approximately $32.0 million at December 31,
2020.
The
Company had outstanding under the Loan Agreement letters of credit totaling $0.7 million to certain vendors as of December 31,
2020.
From
time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a
party to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on the
Company’s consolidated financial position, cash flows, or results from operations.
|
12.
|
Select
Quarterly Financial Data (unaudited)
|
The
following table presents the Company’s unaudited quarterly results of operations for each of the last eight quarters in
the period ended December 31, 2020. The unaudited information has been prepared on the same basis as the audited consolidated
financial statements. Schedule of unaudited quarterly results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
65,460
|
|
|
$
|
70,247
|
|
|
$
|
66,777
|
|
|
$
|
83,533
|
|
Gross
profit
|
|
$
|
14,231
|
|
|
$
|
14,990
|
|
|
$
|
14,236
|
|
|
$
|
19,592
|
|
Operating
(loss) income
|
|
$
|
(10,210
|
)1
|
|
$
|
(519
|
)
|
|
$
|
(2,188
|
)
|
|
$
|
1,586
|
|
Net
(loss) income
|
|
$
|
(10,229
|
)1
|
|
$
|
(735
|
)
|
|
$
|
(2,163
|
)
|
|
$
|
545
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.61
|
)1
|
|
$
|
(0.04
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
(0.61
|
)1
|
|
$
|
(0.04
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
82,287
|
|
|
$
|
85,403
|
|
|
$
|
85,326
|
|
|
$
|
85,270
|
|
Gross profit
|
|
$
|
18,695
|
|
|
$
|
19,431
|
|
|
$
|
20,537
|
|
|
$
|
21,259
|
|
Operating income
|
|
$
|
76
|
|
|
$
|
(87)
|
|
|
$
|
3,030
|
|
|
$
|
3,863
|
|
Net income
|
|
$
|
(656
|
)
|
|
$
|
(721)
|
|
|
$
|
1,643
|
|
|
$
|
2,284
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04)
|
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04)
|
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This includes the loss on divestitures/HFS classification of $8,727.
|
Divestiture
of Southern and Southwest reporting units
On December 2, 2020,
the Company entered into an asset purchase agreement to dispose of our Southern reporting unit. Upon the closing of this transaction
on December 31, 2020, the Company received $17.5 million in cash, net of working capital adjustments of $1.5 million. An additional
$1.0 million is due from escrow and will be released one year following the close of the transaction. For the year ended December 31,
2020, the Company recognized a pre-tax loss on divestiture of approximately $2.0 million related to the transaction in its consolidated
statements of income. The loss recognized included selling costs of $0.3 million. The Company also recorded a tax benefit of $15.4
million related to this transaction.
In
addition, in January 2021 the Company entered into an asset purchase agreement to sell the Southwest reporting unit, other than
accounts receivable. Upon the closing of this transaction, the Company will receive approximately $5.0 million in cash, subject
to estimated working capital adjustments. As of December 31, 2020, the Southwest reporting unit was classified as held for sale
in the Company’s consolidated financial statements and measured at the expected sales price less estimated selling costs.
The Company incurred a loss on classification of the assets held for sale of $6.7 million, which includes $0.1 million of selling
costs incurred prior to year-end, and the Company ceased depreciation of these properties upon their classification as held for
sale.
The
following is a summary of net assets and net liabilities related to Southwest as of December 31, 2020, that were classified as
held for sale: Schedule of net assets and net liabilities classified as held for sale
|
|
|
|
|
Inventory
|
|
$
|
5,145
|
|
Prepaid expenses
|
|
|
38
|
|
PP&E
|
|
|
6,877
|
|
Intangibles
|
|
|
1,020
|
|
Other assets
|
|
|
29
|
|
Total assets
|
|
|
13,109
|
|
Less: Loss on classification to held for sale
|
|
|
(6,711
|
)
|
Assets classified as held for sale
|
|
$
|
6,398
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
969
|
|
Accrued liabilities
|
|
|
394
|
|
Long term lease liabilities
|
|
|
35
|
|
Liabilities classified as held for sale
|
|
$
|
1,398
|
|
The
Company evaluated the divestitures of the Southern and Southwest reporting units individually and in the aggregate and
determined that they did not represent a strategic shift that had a major effect on the Company’s operations or financial
results and did not qualify as a significant component of the Company. As a result, the divestitures were not reported as discontinued
operations.
Completion of Sale of Southwest
On March 12, 2021, the Company completed
the sale of substantially all of the assets, other than accounts receivable of approximately $2.9 million, of its Southwest reporting
unit and received $3.4 million in cash, subject to final working capital adjustments. An additional $0.8 million is due from escrow
and will be released no later than one year following the close of the transaction.
Agreement and Plan of Merger
On March 25, 2021,
the Company announced that it entered into an Agreement and Plan of Merger with Omni Cable, LLC (“OmniCable”) and a
subsidiary of OmniCable pursuant to which, subject to the satisfaction of customary closing conditions, the subsidiary will be
merged with and into the Company, and the Company will become a wholly-owned subsidiary of OmniCable. Under the terms of the merger
agreement, at the effective time of the merger each share of the Company’s common stock will be converted into the right
to receive $5.30 in cash, without interest. In addition, each of the 300,461 stock-based equity awards outstanding under the Company’s
stock and deferred compensation plans will be cancelled in exchange for $5.30. No consideration will be paid for stock options,
all of which have exercise prices above the merger price.
The merger is subject
to the satisfaction or waiver of certain closing conditions, including, among other things: (1) the adoption of the merger
agreement by the holders of a majority of the outstanding shares of Company common stock; (2) the absence of certain legal
impediments preventing the completion of the merger; (3) the accuracy of the representations and warranties of the parties
and the compliance of the parties with their respective covenants, subject to customary qualifications, including with respect
to materiality; and (4) conditions relating to the Company’s tangible net book value and indebtedness. The Company expects
the merger to be completed in the second quarter of 2021.